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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Urals EN. | LSE:UEN | London | Ordinary Share | CY0107130912 | ORD USD0.126 (DI) |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 35.00 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
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RNS Number : 7193D
Urals Energy Public Company Limited
07 December 2009
7 December 2009
Urals Energy Public Company Limited
("Urals Energy", or the "Company")
Annual Financial Report
Urals Energy (LSE: UEN), an independent exploration and production company with
operations in Russia, today announces its audited financial results for the year
ended 31st December 2008.
Strategy
* Following divestiture of Dulisma and Taas Yuriakh, Urals now well positioned to
recommence development programmes on two producing fields, Arcticneft and
Petrosakh
* Restructuring of Petraco indebtedness is Company's immediate priority as it
seeks to advance its strategy
Operational
* Average 2008 production decreased to 6,285 BOPD (8,857 bopd in 2007) due to
divestiture of the Komi assets in April 2008
* Production from Arcticneft and Petrosakh decreased to 1.126 million barrels in
2008 from 1.262 million barrels in 2007
* Current daily levels of production at Petrosakh and Arcticneft decreased in 2008
to 1,672 BOPD and 648 BOPD from an average of 2,246 BOPD and 829 BOPD in 2008
Financial
* Gross Revenues excluding crude oil purchased for resale decreased by $24 million
to $134 million, largely due to the divestiture of the Komi region assets in
April 2008
* An operating loss of $132 million was recorded, largely due to the impairment
losses recognized with respect to production assets in the amount of $95
million.
* Subsequent to year end, the Company sold Dulisma and Taas Yuriakh for the full
discharge of $630 million of debt owed to Sberbank.
* The Company also terminated a Put option agreement with Limenitis Holdings (an
affiliate of the Ashmore Funds).
* Net debt to Petraco, the second largest creditor, was $41.3 million at 10
November, 2009 ($50.5 million at 31 December 2008)
* Subsequently the Company received additional prepayment from Petraco to finance
two more export deliveries. These prepayments to be offset against gross
proceeds
* Extensive cost reduction programme introduced subsequent to year end
Corporate
* Completed significant corporate transactions:
* Subsequent to year-end divestiture of Dulisma and Taas Yuriakh for full
discharge of $630 million of debt
* Divestiture of Komi region assets during 2008
* Divestiture of Chepetskoye NGDU
* Significant Board and Senior Management changes including appointment of Alexei
Maximov as Chief Executive Officer and a Director post period end
Outlook
* Main priority is to agree restructuring of Petraco indebtedness
* Concentrate on early production increase from existing wells
* Complete geological studies in 2010 to develop a drilling program
* Look for possible corporate transactions to derive maximum value to shareholders
Alexei Maximov, Chief Executive, commented:
"We are pleased to be able to release our results today, which marks a
significant milestone in the turnaround of the Company. We are now focused on
refinancing the remaining Petraco debt, which has been reduced further in the
last few months through our ongoing crude sale agreements.
The Company is now considering different options to increase production from the
existing wells by means of side track drilling and installation of down hole
pumps.
"The Company has started geological studies for both remaining fields with the
aim of reviewing and approving new development schemes with the governmental
bodies. This work is anticipated to be completed during 2010. Depending on the
results of the studies and the restructuring of indebtedness with Petraco, the
Company will develop a drilling programme and will announce it during 2010.
"Cost control also remains a priority and we are pleased with the progress made
to date in this regard.
"With the Sberbank debt restructuring now resolved and the right team in place,
Urals Energy is well set to maximize the potential of its existing assets and
recommence development programmes, whilst also looking to increase further
production by identifying new acquisition opportunities, in order to return to
the creation of shareholder value."
Enquiries:
+-----------------------------------------+---------------------------------------+
| Allenby Capital Limited | +44 (0)20 3328 5656 |
+-----------------------------------------+---------------------------------------+
| Rod Venables/James Reeve | |
+-----------------------------------------+---------------------------------------+
| | |
+-----------------------------------------+---------------------------------------+
| Pelham PR | +44 (0)20 7337 1500 |
+-----------------------------------------+---------------------------------------+
| Mark Antelme | |
+-----------------------------------------+---------------------------------------+
| Evgeniy Chuikov | |
+-----------------------------------------+---------------------------------------+
Urals Energy will be holding an investor conference call on Thursday 10th
December at 9.30am (GMT).
To participate please dial +44 (0)20 7190 1596 or +1 480 629 9724.
Investors wishing to submit questions should email them in advance to
uralsenergy@pelhampr.com
CEO STATEMENT AND ANNUAL REPORT TO SHAREHOLDERS
From its IPO in 2005, Urals Energy grew rapidly, mostly through the acquisition
of high quality assets in the Russian Komi region and, subsequently, East
Siberia. Over the past two or three years the Company concentrated its efforts
on developing assets in a single East Siberian region and made a decision to
divest its smaller scale assets in other areas of Russia. The objective of being
among the first companies to develop top quality assets in East Siberia was
designed to create significant benefits for the Company and placed it extremely
well amongst its Eastern Siberian peer group. The proximity of the East Siberian
Pacific Ocean ("ESPO") pipeline, the mineral extraction tax break and expected
export duty holiday were thought to create significant economic benefits for the
Company.
Following its strategy to focus on key East Siberian assets, in 2008 and in
early 2009 the Company sold all other non-core assets except Arcticneft and
Petrosakh and used the proceeds to finance development of Dulisma and to pay
interest and trade debt.
In November 2007, the Company received two loans from Sberbank: $130 million to
refinance a Goldman Sachs facility for Dulisma and a $500 million loan for the
acquisition of a stake in Taas-Yuryakh Neftegas Dobycha ("Taas"), the owner and
operator of the Srednebotuobinskoye field. Both loans had an initial one year
maturity, which was designed to be extended automatically upon the satisfaction
of certain technical conditions. Also, the $130 million loan facility was to be
increased by $140 million, which was planned to be spent on further drilling and
infrastructure construction at Dulisma. In connection with the Sberbank loans,
the Company pledged its 100% share in Dulisma and 35.3% share in Taas. Also,
major management and founder shareholders of the Company pledged their own
shares to the bank as further credit support.
The Company believed that it had fulfilled all conditions precedent for the
loans to be extended and to drawdown the additional $140 million. However,
unfortunately in part due to a shift in corporate policy following a major
change in management at Sberbank, the company was unsuccessful in persuading the
new management of Sberbank to agree with its long term strategy. In addition, as
a direct consequence of the global crisis the Company's share price decreased
below level acceptable to Sberbank and the bank delivered a margin call. The
Company and individual shareholders were not able to satisfy the margin call and
the bank did not extend the maturity nor did it provide the additional draw
down, leaving the Company in a state of limited liquidity.
At the end of 2008, the Company was in negotiations with Sberbank and another
possible investor, who was interested in acquiring all of Urals Energy with its
existing properties. As was announced in early January 2009, the deal with a
possible investor did not proceed and the Company had to return to the plan
previously discussed and agreed with Sberbank. According to that agreement the
Company intended to transfer all of its shares in Dulisma and Taas for the full
discharge of the existing loans with the bank. Also, as part of the transaction,
the bank agreed to release all other pledges to Limenitis and Finfund (other
shareholders of Taas) and Limenitis agreed to cancel a Put option agreement and
deeds of charge associated with that agreement.
A resolution was approved at an EGM, held 26 January 2009, to proceed with the
planned transaction with Sberbank. Then, during the first half of 2009, the
management of the Company proposed alternative solutions to the bank, which were
designed to be more favourable to the Company and shareholders. Unfortunately,
these discussions did not yield a mutually agreeable solution other than the
previously announced divestiture of assets with Sberbank which had been approved
at the Company's shareholder meeting held on 26 January 2009.
Also, since the announcement and implementation of the process of divestiture of
the remaining non-core assets, the Company did not receive any acceptable bids
for the assets and therefore decided that in view of the recovering oil prices
it would be in the interest of all shareholders to maintain these assets and
derive value through developing and operating them.
Corporate
Since the year end, key management changes have been made, reflecting the
Company's efforts to develop and agree on an alternative solution with Sberbank,
and subsequently to complete the previously announced and approved deal with
Sberbank and manage more effectively the challenges presented by the adverse
economic environment.
Following the resignation of Leonid Dyachenko as CEO in April 2009, and of
Vladimir Sidorovich as CFO in May, and the subsequent resignation of Vyatchesla
Ivanov, I assumed the role of Chief Executive and Director, and Grigory Kazakov
was appointed as CFO. Leonid Dyachenko took on the role as Chairman of the
Board. In June 2009, Vasiliy Sechin was appointment as a Non-Executive director.
Operational
Dulisma Field
Despite current financial difficulties which slowed down the Company's
development efforts, a significant effort was made towards extensive
infrastructure preparation, namely the construction of infield roads and land
for facilities, drilling pads and rights-of-way on the Dulisma field.
Notable progress was also made with construction of the field facilities. The
Central Processing Facilities at year end was at its final phase of equipment
installation and could be launched within 3-6 months once the Company resumed
its investment program. 90% of equipment had been delivered, 60% had been
installed.
The first Phase of the Central Transfer Facility (to the ESPO pipeline) was
scheduled for completion for the first half 2010. To date, 31 km of pipeline has
been constructed, representing 42% of the planned workload. 100% of pipe has
been acquired and delivered, right of way has been cleared of forest, 26 km of
pipe welded and buried and the rest of the 42 km pipeline is at various phases
of completion ranging from 40% to 60%.
The drilling campaign at Dulisma was on track with 1 well completed and two
wells spudded in 2008. One well was completed in early 2009.
During the testing phase, the production rate from the Dulisma field varied from
1,094 to 1,703 BOPD and oil was sold through a temporary pipeline operated by a
neighboring production company.
Overall, in 2008, the Company spent approximately $60 million in cash to finance
Dulisma development.
Other Assets
In 2008, the management of the Company decided to focus on key East Siberian
assets and divest other non-core assets. As a result of this decision, Dinyu,
Michayuneft, NizhneomrinskayaNeft, CNPSEI and Chepetskoe NGDU were sold during
2008 and the early part of 2009.
With that disposal strategy in mind, the management did not commit funds for the
development of Arcticneft and Petrosakh except for the mandatory capital
expenditures to comply with the license requirements. During 2008, a total of
$6.5 million was spent on capital expenditures at both assets.
As a result of such limited operations, production at Petrosakh decreased from
1,998 BOPD in January 2008 to 1,650 BOPD in November 2009, and at Arcticneft
from 873 BOPD in January 2008 to 648 BOPD.
The management of the Company is now reviewing the budget for 2010 and will
concentrate on the actions necessary to increase production from the existing
wells and consider locations for new drilling. The geological studies have
already begun and should be completed during 2010. After the results of these
studies are analyzed, the management will develop a proposed drilling program.
2008 Financial
Operating Environment
After rising for several months in late 2007, crude oil prices surpassed $100
per barrel in January 2008. Rising up to $110 in March, Brent price reached a
record of $145.11 per barrel in July for August delivery. Following some
indications of global demand destruction and economic downturn in the United
States and Europe, crude oil fell below $100 in September for the first time in
over six weeks. The worsening of global crises led to a further sell-off with
crude oil prices collapsed to $36.45 in December. The Russian market followed
the global trend with crude oil prices of $86.05 per barrel at the beginning of
the year and $20.40 per barrel at year end.
The rouble continued to appreciate against the dollar during the first six
months of the year and continued its stability until the end of August. Starting
September the government of Russian Federation announced plans to depreciate the
Russian currency for the benefit of the economy which faced global financial
crisis. As a result the rouble depreciated by 20% by the year end, resulting in
lower operating costs for Russian oil companies.
The squeezing of financial markets led to the sharp decrease in the ability to
attract financing both in Russia and internationally, which negatively affected
the Company's operations.
Operating Results
+------------------------------------------------------+-------------+-----------+
| $ '000 |Year ended 31 December: |
+------------------------------------------------------+-------------------------+
| | 2008 | 2007 |
+------------------------------------------------------+-------------+-----------+
| | | |
+------------------------------------------------------+-------------+-----------+
| Gross revenues before excise, export duties | 222,291 | 194,111 |
+------------------------------------------------------+-------------+-----------+
| Net revenues after excise, export duties and VAT | 174,854 | 152,428 |
+------------------------------------------------------+-------------+-----------+
| Gross (loss)/profit | (88,613) | (10,000) |
+------------------------------------------------------+-------------+-----------+
| Operating (loss)/profit | (132,092) | 139,677 |
+------------------------------------------------------+-------------+-----------+
| Normalised management EBITDA (unaudited) | (8,920) | 14,093 |
+------------------------------------------------------+-------------+-----------+
| Total net finance costs | 316,656 | 33,775 |
+------------------------------------------------------+-------------+-----------+
| Profit for the year | (403,249) | 113,791 |
+------------------------------------------------------+-------------+-----------+
In 2008, total gross revenues excluding crude oil for resale declined by $24
million. Positive price variance resulting from higher weighted average gross
price per barrel of $64.48 comparing to $54.94 in 2007 was negatively offset by
a decrease in sales volumes amounting to 2,183 thousand barrels in 2008
comparing to 3,124 thousand barrels in 2007, which was primarily due to the
divestment of non-core assets and bad weather on Kolguev island in December,
which prevented the Company to load 162,139 barrels of crude. These volumes were
presented as finished goods in the balance sheet and were subsequently sold in
October 2009.
Following the divestiture of subsidiaries in the Komi Republic, the Company
continued to re-sell crude oil produced by these former subsidiaries on the
export and domestic markets. The total cost of this purchased crude oil amounted
to $98 million during the year ended 31 December 2008. Also the Company charged
a commission on these operations, which was included in gross revenues in the
financial statements. The profit margin on these operations is substantially
lower than for the self-produced oil, as the price of purchased crude oil also
includes a seller's mark-up. There were no such operations with the Komi
subsidiaries in 2007.
Summary table: Gross Revenues ($'000)
+-------------------------------------------------------------+---------------+-------------+
| | Year ended 31 December: |
+ +-----------------------------+
| | 2008 | 2007 |
+-------------------------------------------------------------+-------------------------------------------------------------+---------------+
| Crude oil | 206,764 | 180,199 |
+-------------------------------------------------------------+---------------+-------------+
| Export sales | 74,859 | 112,091 |
+-------------------------------------------------------------+---------------+-------------+
| Export sales of purchased crude oil from AMNGR and Komi | 72,518 | 22,217 |
| assets | | |
+-------------------------------------------------------------+---------------+-------------+
| Domestic sales (Russian Federation) | 59,387 | 45,891 |
+-------------------------------------------------------------+---------------+-------------+
| Petroleum (refined) products - domestic sales | 12,163 | 12,386 |
+-------------------------------------------------------------+---------------+-------------+
| Other sales | 3,364 | 1,526 |
+-------------------------------------------------------------+---------------+-------------+
| Total gross revenues | 222,291 | 194,111 |
+-------------------------------------------------------------+---------------+-------------+
In 2008, the Company's total net revenues increased to $174.9 million from
$152.4 million in 2007. Netback, in the case of exports, is gross oil sales less
export duty, customs charges, marketing costs and transportation, and, in the
case of domestic crude oil sales, the gross sales net of VAT. Netback for
domestic product sales is defined as gross product sales minus VAT,
transportation, excise tax and refining costs.
The weighted average netback price for crude oil sales during 2008 was $43.74
versus $40.26 per barrel in 2007.
In 2007, netbacks for export sales (excluding sales of purchased crude oil) were
$45.96 per barrel and $41.96 per barrel for domestic sales. Netback prices for
domestic product sales are defined as gross product sales price minus VAT,
transportation, excise tax and refining costs. The average products netback for
the year was $65.48 per barrel (all domestic, as the Company does not export
products).
Summary table: Net backs ($/bbl)
+--------------------------------------------------------------+-------------+-------------+
| | Year ended 31 December: |
+ +---------------------------+
| | 2008 | 2007 |
+--------------------------------------------------------------+--------------------------------------------------------------+-------------+
| Crude oil | 43.74 | 40.26 |
+--------------------------------------------------------------+-------------+-------------+
| Export sales | 45.96 | 41.96 |
+--------------------------------------------------------------+-------------+-------------+
| Export sales (AMNGR crude oil) | 112.22 | 80.36 |
+--------------------------------------------------------------+-------------+-------------+
| Domestic sales (Russian Federation) | 33.44 | 30.95 |
+--------------------------------------------------------------+-------------+-------------+
| Petroleum (refined) products - domestic sales | 65.48 | 32.61 |
+--------------------------------------------------------------+-------------+-------------+
| Other sales | N/A | N/A |
+--------------------------------------------------------------+-------------+-------------+
The gross loss of the Company for the year 2008 was $87 million comparing to $10
million in 2007. The main drivers of the increased loss were impairment charges
recognized by the Company in 2008 in the amount of $95 million. According to
IFRS, those expenses were included in the Cost of sales. Without those
write-offs the Gross profit would be $8.1 million. Cost of sales excluding cost
of crude oil purchased for resale was relatively stable as compared to the year
2007. The depreciation and depletion decrease by $12 million was due to
divestment of non-core Komi assets.
Selling, General and Administrative expenses decreased during the year 2008 by
$15 million to $44.3 million from $59.2 million in 2007. This was primarily due
to settlement of unvested stock and cash compensation for the former senior
management who resigned during 2007. Also a decrease in the SG&A amounting to $5
million was driven by non-recurring fees paid by the Company to professional
advisors in relation to certain significant acquisitions and other corporate
actions undertaken in 2007.
Following the acquisition of 35.329% stake in Taas in 2007 the Group recognized
$208 million negative goodwill in consolidated income statement. Without that
item the Company would record an operating loss of $69 million in 2007 as
compared to $134 million loss in 2008.
The net finance costs increased substantially by $283 million due to recognized
loss from equity investment in Taas amounting to $160 million and interest
expense paid on two loans received from Sberbank mentioned below (amounting to
$98 million).
Net loss for the year attributable to shareholders was $402.0 million as
compared to net profit of $114 million in 2007. The other non-recurring factor
for this result is recognized loss of investment in Taas following sharp
decrease in oil prices in the end of 2008 and reassessment of future discounted
cash flows from this asset performed by the Company. The method for calculating
the fair market value is a conservative discounted cash flow valuation based on
factors known at the time
Consolidated normalized management EBITDA decreased by $21.2 million to a
negative figure of $7.1 million in 2008 compared with positive $14.1 million in
2007, with EBITDA margins of (1.6) % and 9% respectively.
Management EBITDA ($'000) - Unaudited
+--------------------------------------------------+--------------+---------------+
| | Year ended 31 December |
+--------------------------------------------------+------------------------------+
| | 2008 | 2007 |
+--------------------------------------------------+--------------+---------------+
| | | |
+--------------------------------------------------+--------------+---------------+
| Profit for the year attributable to shareholders | (403,249) | 113,791 |
| of UEPCL | | |
+--------------------------------------------------+--------------+---------------+
| | | |
+--------------------------------------------------+--------------+---------------+
| Net interest and foreign currency | 316,656 | 33,775 |
| (income)/expense | | |
+--------------------------------------------------+--------------+---------------+
| Income tax | (37,377) | (9,602) |
+--------------------------------------------------+--------------+---------------+
| Depreciation, depletion and amortization | 16,514 | 28,974 |
+--------------------------------------------------+--------------+---------------+
| Total non-cash expenses | 295,793 | 53,147 |
+--------------------------------------------------+--------------+---------------+
| | | |
+--------------------------------------------------+--------------+---------------+
| Negative Goodwill | - | (208,713) |
+--------------------------------------------------+--------------+---------------+
| Share-based payments | 8,971 | 14,113 |
+--------------------------------------------------+--------------+---------------+
| Impairment of property, plant and equipment | 94,955 | 31,997 |
+--------------------------------------------------+--------------+---------------+
| Resignation fees to top-managers | - | 8,107 |
+--------------------------------------------------+--------------+---------------+
| (Release)/accrual of other taxes risk provision | (189) | (1,929) |
+--------------------------------------------------+--------------+---------------+
| Expenses related to unsuccessful PP in August | - | 1,504 |
| '07 | | |
+--------------------------------------------------+--------------+---------------+
| Gain from disposal of assets held for sale | (8,121) | - |
+--------------------------------------------------+--------------+---------------+
| Write-off non-producing wells | 2,552 | - |
+--------------------------------------------------+--------------+---------------+
| | | - |
+--------------------------------------------------+--------------+---------------+
| Other non-recurrent losses | 2,161 | 3,034 |
+--------------------------------------------------+--------------+---------------+
| Total non-recurrent and non-cash items | 100,329 | (152,845) |
+--------------------------------------------------+--------------+---------------+
| Normalized EBITDA | (7,127) | 14,093 |
+--------------------------------------------------+--------------+---------------+
Cash Flow
The cash position was negatively affected by the interest expense accrued on
outstanding borrowing amounting to $78 million and continuing capital investment
outflows for Dulisma development amounting to $60 million. Proceeds from sale of
subsidiaries generated $93 million of positive cash flow improving the cash
position and providing additional resources to keep on track with day-to-day
operations. As a result Company's cash position decreased by $27 million to $1
million at the year end.
Net debt Position
Towards the end of the 2007, the Company entered into two loan agreements with
Sberbank, aiming to finance the acquisition of Taas and to further develop the
Dulisma field. The principal amount outstanding as at 31 December 2008 was $630
million. As collateral for these loans, certain of the Company's major
non-institutional shareholders pledged UEPCL shares and the Company pledged 100%
of the Company's shares in Dulisma and Taas. As at 31 December 2008 both loans
were overdue. Subsequent to the year-end the Company transferred all of its
shares of Dulisma and Taas to Sberbank Capital for the full discharge of those
loans. As part of that deal, the Company was released of any obligations under a
Put option agreement with Ashmore, which was valued at $161 million in the
consolidated financial statements.
Accounts payable and advances from customers at the year end mainly represented
outstanding debt for completed items of Construction in progress amounting to
$19 million and the revolving prepayment agreement with Petraco, amounting to
$50.5 million. Under the terms of the agreement, prepayments shall be made in
one or more advances against specified future deliveries of agreed volumes of
crude oil to be sold to Petraco.
In December 2008, the original Petraco repayment schedule was modified to take
into account decreased oil prices and Company's financial position. Under this
schedule the Company would have to decrease the amount outstanding to $25
million by July 1, 2009 with the remaining balance payable by deliveries to be
made in 2009 and 2010. Subsequent to year-end management realized that the
proposed repayment schedule was not feasible and the Company proposed an
amendment to the repayment schedule allowing for a more gradual repayment of the
currently outstanding $41.3 million in 2009 and 2010 and providing additional
security to Petraco. At the date of these financials statements, those
discussions were on going and were subject to certain other negotiations where
the Company is a party.
Disposal of assets
In 2008, the Company completed the sale of Komi assets - Dinyu, Michayuneft,
NizhneomrinskayaNeft and CNPSEI for the total cash consideration of $93 million.
The gain from disposal amounting to $8 million was recognized in the
consolidated income statement for the year 2008. Subsequent to the year end, the
Company sold Chepetskoye NGDU for the equivalent of cash consideration of $5
million. The result of the disposal will be recognized in the interim financial
statements for the 6 months ended 30 June 2009.
As at 31 December 2008, management assessed Chepetskoye NGDU for impairment
using the information regarding the transaction which was available at that date
as an indicator of the fair value of the asset. As a result of this analysis, an
impairment charge of $17 million was recognized in the consolidated income
statement.
Cost reduction initiatives
The dramatic changes in market conditions in the second half of the year,
including sharp decrease in oil prices, both domestic and international, notable
decline in demand and squeezing of financial markets and borrowing capacities,
forced the Company's management to implement extensive cost reduction
activities, capital investments preservation and liquidity improving measures in
order to mitigate these challenges and be able to operate as effectively as
possible in such an unstable environment. Management expects that the Company
will start yielding the benefits from this program in 2009.
Sincerely,
Alexei Maximov
Chief Executive Officer
Urals Energy Public Company Limited
International Financial Reporting Standards
Consolidated Financial Statements
As of and for the Year Ended 31 December
2008
+---------------------------------------------------------------------------+
| Independent Auditors' Report |
| To the Members of Urals Energy Public Limited |
| |
+---------------------------------------------------------------------------+
Report on the Financial Statements
We have audited the consolidated financial statements of Urals Energy Public
Limited (the "Company") and its subsidiaries (the "Group") on pages 4 to 53,
which comprise the consolidated balance sheet as at 31 December 2008, and the
consolidated income statement, consolidated statement of changes in equity and
consolidated cash flow statement for the year then ended and a summary of
significant accounting policies and other explanatory notes.
Board of Directors' Responsibility for the Financial Statements
The Company's Board of Directors is responsible for the preparation and fair
presentation of these financial statements in accordance with International
Financial Reporting Standards as adopted by the European Union (EU). This
responsibility includes: designing, implementing and maintaining internal
control relevant to the preparation and fair presentation of financial
statements that are free from material misstatement, whether due to fraud or
error; selecting and applying appropriate accounting policies; and making
accounting estimates that are reasonable in the circumstances.
Auditors' Responsibility
Our responsibility is to express an opinion on these financial statements based
on our audit. Except as discussed in the Basis for Qualified Opinion paragraph,
we conducted our audit in accordance with International Standards on Auditing.
Those Standards require that we comply with ethical requirements and plan and
perform the audit to obtain reasonable assurance whether the financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements. The procedures selected
depend on the auditor's judgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control
relevant to the entity's preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity's internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by the Board of Directors, as well
as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion
Basis for Qualified Opinion
The Company's management have classified the assets and liabilities of its
subsidiary Chepetskoye NGDU ('Chepetskoye') as held-for-sale as of 31 December
2008. A sale agreement was agreed in substance prior to 31 December 2008 and was
concluded in January 2009 with a third party for the disposal of Chepetskoye.
The sale agreement included a currently exercisable call option for the Group to
repurchase Chepetskoye. Due to the existence of the call option, not all of the
criteria under IFRS 5 "Non current assets held for sale and discontinued
operations" required for classification of Chepetskoye as an asset
held-for-sale were met as of 31 December 2008. As a result assets held-for-sale
and liabilities associated with non-current assets held-for-sale were overstated
by US$ 20.0 million and US$ 17.2 million, respectively. This matter does not
impact either total assets or total liabilities as of 31 December 2008.
Qualified Opinion
In our opinion, except for the effect on the financial statements of the matter
described in the Basis for Qualified Opinion paragraph, the consolidated
financial statements give a true and fair view of the financial position of
Urals Energy Public Limited and its subsidiaries as of 31 December 2008, and of
its financial performance and its cash flows for the year then ended in
accordance with International Financial Reporting Standards as adopted by the
EU.
Emphasis of matter - Going Concern
Without further qualifying our audit opinion, we draw attention to Note 3 to the
consolidated financial statements which indicates that the Group incurred a loss
for the year amounting to US$ 403.2 million, was as of 31 December 2008 in
default with respect to its financing arrangements and that the Group's current
liabilities exceed its current assets by US$ 758.2 million as of 31 December
2008. These conditions, along with other matters as set forth in Note 3,
indicate the existence of a material uncertainty which may cast significant
doubt about the Group's ability to continue as a going concern.
Other Matter
This report, including the opinion, has been prepared for and only for the
Company's members as a body and for no other purpose. We do not, in giving this
opinion, accept or assume responsibility for any other purpose or to any other
person to whose knowledge this report may come to.
PricewaterhouseCoopers Limited
Chartered Accountants
Nicosia, 7 December 2009
Urals Energy Public Company Limited
Consolidated Balance Sheets
(presented in US$ thousands)
+--------------------------------------------+-------+-------------+-------------+
| | | 31 December: |
+--------------------------------------------+-------+---------------------------+
| | Note | 2008 | 2007 |
+--------------------------------------------+-------+-------------+-------------+
| | | | |
+--------------------------------------------+-------+-------------+-------------+
| Assets | | | |
+--------------------------------------------+-------+-------------+-------------+
| Current assets | | | |
+--------------------------------------------+-------+-------------+-------------+
| Cash and cash equivalents | | 912 | 28,400 |
+--------------------------------------------+-------+-------------+-------------+
| Accounts receivable and prepayments | 9 | 28,912 | 38,771 |
+--------------------------------------------+-------+-------------+-------------+
| Promissory notes receivable | 16 | - | 64,581 |
+--------------------------------------------+-------+-------------+-------------+
| Current income tax prepayments | | 15 | 905 |
+--------------------------------------------+-------+-------------+-------------+
| Inventories | 10 | 4,100 | 21,464 |
+--------------------------------------------+-------+-------------+-------------+
| Assets held for sale | 8 | 99,163 | 133,363 |
+--------------------------------------------+-------+-------------+-------------+
| Total current assets | | 133,102 | 287,484 |
+--------------------------------------------+-------+-------------+-------------+
| | | | |
+--------------------------------------------+-------+-------------+-------------+
| Non-current assets | | | |
+--------------------------------------------+-------+-------------+-------------+
| Property, plant and equipment | 11 | 336,968 | 518,323 |
+--------------------------------------------+-------+-------------+-------------+
| Supplies and materials for capital | | 13,892 | 22,422 |
| construction | | | |
+--------------------------------------------+-------+-------------+-------------+
| Financial derivatives | 7 | - | 5,103 |
+--------------------------------------------+-------+-------------+-------------+
| Other non-current assets | 12 | 39,885 | 23,729 |
+--------------------------------------------+-------+-------------+-------------+
| Investment in joint venture | 7 | 751,600 | 911,433 |
+--------------------------------------------+-------+-------------+-------------+
| Deferred tax assets | 15 | - | 1,925 |
+--------------------------------------------+-------+-------------+-------------+
| Total non-current assets | | 1,142,345 | 1,482,935 |
+--------------------------------------------+-------+-------------+-------------+
| Total assets | | 1,275,447 | 1,770,419 |
+--------------------------------------------+-------+-------------+-------------+
| | | | |
+--------------------------------------------+-------+-------------+-------------+
| Liabilities and equity | | | |
+--------------------------------------------+-------+-------------+-------------+
| Current liabilities | | | |
+--------------------------------------------+-------+-------------+-------------+
| Accounts payable and accrued expenses | 13 | 29,796 | 23,397 |
+--------------------------------------------+-------+-------------+-------------+
| Income tax payable | | 3,810 | 2,079 |
+--------------------------------------------+-------+-------------+-------------+
| Other taxes payable | 15 | 402 | 3,429 |
+--------------------------------------------+-------+-------------+-------------+
| Financial instruments | 7 | 161,300 | 118,657 |
+--------------------------------------------+-------+-------------+-------------+
| Short-term borrowings and current portion | 16 | 629,749 | 614,031 |
| of long-term borrowings | | | |
+--------------------------------------------+-------+-------------+-------------+
| Advances from customers | 14 | 55,778 | 55,179 |
+--------------------------------------------+-------+-------------+-------------+
| Liabilities associated with non-current | 8 | 10,248 | 27,477 |
| assets held for sale | | | |
+--------------------------------------------+-------+-------------+-------------+
| Current liabilities before warrants | | 891,083 | 844,249 |
| classified as liabilities | | | |
+--------------------------------------------+-------+-------------+-------------+
| Warrants classified as liabilities | | 177 | 1,326 |
+--------------------------------------------+-------+-------------+-------------+
| Total current liabilities | | 891,260 | 845,575 |
+--------------------------------------------+-------+-------------+-------------+
| | | | |
+--------------------------------------------+-------+-------------+-------------+
| Long-term liabilities | | | |
+--------------------------------------------+-------+-------------+-------------+
| Long-term borrowings | | - | 29 |
+--------------------------------------------+-------+-------------+-------------+
| Long-term finance lease obligations | | - | 1,164 |
+--------------------------------------------+-------+-------------+-------------+
| Dismantlement provision | 17 | 15 | 1,448 |
+--------------------------------------------+-------+-------------+-------------+
| Deferred tax liabilities | 15 | 34,344 | 93,835 |
+--------------------------------------------+-------+-------------+-------------+
| Total long-term liabilities | | 34,359 | 96,476 |
+--------------------------------------------+-------+-------------+-------------+
| Total liabilities | | 925,619 | 942,051 |
+--------------------------------------------+-------+-------------+-------------+
| | | | |
+--------------------------------------------+-------+-------------+-------------+
| Equity | | | |
+--------------------------------------------+-------+-------------+-------------+
| Share capital | 18 | 1,122 | 990 |
+--------------------------------------------+-------+-------------+-------------+
| Share premium | 18 | 640,080 | 625,111 |
+--------------------------------------------+-------+-------------+-------------+
| Difference from conversion of share | 18 | (113) | - |
| capital into US$ | | | |
+--------------------------------------------+-------+-------------+-------------+
| Translation difference | | (40,321) | 49,919 |
+--------------------------------------------+-------+-------------+-------------+
| Retained earnings (accumulated deficit) | | (251,045) | 150,744 |
+--------------------------------------------+-------+-------------+-------------+
| Equity attributable to shareholders | | 349,723 | 826,764 |
| of Urals Energy Public Company Limited | | | |
+--------------------------------------------+-------+-------------+-------------+
| Minority interest | | 105 | 1,604 |
+--------------------------------------------+-------+-------------+-------------+
| Total equity | | 349,828 | 828,368 |
+--------------------------------------------+-------+-------------+-------------+
| Total liabilities and equity | | 1,275,447 | 1,770,419 |
+--------------------------------------------+-------+-------------+-------------+
Approved on behalf of the Board of Directors on 24 November 2009
+--------------------------------------------------+--------------------------+
| A.D. Maximov | G.B.Kazakov |
| Chief Executive Officer | Chief Financial Officer |
+--------------------------------------------------+--------------------------+
Urals Energy Public Company Limited
Consolidated Statements of Cash Flows
(presented in US$ thousands)
+--------------------------------------------+-------+-------------+--------------+
| | | Year ended 31 December: |
+--------------------------------------------+-------+----------------------------+
| | Note | 2008 | 2007 |
+--------------------------------------------+-------+-------------+--------------+
| | | | |
+--------------------------------------------+-------+-------------+--------------+
| Revenues | | | |
+--------------------------------------------+-------+-------------+--------------+
| Gross revenues | 19 | 222,291 | 194,111 |
+--------------------------------------------+-------+-------------+--------------+
| Less: excise taxes | 19 | (287) | 1,103 |
+--------------------------------------------+-------+-------------+--------------+
| Less: export duties | | (47,150) | (42,786) |
+--------------------------------------------+-------+-------------+--------------+
| Net revenues after excise taxes, export | | 174,854 | 152,428 |
| duties and VAT | | | |
+--------------------------------------------+-------+-------------+--------------+
| | | | |
+--------------------------------------------+-------+-------------+--------------+
| Cost of sales | 20 | (166,721) | (131,389) |
+--------------------------------------------+-------+-------------+--------------+
| Impairment charges |6, 11 | (94,955) | (31,039) |
+--------------------------------------------+-------+-------------+--------------+
| Gross loss | | (86,822) | (10,000) |
+--------------------------------------------+-------+-------------+--------------+
| | | | |
+--------------------------------------------+-------+-------------+--------------+
| Selling, general and administrative | 21 | (44,331) | (59,233) |
| expenses | | | |
+--------------------------------------------+-------+-------------+--------------+
| Excess of net assets acquired over | | - | 208,713 |
| purchase price | | | |
+--------------------------------------------+-------+-------------+--------------+
| Other operating (loss) gain | | (939) | 197 |
+--------------------------------------------+-------+-------------+--------------+
| Total operating costs | | (45,270) | 149,677 |
+--------------------------------------------+-------+-------------+--------------+
| | | | |
+--------------------------------------------+-------+-------------+--------------+
| Operating (loss) profit | | (132,092) | 139,677 |
+--------------------------------------------+-------+-------------+--------------+
| | | | |
+--------------------------------------------+-------+-------------+--------------+
| Gain from disposal of assets held for sale | 8 | 8,121 | - |
+--------------------------------------------+-------+-------------+--------------+
| | | | |
+--------------------------------------------+-------+-------------+--------------+
| Interest income | 16 | 5,654 | 2,622 |
+--------------------------------------------+-------+-------------+--------------+
| Interest expense | 16 | (98,451) | (47,648) |
+--------------------------------------------+-------+-------------+--------------+
| Foreign currency (loss) gain | | (17,428) | 9,651 |
+--------------------------------------------+-------+-------------+--------------+
| Loss from equity investment in joint | 7 | (159,833) | - |
| venture | | | |
+--------------------------------------------+-------+-------------+--------------+
| Change in fair value of financial | 7 | (46,597) | 1,600 |
| derivatives | | | |
+--------------------------------------------+-------+-------------+--------------+
| Total net finance costs | | (316,655) | (33,775) |
+--------------------------------------------+-------+-------------+--------------+
| (Loss) Profit before income tax | | (440,626) | 105,902 |
+--------------------------------------------+-------+-------------+--------------+
| Income tax benefit | 15 | 37,377 | 7,889 |
+--------------------------------------------+-------+-------------+--------------+
| (Loss) Profit for the year | | (403,249) | 113,791 |
+--------------------------------------------+-------+-------------+--------------+
| | | | |
+--------------------------------------------+-------+-------------+--------------+
| (Loss) Profit for the year attributable | | (1,460) | 69 |
| to: | | | |
| - Minority interest | | | |
+--------------------------------------------+-------+-------------+--------------+
| - Shareholders of Urals Energy Public | | (401,789) | 113,722 |
| Company Limited | | | |
+--------------------------------------------+-------+-------------+--------------+
| | | | |
+--------------------------------------------+-------+-------------+--------------+
| (Loss) Earnings per share of profit | 18 | | |
| attributable to | | | |
| shareholders of Urals Energy Public | | | |
| Company Limited: | | | |
+--------------------------------------------+-------+-------------+--------------+
| - Basic earnings per share (in US dollar | | (2.26) | 0.94 |
| per share) | | | |
+--------------------------------------------+-------+-------------+--------------+
| - Diluted earnings per share (in US dollar | | (2.26) | 0.82 |
| per share) | | | |
+--------------------------------------------+-------+-------------+--------------+
| | | | |
+--------------------------------------------+-------+-------------+--------------+
Urals Energy Public Company Limited
Consolidated Statements of Cash Flows
(presented in US$ thousands)
+-------------------------------------------+-------+---------------+-------------+
| | | Year ended 31 December: |
+-------------------------------------------+-------+-----------------------------+
| | Note | 2008 | 2007 |
+-------------------------------------------+-------+---------------+-------------+
| | | | |
+-------------------------------------------+-------+---------------+-------------+
| Cash flows from operating activities | | | |
+-------------------------------------------+-------+---------------+-------------+
| (Loss) Profit before income tax | | (440,626) | 105,902 |
+-------------------------------------------+-------+---------------+-------------+
| Adjustments for: | | | |
+-------------------------------------------+-------+---------------+-------------+
| Depreciation, | 20 | 16,514 | 28,974 |
| amortization and | | | |
| depletion | | | |
+-------------------------------------------+-------+---------------+-------------+
| Change in fair | 7 | 46,597 | (1,600) |
| value of financial | | | |
| derivatives | | | |
+-------------------------------------------+-------+---------------+-------------+
| Loss from equity | 7 | 159,833 | - |
| investment in | | | |
| joint venture | | | |
+-------------------------------------------+-------+---------------+-------------+
| Share-based | 18 | 8,971 | 14,113 |
| payment | | | |
+-------------------------------------------+-------+---------------+-------------+
| Interest income | 16 | (5,654) | (2,622) |
+-------------------------------------------+-------+---------------+-------------+
| Interest expense | 16 | 98,451 | 47,648 |
+-------------------------------------------+-------+---------------+-------------+
| Gain from disposal | 8 | (8,121) | - |
| of assets held for | | | |
| sale | | | |
+-------------------------------------------+-------+---------------+-------------+
| Accrual (release) | 10 | 4,307 | (882) |
| of provision on | | | |
| inventory | | | |
+-------------------------------------------+-------+---------------+-------------+
| Impairment charges |6, 11 | 94,955 | 31,039 |
+-------------------------------------------+-------+---------------+-------------+
| Write-off of | 11 | 2,552 | - |
| unsuccessful | | | |
| drilling costs | | | |
+-------------------------------------------+-------+---------------+-------------+
| Bad debt write-off | 21 | 2,161 | - |
+-------------------------------------------+-------+---------------+-------------+
| Release of other | 15 | (189) | (1,929) |
| taxes provision | | | |
+-------------------------------------------+-------+---------------+-------------+
| Excess of net | 7 | - | (208,713) |
| assets acquired | | | |
| over purchase | | | |
| price | | | |
+-------------------------------------------+-------+---------------+-------------+
| Foreign currency | | 17,428 | (9,651) |
| (gain) loss | | | |
+-------------------------------------------+-------+---------------+-------------+
| Other non-cash | | (7) | 620 |
| transactions | | | |
+-------------------------------------------+-------+---------------+-------------+
| | | | |
+-------------------------------------------+-------+---------------+-------------+
| Operating cash flows before changes | | (2,828) | 2,899 |
| in working capital | | | |
+-------------------------------------------+-------+---------------+-------------+
| Increase in inventories | | (10,666) | (7,507) |
+-------------------------------------------+-------+---------------+-------------+
| Increase in accounts receivable and | | (12,848) | (6,627) |
| prepayments | | | |
+-------------------------------------------+-------+---------------+-------------+
| Increase in accounts payable and accrued | | 25,781 | 5,130 |
| expenses | | | |
+-------------------------------------------+-------+---------------+-------------+
| Increase in advances from customers | | 693 | 24,322 |
+-------------------------------------------+-------+---------------+-------------+
| Decrease in other taxes payable | | (2,187) | (8,710) |
+-------------------------------------------+-------+---------------+-------------+
| | | | |
+-------------------------------------------+-------+---------------+-------------+
| Cash (used in) generated from operations | | (2,055) | 9,507 |
+-------------------------------------------+-------+---------------+-------------+
| Interest received | | 2,389 | 2,156 |
+-------------------------------------------+-------+---------------+-------------+
| Interest paid | | (78,022) | (35,632) |
+-------------------------------------------+-------+---------------+-------------+
| Income tax paid | | (2,136) | (1,824) |
+-------------------------------------------+-------+---------------+-------------+
| Net cash used in operating activities | | (79,824) | (25,793) |
+-------------------------------------------+-------+---------------+-------------+
| | | | |
+-------------------------------------------+-------+---------------+-------------+
| Cash flows from investing activities | | | |
+-------------------------------------------+-------+---------------+-------------+
| Proceeds from sale of subsidiaries, net | 8 | 93,107 | - |
| of cash acquired | | | |
+-------------------------------------------+-------+---------------+-------------+
| Acquisition of joint venture | | (589) | (495,283) |
+-------------------------------------------+-------+---------------+-------------+
| Purchase of property, plant and equipment | | (68,354) | (80,357) |
+-------------------------------------------+-------+---------------+-------------+
| Purchase of intangible assets | | (82) | (1,626) |
+-------------------------------------------+-------+---------------+-------------+
| Loans issued | | (26,616) | (6,057) |
+-------------------------------------------+-------+---------------+-------------+
| Proceeds on loans issued | | 774 | - |
+-------------------------------------------+-------+---------------+-------------+
| Purchase of promissory notes | 16 | - | (70,000) |
+-------------------------------------------+-------+---------------+-------------+
| Repayment of promissory notes | 16 | 64,247 | 5,753 |
+-------------------------------------------+-------+---------------+-------------+
| Net cash generated from (used in) | | 62,487 | (647,570) |
| investing activities | | | |
+-------------------------------------------+-------+---------------+-------------+
| | | | |
+-------------------------------------------+-------+---------------+-------------+
| Cash flows from financing activities | | | |
+-------------------------------------------+-------+---------------+-------------+
| Proceeds from borrowings | 16 | 18,000 | 776,000 |
+-------------------------------------------+-------+---------------+-------------+
| Repayment of loan organization fees | 16 | (10,000) | (11,586) |
+-------------------------------------------+-------+---------------+-------------+
| Repayment of borrowings | 16 | (18,365) | (198,924) |
+-------------------------------------------+-------+---------------+-------------+
| Purchase of financial derivatives | | - | (20,457) |
+-------------------------------------------+-------+---------------+-------------+
| Repayment of financial derivatives | | - | 7,737 |
+-------------------------------------------+-------+---------------+-------------+
| Finance lease principal payments | | (468) | (423) |
+-------------------------------------------+-------+---------------+-------------+
| Cash proceeds from issuance of ordinary | 18 | 6,155 | 125,830 |
| shares gross | | | |
+-------------------------------------------+-------+---------------+-------------+
| Expenses related to issuance of ordinary | 18 | (263) | (9,228) |
| shares | | | |
+-------------------------------------------+-------+---------------+-------------+
| Cash proceeds from exercise of options | 18 | 125 | - |
+-------------------------------------------+-------+---------------+-------------+
| Net cash (used in) generated from | | (4,816) | 668,949 |
| financing activities | | | |
+-------------------------------------------+-------+---------------+-------------+
| Effect of exchange rate changes on cash | | (5,354) | 111 |
| and cash equivalents | | | |
+-------------------------------------------+-------+---------------+-------------+
| Net decrease in cash and cash equivalents | | (27,507) | (4,303) |
+-------------------------------------------+-------+---------------+-------------+
| Cash and cash equivalents at the | | 28,779 | 33,082 |
| beginning of the year | | | |
+-------------------------------------------+-------+---------------+-------------+
| Cash and cash equivalents at the end of | | 1,272 | 28,779 |
| the year | | | |
+-------------------------------------------+-------+---------------+-------------+
| Cash and cash equivalents at the end of | | 912 | 28,400 |
| the year of the Group, excluding those | | | |
| classified as held for sale | | | |
+-------------------------------------------+-------+---------------+-------------+
| Cash and cash equivalents at the end of | 8 | 360 | 379 |
| the year of the assets classified as held | | | |
| for sale | | | |
+-------------------------------------------+-------+---------------+-------------+
Urals Energy Public Company Limited
Consolidated Statements of Changes in Shareholder's Equity
(presented in US$ thousands)
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| | Notes | Share | Share | Difference | Cumulative | Retained | Equity | Minority | Total |
| | | capital | premium | from | Translation | earnings | attributable | interest | equity |
| | | | | conversion | Adjustment | (accumulated | to | | |
| | | | | of share | | deficit) | Shareholders | | |
| | | | | capital | | | of Urals | | |
| | | | | into US$ | | | Energy | | |
| | | | | | | | Public | | |
| | | | | | | | Company | | |
| | | | | | | | Limited | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| Balance | | 633 | 401,448 | - | 22,445 | 37,022 | 461,548 | 1,428 | 462,976 |
| at 1 | | | | | | | | | |
| January | | | | | | | | | |
| 2007 | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| Effect | | - | - | - | 27,474 | - | 27,474 | 107 | 27,581 |
| of | | | | | | | | | |
| currency | | | | | | | | | |
| translation | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| Profit | | - | - | - | - | 113,722 | 113,722 | 69 | 113,791 |
| for | | | | | | | | | |
| the | | | | | | | | | |
| year | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| Total | | - | - | - | 27,474 | 113,722 | 141,196 | 176 | 141,372 |
| recognized | | | | | | | | | |
| income | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| Issuance | 18 | 357 | 209,550 | - | - | - | 209,907 | - | 209,907 |
| of | | | | | | | | | |
| shares | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| Share-based | 18 | - | 14,113 | - | - | - | 14,113 | - | 14,113 |
| payment | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| Balance | | 990 | 625,111 | - | 49,919 | 150,744 | 826,764 | 1,604 | 828,368 |
| at 31 | | | | | | | | | |
| December | | | | | | | | | |
| 2007 | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| Effect | | - | - | - | (76,982) | - | (76,982) | (39) | (77,021) |
| of | | | | | | | | | |
| currency | | | | | | | | | |
| translation | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| Accumulative | | - | - | - | (13,258) | 13,258 | - | - | - |
| translation | | | | | | | | | |
| adjustment | | | | | | | | | |
| relating to | | | | | | | | | |
| disposed | | | | | | | | | |
| subsidiaries | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| Loss | | - | - | - | | (415,047) | (415,047) | (1,460) | (416,507) |
| for | | | | | | | | | |
| the | | | | | | | | | |
| year | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| Total | | - | - | - | (90,240) | (401,789) | (492,029) | (1,499) | (493,528) |
| recognized | | | | | | | | | |
| loss | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| Issuance | 18 | 19 | 5,998 | - | - | - | 6,017 | - | 6,017 |
| of | | | | | | | | | |
| shares | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| Share-based | 18 | - | 8,971 | - | - | - | 8,971 | - | 8,971 |
| payment | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| Difference | 18 | 113 | - | (113) | - | - | - | - | - |
| from | | | | | | | | | |
| conversion | | | | | | | | | |
| of share | | | | | | | | | |
| capital | | | | | | | | | |
| into US$ | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
| Balance | | 1,122 | 640,080 | (113) | (40,321) | (251,045) | 349,723 | 105 | 349,828 |
| at 31 | | | | | | | | | |
| December | | | | | | | | | |
| 2008 | | | | | | | | | |
+--------------+--------+---------+---------+------------+-------------+--------------+--------------+----------+-----------+
Urals Energy Public Company Limited
Notes to the Consolidated Financial Statements
(presented in US$ thousands)
1Activities
Urals Energy Public Company Limited ("Urals Energy" or the "Company" or "UEPCL")
was incorporated as a limited liability company in Cyprus on 10 November 2003.
Urals Energy and its subsidiaries (the "Group") are primarily engaged in oil and
gas exploration and production in the Russian Federation and processing of crude
oil for distribution on both the Russian and international markets.
The registered office of Urals Energy is at 31 Evagorou Avenue, Suite 34,
CY-1066, Nicosia, Cyprus. UEPCL's shares are traded on the AIM Market operated
by the London Stock Exchange.On 30 June 2009 the Company's shares were suspended
from trading on LSE AIM due to non-compliance with Rule 19 of the AIM rules for
not publishing 2008 year-end accounts. For more information see Note 25.
The Group comprises UEPCL and the following main subsidiaries and joint venture
(Note 7):
+---------------------+---------------+--------+--------+
| Entity | Jurisdiction | Effective |
| | | ownership |
| | | interest |
| | | at 31 December |
+ + +-----------------+
| | | 2008 | 2007 |
+---------------------+---------------+--------+--------+
| Exploration | | | |
| and | | | |
| production | | | |
+---------------------+---------------+--------+--------+
| OOO | Irkutsk | 100.0% | 100.0% |
| Oil | | | |
| Company | | | |
| Dulisma | | | |
| ("Dulisma") | | | |
+---------------------+---------------+--------+--------+
| ZAO Petrosakh | Sakhalin | 97.2% | 97.2% |
| ("Petrosakh") | | | |
+---------------------+---------------+--------+--------+
| ZAO | Nenetsky | 100.0% | 100.0% |
| Arcticneft | | | |
| ("Arcticneft") | | | |
+---------------------+---------------+--------+--------+
| OOO | Irkutsk | 100.0% | 100.0% |
| Lenskaya | | | |
| Transportnaya | | | |
| Kompaniya | | | |
| ("LTK") | | | |
+---------------------+---------------+--------+--------+
| ZAO Chepetskoye | Udmurtia | 100.0% | 100.0% |
| NGDU | | | |
| ("Chepetskoye") | | | |
+---------------------+---------------+--------+--------+
| OOO | Sakha-Yakutia | 35.3% | 35.3% |
| Taas-Yuryakh | | | |
| Neftegazdobycha | | | |
| ("Taas") | | | |
+---------------------+---------------+--------+--------+
| OOO CNPSEI | Komi | 0.0% | 100.0% |
| ("CNPSEI") | | | |
+---------------------+---------------+--------+--------+
| OOO | Komi | 0.0% | 100.0% |
| Dinyu | | | |
| ("Dinyu") | | | |
+---------------------+---------------+--------+--------+
| OOO | Komi | 0.0% | 100.0% |
| Michayuneft | | | |
| ("Michayuneft") | | | |
+---------------------+---------------+--------+--------+
| OOO | Komi | 0.0% | 100.0% |
| Nizhneomrinskaya | | | |
| Neft | | | |
| ("Nizhneomrinskaya | | | |
| Neft") | | | |
+---------------------+---------------+--------+--------+
| | | | |
+---------------------+---------------+--------+--------+
| Management | | | |
| company | | | |
+---------------------+---------------+--------+--------+
| OOO Urals | Moscow | 100.0% | 100.0% |
| Energy | | | |
+---------------------+---------------+--------+--------+
| Urals | United | 100.0% | 100.0% |
| Energy | Kingdom | | |
| (UK) | | | |
| Limited | | | |
| (dormant | | | |
| starting | | | |
| from May | | | |
| 2007) | | | |
+---------------------+---------------+--------+--------+
| | | | |
+---------------------+---------------+--------+--------+
| Exploration | | | |
+---------------------+---------------+--------+--------+
| OOO Urals-Nord | Nenetsky | 100.0% | 100.0% |
| ("Urals-Nord") | | | |
+---------------------+---------------+--------+--------+
| | | | |
+---------------------+---------------+--------+--------+
2Summary of Significant Accounting Policies
Basis of preparation. The consolidated financial statements of the Group have
been prepared in accordance with International Financial Reporting Standards
(IFRS), as adopted by the European Union (EU).
All International Financial Reporting Standards issued by the International
Accounting Standards Board (IASB) and effective as at 1 January 2008 have been
adopted by the EU through the endorsement procedure established by the European
Commission, with the exception of certain provisions of IAS 39 "Financial
Instruments: Recognition and Measurement" relating to portfolio hedge
accounting.
These consolidated financial statements have been prepared under the historical
cost convention as modified by the change in fair value of financial
instruments. The preparation of consolidated financial statements in conformity
with IFRS requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the reporting date and the
reported amounts of revenues and expenses during the reporting period. These
policies have been consistently applied to all the periods presented, unless
otherwise stated. Critical accounting estimates and judgements are disclosed in
Note 5. Actual results could differ from the estimates.
Functional and presentation currency. The United States dollar ("US dollar or
US$ or $") is the presentation currency for the Group's operations as management
have used the US dollar accounts to manage the Group's financial risks and
exposures, and to measure its performance. Financial statements of the Russian
subsidiaries are measured in Russian Roubles, their functional currency.
Translation to functional currency. Monetary balance sheet items denominated in
foreign currencies have been remeasured using the exchange rate at the
respective balance sheet date. Exchange gains and losses resulting from foreign
currency translation are included in the determination of profit or loss. The US
dollar to Russian Rouble exchange rates were 29.38 and 24.55 as of 31 December
2008 and 2007, respectively.
Translation to presentation currency. The Group's financial statements are
presented in US dollars in accordance with IAS 21 The Effects of Changes in
Foreign Exchange Rates. The results and financial position of each group entity
having a functional currency different from the presentation currency are
translated into the presentation currency as follows:
(i) Assets and liabilities for each balance sheet presented are translated at
the closing rate at the date of that balance sheet. Goodwill and fair value
adjustments arising on the acquisitions are treated as assets and liabilities of
the acquired entity.
(ii) Income and expenses for each income statement are translated at average
exchange rates (unless this average is not a reasonable approximation of the
cumulative effect of the rates prevailing on the transaction dates, in which
case income and expenses are translated at the dates of the transactions).
(iii) All resulting exchange differences are recognised as a separate
component of equity.
When a subsidiary is disposed of through sale, liquidation, repayment of share
capital or abandonment of all, or part of, that entity, the exchange differences
deferred in equity are reclassified to the consolidated income statement.
2Summary of Significant Accounting Policies (continued)
Group accounting. Subsidiaries, which are those entities in which the Group has
an interest of more than one half of the voting rights, or otherwise has power
to exercise control over the operations, are consolidated. Subsidiaries are
consolidated from the date on which control is transferred to the Group and are
no longer consolidated from the date that control ceases. The purchase method of
accounting is used to account for the acquisition of subsidiaries by the Group.
The cost of an acquisition is measured as the fair value of the consideration
provided or liabilities incurred or assumed at the date of exchange plus costs
directly attributable to the acquisition.
All intercompany transactions, balances and unrealised gains on transactions
between group companies are eliminated; unrealised losses are also eliminated
unless the transaction provides evidence of an impairment of the asset
transferred.
Minority interest at the balance sheet date represents the minority
shareholders' portion of the fair values of the identifiable assets, liabilities
and contingent liabilities of the subsidiary at the acquisition date, and the
minority's portion of movements in equity since the date of the combination.
Minority interest is presented as a separate component of equity. Where the
losses applicable to the minority in a consolidated subsidiary exceed the
minority interest in the equity of the subsidiary, the excess and any further
losses applicable to the minority are charged against the majority interest
except to the extent that the minority has a binding obligation to, and is able
to, make good the losses. If the subsidiary subsequently reports profits, the
majority interest is allocated all such profits until the minority's share of
losses previously absorbed by the majority has been recovered.
The Group applies a policy of treating transactions with minority interests as
transactions with parties external to the Group. Disposals to minority interests
result in gains or losses for the Group that are recorded in the consolidated
income statement. Purchases from minority interests result in goodwill, being
the difference between any consideration paid and the relevant share acquired of
the carrying value of net assets of the subsidiary.
The Group accounts for the interest in a joint venture using the equity method
of accounting. Investments in joint ventures are initially recognised at fair
value. The group's investment in joint venture includes negative goodwill
identified on acquisition, and immediately recognised as income in the
consolidated income statement.
The Group's share of its joint venture's post-acquisition profits or losses is
recognised in the consolidated income statement, and its share of
post-acquisition movements in reserves is recognised in reserves. The cumulative
post-acquisition movements are adjusted against the carrying amount of the
investment. When the Group's share of losses in a joint venture equals or
exceeds its interest in the joint venture, including any other unsecured
receivables, the Group does not recognise further losses, unless it has incurred
obligations or made payments on behalf of the associate.
Unrealised gains on transactions between the Group and its joint venture are
eliminated to the extent of the Group's interest in the joint venture.
Unrealised losses are also eliminated unless the transaction provides evidence
of an impairment of the asset transferred. Accounting policies of joint venture
have been changed where necessary to ensure consistency with the policies
adopted by the Group.
Dilution gains and losses arising in investments in joint venture are recognised
in equity.
2Summary of Significant Accounting Policies (continued)
Property, plant and equipment.Property, plant and equipment acquired as part of
a business combination is recorded at fair value at the acquisition date and
adjusted for accumulated depreciation, depletion and impairment. All subsequent
additions are recorded at historical cost of acquisition or construction and
adjusted for accumulated depreciation, depletion and impairment. Oil and gas
exploration and production activities are accounted for in a manner similar to
the successful efforts method. Costs of successful development and exploratory
wells are capitalised. The cost of property, plant and equipment includes
provisions for dismantlement, abandonment and site restoration (see Provisions
below).
The Group accounts for exploration and evaluation activities in accordance with
IFRS 6, Exploration for and Evaluation of Mineral Resources. Geological and
geophysical exploration costs are charged against income as incurred. Costs
directly associated with an exploration well are initially capitalised as an
intangible asset until the drilling of the well is complete and the results have
been evaluated. These costs include employee remuneration, materials and fuel
used, rig costs, delay rentals and payments made to contractors. If hydrocarbons
are not found, the exploration expenditure is written off as a dry hole. If
hydrocarbons are found and, subject to further appraisal activity, which may
include the drilling of further wells (exploration or exploratory-type
stratigraphic test wells), are likely to be capable of commercial development,
the costs continue to be carried as an asset. All such carried costs are subject
to technical, commercial and management review at least once a year to confirm
the continued intent to develop or otherwise extract value from the discovery.
When this is no longer the case, the costs are written off. When proved reserves
of oil and natural gas are determined and development is sanctioned, the
relevant expenditure is transferred to property, plant and equipment.
Depletion of capitalized costs of proved oil and gas properties is calculated
using the unit-of-production method for each field based upon proved reserves
for property acquisitions and proved developed reserves for exploration and
development costs. Oil and gas reserves for this purpose are determined in
accordance with Society of Petroleum Engineers definitions and were estimated by
DeGolyer and MacNaughton, the Group's independent reservoir engineers.Gains or
losses from retirements or sales of oil and gas properties are included in the
determination of profit for the year.
Depreciation of non oil and gas property, plant and equipment is calculated
using the straight-line method over their estimated remaining useful lives, as
follows:
+-----------+--------+-----------+
| | | Estimated |
| | | useful |
| | | life |
+-----------+--------+-----------+
| Refinery | | 19 |
| and | | |
| related | | |
| equipment | | |
+-----------+--------+-----------+
| Buildings | | 20 |
+-----------+--------+-----------+
| Other | | 6 to |
| assets | | 20 |
+-----------+--------+-----------+
The assets' residual values and useful lives are reviewed, and adjusted if
appropriate, at each balance sheet date. Gains and losses on disposals are
determined by comparing the proceeds with the carrying amount and are recognised
within 'Other (losses)/gains - net' in the consolidated income statement.
Intangible assets. The Group measures intangible assets at cost less accumulated
amortisation and impairment losses. All of the Group's other intangible assets
have finite useful lives and primarily include capitalised computer software and
licences.
Acquired computer software licences are capitalised on the basis of the costs
incurred to acquire and bring them to use.
Development costs that are directly associated with identifiable and unique
software controlled by the Group are recorded as intangible assets if probable
future economic benefits will be generated. Capitalised costs include staff
costs of the software development team and an appropriate portion of relevant
overheads. All other costs associated with computer software, e.g. its
maintenance, are expensed when incurred.
Intangible assets are amortised using the straight-line method over their useful
lives:
+------------------------------------------------------+---------------------+
| | Estimated useful |
| | life |
+------------------------------------------------------+---------------------+
| Software licences | 1-5 |
+------------------------------------------------------+---------------------+
| Capitalised internal software development costs | 3 |
+------------------------------------------------------+---------------------+
| Other licences | 5 to 7 |
+------------------------------------------------------+---------------------+
2Summary of Significant Accounting Policies (continued)
Provisions. Provisions are recognised when the Group has a present legal or
constructive obligation as a result of past events and when it is probable that
an outflow of resources embodying economic benefits will be required to settle
the obligation, and a reliable estimate of the amount of the obligation can be
made.
Provisions, including those related to dismantlement, abandonment and site
restoration, are evaluated and re-estimated annually, and are included in the
financial statements at each balance sheet date at the present value of the
expenditures expected to be required to settle the obligation using pre - tax
discount rates which reflect the current market assessment of the time value of
money and the risks specific to the liability.
Changes in provisions resulting from the passage of time are reflected in the
consolidated income statement each year under financial items. Other changes in
provisions, relating to a change in the expected pattern of settlement of the
obligation, changes in the discount rate or in the estimated amount of the
obligation, are treated as a change in accounting estimate in the period of the
change. Changes in provisions relating to dismantlement, abandonment and site
restoration are added to, or deducted from, the cost of the related asset in the
current period. The amount deducted from the cost of the asset should not exceed
its carrying amount. If a decrease in the liability exceeds the carrying amount
of the asset, the excess is recognised immediately in profit or loss.
The provision for dismantlement liability is recorded on the balance sheet, with
a corresponding amount being recorded as part of property, plant and equipment
in accordance with IAS 16.
Leases. Leases of property, plant and equipment where the Group has
substantially all the risks and rewards of ownership are classified as finance
leases. Finance leases are capitalised at the commencement of the lease at the
lower of the fair value of the leased property or the present value of the
minimum lease payments. The corresponding rental obligations, net of finance
charges, are presented as finance lease obligations on the consolidated balance
sheet. The interest element of the finance cost is charged to the consolidated
income statement over the lease period. Property, plant and equipment acquired
under finance leases are depreciated over the shorter of the useful life of the
asset or the lease term.
Leases in which a significant portion of the risks and rewards of ownership are
retained by the lessor are classified as operating leases. Payments made under
operating leases are charged to the consolidated income statement on a
straight-line basis over the period of the lease.
Impairment of assets. Assets that are subject to depreciation and depletion are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. An impairment loss is
recognised for the amount by which the asset's carrying amount exceeds its
recoverable amount. The recoverable amount is the higher of an asset's fair
value less costs to sell or value in use. For the purposes of assessing
impairment, assets are grouped by license areas, which are the lowest levels for
which there are separately identifiable cash flows (cash-generating units).
Inventories. Inventories of extracted crude oil, materials and supplies and
construction materials are valued at the lower of the weighted-average cost and
net realisable value. General and administrative expenditure is excluded from
inventory costs and expensed in the period incurred.
Trade receivables. Trade receivables are recognised initially at fair value and
subsequently measured at amortised cost using the effective interest method, net
of provision for impairment. A provision for impairment of trade receivables is
established when there is objective evidence that the Group will not be able to
collect all amounts due according to the original terms of receivables. The
amount of the provision is the difference between the asset's carrying amount
and the present value of estimated future cash flows, discounted at the original
effective interest rate. The change in the amount of the provision is recognised
in the consolidated income statement.
2Summary of Significant Accounting Policies (continued)
Cash and cash equivalents. Cash and cash equivalents includes cash in hand,
deposits held at call with banks, and other short-term highly liquid investments
with original maturities of three months or less. Cash and cash equivalents are
carried at amortised cost using the effective interest method. Restricted
balances are excluded from cash and cash equivalents for the purposes of the
consolidated cash flow statement. Balances restricted from being exchanged or
used to settle a liability for at least twelve months after the balance sheet
date are included in other non-current assets.
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 balance sheet on a gross basis and disclosed
separately as an asset and liability. Where provision has been made for
impairment of receivables, impairment loss is recorded for the gross amount of
the debtor, including VAT.
Borrowings. Borrowings are recognised initially at the fair value of the
liability, net of transaction costs incurred. In subsequent periods, borrowings
are stated at amortised cost using the effective yield method; any difference
between amount at initial recognition and the redemption amount is recognised as
interest expense over the period of the borrowings. Borrowings are classified as
current liabilities unless the Group has an unconditional right to defer
settlement of the liability for at least 12 months after the balance sheet date.
Interest costs on borrowings to finance the construction of property, plant and
equipment are capitalised during the period of time that is required to complete
and prepare the asset for its intended use.
Loans receivable. The loans advanced by the Group are classified as "loans and
receivables" in accordance with IAS 39 and stated at amortised cost using the
effective interest method. These loans are individually tested for impairment at
each reporting date.
Income taxes. Income taxes have been provided for in the consolidated financial
statements in accordance with Russian legislation enacted or substantively
enacted by the balance sheet date. The income tax charge or benefit comprises
current tax and deferred tax and is recognised in the consolidated income
statement unless it relates to transactions that are recognised, in the same or
a different period, directly in equity.
Current tax is the amount expected to be paid to or recovered from the taxation
authorities in respect of taxable profits or losses for the current and prior
periods. Taxes other than on income are recorded within operating expenses.
Deferred income tax is calculated at rates enacted or substantively enacted by
the balance sheet date, using the balance sheet liability method, for all
temporary differences between the tax bases of assets and liabilities and their
carrying values for financial reporting purposes. The principal temporary
differences arise from depreciation on property, plant and equipment, provisions
and other fair value adjustments to long-term items, and expenses which are
charged to the consolidated income statement before they become deductible for
tax purposes.
Deferred income tax assets attributable to deducible temporary differences,
unused tax losses and credits are recognised only to the extent that it is
probable that future taxable profit or taxable temporary differences will be
available against which they can be utilised.
Deferred income tax assets and liabilities are offset when the Group has a
legally enforceable right to set off current tax assets against current tax
liabilities, when deferred tax balances relate to the same regulatory body, and
when they relate to the same taxable entity.
The Group's uncertain tax positions are reassessed by management at every
balance sheet date. Liabilities are recorded for income tax positions that are
determined by management as more likely than not to result in additional taxes
being levied if the positions were to be challenged by the tax authorities. The
assessment is based on the interpretation of tax laws that have been enacted or
substantively enacted by the balance sheet date and any known court or other
rulings on such issues. Liabilities for penalties, interest and taxes other than
on income are recognized based on management's best estimate of the expenditure
required to settle the obligations at the balance sheet date.
2Summary of Significant Accounting Policies (continued)
Employee benefits. Wages, salaries, contributions to the Russian Federation
state pension and social insurance funds, paid annual leave and sick leave,
bonuses, and non-monetary benefits (such as health services and kindergarten
services) are accrued in the year in which the associated services are rendered
by the employees of the Group.
Social costs. The Group incurs employee costs related to the provision of
benefits such as health insurance. These amounts principally represent an
implicit cost of employing production workers and, accordingly, are included in
the cost of inventory.
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
goods or 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.
Pension costs. The Group makes required contributions to the Russian Federation
state pension scheme on behalf of its employees. Mandatory contributions to the
governmental pension scheme are expensed or capitalized to inventories on a
basis consistent with the associated salaries and wages.
Revenue recognition.The Group recognises revenue when the amount of revenue can
be reliably measured and it is probable that economic benefits will flow to the
entity, typically when crude oil or refined products are dispatched to customers
and title has transferred. Gross revenues include export duties and excise taxes
but exclude value added taxes.
Interest income is recognised on a time-proportion basis using the effective
interest method. When a receivable is impaired, the Group reduces the carrying
amount to its recoverable amount, being the estimated future cash flow
discounted at the original effective interest rate of the instrument, and
continues unwinding the discount as interest income. Interest income on impaired
loans is recognised using the original effective interest rate.
Segments. The Group operates in one business segment which is crude oil
exploration and production. The Group assesses its results of operations and
makes its strategic and investment decisions based on the analysis of its
profitability as a whole. The Group operates within one geographic segment,
which is the Russian Federation.
Warrants. Warrants issued that allow the holder to purchase shares of the
Group's stock are recorded at fair value at issuance and recorded as liabilities
unless the number of equity instruments to be issued to settle the warrants and
the exercise price are fixed in the issuing entities' functional currency at the
time of grant, in which case they are recorded within shareholders' equity.
Changes in the fair value of warrants recorded as liabilities are recorded in
the consolidated income statement.
Financial derivatives. The fair value of options is evaluated using market
prices if available, taking into account the terms and conditions of the
options, upon which those derivative instruments were issued. If market prices
are not available, the fair value of the equity instruments granted is estimated
using a valuation technique to estimate what the price of those equity
instruments would have been on the measurement date in an arm's length
transaction between knowledgeable, willing parties.
Share capital. Ordinary shares are classified as equity. Incremental costs
directly attributable to the issue of new shares are shown in equity as a
deduction, net of tax, from the proceeds. Any excess of the fair value of
consideration received over the par value of shares issued is presented in the
notes as a share premium.
Share-based payments. The fair value of the employee services received in
exchange for the grant of options is recognised as an expense. The total amount
to be expensed over the vesting period is determined by reference to the fair
value of the options granted, using market prices, taking into account the terms
and vesting conditions upon which those equity instruments were granted.
2Summary of Significant Accounting Policies (continued)
Earnings per share. Earnings per share are determined by dividing the profit or
loss attributable to equity holders of the Group by the weighted average number
of participating shares outstanding during the reporting year.
Non-current assets classified as held for sale. Non-current assets and disposal
groups (which may include both non-current and current assets) are classified in
the consolidated balance sheet as 'Non-current assets held for sale' if their
carrying amount will be recovered principally through a sale transaction within
twelve months after the balance sheet date. Assets are reclassified when all of
the following conditions are met: (a) the assets are available for immediate
sale in their present condition; (b) the Group's management approved and
initiated an active programme to locate a buyer; (c) the assets are actively
marketed for a sale at a reasonable price; (d) the sale is expected to occur
within one year and (d) it is unlikely that significant changes to the plan to
sell will be made or that the plan will be withdrawn. Non-current assets or
disposal groups classified as held for sale in the current period's consolidated
balance sheet are not reclassified or re-presented in the comparative
consolidated balance sheet to reflect the classification at the end of the
current period.
A disposal group is assets (current or non-current) to be disposed of, by sale
or otherwise, together as a group in a single transaction, and liabilities
directly associated with those assets that will be transferred in the
transaction. Goodwill is included if the disposal group includes an operation
within a cash-generating unit to which goodwill has been allocated on
acquisition. Non-current assets are assets that include amounts expected to be
recovered or collected more than twelve months after the balance sheet date. If
reclassification is required, both the current and non-current portions of an
asset are reclassified.
Held for sale property, plant and equipment, intangible assets or disposal
groups as a whole are measured at the lower of their carrying amount and fair
value less costs to sell. Held for sale property, plant and equipment and
intangible assets are not depreciated or amortised. Reclassified non-current
financial instruments and deferred taxes are not subject to the write down to
the lower of their carrying amount and fair value less costs to sell.
Liabilities directly associated with the disposal group that will be transferred
in the disposal transaction are reclassified and presented separately in the
consolidated balance sheet.
Reclassifications and adjustments. Certain reclassifications have been
reflected in the twelve months ended 31 December 2007 amounts to conform to the
consolidated financial information for the year ended 31 December 2008. The
table below discloses the amounts before and after reclassification. Management
believes that the current presentation is preferable to that presented in prior
years.
+------------------------------------------------+----------------+------------------+
| | As originally | Following |
| | reported | reclassification |
| | | or adjustment |
+------------------------------------------------+----------------+------------------+
| At 31 December 2007 | | |
+------------------------------------------------+----------------+------------------+
| | | |
+------------------------------------------------+----------------+------------------+
| Inventories | 43,886 | 21,464 |
+------------------------------------------------+----------------+------------------+
| Supplies and materials for capital | | 22,422 |
| construction | | |
+------------------------------------------------+----------------+------------------+
| | | |
+------------------------------------------------+----------------+------------------+
| Intangible assets | 1,816 | - |
+------------------------------------------------+----------------+------------------+
| Loan receivable from related party | 2,264 | - |
+------------------------------------------------+----------------+------------------+
| Other non-current assets | 19,649 | 23,729 |
+------------------------------------------------+----------------+------------------+
| | | |
+------------------------------------------------+----------------+------------------+
| Other taxes payable | 2,900 | 3,429 |
+------------------------------------------------+----------------+------------------+
| Other taxes provision | 529 | - |
+------------------------------------------------+----------------+------------------+
| | | |
+------------------------------------------------+----------------+------------------+
| For the year ended 31 December 2007 | | |
+------------------------------------------------+----------------+------------------+
| | | |
+------------------------------------------------+----------------+------------------+
| Cost of sales | (162,428) | (131,389) |
+------------------------------------------------+----------------+------------------+
| Impairment charges | - | (31,039) |
+------------------------------------------------+----------------+------------------+
| | | |
+------------------------------------------------+----------------+------------------+
At 31 December 2007, $22,422 thousand of materials and suppliers intended for
construction of fixed assets were reclassified from inventories to supplies and
materials for capital construction; $1,816 thousand of intangible assets and
$2,264 thousand of loan receivable from related party were reclassified to other
non-current assets; $529 thousand of other taxes provision were reclassified to
other taxes payable.
3Going Concern
A substantial portion of the Group's consolidated net assets of $349.8 million
comprises undeveloped mineral deposits requiring significant additional
investment. The Group is dependent upon external debt to fully develop the
deposits and realise the value attributed to such assets.
During 2007, the Group attracted short term financing of $500 million and $130
million from Sberbank (totalling $630 million) to finance acquisitions and
mineral development (Note 16). Despite detailed discussions with Sberbank this
financing was not re-financed during 2008. The Group incurred a loss of US$
403.2 million for the year ended 31 December 2008. As of 31 December 2008 the
Group was in default of its financing arrangement with Sberbank and the Group's
current liabilities exceed its current assets by $758.2 million.
Subsequent to 31 December 2008 the Group's management has been in discussion
with Sberbank and OOO Sberbank Capital (a 100% subsidiary of OAO Sberbank)
concerning the default. As a result of these discussions and discussions with
other parties the following major transactions have taken place to reduce the
Group obligations - these have resulted in a substantial accounting loss for
shareholders in 2009:
* In August 2009 the Group's 100% interest in its exploration and production
subsidiary Dulisma was exchanged for $60 million of the above $500 million of
short term financing from Sberbank. Net assets of Dulisma were equal to $179.0
million as of 31 December 2008. The net asset included the short term debt
obligation of $130 million owed to Sberbank; (see Note 25)
* In November 2009 the Group's 35.3% interest in Taas Yuryakh Neftegaazdobycha
("Tass") was exchanged for the forgiveness of the remaining $440 million short
term financing and accumulated interest owed to Sberbank. The carrying value of
this 35.3% interest in Taas was equal to $751.6 million as of 31 December 2008
(see Notes 7 and 25); and
* In November 2009 the Group was released from its put option for an additional
10.479% in Taas (see Note 25). As of 31 December 2008 a liability of $161.3
million was recognised in respect of this put option (see Note 7). Registration
and actual release of the pledges associated with termination of Put option
agreement were ongoing at the date of these financial statements.
Additionally, management continues to be in discussions with its creditors, the
most significant of which is Petraco (advances of $49.8 million as of 31
December 2008, see Note 14). Through the shipment of oil the Group has partially
reduced this balance during 2009. Group management are currently in ongoing
discussions with Petraco with regard to this liability, see Note 14.
Management have prepared monthly cash flow projections for periods throughout
2009 and 2010. An annual cash flow model has been prepared in respect to 2011.
Judgements with regard to future oil prices and planned production were required
for the preparation of the cash flow projections and model. Positive overall
cash flows are crucially dependant on the ability to re-schedule repayment to
Petraco and to realise short term loans and receivables.
Despite the successful release from the above mentioned debt obligations in
default and the release of the put option, an ongoing discussion with Petraco to
re-schedule exiting indebtedness has not as yet yielded a restructuring
agreement, though certain transactions have continued to take place since year
end (see Note 14). Furthermore, the Company is taking actions to fully realise
short term loans and receivables. As a result of the above there is a material
uncertainty which may cast significant doubt about the Group's ability to
continue as a going concern.
Despite these uncertainties and based on cash flow projections performed,
management considers that the application of the going concern assumption for
the preparation of these financial statements is appropriate.
4New accounting pronouncements and interpretations
Except as discussed below, the principal accounting policies followed by the
Group are consistent with those disclosed in the financial statements for the
year ended 31 December 2007.
Certain new standards and interpretations have been published that are mandatory
for the Group's accounting periods beginning on or after 1 January 2008 or later
periods, none of which were early adopted by the Group.
Beginning 1 January 2008, the Group has adopted the following interpretations:
* IFRIC 11, IFRS 2 - Group and Treasury Share Transactions (effective for annual
periods beginning on or after 1 March 2008). IFRIC 11 addresses accounting for
certain transactions an entity may enter into to satisfy rights to equity
instruments previously granted to employees. Additionally it provides guidance
on accounting for rights to equity instruments of a parent company granted for
employees of a subsidiary in the subsidiary's separate financial statements;
* IFRIC 12, Service Concession Arrangements (effective for annual periods
beginning on or after 1 January 2008). IFRIC 12 gives guidance on the accounting
by operators for public-to-private service concession arrangements;
* IFRIC 14, IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction (effective for annual periods beginning on or
after 1 January 2008). IFRIC 14 addresses the measurement of defined benefit
plan assets and accounting for an obligation under a minimum funding
requirement.
The adoption of these interpretations, if applicable, had an insignificant
effect on the Group's consolidated financial statements.
Recently, the International Accounting Standards Board published the following
new standards and interpretations which have not been early adopted by the
Group:
Standards and interpretations endorsed by the European Union
* IAS 1, Presentation of Financial Statements (revised September 2007; effective
for annual periods beginning on or after 1 January 2009). The main change in IAS
1 is the replacement of the income statement by a statement of comprehensive
income which will also include all non-owner changes in equity, such as the
revaluation of available-for-sale financial assets. Alternatively, entities will
be allowed to present two statements: a separate income statement and a
statement of comprehensive income. The revised IAS 1 also introduces a
requirement to present a statement of financial position (balance sheet) at the
beginning of the earliest comparative period whenever the entity restates
comparatives due to reclassifications, changes in accounting policies, or
corrections of errors. The Group expects the revised IAS 1 to affect the
presentation of its financial statements but to have no impact on the
recognition or measurement of specific transactions and balances;
* IFRS 8, Operating Segments (effective for annual periods beginning on or after 1
January 2009). IFRS 8 requires an entity to report financial and descriptive
information about its operating segments and specifies how an entity should
report such information. The Group is currently assessing what impact the new
standard will have on its consolidated financial statements;
4 New accounting pronouncements and interpretations (continued)
* Amendment to IAS 32 and IAS 1, Puttable financial instruments and obligations
arising on liquidation (effective from 1 January 2009). The amendment requires
classification as equity of some financial instruments that meet the definition
of a financial liability. The Group is currently assessing what impact the new
standard will have on its consolidated financial statements;
* IAS 27, Consolidated and Separate Financial Statements (revised January 2008;
effective for annual periods beginning on or after 1 July 2009). The revised IAS
27 will require an entity to attribute total comprehensive income to the owners
of the parent and to the non-controlling interests (previously "minority
interests") even if this results in the non-controlling interests having a
deficit balance (the current standard requires the excess losses to be allocated
to the owners of the parent in most cases). The revised standard specifies that
changes in a parent's ownership interest in a subsidiary that do not result in
the loss of control must be accounted for as equity transactions. It also
specifies how an entity should measure any gain or loss arising on the loss of
control of a subsidiary. At the date when control is lost, any investment
retained in the former subsidiary will have to be measured at its fair value.
The Group is currently assessing what impact the new standard will have on its
consolidated financial statements;
* Amendment to IFRS 2, Share-based Payment (issued in January 2008; effective for
annual periods beginning on or after 1 January 2009). The amendment clarifies
that only service conditions and performance conditions are vesting conditions.
Other features of a share-based payment are not vesting conditions. The
amendment specifies that all cancellations, whether by the entity or by other
parties, should receive the same accounting treatment. The Group is currently
assessing what impact the new standard will have on its consolidated financial
statements;
* IAS 23 (Revised), Recognition of Borrowing Costs. The revision removed the
option of immediately recognizing as an expense borrowing costs that relate to
assets that take a substantial period of time to get ready for use or sale. The
revised standard applies to borrowing costs relating to qualifying assets for
which the commencement date for capitalization is on or after 1 January 2009.
The Group is currently assessing what impact the new standard will have on its
consolidated financial statements;
* Improvements to International Financial Reporting Standards (issued in May
2008). In 2007, the International Accounting Standards Board decided to initiate
an annual improvements project as a method of making necessary, but non-urgent,
amendments to IFRS. The amendments issued in May 2008 consist of a mixture of
substantive changes, clarifications, and changes in terminology in various
standards. The substantive changes relate to the following areas: classification
as held for sale under IFRS 5 in case of a loss of control over a subsidiary;
possibility of presentation of financial instruments held for trading as
noncurrent under IAS 1; accounting for sale of IAS 16 assets which were
previously held for rental and classification of the related cash flows under
IAS 7 as cash flows from operating activities; clarification of definition of a
curtailment under IAS 19; accounting for below market interest rate government
loans in accordance with IAS 20; making the definition of borrowing costs in IAS
23 consistent with the effective interest method; clarification of accounting
for subsidiaries held for sale under IAS 27 and IFRS 5; reduction in the
disclosure requirements relating to associates and joint ventures under IAS 28
and IAS 31; enhancement of disclosures required by IAS 36; clarification of
accounting for advertising costs under IAS 38; amending the definition of the
fair value through profit or loss category to be consistent with hedge
accounting under IAS 39; introduction of accounting for investment properties
under construction in accordance with IAS 40; and reduction in restrictions over
manner of determining fair value of biological assets under IAS 41. Further
amendments made to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS 7 represent
terminology or editorial changes only, which the IASB believes have no or
minimal effect on accounting. The Group is currently assessing what impact the
new standard will have on its consolidated financial statements;
* Amendment to IFRS 1 and IAS 27, Cost of an Investment in a Subsidiary, Jointly
Controlled Entity or Associate (revised May 2008; effective for annual periods
beginning on or after 1 January 2009). The amendment allows first-time adopters
of IFRS to measure investments in subsidiaries, jointly controlled entities or
associates at fair value or at previous GAAP carrying value as deemed cost in
the separate financial statements. The amendment also requires distributions
from pre-acquisition net assets of investees to be recognized in profit or loss
rather than as a recovery of the investment. The Group is currently assessing
what impact the new standard will have on its consolidated financial statements;
and
* IFRIC 13, Customer loyalty programmers, effective for annual periods beginning
on or after 1 July 2008. IFRIC 13 is not relevant to the Group's operations;
4 New accounting pronouncements and interpretations (continued)
* Amendment to IAS 39, Financial Instruments: Recognition and Measurement.
Entities are required to apply the amendment retrospectively for annual periods
beginning on or after 1 July 2009, with earlier application permitted. The
amendment clarifies how the principles that determine whether a hedged risk or
portion of cash flows is eligible for designation should be applied in
particular situations. The Group is currently assessing what impact the new
standard will have on its consolidated financial statements;
* IFRIC 15, Agreements for the construction of real estate, effective for annual
periods beginning on or after 1 January 2009. IFRIC 15 is not relevant to the
Group's operations because it does not have any agreements for the construction
of real estate;
* IFRIC 16, Hedges of a net investment in a foreign operation, effective for
annual periods beginning on or after 1 October 2008. The Group is currently
assessing what impact the new interpretation will have on its consolidated
financial statements;
* IFRS 3, Business Combinations (revised January 2008; effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after 1 July 2009; not yet adopted
by the EU). The revised IFRS 3 will allow entities to choose to measure
non-controlling interests using the existing IFRS 3 method (proportionate share
of the acquiree's identifiable net assets) or at fair value. The revised IFRS 3
is more detailed in providing guidance on the application of the purchase method
to business combinations. The requirement to measure at fair value every asset
and liability at each step in a step acquisition for the purposes of calculating
a portion of goodwill has been removed. Instead, in a business combination
achieved in stages, the acquirer will have to remeasure its previously held
equity interest in the acquiree at its acquisition-date fair value and recognise
the resulting gain or loss, if any, in profit or loss. Acquisition-related costs
will be accounted for separately from the business combination and therefore
recognised as expenses rather than included in goodwill. An acquirer will have
to recognise at the acquisition date a liability for any contingent purchase
consideration. Changes in the value of that liability after the acquisition date
will be recognised in accordance with other applicable IFRSs, as appropriate,
rather than by adjusting goodwill. The revised IFRS 3 brings into its scope
business combinations involving only mutual entities and business combinations
achieved by contract alone. The Group is currently assessing the impact of the
amended standard on its financial statements;
Standards and interpretations not yet endorsed by the European Union
* IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual
periods beginning on or after 1 July 2009). The amendment clarifies when and how
distribution of non-cash assets as dividends to the owners should be recognised.
An entity should measure a liability to distribute non-cash assets as a dividend
to its owners at the fair value of the assets to be distributed. A gain or loss
on disposal of the distributed non-cash assets will be recognised in profit or
loss when the entity settles the dividend payable. IFRIC 17 is not relevant to
the Group's operations because it does not distribute non-cash assets to owners;
* IFRS 1, First-time Adoption of International Financial Reporting Standards
(following an amendment in December 2008, effective for the first IFRS financial
statements for a period beginning on or after 1 July 2009). The revised IFRS 1
retains the substance of its previous version but within a changed structure in
order to make it easier for the reader to understand and to better accommodate
future changes. The Group concluded that the revised standard does not have any
effect on its financial statements;
* IFRIC 18, Transfers of Assets from Customers (effective for annual periods
beginning on or after 1 July 2009). The interpretation clarifies the accounting
for transfers of assets from customers, namely, the circumstances in which the
definition of an asset is met; the recognition of the asset and the measurement
of its cost on initial recognition; the identification of the separately
identifiable services (one or more services in exchange for the transferred
asset); the recognition of revenue, and the accounting for transfers of cash
from customers. IFRIC 18 is not expected to have any impact on the Group's
financial statements;
4 New accounting pronouncements and interpretations (continued)
* Improving Disclosures about Financial Instruments - Amendment to IFRS 7,
Financial Instruments: Disclosures (issued in March 2009; effective for annual
periods beginning on or after 1 January 2009). The amendment requires enhanced
disclosures about fair value measurements and liquidity risk. The entity will be
required to disclose an analysis of financial instruments using a three-level
fair value measurement hierarchy. The amendment (a) clarifies that the maturity
analysis of liabilities should include issued financial guarantee contracts at
the maximum amount of the guarantee in the earliest period in which the
guarantee could be called; and (b) requires disclosure of remaining contractual
maturities of financial derivatives if the contractual maturities are essential
for an understanding of the timing of the cash flows. An entity will further
have to disclose a maturity analysis of financial assets it holds for managing
liquidity risk, if that information is necessary to enable users of its
financial statements to evaluate the nature and extent of liquidity risk. The
Group is currently assessing the impact of the amendment on disclosures in its
financial statements;
* Embedded Derivatives - Amendments to IFRIC 9 and IAS 39 (effective for annual
periods ending on or after 30 June 2009). The amendments clarify that on
reclassification of a financial asset out of the 'at fair value through profit
or loss' category, all embedded derivatives have to be assessed and, if
necessary, separately accounted for;
* Improvements to International Financial Reporting Standards (issued in April
2009; amendments to IFRS 2, IAS 38, IFRIC 9 and IFRIC 16 are effective for
annual periods beginning on or after 1 July 2009; amendments to IFRS 5, IFRS 8,
IAS 1, IAS 7, IAS 17, IAS 36 and IAS 39 are effective for annual periods
beginning on or after 1 January 2010). The improvements consist of a mixture of
substantive changes and clarifications in the following standards and
interpretations: clarification that contributions of businesses in common
control transactions and formation of joint ventures are not within the scope of
IFRS 2; clarification of disclosure requirements set by IFRS 5 and other
standards for non-current assets (or disposal groups) classified as held for
sale or discontinued operations; requiring to report a measure of total assets
and liabilities for each reportable segment under IFRS 8 only if such amounts
are regularly provided to the chief operating decision maker; amending IAS 1 to
allow classification of certain liabilities settled by entity's own equity
instruments as non-current; changing IAS 7 such that only expenditures that
result in a recognized asset are eligible for classification as investing
activities; allowing classification of certain long-term land leases as finance
leases under IAS 17 even without transfer of ownership of the land at the end of
the lease; providing additional guidance in IAS 18 for determining whether an
entity acts as a principal or an agent; clarification in IAS 36 that a cash
generating unit shall not be larger than an operating segment before
aggregation; supplementing IAS 38 regarding measurement of fair value of
intangible assets acquired in a business combination; amending IAS 39 (i) to
include in its scope option contracts that could result in business
combinations, (ii) to clarify the period of reclassifying gains or losses on
cash flow hedging instruments from equity to profit or loss and (iii) to state
that a prepayment option is closely related to the host contract if upon
exercise the borrower reimburses economic loss of the lender; amending IFRIC 9
to state that embedded derivatives in contracts acquired in common control
transactions and formation of joint ventures are not within its scope; and
removing the restriction in IFRIC 16 that hedging instruments may not be held by
the foreign operation that itself is being hedged. The Group does not expect the
amendments to have any material effect on its financial statements;
* Group Cash-settled Share-based Payment Transactions - Amendments to IFRS 2,
Share-based Payment (effective for annual periods beginning on or after 1
January 2010). The Group is currently assessing the impact of the amended
standard on its financial statements;
* Additional Exemptions for First-time Adopters - Amendments to IFRS 1, First-time
Adoption of IFRS (effective for annual periods beginning on or after 1 January
2010). The revision to this standard is not relevant to the Group;
* Classification of Rights Issues - Amendment to IAS 32, Financial Instruments:
Presentation (effective for annual periods beginning on or after 1 February
2010). The Group is currently assessing the impact of the amendment on its
financial statements;
* IAS 24 Related Party Disclosures - Amended November 2009, effective for annual
periods beginning on or after 1 January 2011). The Group is currently assessing
the impact of the amended standard on disclosures in its financial statements;
4 New accounting pronouncements and interpretations (continued)
* IFRS 9 Financial Instruments - The first part of a three-part project to replace
IAS 39 Financial Instruments: Recognition and Measurement with a new standard
was issued in November 2009. The first part affects classification and
measurement of financial assets and uses a single approach to determine whether
a financial asset is measured at amortised cost or fair value. The approach in
IFRS 9 is based on how an entity manages its financial instruments and the
contractual cash flow characteristics of the financial assets. The new standard
also requires a single impairment method to be used. The standard applies for
annual periods beginning on or after 1 January 2013 but it can be applied early.
The Group is currently assessing the impact of the new standard.
5Critical Accounting Estimates and Judgements in Applying Accounting Policies
The Group makes estimates and assumptions that affect the reported amounts of
assets and liabilities. Estimates and judgements are continually evaluated and
are based on management's experience and other factors, including expectations
of future events that are believed to be reasonable under the circumstances.
Management also makes certain judgements, apart from those involving
estimations, in the process of applying the accounting policies. Judgements that
have the most significant effect on the amounts recognised in the financial
statements and estimates that can cause a significant adjustment to the carrying
amount of assets and liabilities are outlined below.
Estimation of oil and gas reserves. Engineering estimates of hydrocarbon
reserves are inherently uncertain and are subject to future revisions.
Accounting measures such as depreciation, depletion and amortization charges,
impairment assessments and asset retirement obligations that are based on the
estimates of proved reserves are subject to change based on future changes to
estimates of oil and gas reserves.
Proved reserves are defined as the estimated quantities of hydrocarbons which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic
conditions. Proved reserves are estimated by reference to available reservoir
and well information, including production and pressure trends for producing
reservoirs. Furthermore, estimates of proved reserves only include volumes for
which access to market is assured with reasonable certainty. All proved reserves
estimates are subject to revision, either upward or downward, based on new
information, such as from development drilling and production activities or from
changes in economic factors, including product prices, contract terms or
development plans. In some cases, substantial new investment in additional wells
and related support facilities and equipment will be required to recover such
proved reserves. Due to the inherent uncertainties and the limited nature of
reservoir data, estimates of underground reserves are subject to change over
time as additional information becomes available.
In general, estimates of reserves for undeveloped or partially developed fields
are subject to greater uncertainty over their future life than estimates of
reserves for fields that are substantially developed and depleted. As
those fields are further developed, new information may lead to further
revisions in reserve estimates. Reserves have a direct impact on certain amounts
reported in the consolidated financial statements, most notably
depreciation, depletion and amortization as well as impairment expenses.
Depreciation rates on production assets using the units-of-production method for
each field are based on proved developed reserves for development costs, and
total proved reserves for costs associated with the acquisition of proved
properties. Assuming all variables are held constant, an increase in proved
developed reserves for each field decreases depreciation, depletion and
amortization expenses. Conversely, a decrease in the estimated proved developed
reserves increases depreciation, depletion and amortization expenses. Moreover,
estimated proved reserves are used to calculate future cash flows from oil and
gas properties, which serve as an indicator in determining whether or not
property impairment is present.
The possibility exists for changes or revisions in estimated reserves to have a
significant effect on depreciation, depletion and amortization charges and,
therefore, reported net profit for the year.
5 Critical Accounting Estimates and Judgements in Applying Accounting
Policies (continued)
Impairment provision for receivables. The impairment provision for receivables
is based on management's assessment of the probability of collection of
individual receivables. Significant financial difficulties of the debtor,
probability that the debtor will enter bankruptcy or financial reorganization,
and default or delinquency in payments are considered indicators that the
receivable is potentially impaired. Actual results could differ from these
estimates if there is deterioration in a debtor's creditworthiness or actual
defaults are higher than the estimates.
When there is no expectation of recovering additional cash for an amount
receivable, the expected amount receivable is written off against the associated
provision.
Future cash flows of receivables that are evaluated for impairment are estimated
on the basis of the contractual cash flows of the assets and the experience of
management in respect of the extent to which amounts will become overdue as a
result of past loss events and the success of recovery of overdue amounts. Past
experience is adjusted on the basis of current observable data to reflect the
effects of current conditions that did not affect past periods and to remove the
effects of past conditions that do not exist currently.
Asset retirement obligations. Management makes provision for the future costs of
decommissioning hydrocarbon production facilities, pipelines and related support
equipment based on the best estimates of future cost and economic lives of those
assets. Estimating future asset retirement obligations is complex and requires
management to make estimates and judgments with respect to removal obligations
that will occur many years in the future. Changes in the measurement of existing
obligations can result from changes in estimated timing, future costs or
discount rates used in valuation.
Useful lives of non-oil and gas properties. Items of non-oil and gas properties
are stated at cost less accumulated depreciation. The estimation of the useful
life of an asset is a matter of management judgement based upon experience with
similar assets. In determining the useful life of an asset, management considers
the expected usage, estimated technical obsolescence, physical wear and tear and
the physical environment in which the asset is operated. Changes in any of these
conditions or estimates may result in adjustments to future depreciation rates.
Financial derivatives. The fair value of derivative financial instruments is
evaluated using market prices if available, taking into account the specific
terms and conditions of these instruments. If market prices are not available,
the fair value is estimated using a valuation technique to estimate what the
price of those instruments would have been on the measurement date in an arm's
length transaction between knowledgeable, willing parties. Such valuations are
significantly impacted by certain market conditions and assumptions such as
expected exercise dates and equity price volatility, and changes in any of these
conditions may result in significant adjustments to future valuations.
Management have estimated the fair value of financial liabilities to be $161.3
million using a 2.5 year remaining term. If the assumption with respect to the
exercise date changed to a six month remaining term, the revised estimate of the
financial liability would be $100.2 million.
Impairment. As discussed further in Note 6 and 7, management have estimated the
recoverable amount of cash generating units. Changes in the assumptions used can
have a significant impact on the amount of any impairment charge.
Fair values of acquired assets and liabilities. Since its inception, the Group
has completed several significant acquisitions (Note 7). IFRS 3 requires that,
at the date of acquisition, all identifiable assets (including intangible
assets), liabilities and contingent liabilities of an acquired entity be
recorded at their respective fair values. The estimation of fair values requires
management judgement. For significant acquisitions, management engages
independent experts to advice as to the fair values of acquired assets and
liabilities. Changes in any of the estimates subsequent to the finalisation of
acquisition accounting may result in losses in future periods.
Liquidity. These consolidated financial statements have been prepared under the
going concern assumption (see Note 3).
6Impairment
Following a sharp decrease in actual and forecast crude oil prices at the end of
2008 management identified that there were indicators of impairment of
production assets and cash generating units and consequently performed
impairment calculations to assess their recoverable amounts.
In assessing whether a write-down is required in the carrying value of a
potentially impaired item of property, plant and equipment or an
equity-accounted investment, its carrying value is compared with its recoverable
amount. The recoverable amount is the higher of the asset's fair value less
costs to sell and value in use. As the Group is in the process of actively
marketing three businesses it is unlikely that there will be significant future
use. Consequently, unless indicated otherwise, the recoverable amount used in
assessing the impairment charges described below is fair value less cost to
sell. Additionally, management estimated the recoverable amount of other cash
generating units. The Group estimated fair value less cost to sell using
discounted cash flow models. An average oil price of $55 for 2009 and $75 in
real terms for future sales was estimated for the impairment calculation and a
real discount rate of 12% was used to discount the estimated future cash flows.
The discount rate of 12% in real terms was derived from the Group's approximate
post-tax weighted average cost of capital.
The Group recognized an impairment loss for the year ended 31 December 2008 of
$34.6 million and $39.1 million for the Arcticneft and Petrosakh cash generating
units, respectively. As discussed in Note 8 these cash generating units are
classified as held for sale as of 31 December 2008.
If the oil price used in the calculation was reduced to $65 per barrel in real
terms from 2010 onwards an additional impairment charge of $11.3 million and
$3.1 million would be required for Arcticneft and Petrosakh, respectively. If
the discount rate used in the calculation was increased to 14% in real terms an
additional impairment charge of $7.8 million and $8.2 million would be required
for Arcticneft and Petrosakh, respectively.
If the oil price used in the calculation was reduced to $65 per barrel in real
terms from 2010 onwards an impairment charge of $32.2 million would be required
for cash generating units other than the two aforementioned entities. If the
discount rate used in the calculation was increased to 14% in real terms an
impairment charge of $18.8 million would be required for cash generating units
other than the two aforementioned entities.
A summary of the impairment charges incurred by the Group for the year ended 31
December 2008 is presented below:
+----------------------------------------------+-----+--------------+------------+
| | | Year ended 31 December: |
+----------------------------------------------+-----+---------------------------+
| | | | 2008 |
+----------------------------------------------+-----+--------------+------------+
| | | | |
+----------------------------------------------+-----+--------------+------------+
| Arcticneft | | | 34,561 |
+----------------------------------------------+-----+--------------+------------+
| Petrosakh | | | 39,136 |
+----------------------------------------------+-----+--------------+------------+
| Chepetskoe (Note 8, 11) | | | 16,499 |
+----------------------------------------------+-----+--------------+------------+
| Write off of exploration and evaluation | | | 4,759 |
| expenditures (Note 11) | | | |
+----------------------------------------------+-----+--------------+------------+
| Total | | | 94,955 |
+----------------------------------------------+-----+--------------+------------+
Refer to Note 7 for detail of the impairment analysis of the Group's investment
in joint ventures.
7Investments in joint venture
Acquisition of equity interest of 35.3% in Taas Yuryakh Neftegazdobycha
("Taas").In December 2007, the Group acquired a 35.329% stake in OOO Taas
Yuryakh Neftegazdobycha. Taas is a privately-held Russian exploration and
production company with oil development operations in East Siberia and licences
to develop two adjacent blocks of the Srednebotuobinskoye oil, gas and
condensate field in the region (the "SRB field"). The SRB field is essentially
undeveloped. Taas holds (1) an oil production licence for the central block of
the SRB field (the "Central Block"); and (2) a licence for geological
prospecting, exploration and production of hydrocarbons in the adjacent
Kurungsky allotment in East Siberia (the "Southern Block"). As part of the
Acquisition, OOO Urals Energy, the Group's operating subsidiary in Russia, will
become the operator for the development of the SRB field. Also, all shareholders
signed a Joint Venture agreement to formalise the relationship between the new
and existing shareholders of Taas. The agreement requires unanimous consent of
all shareholders for major decisions relating to operating and financial
activities of Taas. There are no restrictions on distributions of dividends,
which are subject to approval by the Taas shareholders.
As part of the transaction the Company also acquired a call option and wrote a
put option for additional interests in Taas of 4.182% and 10.479%, respectively.
The exercise price for the call option to acquire an additional 4.2% of Taas,
exercisable in January 2009, is $70.0 million, plus 11.95% per annum payable at
the Seller's selection either in cash or in equivalent shares of the Company.
The put option is exercisable from November 2008 and expires in December 2012
and allows the holder to put a 10.5% stake in Taas to the Group for $175.0
million plus accrued interest at 14.0% from December 2008 to the exercise date,
or, at the holder's option, 50% in cash and 50% in shares of Urals Energy valued
at a price determined by the average closing price in the two-week period
following the initial closing. The fair values of the call and put options as at
the valuation date were estimated at $5.1 million and $118.7 million,
respectively.
As of 31 December 2008 management has reviewed the long-term model of discounted
cash flows to asses the change in Taas equity value and revalue the financial
instruments as required by IFRS. As a result of changes in macroeconomic
parameters, primarily long-term oil price forecast, the equity value of Taas has
decreased.
This change resulted in an increase of the put option value classified as a
financial instrument from $118.7 million to $161.3 million as of 31 December
2007 and 31 December 2008, respectively. With respect to the call option,
management has not assigned any value to this financial derivative, as the Group
is not planning to exercise this option but rather plans to use funds available
to the Group for value creation through the ongoing development of the Dulisma
oil field. Furthermore, given current market conditions, the Group's ability to
sell this option to a third party prior to its expiration in January 2009 was
uncertain, and the option was ultimately not exercised. Therefore, for the
purposes of the consolidated financial statements as of 31 December 2008,
management have discounted the value of the call option to nil, and recognised a
loss on the revaluation of the financial derivative in the consolidated income
statement. The write down does not result in any loss of cash-flow for the
Group.
The net change in these financial instruments value, as well as change in the
value of the Warrants classified as liabilities, amounted to $46.6 million,
which is recorded as a loss from changes in the fair value of financial
derivatives in the consolidated income statement (2007: $1.6 million gain). The
Put option agreement was terminated in November 2009 (see Note 25).
Registration and actual release of the pledges associated with termination of
Put option agreement were ongoing at the date of these financial statements.
The Group also recognized an impairment loss of $152.5 million on its investment
in Taas. The impairment resulted in a reassessment of economics of the
investment and the global economic downturn. Future oil prices of $75 per
barrel in real terms and a discount rate of 12% in real terms was used to
calculate the fair value less cost to sell. If the oil price used in the
calculation was reduced to $65 per barrel in real terms from 2010 onwards an
additional impairment charge of $148.7 million would be required for Taas. If
the discount rate used in the calculation was increased to 14% in real terms an
additional impairment charge of $137.0 would be required for Taas. The Group
disposed of its equity interest in Taas in November 2009 (see Note 25).
7 Investments in joint venture (continued)
The table below summarises the movements in the carrying amount of the Group's
investment in Taas.
+----------------------------------------------+-----+--------------+------------+
| | | Year ended 31 December: |
+----------------------------------------------+-----+---------------------------+
| | | 2008 | 2007 |
+----------------------------------------------+-----+--------------+------------+
| | | | |
+----------------------------------------------+-----+--------------+------------+
| Carrying amount at 1 January | | 911,433 | - |
+----------------------------------------------+-----+--------------+------------+
| | | | |
+----------------------------------------------+-----+--------------+------------+
| Fair value of net assets of joint | | - | 911,433 |
| venture acquired | | | |
+----------------------------------------------+-----+--------------+------------+
| Share of profit/(loss) of joint venture | | (7,313) | - |
+----------------------------------------------+-----+--------------+------------+
| Share of other equity movements of joint | | - | - |
| venture | | | |
+----------------------------------------------+-----+--------------+------------+
| Dividends received from joint venture | | - | - |
+----------------------------------------------+-----+--------------+------------+
| Impairment of investments in joint | | (152,520) | - |
| venture | | | |
+----------------------------------------------+-----+--------------+------------+
| Total loss from equity investment in | | (159,833) | - |
| joint venture during the year | | | |
+----------------------------------------------+-----+--------------+------------+
| Carrying amount at 31 December | | 751,600 | 911,433 |
+----------------------------------------------+-----+--------------+------------+
At 31 December 2008, the Group's interests in Taas and its summarised financial
information, including total assets, liabilities, revenues and profit or loss,
were as follows:
+-----------+-----------+-------------+-------------+---------------+---------------+
| Name | Total | Total | Revenue | Profit/(loss) | % interest |
| | assets | liabilities | | | held |
+-----------+-----------+-------------+-------------+---------------+---------------+
| Taas | 804,930 | (53,330) | 749 | (7,313) | 35.3 % |
+-----------+-----------+-------------+-------------+---------------+---------------+
At 31 December 2007, the Group's interests in Taas and its summarised financial
information, including total assets, liabilities, revenues and profit or loss,
were as follows:
+-----------+-------------+--------------+-------------+---------------+---------------+
| Name | Total | Total | Revenue | Profit/(loss) | % interest |
| | assets | liabilities | | | held |
+-----------+-------------+--------------+-------------+---------------+---------------+
| Taas | 933,619 | (22,186) | - | - | 35.3 % |
+-----------+-------------+--------------+-------------+---------------+---------------+
8 Non-current assets held for sale
As of 31 December 2007 the assets and liabilities related to Dinyu, Michayuneft,
Nizhneomrinskaya Neft and CNPSEI have been presented as held for sale following
the approval of the Group's Board of Directors in December 2007 to sell these
subsidiaries. In April 2008, the Group completed the sale of Dinyu, Michayuneft
and Nizhneomrinskaya Neft for $93.1 million and CNPSEI was sold to the same
buyer on 31 December 2008 for $13.9 million. This consideration from the sale of
CNPSEI was fully offset against outstanding unpaid liabilities of the Company
under oil sales and other agreements involving Komi assets sold in April 2008;
therefore, the Company had not received any cash proceeds from that transaction.
The Group recognised a net gain on the above sales in the amount of
$8.1 million.
During 2008 the Group's Board of Directors approved a plan to divest other
non-core assets Arcticneft, Petrosakh and Chepetskoye. The assets and
liabilities of those subsidiaries have been presented as held for sale as of 31
December 2008.
Subsequent to the year-end Chepetskoye was sold to a domestic off-taker Galaform
for the full discharge of the domestic prepayment granted to the Group in the
end of 2006 (see Note 14). As part of the transaction the Group assigned to the
buyer intercompany loans amounting to $10.8 million. Sale consideration was
equal to $5.2 million and included in the sales agreement was a call option for
the Group to repurchase Chepetskoye for $5.2 million. This call option expires
in January 2010. As at 31 December 2008 management assessed Chepetskoye for
impairment using the information regarding the transaction which was available
at that date as an indicator of the fair value of the asset. As a result of this
analysis, an impairment charge of $16.5 million was recognized in the
consolidated income statement.
8 Non-current assets held for sale (continued)
Non-current assets classified as held for sale are stated at their carrying
amount, which is less than fair value less costs to sell. No impairment of the
assets was necessary as a result of the decision to sell subsidiaries classified
as assets held for sale at 31 December 2007.
For assets held for sale at 31 December 2008 an inventory provision of $2.1
million was charged to record oil and oil products inventory at net realizable
value (Note 10). Additionally impairment charges discussed in Note 6 relating
to the Arcticneft and Petrosakh assets were recognized.
Below is a breakdown of assets and liabilities of non-current assets of
Arcticneft, Chepetskoye, and Petrosakh that are classified as held for sale at
31 December 2008. As of 31 December 2007 assets of CNPSEI, Dinyu, Michayuneft,
and Nizhneomrinskaya Neft were classified as held for sale; a breakdown of
assets and liabilities is also presented below.
+-----------------------------------------------------+------------+------------+
| | Year ended 31 December: |
+-----------------------------------------------------+-------------------------+
| | 2008 | 2007 |
+-----------------------------------------------------+------------+------------+
| | | |
+-----------------------------------------------------+------------+------------+
| Cash and cash equivalents | 360 | 379 |
+-----------------------------------------------------+------------+------------+
| Accounts receivable and prepayments | 5,545 | 2,166 |
+-----------------------------------------------------+------------+------------+
| Current income tax prepayments | 551 | 288 |
+-----------------------------------------------------+------------+------------+
| Inventories | 18,426 | 3,313 |
+-----------------------------------------------------+------------+------------+
| Property, plant and equipment | 70,710 | 126,052 |
+-----------------------------------------------------+------------+------------+
| Supplies and materials for capital construction | 2,487 | - |
+-----------------------------------------------------+------------+------------+
| Deferred tax assets | - | 726 |
+-----------------------------------------------------+------------+------------+
| Other non-current assets | 1,084 | 439 |
+-----------------------------------------------------+------------+------------+
| Total assets held for sale | 99,163 | 133,363 |
+-----------------------------------------------------+------------+------------+
| | | |
+-----------------------------------------------------+------------+------------+
| Accounts payable and accrued expenses | 2,881 | 2,515 |
+-----------------------------------------------------+------------+------------+
| Income tax payable | - | 1 |
+-----------------------------------------------------+------------+------------+
| Other taxes payable | 1,518 | 3,099 |
+-----------------------------------------------------+------------+------------+
| Advances from customers | 150 | 57 |
+-----------------------------------------------------+------------+------------+
| Long-term borrowings | - | 41 |
+-----------------------------------------------------+------------+------------+
| Long -term finance lease obligations | 846 | - |
+-----------------------------------------------------+------------+------------+
| Dismantlement provision | 1,423 | 2,638 |
+-----------------------------------------------------+------------+------------+
| Deferred tax liabilities | 3,430 | 19,126 |
+-----------------------------------------------------+------------+------------+
| Total liabilities associated with non-current | 10,248 | 27,477 |
| assets held for sale | | |
+-----------------------------------------------------+------------+------------+
During the years ended 31 December 2008 and 2007 these assets had the following
cash flows.
+----------------------------------------------------+-------------+------------+
| | Year ended 31 December: |
+----------------------------------------------------+--------------------------+
| | 2008 | 2007 |
+----------------------------------------------------+-------------+------------+
| Operating cash flows | 3,443 | 15,298 |
+----------------------------------------------------+-------------+------------+
| Investing cash flows | (7,053) | (6,109) |
+----------------------------------------------------+-------------+------------+
| Financing cash flows | - | - |
+----------------------------------------------------+-------------+------------+
| | | |
+----------------------------------------------------+-------------+------------+
| Total cash flows | (3,610) | 9,189 |
+----------------------------------------------------+-------------+------------+
9Accounts Receivable and Prepayments
+----------------------------------------------------+-------------+------------+
| | Year ended 31 December: |
+ +--------------------------+
| | 2008 | 2007 |
+----------------------------------------------------+----------------------------------------------------+-------------+
| Prepaid taxes | 13,883 | 13,566 |
+----------------------------------------------------+-------------+------------+
| Advances to suppliers | 542 | 2,044 |
+----------------------------------------------------+-------------+------------+
| Recoverable taxes including VAT | 1,874 | 9,301 |
+----------------------------------------------------+-------------+------------+
| Receivables from related parties (Note 24) | 4,955 | 5,767 |
+----------------------------------------------------+-------------+------------+
| Trade accounts and notes receivable | 2,043 | 3,079 |
+----------------------------------------------------+-------------+------------+
| Other | 5,615 | 5,014 |
+----------------------------------------------------+-------------+------------+
| | | |
+----------------------------------------------------+-------------+------------+
| Total accounts receivable and prepayments | 28,912 | 38,771 |
+----------------------------------------------------+-------------+------------+
Included in total accounts receivable and prepayments are $7.9 million and
$7.1 million at 31 December 2008 and 2007, respectively, denominated in US
dollars and substantially all remaining amounts are denominated in Russian
Roubles.
Trade accounts receivable arises primarily from sales to ongoing customers with
standard payment terms. The category 'Other' primarily relates to short-term
prepaid expenses, which will be expensed during 2009, and other accounts
receivables and prepayments.
Changes in the provision for impairment of trade and other receivables
related to the recognition of a provision against receivables from related
parties and disposal of assets held for sale are as follows:
+----------------------------------------------------+-------------+------------+
| | Year ended 31 December: |
+ +--------------------------+
| | 2008 | 2007 |
+----------------------------------------------------+----------------------------------------------------+-------------+
| At 1 January | 664 | 640 |
+----------------------------------------------------+-------------+------------+
| Disposals of assets held for sale | (555) | - |
+----------------------------------------------------+-------------+------------+
| Accrual of additional provision (Note 24) | 1,243 | |
+----------------------------------------------------+-------------+------------+
| Effect of currency translation | (109) | 24 |
+----------------------------------------------------+-------------+------------+
| At 31 December | 1,243 | 664 |
+----------------------------------------------------+-------------+------------+
The carrying values of trade and other receivables approximate their fair value.
The maximum exposure to credit risk at the balance sheet date is the carrying
value of each class of receivables mentioned above. The Group does not hold any
collateral as security for trade and other receivables (see Note 23 for credit
risk disclosures).
Trade and other receivables that are less than three months past due are
generally not considered for impairment unless other indicators of impairment
exist. Trade and other receivables of $0.1 million and $1.0 million at 31
December 2008 and 2007, respectively were past due but not impaired. The ageing
analysis of these past due but not impaired trade and other receivables are as
follows:
+-----------------------------------------------------+------------+------------+
| | Year ended 31 December: |
+-----------------------------------------------------+-------------------------+
| | 2008 | 2007 |
+-----------------------------------------------------+------------+------------+
| | | |
+-----------------------------------------------------+------------+------------+
| Up to 90 days past-due | - | - |
+-----------------------------------------------------+------------+------------+
| 91 to 360 days past-due | 137 | 994 |
+-----------------------------------------------------+------------+------------+
| Total past due but not impaired | 137 | 994 |
+-----------------------------------------------------+------------+------------+
10 Inventories
+-----------------------------------------------------+------------+------------+
| | Year ended 31 December: |
+-----------------------------------------------------+-------------------------+
| | 2008 | 2007 |
+-----------------------------------------------------+------------+------------+
| Crude oil (net of adjustment on net realisable | 10,556 | 9,536 |
| value of $2.2 million and $0.0 million at | | |
| 31 December 2008 and 2007, respectively) | | |
+-----------------------------------------------------+------------+------------+
| Oil products (net of adjustment on net realisable | 2,264 | 2,269 |
| value of $0.1 million and $0.0 million at | | |
| 31 December 2008 and 2007, respectively) | | |
+-----------------------------------------------------+------------+------------+
| Materials and supplies (net of allowances of | 9,706 | 12,972 |
| $2.3 million and $0.4million at 31 December 2008 | | |
| and 2007, respectively) | | |
+-----------------------------------------------------+------------+------------+
| Total inventories | 22,526 | 24,777 |
+-----------------------------------------------------+------------+------------+
| - Inventories of the Group, excluding the portion | 4,100 | 21,464 |
| classified as assets held for sale | | |
+-----------------------------------------------------+------------+------------+
| - Inventories held for sale | 18,426 | 3,313 |
+-----------------------------------------------------+------------+------------+
Inventory provision
+-----------------------------------------------------+------------+------------+
| | Year ended 31 December: |
+ +-------------------------+
| | 2008 | 2007 |
+-----------------------------------------------------+-----------------------------------------------------+------------+
| At 1 January | 397 | 1,217 |
+-----------------------------------------------------+------------+------------+
| Additional provisions | 4,307 | - |
+-----------------------------------------------------+------------+------------+
| Reversal of previously booked provisions | - | (882) |
+-----------------------------------------------------+------------+------------+
| Effect of currency translation | (66) | 62 |
+-----------------------------------------------------+------------+------------+
| At 31 December | 4,638 | 397 |
+-----------------------------------------------------+------------+------------+
| - Inventory provision of the Group, excluding the | 2,584 | 397 |
| portion classified as assets held for sale | | |
+-----------------------------------------------------+------------+------------+
| - Inventory provision held for sale | 2,054 | - |
+-----------------------------------------------------+------------+------------+
The largest component of the provision reversal in 2007 is due to a technical
review of materials performed by management which determined that a portion of
the inventory related to power generating facilities at Petrosakh would be used
to upgrade existing power supply units, and was therefore no longer considered
obsolete.
11 Property, Plant and Equipment
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| | Oil | Refinery | Buildings | Other | Assets | Total |
| | and | and | | Assets | under | |
| | gas | related | | | construction | |
| | properties | equipment | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| Cost | | | | | | |
| at | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| 1 | 542,060 | 9,879 | 5,066 | 10,362 | 57,092 | 624,459 |
| January | | | | | | |
| 2007 | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| Translation | 39,822 | 720 | 369 | 952 | 4,822 | 46,685 |
| difference | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| Additions | 8,680 | - | - | - | 57,362 | 66,042 |
| | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| Capitalised | - | - | - | - | 3,576 | 3,576 |
| borrowing | | | | | | |
| costs (Note | | | | | | |
| 16) | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| Transfers | 37,379 | 33 | - | 5,775 | (43,187) | - |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| Changes | 250 | - | - | - | - | 250 |
| in | | | | | | |
| estimates | | | | | | |
| of | | | | | | |
| dismantlement | | | | | | |
| provision | | | | | | |
| (Note 17) | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| Impairment | (31,039) | - | - | - | - | (31,039) |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| Disposals | (898) | (5) | (1) | (460) | (1,817) | (3,181) |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| 31 | 596,254 | 10,627 | 5,434 | 16,629 | 77,848 | 706,792 |
| December | | | | | | |
| 2007 | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| - | 458,952 | 10,627 | 5,434 | 15,278 | 71,247 | 561,538 |
| PPE | | | | | | |
| of | | | | | | |
| the | | | | | | |
| Group, | | | | | | |
| excluding | | | | | | |
| assets | | | | | | |
| held for | | | | | | |
| sale | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| - | 137,302 | - | - | 1,351 | 6,601 | 145,254 |
| PPE | | | | | | |
| held for sale | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| Translation | (76,824) | (1,748) | (884) | (2,662) | (20,433) | (102,551) |
| difference | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| Additions | 93 | - | - | - | 100,136 | 100,229 |
| | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| Capitalised | - | - | - | - | 5,863 | 5,863 |
| borrowing | | | | | | |
| costs (Note | | | | | | |
| 16) | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| Transfers | 38,303 | - | - | 1,871 | (40,174) | - |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| Changes | 128 | - | - | - | - | 128 |
| in | | | | | | |
| estimates | | | | | | |
| of | | | | | | |
| dismantlement | | | | | | |
| provision | | | | | | |
| (Note 17) | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| Impairment | (84,702) | (3,329) | (793) | (1,675) | (4,456) | (94,955) |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| Disposals | (108) | - | (68) | (593) | (5,332) | (6, 101) |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| Disposals | (142,106) | - | - | (1,439) | (6,825) | (150,370) |
| of assets | | | | | | |
| held for | | | | | | |
| sale | | | | | | |
| (KOMI) | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| 31 | 331,038 | 5,550 | 3,689 | 12,131 | 106,627 | 459,035 |
| December | | | | | | |
| 2008 | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| - | 229,044 | - | 2,446 | 8,843 | 103,145 | 343,478 |
| PPE | | | | | | |
| of | | | | | | |
| the | | | | | | |
| Group, | | | | | | |
| excluding | | | | | | |
| assets | | | | | | |
| held for | | | | | | |
| sale | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
| - | 101,994 | 5,550 | 1,243 | 3,288 | 3,482 | 115,557 |
| PPE | | | | | | |
| held | | | | | | |
| for | | | | | | |
| sale | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+-----------+
11 Property, Plant and Equipment (continued)
+----------------------+------------+-----------+-----------+---------+--------------+----------+
| | Oil | Refinery | Buildings | Other | Assets | Total |
| | and | and | | Assets | under | |
| | gas | related | | | construction | |
| | properties | equipment | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+----------+
| Accumulated | | | | | | |
| Depreciation, | | | | | | |
| Amortization | | | | | | |
| and Depletion | | | | | | |
| at | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+----------+
| 1 | (25,696) | (1,084) | (635) | (1,244) | - | (28,659) |
| January | | | | | | |
| 2007 | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+----------+
| Translation | (3,005) | (104) | (59) | (187) | - | (3,355) |
| difference | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+----------+
| Depreciation, | (27,075) | (604) | (270) | (2,618) | - | (30,567) |
| depletion | | | | | | |
| and | | | | | | |
| amortization | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+----------+
| Disposals | 54 | - | - | 110 | - | 164 |
+----------------------+------------+-----------+-----------+---------+--------------+----------+
| 31 | (55,722) | (1,792) | (964) | (3,939) | - | (62,417) |
| December | | | | | | |
| 2007 | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+----------+
| - PPE | (36,831) | (1,792) | (964) | (3,628) | - | (43,215) |
| of the | | | | | | |
| Group, | | | | | | |
| excluding | | | | | | |
| assets | | | | | | |
| held for | | | | | | |
| sale | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+----------+
| - PPE | (18,891) | - | - | (311) | - | (19,202) |
| held for sale | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+----------+
| Translation | 7,797 | 372 | 196 | 812 | - | 9,177 |
| difference | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+----------+
| Depreciation, | (15,935) | (500) | (254) | (1,754) | - | (18,443) |
| depletion | | | | | | |
| and | | | | | | |
| amortization | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+----------+
| Disposals | 43 | - | 14 | 346 | - | 403 |
+----------------------+------------+-----------+-----------+---------+--------------+----------+
| Disposals | 19,599 | - | - | 324 | - | 19,923 |
| of assets | | | | | | |
| held for | | | | | | |
| sale | | | | | | |
| (KOMI) | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+----------+
| 31 | (44,218) | (1,920) | (1,008) | (4,211) | - | (51,357) |
| December | | | | | | |
| 2008 | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+----------+
| - PPE | (3,361) | - | (424) | (2,725) | - | (6,510) |
| of the | | | | | | |
| Group, | | | | | | |
| excluding | | | | | | |
| assets | | | | | | |
| held for | | | | | | |
| sale | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+----------+
| - PPE | (40,857) | (1,920) | (584) | (1,486) | - | (44,847) |
| held | | | | | | |
| for | | | | | | |
| sale | | | | | | |
+----------------------+------------+-----------+-----------+---------+--------------+----------+
+---------------+------------+-----------+-----------+--------+--------------+---------+
| | Oil | Refinery | Buildings | Other | Assets | Total |
| | and | and | | Assets | under | |
| | gas | related | | | construction | |
| | properties | equipment | | | | |
+---------------+------------+-----------+-----------+--------+--------------+---------+
| Net | | | | | | |
| Book | | | | | | |
| Value | | | | | | |
| at | | | | | | |
+---------------+------------+-----------+-----------+--------+--------------+---------+
| 31 | 540,532 | 8,835 | 4,470 | 12,690 | 77,848 | 644,375 |
| December | | | | | | |
| 2007 | | | | | | |
+---------------+------------+-----------+-----------+--------+--------------+---------+
| - PPE | 422,121 | 8,835 | 4,470 | 11,650 | 71,247 | 518,323 |
| of the | | | | | | |
| Group, | | | | | | |
| excluding | | | | | | |
| assets | | | | | | |
| held for | | | | | | |
| sale | | | | | | |
+---------------+------------+-----------+-----------+--------+--------------+---------+
| - PPE | 118,411 | - | - | 1,040 | 6,601 | 126,052 |
| held for sale | | | | | | |
+---------------+------------+-----------+-----------+--------+--------------+---------+
| 31 | 286,820 | 3,630 | 2,681 | 7,920 | 106,627 | 407,678 |
| December | | | | | | |
| 2008 | | | | | | |
+---------------+------------+-----------+-----------+--------+--------------+---------+
| - PPE | 225,683 | - | 2,022 | 6,118 | 103,145 | 336,968 |
| of the | | | | | | |
| Group, | | | | | | |
| excluding | | | | | | |
| assets | | | | | | |
| held for | | | | | | |
| sale | | | | | | |
+---------------+------------+-----------+-----------+--------+--------------+---------+
| - PPE | 61,137 | 3,630 | 659 | 1,802 | 3,482 | 70,710 |
| held | | | | | | |
| for | | | | | | |
| sale | | | | | | |
+---------------+------------+-----------+-----------+--------+--------------+---------+
Included within oil and gas properties at 31 December 2008 and 2007 were
exploration and evaluation assets:
+-------------+----------+-----------+------------+------------+---------------+-------------+----------+
| | Cost | Additions | Transfers | Disposals: | Disposals: | Translation | Cost |
| | at 31 | | to | Impairment | disposal | difference | at 31 |
| | December | | tangible | loss | of assets | | December |
| | 2007 | | part of | | held for sale | | 2008 |
| | | | Oil and | | | | |
| | | | gas | | | | |
| | | | properties | | | | |
+-------------+----------+-----------+------------+------------+---------------+-------------+----------+
| | | | |
+--------------------------------------------------------------+---------------+-------------+----------+
| Exploration and evaluation assets | | | |
+--------------------------------------------------------------+---------------+-------------+----------+
| | | | | | | | |
+-------------+----------+-----------+------------+------------+---------------+-------------+----------+
| Dulisma | 172,666 | - | - | - | - | (28,410) | 144,256 |
+-------------+----------+-----------+------------+------------+---------------+-------------+----------+
| Arcticneft | 20,995 | - | - | (9,908) | - | (3,455) | 7,632 |
+-------------+----------+-----------+------------+------------+---------------+-------------+----------+
| Petrosakh | 43,351 | - | - | (18,478) | - | (6,664) | 18,209 |
+-------------+----------+-----------+------------+------------+---------------+-------------+----------+
| Chepetskoye | 8,461 | - | - | (5,930) | - | (1,392) | 1,139 |
+-------------+----------+-----------+------------+------------+---------------+-------------+----------+
| Dinyu | 71,878 | 90 | - | - | (75,269) | 3,301 | - |
+-------------+----------+-----------+------------+------------+---------------+-------------+----------+
| CNPSEI | 92 | - | - | - | (77) | (15) | - |
+-------------+----------+-----------+------------+------------+---------------+-------------+----------+
| Total | 317,443 | 90 | - | (34,316) | (75,346) | (36,635) | 171,236 |
| cost | | | | | | | |
| of | | | | | | | |
| exploration | | | | | | | |
| and | | | | | | | |
| evaluation | | | | | | | |
| assets | | | | | | | |
+-------------+----------+-----------+------------+------------+---------------+-------------+----------+
11 Property, Plant and Equipment (continued)
+-------------+----------+-----------+------------+-------------+------------+-------------+----------+
| | Cost | Additions | Transfers | Disposals: | Disposals: | Translation | Cost |
| | at 31 | | to | Impairment | disposal | difference | at 31 |
| | December | | Tangible | loss | of | | December |
| | 2006 | | part of | | assets | | 2007 |
| | | | Oil | | held | | |
| | | | and gas | | for sale | | |
| | | | properties | | | | |
+-------------+----------+-----------+------------+-------------+------------+-------------+----------+
| | | | |
+---------------------------------------------------------------+------------+-------------+----------+
| Exploration and evaluation assets | | | |
+---------------------------------------------------------------+------------+-------------+----------+
| | | | | | | | |
+-------------+----------+-----------+------------+-------------+------------+-------------+----------+
| Dulisma | 161,055 | - | - | (96) | - | 11,707 | 172,666 |
+-------------+----------+-----------+------------+-------------+------------+-------------+----------+
| Arcticneft | 19,572 | - | - | - | - | 1,423 | 20,995 |
+-------------+----------+-----------+------------+-------------+------------+-------------+----------+
| Petrosakh | 39,263 | 1,382 | - | - | - | 2,706 | 43,351 |
+-------------+----------+-----------+------------+-------------+------------+-------------+----------+
| Urals-Nord | 20,649 | 7,035 | - | (28,291) | - | 607 | - |
+-------------+----------+-----------+------------+-------------+------------+-------------+----------+
| Chepetskoye | 8,694 | - | (2,813) | (20) | - | 2,600 | 8,461 |
+-------------+----------+-----------+------------+-------------+------------+-------------+----------+
| Dinyu | 66,804 | 207 | - | - | - | 4,867 | 71,878 |
+-------------+----------+-----------+------------+-------------+------------+-------------+----------+
| CNPSEI | 86 | - | - | - | - | 6 | 92 |
+-------------+----------+-----------+------------+-------------+------------+-------------+----------+
| Total | 316,123 | 8,624 | (2,813) | (28,407) | - | 23,916 | 317,443 |
| cost | | | | | | | |
| of | | | | | | | |
| exploration | | | | | | | |
| and | | | | | | | |
| evaluation | | | | | | | |
| assets | | | | | | | |
+-------------+----------+-----------+------------+-------------+------------+-------------+----------+
Cash flows associated with exploration and evaluation assets during the years
ended 31 December 2008 and 2007 were as follows:
+-------------------------------------------+-----------------+----------------+
| | Year ended 31 December: |
+-------------------------------------------+----------------------------------+
| | 2008 | 2007 |
+-------------------------------------------+-----------------+----------------+
| Cash flows used in operating activities | 90 | 8,624 |
+-------------------------------------------+-----------------+----------------+
| Cash flows used in investing activities | - | - |
+-------------------------------------------+-----------------+----------------+
| Total cash used for exploration and | 90 | 8,624 |
| evaluation of assets | | |
+-------------------------------------------+-----------------+----------------+
The Group's oil fields are situated in the Russian Federation on land owned by
the Russian government. The Group holds licenses and associated mining plots and
pays production taxes to extract oil and gas from the fields. The licenses
expire between 2012 and 2067, but may be extended. Management intends to renew
the licences as the properties are expected to remain productive subsequent to
the license expiration date.
Estimated costs of dismantling oil and gas production facilities, including
abandonment and site restoration costs, amounting to $0.3 million
and $2.4 million (including $0.3 million and $2.1 million recorded within assets
held for sale) at 31 December 2008 and 2007, respectively, are included in the
cost of oil and gas properties. The Group has estimated its liability based on
current environmental legislation using estimated costs when the expenses are
expected to be incurred.
Following a sharp decrease in crude oil prices at the end of 2008 the Group
recognised impairment of property plant and equipment as of 31 December 2008 in
the amount of $73.7 million (see Note 6) and write off of exploration and
evaluation of reserves in the amount of $4.8 million. The write off of the
exploration and evaluation of reserves relates to exploration expenses
previously capitalised on the license block on Petrosakh for which the Group has
no further plans as reserves were confirmed to be non-economic for further
exploration and development. Additionally the Group recognised $16.5 impairment
charge following the disposal of Chepetskoye subsequent to the year (see Notes 8
and 25).
Included within disposals of assets under construction were costs related to
unsuccessful drilling in the amount of $2.6 recorded within assets held for sale
in 2008.
At 31 December 2008 and 2007, no property, plant and equipment were pledged as
collateral for the Group's borrowings.
12Other Non-Current Assets
+-----------------------------------------------------+-------------+------------+
| | Year ended 31 December: |
+ +--------------------------+
| | 2008 | 2007 |
+-----------------------------------------------------+-----------------------------------------------------+-------------+
| | | |
+-----------------------------------------------------+-------------+------------+
| Loan receivable from related party (Note | 31,066 | 2,264 |
| 24) | | |
+-----------------------------------------------------+-------------+------------+
| Advances to contractors and suppliers for | 8,195 | 19,649 |
| construction in process | | |
+-----------------------------------------------------+-------------+------------+
| Intangible assets | 624 | 1,816 |
+-----------------------------------------------------+-------------+------------+
| Total other non-current assets | 39,885 | 23,729 |
+-----------------------------------------------------+-------------+------------+
Other long-term investments represent US dollar denominated long-term loans of
$31.1 million and $2.3 million at 31 December 2008 and 2007, respectively,
issued by UEPCL to Taas, as part of the acquisition agreement. The loans were
used to pay organisation fees for a $600.0 million project finance loan facility
provided by Savings Bank of Russian Federation ("Sberbank") for the development
of the SRB field, financing of interest payments and repayment of third party
loans at Taas. The loans bear interest of 12% and mature in February 2015. The
fair value of the loans approximates the carrying value at the balance sheet
date. These loans are considered to be fully performing as of 31 December 2008.
The loans are unsecured.
13Accounts Payable and Accrued Expenses
+-----------------------------------------------------+-------------+------------+
| | Year ended 31 December: |
+ +--------------------------+
| | 2008 | 2007 |
+-----------------------------------------------------+-----------------------------------------------------+-------------+
| Accounts payable for loan organisation fees | - | 10,000 |
+-----------------------------------------------------+-------------+------------+
| Trade payables | 949 | 5,710 |
+-----------------------------------------------------+-------------+------------+
| Accounts payable for construction in process | 18,823 | 4,103 |
+-----------------------------------------------------+-------------+------------+
| Wages and salaries | 624 | 1,035 |
+-----------------------------------------------------+-------------+------------+
| Interest payable | 7,373 | 967 |
+-----------------------------------------------------+-------------+------------+
| Accounts payable for investment in joint venture | - | 589 |
+-----------------------------------------------------+-------------+------------+
| Advances from and payables to related parties (Note | 74 | 113 |
| 24) | | |
+-----------------------------------------------------+-------------+------------+
| Other payable and accrued expenses | 1,953 | 880 |
+-----------------------------------------------------+-------------+------------+
| Total accounts payable and accrued expenses | 29,796 | 23,397 |
+-----------------------------------------------------+-------------+------------+
Total accounts payable and accrued expenses in the amount of $9.1 million and
$19.2 million at 31 December 2008 and 2007, respectively, are denominated in US
dollars and substantially all remaining amounts are denominated in Russian
Roubles.
14 Advances from customers
+-----------------------------------------------------+------------+-----------+
| | Year ended 31 |
| | December: |
+ +------------------------+
| | 2008 | 2007 |
+-----------------------------------------------------+-----------------------------------------------------+------------+
| Petraco | 49,418 | 32,011 |
+-----------------------------------------------------+------------+-----------+
| Galaform | 5,474 | 22,407 |
+-----------------------------------------------------+------------+-----------+
| Other | 886 | 761 |
+-----------------------------------------------------+------------+-----------+
| Total advances from customers | 55,778 | 55,179 |
+-----------------------------------------------------+------------+-----------+
Petraco Revolving Prepayment Agreement. In July 2007, the Group entered into a
five year revolving prepayment agreement with Petraco. Under the terms of the
agreement, US dollar denominated prepayments shall be made to the Group in one
or more advances against specified future deliveries of agreed volumes of crude
oil to be sold to Petraco. Interest accrues at LIBOR plus 5.00% on prepayments
for which the related volumes have not been delivered, and LIBOR plus 1% on
prepayments for which the related volumes have been delivered, in order to
mirror normal commercial payment terms. During 2008 the maximum borrowing base
was increased from $50.0 million to $60.0 million.
In December 2008 the original repayment schedule was modified to take into
account decreased oil prices and Company's financial position. Under this
schedule Company would have to decrease the amount outstanding to $25.0 million
by 1 July 2009 with the remaining balance payable by deliveries to be made in
2009 and 2010. Subsequent to year-end management realized that the proposed
repayment schedule was not feasible, and the Company proposed an amendment to
the repayment schedule allowing for a more gradual repayment of the currently
outstanding $46.0 million in 2009 and 2010 and providing additional security to
Petraco. At the date of these financials statements these discussion were on
going. Furthermore, transactions and cash flows between Petraco and the Group
continue to take place. Specifically, during October and November 2009 the Group
received from Petraco additional short term advances that were used to fund the
loading of three tankers, the majority of the proceeds from these three tankers
are to be used to partially repay the advance from Petraco.
Galaform domestic crude oil prepayment agreement. In November 2007, the Group
received an interest free prepayment from a domestic offtaker, Galaform, for the
amount of RR 550.0 million ($22.4 million). The prepayment was secured with the
domestic crude oil deliveries from the resources of Dinyu, CNPSEI, Michayuneft,
Nizhneomrinskaya Neft and Chepetskoye. The prepayment was due to be settled
starting from November 2008 and should have been fully repaid in April 2009.
In May 2008, the Group repaid RR 374.6 million ($15.8 million) of the Galaform
prepayment and subsequent to year-end the Group transferred to Galaform
Chepetskoye for the discharge of the remaining amount of the prepayment (see
Notes 8 and 25).
15 Taxes
Income taxes for the years ended 31 December 2008 and 2007 comprised the
following:
+------------------+----------+---------+
| | Year ended 31 |
| | December: |
+ +--------------------+
| | 2008 | 2007 |
+------------------+----------+---------+
| Current | 901 | 2,423 |
| tax | | |
| expense | | |
+------------------+----------+---------+
| Accrual | 1,862 | (1,097) |
| (release) | | |
| of income | | |
| tax | | |
| provision | | |
+------------------+----------+---------+
| Deferred | (40,140) | (9,215) |
| tax | | |
| (benefit) | | |
+------------------+----------+---------+
| Income | (37,377) | (7,889) |
| tax | | |
| (benefit) | | |
+------------------+----------+---------+
Below is a reconciliation of profit (loss) before taxation to income tax charge
(benefit):
+-----------------------------------------------------+-------------+-------------+
| | Year ended 31 December: |
+ +---------------------------+
| | 2008 | 2007 |
+-----------------------------------------------------+-----------------------------------------------------+-------------+
| Profit before income tax | (440,626) | 105,902 |
+-----------------------------------------------------+-------------+-------------+
| Theoretical tax (benefit) charge at the statutory | (105,750) | 25,416 |
| rate of 24 % | | |
+-----------------------------------------------------+-------------+-------------+
| | | |
+-----------------------------------------------------+-------------+-------------+
| Effect of recalculation of DTA/DTL at 20% at 31 | (7,712) | - |
| December 2008 | | |
+-----------------------------------------------------+-------------+-------------+
| | | |
+-----------------------------------------------------+-------------+-------------+
| Excess of net assets acquired over purchase price | - | (50,091) |
+-----------------------------------------------------+-------------+-------------+
| Utilisation of previously unrecognised tax loss | - | (1,623) |
| carry forward | | |
+-----------------------------------------------------+-------------+-------------+
| Reversal of previously recognized DTA on loss carry | 1,974 | - |
| forward | | |
+-----------------------------------------------------+-------------+-------------+
| Unrecognised DTA on loss carry forward for the year | 10,202 | 425 |
+-----------------------------------------------------+-------------+-------------+
| Accrual (release) of income tax provision | 1,862 | (1,097) |
+-----------------------------------------------------+-------------+-------------+
| Effect of tax penalties | 46 | 9 |
+-----------------------------------------------------+-------------+-------------+
| Expenses taxable at other tax rate | 59,805 | 12,867 |
+-----------------------------------------------------+-------------+-------------+
| Other non-deductible expenses | 2,196 | 6,205 |
+-----------------------------------------------------+-------------+-------------+
| Income tax (benefit) | (37,377) | (7,889) |
+-----------------------------------------------------+-------------+-------------+
The movements in deferred tax assets and liabilities during the years ended 31
December 2008 were as follows:
+---------------+--------+-------------+-----------+-----------+--------+
| | 2008 | Recognized | Credited | Effect | 2007 |
| | | in equity | (charged) | of | |
| | | for | to the | disposals | |
| | | translation | income | | |
| | | differences | statement | | |
+---------------+--------+-------------+-----------+-----------+--------+
| Deferred | | | | | |
| tax | | | | | |
| liabilities | | | | | |
+---------------+--------+-------------+-----------+-----------+--------+
| Inventories | - | (4) | - | 74 | (70) |
+---------------+--------+-------------+-----------+-----------+--------+
| Property, | (91) | 20 | (111) | - | - |
| plant and | | | | | |
| equipment | | | | | |
+---------------+--------+-------------+-----------+-----------+--------+
| | | | | | |
+---------------+--------+-------------+-----------+-----------+--------+
| Deferred | | | | | |
| tax | | | | | |
| assets | | | | | |
+---------------+--------+-------------+-----------+-----------+--------+
| Property, | - | 12 | 156 | (263) | 95 |
| plant and | | | | | |
| equipment | | | | | |
+---------------+--------+-------------+-----------+-----------+--------+
| Receivables | - | (2) | (85) | - | 87 |
+---------------+--------+-------------+-----------+-----------+--------+
| Payables | 38 | (9) | 47 | - | - |
+---------------+--------+-------------+-----------+-----------+--------+
| Dismantlement | - | 25 | - | (565) | 540 |
| provision | | | | | |
+---------------+--------+-------------+-----------+-----------+--------+
| Other | 53 | 30 | 23 | - | - |
| deductible | | | | | |
| temporary | | | | | |
| differences | | | | | |
+---------------+--------+-------------+-----------+-----------+--------+
| Tax | 0 | (25) | (1,974) | - | 1,999 |
| losses | | | | | |
+---------------+--------+-------------+-----------+-----------+--------+
| Net | - | 47 | (1,944) | (754) | 2,651 |
| deferred | | | | | |
| tax | | | | | |
| assets | | | | | |
+---------------+--------+-------------+-----------+-----------+--------+
| Net | - | 14 | (1,939) | - | 1,925 |
| deferred | | | | | |
| tax | | | | | |
| assets | | | | | |
| of the | | | | | |
| Group, | | | | | |
| excluding | | | | | |
| those | | | | | |
| classified | | | | | |
| as held | | | | | |
| for sale | | | | | |
+---------------+--------+-------------+-----------+-----------+--------+
| Net | - | - | - | - | - |
| deferred | | | | | |
| tax | | | | | |
| assets | | | | | |
| classified | | | | | |
| as assets | | | | | |
| held for | | | | | |
| sale at 31 | | | | | |
| December | | | | | |
| 2008 | | | | | |
+---------------+--------+-------------+-----------+-----------+--------+
| Net | - | 33 | (5) | (754) | 726 |
| deferred | | | | | |
| tax | | | | | |
| assets | | | | | |
| classified | | | | | |
| as assets | | | | | |
| held for | | | | | |
| sale at 31 | | | | | |
| December | | | | | |
| 2007 | | | | | |
+---------------+--------+-------------+-----------+-----------+--------+
15 Taxes (continued)
+---------------+----------+-------------+-----------+-----------+-----------+
| | 2008 | Recognized | Credited | Effect | 2007 |
| | | in equity | (charged) | of | |
| | | for | to the | disposals | |
| | | translation | income | | |
| | | differences | statement | | |
+---------------+----------+-------------+-----------+-----------+-----------+
| Deferred | | | | | |
| tax | | | | | |
| liabilities | | | | | |
+---------------+----------+-------------+-----------+-----------+-----------+
| Property, | (48,262) | 15, 304 | 31,199 | 20,400 | (115,165) |
| plant and | | | | | |
| equipment | | | | | |
+---------------+----------+-------------+-----------+-----------+-----------+
| Inventories | (1,474) | 435 | -169 | 20 | (1,760) |
+---------------+----------+-------------+-----------+-----------+-----------+
| Payables | - | - | 54 | 4 | (58) |
+---------------+----------+-------------+-----------+-----------+-----------+
| Other | (34) | (146) | 450 | - | (338) |
| taxable | | | | | |
| temporary | | | | | |
| differences | | | | | |
+---------------+----------+-------------+-----------+-----------+-----------+
| | | | | | |
+---------------+----------+-------------+-----------+-----------+-----------+
| Deferred | | | | | |
| tax | | | | | |
| assets | | | | | |
+---------------+----------+-------------+-----------+-----------+-----------+
| Receivables | 209 | (70) | 172 | (192) | 299 |
+---------------+----------+-------------+-----------+-----------+-----------+
| Dismantlement | 288 | (68) | 4 | (89) | 441 |
| provision | | | | | |
+---------------+----------+-------------+-----------+-----------+-----------+
| Payables | 315 | (73) | 18 | - | 370 |
+---------------+----------+-------------+-----------+-----------+-----------+
| Inventories | 645 | (36) | 726 | (45) | - |
+---------------+----------+-------------+-----------+-----------+-----------+
| Other | 5 | 2 | 3 | | |
| deductible | | | | | |
| temporary | | | | | |
| differences | | | | | |
+---------------+----------+-------------+-----------+-----------+-----------+
| Tax | 10,534 | (2,343) | 9,627 | - | 3,250 |
| losses | | | | | |
+---------------+----------+-------------+-----------+-----------+-----------+
| Net | (37,774) | 13,005 | 42,084 | 20,098 | (112,961) |
| deferred | | | | | |
| tax | | | | | |
| liabilities | | | | | |
+---------------+----------+-------------+-----------+-----------+-----------+
| Net | (34,344) | 8,277 | 17,825 | - | (60,446) |
| deferred | | | | | |
| tax | | | | | |
| liabilities | | | | | |
| of the | | | | | |
| Group, | | | | | |
| excluding | | | | | |
| the portion | | | | | |
| classified | | | | | |
| as | | | | | |
| liabilities | | | | | |
| directly | | | | | |
| associated | | | | | |
| with | | | | | |
| non-current | | | | | |
| assets | | | | | |
| classified | | | | | |
| as held for | | | | | |
| sale | | | | | |
+---------------+----------+-------------+-----------+-----------+-----------+
| Net | (3,430) | 5,387 | 24,572 | - | (33,389) |
| deferred | | | | | |
| tax | | | | | |
| liabilities | | | | | |
| classified | | | | | |
| as | | | | | |
| liabilities | | | | | |
| directly | | | | | |
| associated | | | | | |
| with | | | | | |
| non-current | | | | | |
| assets | | | | | |
| classified | | | | | |
| as held for | | | | | |
| sale at 31 | | | | | |
| December | | | | | |
| 2008 | | | | | |
+---------------+----------+-------------+-----------+-----------+-----------+
| Net | - | (659) | (313) | 20,098 | (19,126) |
| deferred | | | | | |
| tax | | | | | |
| liabilities | | | | | |
| classified | | | | | |
| as | | | | | |
| liabilities | | | | | |
| directly | | | | | |
| associated | | | | | |
| with | | | | | |
| non-current | | | | | |
| assets | | | | | |
| classified | | | | | |
| as held for | | | | | |
| sale at 31 | | | | | |
| December | | | | | |
| 2007 | | | | | |
+---------------+----------+-------------+-----------+-----------+-----------+
+---------------+--------+-------------+------------+--------------+--------+
| | 2007 | Recognized | Credited | Effect | 2006 |
| | | in equity | (charged) | of | |
| | | for | to the | acquisitions | |
| | | translation | income | | |
| | | differences | statement | | |
+---------------+--------+-------------+------------+--------------+--------+
| Deferred | | | | | |
| tax | | | | | |
| liabilities | | | | | |
+---------------+--------+-------------+------------+--------------+--------+
| Inventories | (70) | (3) | (67) | - | - |
+---------------+--------+-------------+------------+--------------+--------+
| | | | | | |
+---------------+--------+-------------+------------+--------------+--------+
| Deferred | | | | | |
| tax | | | | | |
| assets | | | | | |
+---------------+--------+-------------+------------+--------------+--------+
| Property, | 95 | 8 | (163) | - | 250 |
| plant and | | | | | |
| equipment | | | | | |
+---------------+--------+-------------+------------+--------------+--------+
| Receivables | 87 | 1 | 83 | - | 3 |
+---------------+--------+-------------+------------+--------------+--------+
| Dismantlement | 540 | 34 | 95 | - | 411 |
| provision | | | | | |
+---------------+--------+-------------+------------+--------------+--------+
| Tax | 1,999 | 123 | 741 | - | 1,135 |
| losses | | | | | |
+---------------+--------+-------------+------------+--------------+--------+
| Net | 2,651 | 163 | 689 | - | 1,799 |
| deferred | | | | | |
| tax | | | | | |
| assets | | | | | |
+---------------+--------+-------------+------------+--------------+--------+
| Net | 1,925 | - | - | - | - |
| deferred | | | | | |
| tax | | | | | |
| assets | | | | | |
| of the | | | | | |
| Group, | | | | | |
| excluding | | | | | |
| those | | | | | |
| classified | | | | | |
| as assets | | | | | |
| held for | | | | | |
| sale | | | | | |
+---------------+--------+-------------+------------+--------------+--------+
| Net | 726 | - | - | - | - |
| deferred | | | | | |
| tax | | | | | |
| assets | | | | | |
| classified | | | | | |
| as assets | | | | | |
| held for | | | | | |
| sale at 31 | | | | | |
| December | | | | | |
| 2007 | | | | | |
+---------------+--------+-------------+------------+--------------+--------+
15Taxes (continued)
+---------------+-----------+-------------+-----------+--------------+-----------+
| | 2007 | Recognized | Credited | Effect | 2006 |
| | | in equity | (charged) | of | |
| | | for | to the | acquisitions | |
| | | translation | Income | | |
| | | differences | statement | | |
+---------------+-----------+-------------+-----------+--------------+-----------+
| Deferred | | | | | |
| tax | | | | | |
| liabilities | | | | | |
+---------------+-----------+-------------+-----------+--------------+-----------+
| Property, | (115,165) | (8,020) | 7,493 | - | (114,638) |
| plant and | | | | | |
| equipment | | | | | |
+---------------+-----------+-------------+-----------+--------------+-----------+
| Inventories | (1,760) | (75) | (1,561) | - | (124) |
+---------------+-----------+-------------+-----------+--------------+-----------+
| Payables | (58) | (5) | 22 | - | (75) |
+---------------+-----------+-------------+-----------+--------------+-----------+
| Other | (338) | (14) | (285) | - | (39) |
| taxable | | | | | |
| temporary | | | | | |
| differences | | | | | |
+---------------+-----------+-------------+-----------+--------------+-----------+
| | | | | | |
+---------------+-----------+-------------+-----------+--------------+-----------+
| Deferred | | | | | |
| tax | | | | | |
| assets | | | | | |
+---------------+-----------+-------------+-----------+--------------+-----------+
| Receivables | 299 | 23 | 24 | - | 252 |
+---------------+-----------+-------------+-----------+--------------+-----------+
| Dismantlement | 441 | 29 | 24 | - | 388 |
| provision | | | | | |
+---------------+-----------+-------------+-----------+--------------+-----------+
| Payables | 370 | 28 | (117) | - | 459 |
+---------------+-----------+-------------+-----------+--------------+-----------+
| Inventories | - | 5 | (135) | - | 130 |
+---------------+-----------+-------------+-----------+--------------+-----------+
| Other | - | (2) | (59) | - | 61 |
| deductible | | | | | |
| temporary | | | | | |
| differences | | | | | |
+---------------+-----------+-------------+-----------+--------------+-----------+
| Tax | 3,250 | 130 | 3,120 | - | - |
| losses | | | | | |
+---------------+-----------+-------------+-----------+--------------+-----------+
| Net | (112,961) | (7,901) | 8,526 | - | (113,586) |
| deferred | | | | | |
| tax | | | | | |
| liabilities | | | | | |
+---------------+-----------+-------------+-----------+--------------+-----------+
| Net | (93,835) | - | - | - | - |
| deferred | | | | | |
| tax | | | | | |
| liabilities | | | | | |
| of the | | | | | |
| Group, | | | | | |
| excluding | | | | | |
| the portion | | | | | |
| classified | | | | | |
| as | | | | | |
| liabilities | | | | | |
| directly | | | | | |
| associated | | | | | |
| with | | | | | |
| non-current | | | | | |
| assets | | | | | |
| classified | | | | | |
| as held for | | | | | |
| sale | | | | | |
+---------------+-----------+-------------+-----------+--------------+-----------+
| Net | (19,126) | - | - | - | - |
| deferred | | | | | |
| tax | | | | | |
| liabilities | | | | | |
| classified | | | | | |
| as | | | | | |
| liabilities | | | | | |
| directly | | | | | |
| associated | | | | | |
| with | | | | | |
| non-current | | | | | |
| assets | | | | | |
| classified | | | | | |
| as held for | | | | | |
| sale at 31 | | | | | |
| December | | | | | |
| 2007 | | | | | |
+---------------+-----------+-------------+-----------+--------------+-----------+
The Group is subject to corporation tax on taxable profits at the rate of 10%.
Most of the individual operating entities are taxed in the Russian Federation at
the rate of 24%. Under certain conditions interest may be subject to defence
contribution at the rate of 10%. In such cases 50% of the same interest will be
exempt from corporation tax thus having an effective tax rate burden of
approximately 15%. In certain cases dividends received from abroad may be
subject to defence contribution at the rate of 15%.
There is no concept of consolidated tax returns in the Russian Federation and,
consequently, tax losses and current tax assets of different subsidiaries cannot
be set off against tax liabilities and taxable profits of other subsidiaries.
Accordingly, taxes may accrue even where there is a net consolidated tax
loss. Similarly, deferred tax assets of one subsidiary cannot be offset against
deferred tax liabilities of another subsidiary. At 31 December 2008 and 2007,
deferred tax assets of $45.6 million and $12.6 million, respectively, have not
been recognized for deductible temporary differences for which it is not
probable that sufficient taxable profit will be available to allow the benefit
of that deferred tax assets to be utilised. Accumulated tax losses were $409.6
million and $119.0 million at 31 December 2008 and 2007, respectively; of which
$363.4 million in 2008 and $114.2 million in 2007 can be carried forward
indefinitely. The remaining $46.2 million of the accumulated tax losses at 31
December 2008 expire in 2018 and of the remaining $4.8 million at 31 December
2007 expire in 2017.
The Group has not recognised deferred tax liabilities for 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. Such amounts are permanently reinvested.
At 31 December 2008 and 2007, the estimated unrecorded deferred tax liabilities
for such differences were $0.0 million and $1.7 million, respectively.
Unremitted earnings amounted nil and $34.4 million at 31 December 2008 and 2007,
respectively
In the Russian Federation, an income tax rate of 20% has been enacted in
November 2008 which becomes effective starting from 1 January 2009. As this tax
rate was enacted by 31 December 2008, the effect of the change on closing
deferred tax liabilities (assets) amounted to $7.7 million has been recognised
in these financial statements.
15 Taxes (continued)
Other taxes payable at 31 December 2008 and 2007 were as follows:
+--------------------------------------------------------+-----------+----------+
| | Year ended 31 |
| | December: |
+ +----------------------+
| | 2008 | 2007 |
+--------------------------------------------------------+--------------------------------------------------------+-----------+
| Unified production tax | 940 | 4,424 |
+--------------------------------------------------------+-----------+----------+
| Value added tax | - | 459 |
+--------------------------------------------------------+-----------+----------+
| Other taxes payable | 728 | 1,116 |
+--------------------------------------------------------+-----------+----------+
| Other taxes provision | 252 | 529 |
+--------------------------------------------------------+-----------+----------+
| Total other taxes payable | 1,920 | 6,528 |
+--------------------------------------------------------+-----------+----------+
| Total other taxes payable of the Group, excluding the | 402 | 3,429 |
| portion classified as liabilities directly associated | | |
| with non-current assets classified as held for sale | | |
+--------------------------------------------------------+-----------+----------+
| Total other taxes payable classified as liabilities | 1,518 | 3,099 |
| directly associated with non-current assets classified | | |
| as held for sale | | |
+--------------------------------------------------------+-----------+----------+
Other taxes provision
+--------------------------------------------------------+-----------+----------+
| | Year ended 31 |
| | December: |
+--------------------------------------------------------+----------------------+
| | 2008 | 2007 |
+--------------------------------------------------------+-----------+----------+
| Other taxes provision at 1 January | 529 | 2,367 |
+--------------------------------------------------------+-----------+----------+
| Release of taxes provision: | | |
+--------------------------------------------------------+-----------+----------+
| Excise tax | - | (1,717) |
| (Note 19) | | |
+--------------------------------------------------------+-----------+----------+
| Value added tax | (167) | (137) |
| (Note 20) | | |
+--------------------------------------------------------+-----------+----------+
| Other taxes (Note | (22) | (75) |
| 20) | | |
+--------------------------------------------------------+-----------+----------+
| Effect of currency translation | (88) | 91 |
+--------------------------------------------------------+-----------+----------+
| Total other taxes provision at 31 December | 252 | 529 |
+--------------------------------------------------------+-----------+----------+
| Total other taxes provision of the Group, excluding | 38 | 529 |
| the portion classified as liabilities directly | | |
| associated with non-current assets classified as held | | |
| for sale | | |
+--------------------------------------------------------+-----------+----------+
| Total other taxes provision classified as liabilities | 214 | - |
| directly associated with non-current assets classified | | |
| as held for sale | | |
+--------------------------------------------------------+-----------+----------+
In 2008 the Group released $0.2 million tax risks due to expiration of
limitation period. During 2007 the Group was successful in defending its
position in the courts and released $1.9 million of income in the consolidated
income statement.
16 Borrowings
Short-term borrowings. Short-term borrowings were as follows at 31 December
2008 and 2007:
+---------------------------------------------------------+----------+----------+
| | Year ended 31 |
| | December: |
+ +---------------------+
| | 2008 | 2007 |
+---------------------------------------------------------+---------------------------------------------------------+----------+
| Sberbank acquisition loan | 499,635 | 500,000 |
+---------------------------------------------------------+----------+----------+
| - loan organization fees | - | (14,678) |
+---------------------------------------------------------+----------+----------+
| Sberbank field development loan | 130,000 | 130,000 |
+---------------------------------------------------------+----------+----------+
| - loan organization fees | - | (1,415) |
+---------------------------------------------------------+----------+----------+
| Other | 114 | 124 |
+---------------------------------------------------------+----------+----------+
| Total short-term borrowings | 629,749 | 614,031 |
+---------------------------------------------------------+----------+----------+
Sberbank Taas acquisition loan. In December 2007, the Group entered into a loan
agreement with the Savings Bank of the Russian Federation ("Sberbank") in the
amount of $500.0 million to finance the acquisition of its participation
interest in Taas. The loan bears interest of 14% per annum payable monthly. The
interest payments are secured with interest bearing promissory notes acquired
from Sberbank that will be redeemed as payment for interest. The loan matured
in November 2008. The Group incurred loan organisation fees of $6.250 million
(or 1.25% of the loan amount), which are recorded net against the loan balance
and are amortised over the life of the loan using the effective interest method.
The Group will be subject to a 3.9% penalty for any early repayments of the
loan.
Additionally, the Group is contracted to pay $10.0 million fees to Ashmore
Investment Management Limited ("Ashmore"), a fellow shareholder in Taas, in
exchange for a pledge of 10.5% of Ashmore share in Taas to
16 Borrowings (continued)
Sberbank in support of the Group's acquisition loan. The payment was rendered
in 2008. The Group also pledged its 100% stakes in Petrosakh and Arcticneft to
Ashmore as part of the arrangement. The Group was released from these pledges
in November 2009 (see note 25).
The Group guaranteed its obligations under the loan by pledging its interest in
Taas. Additionally, other shareholders of Taas and of the Group have pledged a
portion of their shares in Taas and in UEPCL as collateral for the Group's
obligations under the loan. The Company incurred additional $3.6 million of
expenses associated with this pledge.
Additionally, according to the loan agreement the Group has to secure interest
payment for the next year by Sberbank promissory notes, which should be acquired
by the Group and pledged in the deposit with Sberbank. In November 2007 the
Group acquired $70.0 million of promissory notes of which $5.8 million were
released in December 2007 to make a repayment of interest on due date. The
outstanding promissory notes receivable was $64.6 million as at 31 December 2007
which included $64.2 million of principal amount of promissory notes and $0.4
million of interest receivable. The promissory notes were fully released at 31
December 2008.
Sberbank Dulisma field development loan. In November 2007, the Group entered
into a loan agreement with Sberbank in the amount of $130.0 million bearing
interest of 14% per annum and maturing in November 2008. The Group incurred loan
organization fees of $1.625 million (1.25% of the facility amount) which are
recorded net against the loan balance and are amortised over the life of the
loan using the effective interest method. If the Group meets certain technical
conditions, the loan can be extended for six years with 15 equal quarterly
principal installments payable starting May 2010. Sberbank did not consider the
requirements as being met and consequently as of 31 December 2008 this loan was
overdue.
The Group pledged 100% of its shares in Dulisma as collateral for its
obligations under the loan. Additionally, major shareholders of the Group agreed
to pledge UEPCL shares to Sberbank as additional collateral.
As of 31 December 2008 both loans to Sberbank were overdue (see note 25).
Goldman Sachs project finance loan. In January 2007, the Group entered into a
loan agreement to fund the development of the Dulisminskoye field in Irkutsk
Region, Eastern Siberia. The loan was fully repaid and the swap agreement
terminated in November 2007 when the Group obtained new financing under the
Sberbank Dulisma field development loan. As a result of the repayment of this
loan and the termination of the swap agreement, the Group incurred early
repayment fees which were recognized as interest expense.
Weighted average interest rate. The Group's weighted average interest rates on
borrowings were 14.0% and 14.6% at 31 December 2008 and 2007, respectively.
16 Borrowings (continued)
Interest expense and income. Interest expense and income for the years ended 31
December 2008 and 2007, respectively, comprised the following:
+---------------------------------------------------+--------------+-----------+
| | Year ended 31 December: |
+---------------------------------------------------+--------------------------+
| | 2008 | 2007 |
+---------------------------------------------------+--------------+-----------+
| | | |
+---------------------------------------------------+--------------+-----------+
| Short-term borrowings | | |
+---------------------------------------------------+--------------+-----------+
| Sberbank | | |
+---------------------------------------------------+--------------+-----------+
| - interest at coupon rate | 77,959 | 8,505 |
+---------------------------------------------------+--------------+-----------+
| - accretion of issuance costs | 16,005 | 1,689 |
+---------------------------------------------------+--------------+-----------+
| - pledge fee | 3,636 | - |
+---------------------------------------------------+--------------+-----------+
| BNP Paribas | - | 58 |
+---------------------------------------------------+--------------+-----------+
| Evrofinance | 408 | - |
+---------------------------------------------------+--------------+-----------+
| | | |
+---------------------------------------------------+--------------+-----------+
| Total interest expense associated with short-term | 98,008 | 10,252 |
| borrowings | | |
+---------------------------------------------------+--------------+-----------+
| | | |
+---------------------------------------------------+--------------+-----------+
| Long-term borrowings | | |
+---------------------------------------------------+--------------+-----------+
| BNP Paribas Subordinated Loan | | |
+---------------------------------------------------+--------------+-----------+
| - interest at coupon rate | - | 628 |
+---------------------------------------------------+--------------+-----------+
| - commitments and break up cost | - | 26 |
+---------------------------------------------------+--------------+-----------+
| - accretion of issuance costs and discount | - | 1,694 |
| associated with warrants | | |
+---------------------------------------------------+--------------+-----------+
| BNP Paribas Reserve Based Loan Facility | | |
+---------------------------------------------------+--------------+-----------+
| - interest at coupon rate | - | 2,303 |
+---------------------------------------------------+--------------+-----------+
| - commitments | - | 610 |
+---------------------------------------------------+--------------+-----------+
| - accretion of issuance costs | - | 2,132 |
+---------------------------------------------------+--------------+-----------+
| | | |
+---------------------------------------------------+--------------+-----------+
| Goldman Sachs | | |
+---------------------------------------------------+--------------+-----------+
| - interest at coupon rate | - | 11,817 |
+---------------------------------------------------+--------------+-----------+
| - early repayment fees | - | 12,193 |
+---------------------------------------------------+--------------+-----------+
| - accretion of issuance costs | - | 4,379 |
+---------------------------------------------------+--------------+-----------+
| | | |
+---------------------------------------------------+--------------+-----------+
| Total interest expense associated with long-term | - | 35,782 |
| borrowings | | |
+---------------------------------------------------+--------------+-----------+
| | | |
+---------------------------------------------------+--------------+-----------+
| Finance leases | 271 | 272 |
+---------------------------------------------------+--------------+-----------+
| Less capitalised borrowing costs | (5,863) | (3,576) |
+---------------------------------------------------+--------------+-----------+
| Change in dismantlement provision due to passage | 138 | 438 |
| of time (Note 17) | | |
+---------------------------------------------------+--------------+-----------+
| Interest on advance from Petraco Oil Company | 5,661 | 4,310 |
| Limited | | |
+---------------------------------------------------+--------------+-----------+
| Interest on advance from Galaform | 175 | - |
+---------------------------------------------------+--------------+-----------+
| Other interest expense | 61 | 170 |
+---------------------------------------------------+--------------+-----------+
| Total interest expense | 98,451 | 47,648 |
+---------------------------------------------------+--------------+-----------+
| | | |
+---------------------------------------------------+--------------+-----------+
| Interest income | | |
+---------------------------------------------------+--------------+-----------+
| JP Morgan Liquidity Fund | - | (76) |
+---------------------------------------------------+--------------+-----------+
| Related party loans issued (Note 24) | (3,704) | (146) |
+---------------------------------------------------+--------------+-----------+
| Sberbank promissory notes | (1,737) | (343) |
+---------------------------------------------------+--------------+-----------+
| Bank deposit | (70) | (2,052) |
+---------------------------------------------------+--------------+-----------+
| Other interest income | (143) | (5) |
+---------------------------------------------------+--------------+-----------+
| Total interest income | (5,654) | (2,622) |
+---------------------------------------------------+--------------+-----------+
| Total finance costs | 92,797 | 45,026 |
+---------------------------------------------------+--------------+-----------+
The capitalisation rates used to determine the amount of borrowing costs
eligible for capitalisation were 14.0% and 13.5% in 2008 and 2007, respectively.
17Dismantlement Provision
The dismantlement provision represents the net present value of the estimated
future obligation for dismantlement, abandonment and site restoration costs
which are expected to be incurred at the end of the production lives of the oil
and gas fields, which vary from 10 to 40 years depending on the field and type
of assets. The discount rate used to calculate the net present value of the
dismantling liability was 13.0%.
+--------------------------------------------------------+----------+----------+
| | Year ended 31 |
| | December: |
+ +---------------------+
| | 2008 | 2007 |
+--------------------------------------------------------+--------------------------------------------------------+----------+
| Opening dismantlement provision | 4,086 | 3,327 |
+--------------------------------------------------------+----------+----------+
| Translation difference | (311) | 264 |
+--------------------------------------------------------+----------+----------+
| Additions | 2 | 13 |
+--------------------------------------------------------+----------+----------+
| Disposals | (2,605) | (206) |
+--------------------------------------------------------+----------+----------+
| Changes in estimates | 128 | 250 |
+--------------------------------------------------------+----------+----------+
| Change due to passage of time | 138 | 438 |
+--------------------------------------------------------+----------+----------+
| Closing dismantlement provision | 1,438 | 4,086 |
+--------------------------------------------------------+----------+----------+
| - Dismantlement provision of the Group, excluding the | 15 | 1,448 |
| portion classified as liabilities directly associated | | |
| with non-current assets classified as held for sale | | |
+--------------------------------------------------------+----------+----------+
| - Dismantlement provision classified as liabilities | 1,423 | 2,638 |
| directly associated with non-current assets classified | | |
| as held for sale | | |
+--------------------------------------------------------+----------+----------+
As further discussed in Note 22, environmental regulations and their enforcement
are being developed by governmental authorities. Consequently, the ultimate
dismantlement, abandonment and site restoration obligation may differ from the
estimated amounts, and this difference could be significant.
18Equity
Redenomination of shares. Following the adoption of the Euro on 1 January 2008
as the official currency of the Republic of Cyprus, replacing the Cyprus Pound,
the Company was obliged to convert its authorised and issued share capital first
to Euro and subsequently was permitted to change to any other approved currency.
On 22 January 2008 following the Extraordinary General Meeting, the Company
converted its shares first into Euro at a conversion rate of 1.71 Euro to 1
Cypriot Pound and subsequently into US dollars at a conversion rate of $1.48 to
1 Euro. As a result of this at 22 January 2008 the authorised share capital was
changed to $1,890 thousand divided into 300 million shares of $0.0063 each and
the issued share capital was changed to $1,103 thousand divided into 175.1
million shares of $0.0063 each. The effect of this redenomination was to
increase share capital by $113 thousand.
At 31 December 2008 authorised share capital was $1,890 thousand divided into
300 million shares of $0.0063 each and issued share capital was $1,122 thousand
divided into 178.1 million shares of $0.0063 each.
Shares issued for cash. In January 2008, Morgan Stanley, the Group's nominated
adviser of a private placement in December 2007, executed an option for 5% of
overallotment of UEPCL shares in the amount of 1,643,000 shares. Proceeds from
the overallotment issuance totalled $5.9 million net of transaction costs of
$0.3 million.
18 Equity (continued)
+------------------------------------+--+-----------+----------+------------+------------+
| | | Number of | Share | Share | Difference |
| | | Shares | capital | premium | from |
| | | (thousand | | | conversion |
| | | of | | | of share |
| | | shares) | | | capital |
| | | | | | into US$ |
+------------------------------------+--+-----------+----------+------------+------------+
| | | | | | |
+------------------------------------+--+-----------+----------+------------+------------+
| Balance at 1 January 2007 | | 118,113 | 633 | 401,448 | - |
+------------------------------------+--+-----------+----------+------------+------------+
| | | | | | |
+------------------------------------+--+-----------+----------+------------+------------+
| Shares issued for cash | | 32,857 | 205 | 116,397 | - |
+------------------------------------+--+-----------+----------+------------+------------+
| Shares issued for payment of | | 22,738 | 143 | 93,162 | - |
| investment in TYNGD | | | | | |
+------------------------------------+--+-----------+----------+------------+------------+
| Shares issued under restricted | | 811 | 5 | (5) | - |
| stock plans | | | | | |
+------------------------------------+--+-----------+----------+------------+------------+
| Shares issued immediately under | | 602 | 4 | (4) | - |
| restricted stock plans | | | | | |
+------------------------------------+--+-----------+----------+------------+------------+
| Share-based payment under | | - | - | 9,898 | - |
| restricted stock | | | | | |
+------------------------------------+--+-----------+----------+------------+------------+
| Share-based payment related to | | - | - | 4,215 | - |
| immediate vesting | | | | | |
+------------------------------------+--+-----------+----------+------------+------------+
| Balance at 31 December 2007 | | 175,121 | 990 | 625,111 | - |
+------------------------------------+--+-----------+----------+------------+------------+
| | | | | | |
+------------------------------------+--+-----------+----------+------------+------------+
| Shares issued for cash | | 1,643 | 10 | 5,882 | - |
+------------------------------------+--+-----------+----------+------------+------------+
| Shares issued under restricted | | 753 | 5 | (5) | - |
| stock plans | | | | | |
+------------------------------------+--+-----------+----------+------------+------------+
| Early vested shares issued under | | 460 | 3 | (3) | - |
| restricted stock plans | | | | | |
+------------------------------------+--+-----------+----------+------------+------------+
| Share issued under option | | 167 | 1 | 124 | - |
| agreement | | | | | |
+------------------------------------+--+-----------+----------+------------+------------+
| Share-based payment under | | - | - | 8,971 | - |
| restricted stock | | | | | |
+------------------------------------+--+-----------+----------+------------+------------+
| Difference from conversion of | | - | 113 | - | (113) |
| share capital into US$ | | | | | |
+------------------------------------+--+-----------+----------+------------+------------+
| Balance at 31 December 2008 | | 178,144 | 1,122 | 640,080 | (113) |
+------------------------------------+--+-----------+----------+------------+------------+
Restricted Stock Plan. In February 2006, the Group's Board of Directors
approved a Restricted Stock Plan (the "Plan") authorizing the Compensation
Committee of the Board of Directors to issue restricted stock of up to five
percent of the outstanding shares of the Group. Restricted stock grants entitle
the holder to shares of stock for no consideration upon vesting. There are no
performance conditions beyond continued employment with the Group. Upon
adoption, the Group granted restricted stock awards in the amount of 1,332,355
shares of which 145,952 shares were forfeited during 2007. Also, of the
initially granted in 2007 restricted stock of 3,075,393 shares, 93,901 and
75,275 granted shares were cancelled as a result of retirement of certain
employees of the Company during years 2008 and 2007.
In March 2008, the Group substantially granted an additional 2,281,677 shares of
restricted stock of which 71,796 granted shares were cancelled as a result of
retirement of certain employees of the Company during 2008.
The total costs associated with the restricted stock granted during the years
ended 31 December 2008, 2007 and 2006, were $7.6 million, $19.6 million and $5.9
million, respectively, based upon the market value of the Group's shares on the
date of grant. Such amounts are being recognized over the vesting period of the
respective awards. During the years ended 31 December 2008 and 2007, $9.0
million and $14.1 million, respectively, of expense related to share-based
payments were recognized in the consolidated statements of income. Such expense
for the year ended 2007 includes $4.2 million of expense related to restricted
stock granted to certain members of the Group's executive management, who
resigned 2007. As part of the severance agreement with those employees, all
unvested restricted stock grants which they held were immediately vested in 2007
and early 2008.
At 31 December 2008 and 31 December 2007, restricted stock grants for
1,213,407 shares and 1,413,307 shares were fully vested and issued.
18 Equity (continued)
As of 31 December 2008, the number of unvested restricted stock grants and their
respective vesting dates are presented in the table below.
+----------------------+-----------+-----------+-----------+----------+-------------+
| Date of | January | January | January | January | Total |
| Grant | 2008 | 2009 | 2010 | 2011 | |
+----------------------+-----------+-----------+-----------+----------+-------------+
| | | | | | |
+----------------------+-----------+-----------+-----------+----------+-------------+
| Unvested Restricted | 753,588 | 798,931 | 715,530 | 45,344 | 2,313,393 |
| Stock Granted as of | | | | | |
| 31 December 2007 | | | | | |
+----------------------+-----------+-----------+-----------+----------+-------------+
| | | | | | |
+----------------------+-----------+-----------+-----------+----------+-------------+
| Restricted Stock | - | 760,559 | 760,559 | 760,559 | 2,281,677 |
| Granted in 2008 | | | | | |
+----------------------+-----------+-----------+-----------+----------+-------------+
| Forfeitured in 2008 | - | (63,915) | (74,365) | (27,415) | (165,695) |
+----------------------+-----------+-----------+-----------+----------+-------------+
| Vested in 2008 | (753,588) | - | - | - | (753,588) |
+----------------------+-----------+-----------+-----------+----------+-------------+
| Total Restricted | - | 1,495,575 | 1,401,724 | 778,488 | 3,675,787 |
| Stock Granted as of | | | | | |
| 31 December 2008 | | | | | |
+----------------------+-----------+-----------+-----------+----------+-------------+
Subsequent to 31 December 2008, the Group issued 1,432,062 shares which included
early vesting of grants of 290,581 shares to the retired employees in early 2009
as part of severance payments and issue of 1,141,481 shares as a result of
normal vesting of previously issued restricted stock grants. The vesting of
354,094 shares under plans of restricted stock grants to certain top managers
was deferred.
Share options granted.In September 2005, the Group granted options to purchase
20,000 shares at an exercise price of GBP 2.40 per share to one of its
non-executive directors. These options were granted for zero consideration. All
of these options remain unexercised. The fair value of this option was evaluated
at $7 thousand. The options vest on 30 September 2006, 2007 and 2008 in equal
parts and expire on 30 September 2009. No option had been exercised at the date
of these financial statements.
During 2005, the Group granted a share-based award to one of its officers who is
no longer with the Company. Under the award, the officer had the option to
purchase a certain number of the Company's shares at a share price equal to
$131.0 million divided by the number of the Company's shares that are issued and
outstanding at both 1 August 2006 and 1 August 2007. The option is in two parts
comprised of the number of shares that can be purchased for a payment of $125
thousand on 1 August 2006 and of $125 thousand on 1 August 2007, which are the
respective vesting dates of the two parts of the award. The Group estimated the
total fair value of the award to be $120 thousand.
During the year ended 31 December 2008, 167 thousand shares were issued as a
result of execution of the award. The option was executed in full in February
2008, when the Group issued 167,100 shares to the former officer. Overall the
Group issued 280 thousand shares in accordance with that plan.
Earnings per share. Basic earnings per share is calculated by dividing the
profit attributable to equity holders of the company by the weighted average
number of ordinary shares in issue during the year.
The weighted average number of ordinary shares issued was calculated as
following:
+-----------------------------------------------------+--------------+-------------+
| | Year ended 31 December: |
+-----------------------------------------------------+----------------------------+
| | 2008 | 2007 |
+-----------------------------------------------------+--------------+-------------+
| Balance at 1 January | 175,120,478 | 118,112,135 |
+-----------------------------------------------------+--------------+-------------+
| | | |
+-----------------------------------------------------+--------------+-------------+
| Shares issued for cash | 1,607,087 | 1,260,269 |
+-----------------------------------------------------+--------------+-------------+
| Shares issued for payment of investment in Taas | - | 1,121,328 |
+-----------------------------------------------------+--------------+-------------+
| Shares issued under restricted stock plans | 704,174 | 606,663 |
+-----------------------------------------------------+--------------+-------------+
| Early vested shares under restricted stock plans | 405,797 | 318,660 |
+-----------------------------------------------------+--------------+-------------+
| Exercise of options | 147,468 | - |
+-----------------------------------------------------+--------------+-------------+
| | | |
+-----------------------------------------------------+--------------+-------------+
| Weighted average number of ordinary shares in issue | 177,985,004 | 121,419,055 |
| | | |
+-----------------------------------------------------+--------------+-------------+
18 Equity (continued)
+--------------------------------------------------------+-----------+----------+
| | Year ended 31 |
| | December: |
+--------------------------------------------------------+----------------------+
| | 2008 | 2007 |
+--------------------------------------------------------+-----------+----------+
| (Loss) Profit attributable to equity holders of the | (401,789) | 113,722 |
| Company | | |
+--------------------------------------------------------+-----------+----------+
| Weighted average number of ordinary shares in issue | 177,985 | 121,419 |
| (thousands) | | |
+--------------------------------------------------------+-----------+----------+
| | | |
+--------------------------------------------------------+-----------+----------+
| Basic earnings per share (in US dollar per share) | (2.26) | 0.94 |
+--------------------------------------------------------+-----------+----------+
The company has three categories of potential ordinary shares: warrants, share
options and restricted stock plan, and call and put options associated with the
purchase of Taas. Diluted earnings per share is calculated by adjusting the
weighted average number of ordinary shares outstanding and the profit
attributable equity holders of the Company to assume conversion of all dilutive
potential ordinary shares. For the year ended 31 December 2008, basic and
diluted earnings per share and the corresponding weighted average shares
outstanding used in each calculation are identical as all potentially dilutive
instruments are antidilutive. The diluted earning per share for 2007 was 0.82
USD per share.
19Revenues
+---------------------------------------------------------+----------+----------+
| | Year ended 31 |
| | December: |
+ +---------------------+
| | 2008 | 2007 |
+---------------------------------------------------------+---------------------------------------------------------+----------+
| Crude oil | | |
+---------------------------------------------------------+----------+----------+
| Export sales | 147,377 | 134,308 |
+---------------------------------------------------------+----------+----------+
| Domestic sales (Russian Federation) | 59,387 | 45,891 |
+---------------------------------------------------------+----------+----------+
| Petroleum (refined) products - domestic sales | 12,163 | 12,386 |
+---------------------------------------------------------+----------+----------+
| Other sales | 3,364 | 1,526 |
+---------------------------------------------------------+----------+----------+
| Total gross revenues | 222,291 | 194,111 |
+---------------------------------------------------------+----------+----------+
Substantially all of the Group's export sales are made to third party traders
with title passing at the Russian border. Accordingly, management does not
monitor the ultimate consumers and geographic markets of its export sales.
Included within excise taxes was a gain from release of tax risk provisions of
$1.7 million in the year ended 31 December 2007. There were no such adjustments
in the year ended 31 December 2008.
20Cost of Sales
+---------------------------------------------------------+----------+----------+
| | Year ended 31 |
| | December: |
+ +---------------------+
| | 2008 | 2007 |
+---------------------------------------------------------+---------------------------------------------------------+----------+
| Unified production tax | 37,952 | 41,509 |
+---------------------------------------------------------+----------+----------+
| Depreciation, amortization and depletion | 16,514 | 28,974 |
+---------------------------------------------------------+----------+----------+
| Cost of purchased products | 70,799 | 21,624 |
+---------------------------------------------------------+----------+----------+
| Wages and salaries (including payroll taxes of $3.5 | 22,175 | 21,489 |
| million and | | |
| $3.5 million for the years ended 31 December 2008 and | | |
| 2007, respectively) | | |
+---------------------------------------------------------+----------+----------+
| Materials | 7,184 | 7,285 |
+---------------------------------------------------------+----------+----------+
| Oil treating, storage and other services | 6,571 | 5,467 |
+---------------------------------------------------------+----------+----------+
| Write-off unsuccessful drilling costs (Note 11) | 2,552 | - |
+---------------------------------------------------------+----------+----------+
| Other taxes | 2,721 | 3,214 |
+---------------------------------------------------------+----------+----------+
| Rent, utilities and repair services | 1,534 | 1,611 |
+---------------------------------------------------------+----------+----------+
| Energy services | 774 | 1,377 |
+---------------------------------------------------------+----------+----------+
| Release of other taxes provision (Note 15) | (189) | (212) |
+---------------------------------------------------------+----------+----------+
| Accrual (release) provision on inventory (Note 10) | 4,307 | (882) |
+---------------------------------------------------------+----------+----------+
| Other expenses | 4,203 | 4,086 |
+---------------------------------------------------------+----------+----------+
| Change in finished goods | (10,376) | (4,153) |
+---------------------------------------------------------+----------+----------+
| Total cost of sales | 166,721 | 131,389 |
+---------------------------------------------------------+----------+----------+
21Selling, General and Administrative Expenses
+---------------------------------------------------------+----------+----------+
| | Year ended 31 |
| | December: |
+ +---------------------+
| | 2008 | 2007 |
+---------------------------------------------------------+---------------------------------------------------------+----------+
| Wages and salaries | 13,431 | 21,812 |
+---------------------------------------------------------+----------+----------+
| Share-based payment | 8,971 | 14,113 |
+---------------------------------------------------------+----------+----------+
| Professional consultancy fees | 3,350 | 5,309 |
+---------------------------------------------------------+----------+----------+
| Office rent and other expenses | 2,411 | 3,440 |
+---------------------------------------------------------+----------+----------+
| Transport and storage services | 2,244 | 2,327 |
+---------------------------------------------------------+----------+----------+
| Loading services | 3,331 | 3,658 |
+---------------------------------------------------------+----------+----------+
| Trip expenses and communication services | 1,630 | 1,824 |
+---------------------------------------------------------+----------+----------+
| Audit fees | 1,479 | 1,307 |
+---------------------------------------------------------+----------+----------+
| Bad debt write-off | 2,161 | - |
+---------------------------------------------------------+----------+----------+
| Other expenses | 5,323 | 5,443 |
+---------------------------------------------------------+----------+----------+
| Total selling, general and administrative expenses | 44,331 | 59,233 |
+---------------------------------------------------------+----------+----------+
Directors' fees for the years ended 31 December 2008 and 2007 were $172 thousand
and $170 thousand, respectively, and do not include amounts related to
share-based payments provided to the Group's directors (Note 24).
22Contingencies, Commitments and Operating Risks
Operating environment. The Russian Federation continues to display some
characteristics of an emerging market economy. These characteristics include,
but are not limited to, the existence of a currency that is not yet fully
convertible in many countries outside of the Russian Federation, and relatively
high inflation. Tax and customs legislation within the Russian Federation is
subject to varying interpretations, and changes can occur frequently.
The future economic direction of the Russian Federation is largely dependent
upon the effectiveness of economic, financial and monetary measures undertaken
by the Government, together with tax, legal, regulatory, and political
developments.
Oilfield licenses.The Group is subject to periodic reviews of its activities by
governmental authorities with respect to the requirements of its oil field
licenses. Management of the Group correspond with governmental authorities to
agree on remedial actions, if necessary, to resolve any findings resulting from
these reviews. Failure to comply with the terms of a license could result in
fines, penalties or license limitations, suspension or revocations. Management
believes any issues of non-compliance will be resolved through negotiations or
corrective actions without any materially adverse effect on the financial
position or the operating results of the Group.
Management believes that proved reserves should include quantities that are
expected to be produced after the expiry dates of the Group's production
licenses. These licenses expire between 2012 and 2067.
The principal licenses of the Group and their expiry dates are:
+--------------------------+--------------------------+-------------------------+
| Field | License holder | License expiry date |
+--------------------------+--------------------------+-------------------------+
| | | |
+--------------------------+--------------------------+-------------------------+
| Okruzhnoye | Petrosakh | 2012 |
+--------------------------+--------------------------+-------------------------+
| Peschanozerskoye | Arcticneft | 2067 |
+--------------------------+--------------------------+-------------------------+
| Dulisminskoye | Dulisma | 2019 |
+--------------------------+--------------------------+-------------------------+
| Srednebotuobinskoye | Taas-Yuryakh | 2016 |
| | Neftegazdobycha | |
+--------------------------+--------------------------+-------------------------+
| Kurungsky | Taas-Yuryakh | 2032 |
| | Neftegazdobycha | |
+--------------------------+--------------------------+-------------------------+
| | | |
+--------------------------+--------------------------+-------------------------+
Management believes the licenses may be extended at the initiative of the Group
and management intends to extend such licenses for properties expected to
produce subsequent to their license expiry dates.
22 Contingencies, Commitments and Operating Risks (continued)
As of 31 December 2008 the Group was not in compliance with all of the
conditions as set forth in its license agreements. As a result, the Group is
exposed to potential penalties, but not revocation of the license. Management
does not believe that any of its significant exploration or production licenses
are at risk of being withdrawn by the licensing authorities because subsequent
to year end, management has taken steps to amend license agreements with the
relevant authorities. Management plans to complete all the required exploration
and development work, in accordance with the timetables established in the
amended licenses.
Taxation. Russian tax and customs legislation is subject to varying
interpretations, and changes, which can occur frequently. Management's
interpretation of such legislation as applied to the transactions and activity
of the Group may be challenged by the relevant authorities. The Russian tax
authorities may be taking a more assertive position in their interpretation of
the legislation and assessments, and it is possible that transactions and
activities that have not been challenged in the past may be challenged. The
Supreme Arbitration Court issued guidance to lower courts on reviewing tax cases
providing a systemic roadmap for anti-avoidance claims, and it is possible that
this will significantly increase the level and frequency of tax authorities
scrutiny. As a result, significant additional taxes, penalties and interest may
be assessed. Fiscal periods remain open to review by the authorities in respect
of taxes for three calendar years preceding the year of review. Under certain
circumstances reviews may cover longer periods.
Russian transfer pricing legislation introduced 1 January 1999 provides the
possibility for tax authorities to make transfer pricing adjustments and impose
additional tax liabilities in respect of all controllable transactions, provided
that the transaction price differs from the market price by more than 20%.
Controllable transactions include: transactions with interdependent parties, as
determined under the Russian Tax Code; all cross-border transactions
(irrespective whether performed between related or unrelated parties);
transactions where the price applied by a taxpayer differs by more than 20% from
the price applied in similar transactions by the same taxpayer within a short
period of time; and barter transactions. There is no formal guidance as to how
these rules should be applied in practice. In the past, the arbitration court
practice with this respect has been contradictory.
Tax liabilities arising from intercompany transactions are determined using
actual transaction prices. It is possible with the evolution of the
interpretation of the transfer pricing rules in the Russian Federation and the
changes in the approach of the Russian tax authorities, that such transfer
prices could potentially be challenged in the future. Given the brief nature of
the current Russian transfer pricing rules, the impact of any such challenge
cannot be reliably estimated; however, it may be significant to the financial
condition and/or the overall operations of the entity.
The Group includes companies incorporated outside of Russia. Tax liabilities of
the Group are determined on the assumptions that these companies are not subject
to Russian profits tax because they do not have a permanent establishment in
Russia. Russian tax laws do not provide detailed rules on taxation of foreign
companies. It is possible that with the evolution of the interpretation of these
rules and the changes in the approach of the Russian tax authorities, the
non-taxable status of some or all of the foreign companies of the Group may be
challenged. The impact of any such challenge cannot be reliably estimated;
however, it may be significant to the financial condition and/or the overall
operations of the Group.
Russian tax legislation does not provide definitive guidance in certain areas.
From time to time, the Group adopts interpretations of such uncertain areas that
reduce the overall tax rate of the Group. As noted above, such tax positions may
come under heightened scrutiny as a result of recent developments in
administrative and court practices; the impact of any challenge by the tax
authorities cannot be reliably estimated; however, it may be significant to the
financial condition and/or the overall operations of the entity.
22Contingencies, Commitments and Operating Risks (continued)
Management regularly reviews the Group's taxation compliance with applicable
legislation, laws and decrees as well as interpretations published by the
authorities in the jurisdictions in which the Group has operations. However,
from time to time potential exposures and contingencies are identified and at
any point in time a number of open matters exist, management believes that its
tax positions are sustainable. Management estimates that possible tax exposures
that are more than remote but for which no liability is required to be
recognised under IFRS, could be up to $10.1 million of the Group's profit before
tax for the current year. These exposures primarily relate to income tax, VAT
and other taxes. This estimation is provided for the IFRS requirement for
disclosure of possible taxes and should not be considered as an estimate of the
Group's future tax liability.
Insurance policies.The Group insured all of its major assets, including oil in
stock, plant and equipment, transport and machinery with a total limit of $7.3
million. Also, a liability insurance policy covering property, plant and
equipment, hazardous objects, including environmental liability, was put in
place with a total limit of $1.7 million and directors and officers liability
with total limit up to $100.0 million. Staff and personal insurance includes
casualty, medical and travel insurance for losses of up to $2.4 million. The
associated expenses are included within selling, general and administrative
expenses in the consolidated income statement.
Restoration, rehabilitation and environmental costs.The Group companies have
operated in the upstream and refining oil industry in the Russian Federation for
many years, and their activities have had an impact on the environment. The
enforcement of environmental regulations in the Russian Federation is evolving
and the enforcement posture of government authorities is continually being
reconsidered. The Group periodically evaluates its obligations related thereto.
The outcome of environmental liabilities under proposed or future legislation,
or as a result of stricter enforcement of existing legislation, cannot
reasonably be estimated at present, but could be material. Under the current
levels of enforcement of existing legislation, management believes there are no
significant liabilities in addition to amounts which are already accrued and
which would have a material adverse effect on the financial position of the
Group.
Legal proceedings.The Group is involved in a number of court proceedings (both
as a plaintiff and a defendant) arising in the ordinary course of business. In
the opinion of management, there are no current legal proceedings or other
claims outstanding, which could have a material effect on the result of
operations or financial position of the Group and which have not been accrued or
disclosed in these consolidated financial statements.
Impact of the ongoing global financial and economic crisis. The ongoing global
financial and economic crisis that emerged out of the severe reduction in global
liquidity which commenced in the middle of 2007 (often referred to as the
"Credit Crunch") has resulted in, among other things, a lower level of capital
market funding, lower liquidity levels across the banking sector and wider
economy, and, at times, higher interbank lending rates and very high volatility
in stock and currency markets. The uncertainties in the global financial markets
have also led to failures of banks and other corporates, and to bank rescues in
the United States of America, Western Europe, Russia and elsewhere. The full
extent of the impact of the ongoing financial crisis is proving to be difficult
to anticipate or completely guard against.
The availability of external funding in financial markets has significantly
reduced since August 2007. Such circumstances may affect the ability of the
Group to obtain new borrowings and re-finance its existing borrowings at terms
and conditions similar to those applied to earlier transactions.
Management is unable to reliably determine the effects on the Group's future
financial position of any further deterioration in the liquidity of the
financial markets and the increased volatility in the currency and equity
markets. Management believes it is taking all the necessary measures to support
the sustainability and development of the Group's business in the current
circumstances.
Other capital commitments. At 31 December 2008, the Group had no significant
contractual commitments for capital expenditures.
23 Financial Risks
The accounting policies for financial instruments have been applied to the line
items below:
+--------------------------------------------------+--------------+------------+
| | At 31 December: |
+--------------------------------------------------+---------------------------+
| | 2008 | 2007 |
+--------------------------------------------------+--------------+------------+
| Financial assets | | |
+--------------------------------------------------+--------------+------------+
| | | |
+--------------------------------------------------+--------------+------------+
| Investments held-to-maturity: current assets | | |
+--------------------------------------------------+--------------+------------+
| Promissory notes | - | 64,581 |
+--------------------------------------------------+--------------+------------+
| Total investments held-to-maturity | - | 64,581 |
+--------------------------------------------------+--------------+------------+
| | | |
+--------------------------------------------------+--------------+------------+
| Loans and receivables: current assets | | |
+--------------------------------------------------+--------------+------------+
| Cash and cash equivalents | 912 | 28,400 |
+--------------------------------------------------+--------------+------------+
| Trade receivables | 6,998 | 8,846 |
+--------------------------------------------------+--------------+------------+
| Total loans and receivables: current assets | 7,910 | 37,246 |
+--------------------------------------------------+--------------+------------+
| Measured at fair value - non-current assets | | |
+--------------------------------------------------+--------------+------------+
| Financial derivatives | - | 5,103 |
+--------------------------------------------------+--------------+------------+
| Total non-current assets measured at fair value | - | 5,103 |
+--------------------------------------------------+--------------+------------+
| | | |
+--------------------------------------------------+--------------+------------+
| Loans and receivables: non-current assets | | |
+--------------------------------------------------+--------------+------------+
| Loans receivable: non-current | 31,066 | 2,264 |
+--------------------------------------------------+--------------+------------+
| Total loans and receivables | 38,976 | 44,613 |
+--------------------------------------------------+--------------+------------+
| | | |
+--------------------------------------------------+--------------+------------+
| Financial liabilities | | |
+--------------------------------------------------+--------------+------------+
| | | |
+--------------------------------------------------+--------------+------------+
| Measured at fair value - current liabilities | | |
+--------------------------------------------------+--------------+------------+
| Derivative financial instruments | 161,300 | 118,657 |
+--------------------------------------------------+--------------+------------+
| Warrants classified as liabilities | 177 | 1,326 |
+--------------------------------------------------+--------------+------------+
| Total current liabilities measured at fair value | 161,477 | 119,983 |
+--------------------------------------------------+--------------+------------+
| | | |
+--------------------------------------------------+--------------+------------+
| Measured at amortized cost: current liabilities | | |
+--------------------------------------------------+--------------+------------+
| Trade and other payables | 27,742 | 22,362 |
+--------------------------------------------------+--------------+------------+
| Short-term borrowings and current portion of | 629,749 | 614,031 |
| long-term borrowings | | |
+--------------------------------------------------+--------------+------------+
| Total current liabilities measured at amortized | 657,491 | 636,393 |
| cost | | |
+--------------------------------------------------+--------------+------------+
| | | |
+--------------------------------------------------+--------------+------------+
| Measured at amortized cost: non-current | | |
| liabilities | | |
+--------------------------------------------------+--------------+------------+
| Long-term borrowings | - | 29 |
+--------------------------------------------------+--------------+------------+
| Total long-term liabilities measured at | - | 29 |
| amortized cost | | |
+--------------------------------------------------+--------------+------------+
| | | |
+--------------------------------------------------+--------------+------------+
Financial risk management objectives and policies. In the ordinary course of
business, the Group is exposed to market risks from fluctuating prices on
commodities purchased and sold, credit risk, liquidity risk, currency exchange
rates and interest rates. Depending on the degree of price volatility, such
fluctuations in market price may create volatility in the Group's financial
results. As an entity focused upon the exploration and development of oil and
gas properties, the Group's overriding strategy is to maintain a strong
financial position by securing access to capital to meet its capital investment
needs.
The Group's principal risk management policies are established to identify and
analyze the risks faced by the Group, to set appropriate risk limits and
controls, and to monitor risks and adherence to these limits. Risk management
policies and systems are reviewed regularly to reflect changes in market
conditions and the Group's activities.
23 Financial Risks (continued)
Market risk. Market risk is the risk that changes in market prices and rates,
such as foreign exchange rates, interest rates, commodity prices and equity
prices, will affect the Group's financial results or the value of its holdings
of financial instruments. The primary objective of mitigating these market risks
is to manage and control market risk exposures. The Group is exposed to market
price movements relating to changes in commodity prices such as crude oil, gas
condensate, petroleum products and natural gas (commodity price risk), foreign
currency exchange rates, interest rates, equity prices and other indices that
could adversely affect the value of the Group's financial assets, liabilities or
expected future cash flows.
(a) Foreign exchange risk
The Group is exposed to foreign exchange risk arising from various exposures in
the normal course of business, primarily with respect to the US dollar. Foreign
exchange risk arises primarily from commercial transactions, and recognized
assets and liabilities when such transactions, assets and liabilities are
denominated in a currency other than the functional currency.
The Group's overall strategy is to have no significant net exposure in
currencies other than the Russian rouble or the US dollar.
The carrying amounts of the Group's financial instruments are denominated in the
following currencies (all amounts expressed in thousands of US dollars at the
appropriate 31 December 2008 and 2007 exchange rates):
+-----------------------------------+-----------+-----------+--------+-----------+
| At 31 December 2008 | Russian | US | Other | Total |
| | rouble | dollar | | |
+-----------------------------------+-----------+-----------+--------+-----------+
| | | | | |
+-----------------------------------+-----------+-----------+--------+-----------+
| Financial assets | | | | |
+-----------------------------------+-----------+-----------+--------+-----------+
| | | | | |
+-----------------------------------+-----------+-----------+--------+-----------+
| Non-current | | | | |
+-----------------------------------+-----------+-----------+--------+-----------+
| Loans receivable | - | 31,066 | - | 31,066 |
+-----------------------------------+-----------+-----------+--------+-----------+
| | | | | |
+-----------------------------------+-----------+-----------+--------+-----------+
| Current | | | | |
+-----------------------------------+-----------+-----------+--------+-----------+
| Cash and cash equivalents | 396 | 491 | 25 | 912 |
+-----------------------------------+-----------+-----------+--------+-----------+
| Accounts receivable | 2,043 | 4,955 | - | 6,998 |
+-----------------------------------+-----------+-----------+--------+-----------+
| | | | | |
+-----------------------------------+-----------+-----------+--------+-----------+
| Financial liabilities | | | | |
+-----------------------------------+-----------+-----------+--------+-----------+
| | | | | |
+-----------------------------------+-----------+-----------+--------+-----------+
| Current | | | | |
+-----------------------------------+-----------+-----------+--------+-----------+
| Accounts payable and accrued | (18,594) | (9,148) | - | (27,742) |
| expenses | | | | |
+-----------------------------------+-----------+-----------+--------+-----------+
| Derivative financial instruments | - | (161,300) | - | (161,300) |
+-----------------------------------+-----------+-----------+--------+-----------+
| Short-term borrowings and current | (53) | (629,696) | - | (629,749) |
| portion of long-term borrowings | | | | |
+-----------------------------------+-----------+-----------+--------+-----------+
| Warrants classified as | - | - | (177) | (177) |
| liabilities | | | | |
+-----------------------------------+-----------+-----------+--------+-----------+
| Net exposure at 31 December 2008 | (16,208) | (763,632) | (152) | (779,992) |
+-----------------------------------+-----------+-----------+--------+-----------+
23 Financial Risks (Continued)
+-----------------------------------+-----------+-----------+---------+-----------+
| At 31 December 2007 | Russian | US | Other | Total |
| | rouble | dollar | | |
+-----------------------------------+-----------+-----------+---------+-----------+
| | | | | |
+-----------------------------------+-----------+-----------+---------+-----------+
| Financial assets | | | | |
+-----------------------------------+-----------+-----------+---------+-----------+
| | | | | |
+-----------------------------------+-----------+-----------+---------+-----------+
| Non-current | | | | |
+-----------------------------------+-----------+-----------+---------+-----------+
| Financial derivatives | - | 5,103 | - | 5,103 |
+-----------------------------------+-----------+-----------+---------+-----------+
| Loans receivable | - | 2,264 | - | 2,264 |
+-----------------------------------+-----------+-----------+---------+-----------+
| | | | | |
+-----------------------------------+-----------+-----------+---------+-----------+
| Current | | | | |
+-----------------------------------+-----------+-----------+---------+-----------+
| Cash and cash equivalents | 2,968 | 5,414 | 20,018 | 28,400 |
+-----------------------------------+-----------+-----------+---------+-----------+
| Accounts receivable | 3,079 | 5,767 | - | 8,846 |
+-----------------------------------+-----------+-----------+---------+-----------+
| Promissory notes | - | 64,581 | - | 64,581 |
+-----------------------------------+-----------+-----------+---------+-----------+
| | | | | |
+-----------------------------------+-----------+-----------+---------+-----------+
| Financial liabilities | | | | |
+-----------------------------------+-----------+-----------+---------+-----------+
| | | | | |
+-----------------------------------+-----------+-----------+---------+-----------+
| Non-current | | | | |
+-----------------------------------+-----------+-----------+---------+-----------+
| Long-term borrowings | - | - | (29) | (29) |
+-----------------------------------+-----------+-----------+---------+-----------+
| | | | | |
+-----------------------------------+-----------+-----------+---------+-----------+
| Current | | | | |
+-----------------------------------+-----------+-----------+---------+-----------+
| Accounts payable and accrued | (3,169) | (19,193) | - | (22,362) |
| expenses | | | | |
+-----------------------------------+-----------+-----------+---------+-----------+
| Derivative financial instruments | - | (118,657) | - | (118,657) |
+-----------------------------------+-----------+-----------+---------+-----------+
| Short-term borrowings and current | (63) | (613,968) | - | (614,031) |
| portion of long-term borrowings | | | | |
+-----------------------------------+-----------+-----------+---------+-----------+
| Warrants classified as | - | - | (1,326) | (1,326) |
| liabilities | | | | |
+-----------------------------------+-----------+-----------+---------+-----------+
| Net exposure at 31 December 2007 | 2,815 | (668,689) | 18,663 | (647,211) |
+-----------------------------------+-----------+-----------+---------+-----------+
In accordance with IFRS requirements, the Group has provided information about
market risk and potential exposure to hypothetical loss from its use of
financial instruments through sensitivity analysis disclosures. The sensitivity
analysis depicted in the table below reflects the hypothetical income (loss)
that would occur assuming a 15% change in exchange rates and no changes in the
portfolio of instruments and other variables held at 31 December 2008 and 2007,
respectively.
+----------------------------+----------------------+--------------+------------+
| | Year ended 31 December: |
+---------------------------------------------------+---------------------------+
| Effect on pre-tax profit | Increase in exchange | 2008 | 2007 |
| | rate | | |
+----------------------------+----------------------+--------------+------------+
| | | | |
+----------------------------+----------------------+--------------+------------+
| $/RUS | 15% | (114,545) | (100,303) |
+----------------------------+----------------------+--------------+------------+
| $/Other | 15% | (23) | 2,799 |
+----------------------------+----------------------+--------------+------------+
The effect of a corresponding 15% decrease in exchange rate is approximately
equal and opposite.
(b) Commodity price risk
The Group's overall commercial trading strategy in crude oil and related
products is centrally managed. Changes in commodity prices could negatively or
positively affect the Group's results of operations.
The Group sells all its crude oil and petroleum products under spot contracts.
Crude oil sold internationally is based on benchmark reference crude oil prices
of Brent dated, plus or minus a discount for quality and on a
transaction-by-transaction basis for volumes sold domestically. As a result, the
Group's revenues from the sales of liquid hydrocarbons are subject to commodity
price volatility based on fluctuations or changes in the crude oil benchmark
reference prices. Presently, the Group does not use commodity derivative
instruments for trading purposes to mitigate price volatility.
23 Financial Risks (continued)
(c) Cash flow and fair value interest rate risk
The Group is not significantly exposed to cash flow interest rate risk on its
financial liabilities as most of its financial liabilities bear fixed rates of
interest. However, changes in market interest rates impact the fair values of
fixed rate financial liabilities or future cash flows in the case of variable
financial liabilities. Management does not have a formal policy on the
proportion of the Group's exposure interest rate risk on its financial
liabilities.
At 31 December 2008 and 2007, the Group's interest rate profiles for
interest-bearing financial liabilities were:
+------------------------------------------------+--------------+--------------+
| | Year ended31 December: |
+------------------------------------------------+-----------------------------+
| | 2008 | 2007 |
+------------------------------------------------+--------------+--------------+
| At fixed rate | 629,749 | 614,060 |
+------------------------------------------------+--------------+--------------+
| Total interest bearing financial liabilities | 629,749 | 614,060 |
+------------------------------------------------+--------------+--------------+
To the degree possible, the Group centralizes the cash requirements and
surpluses of controlled subsidiaries and the majority of their external
financing requirements, and applies, on its consolidated net debt position, a
funding policy to optimize its financing costs and manage the impact of
interest-rate changes on its financial results in line with market conditions.
The Group's financial results are sensitive to changes in interest rates on the
floating rate portion of the Group's debt portfolio. If the weighted average
interest rates applicable to floating rate debt were to increase by 100 basis
points for the years in question, assuming all other variables remain constant,
it is estimated that the Group's profit before taxation for the years ended 31
December 2008 and 2007 would decrease by the amounts shown below.
+------------------------------------------------+-------------+---------------+
| | Year ended 31 December: |
+------------------------------------------------+-----------------------------+
| Effect on pre-tax profit | 2008 | 2007 |
+------------------------------------------------+-------------+---------------+
| | | |
+------------------------------------------------+-------------+---------------+
| Increase by 100 basis point | - | - |
+------------------------------------------------+-------------+---------------+
The effect of a corresponding 100 basis points decrease in interest rates is
approximately equal and opposite.
Credit risk. Credit risk refers to the risk exposure that a potential financial
loss to the Group may occur if a counterparty defaults on its contractual
obligations.
Credit risk is managed on a Group level and arises from cash and cash
equivalents, including short-term deposits with banks, promissory notes, loans
issued as well as credit exposures to customers, including outstanding trade
receivables and committed transactions. Cash and cash equivalents are deposited
only with banks that are considered by the Group at the time of deposit to
minimal risk of default.
The Group's domestic trade and other receivables consist of a large number of
customers, spread across diverse industries and geographical areas. All of the
Group's export crude oil sales are made to one customer, Petraco, with whom the
Group was trading for the past several years (see Note 14). A majority of
domestic sales of petroleum products are made on a prepayment basis. Although
the Group does not require collateral in respect of trade and other receivables,
it has developed standard credit payment terms and constantly monitors the
status of trade receivables and the creditworthiness of the customers. The
maximum exposure to credit risk is represented by the carrying amount of each
financial asset exposed to credit risk.
Liquidity risk. Liquidity risk is the risk that the Group will not be able to
meet its financial obligations as they fall due. The Group's approach to
managing liquidity has been to ensure that it will have sufficient liquidity to
meet its liabilities when due, under both normal and stressed conditions. As
discussed in Note 3 and Note 25, the Group is in process of negotiations with a
major creditor with a view to securing a more stable financial position.
The Group prepares various financial and operational plans (monthly, quarterly
and annually) to ensure that the Group has sufficient cash on demand to meet
expected operational expenses. Additionally, the Group has pursued a program of
divesting certain assets in order to both raise funds to meet its short term
liabilities and save on the cash outflows necessary to maintain those assets.
23 Financial Risks (continued)
The following tables summarize the maturity profile of the Group's financial
liabilities based on contractual undiscounted payments, including interest
payments:
+------------------------+----------+----------+----------+----------+-----------+
| At 31 December 2008 | Less | Between | Between | After 5 | Total |
| | than 1 | 1 and 2 | 2 and 5 | years | |
| | year | years | years | | |
+------------------------+----------+----------+----------+----------+-----------+
| | | | | | |
+------------------------+----------+----------+----------+----------+-----------+
| Debt at fixed rate | | | | | |
+------------------------+----------+----------+----------+----------+-----------+
| Principal | 629,749 | - | - | - | 629,749 |
+------------------------+----------+----------+----------+----------+-----------+
| Interest | 5,943 | - | - | - | 5,943 |
+------------------------+----------+----------+----------+----------+-----------+
| | | | | | |
+------------------------+----------+----------+----------+----------+-----------+
| Warrants classified as | 177 | - | - | - | 177 |
| liability | | | | | |
+------------------------+----------+----------+----------+----------+-----------+
| Financial instruments | 161,300 | - | - | - | 161,300 |
+------------------------+----------+----------+----------+----------+-----------+
| Accounts payable and | 21,799 | - | - | - | 21,799 |
| accrued expenses | | | | | |
+------------------------+----------+----------+----------+----------+-----------+
| Total financial | 818,968 | - | - | - | 818,968 |
| liabilities | | | | | |
+------------------------+----------+----------+----------+----------+-----------+
As discussed in Note 25 the debt liabilities and financial instruments were
settled in November 2009.
+------------------------+----------+----------+----------+----------+-----------+
| At 31 December 2007 | Less | Between | Between | After 5 | Total |
| | than 1 | 1 and 2 | 2 and 5 | years | |
| | year | years | years | | |
+------------------------+----------+----------+----------+----------+-----------+
| | | | | | |
+------------------------+----------+----------+----------+----------+-----------+
| Debt at fixed rate | | | | | |
+------------------------+----------+----------+----------+----------+-----------+
| Principal | 630,124 | 29 | - | - | 630,153 |
+------------------------+----------+----------+----------+----------+-----------+
| Interest | 967 | - | - | - | 967 |
+------------------------+----------+----------+----------+----------+-----------+
| | | | | | |
+------------------------+----------+----------+----------+----------+-----------+
| Warrants classified as | 1,326 | - | - | - | 1,326 |
| liability | | | | | |
+------------------------+----------+----------+----------+----------+-----------+
| Financial instruments | 118,657 | - | - | - | 118,657 |
+------------------------+----------+----------+----------+----------+-----------+
| Accounts payable and | 21,395 | - | - | - | 21,395 |
| accrued expenses | | | | | |
+------------------------+----------+----------+----------+----------+-----------+
| Total financial | 772,469 | 29 | - | - | 772,498 |
| liabilities | | | | | |
+------------------------+----------+----------+----------+----------+-----------+
Significant assumptions included in the option valuation model for the financial
instruments associated with Taas are summarized as follows:
+-----------------------------------------------+--------------+--------------+
| | Call option | Put option |
+-----------------------------------------------+--------------+--------------+
| Share price | $4.06 | $4.06 |
+-----------------------------------------------+--------------+--------------+
| Dividend yield | - | - |
+-----------------------------------------------+--------------+--------------+
| Expected volatility | 41.25% | 57.14% |
+-----------------------------------------------+--------------+--------------+
| Risk-free interest rate | 4.25% | 4.40% |
+-----------------------------------------------+--------------+--------------+
| Expected life | 1.099 year | 2.5 years |
+-----------------------------------------------+--------------+--------------+
| Correlation coefficient | N/A | 75% |
+-----------------------------------------------+--------------+--------------+
Put option. The Group's evaluation of the put option associated with the Taas
investment (Note 7) was assessed as $161.3 million at 31 December 2008.
23 Financial Risks (continued)
Capital management. The primary objectives of the Group's capital management
policy is to ensure a strong capital base to fund and sustain its business
operations through prudent investment decisions and to maintain investor, market
and creditor confidence to support its business activities.
The capital as defined by management at 31 December 2008 and 2007 was as
follows:
+--------------------------------+--------------+--------------+
| | 2008 | 2007 |
+--------------------------------+--------------+--------------+
| Total borrowings | 629,749 | 614,060 |
+--------------------------------+--------------+--------------+
| Less cash and cash equivalents | (912) | (28,400) |
+--------------------------------+--------------+--------------+
| Net debt | 628,837 | 585,660 |
+--------------------------------+--------------+--------------+
| Total equity | 349,828 | 828,368 |
+--------------------------------+--------------+--------------+
| Gearing ratio | 1.8 | 0.7 |
+--------------------------------+--------------+--------------+
For the capital management, the Group manages and monitors its liquidity on a
corporate-wide basis to ensure adequate funding to sufficiently meet group
operational requirements. The Group controls all external debts at the Parent
level, and all financing to Group entities for the operating and investing
activity is facilitated through inter-company loan arrangements, except for the
specific project financing, which are taken on the subsidiary level.
There were no changes to the Group's approach to capital management during the
year.
24Balances and transactions with Related Parties
Parties are generally considered to be related if one party has the ability to
control the other party, is under common control, or can exercise significant
influence over the other party in making financial or operational decisions as
defined by IAS 24 "Related Party Disclosures". Key management personnel are
considered to be related parties. In considering each possible related party
relationship, attention is directed to the substance of the relationship, not
merely the legal form.
+--------------------------------------------------------+----------+----------+
| | As of or for the |
| | year |
| | ended 31 December |
+ +---------------------+
| | 2008 | 2007 |
+--------------------------------------------------------+--------------------------------------------------------+----------+
| Interest income | 3,704 | 146 |
+--------------------------------------------------------+----------+----------+
| Rental expenses (included in selling, general | 56 | - |
| and administrative expense) | | |
+--------------------------------------------------------+----------+----------+
| Other expenses | - | 34 |
+--------------------------------------------------------+----------+----------+
| | | |
+--------------------------------------------------------+----------+----------+
| Accounts and notes receivable | 73 | 48 |
+--------------------------------------------------------+----------+----------+
| Loans receivable | 5,250 | 5,372 |
+--------------------------------------------------------+----------+----------+
| Interest receivable | 875 | 347 |
+--------------------------------------------------------+----------+----------+
| Impairment of receivables from related parties | (1,243) | - |
| (Note 9) | | |
+--------------------------------------------------------+----------+----------+
| Receivables from related parties | 4,955 | 5,767 |
+--------------------------------------------------------+----------+----------+
| | | |
+--------------------------------------------------------+----------+----------+
| Loans issued to Taas (Note 12) | 28,099 | 2,261 |
+--------------------------------------------------------+----------+----------+
| Interest receivable from Taas (Note 12) | 2,967 | 3 |
+--------------------------------------------------------+----------+----------+
| Advances from and payables to related parties | (13) | (24) |
| (Note 13) | | |
+--------------------------------------------------------+----------+----------+
| Loans payable (Note 13) | (61) | (89) |
+--------------------------------------------------------+----------+----------+
| | | |
+--------------------------------------------------------+----------+----------+
Compensation to senior management. The Group's senior management team
compensation totalled $15.042 million and $26.732 million for the periods ended
31 December 2008 and 2007, respectively, including salary, bonuses and severance
payments of $0.946 million and $12.891 million respectively and stock
compensation of $8.971 million and $13.841 million, respectively. No other
compensation was paid for either year. Additionally, included in loans
receivable at 31 December 2008 and 2007 were loans receivable of $4.142 million
and $3.743 million, respectively from the Group's senior management team.
Within loans receivable the largest part relates to a short-term loan provided
to one of the senior managers of the company in the amount of $4.1 million,
including accrued interest. The loan bears 15% interest and matures on 30
September 2008. The loan is secured with real estate properties located in
Moscow. The loan receivable was past-due and impaired at 31 December 2008 by
$1.2 million as a result of valuation of the pledge which decreased following
lack of liquidity in the real estate market in Moscow.
24 Balances and transactions with Related Parties (Continued)
Additionally, loans receivable include amounts due by OOO Komineftegeophysica in
the amount of $0.866 million, where major shareholders of the Group hold the
majority of shares. The loans bear interest from 5% to 15% and are short term in
nature. These loans are not secured, however, in the ordinary course of business
and on market terms Komineftegeophysica provides geological and geophysical
services to the Group companies.
Interest income is earned from the loan provided by the Group to Taas (Note 12)
and the loans provided to senior management of the Group as described above.
Other loans and receivable balances are short-term in the nature, immaterial
individually and expire during 2009.
25 Subsequent events
Sale of non-core assets. Sale of Chepetskoye to Galaform for $5.2 million of
total consideration in January 2009. For more details refer to Note 8.
Changes to management. In April 2009 Vyacheslav Ivanov was elected to the Board
of Directors and was subsequently appointed Chairman of the Board and Chief
Executive Officer. In May 2009 there were further significant changes to the
management team, including appointment of a new Chief Financial Officer of the
Group, Grigory Kazakov. Further, in October 2009 Vyacheslav Ivanov resigned from
the positions of CEO and Chairman of the Board of Directors and Mr. Leonid
Dyachenko was appointed as a Chairman of the Board of Directors and as interim
Chief Executive Officer. In November 2009 Mr. Alexei Maximov was appointed as a
Chief Executive Officer of the Company and a director in the Board of Directors.
Repayment of Sberbank loans. Subsequent to 31 December 2008 the Company sold
it's 100% interest in Dulisma (August 2009) and 35.3% interest in Taas (November
2009) for the full discharge of the Company's debt to Sberbank Capital plus
assumption of all trade accounts payable accrued by Dulisma and Taas at the date
of the transaction. Additionally, subsequent to the two sales the Company was
released from any obligations under Taas Shareholders' agreement and terminated
the Put Option agreement with Ashmore for nil consideration. Registration and
actual release of the pledges associated with termination of Put option
agreement were ongoing at the date of these financial statements. This matter is
discussed in greater detail in Note 3.
Change in the long-term strategy of the Company. During the negotiations with
Sberbank Capital (which resulted in the above repayment of Sberbank loans) the
Board of Directors and management of the Company reconsidered a previously
announced strategy to divest the remaining assets of the Company Arcticneft and
Petrosakh. As a result of an improvement in world oil prices and a lack of
acceptable offers for Arcticneft and Petrosakh management decided to keep these
assets and to concentrate on the operations of these assets in order to increase
production.
Suspension of Company's shares trading. On 30 June 2009 the Company's shares
were suspended from trading on LSE AIM due to non-compliance with Rule 19 of the
AIM rules for not publishing 2008 year-end accounts. Management considered in
June 2009 that due to uncertainties over the direction of negotiations with
Sberbank Capital it was not in a position to complete its 2008 annual financial
statements. Also in August 2009 Morgan Stanley retired from Nominated Adviser
("NOMAD") and Company's Broker positions. As a result of the above the Company's
shares were suspended from trading.
In October 2009 the Company appointed a new NOMAD, Allenby Capital. Following
the appointment of the NOMAD and following the completion of the transactions
with Sberbank Capital and others, the Company is now in a position to release
its 2008 year-end consolidated financial statements and plans to release the
interim 2009 accounts and report before 31 December 2009 and thus intends to be
compliant with AIM rules. As a result of this management expects there will be a
resumption of trading of the Company's shares on LSE AIM.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR EAKAXEALNFFE
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