UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F

[   ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended December 31, 2016

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[   ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-29832

CHELSEA OIL AND GAS LTD.
(Exact name of Registrant as specified in its charter)

Alberta, Canada
(Jurisdiction of incorporation or organization)

127, 10 th Ave NW
Calgary, Alberta, Canada, T2M 0B4
(Address of principal executive offices)

Jesse Meidl, Director
T: (403) 457-1959
F: (403) 457-1933
127, 10 th Ave NW
Calgary, Alberta, Canada, T2M 0B4
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares, no par value

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Common Shares, no par value


Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

64,056,876 Common Shares, no par value as of December 31, 2016

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [   ]         No [X]

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes [   ]        No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]        No [   ] 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [   ]        No [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer [   ] Accelerated filer [   ] Non-accelerated filer [X]

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

[X] International Financial Reporting Standards  
[   ] U.S. GAAP        as issued by the International Accounting [   ] Other
         Standards Board  

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 [   ]    Item 18 [   ] 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]        No [X]


TABLE OF CONTENTS

  Page
           
INTRODUCTION AND USE OF CERTAIN TERMS 1
           
FORWARD-LOOKING STATEMENTS 5
           
PART I 6
           
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 6
           
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 6
           
ITEM 3. KEY INFORMATION 6
           
3.A SELECTED FINANCIAL DATA 6
           
3.B CAPITALIZATION AND INDEBTEDNESS 6
           
3.C REASONS FOR THE OFFER AND USE OF PROCEEDS 6
           
3.D RISK FACTORS 6
           
ITEM 4. INFORMATION ON THE COMPANY 16
           
  4.A THREE YEAR HISTORY AND DEVELOPMENT OF CHELSEA 16
           
  4.B BUSINESS OVERVIEW 19
           
  4.C ORGANIZATIONAL STRUCTURE 20
           
  4.D PROPERTY, PLANT AND EQUIPMENT 20
           
  4.E UNRESOLVED STAFF COMMENTS 24
           
  ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 24
           
  ITEM 6. DIRECTORS AND SENIOR MANAGEMENT 33
           
  6.A DIRECTORS AND SENIOR MANAGEMENT 33
           
  6.B COMPENSATION 35
           
  6.C BOARD PRACTICES 35
           
  6.D EMPLOYEES 35
           
  6.E SHARE OWNERSHIP 35
           
  ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 36
           
  7.A MAJOR SHAREHOLDERS 36
           
  7.B RELATED PARTY TRANSACTIONS 36

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TABLE OF CONTENTS
(continued)

      Page
           
  7.C INTEREST OF EXPERTS AND COUNSEL 37
           
  ITEM 8. FINANCIAL INFORMATION 37
           
  8.A CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION 37
           
  8.B SIGNIFICANT CHANGES 37
           
  ITEM 9. THE OFFER AND LISTING 37
           
  9.A PRICING HISTORY 37
           
  9.B PLAN OF DISTRIBUTION 38
           
  9.C MARKET 38
           
  9.D SELLING SHAREHOLDERS 38
           
  9.E DILUTION 38
           
  9.F EXPENSES OF THE ISSUE 38
           
  ITEM 10. ADDITIONAL INFORMATION 38
           
  10.A SHARE CAPITAL 38
           
  10.B ARTICLES OF AMALGAMATION 38
           
  10.C MATERIAL CONTRACTS 39
           
  10.D EXCHANGE CONTROLS 40
           
  10.E TAXATION 40
           
  10.F DIVIDENDS AND PAYING AGENTS 40
           
  10.G STATEMENT BY EXPERTS 40
           
  10.H DOCUMENTS ON DISPLAY 40
           
  10.I SUBSIDIARY INFORMATION 41
           
  ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT NON-PRODUCT RELATED MARKET RISK 41
           
  ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 41
           
  PART II 42
           
  ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 42

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TABLE OF CONTENTS
(continued)

      Page
     
  ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 42
       
  ITEM 15. CONTROLS AND PROCEDURES 42
       
  ITEM 16. AUDIT COMMITTEE FINANCIAL EXPERTS 43
         
  16.A AUDIT COMMITTEE FINANCIAL EXPERTS 43
         
  16.B CODE OF ETHICS 45
         
  16.C PRINCIPAL ACCOUNTANT FEES AND SERVICES 45
         
  16.D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE 46
         
  16.E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASER 46
         
  16.F CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 46
         
  16.G CORPORATE GOVERNANCE 47
         
  16.H MINE SAFETY DISCLOSURES 47
         
  PART III 48
         
  ITEM 17. FINANCIAL STATEMENTS 48
         
  ITEM 18. FINANCIAL STATEMENTS 48
         
  ITEM 19. EXHIBITS 48
         
SIGNATURE 49

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INTRODUCTION AND USE OF CERTAIN TERMS

            Unless otherwise specified, information provided in this annual report on Form 20-F (this “ Form 20-F ”) is as of December 31, 2016.

            Unless the context requires otherwise, when used in this annual report on Form 20-F, the terms “Chelsea”, “we”, “us” “our” the “Corporation” and the “Company” refer to Chelsea Oil and Gas Ltd. All dollar amounts contained in this Form 20-F are expressed in U.S. dollars and references to “dollars”, “$”, “US$” or “USD” are to U.S. dollars, and all references to “A$” or “AUD” are to Australian dollars and “C$” are to Canadian dollars. In addition, unless the context suggests otherwise, references to:

  • ABCA ” means the Business Corporations Act (Alberta), as amended or re-enacted, including the regulations promulgated thereunder;

  • ACOR ” means Australian-Canadian Oil Royalties Ltd., a predecessor of Chelsea;

  • AIF ” means the Annual Information Form including the appendices hereto filed by Chelsea for the year ended December 31, 2016 pursuant to Canadian National Instrument (“NI”) 51- 105;

  • AGM ” means the Annual General Meeting of the Corporation held on June 2, 2015;

  • Arrangement ” means the plan of arrangement under the provisions of Section 288 of the BCBA between Chelsea and ITME on the terms and conditions set forth in the Arrangement Agreement;

  • Arrangement Agreement ” means the arrangement agreement dated May 28, 2013 between ITME and Chelsea in respect of the Arrangement;

  • ATP ” means Authority to Prospect, an ATP is a concession granted by the State of Queensland, Australia, which entitles its holders to an exclusive right to explore for oil and natural gas in Queensland in the particular area covered by the ATP. Each ATP has an initial term of four years. The area covered by an ATP is reduced by relinquishment of approximately one-fourth of the area at the start of the third year of its effectiveness and an additional one-fourth of the original area at the start of the fourth year of its effectiveness. The area to be relinquished is chosen by the holder of the ATP. An ATP will require some kind of geological and/or geophysical operations, such as new seismic or seismic interpretation, drilling or other operations during the term of the tenure. The amount of work to be performed depends upon the expenditures required for each specific year of the tenure. Holders are only required to expend those amounts as set out in the original concession document. Applications for renewal may be filed at the time of expiration of an ATP;

  • ATP 582 ” means Authority to Prospect number 582, issued pursuant to section 84 of the Petroleum and Gas (Production and Safety) Act 2004;

  • BCBCA ” means the Business Corporations Act (British Columbia), as amended or re- enacted, including the regulations promulgated thereunder;

  • BCSC ” has the meaning ascribed under Directors and Senior Management; Cease Trade Orders in this Form 20-F;

  • Board of Directors ” means the board of directors of Chelsea, as constituted from time to time, and where the context requires, includes any duly constituted committee thereof;

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  • Bowen Basin ” means a foreland basin in eastern Queensland of Early Permian to Middle Triassic age sediments. It occupies about 160,000km 2 , the southern half of which is covered by the Surat Basin;

  • Brokered Private Placement ” means the proposed brokered private placement of Common Shares and convertible common equity led by RiverRock;

  • Central ” means Central Petroleum Ltd.;

  • CFI ” means Carbon Farming Initiative;

  • Chapman ” means Chapman Petroleum Engineering Ltd., engaged by Chelsea to complete a NI 51-101 reserve report on Chelsea’s assets in the Surat Basin in;

  • COGE Handbook ” means the Canadian Oil and Gas Evaluation Handbook prepared jointly by the Society of Petroleum Evaluation Engineers (Calgary Chapter) and the Canadian Institute of Mining, Metallurgy & Petroleum (Petroleum Society), as amended from time to time;

  • Common Shares ” or “ Chelsea Common Shares ” means the common shares in the capital of the Corporation;

  • Computershare ” means Computershare Trust Company of Canada, the registrar and transfer agent for the Common Shares;

  • Cooper Basin ” means the sedimentary geological basin of Triassic age covering 130,000 km 2 in the north east part of South Australia and in the south west part of Queensland;

  • Corporation ” or “ Chelsea ” means Chelsea Oil and Gas Ltd., including where the context requires, its predecessors;

  • CSG ” has the meaning ascribed under Industry Overview; Availability of Services in this Form 20-F;

  • DPIIP ” means Discovered Petroleum Initially In Place, the quantity of petroleum which is estimated, on a given date, to be contained in known accumulations, plus those quantities already produced therefrom. If the hydrocarbon is oil, it may be referred to as OOIP and if the hydrocarbon is gas, it may be referred to as OGIP;

  • EA ” means Environmental Authority;

  • Earning Obligations ” has the meaning ascribed under Information of the Company; Three Year History and Development of Chelsea in this Form 20-F;

  • Farm-Out ” has the meaning ascribed under Information of the Company; Three Year History and Development of Chelsea in this Form 20-F;

  • Farm-Out Interest ” has the meaning ascribed under Property, Plant and Equipment in this Form 20-F;

  • Georgina Basin ” means the intracratonic sedimentary basin in central and northern Australia, lying within the Northern Territory and within Queensland and “South Georgina Basin” means the southerly portion of the Georgina Basin;

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  • “IFRS” means International Financial Reporting Standards as issued by the International Accounting Standard Board;

  • ITME ” means International TME Resources Inc.;

  • Heritage Act ” has the meaning ascribed under Industry Overview; Aboriginal Heritage in this Form 20-F;

  • FIRB ” has the meaning ascribed under Industry Overview; Foreign Acquisitions in Australia in this Form 20-F;

  • FIRB Approval ” has the meaning ascribed under Industry Overview; Acquiring Shares in this Form 20-F;

  • MI 51-105 ” has the meaning ascribed under Operating and Financial Review and Prospects in this Form 20-F;

  • Native Title ” means agreements signed pursuant to the Native Title Act 1993 which recognizes that the indigenous people of Australia continue to hold rights and interests in relation to certain lands and water;

  • Native Title Act ” means the Native Title Act 1933 (Cwth), as amended;

  • NGL ” means Natural Gas Liquids, those hydrocarbon components that can be recovered from natural gas as liquids, including but not limited to ethane, propane, butanes, pentanes plus condensate, and small quantities of non-hydrocarbons;

  • NI 51-101 ” means Canadian National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities ;

  • NI 52-110 ” has the meaning ascribed under Audit Committee in this Form 20-F;

  • Non-Brokered Private Placement ” means the private placement of 5,473,385 subscription receipts of the Corporation issued at a price of $0.35 per subscription receipt which closed in January, 2012, and which subscription receipts were converted into 5,473,385 Common Shares on February 29, 2012;

  • Options ” means stock options to purchase Common Shares issued pursuant to the Corporation’s stock option plan;

  • “Overriding Royalty” or “ ORRI ” means Overriding Royalty Interest, an interest assigned out of the lessee’s leasehold or Working Interest. The amounts payable from Overriding Royalty Interests are payments calculated as a percentage of either Gross Production or the gross revenues of the Working Interest (based on the wellhead price) from a concession or lease, usually free and clear of all exploration, drilling and development and production costs, except for any applicable taxes and federal levies. In calculating the wellhead price, pipeline and trucking costs have already been deducted from the refinery price. The overriding royalties discussed herein are generally expressed as a percent of the Gross Production;

  • OTCQB ” has the meaning ascribed under The Offer and Listing; Pricing History in this Form 20-F;

  • Petroleum Act ” means the Petroleum Act 1923 (QLD);

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  • PL ” means Petroleum Lease, a lease granted by the State of Queensland, Australia under the Petroleum Act and includes any variation, renewal, permit, license or other interest issued in substitution thereof and any other petroleum tenure or rights to explore for or produce Petroleum Substances;

  • PRRT ” has the meaning ascribed under Industry Overview; Land Tenure and Royalties in this Form 20-F;

  • PVIL ” has the meaning ascribed under Directors and Senior Management; Bankruptcies in this Form 20-F;

  • RiverRock ” means RiverRock Securities Limited, a UK broker and advisor having its principal place of business at 3rd Floor, Grosvenor Gardens, London SW1W 0DH, United Kingom;

  • Santos ” means Santos Ltd. an Australian oil company;

  • Simpson Basin ” means the intracratonic early to middle Triassic basin occupying 100,000km 2 of northern South Australia, south east Northern Territory and south west Queensland;

  • Statoil ” means Statoil ASA;

  • Surat Basin ” means the intracratonic early Jurassic to Cretaceous basin occupying 300,000km 2 of central southern Queensland and central northern New South Wales;

  • Surat-Bowen Basin ” means the combination of Permian and Triassic age sediments of the deeper Bowen Basin, overlain by the Jurassic and Cretaceous strata of the Surat Basin. Because intervals of both sequences are prospective and have produced in close or even over-lying proximity, Operators tend to use the two names inter-changeably;

  • Section 31 Deed ” means the right to negotiate deed of agreement regarding the addition of excluded land into an ATP under Section 31(1)(b) of the Native Title Act 1993 (Cth) ;

  • Total ” means Total S.A;

  • US GAAP ” means United States Generally Accepted Accounting Principles;

  • Warrant ” means one Common Share purchase warrant of the Corporation; and

  • Working Interest ” or “WI” means all or a fractional part of the ownership rights granted by a concession or lease. The owner of a Working Interest or a part thereof pays all costs of exploration and is entitled to the Gross Production, less royalties retained by the grantor or lessor, and less Overriding Royalty Interests or other non-operating interests created or assigned from the Working Interest. The owner of a Working Interest may incur operating expenses in excess of income.

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FORWARD-LOOKING STATEMENTS

            Statements made in this Form 20-F that are not historical or current facts are “forward looking statements” made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “ Act ”), and Section 21E of the Securities Exchange Act of 1934, as amended. These statements often can be identified by the use of terms such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” “approximate,” or “continue,” or the negative thereof. We intend that such forward-looking statements be subject to the safe harbors for such statements. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management’s best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events. See Item 3.D “Risk Factors” for additional information relating to our risk factors.

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PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

            Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

            Not applicable.

ITEM 3. KEY INFORMATION

3.A      SELECTED FINANCIAL DATA

            The following table presents financial data for Chelsea as of and for the periods indicated:

  As at December 31,
  2016   2015   2014   2013   2012
Total assets $10,532,948   $10,786,357   $12,305,046   $13,845,019   $11,073,620
Current liabilities $4,876,262   $4,457,722   $4,310,779   $4,418,783   $3,667,974
Shareholders’ equity $5,290,169   $5,968,352   $7,603,365   $9,010,936   $6,937,162
Weighted-average shares outstanding 64,056,876   64,056,876   64,056,876   56,027,645   43,670,542

    For the Year Ended December 31,
  2016   2015   2014   2013   2012
Revenue $36,701   $68,974   $361,990   $98,805   $79,325
Net loss for the year $542,938   $467,693   $335,221   $1,005,632   $382,955
Basic and diluted loss $(0.01)   $(0.01)   $(0.01)   $(0.02)   $(0.01)
per share                  

3.B      CAPITALIZATION AND INDEBTEDNESS

            Not applicable.

3.C      REASONS FOR THE OFFER AND USE OF PROCEEDS

            Not applicable.

3.D      RISK FACTORS

             Overview

            You should carefully consider the following factors in addition to the other information set forth in this Form 20-F. If any of the following risks actually occur, our business, financial condition and results of operations and the value of our shareholders’ common shares would likely suffer.

            The Company’s primary business consists of the exploration and, if successful, the development of oil and gas properties. There are a number of inherent risks associated with the exploration, development and production of oil and gas reserves, many of these risks are beyond the control of the Company.

            Success in the junior oil and gas sector is measured by a company’s ability to raise funds and the ability to secure properties of merit. Not all of these factors are within management’s control. The ability to raise funds is in part dependent on the state of the junior resource stock market, which in turn is dependent on the economic climate, oil and gas prices and perceptions as to which way the market is headed. The ability to secure properties of merit is in large part dependent on management’s contacts and the vitality of the sector.


            The risks and uncertainties below are not the only issues facing Chelsea. Additional risks and uncertainties not presently known to Chelsea or that Chelsea currently considers immaterial may also impair the business and operations of Chelsea and cause the price of the Chelsea Common Shares to decline.

             Exploration, Development and Production Risks

            Oil and natural gas operations involve many risks that even a combination of experience, knowledge and careful evaluation may not be able to overcome. The long-term commercial success of Chelsea depends on its ability to find, acquire, develop and commercially produce oil and natural gas reserves. The future value of Chelsea is therefore dependent on the success of Chelsea’s activities, which are principally directed toward the exploration, appraisal and development of its properties in Australia. Exploration, appraisal and development of oil and natural gas properties is highly speculative and involves a significant degree of risk. Without the continual addition of new reserves, any existing reserves that Chelsea may discover or acquire at any particular time and the production therefrom will decline over time as such existing reserves are exploited. Any discovery of or future increase in Chelsea’s reserves will depend not only on its ability to explore and develop any properties it may have from time to time, but also on its ability to select and acquire suitable producing properties or prospects. No assurance can be given that Chelsea will be able to continue to locate satisfactory properties for acquisition or participation. Moreover, if such acquisitions or participations are identified, Chelsea may determine that current markets, terms of acquisition and participation or pricing conditions make such acquisitions or participations uneconomical. There is no assurance that commercial quantities of oil and natural gas will be discovered or acquired by Chelsea.

            Oil and natural gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. In addition, fixing drilling hazards or environmental damage caused by operations could greatly increase the cost of those operations, and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental and other approvals or consents, insufficient storage or transportation capacity or other geological and mechanical conditions. While diligent well supervision and effective maintenance operations can contribute to maximizing production rates over time, production delays and declines from normal field operating conditions cannot be eliminated and can be expected to adversely affect revenue and cash flow levels to varying degrees.

             Additional Funding Requirements

            Chelsea will have limited financial resources and limited cash flow from operations, and therefore will likely require additional financing in order to carry out its oil and natural gas exploration, acquisition and development activities. There can be no assurance that additional funding will be available, or available under terms favourable to Chelsea. Failure to obtain such financing on a timely basis could cause Chelsea to have limited ability to expend the capital necessary to undertake or complete future drilling programs, forfeit its interest in certain properties, miss certain acquisition opportunities and reduce or terminate its operations. There can be no assurance that debt or equity financing or cash generated by operations will be available or sufficient to meet these requirements or for other corporate purposes or, if debt or equity financing is available, that it will be on terms acceptable to Chelsea. Moreover, future activities may require Chelsea to alter its capitalization significantly. Financing by issuing additional securities from the Chelsea’s treasury may result in a change of control of Chelsea and dilution to holders of Chelsea Shares.

             History of Losses

            Chelsea has historically incurred losses from operations. There can be no assurance that Chelsea will achieve profitability in the future. In addition, should Chelsea be unable to continue as a going concern, realization of assets and settlement of liabilities other than in the normal course of business may be at amounts significantly different from those in the financial statements.

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             Investment Risks

            Revenues may not occur for some time, if at all. The timing and extent of these is variable and uncertain and accordingly the Corporation is unable to predict when, if at all, profitability will be achieved. An investment in the Common Shares is highly speculative and should only be made by persons who can afford a significant or total loss of their investment.

             Commodity Prices

            Chelsea’s future revenue, profitability, growth and the carrying value of its oil and natural gas properties will be substantially dependent on prevailing prices of oil and natural gas. Chelsea’s ability to borrow and to obtain additional capital on attractive terms will also be substantially dependent upon oil and natural gas prices. Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors beyond the control of Chelsea. These factors include economic conditions in Australia and elsewhere in the world, the actions of the Organization of the Petroleum Exporting Countries (“ OPEC” ), governmental regulation, political stability in the Middle East and elsewhere, the foreign supply of oil and natural gas, the price of foreign imports and the availability of alternative fuel sources. Any substantial and extended decline in the price of oil and natural gas could have an adverse effect in the future on Chelsea’s carrying value of its proved reserves, borrowing capacity, revenues, profitability and cash flows from operations, as applicable. There can be no assurance that recent commodity prices will be sustained if and when Chelsea commences production or over the life of the Chelsea’s operations. There is risk that commodity prices may decline in the future, although it is not possible to predict the time or extent of such decline.

             Early Stage of Development, Limited Operating and Earnings History

            Chelsea’s business plan requires significant expenditure, particularly capital expenditure, in its oil and gas exploration phase. Any future profitability from Chelsea’s business will be dependent upon the successful exploration and development of its petroleum properties, and there can be no assurance that Chelsea will achieve profitability in the future. Revenues may not occur for some time, if at all. The timing and extent of these is variable and uncertain and accordingly Chelsea is unable to predict when, if at all, profitability will be achieved.

              Ability to Execute Exploration and Development Program

            It may not always be possible for Chelsea to execute its exploration and development strategies in the manner in which Chelsea considers optimal. Chelsea’s exploration and development programs in onshore Australia involve the need to obtain approvals from the relevant authorities, which may require conditions to be satisfied or the exercise of discretion by the relevant authorities. It may not be possible for such conditions to be satisfied.

             Operational Experience

            The management and directors of Chelsea have significant international experience in the oil and gas industry; however, given the fact that the team was constituted recently, the team has, as a group, limited direct experience operating in onshore Australia, aside from its consultants and advisors.

             Assessments of Value of Acquisitions

            Acquisitions of oil and natural gas issuers and oil and natural gas assets are typically based on engineering and economic assessments made by independent engineers and Chelsea’s own assessments. These assessments will include a series of assumptions regarding such factors as recoverability and marketability of oil and natural gas, future prices of oil and natural gas and operating costs, future capital expenditures and royalties and other government levies which will be imposed over the producing life of the reserves. Many of these factors are subject to change and are beyond Chelsea’s control. In particular, the prices of, and markets for, oil and natural gas products may change from those anticipated at the time of making such assessment. In addition, all such assessments involve a measure of geologic and engineering uncertainty which could result in lower production and reserves than anticipated. Initial assessments of acquisitions may be based on reports by a firm of independent engineers that are not the same as the firm that Chelsea may use for its year-end reserve evaluations. Because each of these firms may have different evaluation methods and approaches, these initial assessments may differ significantly from the assessments of the firm used by Chelsea. Any such instance may offset the return on and value of the securities of Chelsea.

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             Availability of Drilling Equipment

            Oil and natural gas exploration and development activities are dependent on the availability of drilling and related equipment in the particular areas where such activities will be conducted. Demand for such limited equipment or access restrictions may affect the availability of such equipment to Chelsea and may delay exploration and development activities. Recent industry conditions have led to shortages of drilling equipment in certain areas. To the extent that Chelsea is not the operator of its oil and gas properties, Chelsea will be dependent on such operators for the timing of activities related to such properties and will be largely unable to direct or control the activities of the operators.

             Cash Outflow Used In Operations

            The inability of Chelsea to generate positive operating cash inflow in the future could have a material adverse impact on Chelsea’s business, financial condition, results of operations and prospects.

             Project Risks

            Chelsea will manage a variety of projects in the conduct of its business. Project delays may delay expected revenues from operations. Significant project cost over runs could make a project uneconomic. Chelsea’s ability to execute projects and market oil and natural gas depends upon numerous factors beyond Chelsea’s control, including:

the effects of inclement weather;
   
the availability of drilling and related equipment;
   
unexpected cost increases;
   
accidental events;
   
currency fluctuations;
   
changes in regulations;
   
the availability and productivity of skilled labour;
   
the regulation of the oil and natural gas industry by various levels of government and
   
governmental agencies.

Because of these factors, Chelsea could be unable to execute projects on time, on budget or at all.

             Access to Infrastructure

            Chelsea’s ability to market production from any potential oil and natural gas discoveries may depend on its ability to secure transportation. Chelsea may also be affected by deliverability uncertainties related to the proximity of its potential production to pipelines and processing facilities and operational problems affecting such pipelines and facilities.

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             Delays in Business Operations

            In addition to the usual delays in payments by purchasers of oil and natural gas to Chelsea or to the operators, and the delays by operators in remitting payment to Chelsea, payments between these parties may be delayed due to restrictions imposed by lenders, accounting delays, delays in the sale or delivery of products, delays in the connection of wells to a gathering system, adjustment for prior periods, or recovery by the operator of expenses incurred in the operation of the properties. Any of these delays could reduce the amount of cash flow available for the business of Chelsea in a given period and expose Chelsea to additional third party credit risks.

             Hedging

            From time to time, Chelsea may enter into agreements to receive fixed prices on any future oil and natural gas production to offset the risk of revenue losses if commodity prices decline; however, if commodity prices increase beyond the levels set in such agreements, Chelsea would not benefit from such increases. Similarly, from time to time, Chelsea may enter into agreements to fix the exchange rate of various currencies used in its business in order to offset the risk of revenue or cost related losses in the event of currency fluctuations. There is no certainty that any such currency hedges which may be entered into will benefit Chelsea.

             Expiration of Permits, Applications and Authorities

            Chelsea’s properties are and will continue to be held in the form of permits, applications, authorities and Working Interests in permits, applications and authorities. If Chelsea or the holder of the permits, applications and authorities fails to meet the specific requirement of the permits, applications or authorities (including any requirements as to their renewal where renewal is available), the permits, applications or authorities may terminate or expire. There can be no assurance that the obligations required to maintain each of the permits, applications and authorities will be met. The termination or expiration of Chelsea’s permits, applications and authorities or the Working Interests relating to the permits, applications and authorities could have a material adverse effect on Chelsea’s business, financial condition, results of operations and prospects.

             Operational Dependence

            In the future other companies may operate some of the assets in which Chelsea has an interest. As a result, Chelsea may have limited ability to exercise influence over the operation of such assets or their associated costs, which could have a material adverse effect on Chelsea’s business, financial condition, results of operations and prospects. Therefore, Chelsea’s return on the assets operated by others will depend upon a number of factors that may be outside of Chelsea’s control, including the timing and amount of capital expenditures, the operator’s expertise and financial resources, the approval of other participants, the selection of technology and risk management practices.

             Markets and Marketing

            The marketability and price of oil and natural gas that may be discovered or acquired by Chelsea will be affected by numerous factors beyond its control. Chelsea’s ability to market oil and natural gas in the future, may depend upon its ability to acquire space on pipelines that deliver natural gas to commercial markets including availability of processing and refining facilities and transportation infrastructure, including access to facilities, pipelines and pipeline capacity and economic tariff rates over which Chelsea may have limited or no control. Chelsea may also be affected by deliverability uncertainties related to the proximity of its reserves to pipelines and processing facilities, and related to operational and maintenance problems with such pipelines and facilities as well as extensive government regulation relating to price, taxes, royalties, land tenure, allowable production, the export of oil and natural gas and many other aspects of the oil and natural gas business. Any delay or failure to acquire access to, or improper operation or maintenance of, such pipelines and facilities could have a material adverse effect on Chelsea’s business, financial condition, results of operations and prospects.

             Competition

            Oil and gas exploration is intensely competitive in all phases and involves a high degree of risk. Chelsea competes with numerous other participants in the search for, and the acquisition of, oil and natural gas properties. Chelsea’s competitors include oil and natural gas companies that have substantially greater financial resources, staff and facilities than those of Chelsea. Currently Chelsea is insulated from competition on the lands which it currently holds due to the nature of the proprietary exploration rights granted by the governing bodies under the various licenses and permits, however Chelsea may face competition on surrounding lands if it seeks to increase its land position to acquire other prospective properties. Chelsea may also face competition from competitors on lands which it currently holds a license or permit for in the event that, as a condition of the license or permit, it is required to partially relinquish certain of the lands. In this circumstance, if Chelsea elects to re-apply for such permits or licenses, there are no assurances that Chelsea will be successful. Chelsea’s ability to add reserves in the future will depend not only on its ability to explore and develop its present properties, but also on its ability to select and acquire suitable producing properties or prospects for exploratory drilling. Competitive factors in the distribution and marketing of oil and natural gas include price and methods and reliability of delivery. Competition may also be presented by alternate fuel sources.

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             Reliance on Key Personnel

            Chelsea’s success will depend in large measure on the performance of its management and other key personnel. The loss of the services of any of such persons could have a material adverse effect on the Chelsea’s business, financial condition, results of operations and prospects. Chelsea does not have key person insurance in effect for management. The contributions of these individuals to the immediate operations of Chelsea are likely to be of central importance. In addition, the competition for qualified personnel in the oil and natural gas industry is intense and there can be no assurance that Chelsea will be able to continue to attract and retain all personnel necessary for the development and operation of its business. Investors must rely upon the ability, expertise, judgment, discretion, integrity and good faith of the management of Chelsea.

             Estimate of Resources

            The Corporation’s historical resource estimates, available in the Corporation’s disclosure documents filed on SEDAR and on EDGAR, have been classified as undiscovered petroleum initially in place and prospective resources. Any such resource estimates are estimates only. There is no certainty that any portion of the resources will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the resources. Readers are cautioned that the volumes presented are estimates only and should not be construed as being exact quantities. Chelsea’s proposed drilling and seismic program must be considered as a high risk exploration play.

             Estimate of Fair Market Value

            There are numerous uncertainties inherent in an estimate of fair market value including many factors beyond the Corporation’s control. The valuations herein represent estimates only. In general, estimates are based upon a number of variable factors and assumptions, such as engineering and geophysical information pertaining to hydrocarbon potential, current material contracts of the Corporation, production history of competitors on similar land positions, access to lands, availability, timing and amount of capital expenditures, marketability of oil and natural gas, royalty rates, the assumed effects of regulation by governmental agencies, and future operating costs, all of which may vary from actual results. All such estimates are to some degree speculative, and are only attempts to define the degree of speculation involved.

             Third Party Credit Risk

            Chelsea is or may be exposed to third party credit risk through its contractual arrangements with its current or future joint venture partners, marketers of its petroleum and natural gas production and other parties. In the event such entities fail to meet their contractual obligations to Chelsea, such failures could have a material adverse effect on Chelsea’s business, financial condition, results of operations and prospects.

             Management of Growth

            Chelsea may be subject to growth-related risks including capacity constraints and pressure on its internal systems and controls. The ability of Chelsea to manage growth effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and manage its employee base. The inability of Chelsea to deal with this growth could have a material adverse effect on Chelsea’s business, financial condition, results of operations and prospects.

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             Market Price of the Corporation’ s Securities

            The trading price of securities of oil and natural gas companies is subject to substantial volatility, and such trading prices have been particularly volatile in recent months. This volatility is often based on factors both related and unrelated to the financial performance or prospects of the companies involved. The market price of the Common Shares could be subject to significant fluctuations in response to variations in Chelsea’s operating results, financial condition, liquidity and other internal factors. Factors that could affect the market price of the Common Shares that are unrelated to Chelsea’s performance include domestic and global commodity prices and market perceptions of the attractiveness of particular industries. The price at which the Common Shares will trade cannot be accurately predicted.

             Insurance

            Oil and natural gas exploration, development and production operations are subject to all the risks and hazards typically associated with such operations, including hazards such as fire, explosion, blowouts, cratering, sour gas releases and spills, each of which could result in substantial damage to oil and natural gas wells, production facilities, other property and the environment or in personal injury. In accordance with industry practice, Chelsea is not fully insured against all of these risks, nor are all such risks insurable. Prior to drilling, Chelsea will obtain insurance in accordance with industry standards to address certain of these risks. However, such insurance has limitations on liability that may not be sufficient to cover the full extent of such liabilities. In addition, such risks may not be insurable in all circumstances or, in certain circumstances, Chelsea may elect not to obtain insurance to deal with specific risks due to the high premiums associated with such insurance or other reasons. The payment of any such uninsured liabilities would reduce the funds available to Chelsea. The occurrence of a significant event that Chelsea is not fully insured against, or the insolvency of the insurer of such event, could have a material adverse effect on Chelsea’s business, financial condition, results of operations and prospects.

             Dividends

            Chelsea has not paid any dividends on the Common Shares and it is not anticipated that Chelsea will pay any dividends on the Common Shares for the foreseeable future.

             Conflicts of Interest

            The directors or officers of Chelsea may also be directors or officers of other oil and gas companies or otherwise involved in natural resource exploration and development and situations may arise where they are in a conflict of interest with Chelsea. Conflicts of interest, if any, which arise will be subject to and governed by procedures prescribed by the ABCA which require a director or officer of a company who is a party to, or is a director or an officer of, or has some material interest in any person who is a party to, a material contract or proposed material contract with Chelsea to disclose his or her interest and, in the case of directors, to refrain from voting on any matter in respect of such contract unless otherwise permitted under the ABCA.

             Title to Properties

            Title to oil and natural gas interests is often not capable of conclusive determination without incurring substantial expense. Although title reviews will be done according to industry standards prior to the purchase of most oil and natural gas producing properties or the commencement of drilling wells, such reviews do not guarantee or certify that an unforeseen defect in the chain of title will not arise to defeat the claim of Chelsea. To the extent title defects do exist, it is possible Chelsea may lose all or a portion of its right, title, estate and interest in and to the properties to which the title relates.

             Issuance of Debt

            From time to time, Chelsea may enter into transactions to acquire assets or the shares of other corporations. These transactions may be financed partially or wholly with debt, which may increase Chelsea’s debt levels above industry standards. Depending on future exploration and development plans, Chelsea may require additional equity and/or debt financing that may not be available or, if available, may not be available on favourable terms. Neither Chelsea’s articles nor its by-laws limit the amount of indebtedness that Chelsea may incur. The level of Chelsea’s indebtedness from time to time could impair Chelsea’s ability to obtain additional financing in the future on a timely basis to take advantage of business opportunities that may arise. If Chelsea becomes unable to pay its debt service charges or otherwise commits an event of default, such as bankruptcy, lenders may foreclose on or sell Chelsea’s properties.

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             Currency

            Many of the operational, capital and other expenses incurred by Chelsea are paid in Australian dollars or US dollars. If Chelsea achieves commercial production, the revenue from its products will likely be denominated in US dollars or Australian dollars. The assets and liabilities of Chelsea are recorded in Canadian dollars. As a result, fluctuations in the Australian dollars or the US dollars against the Canadian dollar could result in unanticipated and material fluctuations in the financial results of Chelsea. Chelsea does not currently use derivative instruments to hedge exposure to foreign exchange risks.

             Dilution

            Chelsea may make future acquisitions or enter into financing or other transactions involving the issuance of securities of Chelsea which may be dilutive to existing securityholders.

             Regulatory

            Oil and natural gas operations (exploration, production, pricing, marketing and transportation) are subject to extensive controls and regulations imposed by various levels of government that may be amended from time to time. Chelsea’s operations require licenses and permits from various governmental authorities. There can be no assurance that Chelsea will be able to obtain all necessary licenses and permits that may be required to carry out exploration and development of its projects.

            In Australia, while government policies and regulations in relation to exploration, production and marketing are similar in many respects, they ultimately vary between different states and between different governing bodies. Chelsea’s activities will require compliance with various laws, both state and those of the Commonwealth of Australia, relating to, among other things, the protection of the environment, Aboriginal cultural heritage, native title rights, the protection of workers and the public. Changes in government, government policies and legislation could have a material adverse effect on Chelsea’s business, financial condition, results of operations and prospects.

            In particular, in order to pursue its exploration programs in Australia, Chelsea may require approval from government and non-government bodies to facilitate access to any blocks and tenements in which it has an interest. Any tenements residing within reserves, including national parks and conservation reserves, which are subject to state and Commonwealth legislation could be subject to a change in legislation that could have a material adverse effect on Chelsea’s business, financial condition, results of operations and prospects. In addition, any tenements residing in areas which are subject to government policies regarding national defence or of any other particular national interest to Australia may be subject to access requirements that could result in a material adverse effect on Chelsea if they are particularly onerous to Chelsea.

            Chelsea’s licenses, permits and authorizations will be subject to applications for renewal in accordance with their terms. Where a licensee has not complied with the conditions to which an exploration permit is subject, or any directions given by the relevant Minister and the Minister is not satisfied that special circumstances exist that justify the granting of the renewal of the permit, the Minister may refuse to grant a renewal of a permit. Where a Minister is satisfied that a commercially exploitable accumulation of petroleum may occur in an exploration permit area, the Minister may require the licensee to apply for a production license or risk losing the exploration permit. A Minister may also refuse to grant a production license, or may grant a production license subject to such conditions as the Minister sees fit but which are unfavourable or particularly onerous to Chelsea. If a permit is not renewed or a production license is not granted or granted subject to unfavourable conditions, Chelsea may suffer significant damage through loss of the opportunity to develop and discover that tenement and this could have an adverse effect on Chelsea’s business plan.

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            Rights to licenses, permits and authorities held by Chelsea carry with them various obligations in regard to minimum expenditure levels, work commitments and responsibilities in respect of the environment and safety generally. Failure to observe such requirements could prejudice the right to maintain title to a given area.

             Environmental Risks and Regulations

            All phases of the oil and natural gas business present potential environmental risks and hazards and are therefore subject to environmental regulation pursuant to a variety of federal, state and local laws and regulations. Environmental legislation provides for, among other things, restrictions and prohibitions on spills, releases or emissions of various substances produced in association with oil and natural gas operations. The legislation also requires that wells and facility sites be operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability and the potential for increased capital expenditures and operating costs. The discharge of oil, natural gas or other pollutants into the air, soil or water may give rise to liabilities to governments and third parties and may require Chelsea to incur costs to remedy such discharge. Generally, Australian state and territory legislation and associated regulations include provisions for the regulation of activities on petroleum tenement lands. Statutory provisions require petroleum tenement lands to be protected and rehabilitated to ensure that environmental damage is avoidable or minimal where authorized. These provisions may require approvals and consents to be obtained before certain lands may be accessed and explored. In addition, each state and territory government may impose a wide range of obligations on tenement holders to ensure that petroleum operations comply with various environmental standards and requirements.

            No assurance can be given that environmental laws will not result in a curtailment of future production (if any) or a material increase in the costs of production, development or exploration activities or otherwise adversely affect the Corporation’s financial condition, results of operations or prospects.

             Changes in Legislation

            The return on an investment in securities of Chelsea is subject to changes in Canadian and Australian tax laws and government incentive programs and there can be no assurance that such laws or programs will not be changed in a manner that adversely affects Chelsea or the holding and disposing of the securities of Chelsea. Legislation, regulations and policies continue to be introduced by government and government agencies concerning the security of industrial facilities, including oil and natural gas facilities. Chelsea’s operations may be subject to such laws and regulations. Presently, it is not possible to accurately estimate the costs Chelsea could incur to comply with any such laws or regulations, but such expenditures could be substantial.

             Income Taxes

            Chelsea, and all of its subsidiaries will file all required income tax returns and believes that it will be in full compliance with the provisions of the Income Tax Act (Canada), United States taxation laws and Australian taxation laws and all other applicable tax legislation. However, such returns are subject to reassessment by applicable taxation authorities. In the event of a successful reassessment of Chelsea, or its subsidiaries, as the case may be, whether by re- characterization of exploration and development expenditures or otherwise, such reassessment may have an impact on current and future taxes payable. In Australia, Chelsea Oil Australia pty will file any annual income tax returns required pursuant to the Australian taxation laws. It will be assessed while in exploration and production phases of its operation. While in exploration it will be assessed as having no or negative income and will be able to retain a credit towards future income in the event that it has an income from production in the future. In other words, losses for the Australian subsidiaries will be able to be set-off against future profits. The Corporation’s subsidiaries will still be required to file annual income tax returns.

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            Climate Change

            Australia is a signatory to the United Nations Framework Convention on Climate Change and has ratified the Kyoto Protocol established thereunder to set legally binding targets to reduce nationwide emissions of carbon dioxide, methane, nitrous oxide and other so called “greenhouse gases”. Subsequently, representatives from approximately 170 countries met in Copenhagen, Denmark to attempt to negotiate a successor to the Kyoto Protocol. The result of such meeting was the Copenhagen Accord, a non-binding political consensus rather than a binding international treaty such as the Kyoto Protocol.

            Chelsea’s exploration and production facilities and other operations and activities emit greenhouse gases and Chelsea may therefore be required to comply with various laws under the jurisdiction in which its activities are being carried out. For example, for its Australian activities, it will be required to report its greenhouse gas emissions to the Australian government where those emissions exceed the thresholds prescribed under the National Greenhouse and Energy Reporting Act 2007 (Cwth). In addition, the Australian Energy Efficiency Opportunities Act 2006 (Cwth) requires persons using more than certain amounts of energy per year to identify and implement opportunities for energy efficiency and to publicly report the results of those measures. Additionally, the Australian government also is proposing to set a national greenhouse emissions cap and introduce an associated national greenhouse emissions trading scheme from 2011. Under such a scheme, companies may face potentially significant costs to pay for the greenhouse emissions associated with their operations and activities, as well as face significant increases in energy costs generally.

            The direct or indirect costs of these laws and regulations could have a material adverse effect on Chelsea’s business, financial condition, results of operations and prospects. The future implementation or modification of greenhouse gases regulations, whether to meet the limits required by the Kyoto Protocol, the Copenhagen Accord or as otherwise determined, could have a material impact on the nature of oil and natural gas operations, including those of Chelsea. Given the evolving nature of the debate related to climate change and the control of greenhouse gases and resulting requirements, it is not possible to predict the impact on Chelsea and its operations and financial condition.

             Geo-Political Risks

            The marketability and price of oil and natural gas that may be acquired or discovered by Chelsea is and will continue to be affected by political events throughout the world that cause disruptions in the supply of oil. Conflicts, or conversely peaceful developments, arising in the Middle East, and other areas of the world, have a significant impact on the price of oil and natural gas. Any particular event could result in a material decline in prices and therefore result in a reduction of Chelsea’s net production revenue (if any).

            In addition, Chelsea’s properties and facilities could be subject to a terrorist attack. If any of Chelsea’s properties, wells or facilities are the subject of terrorist attack it could have a material adverse effect on Chelsea’s business, financial condition, results of operations and prospects. Chelsea will not have insurance to protect against the risk from terrorism.

             Native Title

            The requirement to comply with the procedures provided for under the Native Title Act where native title has not been extinguished is likely to be affected by exploration or production activities have the potential to significantly delay the grant of petroleum tenements in Australian jurisdictions. To the extent such requirements delay or restrict the granting of any petroleum tenements to Chelsea, or petroleum tenements are not granted to Chelsea, it could have a material adverse effect on Chelsea. Indigenous Land Access Agreements with the relevant aboriginal have been entered into and therefore, at present there are no further negotiations currently required under the Native Title Act.

             Alternatives to and Changing Demand for Hydrocarbon Products

            Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, and technological advances in fuel economy and energy generation devices could reduce the demand for crude oil and other liquid hydrocarbons. The Corporation cannot predict the impact of changing demand for oil and natural gas products, and any major changes may have a material adverse effect on the Corporation’s business, financial condition, results of operations and cash flows and therefore on the dividends declared on the Common Shares.

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             Forward-looking Information May Prove Inaccurate

            Numerous statements containing forward-looking information are found in this Form 20-F, documents incorporated by reference herein and other documents forming part of the Corporation’s public disclosure record. Such statements and information are subject to risks and uncertainties and involve certain assumptions, some, but not all, of which are discussed elsewhere in this document. The occurrence or non-occurrence, as the case may be, of any of the events described in such risks could cause actual results to differ materially from those expressed in the forward-looking information.

             Government Approval for Share Acquisitions

            There are circumstances in which the acquisition of shares by a foreign person or corporation in a foreign corporation which has an Australian subsidiary (such as Chelsea) may activate the Australian Treasurer’s powers and, in order to avoid an adverse order by the Australian Treasurer, require the foreign person or company to provide prior notification of the proposed acquisition and seek a statement of no objections in respect of that proposal. In such case, the associated risks include the Australian Treasurer objecting to the acquisition, the Australian Treasurer imposing conditions on a statement of no objection which are onerous, prohibitive or uncommercial, having regard to the individual circumstances of the foreign person or company and the time period for assessing the acquisition being extended and unduly delaying the foreign person’s or company’s ability to purchase the shares.

             Aboriginal Heritage

            The procedures and regulatory powers set forth in applicable laws relating to the protection of Aboriginal cultural heritage in Australia may delay, limit or prevent oil and gas exploration activities in Australia. Such procedures and powers, to the extent they affect Chelsea, could have an adverse effect on Chelsea’s business, financial condition, results of operations and prospects.

             Other Risks

            Chelsea also faces a number of risk factors that are outside of its control, generally, including, without limitation, terrorist activities, natural disasters, general economic and other conditions.

ITEM 4. INFORMATION ON THE COMPANY

4.A      THREE YEAR HISTORY AND DEVELOPMENT OF CHELSEA

             Business Development

            ACOR was incorporated April 28, 1997 in British Columbia, Canada. On October 1, 2013, ACOR amalgamated with International TME Resources Inc. and was renamed “Chelsea Oil and Gas Ltd.” and continued into the province of Alberta, Canada. The address of the Company’s head office is 127, 10 th Ave NW, Calgary, AB Canada.

            The Company’s business plan is the exploration and development of the Company’s working interest properties in Australia. The Company also holds and acquires and sells overriding royalty interests in Australia. Current primary income sources are royalties earned on overriding royalty interests held by the Company.

            Our website address is www.chelseaoilandgas.com. The information contained on, or that can be accessed through, our website is not part of, and is not incorporated into, this Form 20-F.

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            The Company has continued to be active with its Working Interest and Overriding Royalty interests held in Australia. The business of Chelsea during 2014 was to work on its existing Working Interest projects as well as study the oil and gas exploration acreage available in Australia in basins that demonstrate a high probability of success with the maximum rate of return for dollars invested. For additional information on our working and overriding royalty interests, see Item 4.D “Property, Plant and Equipment”.

             Three Year History

             2014

            On June 16, 2014, the Corporation announced that it had received a two-year extension for ATP 582 from the Queensland government. In addition, the government deferred the mandatory relinquishment requirements while retaining the available extension provisions.

            On October 30, 2014, the Corporation announced that it sold its non-operated working interests and associated overriding royalty interests in PEL 112 and 444 in the Cooper Basin, South Australia to an arm’s length private company for nominal consideration. Following the sale of PEL 112 and PEL 444, all of the Corporation’s working interest properties are located in the state of Queensland.

             2015

            On June 1, 2015, the Corporation announced that the BCSC granted a full revocation of the cease trade order issued by the BCSC on February 18, 1999 in respect of ITME, a predecessor company to Chelsea.

             2016

            During 2016 the Company’s efforts were focused on obtaining financing through the issuance of equity or debt instruments to existing and new investors, and monetizing assets held within the portfolio.

             Current Business Operations

            Throughout 2016 and to the date of this 20-F, the Corporation has continued to advance discussions with investors, which if successful, is expected to enable the Corporation to fund its operations and maintain its debt obligations for 2017 and 2018. There is no certainty that the Brokered Private Placement will be completed.

            In tandem, the Corporation has initiated discussions with multiple parties regarding the full or partial sale of some of its assets. The proceeds of any sale would be used by the Corporation to fund its operations and maintain its debt obligations for 2017 and 2018. There is no certainty that any asset sale will be completed.

            For further information on each of the Company’s interests, see Item 4.D “Property, Plant and Equipment”.

             Proposed Future Business Operations

            The Company’s strategy is three fold: 1) to seek Overriding Royalty Interests in oil and gas concessions within sedimentary basins in Australia, 2) to explore and develop the oil and gas concessions in Queensland, Australia in which it holds a Working Interest and 3) to seek other Working Interests in oil and gas concessions within other sedimentary basins of Australia to promote oil and gas exploration through seismic programs and drilling operations.

            The Company’s ability to explore other oil and gas opportunities is dependent on adequate capital resources being available and equity being obtained, and/or finding partners to fund the exploration and drilling programs on the areas in which the Company holds Working Interests.

            For further information on each of the Company’s interests, see Item 4.D “Property, Plant and Equipment”.

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             Competition

            The Company is competing with other oil companies for oil and gas leases and concessions. The oil and gas industry is highly competitive in all of its phases, with competition for favorable producing royalties, overriding royalties, and good oil and gas leases being particularly intense. The Company believes that the exploration program, promised expenditures, geological and geophysical skill, and familiarity with an area of operations are the primary competitive factors in the identification, selection, and acquisition of desirable leases. When attempting to purchase interests in such properties, the Company competes with independent operators and major oil companies.

             Foreign Taxes and United States Tax Credits

            As a result of its Overriding Royalty Interests attributable to properties outside the United States, the Company is subject to the imposition of taxes by foreign governments upon the Company’s income derived from such foreign jurisdictions. These taxes are of various types, with differing tax rates, and are subject to change. Generally, the Company’s income from a foreign jurisdiction will be taxed in the same manner as that for other companies operating in the jurisdiction, but discriminatory taxation by a particular jurisdiction may occur. The current non-resident corporate income tax rate in Australia, for Overriding Royalty Interests, is 30%.

            As a Canadian corporation, the Company is liable for income taxes under the laws of Canada. Under Canadian law the Company’s Australian-source income is subject to a 25% tax (on Canadian income). We believe the 30% Australian tax should be a partial credit toward the payment of the 25% Canadian tax under double taxation treaties between the countries.

            The Company is taxable in the U.S. on U.S. source income. Because there has been neither U.S. source net income nor any income effectively connected with a U.S. trade or business, there have been no U.S. taxes incurred to date.

             Governmental Regulation

            Oil and gas operations are subject to federal, state and local laws and regulations governing waste, environmental quality, pollution control, conservation and other measures regarding environmental and ecological matters. It is impossible to predict the impact of environmental legislation and regulations on the Company’s operations and earnings in the future.

            The domestic production and sale of oil and gas are subject to federal regulation by the Department of Energy and the Federal Energy Regulation Commission. Rates of production of oil and gas have for many years been subject to federal and state conservation laws and regulations. In addition, oil and gas operations are subject to extensive federal and state regulations concerning exploration, development, production, transportation, and pricing, and even to interruption or termination by governmental authorities.

            In foreign countries, the Company may be subject to governmental restrictions on production, pricing and export controls. Regulations existing or imposed upon the Company or its properties at the time of their acquisition may change to an unpredictable extent. The Company will have little or no control over the change of regulations or imposition of new regulations and restrictions, expropriation or nationalization by foreign governments or the imposition of additional foreign taxes. Management believes that these actions are unlikely to be undertaken by the state governments of South Australia, Queensland or Victoria, where all of the foreign oil and gas properties from which the Company receives royalty income are currently located.

             Foreign Currency

            Due to the nature of the Company’s activities in Australia, portions of the Company’s operating capital may at times be held in various foreign currencies. This subjects the Company to the risk of currency fluctuations and changes in rates of conversion for different currencies. The Company does not engage or expect to engage in any hedging or other transactions, which are intended to manage risks relating to foreign currency fluctuations. Additionally, revenues generated in foreign countries in which the Company has or may acquire interests may be subject to governmental regulations, which restrict the free convertibility of such funds, and all remittances of funds out of these countries might require the approval of the applicable government’s exchange control agency. Presently, the Company experiences no difficulties with the free convertibility of funds from Australia. In the Company’s opinion, the foreign exchange control laws currently in effect in Australia, do not unreasonably delay the remittance of funds generated in Australia to the United States and Canada. The exchange rate on April 29, 2015 was $0.76201 Australian = $1.00 United States dollar and 0.79561 Canadian = $1.00 United States dollar

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             Regulation of Oil and Natural Gas Production

            Our oil and natural gas exploration, production and related operations are subject to extensive rules and regulations promulgated by federal, state and local authorities and agencies. Failure to comply with such rules and regulations can result in substantial penalties. The regulatory burden on the oil and natural gas industry increases our cost of doing business and affects our profitability. Although we believe we are in substantial compliance with all applicable laws and regulations, because such rules and regulations are frequently amended or reinterpreted, we are unable to predict the future cost or impact of complying with such laws.

            Many states require permits for drilling operations, drilling bonds and reports concerning operations, and impose other requirements relating to the exploration and production of oil and natural gas. Such states also have statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum rates of production from wells, and the regulation of spacing, plugging and abandonment of such wells.

             Environmental Matters

            Our operations and properties will be subject to extensive and changing federal, state and local laws and regulations relating to environmental protection, including the generation, storage, handling, emission, transportation and discharge of materials into the environment, and relating to safety and health. The recent trend in environmental legislation and regulation generally is toward stricter standards, and this trend will likely continue. These laws and regulations may: (i) require the acquisition of a permit or other authorization before construction or drilling commences and for certain other activities; (ii) limit or prohibit construction, drilling and other activities on certain lands lying within wilderness and other protected areas; and (iii) impose substantial liabilities for pollution resulting from our operations. The permits required for several of our operations are subject to revocation, modification and renewal by issuing authorities. Governmental authorities have the power to enforce their regulations, and violations are subject to fines or injunctions, or both. In the opinion of management, we are in substantial compliance with current applicable environmental law and regulations, and we have no material commitments for capital expenditures to comply with existing environmental requirements. Nevertheless, changes in existing environmental laws and regulations or in interpretations thereof could have a significant impact on our business operations, as well as the oil and natural gas industry in general.

4. B      BUSINESS OVERVIEW

            The Company’s principal activities are the exploration, development and production of oil, natural gas, and natural gas liquids in Australia. In addition, the Company has acquired and sold ORRI’s on production in Australia. The Company previously held ORRI on natural gas production in the United States, however it has not received any material revenues from these ORRI’s since 2009.

            For the past three years, all of the Company’s revenues were earned from ORRI’s on Australian oil, natural gas and natural gas liquids production.

            The Company has WI operations and ORRI interests in the States of Queensland, South Australia and Victoria in Australia, and is subject to the laws and regulations of both the States and the federal laws of Australia, where applicable.

            The Company has ORRI’s in Texas and Kentucky, however it has not earned any revenues on these interests in several years. The Company is subject to applicable State and federal laws of the United States.

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4.C      ORGANIZATIONAL STRUCTURE

             Significant Subsidiaries

            The following table sets forth each of our significant subsidiaries, the jurisdiction of organization and the percentage ownership held by us:

  Jurisdiction of Percentage
  Organization Ownership
Cooper-Eromanga Oil Inc. Texas, USA 100%
Chelsea Oil Australia Pty Ltd. Queensland, Australia 100%
1629518 Alberta Ltd. Alberta, Canada 100%
Cooper Basin Oil & Gas Inc. Texas, USA 20%

             Organizational Charts

            The chart below presents a summary of our ownership and organizational structure. Each subsidiary companies Country or State of domicile is represented in parenthesis, and the ownership of each subsidiary is represented as a percentage.

Chelsea is the parent and holding company for each of its wholly-owned subsidiaries and minority interest in Cooper Basin Oil and Gas Inc. Chelsea also directly holds all of the Corporation’s ORRIs and held the Working Interests in PEL 112 and 444 which were sold on October 29, 2014.

Cooper-Eromanga Oil Inc. holds ATP 582 as its sole asset.

Chelsea Oil Australia Pty Ltd. holds the Surat Basin Petroleum Leases: PL 18, PL 40 and PL 280.

Cooper Basin Oil and Gas Inc. has no assets and is not currently active. Chelsea has a 20% minority interest in this company.

1629518 Alberta Ltd. has no assets and is not currently active.

4.D      PROPERTY, PLANT AND EQUIPMENT

            The Company’s principal office is located at 127, 10 th Ave NW, Calgary, Alberta, Canada, T2M 0B4.

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            The Company holds Working Interests and ORRI’s in Queensland, Victoria and South Australia. See Item 4.D “Property, Plant and Equipment – Working Interest Holdings”, Item 4.D “Property, Plant and Equipment – Producing Overriding Royalty Interests” and Item 4.D “Property, Plant and Equipment – Non-Producing Overriding Royalty Interests” below for an itemised listing of the Company’s interests and associated geographic region. Chelsea is an Australian focused exploration, development and production company with approximately 5.2 million net Working Interest acres of land onshore Australia. The Corporation has a portfolio of assets, as follows:

Surat-Bowen Basin: Six existing oil discoveries and one gas pool with independently evaluated reserves.

   

Georgina and Simpson Basins: multi-billion barrel potential in two emerging unconventional resource plays. .

   

Overriding Royalty Interests: In addition to its Working Interest lands, the Corporation also holds an ORRI in more than approximately 11.1 million gross acres (60,000 net acres) in both onshore and offshore basins in Australia.

            During 2016 and 2015, the Company received revenues from six of its ORRIs: PEL 111, PEL 115, ATP 267, ATP 299, ATP 560, and VIC/P54. For further information, see Item 5. “Operating and Financial Review and Prospects – Management’s Discussion and Analysis of Financial Condition and Results of Operation”.

WORKING INTEREST HOLDINGS

License   Basin   Operator   Gross Acres   WI   Net WI Acres  
PL 18   Surat   Chelsea Oil (1)   46,482   100%   46,482  
PL 40   Surat   Chelsea Oil (1 )   18,744   100%   18,744  
PL 280   Surat   Chelsea Oil (1 )   23,308   50%   11,654  
ATP 582   Georgina / Simpson   Cooper-Eromanga Oil (1 )   5,022,000   100%   5,022,000  
PEL 100   Cooper / Eromanga   Cooper Energy   73,143   1.00%   731  
Total           5,183,677       5,099,611  

Note:

1.

Wholly owned subsidiary of Chelsea Oil and Gas

PRODUCING OVERRIDING ROYALTY INTERESTS

License   Basin   Operator   Gross Acres   ORR Interest   Net Royalty Acres  
VIC P54   Gippsland   Nexus Energy   155,676   0.05%   78  
PEL 111 (1)   Cooper   Senex Energy   290,101   0.60%   1,741  
PEL 115   Cooper   Senex Energy   65,730   0.175%   115  
ATP 267   Cooper   Santos   220,800   0.17%   379  
ATP 299   Cooper   Santos   441,600   0.06%   254  
ATP 560   Cooper   First Source   625,600   0.25%   1,564  
Total           1,799,507       4,131  

Note:

1.

1.0% Working Interest only in the Cleansweep field in addition to the ORRI held.

NON-PRODUCING OVERRIDING ROYALTY INTERESTS

License   Basin   Operator   Gross Acres   ORR Interest   Net Royalty Acres  
PEL 88   Cooper   Senex Energy   816,436   0.30%   4,899  
PEL 424   Cooper   Senex Energy   1,516,733   0.10%   1,517  
PEL 444   Cooper   Terra Nova   582,674   0.67%   3,886  
ATP 544   Cooper   Australia Pete   901,600   0.81%   7,285  
ATP 550   Cooper   Discovery Geo   276,000   0.25%   690  
ATP 582   Georgina   Cooper-Eromanga Oil (1)   5,022,000   0.67%   33,698  
ATP 616   Cooper   Sundance Resources   147,200   3.33%   4,907  
ATP 636   Cooper   Santos   640,000   0.50%   3,200  
Total           9,319,969       56,195  

Note:

1.

Wholly-owned subsidiary of Chelsea.

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TOTAL OVERRIDING ROYALTY INTERESTS

  Gross Acres   Avg. ORR Interest   Net Royalty Acres
Producing Overriding Royalty Interests 1,799,507   0.22%   4,131
Non-Producing Overriding Royalty interests 9,319,969   0.60%   56,195
Total Overriding Royalty Interests 11,119,476   0.55%   60,326

ASSET SUMMARY

             Surat-Bowen Basin

            The Surat-Bowen Basin is a combination of Permian and Triassic age sediments of the deeper Bowen Basin, overlain by the Jurassic and Cretaceous strata of the Surat Basin. Because intervals of both sequences are prospective and have produced in close or even over-lying proximity, operators tend to use the two names inter-changeably.

            The Bowen Basin of eastern Queensland is a foreland basin of Early Permian to Middle Triassic age sediments. It occupies about 60,000km2, the southern half of which is covered by the Surat Basin. It has a maximum sediment thickness of about 10,000 metres concentrated in two north-trending depocentres, the Taroom Trough to the east and the Denison Trough to the north-west. Deposition in the basin commenced during an Early Permian extensional phase, with fluvial and lacustrine sediments and volcanics being deposited in a series of half-grabens in the east while in the west a thick succession of coals and nonmarine clastics were deposited. Following rifting, there was a thermal subsidence phase extending from the mid Early to Late Permian, during which a basin-wide transgression allowed deposition of deltaic and shallow marine, predominantly clastic sediments as well as extensive coal measures. Foreland loading of the basin spread from east to west during the Late Permian, resulting in accelerated subsidence, which allowed the deposition of a very thick succession of Late Permian marine and fluvial clastics, again with coal and Early to Middle Triassic fluvial and lacustrine clastics. Sedimentation in the basin was terminated by a Middle to Late Triassic contractional event.

            Over 100 hydrocarbon accumulations have been discovered in the Bowen Basin, of which about one third are producing fields. Accumulations occur throughout the succession, but the most important reservoirs are in the Early Permian and Middle Triassic. Source rocks have been identified throughout the Permian and in the Middle Triassic and are mostly nonmarine. Proven plays comprise mostly anticlinal closures sometimes enhanced by a stratigraphic component, as well as fault rollovers. Other plays are largely untested. The Bowen Basin also has vast coal resources, with major open cut and underground coal mines in the north of the basin. Large volumes of methane gas are held at shallow depths within Permian coals in the north and have potential for coal seam methane developments.

            The Surat Basin is a large, mature, intracratonic, Early Jurassic to Cretaceous basin occupying approximately 300,000km2 of central southern Queensland and central northern New South Wales. It has a maximum sediment thickness of 2500 metres and deposition was relatively continuous and widespread. Deposition in the basin commenced with the onset of a period of passive thermal subsidence of much of eastern Australia. During the Early Jurassic, deposition was mostly fluviolacustrine, while by the Middle Jurassic coal swamp environments predominated over much of the basin, except in the north where fluvial sedimentation continued.

            Towards the end of the Middle Jurassic, fluvial deposition again predominated and continued until the earliest Cretaceous. A marine transgression followed, depositing paralic and marine sediments and reaching its peak in the Aptian. The subsequent regression caused a fairly abrupt return to fluvial, lacustrine and paludal environments before sedimentation ceased in the Aptian. About 100 hydrocarbon accumulations have been discovered in the Surat Basin, of which about half are producing fields. Most accumulations are reservoired in Early Jurassic sands, with occasional gas occurrences in the Middle and Late Jurassic, but all are sourced from the Permian nonmarine sediments of the underlying Bowen Basin. Proven plays comprise mostly low amplitude anticlinal closures occasionally associated with thrust faulting and drapes over basement highs. Because the basin is largely flat-lying and sedimentation widespread and relatively uniform, other types of traps are unlikely to be important. The upper part of the Surat Basin sequence comprises the Great Artesian Basin of Australia, an enormous fresh water resource.

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            Chelsea holds a 100% Working Interest in PL 18 and PL 40 as well as a 50% Working Interest in PL 280. The Corporation is in the process of completing the transfer of the EA for PL 280.

            The Corporation’s Surat-Bowen Basin oil assets comprise six existing oil pools with 14 million barrels of light, high quality (51°), high mobility DPIIP, of which, to date, only 6%, or 770,000 barrels has been recovered. As the oil is 51°, it exhibits high mobility. There is no certainty that it will be commercially viable to produce any portion of the resources. To date, exploration has been directed at finding and drilling structural “highs”, usually the first phase of exploration before more subtle stratigraphic prospects are tested. All production has been primary, meaning that no secondary enhancements such as pressure maintenance, water flooding, etc., have been implemented. Oil is produced to single well batteries and trucked about 30 kilometres to Fairymount where it enters the Santos pipeline carrying oil from the Cooper Basin to Brisbane. The last production from the area was from the Yellowbank Creek pool in 2010.

            Given the low overall recovery to date (0.770 mmbo or 6% of DPIIP) under primary production methods, there is an opportunity for a relatively low risk redevelopment of the proven productive oil pools. There are numerous water-flood projects in Western Canada, including some that recover as high as 40% OOIP. Good reservoir qualities of porosity and permeability, together with the high quality and mobility of the oil suggest that reservoir response should be similar to those observed when similar procedures have been implemented in Western Canada.

            On the PL 40 permit, also in the Surat-Bowen Basin, bypassed gas has been identified in three wells on Chelsea’s lands.

             Georgina and Simpson Basins

            The Georgina Basin is a large (ca. 330,000 km², 5.0mm acres) intracratonic sedimentary basin in central and northern Australia, lying mostly within the Northern Territory and partly within Queensland. It is named after the Georgina River which drains part of the basin. Deposition of locally up to ca. 4 km of marine and non-marine sedimentary rocks took place from the Neoproterozoic to the late Paleozoic (ca. 850-350 Ma). Along with other nearby sedimentary basins of similar age (Amadeus Basin, Officer Basin); the Georgina Basin is believed to have once been part of the hypothetical Centralian Superbasin that was fragmented during episodes of tectonic activity.

            More recently, the Georgina Basin has been recognized as having considerable potential for unconventional hydrocarbons within the Arthur Creek Formation of Middle Cambrian age. This has led to all the prospective parts of the basin now being held under exploration permits and a new phase of exploration is under way. The deepest part of the basin, known as the Toko Syncline, lies within Queensland and is considered by many to have the most hydrocarbon potential.

            The Simpson Basin extends over 100 000 km2 in South Australia, southeast part of Northern Territory, and southwest part of Queensland. Approximately half lies in South Australia. It is a circular, poorly defined depression with one major depo centre, the Poolowanna Trough. The Simpson Basin has a known petroleum system within the Permian and Triassic sequence and recently an operator in the adjacent Northern Territory announced an in-house estimate of 12 to 25 Tcf of prospective unconventional gas resource within its permit. Chelsea does not know if such estimate was prepared by a qualified reserves evaluator or auditor or in accordance with the COGE Handbook. There is no certainty that any portion of the resources will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the resources. Validation of this resource is likely to increase exploration activity in this area. The basin overlies older Pedirka Basin strata, also considered prospective, and is overlain by the younger Eromanga Basin sediments.

            In the Georgina Basin, more specifically the Toko Syncline, three vertical wells have been drilled to basement and one other was abandoned before reaching total depth for mechanical reasons. This well did, however, encounter natural gas which flowed against a full column of drilling fluid at an estimated 200 Mcf per day. This well is important in that it confirms the presence of movable hydrocarbons in the basin. Each of the basement penetrations are on ATP 582 and serve to define the play model and the thermal maturity windows encountered within the Arthur Creek in the wells. These wells are Todd-1 (1991), Netting Fence-1 (1964), Mirrica-1 (1980), and Ethabuka-1 (1974), the well that encountered the gas flow but did not reach what is now the unconventional target. Based on these wells, fairways have been defined within the Toko Syncline as being prospective for oil, gas and liquids, and “dry” natural gas.

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            All previous seismic and drilling was for conventional structural traps, particularly near the basin-defining Toomba Fault. Approximately 200 kilometres of legacy seismic exists on ATP 582 from 1977 through 1981 vintage. This data is of limited value for any possible defining of hydrocarbon indicators but does serve to define gross structural features.

            At the southern portion of ATP 582, thought to contain Simpson Basin strata, management has identified several untested four-way dip closed structures on the basis of similar vintage 2D seismic. No wells have tested this part of ATP 582.

            No reserves are attributed to ATP 582.

             Overriding Royalty Interests

            Chelsea has ORRIs over more than approximately 9.3 million gross acres (60,000 net acres) in the Cooper, Gippsland (Offshore) and Victoria (Offshore VIC P54) basins. These interests have generated small amounts of revenue for the Corporation.

             Outlook

            Along with a 3D seismic survey of the productive trend, Chelsea’s future development plans call for conversion of Yellowbank Creek 1 to a water injection well, re-pressuring the reservoir at least partially, and reestablishing production from Yellowbank Creek 2 and 3. These wells were producing at an approximate 8% oil cut when shut-in, which should be able to be maintained at higher volumes upon re-pressuring and is in line with oil cuts experienced in western Canadian pools such as the Dina and Taber pools in Alberta, Canada.

            Concurrent with this, the already permitted 3D program will further define the existing pools and possibly further develop additional drilling locations, as well as new pool prospects. This improved reservoir definition will also greatly aid in the design and implementation enhanced recovery through additional water-flood and horizontal drilling of the current pools.

            Further, Chelsea believes that similar opportunities exist for further exploitation of mature pools within the basin generally, and has one or more in sight at present.

            See also the information contained under Item 3.D “Risk Factors” and Item 5 “Operating and Financial Review and Prospects”.

4.E      UNRESOLVED STAFF COMMENTS

            Not applicable.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

            The following Management’s Discussion and Analysis (“MD&A”) dated April 28, 2017 is a review of the results of operations and the liquidity and capital resources of Chelsea Oil and Gas Ltd. (“Chelsea” or the “Company”) for the years ended December 31, 2016, 2015 and 2014.

            The audited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”).

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            Certain information contained herein is forward-looking and based upon assumptions and anticipated results that are subject to risks, uncertainties and other factors. Should one or more of these uncertainties materialize or should the underlying assumptions prove incorrect, actual results may vary materially from those expected. For additional information, refer to “Forward Looking Statements”.

             General Discussion

             Georgina Basin

            In 2012, Total entered into the Georgina Basin through a farm-in whereby it would spend up to A$190.0 million by 2016 to earn a 68% Working Interest in an offsetting operators Georgina Basin lands. As well in 2012, Statoil entered into the Georgina Basin through a farm-in whereby it would spend up to A$210.0 million in separate offsetting Georgina Basin lands to earn an 80% Working Interest.

            In 2014, Statoil terminated its farm-in, and in 2017 Total terminated its farm-in. The termination of these farm-ins follows unsuccessful exploration results. Although the Corporation continues to see significant potential in ATP 582, with the termination of these farm-ins its ability to fund future exploration on this concession is in doubt.

             Surat-Bowen Basin

            Chelsea’s lower risk exploitation and development assets in the Surat-Bowen Basin will be the focus of our efforts in the near future as we strive to build cashflow. Our technical team believes that while the Surat-Bowen basins are considered mature by Australian standards, much potential remains for not only secondary and enhanced recovery projects as typically applied in North America, but also for significant low risk exploration and development in areas and formations previously considered uneconomic.

            Further, the fiscal regime for oil and, especially natural gas is very attractive to producers. Unlike North American where natural gas prices have fluctuated wildly the past decade, Australia and particularly Queensland has a long term demand for natural gas to supply its existing and planned LNG exports to Asia. This Asian demand and the under- performance of the coal seam gas sector has resulted in current prices of $8-$10 per GJ.

            The environment for oil is currently subdued due to world pricing but remains attractive longer term. Plans for redevelopment of our light oil assets have been deferred in favour of furthering our natural gas opportunities, as gas markets in Australia remain highly attractive.

             Funding and Capitalization

            While the Company’s commitments are modest considering the scope and potential of its asset base, funding is required to advance the projects. To this end, Chelsea continues its financing process in what is and has been a difficult capital market for junior energy companies. While continuing to assemble an investor group, Chelsea has raised funds necessary to continue operations through a rationalization of certain minor assets including the Company’s non-operated interests in the Cooper Basin and deploying those funds to advance our primary high working interest assets. Response from the investment community continues to be very positive with regard to the Company’s assets and in spite of current challenging market conditions for small cap energy ventures, we have made significant progress and are optimistic that a significant financing can be secured in the near term, sufficient to meet our work obligations and advance our current Surat-Bowen projects to cash generating status. Particulars of any transaction will be released immediately in accordance with applicable securities laws.

             Summary

            Management and the Board continue to believe strongly in the quality of Chelsea’s asset base. Ongoing technical work continues to add value to existing assets and define new opportunities for growth.

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            However without access to capital or a partner to fund the obligations and development of these assets, the company will be unable to realise this value. To that end, the Company’s current principle focus is securing finance or a funding partner.

             Overall Performance

            ACOR was incorporated April 28, 1997 in British Columbia, Canada. On September 27, 2013 ACOR was continued into the province of Alberta. On October 1, 2013, ACOR amalgamated with ITME and was renamed “Chelsea Oil and Gas Ltd.”. The address of the Company’s head office is 127, 10 th Ave NW, Calgary, AB Canada.

            This MD&A and accompanying financial statements for the years ended December 31, 2016, 2015 and 2014 are prepared in accordance with IFRS as the Company is considered a Canadian Reporting Issuer. Chelsea reported under USGAAP and filed as a US Reporting Issuer until June 30, 2012, when the Company became a Foreign Private Issuer under applicable US Securities Laws.

            With the completion of the acquisition of International TME Resources Inc. (“ITME”) on October 1, 2013, the Company became a Canadian Reporting Issuer and files its continuing disclosure obligations required under MI 51-105 Issuers Quoted in the U.S. Over-The-Counter Markets .

             2016 Highlights

            For the year ended December 31, 2016 the Company’s main operations were the advancement of the Company’s fundraising and continued technical development of the portfolio. These efforts have continued through 2017.

             Results of Operations

             Royalty Income

            For the year ended December 31, 2016, the Company received $36,701 (2015 – $68,974, 2014 –$361,990) in freehold royalties from its ORRI both onshore and offshore Australia. The decrease over prior years is attributable to lower commodity prices over the comparative periods.

             General and administrative

            For the year ended December 31, 2016, the Company incurred $186,416 (2015 – $242,410, 2014 – $331,934) in general and administrative (“G&A”) expenses. The decrease over 2015 is attributable to reduced travel, professional and shareholder reporting costs in the current year. In 2014, G&A costs were attributable to professional costs.

             Depletion

            For the year ended December 31, 2016, the Company incurred $112,482 in depletion expense (2015 – $112,482, 2014 – $112,482). Depletion in 2016 is consistent with prior years as there has been no change in the depleatable base and the Company uses straight-line amortization as described in Note 3 of the audited financial statements for the years ending December 31, 2016, 2015 and 2014.

             Finance expense

            For the year ended December 31, 2016, the Company incurred $327,401 in finance expense (2015 – $302,244, 2014 – $259,976). The increase over prior years is attributable to compounding interest on the shareholder loan balance.

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             Expense reimbursements

            During the year, the Company received $87,652 (2015 - $nil, 2014 - $nil) from an arms length party (the “Sponsor”. These receipts relate to ongoing travel and general and administrative expenses the Sponsor has agreed to fund during 2016 and 2017. The purpose of the reimbursements is for facilitating funding and restructuring efforts for the Company. There is no obligation to repay these unsecured advances.

             Foreign exchange (gain) loss

            For the year ended December 31, 2016 the Company experienced a foreign exchange loss of $37,623 (2015 – gain of $125,515, 2014 – gain of $20,002). The loss in the current year is attributable to weakness in the US dollar in the current period. The gains in the prior years were realized on the Company’s accounts payable as both the Australian and Canadian dollars depreciated against the US dollar during the periods.

             Current income tax expense

            For the year ended December 31, 2016, the Company incurred current income tax expenses of $3,369 (2015 – $5,046, 2014 – $12,821). Current income tax expense is derived from withholding taxes on the Company’s overriding and interest revenue received directly from Australian sources. The change over the prior years is commensurate with the change in revenue received from those sources over the same period.

             Net loss

            For the year ended December 31, 2016, the Company incurred a net loss of $542,938 (2015 – $467,693, 2014 – $335,221). The loss in 2016 was attributable to interest expenses and general and administrative costs. The lower loss in 2014 is attributable to significantly higher revenues, reflecting commodity prices during the year.

             Foreign currency translation adjustment

            Both of the Company’s wholly-owned subsidiaries operate exclusively in Australia, and utilize the Australian dollar as their functional currency. Assets and liabilities of the Company’s Australian operations are translated into US dollars at period end exchange rates while revenues and expenses are translated using average rates for the period. Gains and losses from the translation are deferred and included in accumulated other comprehensive loss on the consolidated statements of financial position.

            For the year ended December 31, 2016, the Company’s foreign currency translation adjustment was a loss of $135,245 (2015 – $1,167,320, 2014 – $1,072,350). The adjustment in 2016 is attributable to the 2% decline in the Australian dollar compared to the US dollar over the year. The adjustment in 2015 and 2014 is attributable to the 12% decline in the Australian dollar compared to the US dollar over each comparable year.

Liquidity and Capital Resources

            At December 31, 2016, the Company had $15,341 (2015 – $121,620, 2014 – $463,546) in cash held in the Company’s bank accounts. The Company’s total accounts receivable as at December 31, 2016 was $6,527 (2015 – $9,048, 2014 – $35,852). The Company’s trade accounts payable and shareholder loans outstanding as at December 31, 2016 was $4.9 million (2015 – $4.5 million, 2014 – $4.4 million). The Company’s net working capital deficiency as at December 31, 2016 was $4.7 million (2015 – $4.3 million, 2014 – $3.8 million).

            During 2016 the Company received $87,652 (2015 - $nil, 2014 - $nil) from an arms length party (the “Sponsor”. These receipts relate to ongoing travel and general and administrative expenses the Sponsor has agreed to fund during 2016 and 2017. The purpose of the reimbursements is for facilitating funding and restructuring efforts for the Company. There is no obligation to repay these unsecured advances. Refer to Item 5 for additional disclosures.

            The Company has several projects in development. These include the exploration of the Georgina Basin on ATP 582, the exploitation of the Surat-Bowen Basin oilfields, and the development of the Louise gas field. In aggregate, the Company’s work commitments for these projects is estimated at $19.0 million Australian dollars.

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            The Company has financed its operations to date through the issuance of common shares to founding directors and other shareholders. Refer to 2017 Summary herein and note 2 of the audited consolidated financial statements for the year ended December 31, 2016 for additional discussion of the Company’s liquidity and capital resources. The following table outlines the timing of the Company’s debt and commitments:

Debt /  February August August September August  
Commitment            2016 2020 2024              2029 2031 Total
             
US$            
Shareholder loan 4,201,120 - -                - - 4,201,120
Total US$ 4,201,120 - -                 - - 4,201,120
             
A$            
ATP 582                - 11,000,000 -                - - 11,000,000
PL 18                - - 5,000,000                - - 5,000,000
PL 40                - - - 2,000,000 - 2,000,000
PL 280                - - -                - 1,000,000 1,000,000
Total A$                 - 11,000,000 5,000,000 2,000,000 1,000,000 19,000,000

Plan of Operation and Funding

            The Company plans to seek additional oil and gas concessions in Australia on a ground level basis and will seek partners to join in this process. The Company has been successful in entering into farm-out arrangements to defer the exploration commitments on six Australian concessions to joint venture partners and is confident of being able to repeat this process in the event the Company is successful in acquiring other concessions in Australia.

Material Commitments

            The Company has material financial commitments on several of its working interest properties located in Australia. PL 18, PL40, PL 280 and ATP 582 have expenditure requirements that may exceed the Company’s Carried Working Interest in each of these concessions.

            ATP 582, PL 18 and PL 40 are owned 100% by the Company, PL 280 is 50% owned by Chelsea. Expenditures on these concessions will require additional funding or securing a WI partner. See Item 5. “Operating and Financial Review and Prospects – Contractual Obligations” for additional information.

Purchase of Significant Equipment

            The Company does not intend to purchase any significant equipment during the next 12 months.

Subsequent Events

            No undisclosed subsequent events from December 31, 2016 to the date of this 20-F.

Recent Accounting Pronouncements

            In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (" IFRS 15 "). The new standard is effective for annual periods beginning on or after January 1, 2018. Earlier application is permitted. The standard contains a single model that applies to contracts with customers and two approaches to recognising revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The new standard applies to contracts with customers. It does not apply to insurance contracts, financial instruments or lease contracts, which fall in the scope of other IFRSs. The Company does not expect the standard to have a material impact on the financial statements.

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            In July 2014, the IASB issued the complete IFRS 9 (" IFRS 9 (2014) "). The mandatory effective date of IFRS 9 is for annual periods beginning on or after January 1, 2018 and must be applied retrospectively with some exemptions. Early adoption is permitted. The restatement of prior periods is not required and is only permitted if information is available without the use of hindsight. IFRS 9 (2014) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2014), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. The standard introduces additional changes relating to financial liabilities. It also amends the impairment model by introducing a new ‘expected credit loss’ model for calculating impairment. IFRS 9 (2014) also includes a new general hedge accounting standard which aligns hedge accounting more closely with risk management. This new standard does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness; however it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging relationship. Special transitional requirements have been set for the application of the new general hedging model. The extent of the impact of adoption of the standard has not yet been determined.

            In January 2016, the IASB issued the complete IFRS 16 Leases (" IFRS 16 ") which replaces IAS 17, Leases. The effective date of IFRS 16 is for annual periods beginning on or after January 1, 2019 and early adoption is permitted. Under IFRS 16, a single recognition and measurement model will apply for lessees which will require recognition of assets and liabilities for most leases. The extent of the impact of adoption of the standard has not yet been determined.

Dividend Policy

            No dividends have ever been declared by the Board of Directors on our common stock. Our losses do not currently indicate the ability to pay any cash dividends, and the Company does not indicate the intention of paying cash dividends on our common stock in the foreseeable future.

Securities Authorized For Issuance Under Compensation Plans

             Share options

            The Company has a share option plan (“ Option Plan ”) whereby it can issue up to 10% of its common shares to directors, management and consultants at a price in the context of the market price of the shares, or such a price as determined by the directors. As at April 28, 2017, the Company has not issued any options pursuant to the Option Plan.

             Warrants

            On January 9, 2013, the Company issued 5.0 million warrants to directors, officers and consultants. These performance warrants have an exercise price of $0.25 per warrant, but are only exercisable if the share price of the Company exceeds $1.00 per share for ten consecutive trading days, with a minimum of 100,000 shares traded over the same period. On January 18, 2015, the Company extended the warrants for two years, expiring January 18, 2017. All other terms remained the same. On January 18, 2017 all 5.0 million of the warrants expired out of the money.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Overview

            The Company's primary business consists of the exploration and, if successful, the development of oil and gas properties. There are a number of inherent risks associated with the exploration, development and production of oil and gas reserves, many of these risks are beyond the control of the Company.

            Success in the junior oil and gas sector is measured by a Company’s ability to raise funds and the ability to secure properties of merit. Not all of these factors are within management’s control. The ability to raise funds is in part dependent on the state of the junior resource stock market, which in turn is dependent on the economic climate, oil and gas prices and perceptions as to which way the market is headed. The ability to secure properties of merit is in large part dependent on management’s contacts and the vitality of the sector.

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            For a detailed discussion of the Company’s risk factors, refer to 3.D “Risk Factors”.

Business Risks and Risk Mitigation

            There are a number of risks facing participants in the upstream oil and gas industry. Some of the risks are common to all businesses, while others are specific to the sector. The most important of these risks are set out below, together with the strategies Chelsea employs to mitigate and minimize these risks.

             Inherent Industry Risks – Risks of Failing to Discover Economic Reserves Additions

            The Company’s strategies include focusing on oil and gas prone selected areas in Australia, utilizing a team of highly qualified professionals with expertise and experience in these areas, expanding operations in core areas, continuously assessing new exploration opportunities to complement existing activities and striving for a balance between higher risk exploratory drilling, and lower risk development drilling.

            Beyond exploration risk, there is the potential that the Company’s oil and natural gas reserves may not be economically produced at prevailing prices. Chelsea minimizes this risk by generating exploration prospects internally, targeting high quality projects and by attempting to operate the projects and the infrastructure used to access the sales markets.

             Financial Commodity Price, Capital Expenditure Requirements, Liquidity and Environmental Risks

            Commodity prices are driven by supply, demand and market conditions outside the Company’s influence and control. Chelsea manages this risk by constantly monitoring the forecasted price given by aggregators, banks, and third party engineering firms.

            Chelsea manages capital expenditures by two separate tracking systems: a historical accounting system that records the actual costs and a perpetual forecasting model that is constantly updated based on real-time information. Chelsea’s capital investment process is based on risk analysis to ensure capital expenditures balance the objectives of immediate cash flow growth in development activities and future cash flow from the discovery of reserves through exploration.

            It is likely that in the future, Chelsea will be required to raise additional capital through debt and equity financings in order to fully realize the Company’s strategic goals and business plans. Chelsea’s ability to raise additional capital will depend on a number of factors, such as general economic and market conditions that are beyond the Company’s control. If the Company is unable to obtain additional financing or to obtain it on favourable terms, Chelsea may be required to forego attractive business opportunities. However, as Chelsea strives to be the operator of virtually all of its operations at a high working interest position, the Company should be able to be flexible in the timing of operations to ensure a continued strong financial position. The Company is committed to maintaining a strong balance sheet combined with an adaptable capital expenditures program that can be adjusted to capitalize on or reflect acquisition opportunities or a tightening of liquidity sources if necessary.

            The Company manages operational risks by employing skilled professionals utilizing leading-edge technology and conducting regular maintenance and training programs. Chelsea has updated its operational emergency response plan to address these operational issues. In addition, a comprehensive insurance program is maintained to mitigate risks and protect against significant losses where possible. Chelsea operates in accordance with all applicable environmental legislation and strives to maintain compliance with such regulations.

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CONTRACTUAL OBLIGATIONS

            The table below outlines our contractual obligations as at December 31, 2016 in millions of Australian dollars:

    Minimum Work  
  Current Commitment  
License Phase Expiry (A$ million) License Term
PL 18 July 2020 AUD 5.0 August 2024
PL 40 September 2018 AUD 2.0 September 2029
PL 280 August 2015 AUD 1.0 August 2031
ATP 582 August 2016 AUD 11.0 August 2020
    AUD 19.0  

OFF-BALANCE SHEET ARRANGEMENTS

            Chelsea does not have any off-balance sheet arrangements.

RELATED PARTY TRANSACTIONS

            Concurrent with the acquisition of the assets in the Surat Basin in Australia, on March 1, 2012 the Company agreed to pay certain vendors $3.0 million within 12 months and 8.57 million shares of the Company. The loan was non-interest bearing and was recorded at net present value of $2,770,084 and is secured by the Surat assets.

            At January 1, 2013 the net present value of the loan was $2,960,396. On March 25, 2013, the Company agreed to amend the terms of the loan so that interest would accrue at 8% per annum, with interest accruing from September 1, 2012.

            On February 28, 2015, the Company and shareholder agreed to extend the loan to February 28, 2016. At the date of these financial statements the shareholder has the right to demand repayment, the debt continues to accrue interest on the same terms as previously agreed. The Company is in discussions with the debtholder to further extend maturity of the debt.

            During 2011, the Company borrowed $243,500 from two stockholders to fund the deposit for one of its exploration concessions in Australia. In the third quarter of 2012, $109,250 plus accrued interest of $6,958 was repaid. In the third quarter of 2014, the Company paid $151,470, and the stockholders agreed to forgive the remaining $31,494 outstanding.

            On January 9, 2013, the Company issued 5.0 million warrants to directors, officers and consultants. These performance warrants have an exercise price of $0.25 per warrant, but are only exercisable if the share price of the Company exceeds $1.00 per share for ten consecutive trading days, with a minimum of 100,000 shares traded over the same period. On January 18, 2015, the Company extended the warrants for two years, expiring January 18, 2017. All other terms remained the same.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

            The preparation of the consolidated financial statements in conformity with IFRS requires management to make estimates and use judgment regarding the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as at the date of the consolidated financial statements and the reported amounts of revenues, expenses and impairment during the year. By their nature, estimates are subject to measurement uncertainty and changes in such estimates in future periods could require a material change in the financial statements. Accordingly, actual results may differ from the estimated amounts as future confirming events occur. Significant estimates and judgments made by management in the preparation of these consolidated financial statements are as follows:

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             Recoverability of asset carrying values

            The recoverability of development and production asset carrying values are assessed at a cash generating unit (“CGU”) level. Determination of what constitutes a CGU is subject to management judgments. The asset composition of a CGU can directly impact the recoverability of the assets included therein. Judgments are required to assess when impairment indicators exist and impairment testing is required. The key estimates used in the determination of cash flows from oil and natural gas reserves include the following:

            Reserves – Assumptions that are valid at the time of reserve estimation may change significantly when new information becomes available. Changes in forward price estimates, production costs or recovery rates may change the economic status of reserves and may ultimately result in reserves being restated. The Company has obtained an independently evaluated reserves report in respect of certain of its assets which is complaint with the Canadian Securities Administrators National Instrument 51-101: Standards for Disclosure for Oil and Gas Activities.

            Oil and natural gas prices – Forward price estimates are used in the cash flow model. Commodity prices can fluctuate for a variety of reasons including supply and demand fundamentals, inventory levels, exchanges rates, weather, and economic and geopolitical factors.

            Discount rate – The discount rate used to calculate the net present value of cash flows is based on estimates of an approximate industry peer group weighted average cost of capital. Changes in the general economic environment could result in significant changes to this estimate.

             Depletion and depreciation

            Amounts recorded for depletion and depreciation and amounts used for impairment calculations are based on estimates of total proved and probable petroleum and natural gas reserves and future development capital. By their nature, the estimates of reserves, including the estimates of future prices, costs and future cash flows, are subject to measurement uncertainty. Accordingly, the impact to the consolidated financial statements in future periods could be material.

            Market conditions, discovery and analysis of site conditions and changes in technology. Other provisions are recognized in the period when it becomes probable that there will be a future cash outflow.

             Share-based compensation

            Compensation costs recognized for share based compensation plans are subject to the estimation of what the ultimate payout will be using pricing models such as the Black-Scholes model which is based on significant assumptions such as volatility, dividend yield and expected term. Several compensation plans are also performance based and are subject to management’s judgment as to whether or not performance criteria will be met.

             Deferred taxes

            Tax interpretations, regulations and legislation in the various jurisdictions in which the Company operates are subject to change. As such income taxes are subject to measurement uncertainty. Deferred income tax assets are assessed by management at the end of the reporting period to determine the likelihood that they will be realized from future taxable earnings.

             Financial Instruments

            A financial instrument is any contract that gives rise to a financial asset of one party and a financial liability or equity instrument of another party. A financial asset is any asset that is (i) cash; (ii) a contractual right to receive cash or another financial asset from another party; (iii) a contractual right to exchange financial instruments with another party under conditions that are potentially favourable to the entity; or (iv) an equity instrument of another entity. A financial liability is any liability that is a contractual obligation to (i) deliver cash or another financial asset to another party; or (ii) exchange financial instruments with another party under conditions that are potentially unfavourable to the entity. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

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            As at December 31, 2016, the Company’s financial instruments are cash, accounts receivable and accounts payable and accrued liabilities and shareholder loans. The carrying amounts reflected in the balance sheet are carrying amounts and approximate their fair values due to the short-term nature and negligible credit losses.

            The Company does not use derivative instruments or hedges to manage risks because the Company’s exposure to credit risk and interest rate risk is insignificant.

ITEM 6. DIRECTORS AND SENIOR MANAGEMENT

6.A      DIRECTORS AND SENIOR MANAGEMENT

            The following table sets out the names and municipalities of residence of the directors and executive officers of the Corporation, their present position(s) and offices with the Corporation, their principal occupations during the last five years and their holdings of Common Shares as at the date hereof.

            The term of office of the directors expires annually at the time of the Corporation’s annual shareholder meeting or when or until their successor is duly appointed or elected. The term of office of the Corporation’s executive officers expires at the discretion of the Corporation’s directors.

Name, Residence and Position   Principal Occupation For The Past Five Years   Director/Officer Since
William H. Petrie Sr. (3)
Cochrane, Alberta
Executive Chairman

Executive Chairman and a Director of Chelsea since March 1, 2012 and Director of Chelsea Oil Australia Pty since November 2011. Chief Executive Officer and Director of Birch Lake Energy Inc. since December 5, 2007.

March 1, 2012 (Director) October 1, 2013 (Executive Chairman)

 

 

 

 

 
Jesse D. Meidl (1)
Calgary, Alberta
Chief Executive Officer

Chief Executive Officer of Chelsea since January 2014, Vice President, Finance and Chief Financial Officer of Caithness Petroleum Limited April 2010. Investment Banker with Westwind Partners and Thomas Weisel Partners International from June 2007.

March 1, 2012 (Director) January 30, 2014 (Chief Executive Officer)

 

 

 

 

 
William H. Petrie, Jr.
Calgary, Alberta
Chief Exploration Officer

Chief Exploration Officer, Former Vice-President Exploration for Windtalker Energy Corp., Former Technical Manager at ENVOI Ltd., UK based firm providing marketing and A&D services.

October 1, 2013

 

 

 

 

 
Yves Merer (1)(2)
Dubai, UAE
Independent Director

Chief Executive Officer and Director of Caithness Petroleum Limited from August 2011 – December 2013. Prior thereto, consultant from June 2010 – July 2011 in respect of the Middle East and North Africa. Country Chairman of Royal Dutch Shell plc companies in Iran.

October 1, 2013

 

 

 

 

 
Stewart Gibson (2)(3)
Montrose, Scotland
Independent Director

Director and advisor of Sterling Resources Ltd. from May 2010- May 2013. Prior thereto, Managing Director, Chief Operating Officer, President and Chief Executive Officer of Sterling Resources Ltd. from 1999 to May 2010

October 1, 2013

 

 

 

 

 
Toby Pierce (1)(2)(3)
Vancouver, BC
Independent Director

Chief Executive Officer of Taq Oil Ltd. Since June 2015. Chairman and Director of Crest Petroleum Corp. since May 2012. Prior thereto Partner and Senior Oil Equity analyst with GMP Securities LP and Tristone Capital Global Inc. in London, England

October 1, 2013

Notes:

1.

Member of the Audit Committee.

2.

Member of the Corporate Governance and Compensation Committee.

3.

Member of the Reserves Committee.

             Audit Committee Financial Expert

            Our board of directors has determined that Jesse Meidl possesses specific accounting and financial management expertise, that he is the audit committee financial expert as defined by the U.S. Securities and Exchange Commission, and that he is independent within the meaning of the rules of the NYSE. Our board of directors has also determined that other members of our audit committee have sufficient experience and ability in finance and compliance matters to enable them to adequately discharge their responsibilities.

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             Cease Trade Orders

            To the knowledge of the Corporation, other than as disclosed below, no director or executive officer is, as of the date of this Form 20-F, or was within 10 years prior to the date of this Form 20-F, a director, chief executive officer or chief financial officer of any company (including the Corporation) that: (i) was subject to a cease trade order, an order similar to a cease trade order or an order that denied the Corporation access to any exemption under securities legislation and which order was in effect for a period of more than 30 consecutive days while he was acting in the capacity as director, chief executive officer or chief financial officer of such company; or (ii) was subject to any of the foregoing orders for a period of more than 30 consecutive days after he ceased to be a director, chief executive officer or chief financial officer of such company and which resulted from an event that occurred while he was acting in such capacity.

            William Petrie Sr. and Jesse Meidl were each directors of Birch Lake Energy Inc (“ Birch Lake ”), which was subject to cease trade orders in the province of Alberta for failure to file financial statements for the financial year ended December 30, 2014 and subsequent periods. The Toronto Stock Exchange (“ TSX ”) delisted Birch Lake’s common shares for failure to meet the continue disclosure obligations of the TSX on April 5, 2015.

            A cease trade order was issued by the British Columbia Securities Commission (“ BCSC ”) under Section 164 of the Securities Act (British Columbia) against ITME on February 18, 1999 for failure to file certain continuous disclosure documents. Upon completion of the Arrangement, such cease trade order applies in the province of British Columbia to Chelsea. On June 1, 2015, the Corporation announced that the BCSC granted a full revocation of the cease trade order.

             Bankruptcies

            To the knowledge of the Corporation, other than as disclosed below, no director, executive officer or shareholder holding a sufficient number of securities to affect materially the control of the Corporation, is, as of the date of this Form 20-F, or was within 10 years prior to the date of this Form 20-F, a director or executive officer of any company that, while such person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver-manager or trustee appointed to hold its assets.

            To the knowledge of the Corporation, no director or executive officer of the Corporation, or shareholder holding a sufficient number of securities to affect materially the control of the Corporation has, within the 10 years before the date of this Form 20-F, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director, executive officer or Shareholder.

            Stewart Gibson resigned from the board of Petro Ventures International Limited (“ PVIL ”) in March 2013. PVIL is incorporated in Australia and on 13 September 2013, Administrators, Scott Langdon & Cliff Rocke of Korda Mentha, were appointed by the PVIL board.

             Penalties or Sanctions

            To the knowledge of the Corporation, no director or executive officer of the Corporation, or shareholder holding a sufficient number of securities to affect materially the control of the Corporation has been subject to any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority, or has been subject to any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.

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             Conflicts of Interest

            To the knowledge of the Corporation, there are no conflicts of interest between the Corporation and its officers, Board of Directors and senior management.

6.B      COMPENSATION

            The remuneration of directors and key executives is determined by the Board of Directors having regard to the performance of individuals and market trends. During 2016, 2015 and 2014, the Company did not incur any salaries and no key management or Director received any salary or consulting fees.

6.C      BOARD PRACTICES

            Each director holds office until the next annual general meeting of the Company unless his or her office is earlier vacated in accordance with the Articles of the Company (the “Articles”) or the ABCA.

            During the most recently completed fiscal year, there were no arrangements (standard or otherwise) under which directors of the Company were compensated by the Company or its subsidiaries for services rendered in their capacity as directors, nor were any amounts paid to the directors for committee participation or special assignments. There were no arrangements under which the directors of the Company would receive compensation or benefits in the event of the termination of that office.

            The current members of the Audit Committee are Messrs. Pierce (Chairman), Merer and Meidl, all of whom are “financially literate” and each of Messrs. Pierce and Merer are considered to be “independent” under NI 52-110. Mr. Meidl is the Chief Executive Officer of the Corporation and is therefore not considered to be independent. The audit committee is responsible for selecting, evaluating and recommending the Company’s auditors to the Board of Directors for shareholder approval; evaluating the scope and general extent of the auditors’ review; overseeing the work of the auditors; recommending the auditors’ compensation to the Board of Directors; and assisting with the resolution of any disputes between management and the auditors regarding financial reporting. The audit committee is also responsible for reviewing the Company’s annual and interim financial statements and recommending their approval to the Board of Directors; reviewing the Company’s policies and procedures with respect to internal controls and financial reporting; and establishing procedures for dealing with complaints regarding accounting, internal controls or auditing matters.

6.D      EMPLOYEES

            The Company does not have any full-time employees. The Company also engages consultants and professionals on an as needed basis.

6.E      SHARE OWNERSHIP

            As of the date of this Form 20-F, the Corporation’s directors and executive officers, including the directors and officers of the Corporation’s subsidiaries, as a group beneficially own, directly or indirectly, or exercise control or direction over, an aggregate of 14,171,400 of the issued and outstanding Common Shares representing 22.1% of the outstanding Common Shares.

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7.A      MAJOR SHAREHOLDERS

            The following table sets forth information regarding the beneficial ownership of the common stock of the Company as of April 26, 2016 by each of the Company’s officers and directors, each person who is known by the Company to own beneficially more than 5% of the outstanding common stock and all officers and directors of the Company as a group. The title of the class is common stock, no par value.

    # of Shares    
    Beneficially   Percentage of
Name and Address of Stockholder   Owned   Class
         
Robert Kamon   5,012,717   7.72%
PO Box 1629        
Cisco TX 76437        
USA        
         
Brisbane Petroleum Ltd.   4,668,319   7.32%
65 Burswood Road        
Burswood WA 6100        
Australia        
         
Ely Sakhai   3,801,571   5.93%
10 Windsor Drive        
Old Westbury NY 11568        
USA        
         
Jesse Meidl   3,771,400   5.89%
127 – 10 th Avenue NW        
Calgary, Alberta, Canada T2M 0B4        
         
William Petrie, Sr.   3,700,000   5.78%
P. O. Box 1359        
Cochrane, Alberta Canada T4C 1B3        
         
William Petrie, Jr.   3,700,000   5.78%
P. O. Box 1359        
Cochrane, Alberta Canada T4C 1B3        

            Note: The stockholders identified in this table have sole voting and investment power with respect to the shares beneficially owned by them.

            The shareholders listed in the table above (i) have no rights to acquire additional shares through options, warrants, rights, or conversion privileges within the next sixty days, and (ii) do not have voting rights different from other holders of our common shares.

            As of April 28, 2017, 31% shares of the Company’s outstanding common stock were held by 339 holders of record in the United States, not including The Depository Trust Company (“DTC”). As of April 28, 2017, DTC was the holder of record of 16.1 million shares.

7.B      RELATED PARTY TRANSACTIONS

             Shareholder loans

            The Company’s shareholder loans are described in note 8 on the audited consolidated financial statements for the year ended December 31, 2016. The loans were negotiated between the Company and the shareholders on terms comparable to arms-length transactions of similar type. The fair value of the shareholder loans approximates their carrying value at December 31, 2016 and 2015.

            For disclosure about common shares awarded to directors, see Item 5. “Operating and Financial Review and Prospects – Related Party Transactions” and Item 6.B “Compensation”.

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7.C     INTEREST OF EXPERTS AND COUNSEL

            No director, officer or employee of any of the experts referred to herein is or is expected to be elected, appointed or employed as a director, officer or employee of Chelsea or of any associate or affiliate of Chelsea.

ITEM 8. FINANCIAL INFORMATION

8.A    CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

           Please see Item 18. “Financial Statements” for additional information required to be disclosed under this Item.

8.B    SIGNIFICANT CHANGES

            Please see Item 3. “Key Information”, Item 4 “Information on the Company” and Item 5. “Operating and Financial Review and Prospects” for additional information.

ITEM 9. THE OFFER AND LISTING

9.A      PRICING HISTORY

            The principal trading market for the common equity securities of the Company is the National Association of Securities Dealers OTC Quotation Board (the “ OTCQB ”) quotation system under the symbol COGLF. These quotations reflect inter-dealer prices, without retail mark-up, mark- down or commissions, and may not represent actual transactions.

            The following table summarizes the annual high and low market prices for the five most recent full financial years:

  US$
  High Low
2016 0.04 0.01
2015 0.11 0.01
2014 0.30 0.04
2013 0.35 0.04
2012 0.10 0.35

            The following table summarizes the quarterly high and low market prices for each full financial quarter over the two most recent full financial years:

  2016 2015
US$ High Low High Low
1st Quarter 0.04 0.01 0.10 0.04
2nd Quarter 0.02 0.01 0.11 0.04
3rd Quarter 0.02 0.01 0.10 0.04
4th Quarter 0.02 0.01 0.08 0.01

            The following table summarizes monthly high and low market prices for each of the most recent six months:

  US$
  High Low
April 2017 0.01 0.01
March 2017 0.01 0.01
February 2017 0.01 0.01

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January 2017 0.01 0.01
December 2016 0.01 0.01
November 2016 0.01 0.01

     The approximate number of securities holders of record of the Company on April 28, 2017 was 390 of record, which does not include stockholders whose shares are held in street or nominee names. We have no outstanding stock options. See Item 5. “Operating and Financial Review and Prospects – Warrants” for additional information.

9.B      PLAN OF DISTRIBUTION

            Not applicable.

9.C      MARKET

            Our common shares are listed on the OTCQB under the symbol COGLF.

9.D      SELLING SHAREHOLDERS

            Not applicable.

9.E      DILUTION

            Not applicable.

9.F      EXPENSES OF THE ISSUE

            Not applicable.

ITEM 10. ADDITIONAL INFORMATION

10.A    SHARE CAPITAL

            Not applicable.

10.B    ARTICLES OF AMALGAMATION

            The Company is registered under the ABCA. The Articles do not contain any limitations on the Company’s objects or purposes.

            With respect to directors, under the Articles, a director who is in any way, directly or indirectly, interested in an existing or proposed contract or transaction with the Company or who holds any office or possesses any property whereby, directly or indirectly, a duty or interest might be created to conflict with his or her duty or interest as a director must disclose the nature and extent of his or her interest in such contract or transaction or of the conflict or potential conflict with his or her duty and interest as a director, as the case may be. An interested director can vote on only a limited number of such matters (securing a loan to the Company, a contract with an affiliate of which a director is a director or officer, a contract to subscribe for or underwrite debentures to be issued, a contract where all other directors are also interested in the contract, compensation of the directors or insurance or indemnity) provided the interest is disclosed. Otherwise, even with disclosure of the interest, such a director cannot vote on a material contract or proposed material contract.

            Subject to the ABCA, there is no restriction in the Articles on the power of the board of directors to have the Company borrow money, issue debt obligations, secure debt or other obligations of the Company or give financial assistance to any person. The Articles contain no provision for the retirement or non-retirement of directors under an age limit requirement. A director is not required to hold any shares of the Company in order to be a director.

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            The Articles provide for the issuance of an unlimited number of common shares, without par value, and an unlimited number preferred shares, without par value. All holders of common shares have equal voting rights (one vote per share), equal rights to dividends when and if declared, and equal rights to share in assets upon liquidation of the Company. The common shares are not subject to any redemption or sinking fund provisions or any purchase or pre-emptive rights. All issued and outstanding shares are fully paid and non-assessable securities.

            The Company may alter the Articles, by special resolution, to create, define and attach special rights or restrictions to any common shares as well as to vary or abrogate any special rights and restrictions attached to any common shares.

            An annual meeting of shareholders must be called by the board of directors not later than 15 months after the last annual meeting. The directors at any time may call an extraordinary general meeting of shareholders. Notice of any meeting must be sent in accordance with the ABCA. All shareholders entitled to vote are entitled to be present at a shareholders meeting. A quorum is the presence in person or by proxy of the holders of at least 10% of the issued shares entitled to be voted at the meeting.

            Except under the Investment Canada Act (the “ICA”), there are no limitations specific to the rights of non-Canadians to hold or vote our shares under the laws of Canada or our organizational documents. The ICA requires a non-Canadian making an investment which would result in the acquisition of control of a Canadian business, the gross value of the assets of which exceed certain threshold levels or the business activity of which is related to Canada’s cultural heritage or national identity, to either notify, or file an application for review with, Investment Canada, the federal agency created by the ICA. The notification procedure involves a brief statement of information about the investment on a prescribed form which is required to be filed with Investment Canada by the investor at any time up to 30 days after implementation of the investment. It is intended that investments requiring only notification will proceed without intervention by government unless the investment is in a specific type of business related to the scope of the ICA. If an investment is reviewable under the ICA, an application for review in the prescribed form normally is required to be filed with Investment Canada before the investment is made and it cannot be implemented until completion of review and Investment Canada has determined that the investment is likely to be of net benefit to Canada. If the agency is not so satisfied, the investment cannot be implemented if not made, or if made, it must be unwound.

10.C    MATERIAL CONTRACTS

            Except as set forth below, no director or executive officer of the Corporation or a person or company that beneficially owns, or controls or directs, directly or indirectly, more than ten percent (10%) of any class or series of voting securities of the Corporation, or any associate or affiliate of any such person, has had any material interest, direct or indirect, in any transaction within the three (3) most recently completed financial years or the current financial year that has materially affected or is reasonable expected to materially affect the Corporation.

            Each of Jesse Meidl, William H. Petrie, Sr. and William H. Petrie, Jr. were directors, officers and significant shareholders of 1629518 Alberta Ltd., which company was acquired by Chelsea in exchange for the issuance of an aggregate of 13,278,571 Common Shares on February 29, 2012. Concurrently with such acquisition, Chelsea acquired a 100% Working Interest in PL 18 and 40 and a 50% Working Interest in PL 280 and completed the Non-Brokered Private Placement. Each of Messrs. Meidl and Petrie, Sr. were also added to the Board of Directors on such date.

            On November 17, 2011, 1629518 Alberta Ltd. (“ Newco ”), the Company and the registered and beneficial owners of all the issued and outstanding shares of Newco (the “ Newco Securityholders ”) entered into a share exchange agreement (the “ Share Exchange Agreement ”). Pursuant to the Share Exchange Agreement, the Company and the Newco Securityholders exchanged common shares on a one for one basis. The common shares of the Company that were issued pursuant to the Share Exchange Agreement were subject to an indefinite hold period in Canada. The Newco Securityholders were required to surrender the certificates representing their shares and, in return, were entitled to receive a certificate representing the Company's common shares. From the date of the Share Exchange Agreement until the date of closing, the Company had to use its commercially reasonable efforts to conduct its business in the ordinary course, as well as obtain all necessary regulatory approvals and financing.

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            On November 17, 2011, Brisbane Petroleum Ltd., Delbaere Associates Pty. Limited (both parties together, the “ Vendor ”), Chelsea Oil Australia Pty Ltd (the “ Purchaser ”) and the Company entered into a purchase and sale agreement (the “Purchase and Sale Agreement”). Pursuant to the Purchase and Sale Agreement, the Vendor sold and transferred certain assets to the Purchaser in exchange for the Company issuing a total of 8,571,429 of its common shares to the Vendor. In order to close the transaction certain conditions were to be met, including obtaining certain approvals and consents, passing of certain resolutions and the completing of financing.

10.D    EXCHANGE CONTROLS

            There are currently no governmental laws, decrees, regulations or other legislation of Canada or the United States which restrict the import or export of capital or the remittance of dividends, interest or other payments to non-residents of Canada or the United States holding our securities, except as otherwise described in this annual report on Form 20-F under Item 10.E “Taxation.”

10.E    TAXATION

            As a result of its Overriding Royalty Interests attributable to properties outside the United States, the Company is subject to the imposition of taxes by foreign governments upon the Company’s income derived from such foreign jurisdictions. These taxes are of various types, with differing tax rates, and are subject to change. Generally, the Company’s income from a foreign jurisdiction will be taxed in the same manner as that for other companies operating in the jurisdiction, but discriminatory taxation by a particular jurisdiction may occur. The current non-resident corporate income tax rate in Australia, for Overriding Royalty Interests, is 30%.

            As a Canadian corporation, the Company is liable for income taxes under the laws of Canada. Under Canadian law the Company’s Australian-source income is subject to a 25% tax (on Canadian income). We believe the 30% Australian tax should be a partial credit toward the payment of the 25% Canadian tax under double taxation treaties between the countries.

            The Company is taxable in the U.S. on U.S. source income. Because there has been neither U.S. source net income nor any income effectively connected with a U.S. trade or business, there have been no U.S. taxes incurred to date.

10.F    DIVIDENDS AND PAYING AGENTS

            Not applicable.

10.G    STATEMENT BY EXPERTS

            Not applicable.

10.H    DOCUMENTS ON DISPLAY

            Any statement in this Form 20-F about any of our contracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to this Form 20-F, the contract or document is deemed to modify the description contained in this Form 20-F. You must review the exhibits themselves for a complete description of the contract or document.

            We are subject to the information filing requirements of the Exchange Act, and accordingly are required to file periodic reports and other information with the SEC. As a foreign private issuer under the SEC’s regulations, we file annual reports on Form 20-F and other reports on Form 6-K. The information disclosed in our reports may be less extensive than that required to be disclosed in annual and quarterly reports on Forms 10-K and 10-Q required to be filed with the SEC by U.S. issuers.

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            Moreover, as a foreign private issuer, we are not subject to the proxy solicitation or disclosure requirements under Section 14 of the Exchange Act, and our directors and principal shareholders are not subject to the insider short swing profit reporting and recovery rules under Section 16 of the Exchange Act. Our SEC filings are available at the SEC’s website at www.sec.gov. You may also read and copy any document we file with the SEC at the public reference facilities maintained by the SEC at SEC Headquarters, Public Reference Section, 100 F Street, N.E., Washington D.C. 20549. You may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330.

10.I SUBSIDIARY INFORMATION

            Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT NON-PRODUCT RELATED MARKET RISK

            See Item 5. “Operating and Financial Review and Prospects – Quantitative and Qualitative Disclosures About Market Risks.”

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

            Not applicable.

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PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

            None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

            None.

ITEM 15. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

            In connection with the preparation of this Form 20-F, an evaluation was carried out by our management, with the participation of the Chief Executive Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“ Exchange Act ”)) as of December 31, 2016. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer, to allow timely decisions regarding required disclosures.

            Based on that evaluation, our management concluded that our disclosure controls and procedures were effective in reporting information required to be disclosed within the time periods specified in the SEC’s rules and forms.

Management’s Annual Report on Internal Control Over Financial Reporting

            Management of our company is responsible for establishing and maintaining adequate internal control over financial reporting. Our company’s internal control over financial reporting is a process, under the supervision of the Chief Executive Officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with IFRS accounting principles. Internal control over financial reporting includes those policies and procedures that:

  • Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets;

  • Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the Board of Directors; and

  • Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

            Our management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management concluded that there was no material weakness in our internal controls over financial reporting, and accordingly, our controls are effective.


            Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Report of Independent Registered Chartered Accountants

            This Form 20−F does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm under confirming rules of the SEC adopted pursuant to the 2010 Dodd−Frank Wall Street Reform and Consumer Protection Act.

Changes in Internal Control

            There was no change in our internal control over financial reporting during the year ended December 31, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16. AUDIT COMMITTEE FINANCIAL EXPERTS

16.A    AUDIT COMMITTEE FINANCIAL EXPERTS

            The Audit Committee has been structured to comply with the requirements of Canadian National Instrument 52- 110 - Audit Committee (“ NI 52-110 ”) as it relates to OTC reporting issuers. The Board has determined that the Audit Committee members have the appropriate level of financial understanding and industry specific knowledge to be able to perform the duties of the position and in particular are financially literate as defined in NI 52-110.

            The Audit Committee periodically assesses the adequacy of procedures for the public disclosure of financial information and review, on behalf of the Board, and reports to the Board the results of its review and its recommendations regarding all material matters of a financial reporting and audit nature, including, but not limited to:

oversight of the nature and scope of the annual audit;
oversight of management’s reporting on internal accounting standards and practices; and
review of financial information, accounting systems and procedures, financial reporting and financial statements.

The primary objectives of the Audit Committee are as follows:

assist directors in meeting their responsibilities (especially for accountability) in respect of the preparation and disclosure of the financial statements of the Corporation and related matters;
provide better communication between directors and external auditors;
enhance the external auditor’s independence;
increase the credibility and objectivity of financial reports; and
strengthen the role of the outside directors by facilitating in-depth discussions between directors on the Audit Committee, management and external auditors.

            The Audit Committee ensures satisfactory procedures for (i) receipt, retention and treatment of complaints received by the Corporation regarding any accounting, internal accounting controls or auditing matters and (ii) the confidential anonymous submission of concerns by employees regarding questionable accounting or auditing matters. The Board is kept informed of the Audit Committee’s activities by a report delivered at each regular meeting of the Board of Directors.

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            The Audit Committee shall recommend the appointment and terms of engagement of the external auditor annually and reviews and evaluates the external auditor. The external auditor reports directly to the Audit Committee. In addition, the Audit Committee pre-approves non-audit services undertaken by the external auditor and on an annual basis, reviews and discusses with the external auditors all significant relationships such auditors have with the Corporation to determine the auditors’ independence.

            The Audit Committee has direct responsibility for overseeing the work of the external auditor engaged for the purpose of preparing or issuing an auditor’s report or performing other audit, review or attest services, including the resolution of disagreements between the external auditor and management.

            The Audit Committee meets at least once per financial quarter to fulfill its mandate. A copy of the Audit Committee Charter is attached as Appendix A to this Form 20-F.

             Composition of the Audit Committee

            The current members of the Audit Committee are Messrs. Pierce (Chairman), Merer and Meidl, all of whom are “financially literate” and each of Messrs. Pierce and Merer are considered to be “independent” under NI 52-110. Mr. Meidl is the Chief Executive Officer of the Corporation and is therefore not considered to be independent.

             Relevant Education and Experience

            The following relevant education and experience of the current and proposed members of the Audit Committee have been used in assessing their financial literacy:

             Toby Pierce (Chairman)

            Mr. Peirce is current the Chief Executive Officer and Director of Tag Oil Ltd. Mr. Pierce was previously a Director & Senior Analyst with GMP Securities (London, UK) and prior to GMP served as Director of Institutional Research at Tristone Capital (London, U.K.) since 1994. Previous engagements include wellsite geology over a period of five years for numerous companies across the Western Canadian Sedimentary Basin. In addition, he has worked for three years across North and Latin America as a geologist in the mining and exploration industry. Mr. Pierce brings strong geological and financial understanding within resource sectors. Mr. Pierce holds an M.B.A. from the Rotman School of Business and a B.Sc. Geology from the University of Victoria.

             Yves Merer

            A graduate of the School of Geology in Nancy, France, Mr. Merer holds a Masters in Petroleum Economics from the French Institute of Petroleum and began his career in the mining sector before joining Shell in 1979. After twelve years in operations and production roles in the North Sea and Brunei, Mr. Merer moved to London in 1992 and spent four years in a regional business governance role, managing Shell’s interests in French-speaking West Africa. In 1996 he was appointed General Manager of Salym Petroleum Development in Siberia. Mr. Merer then served as Chairman of Shell Syria, based in Damascus, before moving to Beijing for three years as President of Shell China Exploration and Production, in charge of a large portfolio of exploration, development and production assets, both onshore and offshore. In 2006, he moved to Tehran to take on his final role with Shell. As Iran Country Chairman, he was responsible for several joint ventures, large oil and gas projects and a number of important contracts.

             Jesse Meidl

            Mr. Meidl has over 18 years of experience in the oil and gas sector. He was previously Chief Financial Officer of a private international energy company, headquartered in London, England. Prior thereto, he was an investment banker in the International Oil & Gas group of Thomas Weisel Partners in London (now Stifel Nicolas). Mr. Meidl was previously the Chief Financial Officer for Arsenal Energy Inc., an international exploration company listed on the Toronto Stock Exchange, which held production assets in Canada and the USA and exploration assets in Egypt, Colombia and Uzbekistan. He qualified as a Chartered Accountant with KPMG in Calgary, where he specialized in oil and gas exploration and production and services. He also holds the ICAEW Corporate Finance qualification and a B. Comm. degree from the University of Saskatchewan (Canada).

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Audit Committee Over sight

            At no time was a recommendation of the Audit Committee to nominate or compensate an external auditor not adopted by the board of directors.

Pre-Approval Policies and Procedures

            Any proposed audit and permitted non-audit services (as identified by the Audit Committee at the time the annual audit engagement is approved) to be provided by the external auditor to the Corporation or its subsidiaries must receive prior approval from the Audit Committee. The Corporation has not adopted specific policies and procedures for the engagement of non-audit services. The Audit Committee will review the engagement of non-audit services as may be required.

            The Chief Executive Officer shall act as the primary contact to receive and assess any proposed engagements from the external auditor. Following receipt and initial review for eligibility by the primary contact, a proposal would then be forwarded to the Audit Committee for review and confirmation that a proposed engagement is permitted. In the majority of such instances, proposals may be received and considered by the Chair of the Audit Committee (or such other member of the Audit Committee who may be delegated authority to approve audit and permitted non-audit services), for approval of the proposal on behalf of the Audit Committee. The Audit Committee Chair will then inform the Audit Committee of any approvals granted at the next scheduled meeting.

            Our board of directors has determined that Toby Pierce possesses specific accounting and financial management expertise, that he is the audit committee financial expert as defined by the U.S. Securities and Exchange Commission, and that he is independent within the meaning of the rules of the NYSE. Our board of directors has also determined that other members of our audit committee have sufficient experience and ability in finance and compliance matters to enable them to adequately discharge their responsibilities.

16.B    CODE OF ETHICS

            The Company has not adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions because it does not believe that, given its small size and limited operations, a code of ethics is warranted. However, as the Company grows and it continues to develop its operations it may consider adopting a code of ethics.

16.C    PRINCIPAL ACCOUNTANT FEES AND SERVICES

            MNP LLP was appointed as the Corporation’s auditor on April 12, 2017. Prior thereto, KPMG LLP was the auditor of the Corporation from March 31, 2014. The following table provides information about the fees billed to the Corporation for professional services rendered by KPMG LLP and MNP LLP during the three prior fiscal years:

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  2016   2015   2014
  MNP   KPMG   KPMG
Audit Fees $30,000   $10,000   $60,000
Audit-Related Fees -   $50,000   -
Tax Fees -   $7,500   -
All Other Fees -   -   -
Total: $30,000   $67,500   $60,000

            Our audit committee pre-approves all audit and non-audit services provided to the Company.

16.D    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE

            None.

16.E    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASER

            We may from time-to-time, subject to applicable law, purchase our common shares for cancellation in the open market, provided that any necessary approval has been obtained.

            In the year ended December 31, 2016, none of our common shares were repurchased and cancelled.

16.F    CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

            Effective April 10, 2017, our board of directors resolved to appoint MNP LLP (“MNP”) as the Company’s independent registered public accounting firm, and KPMG LLP (“KPMG”) was dismissed on the same day. We reported the change in our independent registered public accounting firm to appropriate Canadian regulators on April 19, 2017. The change was not made due to any disagreements with KPMG LLP.

            The report of KPMG on our consolidated financial statements as at December 31, 2015 and 2014 and for each of the years in the three year period ended December 31, 2015 contained no adverse opinion or a disclaimer of opinion, and were not qualified or modified as to audit scope, or accounting principles. The report of KPMG did contain an emphasis of matter paragraph in relation to the Company’s working capital deficiency as at December 31, 2015, which included shareholder loans that had matured and were in default, and the negative cash flow from operation for the year ended December 31, 2015, which events casted significant doubt about the Company’s ability to continue as a going concern.

            During the two fiscal years ended December 31, 2014 and 2015, and the subsequent interim period through April 12, 2017, the date of resignation of KPMG, there have been no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of KPMG, would have caused it to make reference thereto in their reports on the consolidated financial statements for such years.

            During the two fiscal years ended December 31, 2014 and 2015, and the subsequent interim period through April 12, 2017, there have been no reportable events requiring disclosure pursuant to Item 16F(a)(1)(v) of Form 20-F.

            We provided a copy of the above disclosure under this Item 16F to KPMG and requested that KPMG furnish a letter stating whether it agrees with the above statements, and if not, stating the respects in which it does not agree. A copy of the letter from KPMG is filed as Exhibit 16.1.

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            During the two fiscal years ended December 31, 2014 and 2015, and the subsequent interim period prior to our engagement of MNP, neither we nor anyone on our behalf consulted MNP regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on our financial statements, or (ii) any matter that was either the subject of a disagreement with MNP or a reportable event. Also, during the two fiscal years ended December 31, 2014 and 2015, and the subsequent interim period prior to our engagement of MNP, we have not obtained any written report or oral advice that MNP concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue.

            As used herein, the term “reportable event” means any of the items listed in paragraphs (a)(1)(v)(A)-(D) of Item 16F of Form 20-F, and the term “disagreement” shall be interpreted in accordance with Item 16F(a)(1)(iv) of Form 20-F and related instructions to Item 16-F of Form 20-F.

16.G    CORPORATE GOVERNANCE

            Our corporate practices are not materially different from those required of domestic corporations under the NYSE listing standards.

16.H    MINE SAFETY DISCLOSURES

            Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd−Frank Act”), issuers that are operators, or that have a subsidiary that is an operator, of a coal or other mine in the United States are required to disclose in their periodic reports filed with the SEC information regarding specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities under the regulation of the Federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977, as amended (the “Mine Act”). During the fiscal year ended December 31, 2016, we did not have any mines in the United States subject to regulation by MSHA under the Mine Act.

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PART III

ITEM 17. FINANCIAL STATEMENTS

            Not applicable.

ITEM 18. FINANCIAL STATEMENTS

            See the list of financial statements on page F-1 which are filed as part of this annual report on Form 20-F.

ITEM 19. EXHIBITS

            The following exhibits are incorporated by reference or filed with this 20-F as denoted below:

Number   Description
     
1.1  

Certificate of Amalgamation of Chelsea Oil and Gas Ltd. dated October 1, 2013

     
1.2  

Articles of Amalgamation of Chelsea Oil and Gas Ltd. dated October 1, 2013

     
4.1  

Voting Agreement entered into as of February 29, 2012 by and among Australian-Canadian Oil Royalties, Ltd. and Jessie Meidl and William Petrie, Sr.

     
4.2  

Share Exchange Agreement among Australian-Canadian Oil Royalties Ltd., 1629518 Alberta Ltd. and its individual security holders, incorporated by reference to Exhibit 10-1 to ACOR’s Current Report on Form 8K filed November 23, 2011

     
4.3  

Purchase and Sale Agreement among Australian-Canadian Oil Royalties Ltd., Brisbane Petroleum Ltd., Delbaere Associates Pty. Limited and Chelsea Oil Australia Pty, Ltd., incorporated by reference to Exhibit 10-2 to ACOR’s Current Report on Form 8K filed November 23, 2011

     
8.1  

Significant Subsidiaries (as defined in (210.1-02(w) of Regulation S-X) of Chelsea Oil & Gas Ltd. (incorporated by reference to Item 4 “Information on the Company”)

     
12.1  

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)

     
12.2  

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)

     
12.3  

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)

     
16.1  

Letter from KPMG LLP regarding Notice of Change of Auditors of Chelsea Oil and Gas Ltd. (1)

     
16.2   Consent letter from MNP LLP (1)

(1) Filed as an exhibit to this 20-F.

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SIGNATURE

            The registrant hereby certifies that it meets all of the requirements for filing an annual report on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

            Dated: April 28, 2017

Chelsea Oil and Gas Ltd.

  By: /s/ Jesse Meidl
    Name:   Jesse Meidl
    Title:     Chief Executive Officer

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APPENDIX A
AUDIT COMMITTEE CHARTER

Role and Obligations

The Audit Committee (the “ Committee ”) is a committee of the board of directors (the “ Board ”) of Chelsea Oil and Gas Ltd. (the “ Corporation ”) to which the Board has delegated its responsibility for the oversight of the nature and scope of the annual audit, the oversight of management’s reporting on internal accounting standards and practices, the review of financial information, accounting systems and procedures, financial reporting and financial statements and has charged the Committee with the responsibility of recommending, for approval of the Board, the audited financial statements, interim financial statements and other mandatory disclosure releases containing financial information.

The primary objectives of the Audit Committee are as follows:

1.

assist directors in meeting their responsibilities (especially for accountability) in respect of the preparation and disclosure of the financial statements of the Corporation and related matters;

   
2.

provide better communication between directors and external auditors;

   
3.

enhance the external auditor’s independence;

   
4.

increase the credibility and objectivity of financial reports; and

   
5.

strengthen the role of the outside directors by facilitating in depth discussions between directors on the Audit Committee, management and external auditors.

Membership of Committee

6.

The Committee will be comprised of at least three (3) directors of the Corporation, none of whom are members of management of the Corporation and all of whom are “independent” (as such term is used in National Instrument 52-110 - Audit Committees (“ NI 52-110 ”) unless the Board determines that the exemption contained in NI 52-110 is available and determines to rely thereon.

   
7.

The Board of Directors may from time to time designate one of the members of the Committee to be the Chairman of the Committee (the “ Committee Chairman ”).

All of the members of the Committee must be “financially literate” (as defined in NI 52-110) unless the Board determines that an exemption under NI 52-110 from such requirement in respect of any particular member is available and determines to rely thereon in accordance with the provisions of NI 52-110.

Mandate and Responsibilities Committee

It is the responsibility of the Committee to:

8.

Oversee the work of the external auditors, including the resolution of any disagreements between management and the external auditors regarding financial reporting.

   
9.

Satisfy itself on behalf of the Board with respect to Corporation’s internal control systems:


  (a)

identifying, monitoring and mitigating business risks; and

     
  (b)

ensuring compliance with legal, ethical and regulatory requirements.


10.

Review the annual and interim financial statements of the Corporation and related management’s discussion and analysis (“ MD&A ”) prior to their submission to the Board for approval. The process should include but not be limited to:


  (a)

reviewing changes in accounting principles and policies, or in their application, which may have a material impact on the current or future years’ financial statements;




  (b)

reviewing significant accruals, reserves or other estimates such as the ceiling test calculation;

     
  (c)

reviewing accounting treatment of unusual or non-recurring transactions; (d)ascertaining compliance with covenants under loan agreements;

     
  (d)

reviewing disclosure requirements for commitments and contingencies;

     
  (e)

reviewing adjustments raised by the external auditors, whether or not included in the financial statements;

     
  (f)

reviewing unresolved differences between management and the external auditors; and

     
  (g)

obtain explanations of significant variances with comparative reporting periods.


11.

Review the financial statements, prospectuses, MD&A, annual information forms (“ AlF ”) and all public disclosure containing unaudited financial information (including, without limitation, annual and interim press releases and any other press releases disclosing earnings or financial results) before release and prior to Board approval. The Committee must be satisfied that adequate procedures are in place for the review of the Corporation’s disclosure of all other financial information and will periodically assess the accuracy of those procedures.

     
12.

With respect to the appointment of external auditors by the Board:

     
(a)

recommend to the Board the external auditors to be nominated;

     
(b)

recommend to the Board the terms of engagement of the external auditor, including the compensation of the auditors and a confirmation that the external auditors will report directly to the Committee;

     
(c)

on an annual basis, review and discuss with the external auditors all significant relationships such auditors have with the Corporation to determine the auditors’ independence;

     
(d)

when there is to be a change in auditors, review the issues related to the change and the information to be included in the required notice to securities regulators of such change; and

     
(e)

review and pre-approve any non-audit services to be provided to the Corporation or its subsidiaries by the external auditors and consider the impact on the independence of such auditors. The Committee may delegate to one or more independent members the authority to pre-approve non-audit services, provided that the member(s) report to the Committee at the next scheduled meeting such pre-approval and the member(s) comply with such other procedures as may be established by the Committee from time to time.

     
(f)

recommend to the Board the external auditors to be nominated;

     
(g)

recommend to the Board the terms of engagement of the external auditor, including the compensation of the auditors and a confirmation that the external auditors will report directly to the Committee;


13.

Review with external auditors (and internal auditor if one is appointed by the Corporation) their assessment of the internal controls of the Corporation, their written reports containing recommendations for improvement, and management’s response and follow-up to any identified weaknesses. The Committee will also review annually with the external auditors their plan for their audit and, upon completion of the audit, their reports upon the financial statements of the Corporation and its subsidiaries.

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14.

Review risk management policies and procedures of the Corporation (i.e., hedging, litigation and insurance).

   
15.

Establish a procedure for:


  (a)

the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal accounting controls or auditing matters; and

     
  (b)

the confidential anonymous submission by employees of the Corporation of concerns regarding questionable accounting or auditing matters.


16.

Review and approve the Corporation’s hiring policies regarding partners and employees and former partners and employees of the present and former external auditors of the Corporation.

The Committee has authority to communicate directly with the internal auditors (if any) and the external auditors of the Corporation. The Committee will also have the authority to investigate any financial activity of the Corporation. All employees of the Corporation are to cooperate as requested by the Committee. The Committee may also retain persons having special expertise and/or obtain independent professional advice to assist in filling their responsibilities at such compensation as established by the Committee and at the expense of the Corporation without any further approval of the Board.

Meetings and Administrative Matters

17.

At all meetings of the Committee every question shall be decided by a majority of the votes cast. In case of an equality of votes, the Committee Chairman shall be entitled to a second or casting vote.

   
18.

The Committee Chairman will preside at all meetings of the Committee, unless the Committee Chairman is not present in which case the members of the Committee that are present will designate from among such members a Committee Chairman for purposes of the meeting.

   
19.

A quorum for meetings of the Committee will be a majority of its members, and the rules for calling, holding, conducting and adjourning meetings of the Committee will be the same as those governing the Board unless otherwise determined by the Committee or the Board.

   
20.

Meetings of the Committee should be scheduled to take place at least four times per year.

   
21.

Minutes of all meetings of the Committee will be taken. The Chief Financial Officer will attend meetings of the Committee, unless otherwise excused from all or part of any such meeting by the Committee Chairman.

   
22.

The Committee will meet with the external auditor at least once per year (in connection with the preparation of the year-end financial statements) and at such other-times as the external auditor and the Committee consider appropriate.

   
23.

Agendas, approved by the Committee Chairman, will be circulated to Committee members along with background information on a timely basis prior to the Committee meetings.

   
24.

The Committee may invite such officers, directors and employees of the Corporation as it sees fit from time, to time to attend at meetings of the Committee and assist in the discussion and consideration of the matters being considered by the Committee.

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25.

Minutes of the Committee will be recorded and maintained and circulated to directors who are not members of the Committee or otherwise made available at a subsequent meeting of the Board.

   
26.

The Committee may retain persons having special expertise and may obtain independent professional advice to assist in fulfilling its responsibilities at the expense of the Corporation.

   
27.

Any members of the Committee may be removed or replaced at any time by the Board and will cease to be a member of the Committee as soon as such member ceases to be a director. The Board may fill vacancies on the Committee by appointment from among its members. If and whenever a vacancy exists on the Committee, the remaining members may exercise all its powers so long as a quorum remains. Subject to the foregoing, following appointment as a member of the Committee, each member will hold such office until the Committee is reconstituted.

   
28.

Any issues arising from these meetings that bear on the relationship between the Board and management should be communicated to the Chairman of the Board by the Committee Chairman.

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Chelsea Oil and Gas Ltd.

Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014

 

 

 



Chelsea Oil and Gas Ltd.
Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014

Consolidated Statements of Financial Position F-3
   
Consolidated Statements of Comprehensive Loss F-4
   
Consolidated Statements of Changes in Equity F-5
   
Consolidated Statements of Cash Flows F-6
   
Notes to the Consolidated Financial Statements F-7 – F-26



Independent Auditors’ Report

To the Shareholders of Chelsea Oil and Gas Ltd.

We have audited the accompanying consolidated financial statements of Chelsea Oil and Gas Ltd., which comprise the consolidated statement of financial position as at December 31, 2016, the consolidated statements of comprehensive loss, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated 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 management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our audit opinion.

Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Chelsea Oil and Gas Ltd. as at December 31, 2016, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards.

Emphasis of Matter
Without qualifying our opinion, we draw attention to note 2 in the consolidated financial statements which describes matters and conditions that indicate the existence of a material uncertainty that casts significant doubt about Chelsea Oil and Gas Ltd.'s ability to continue as a going concern.

Other Matter
The consolidated financial statements of Chelsea Oil and Gas Ltd. as December 31, 2015 and for the year then ended, were audited by another auditor who expressed an unmodified opinion on those consolidated financial statements on April 29, 2016.  

Calgary, Alberta
April 28, 2017 Chartered Professional Accountants 

Chelsea Oil and Gas Ltd.
Consolidated Statements of Financial Position
(US Dollars)

          December 31     December 31  
As at   Notes     2016     2015  
                   
Current assets                  
Cash   7   $  15,341   $  121,620  
Accounts receivable         6,527     9,048  
Current assets         21,868     130,668  
                   
Restricted cash   7     172,703     174,859  
Property, plant and equipment   9     787,278     899,760  
Exploration and evaluation assets   10     9,551,099     9,581,070  
Non-current assets         10,511,080     10,655,689  
                   
Assets       $  10,532,948   $  10,786,357  
                   
Liabilities                  
Current liabilities                  
Shareholder loans   8   $  4,201,120   $  3,881,185  
Trade and other payables         675,142     576,537  
Current liabilities         4,876,262     4,457,722  
                   
Decommissioning liabilities   11     366,517     360,283  
                   
Shareholders' equity                  
Common stock   12     14,056,459     14,056,459  
Warrants   12     254,938     254,938  
Contributed surplus         176,752     176,752  
Accumulated deficit         (6,144,282 )   (5,601,344 )
Accumulated other comprehensive loss         (3,053,698 )   (2,918,453 )
Shareholders' equity         5,290,169     5,968,352  
                   
Shareholders' equity and liabilities       $  10,532,948   $  10,786,357  
                   
Going concern   2              
Commitments   18              

The notes are an integral part of these consolidated financial statements.

Apporoved on behalf of the Board of Directors:

/s/ Bill Petrie Sr   /s/ Jesse Meidl
William Petrie Sr   Jesse Meidl

F-3


Chelsea Oil and Gas Ltd.
Consolidated Statements of Comprehensive Loss
(US Dollars)

          December 31     December 31     December 31  
For the years ended   Notes     2016     2015     2014  
                         
Revenues                        
Royalty income       $  36,701   $  68,974   $  361,990  
          36,701     68,974     361,990  
Expenses                        
General and administrative         186,416     242,410     331,934  
Depletion   9     112,482     112,482     112,482  
Finance expense   13     327,401     302,244     259,976  
Expense reimbursements   19     (87,652 )   -     -  
Foreign exchange (gain) loss         37,623     (125,515 )   (20,002 )
          576,270     531,621     684,390  
                         
Net loss before tax         (539,569 )   (462,647 )   (322,400 )
Current income tax expense   14     3,369     5,046     12,821  
Deferred income tax expense   14     -     -     -  
Net income loss         (542,938 )   (467,693 )   (335,221 )
                         
Foreign currency translation adjustment         135,245     1,167,320     1,072,350  
Comprehensive loss       $  (678,183 ) $  (1,635,013 ) $  (1,407,571 )
                         
Net loss per share (basic and diluted)   16   $  (0.01 ) $  (0.01 ) $  (0.01 )

The notes are an integral part of these consolidated financial statements.

F-4


Chelsea Oil and Gas Ltd.
Consolidated Statements of Changes in Equity
(US Dollars)

          December 31     December 31     December 31  
As at   Notes     2016     2015     2014  
                         
                         
Share capital                        
Balance, beginning and end of year   12   $  14,056,459   $  14,056,459   $  14,056,459  
                         
Warrants                        
Balance, beginning and end of year   12     254,938     254,938     254,938  
                         
Contributed surplus                        
Balance, beginning and end of year   12     176,752     176,752     176,752  
                         
Accumulated other comprehensive loss                        
Balance, beginning of year         (2,918,453 )   (1,751,133 )   (678,783 )
Foreign currency translation adjustment         (135,245 )   (1,167,320 )   (1,072,350 )
Balance, end of year         (3,053,698 )   (2,918,453 )   (1,751,133 )
                         
Accumulated deficit                        
Balance, beginning of year         (5,601,344 )   (5,133,651 )   (4,798,430 )
Loss for the year         (542,938 )   (467,693 )   (335,221 )
Balance, end of year         (6,144,282 )   (5,601,344 )   (5,133,651 )
                         
Total equity       $  5,290,169   $  5,968,352   $  7,603,365  

The notes are an integral part of these consolidated financial statements.

F-5


Chelsea Oil and Gas Ltd.
Consolidated Statements of Cash Flows
(US Dollars)

    December 31     December 31     December 31  
For the years ended   2016     2015     2014  
                   
Operating activities                  
Net loss $  (542,938 ) $  (467,693 ) $  (335,221 )
                   
Items not affecting cash                  
     Depletion   112,482     112,482     112,482  
     Interest on shareholder loans   319,935     295,570     285,143  
     Debt forgiveness   -     -     (31,494 )
     Accretion on decommissioning obligations   10,545     10,494     12,597  
     Unrealized foreign exchange (gain) loss   37,623     (125,515 )   (20,002 )
Operating cashflow before working capital movements   (62,353 )   (174,662 )   23,505  
Change in non-cash working capital   55,080     (49,033 )   (152,331 )
Total cash used in operating activities   (7,273 )   (223,695 )   (128,826 )
                   
Financing activities                  
Decrease in restricted cash   2,156     20,552     23,893  
Repayment of shareholder loans and interest   -     -     (151,470 )
Total cash provided by (used in) financing activities   2,156     20,552     (127,577 )
                   
Investing activities                  
Sale of overriding royalty interest   -     -     25,000  
Sale of exploration and evaluation assets   -     -     806,115  
Net exploration and evaluation expenditure   (93,383 )   (141,960 )   (187,567 )
Total cash provided by (used in) investing activities   (93,383 )   (141,960 )   643,548  
                   
Increase (decrease) in cash   (98,500 )   (345,102 )   387,145  
Foreign exchange gain (loss) on cash denominated in a foreign currency   (7,779 )   3,177     (18,597 )
Cash, beginning of year   121,620     463,546     94,998  
Cash, end of year $  15,341   $  121,620   $  463,546  
                   
Cash interest paid $  -   $  -   $  17,220  
Cash interest received $  3,079   $  3,872   $  6,371  
Taxes paid $  3,369   $  5,046   $  12,821  

The notes are an integral part of these consolidated financial statements.

F-6



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

1.

Reporting entity:

   

Australian-Canadian Oil Royalties Ltd. was incorporated April 28, 1997 in British Columbia, Canada. On October 1, 2013, Australian-Canadian Oil Royalties Ltd. amalgamated with International TME Resources Inc. and was renamed Chelsea Oil and Gas Ltd. (“Chelsea” or the “Company”). The address of the Company’s head office is 127, 10 th Ave NW, Calgary, AB Canada. The Company’s business plan is the exploration and development of the Company’s working interest properties in Australia. The Company also holds and acquires and sells overriding royalty interests in Australia. Current primary income sources are royalties earned on overriding royalty interests held by the Company.

   
2.

Going concern:

   

The accompanying consolidated financial statements have been prepared on a going concern basis. The going concern basis of presentation assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. The Company’s properties are principally in the exploration and development stage and, as a result, the Company has minimal sources of operating cash flow. The continued operations, and exploration and development activities (including commitments in note 18) depend on the ability of the Company to obtain financing. For the year ended December 31, 2016, the Company has negative cash flow from operations. It has an accumulated deficit of $6.1 million and a working capital deficit of $4.9 million at December 31, 2016 which includes $4.2 million of shareholder loans that matured in February 2016 and are unpaid and in default. These conditions create a material uncertainty that casts significant doubt on the Company’s ability to continue as a going concern.

   

Additional funds will be required to explore and develop the Company’s properties and to place them into commercial production. During the year, the Company received reimbursements from an arm’s length party (the “Sponsor”) for facilitating funding and restructuring efforts for the Company in 2016 and 2017. There is no obligation to repay these reimbursements.

   

The only other source of future funds presently available to the Company is through the issuance of share capital, or by the sale of an interest in any of its working and royalty interests in whole or in part. The Company is in discussions with the note holder to extend the maturity date of the shareholder loan. The ability of the Company to arrange such financing or sale of an interest in the future will depend in part upon the prevailing market conditions as well as the business performance of the Company. There can be no assurance that the Company will be successful in its efforts to arrange additional financing, if needed, on terms satisfactory to the Company or at all. If additional financing is raised through the issuance of shares, control of the Company may change and shareholders may suffer dilution. If adequate financing is not available, the Company may be required to delay, reduce the scope of, or eliminate one or more exploration activities or relinquish rights to certain of its interests.

   

The amounts shown as property, plant and equipment and exploration and evaluation assets represent acquisition costs net of recoveries to date, less amounts written off, and do not necessarily represent present or future values. Recoverability of the amounts shown for property, plant and equipment and exploration and evaluation assets is dependent upon the discovery of economically recoverable reserves, securing and maintaining title and beneficial interest in the properties, the ability of the Company to obtain financing necessary to complete the exploration and development of its exploration and evaluation assets, and on future profitable production or proceeds from the disposition of the property, plant and equipment and exploration and evaluation interests. The consolidated financial statements do not reflect adjustments that would be necessary if the going concern basis was not appropriate. If the going concern basis was not appropriate for these consolidated financial statements, then significant adjustments would be necessary in the carrying value of assets and liabilities, the reported revenues and expenses, and the classifications used in the statement of financial position. The appropriateness of the going concern basis is dependent upon the events and circumstances outlined above.

F-7



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

3.

Basis of preparation:

     
a)

Statement of compliance:

     

These consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards and interpretations (collectively referred to as “IFRS”) as issued by the International Accounting Standards Board (“IASB”) and in effect at January 1, 2016. These consolidated financial statements were approved by the Board of Directors on April 28, 2017.

     
b)

Basis of preparation:

     

The consolidated financial statements have been prepared on the historical cost basis. The Company’s accounting policies have been applied consistently to all periods presented in these consolidated financial statements.

     
c)

Functional and presentation currency:

     

These consolidated financial statements are expressed in US dollars (“$” or “US$”), which is the Company’s functional currency. The Company’s wholly owned subsidiaries Cooper-Eromanga Oil Inc. and Chelsea Oil Australia Pty have a functional currency of Australian dollars (“A$” or “AUD”).

     
d)

Use of estimates and judgments:

     

The preparation of the consolidated financial statements in conformity with IFRS requires management to make estimates and use judgment regarding the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the year. By their nature, estimates are subject to measurement uncertainty and changes in such estimates in future periods could require a material change in the financial statements. Accordingly, actual results may differ from the estimated amounts as future confirming events occur. Significant estimates and judgments made by management in the preparation of these consolidated financial statements are as follows:

     

Recoverability of asset carrying values

     

The recoverability of oil and gas asset carrying values are assessed at a cash generating unit (“CGU”) level. Determination of what constitutes a CGU is subject to management judgments. The asset composition of a CGU can directly impact the recoverability of the assets included therein. The key estimates used in the determination of cash flows from oil and natural gas reserves include the following:


  i)

Reserves – Assumptions that are valid at the time of reserve estimation may change significantly when new information becomes available. Changes in forward price estimates, production costs or recovery rates may change the economic status of reserves and may ultimately result in reserves being restated.

     
  ii)

Oil and natural gas prices – Forward price estimates are used in the cash flow model. Commodity prices can fluctuate for a variety of reasons including supply and demand fundamentals, inventory levels, exchanges rates, weather, and economic and geopolitical factors.

     
  iii)

Discount rate – The discount rate used to calculate the net present value of cash flows is based on estimates of an approximate industry peer group weighted average cost of capital. Changes in the general economic environment could result in significant changes to this estimate.

F-8



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

3.

Basis of preparation (continued):

Depletion and depreciation

Amounts recorded for depletion and depreciation and amounts used for impairment calculations are based on estimates of total proved and probable petroleum and natural gas reserves and future development capital. By their nature, the estimates of reserves, including the estimates of future prices, costs and future cash flows, are subject to measurement uncertainty. Accordingly, the impact to the consolidated financial statements in future periods could be material.

Decommissioning obligations

Amounts recorded for decommissioning obligations and the related accretion expense requires the use of estimates with respect to the amount and timing of decommissioning expenditures. Actual costs and cash outflows can differ from estimates because of changes in laws and regulations, public expectations, market conditions, discovery and analysis of site conditions and changes in technology. Other provisions are recognized in the period when it becomes probable that there will be a future cash outflow.

Share-based compensation

Compensation costs recognized for share based compensation plans are subject to the estimation of what the ultimate payout will be using pricing models such as the Black-Scholes model which is based on significant assumptions such as volatility, dividend yield and expected term. Several compensation plans are also performance based and are subject to management’s judgment as to whether or not performance criteria will be met.

Deferred income taxes

Tax interpretations, regulations and legislation in the various jurisdictions in which the Company operates are subject to change. As such income taxes are subject to measurement uncertainty. Deferred income tax assets are assessed by management at the end of the reporting period to determine the likelihood that they will be realized from future taxable earnings.

4.

Significant accounting policies:


 

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by the Company and its subsidiaries.

     
  a)

Basis of consolidation:

(i) Subsidiaries:

Subsidiaries are entities controlled by the Company. Control exists when an entity is exposed to, or has rights to variable returns from its involvement with the entity and has the ability to affect these returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

Transaction costs that are incurred in connection with a business combination, other than those costs associated with the issue of debt or equity securities, or recognized in profit or loss.

F-9



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

4.

Significant accounting policies (continued):


  a) Basis of consolidation (continued):
     
  (ii) Jointly owned operations and jointly owned assets:
     
  The Company conducts many of its oil and gas production activities through jointly controlled operations and the financial statements reflect only the Company’s proportionate interest in such activities. Joint control exists for contractual arrangements governing the Company's assets whereby the Company has less than 100 per cent working interest, all of the partners have control of the arrangement collectively, and spending on the project requires unanimous consent of all parties that collectively control the arrangement and share the associated risks. The Company does not have any joint arrangements that are structured through joint venture arrangements.
     
  (iii) Transactions eliminated on consolidation:
     
  Intercompany balances and transactions, and any unrealized income and expenses arising from intercompany transactions are eliminated in preparing the consolidated financial statements.
     
  b) Foreign currency:

  i)

Transactions in foreign currencies are generally translated to the entities functional currency at the average exchange rate for the period. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the period end exchange rate. Non-monetary assets and liabilities denominated in foreign currencies that are carried at fair value are translated to the functional currency at the exchange rate at the date that the fair value was determined. Non- monetary assets held at historical cost are not retranslated subsequent to initial recognition. Foreign currency differences arising on translation are recognized in earnings in the period in which they arise.

     
  ii)

Assets and liabilities of the Company’s Australian operations are translated into US dollars at period- end exchange rates while revenues and expenses are translated using average rates for the period. Gains and losses from the translation are deferred and included in accumulated other comprehensive income (“AOCI”).


  c)

Financial instruments:

     
 

(i) Non-derivative fi nancial instruments:

     
 

Non-derivative financial instruments comprise cash, accounts receivable, shareholder loans and trade and other payables. Non-derivative financial instruments are recognized initially at fair value. Subsequent to initial recognition non-derivative financial instruments are measured as described below. Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership.

     
 

Financial assets and liabilities are offset and the net amount is reported when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

F-10



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

4.

Significant accounting policies (continued):


  c) Financial instruments (continued):
     
 

Cash and cash equivalents:

   

 

 

Cash and cash equivalents are comprised of cash on hand, term deposits held with banks, and other short-term highly liquid investments with original maturities of three months or less.

   

 

 

Financial assets at fair value through profit or loss:

   

 

 

An instrument is classified at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Financial instruments are designated at fair value through profit or loss if the Company manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Company’s risk management or investment strategy. Upon initial recognition attributable transaction costs are recognized in profit or loss when incurred. Financial instruments are measured at fair value and changes therein are recognized in profit or loss.

   

 

 

Other:

   

 

 

Other non-derivative financial instruments, such as accounts receivable, shareholder loans and trade and other payables, are measured at amortized cost using the effective interest method, less any impairment losses for financial assets.

   

 

 

(ii) Equity instruments:

   

 

 

Equity instruments including common shares, options and warrants are classified as equity. Incremental costs directly attributable to the issue of common shares and share options are recognized as a deduction from equity, net of any tax effects, if any.

   

 

  d)

Property, plant and equipment and exploration and evaluation assets:

   

 

 

(i) Recognition and measurement:

   

 

 

Development and production (“D&P”) costs:

   

 

Property, plant and equipment is stated at cost, less accumulated depletion and depreciation and accumulated impairment losses. The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of any decommissioning obligation, if any, and, for qualifying assets, borrowing costs. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset.

   

 

 

Expenditures on major maintenance, inspections or overhauls are capitalized when the item enhances the life or performance of an asset above its original standard. Such capitalized oil and natural gas interests generally represent costs incurred in developing proved and/or probable reserves and bringing in or enhancing production from such reserves, and are accumulated on a field or geotechnical area basis. The carrying amount of any replaced or sold component is derecognized. The costs of the day-to- day servicing of property, plant and equipment are recognized in profit or loss as incurred. Where an asset or part of an asset that was separately depreciated is replaced and it is probable that future economic benefits associated with the item will flow to the Company, the expenditure is capitalized and the carrying amount of the replaced asset is derecognized.

   

 

 

General and administrative costs associated with property acquisition development activities are capitalized.

F-11



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

4.

Significant accounting policies (continued):


  d)

Property, plant and equipment and exploration and evaluation assets:

     
 

Exploration and evaluation (“E&E”) expenditures:

     
 

Pre-licence costs are recognized in the statement of loss as incurred.

     
 

Exploration and evaluation expenditures, including the costs of acquiring licences and directly attributable general and administrative costs, geological and geophysical costs, other direct costs of exploration (drilling, trenching, sampling and evaluating the technical feasibility and commercial viability of extraction) and appraisal are accumulated and capitalized as E&E assets.

     
 

On a quarterly basis, a review of any areas classified and accounted for as E&E is performed to determine whether enough information exists to make a determination of the technical feasibility and commercial viability of the area. Where appropriate, review may indicate that an area should be further sub-divided due to a significant portion having been explored whilst a significant undeveloped portion with different traits (i.e. different zone, technical approach, play type, etc.) remains that requires additional E&E activities to arrive at the point where it can be assessed for technical feasibility and commercial viability.

     
 

The assessment of technical feasibility and commercial viability is performed on an area level basis unless further sub-division is merited. Depending on the extent and complexity of the prospective play, many wells may need to be drilled and potentially significant E&E costs accumulated prior to obtaining enough information to make the determination of technical feasibility and commercial viability possible. E&E costs are not amortized prior to the conclusion of appraisal activities. At the completion of appraisal activities, if technical feasibility is demonstrated and commercial reserves are discovered, then, the carrying value of the relevant E&E asset will be reclassified as a D&P asset into the CGU to which it relates, but only after the carrying value of the relevant E&E asset has been assessed for impairment, and where appropriate, its carrying value adjusted. Typically, technical feasibility and commercial viability of extracting a mineral resource is considered to be demonstrable when proved or probable reserves are determined to exist. However, if the Company determines the area or portion thereof is not technically feasible and commercially viable, accumulated E&E costs are expensed.

     
 

(ii) Depletion and depreciation:

     
 

The net carrying value of working interest development and production assets is depleted using the unit of production method by reference to the ratio of production in the year to the related proven and probable reserves, taking into account estimated future development costs necessary to bring those reserves into production. These estimates are reviewed by independent reserve engineers at least annually. Natural gas reserves are converted to barrels of oil equivalent based on relative energy content of 6:1.

     
 

For other assets, depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term.

     
 

The estimated useful lives for other assets for the current and comparative years are as follows:

     
 

Office equipment 5 – 12 years
Fixtures and fittings 5 – 10 years

 

Depreciation methods, useful lives and residual values are reviewed at each reporting date.

F-12



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

4.

Significant accounting policies (continued):


  d)

Property, plant and equipment and exploration and evaluation assets:

     
 

iii) Subsequent costs:

     
 

Costs incurred subsequent to the determination of technical feasibility and commercial viability and the costs of replacing parts of property, plant and equipment are recognized as oil and natural gas interests only when they increase the future economic benefits embodied in the specific asset to which they relate. All other expenditures are recognized in earnings as incurred. Such capitalized oil and natural gas interests generally represent costs incurred in developing proved and/or probable reserves and bringing in or enhancing production from such reserves, and are accumulated on a field or geotechnical area basis. The carrying amount of any replaced or sold component is derecognized. The costs of the periodic servicing of property, plant and equipment are recognized in earnings as incurred.

     
  e)

Impairment:

     
 

(i) Financial assets:

     
 

A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.

     
 

An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.

     
 

Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.

     
 

All impairment losses are recognized in profit or loss. An impairment loss is reversed when there is a significant change in the underlying estimates or other objective evidence. For financial assets measured at amortized cost the reversal is recognized in profit or loss.

     
 

(ii) Non- fi nancial assets:

     
 

Exploration and evaluation assets are tested for impairment when reclassified to D&P assets or whenever facts and circumstances indicate potential impairment. Exploration and evaluation assets are tested separately for impairment or grouped with the associated cash generating unit. An impairment loss is recognized for the amount by which the exploration and evaluation expenditure’s carrying amount exceeds its recoverable amount.

     
 

The carrying amount of D&P assets are reviewed for impairment when indicators of such impairment exist. If any indication of impairment exists an estimate of the asset’s recoverable amount is calculated. Assets are grouped for impairment assessment purposes at CGU level at which there are identifiable cash inflows that are largely independent of the cash inflows of other groups of assets. The recoverable amount of an asset or CGU is the greater of its fair value less costs of disposal and its value in use. Where the carrying amount of an asset group exceeds its recoverable amount, the asset group is considered impaired and is written down to its recoverable amount. An impairment loss is charged to the statement of comprehensive loss.

F-13



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)
4.

Significant accounting policies (continued):


  e)

Impairment:

     
 

In assessing value in use, the estimated future cash flows are adjusted for the risks specific to the asset group and are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money. Fair value less costs of disposal is generally determined at the current market bid price, when an active market exists. The intent is that this represents what a market participant would pay to acquire control of the CGU.

     
 

For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Company makes an estimate of the recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is the case the carrying amount of the asset is increased to its recoverable amount. The increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years.

     
  f)

Business combinations:

     
 

The acquisition method of accounting is used to account for acquisitions of subsidiaries and assets that meet the definition of a business under IFRS. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. The recognized amount of identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured mostly at fair value at the acquisition date. The excess of the cost of acquisition over the recognized amount of identifiable assets, liabilities and contingent liabilities acquired is recorded as goodwill. If the cost of acquisition is less than the recognized amount of the net assets of the subsidiary acquired, the difference is recognized immediately in earnings.

     
  g)

Share-based payments:

     
 

The grant date fair value of equity-settled options and warrants granted to employees is recognized as share-based compensation expense, with a corresponding increase in contributed surplus over the vesting period. Each tranche granted is considered a separate grant and is fair valued independently. A forfeiture rate is estimated on the grant date and is adjusted to reflect the actual number of options that vest.

     
  h)

Provisions:

     
 

A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an out flow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Provisions are not recognized for future operating losses.

F-14



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

4.

Significant accounting policies (continued):


 

Decommissioning obligations:

     
 

The Company’s activities can give rise to dismantling, decommissioning and site disturbance re- mediation activities. Provision is made for the estimated cost of site restoration and capitalized in the relevant asset category.

     
 

Decommissioning obligations are measured at the present value of management’s best estimate of expenditure required to settle the present obligation at the statement of financial position date. Subsequent to the initial measurement, the obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation.

     
 

The increase in the provision due to the passage of time is recognized as finance costs whereas increases/decreases due to changes in the estimated future cash flows are capitalized. Actual costs incurred upon settlement of the asset retirement obligations are charged against the provision to the extent the provision was established.

     
  i)

Revenue:

     
 

Revenue from the sale of oil and natural gas is recorded when the significant risks and rewards of ownership of the product is transferred to the buyer which is usually when legal title passes to the external party. This is generally at the time product enters the pipeline or delivered to the refinery.

     
 

Revenue is measured net of discounts, customs duties and royalties.

     
 

Tariffs and tolls charged to other entities for use of pipelines and facilities owned by the Company are recognized as revenue as they accrue in accordance with the terms of the service or tariff and tolling agreements.

     
 

Royalty income is recognized as it accrues in accordance with the terms of the overriding royalty agreements. Interest income is recognized as it is earned.

     
  j)

Finance income and expenses:

     
 

Finance expense comprises interest expense on borrowings, accretion of the discount on provisions and transaction costs.

     
 

Borrowing costs incurred for the construction of qualifying assets are capitalized during the period of time that is required to complete and prepare the assets for their intended use or sale. All other borrowing costs are recognized in profit or loss using the effective interest method.

     
 

Finance income is recognized as it accrues in profit or loss, using the effective interest method.

     
  k)

Per share amounts:

     
 

Basic loss per share is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined by adjusting the profit attributable to common shareholders and the weighted average number of common shares outstanding for the effects of dilutive instruments such as options granted to employees. The calculation assumes that the proceeds on exercise of options are used to repurchase shares at the current market price.

F-15



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

4.

Significant accounting policies (continued):


  l)

Segment reporting:

     
 

A segment is a distinguishable component of the Company that is engaged either in providing related products or services (business segment), or in providing products or services within a particular economic environment (geographic segment), which is subject to risks and returns that are different from those of other segments. The Company has one reportable segment, which comprises all property, plant and equipment and exploration and evaluation assets in Australia. Property, plant and equipment is comprised primarily of overriding royalty interests, which are the only revenue generating assets of the Company.

     
  m)

Recent accounting pronouncements:

     
 

In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (" IFRS 15 "). The new standard is effective for annual periods beginning on or after January 1, 2018. Earlier application is permitted. The standard contains a single model that applies to contracts with customers and two approaches to recognising revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The new standard applies to contracts with customers. It does not apply to insurance contracts, financial instruments or lease contracts, which fall in the scope of other IFRSs. The extent of the impact of adoption of the standard has not yet been determined.

     
 

In July 2014, the IASB issued the complete IFRS 9 (" IFRS 9 (2014) "). The mandatory effective date of IFRS 9 is for annual periods beginning on or after January 1, 2018 and must be applied retrospectively with some exemptions. Early adoption is permitted. The restatement of prior periods is not required and is only permitted if information is available without the use of hindsight. IFRS 9 (2014) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2014), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. The standard introduces additional changes relating to financial liabilities. It also amends the impairment model by introducing a new ‘expected credit loss’ model for calculating impairment. IFRS 9 (2014) also includes a new general hedge accounting standard which aligns hedge accounting more closely with risk management. This new standard does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness; however, it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging relationship. Special transitional requirements have been set for the application of the new general hedging model. The extent of the impact of adoption of the standard has not yet been determined.

     
 

In January 2016, the IASB issued the complete IFRS 16 Leases (" IFRS 16 ") which replaces IAS 17, Leases. The effective date of IFRS 16 is for annual periods beginning on or after January 1, 2019 and early adoption is permitted. Under IFRS 16, a single recognition and measurement model will apply for lessees which will require recognition of assets and liabilities for most leases. The extent of the impact of adoption of the standard has not yet been determined.

F-16



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

5.

Determination of fair values:

   

A number of the Company’s accounting policies and disclosures require the determination of fair value, both for financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

   

The different levels of financial instrument valuation methods have been defined as follows:

   

Level 1 fair value measurements are based on unadjusted quoted market prices.

   

Level 2 fair value measurements are based on valuation models and techniques where the significant inputs are derived from quoted indices.

   

Level 3 fair value measurements are based on unobservable information.

   

The carrying value of cash, accounts receivables, shareholder loans and trade and other payables included in the consolidated statements of financial position approximate fair value due to the short term nature of those instruments.

   

The fair value of warrants is measured using a Black–Scholes option pricing model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility based on peer comparisons weighted average expected life of the instruments based on historical experience and general option holder behavior, expected dividends, and the risk–free interest rate.

   
6.

Financial risk management:

   

The Company’s activities expose it to a variety of financial risks that arise as a result of its exploration, development, production, and financing activities such as:


  Credit risk
  Liquidity risk
  Market risk

This note presents information about the Company’s exposure to each of the above risks, the Company’s objectives, policies and processes for measuring and managing risk, and the Company’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements.

The Board of Directors oversees managements’ establishment and execution of the Company’s risk management framework. Management has implemented and monitors compliance with risk management policies. The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to market conditions and the Company’s activities.

F-17



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

6.

Financial risk management (continued):


  a)

Credit risk:

     
 

The Company is exposed to credit risk in relation to its cash and accounts receivable. The Company maintains cash with highly rated international banks and therefore considers these assets to have negligible credit risk. Credit risk is the potential financial loss to the Company if a customer is unable to meet its contractual obligations and arises principally from the Company's accounts receivables. The Company's accounts receivable is comprised of:


  Overriding royalty payments
  Customers
  Joint venture partners

 

The Company’s accounts receivable are with overriding royalty owners, customers and joint arrangement partners who are in the petroleum and natural gas business and are subject to normal credit risks. Concentration of credit risk is mitigated by marketing production to purchasers under normal industry sale and payment terms. The Company routinely assesses the financial strength of its customers and joint venture partners. The Company’s maximum exposure to credit risk relates to its cash and cash equivalents and accounts receivable.

     
 

Accounts receivable:

     
 

The Company’s operations are primarily in Australia. The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each counter party. The Company expects to collect the outstanding receivables in the normal course of operations. As at December 31, 2016 the Company’s accounts receivables are current and due within 90 days.

     
 

Cash and cash equivalents:

     
 

The Company limits its exposure to credit risk by only investing in liquid securities and only with highly rated counterparties. The Company’s cash is currently held by banks with AA or equivalent credit ratings or better. Given these credit ratings, management does not expect any counterparty to fail to meet its obligations.

     
  b)

Liquidity risk:

     
 

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.

     
 

Typically the Company ensures that it has sufficient cash on demand to meet expected operational expenses, including the servicing of financial obligations; this excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters and political unrest. To achieve this objective, the Company prepares annual capital expenditure budgets, which are regularly monitored and updated as considered necessary. As at December 31, 2016, the Company’s financial liabilities being trade and other payables and shareholder loans are due within one year (refer to note 2).

F-18



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

6.

Financial risk management (continued):


  c)

Market risk:

     
 

Market risk is the risk that changes in market prices, such as foreign exchange rates, commodity prices and interest rates will affect the Company’s net earnings or the value of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while maximizing returns.

     
 

Interest rate risk:

     
 

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The shareholder loans bear interest at the prescribed rate in the debenture agreements. The effect of interest rate fluctuations would not have had a significant effect on the Company’s reported net loss for the years ended December 31, 2016, 2015, and 2014.

     
 

Commodity price risk:

     
 

Commodity price risk is the risk that the fair value of financial instruments or future cash flows will fluctuate as a result of changes in commodity prices. Petroleum and natural gas prices are impacted by not only the relationship between the Australian and US dollar but also world economic events that dictate the levels of supply and demand. At this time production from the Company’s oil and gas properties are not sufficient to justify the utilisation of financial instruments including derivatives, or physical instruments including forward sales contracts. The Company will continually evaluate its exposure to commodity price risks, and if production and associated revenues increase, the Company will consider the use of derivatives and other instruments to mitigate its risk exposure.

     
 

Foreign currency risk:

     
 

Currency risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in foreign exchange rates. The reporting and functional currency of the Company is US$. A material proportion of the Company’s capital expenditures and major service contracts related to the exploration and development in Australia are denominated in A$, and as such the Company holds a significant proportion of its cash in A$ in order to mitigate against foreign currency risk.

     
 

The Company’s operations are in foreign jurisdictions, therefore the Company is exposed to foreign currency exchange rate risk on some of its activities. General and administrative expenses, are denominated in currencies other than US$ including A$ and Canadian dollars (C$). The Company also settles certain capital expenditures in A$. To match the foreign currency on the trade payables related to these activities the Company may hold cash in the currency of the transaction.

     
 

The following table contains an analysis of US$ equivalent cash balances, trade receivables and trade payables denominated in each currency:


      Cash and     Trade     Trade  
  As at December 31, 2016   Restricted Cash     Recievables     Payables  
  Denominated in US$ $  12,565   $  2,328   $  305,351  
  Denominated in A$   174,824     1,628     74,038  
  Denominated in C$   655     2,571     295,753  
    $  188,044   $  6,527   $  675,142  

F-19



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

6.

Financial risk management (continued):

d)    Capital management:

The Company's objectives when managing capital are to safeguard the Company's ability to continue as a going concern and to maintain a flexible capital structure which will allow it to pursue the development of its oil and gas properties. Therefore, the Company monitors the level of risk incurred in its oil and gas property expenditures relative to its capital structure. The Company considers its capital structure to include working capital and shareholders' equity. The Company monitors its capital structure and makes adjustments in light of changes in economic conditions and the risk characteristics of the underlying assets.

The Company is dependent on external financing to fund its activities. In order to carry out the planned exploration and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. The Company is not subject to any capital restrictions.

7.

Cash and restricted cash:

   

At December 31, 2016, the Company held cash of $15,341 (2015 – $121,620). Cash at banks earn interest at floating rates based on daily bank deposit rates. Short term deposits are made for varying periods of between one day and three months, depending on the cash requirements of the Company, and earn interest at the respective short term deposit rates.

   

At December 31, 2016, the Company held restricted cash of $172,703 (2015 – $174,859). Restricted cash is cash held on deposit with a chartered Australian bank which will be returned to the Company when it satisfies the capital commitments pertaining to the licenses.

   
8.

Shareholder loans:


      2016     2015     2014  
  Loans on acquisition of Surat Basin properties $  3,000,000   $  3,000,000   $  3,000,000  
     Accrued and unpaid interest thereon   1,201,120     881,185     585,615  
  Loan to fund deposits $  -   $  -   $  134,250  
     Accrued and unpaid interest thereon   -     -     48,714  
     Repayment   -     -     (151,470 )
     Debt forgiveness   -     -     (31,494 )
    $  4,201,120   $  3,881,185   $  3,585,615  

Concurrent with the acquisition of the assets in the Surat Basin in Australia, on March 1, 2012 the Company agreed to pay certain vendors $3.0 million within 12 months and 8.57 million shares of the Company. The loan was non-interest bearing and was recorded at net present value of $2,770,084 and is secured by the Surat assets.

At January 1, 2013, the net present value of the loan was $2,960,396. On March 25, 2013, the Company agreed to amend the terms of the loan so that interest would accrue at 8% per annum, with interest accruing from September 1, 2012.

On February 28, 2015, the Company and shareholder agreed to extend the loan to February 28, 2016. At the date of these financial statements the shareholder has the right to demand repayment. The debt continues to accrue interest on the same terms as previously agreed. The Company is in discussions with the debtholder to further extend maturity of the debt.

F-20



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

8.

Shareholder loans (continued):

   

During 2011, the Company borrowed $243,500 from two stockholders to fund the deposit for one of its exploration concessions in Australia. In the third quarter of 2012, $109,250 plus accrued interest of $6,958 was repaid. In the third quarter of 2014, the Company paid $151,470, and the stockholders agreed to forgive the remaining $31,494 outstanding.

   
9.

Property, Plant and Equipment:


  Cost or deemed cost      
  Balance, January 1, 2014 $  1,203,999  
  Dispositions   (25,000 )
  Balance, December 31, 2016, 2015 and 2014 $  1,178,999  

  Accumulated depletion and depreciation      
  Balance, January 1, 2014 $  54,275  
  Depletion and depreciation expense   112,482  
  Balance, December 31, 2014 $  166,757  
  Depletion and depreciation expense   112,482  
  Balance, December 31, 2015 $  279,239  
  Depletion and depreciation expense   112,482  
  Balance, December 31, 2016 $  391,721  

  Net book value      
  As at December 31, 2014 $  1,012,242  
  As at December 31, 2015 $  899,760  
  As at December 31, 2016 $  787,278  

The Company’s property, plant and equipment is comprised primarily of its overriding royalty interests in Australia. These interests are currently the Company’s only revenue generating asset.

On October 29, 2014, Company disposed of certain overriding royalty interests to an arms-length party.

At December 31, 2016, there were no indicators of impairment identified. As a result no impairment testing was conducted.

At December 31, 2015, management identified impairment indicators in its D&P CGU as a result of a decline in global commodity prices and significantly reduced access to debt and equity financings in the exploration and production sector. The recoverable amount of the CGU was estimated using fair value less costs of disposal based on comparable market transactions and multiples. It was determined that no impairment was required as the recoverable amount was higher than the carrying amount.

At December 31, 2015, management identified impairment indicators in its D&P CGU as a result of a decline in global commodity prices and significantly reduced access to debt and equity financings in the exploration and production sector. The recoverable amount of the CGU was estimated using fair value less costs to sell based on comparable market transactions and multiples. It was determined that no impairment was required as the recoverable amount was higher than the carrying amount.

F-21



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

10.

Exploration and evaluation assets:


  Balance, January 1, 2014 $  12,289,692  
  Additions   187,567  
  Dispositions   (806,115 )
  Foreign exchange translation   (1,073,150 )
  Balance, December 31, 2014 $  10,597,994  
  Additions   141,960  
  Foreign exchange translation   (1,158,884 )
  Balance, December 31, 2015 $  9,581,070  
  Additions   93,383  
  Foreign exchange translation   (123,354 )
  Balance, December 31, 2016 $  9,551,099  

Intangible exploration and evaluation assets consist of the Company’s exploration projects which are pending the determination of proven or probable reserves, or pending the decision by the Company to elect to proceed with the development of a project.

   

On October 29, 2014, the Company completed the sale of certain E&E assets in Australia for net proceeds of $0.8 million.

   
11.

Decommissioning liability:

   

The Company’s decommissioning liability results from the ownership interest in oil and natural gas assets. The Company has estimated the net present value of the decommissioning liability to be $366,517 as at December 31, 2016 (2015 – $360,283, 2014 – $390,902) based on an undiscounted inflation-adjusted total future liability of A$671,718 (2015 and 2014 – A$671,718). These payments are expected to be made over the next 25 years with the majority of costs to be incurred between 2024 and 2029. At December 31, 2016, the liability has been calculated using an inflation rate of 3.0% (2015 and 2014 – 3.0%) and discounted using a risk-free rate of 3.0% (2015 and 2014 – 3.0%).


  Balance, January 1, 2014 $  415,300  
  Accretion expense   12,597  
  Foreign exchange translation   (36,995 )
  Balance, December 31, 2014 $  390,902  
  Accretion expense   10,494  
  Foreign exchange translation   (41,113 )
  Balance, December 31, 2015   360,283  
  Accretion expense   10,545  
  Foreign exchange translation   (4,311 )
  Balance, December 31, 2016   366,517  

F-22



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

12.

Share capital:


  a)

Authorized:

     
 

Unlimited number of common shares with no par value.

 

Unlimited number of preferred shares, of which none have been issued.

     
  b)

Issued and outstanding:


      Number of        
      shares     Amount  
  Balance, January 1, 2014 and December 31, 2016 and 2015 and 2014   64,056,876   $  14,056,459  

  b)

Stock option plan:

     
 

Pursuant to resolutions of the Board of Directors of the Company dated January 9, 2013, the Company established a stock option plan for its directors, officers, consultants and employees under which the Company may grant options to acquire a maximum number of common shares equal to 10% of the total issued and outstanding shares of the Company. At December 31, 2016 and 2015, no options have been issued under this plan.

     
  c)

Warrants:

     
 

On January 19, 2013, the Company granted 5.0 million warrants to directors, officers and consultants. These performance warrants have an exercise price of $0.25 per warrant, but are only exercisable if the share price of the Company exceeds $1.00 per share for ten consecutive trading days, with a minimum of 100,000 shares traded over the same period. The fair value of these warrants was estimated to be $254,938 using the Black-Scholes pricing model based on a volatility of 98%, risk-free interest rate of 1.5%, expected life of 2 years and no dividend yield.

     
 

On January 18, 2015, the Company extended the warrants for two years, expiring January 18, 2017. All other terms remained the same. The incremental fair value with respect to extending the warrant term was not significant.

     
 

On January 18, 2017, all 5.0 million of the warrants expired out of the money.


13.

Finance expense:


      2016     2015     2014  
  Interest income on cash $  (3,079 ) $  (3,872 ) $  (6,371 )
  Interest expense   319,935     295,622     285,244  
  Accretion on decommissioning liability   10,545     10,494     12,597  
  Shareholder loan forgiveness   -     -     (31,494 )
  Net finance expense $  327,401   $  302,244   $  259,976  

F-23



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

14.

Income taxes:

   

The provision for income taxes differs from the amount that would have been expected by applying the combined federal and provincial tax rates to the loss for the year. This difference results from the following items:


      2016     2015     2014  
  Loss before tax $  (539,569 ) $  (462,647 ) $  (322,400 )
  Combined tax rate   27.0%     25.0%     25.0%  
  Expected income tax reduction $  (145,684 ) $  (115,662 ) $  (80,600 )
  Increase (decrease) resulting from:                  
       Effect of foreign tax rates   (9,496 )   (13,141 )   (13,187 )
       Change in unrecognized deferred tax assets   155,249     127,787     93,278  
       Non-deductible and other   3,300     6,062     13,330  
        Income tax expense   3,369     5,046     12,821  

The statutory tax rate increased from 25% to 27% due to an increase in the Alberta provincial tax rate effective July 1, 2015.

The components of the recognized deferred income tax asset (liability) are as follows:

  As at December 31   2016     2015     2014  
                     
  Property, plant and equipment / exploration and evaluation assets - Canada $  (188,047 ) $  (202,238 ) $  (230,358 )
  Non-capital losses – Canada   188,047     202,238     230,358  
  Property, plant and equipment / exploration and evaluation assets – Canada   (142,803 )   (142,803 )   (142,803 )
  Decommissioning obligations – Australia   109,955     142,803     142,803  
  Non-capital losses – Australia   32,848     -     -  
                     
  Deferred tax asset (liability) $  -   $  -   $  -  

Deferred tax assets have not been recognized in respect of the following temporary differences:

  As at December 31   2016     2015     2014  
  Canada:                  
  Share issue costs $  -   $  58,010   $  116,021  
  Non-capital losses (expire 2024 to 2034)   4,759,377     4,486,366     4,307,618  
                     
    $  4,759,377   $  4,544,376   $  4,423,639  

  As at December 31   2016     2015     2014  
  Australia:                  
  Decommissioning obligations $  -   $  28,683   $  18,189  
  Non-capital losses   1,316,752     1,112,794     850,101  
                     
  $ 1,316,752   $  1,141,477   $  868,290  

Deferred tax assets have not been recognized in respect of these items because it is not probable that future tax profit will be available against which the Company can utilize the benefits.

F-24



Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

15.

Related party transactions:

a) Shareholder loans:

The Company’s shareholder loans are described in note 8. The loans were negotiated between the Company and the shareholders on terms comparable to arms-length transactions of similar type. The fair value of the shareholder loans approximates their carrying value at December 31, 2016, 2015 and 2014.

b) Compensation of key management personnel:

The remuneration of directors and key executives is determined by the Board of Directors having regard to the performance of individuals and market trends. During 2016, 2015 and 2014, the Company did not incur any salaries and no key management or Director received any salary or consulting fees.

During 2013, key Company personnel received performance warrants. The fair value of these warrants was estimated using the Black-Scholes pricing model based on a volatility of 98%, risk-free interest rate of 1.5%, expected life of 2 years and no dividend yield. On January 18, 2017, all 5.0 million of the warrants expired out of the money.

16.

Loss per share:

   

Basic per share amounts are calculated using the weighted average number of shares outstanding of 64,056,876 for the year ended December 31, 2016 (2015 – 64,056,876, 2014 – 64,056,876). In computing diluted per share amounts, all of the Company’s outstanding warrants were excluded from the calculation of the weighted average number of common shares outstanding as they were anti-dilutive.

   
17.

Subsidiaries and jurisdictions:

   

The consolidated financial statements of the Company for the years ended December 31, 2016, 2015 and 2014 comprise the Company and the following subsidiaries:


    Country of   % Equity
    Incorporation Assets Held Interest
  Chelsea Oil Australia Pty. Australia PL 18, PL 40, PL 280 100%
  Cooper-Eromanga Oil Inc. US ATP 582 100%
  Cooper Basin Oil and Gas Inc. US - 20%

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Chelsea Oil and Gas Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015 and 2014 (US Dollars)

18.

Commitments:


            Remaining     Remaining        
      Current     Work Commitment     Work Commitment     License  
  License   Phase     ($ million)     (A$ million)     Term  
  PL 18   Later Development   $ 3.6     AUD 5.0     August 2024  
  PL 40   Later Development   $ 1.4     AUD 2.0     September 2029  
  PL 280   Initial Development   $ 0.7     AUD 1.0     August 2031  
  ATP 582   Second Term   $ 8.0     AUD 11.0     August 2020  
          $ 13.7     AUD 19.0        

19.

Expense reimbursements:

   

During the year, the Company received $87,652 (2015 - $nil, 2014 - $nil) reimbursements from the Sponsor. These reimbursements relate to travel and general and administrative expenses incurred during the year. The Sponsor has agreed to fund the Company’s funding and restructuring efforts. There is no obligation to repay these reimbursements.

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