TIDMVGAS
RNS Number : 2809Y
Volga Gas PLC
08 September 2020
8 September 2020
Volga Gas plc
("Volga Gas", or "the Company")
2019 ANNUAL RESULTS
AND NOTICE OF AGM
Volga Gas plc (LSE: VGAS), the oil and gas exploration and
production group operating in the Volga Region of Russia, is
pleased to announce the completion of the Company's audited
financial results for the year ended 31 December 2019 ("Final
Results"). The contents of the annual report and accounts are
substantially reproduced below.
The delay in completion of the audit was occasioned at the
request of the Company's auditors KPMG LLP and to reflect the
additional time needed to complete additional auditor reviews and
Board investigations into the effectiveness of the Group's internal
control and risk management systems and the potential introduction
of a number of measures to strengthen them.
As disclosed in the Company's Preliminary Results Announcement
on 7 April 2020, the Audit Committee appointed external consultants
to conduct a forensic examination of the process for appointment of
sales agents, and the manner in which payments to these agents are
calculated. An extensive and expensive investigation led by the
Company's legal counsel was completed in August, delivered to the
Board and shared with the Company's auditors. While the
investigation found no evidence of serious misconduct by any
executives or contractors, the auditors were not sufficiently
satisfied to provide an unqualified opinion. The Board has no
option other than to accept this qualified opinion. The Board is
undertaking a review of control procedures to improve the
transparency and accountability in relation to all material
contractual relationships entered into by Group companies.
RESULTS FOR THE YEARED 31 DECEMBER 2019
The Group has recognised a 48% reduction in its oil, gas and
condensate reserves following the discovery of unexpectedly high
water levels in the main producing reservoir of the Vostochny
Makarovskoye ("VM") field. The main strategic objective of the
Company at this stage is to re-build its reserve and production
base and re-establish a growth profile. Management believes the
Company has the financial stability and resources to withstand
current challenges and pursue this objective.
In spite of reduced output from VM during H2 2019, the Group's
production was only slightly below that of 2018. Gross revenues
were level whilst EBITDA was 6% below 2018. The reserve reduction
and unsuccessful sidetracks to the VM2 and Uzen4 wells led to
one-off expenses for impairment and asset write offs totalling
US$10.9 million, as well as increased depletion charges. These were
the main contributing factors to the loss before tax of US$10.5
million reported today.
In common with many companies in the oil industry and several
economic sectors worldwide, we currently face the significant
additional challenges operationally and financially set by the
Covid-19 pandemic. Our immediate priority has been to modify our
operations so as to protect the health of our employees,
contractors and customers; and to follow all government mandated
measures. To date, our production operations and markets for our
products are not significantly affected, but we clearly recognise
the possibility that this may happen. The impact on oil prices,
exacerbated by competition between major oil producing countries in
light of falling global demand for oil, is already apparent.
However, we entered this crisis in a position of financial
strength, with a cash balance of US$14.1 million and no debt. Our
capital expenditures are almost entirely discretionary and can be
delayed or cancelled as necessary and we have taken action to
reduce the fixed costs of the business. Management is determined to
enable the Group to survive the current crisis and to re-build the
reserves and production for the benefit of shareholders.
FINANCIAL RESULTS FOR 2019
-- Sales volumes down 2% to 4,871 boepd (2018: 4,956 boepd).
-- Gross revenues flat at US$46.0 million (2018: US$45.9 million).
-- Netback revenues (after export taxes and transport costs)
down 3% to US$42.2 million (2018: US$43.4 million), as more
condensate was exported in 2019.
-- EBITDA down 6% to US$15.9 million (2018: US$16.9 million).
-- EBITDA per barrel of oil equivalent sold was US$8.93 per boe (2018: US$9.36 per boe).
-- Gross profit of US$9.6 million (2018: US$16.3 million) as
depletion charges increased to US$14.9 million (2018: US$8.2
million).
-- Net cash flow from operations of US$15.0 million (2018: US$18.3 million).
-- One-off charges including impairment of US$8.3 million (2018:
nil) and write off of development assets of US$2.6 million (2018:
US$1.5 million), leading to an operating loss of US$9.9 million
(2018: profit of US$10.3 million).
-- Net cash of US$14.1 million as at 31 December 2019 (31
December 2018: US$13.5 million) after utilising US$9.6 million for
capital expenditure (2018: US$2.2 million), loan repayments of
US$1.7 million (2018:US$1.8 million), paying US$5.2 million in
equity dividends (2018: US$4.9 million) and purchase of own shares
for US$159,000 (2018: nil).
-- Debt free as at 31 December 2019 (31 December 2018 borrowings of: US$1.7 million).
PRODUCTION & DEVELOPMENT
-- Group average production in 2019 decreased 4.0% to 4,927 boepd (2018: 5,144 boepd).
-- At the VM field unsuccessful sidetracks led to reduced output
during H2 2019 and a reservoir study culminating in a 73% reduction
in reserves. Production from VM and Dobrinskoye in 2019 averaged
4,500 boepd (2018: 4,537 boepd).
-- At the Uzen field, drilling of slim hole wells commenced
during 2019, with six wells completed by the end of the year.
These, and additional slim hole wells completed more recently are
to be brought into production in 2020. Oil production averaged at
427 bopd in 2019 (2018: 607 bopd).
-- New reserves were discovered with a slim hole well in Upper
Aptian reservoir of the Uzen field. These reserves will be
quantified with appraisal drilling in 2020.
DOBRINSKOYE GAS PLANT
-- Improvements in the operation of the Redox based gas
sweetening enabled steady gas throughput and minimal unplanned
operational downtime in 2019.
-- An upgrade of the LPG extraction plant was completed in
during 2019 with the installation of a turbo compressor to improve
extraction rates.
COVID-19 RESPONSE
Fortunately our operations to date have seen little direct
operational impact from the Covid-19 pandemic other than a
temporary drop in demand during April 2020 and volatility in
international oil prices, We have implemented measures to ensure
the safety of our employees and contractors, the integrity of our
operational facilities and to prepare the business to face
potential challenges that emerge.
CURRENT TRADING
-- Between January and August 2020, Group production averaged
3,685 boepd, slightly below management's plan as a result of a
slower build-up of production from slim hole wells.
-- The average sales prices for oil and condensate in this
period have generally tracked the international market, averaging
US$31.44 per barrel in for oil and US$26.80 per barrel for
condensate.
-- In the absence of any disruptions resulting from Covid-19 or
any other causes, management plans production to average close to
4,000 boepd in 2020.
-- As at 31 December 2019, the Group budgeted capital
expenditure of US$8.3 million for 2020, Following the onset of the
Covid-19 pandemic, the Board decided to delay some of this and
focus investment on slim hole drilling. Total capital expenditure
for 2020 is currently expected to be US$4.4 million.
-- As at 31 August 2020, the Group had cash balances of US$12.1 million and no debt.
ANNUAL REPORT AND ACCOUNTS
The Annual Report and Accounts 2019, together with the Notice of
Annual General Meeting, is being dispatched to shareholders and
will shortly be available for download from the Company's website.
There are no changes to the financial statements from the
Preliminary Results announcement released on 6 April 2020.
ANNUAL GENERAL MEETING
The Company's AGM is scheduled to take place at 10.00 AM on 30
September at the offices of Akin Gump. Full details of the meeting
and the resolutions to be put to the Meeting are contained in the
Notice of AGM which will also shortly be available for download
from the Company's website.
In light of the continuing Covid-19 pandemic, attendance at the
AGM will be the minimum required to achieve a quorum
Market Abuse Regulation (MAR) Disclosure
Certain information contained in this announcement would have
been deemed inside information for the purposes of Article 7 of
Regulation (EU) No 596/2014 until the release of this
announcement.
For further information, please contact:
Volga Gas plc
Andrey Zozulya, Chief Executive Officer +7 (903) 385 9889
Vadim Son, Chief Financial Officer +7 (905) 381 4377
Tony Alves, Investor Relations Consultant +44 (0) 7824 884 342
S.P. Angel Corporate Finance LLP (Nominated
Adviser and Broker)
Richard Morrison, Richard Hail, Soltan
Tagiev +44 (0) 20 3470 0470
FTI Consulting (Financial PR)
Alex Beagley, Fern Duncan +44 (0) 20 3727 1000
Chairman's Statement
Dear Shareholder,
In this highly unusual year, production of the Volga Gas Annual
Report and Accounts for the year ended 31 December 2019 has been
delayed from its usual timetable not by Covid-19, but to allow the
Company's legal counsel time to conduct an investigation into
certain consultancy arrangements relating to gas sales by a Group
company. The investigation, which was completed earlier in August
2020 at considerable expense to your Company, discovered no
evidence or indication of illegality. Nevertheless, the auditors,
KPMG LLP, continued to have certain reservations. As we approach
the absolute deadline for filing accounts, which this year
exceptionally was extended to 30 September 2020, there is
insufficient time to pursue further investigations which may have
enabled KMPG to provide an unqualified audit opinion. Your Board
decided that it is in the interests of the Company and its
shareholders to end this process and to accept the audit opinion
KPMG felt able to provide. The Board is undertaking an extensive
review of processes for engagement and operation of all material
contractual relationships entered into by Group companies to ensure
greater transparency and accountability to the Board. Apart from
this introductory paragraph, the Report of the Auditors and updates
to various disclosures, the contents of this Annual Report were
completed in April 2020. There have been no amendments or
alterations to the financial statements as presented in the
preliminary results which were released on 6 April 2020.
Overview and Strategy
In 2019, the events of greatest impact operationally and
financially for Volga Gas were at the Group's Vostochny
Makarovskoye ("VM") field. As we announced in July 2019, it was
found that water levels within the main producing reservoir in the
VM field had risen significantly above management's expectations.
An ongoing study on the reservoir was extended into a more
extensive collection of data to enable a production management
strategy to extract the maximum amounts of gas and condensate
possible economically as well as to provide an updated estimate of
the remaining economically recoverable reserves in the field. The
details of the new reserve estimates and the forward plans for the
VM field are covered by the Chief Executive in his Report on page
5.
The strategic challenge facing the Company at this stage is to
re-build its reserve and production base and re-establish a growth
profile. The Board and management have identified three key strands
to achieving this:
-- To maximise extraction from the VM field and extend the
field's economic life with optimal reservoir management;
-- To grow the Group's oil business centered on the Uzen field
and exploration in the Karpenskiy licence area in which it sits;
and
-- New business opportunities, both to utilise the Group's gas
processing infrastructure and expertise and to extend the Group's
activities into new areas
I am pleased that Group's financial strength gives us the
ability to survive the challenges posed by the Covid-19 pandemic to
the entire world economy and to start on the process of rebuilding
the Group's assets. The Chief Executive's report outlines the
actions being taken by management to deal with the challenges of
the pandemic.
Performance in 2019
During 2019 the external conditions for the oil and gas industry
remained generally stable although oil prices on average in 2019
were approximately 10% lower than 2018. Despite challenging
geopolitics, the Ruble and the Russian domestic energy market
conditions were also stable during 2019. The Group has continued to
benefit from the improved operational efficiency at the Dobrinskoye
gas processing plant from switching of the gas sweetening process
in 2018 to a Redox-based system. This is reflected in the lower
operating expense in 2019 than in 2018.
Apart from further minor improvements to the gas processing
facility, a further upgrade to the project for the capture of
liquid petroleum gases ("LPG") was undertaken to improve the
recovery of propane and butane from the gas stream. While the LPG
project as a whole will manifestly generate sufficient additional
revenues to recoup the costs, the final part of the project was
sanctioned before the problems with the VM field became apparent.
Given the now expected curtailment of the economic life of the
field, the additional investment may not be fully recouped by the
extra LPG that produced during the remaining economic field
life.
One of the potentially most important developments in 2019 for
the Group is the application of slim hole drilling. This technique
uses a light weight, truck-mounted drilling rig, of a design that
was originally developed for mineral exploration. These rigs
produce narrow bore holes which can used to develop the relatively
shallow oil and gas deposits in the Group's licences. The key
advantage is economic, as the cost of a producing slim hole well is
typically one-fifth of the cost of a conventional well. Slim hole
wells also provide a highly cost effective means of drilling
exploratory wells, which will be part of the forward strategy of
the Group.
These matters are discussed in greater detail by the Chief
Executive Officer in the Operational Review.
Board and Governance
Finally, I would like to update you on the Board. As previously
announced, Ronald Freeman retired from the Board on 31 December
2019. Vladimir Koshcheev has also advised me of his intention to
retire from the Board at the next Annual General Meeting.
Similarly, Michael Calvey will be retiring by rotation and this
time will not be offering himself for re-election. I and my
colleagues express our warm thanks to all three of them for their
contributions to the Board over many years of service. I am
delighted to report the appointments of Stewart Dickson and Andrei
Yakovlev as independent non-executive directors of the Company.
Their summarised biographies are included on pages 16 and 17.
Mikhail Ivanov
Chairman
Chief Executive's Report
As discussed in the Chairman's letter, the most significant
events of 2019 centered on the VM field, where the Company had to
downgrade reserves in the field by 73% and decide on a production
strategy to maximise the economic recovery of hydrocarbons. The
background to this is covered in greater detail in the operations
report and I cover the forward plan later in this Report.
When the logging in VM during H1 2019 indicated much higher than
anticipated levels of gas:water contact in the reservoir, the
management team decided to reduce the production rates in order to
prevent further rapid rise in water encroachment. For this reason,
Group total production in 2H 2019 averaged 4,220 boepd compared to
5,634 boepd in H1 2019, to average 4,927 boepd for 2019 as a whole
(2018: 5,144 boepd), a 4% reduction year on year.
On a more positive note, early in 2019, management identified an
opportunity to utilise slim hole drilling technology as an
advantageous way of developing relatively shallow hydrocarbon
resources. Initially using a contractor owned slim hole rig, the
Company drilled six slim hole wells in and around the Uzen oil
field. This was in general a successful undertaking and provided
the drilling team with valuable experience which has been put to
use for the remainder of the programme. In mid-2019, the decision
was taken to acquire a Company-owned slim hole rig at a cost of
US$0.7 million, equivalent to approximately 18 months of rig
rental. By the end of 2019, a total of six slim hole wells had been
drilled and three others were in progress.
Based on the experience acquired with slim hole drilling, an
extended drilling programme fully utilizing two rigs has been
proposed comprising 8 new wells during 2020, 6 on Uzen and 2 on VM,
and a further 20 wells during 2021-2022. In addition to the
development drilling programme there are plans for seven
exploratory wells to be drilled on identified structures in the
Group's Karpenskiy licence area. While success with any one of
these cannot be assumed, management is optimistic of being able to
report a measure of success in finding new oil reserves for the
Group. Equally importantly, any newly discovered oil reserves can
be rapidly and cost-effectively brought into production.
Included among the eight production wells included in the slim
hole drilling programme are two new wells on the VM field, which
will be required to produce the identified remaining reserves in
the field, and a new well on the Sobolevskoye field, a small
currently non-producing field in the Group's Urozhainoye-2 licence
area.
While during 2019, the most important aspects of the Group's
activities relate to the sub-surface, additional works were carried
out to improve the operational efficiency of the surface
facilities, most especially at the Dobrinskoye gas processing
plant.
The LPG unit, which was commissioned in May 2018 and has been
operating since then, was upgraded with an additional investment of
approximately US$2.0 million in a turbo expander which has enabled
a greater level of extraction of propane and butane from the gas
stream by achieving lower temperatures in the LPG extraction
vessel. This upgrade was completed in November 2019 with a notable
increase in LPG extraction.
There were also further improvements to the Redox-based
sweetening process to improve the operational efficiency of the
plant, improving the reliability of the process and reducing
operating costs.
In spite of the operational challenges, lower production rates
and lower oil prices than seen in 2018, the Group control costs,
especially overheads. This has enabled the Group to remain cash
flow positive throughout the year and to preserve its financial
strength and provide some cushion to deal with the present
challenges facing the Group. The Financial Review on pages 9 to 11
sets out the details.
Medium-term strategy
Management's key objective is to rebuild the Group's reserve and
production base to rebuild asset value and provide a sustainable
profile of profit and cash generation. The key strategic actions
identified with the Board have been set out in the Chairman's
letter above. The specific actions to be undertaken in 2020
are:
-- Drilling of two new production wells on the VM field using
slim hole drilling and to undertake production management studies
to mitigate future formation water production. This is with the aim
of maintaining economic gas production and maximising the
extraction of the remaining reserves.
-- Sustained slim hole development drilling, especially of the
Albian reservoir in the Uzen field to increase oil production.
-- Commence a sustained exploration drilling programme in the
Karpenskiy licence area during 2020-2021 to test the maximum number
of prospects within the remaining exploration term, with the aim of
discovering material new oil reserves.
-- Business development activities to seek additional gas
throughput on the Dobrinskoye gas plant, including tolling of third
party production; and new licence areas and ventures which can
utilise the skills of the operational and management team.
Covid-19 response
Whilst our operations to date have seen little direct impact
from the Covid-19 pandemic, we have focused on implementing
measures to ensure the safety of our employees and contractors, the
integrity of our operational facilities and to prepare the business
to face potential challenges that emerge. The potential impacts are
currently unknown but could include production disruption due to
government restrictions or customer sales, impact on our workforce
and supply chain disruption. The actions implemented to mitigate
the risks associated with the Covid-19 pandemic are set out on
pages 14 and 15. In the current environment, with significantly
lower oil prices and numerous uncertainties in the global economy,
management expects the Group's financial performance in 2019 to be
lower than that of 2018. Nevertheless, management is confident that
the Group's planned capital expenditure of US$8.3 million will be
covered by operating cash flow and existing liquid resources. The
Board is determined to maintain the Group's financial strength, if
necessary by deferring capital expenditure, while taking the
actions to rebuild the Group's asset value.
Andrey Zozulya
Chief Executive Officer
Operational Review
Operations overview
As outlined on the previous page, Group production in 2019, at
an average daily rate of 4,927 boepd, was 4% lower than the 5,144
boepd achieved in 2018. Following higher production in H1 2019, in
July the output from the VM field was significantly reduced
following the finding of higher than anticipated levels of
gas:water contact in the reservoir.
International oil prices were on average approximately 9% lower
with the Urals oil price reaching an average level of US$63.71 per
barrel in 2019 compared to US$69.69 per barrel in 2018.
Nevertheless, the higher proportion of condensate to gas (as
mentioned below) mitigated the impact of lower volumes and lower
pricing on the total sales. Taking into account selling expenses,
netback revenues (defined as revenues less selling expenses as
shown in the Income statements) in 2019 of US$42.2 million were
just 3% lower than the US$43.4 million in 2018. The fall in total
sales volumes and oil prices were cushioned by a higher proportion
of oil and condensate in the product mix.
Overall production costs were lower, with benefits of savings
from improved operational efficiencies. On the other hand, the
scheduled adjustments to the rate formulas led to higher rates of
Mineral Extraction Tax. Consequently EBITDA* for 2019 was 6% lower
at US$15.9 million (2018: US$16.9 million).
Gas/condensate production and development
The Dobrinskoye and VM fields are managed as a single business
unit. Production from the fields is processed at the gas plant
located next to the Dobrinskoye field, extracting the condensate
and processing the gas to pipeline standards before input into
Gazprom's regional pipeline system via an inlet located at the
plant. The VM field was developed with wells drilled by Volga Gas,
while the Dobrinskoye wells were acquired from previous
licensees.
Production during 2019 averaged 16.2 mmcf/d of gas and 1,507 bpd
of condensate and 287 bpd of LPG (2018: 18.8 mmcf/d of gas and
1,183 bpd condensate and 223 boepd LPG), a total of 4,500 boepd
(2018: 4,537 boepd). It is notable that while the overall
production volumes of hydrocarbons extracted from the wells
decreased from July 2019, the proportion of condensate increased
such that for the year as a whole, the average total production was
not materially lower on a barrel of oil equivalent basis.
The VM field has three active production wells, VM#1, VM#3 and
VM#4, in the principal reservoir, the Evlano Livinskiy carbonate,
and a further well in the secondary Bobrikovskiy sandstone
reservoir. Smaller volumes were also derived from the Dobrinskoye
#26 well which in January 2019 were revived with a successful
sidetrack.
A sidetrack well that commenced drilling late in 2018 on VM#2
was unsuccessful as several attempts made during early 2019 to cut
off water incursion into the well bore failed. Management
subsequently undertook logging in the VM#3 which showed that the
gas:water contact was higher than previously expected. The Company
appointed Schlumberger Ltd to conduct a comprehensive technical
evaluation and reservoir study on the VM and Dobrinskoye fields.
The study was completed recently and, based on the data
accumulated, a independent re-calculation of remaining reserves was
carried out.
These results indicate total estimates of Proved reserves for
the VM field of 3.2 million barrels of oil equivalent ("mmboe"), a
downward revision of approximately 7.6 mmboe, or 70%. The
preliminary Proved reserves for the Dobrinskoye field, as at 31
December 2019 are 0.4 mmboe, a downward revision of approximately
0.7 mmboe, or 64%.
Two new wells, VM#5 and VM#6 are planned to be drilled during H1
2020 on locations on the eastern flank of the field, where the
recently concluded study indicates there are undepleted resources
of gas and condensate that would be accessed by these wells. These
wells are to be drilled with slim holes to a vertical depth of
approximately 2,000 metres. While this is a greater depth than the
slim hole wells drilled hitherto, management is confident of
achieving its aims. The aim of this is to maintain economic levels
of production to cover the fixed costs of operating the gas
processing facility. On current estimates, this is considered
unlikely to extend beyond mid-2022.
Management estimates production in 2020 from the VM field to be
approximately 10.0 mmcfd of gas plus 1,300 bpd of condensate and
240 boepd of LPG, a total of 3,200 boepd. This rate is consistent
with the strategy of reservoir management adopted after the
detection of water influx in the wells. However, there is a
significant risk that in the event of either disruption to our
ability to market condensate or a shortage of manpower to operate
the gas processing plant that may be caused by the Covid-19
pandemic, production of gas and condensate may need to be curtailed
during the year. While there would be a financial impact, temporary
shut-downs are unlikely to have an impact on the future ability of
the VM wells to produce or on the remaining recoverable reserves in
the field. In addition, the effects of the pandemic may disrupt
plans to drill the new VM wells and may also lead management to
defer the drilling.
Gas, condensate and LPG sales
The Group has been making its gas sales directly to Gazprom
since 2017 and, although there is no long term contract, the
Directors expect the current arrangements to remain in place.
During 2019, the Ruble exchange rate was stable but slightly
weaker than in 2018. Since the gas pricing was fixed in Ruble
terms, in US Dollar terms the average gas sales realisations were
slightly lower in 2019 at US$1.98/mcf (2018: US$1.99), offsetting
the 4% increase in the Ruble sales price.
During 2019, the Group found it advantageous as times to export
its condensate. Consequently condensate exports in 2019 were 34% of
total sales (2018: 12%).
* This measure is adjusted EBITDA and represents earnings before
interest, tax, DD&A, impairment and other operating income.
Further reconciliation can be found on page 11.
During 2019, the average condensate netback price (after
accounting for export taxes and transportation costs) was US$41.75
per barrel (2018: US$43.32).
LPG commenced on a pilot basis in May 2018. As a result of
production during the full year ended 31 December 2019 total sales
increased by 28% to 8,803 tonnes (2018: 6,903 tonnes). However the
average realisations were lower in 2019 at US$299 (2018:US$412) per
tonne. Our experience is that the selling price of LPG is highly
seasonal. Management hopes to increase selling flexibility in 2020
to gain an improved market position.
The impact of Covid-19 on the domestic market for condensate in
the Volga region of Russia is unpredictable. We will retain a
flexible policy of selling domestically or exporting as necessary.
However, possible disruption to logistics beyond the control of the
Group may impact marketing of both condensate and LPG, which may
lead to temporary reduction or shut-downs of production.
Production costs
Average unit production costs on the gas condensate fields
decreased to US$3.78 per boe in 2019 (2018: US$4.21). The decline
in the Ruble, in which effectively all the costs are denominated,
improved throughput rates during 1H 2019 which reduced the impact
of the fixed cost element of the operating expenses and benefits
further operational efficiencies all contributed.
Gas processing plant
Since June 2017, the plant has been operating entirely with
Redox-based gas sweetening. In this time, the process has been
progressively optimised and the efficiency of the process improved.
During 2019 the plant operated with expected uptime, with temporary
closures only for routine maintenance and in periods when Gazprom
was undertaking maintenance on its gas transmission lines.
Since May 2018, the LPG unit has been operational at the gas
plant and has been providing an additional high value product
stream from gas that was either previously flared or sold with
natural gas at a lower value. During 2019, a turbo expander was
added to the LPG unit, enabling the system to operate at a lower
temperature and thereby capturing a greater proportion of the
butane and propane in the gas stream.
The physical capacity of the plant is currently significantly
greater than well output. As the plant is on a fairly open
expansive site, it is possible to operate it while enabling
personnel to maintain a safe distance between them. As the majority
of staff live locally to the plant, travel restrictions should not
have a material impact on the ability of the plant to operate. The
Group has established changes to the work patterns, including to
the catering facilities on site, to preserve the health of our
workers.
Oil production and development
The Group's oil production is derived from the Uzen field.
During 2019 production averaged 427 bopd (2018: 607 bopd). Up to
and including 2019, the Uzen field has been producing oil from a
cretaceous Aptian reservoir at a depth of approximately 1,000
metres. This is now at a late stage of maturity of production.
Early in 2019 the Group drilled a sidetrack to the Uzen#4 well
into an undeveloped pool in the Albian reservoir. After a series of
production tests, it was concluded that the pool into which the
well was drilled was charged primarily with gas rather than oil.
This small gas accumulation is not of significant commercial
potential - although the gas can be utilised for in field fuel
requirements. Consequently, the Group has decided to write off the
cost of this well.
The majority of remaining reserves in the Uzen field are in the
shallower Albian reservoir. The initial development of this
reservoir with conventional horizontal wells was found to be
economically marginal. For this reason, management sought a low
cost drilling alternative and opted for slim hole drilling. This
method uses a light, truck-mounted drilling rig that hitherto has
been used primarily for mineral exploration drilling. With suitable
adaptation and the use of appropriate tubing and tools, the Company
undertook an extended trial of this method. After an initial six
wells drilled with a rented rig, management decided to purchase a
Company-owned rig, with higher specifications.
By the end of 2019 a total of 6 slim hole oil wells had been
drilled, with a further 3 in progress. By 29 February a total of 10
wells have been drilled, with an eleventh in progress. Following
installation of production tubing and or artificial lift
mechanisms, the new wells are progressively being brought into
production.
One of the slim hole wells drilled in 2019 discovered oil in a
previously unevaluated geological layer, the Upper Aptian, at a
depth of approximately 900 metres. As a newly identified resource,
Volga Gas is required to prepare a drilling project, drill at least
one appraisal well, calculate the reserves and submit development
plans for approval by the State Reserves Committee. The normal
timeline for this approval process is approximately one year.
As with condensate sales, oil sales may be disrupted by the
effects of the Covid-19 pandemic. Production operations on the Uzen
field are not manpower intensive and not critically dependent on
external supplies. The Group has implemented changes to ensure the
health of personnel on the field. Drilling operations, on the other
hand, utilise more personnel on site and rely on the availability
of consumables, such as drill pipe and drilling mud. While the
Group has implemented enhanced health and safety processes on drill
sites, the operations may be disrupted by illness, travel
restrictions and supply constraints of consumables.
Exploration
During 2019, the Group's exploration activity was confined to
technical studies principally on prospects in the Karpenskiy block,
on which the Group has identified a number of exploration targets
in the Karpenskiy Licence Area at shallow horizons of between 1,000
and 2,000 metres' depth. With the acquisition of slim hole drilling
rigs and capability, the Group now has a highly cost effective
manner of evaluating its exploration prospects for the remaining
two year period of its exploration rights in the Karpenskiy licence
area. During 2020, a total of seven exploratory wells have been
identified for drilling in the Karpenskiy licence area.
In addition, the Group has acquired at low cost and with little
committed capital expenditure a new exploration project, the
Muradymovsky License Area, in the Bashkiriya region in an area of
active oil production. Studies on this indicate the potential for
material new reserves that could be brought rapidly into
production. However, Volga Gas has not to date prepared estimates
of any reserves or resources in this licence.
The comments of the potential impact of Covid-19 on development
drilling clearly apply equally to exploration drilling.
Oil, gas and condensate reserves as of 1 January 2020
During 2019, the Company appointed Schlumberger Ltd to conduct a
comprehensive technical evaluation and reservoir study on the VM
field. The study was completed in December 2019 and a
re-calculation of remaining reserves in the fields was carried out
by independent reserve engineers Panterra. The results were
presented to the Company in February. As announced on 27 January
2019, there is a significant reduction in the estimated remaining
reserves in the VM field as a result of this work. Separately, a
re-assessment of the reserves in the Dobrinskoye field was carried
out and a reduction in remaining reserves estimates was indicated
there as well.
At the Uzen field, as mentioned above there were two events in
2019 which may have an impact on reserve estimates on the Uzen
field: the Uzen #4 sidetrack that encountered mainly gas rather
than oil; and the discovery of oil in the Upper Aptian reservoir
with one of the slim hole wells. Further appraisal drilling is
required for an accurate determination of the Upper Aptian
reserves. Meanwhile, a recent study by Panterra confirmed current
geological reserves estimates.
The changes to oil, gas, condensate and LPG reserves between 1
January 2019 and 31 December 2019 are summarised in the following
table.
Oil, gas and condensate reserves
Oil & Condensate Gas LPG Total
(mmbbl) (bcf) (tonnes (mmboe)
'000)
------------------------ ----------------- ------- --------- ---------
As at 31 December 2018
Proved reserves 9.174 50.5 141 19.247
Proved plus probable
reserves 10.472 70.7 198 24.592
------------------------ ----------------- ------- --------- ---------
Production: 1 Jan-31
Dec 2019 0.710 5.9 8.9 1.804
Revisions to reserves:
Proved reserves (1.446) (33.8) (108.5) (8.356)
Proved plus probable
reserves (2.745) (54.1) (165.5) (13.701)
As at 31 December 2019
Proved reserves 7.018 10.7 23.6 9.087
Proved plus probable
reserves 7.018 10.7 23.6 9.087
------------------------ ----------------- ------- --------- ---------
Revision as % of 2018 reserves
less 2019 production
Proved reserves (17%) (76%) (82%) (48%)
Proved plus probable
reserves (28%) (83%) (88%) (60%)
Notes:
1. Volga Gas (through its wholly owned subsidiaries PGK and GNS)
is the operator and has a 100% interest in five licences to explore
for and produce oil, gas and condensate in the Volga region.
2. The reserve estimates as at 31 December 2019 for gas,
condensate and LPG held by GNS were independently assessed in an
updated study conducted by OOO Panterra dated 7 February 2020. The
full reserve report is available on the Company's website:
www.volgagas.com .
3. There was an updated geological study by Panterra based on
the results of the 2019 drilling activities which concluded there
were no material net revisions to oil reserves.
4. The reserve estimates were prepared in metric units: tonnes
for oil, condensate and LPG and standard cubic metres for gas. The
conversion ratios from tonnes to barrels applied in the table above
were 7.833 barrels per tonne of oil, 8.75 barrels per tonne of
condensate and 11.75 barrels per tonne of LPG. One cubic metre
equates to 35.3 cubic feet and one barrel of oil equivalent is
given by 6,000 standard cubic feet of gas.
5. The above reserve estimates, prepared in accordance with the
PRMS reserve definitions prepared by the Oil and Gas Reserves
Committee of the SPE, have been reviewed and verified by Mr Andrey
Zozulya, Director and Chief Executive Officer of Volga Gas plc, for
the purposes of the Guidance Note for Mining, Oil and Gas companies
issued by the London Stock Exchange in June 2009. Mr Zozulya holds
a degree in Geophysics and Engineering from the Groznensky Oil
& Gas Institute and is a member of the Society of Petroleum
Engineers.
Andrey Zozulya
Chief Executive Officer
Financial Review
Results for the year
In 2019, the Group generated US$46.0 million in turnover (2018:
US$45.9 million) from the sale of 729,147 barrels of crude oil and
condensate (2018: 649,541 barrels), 8,803 tonnes of LPG (2018:
6,903 tonnes) and 5,674 million cubic feet of natural gas (2018:
6,471 million cubic feet).
During 2019, 34% by volume of condensate sales were exported
(2018: 12%). In 2019 as in 2018 all oil sales were in the domestic
market.
The gas sales price during 2019 averaged US$1.98 per thousand
cubic feet (2018: US$1.99 per thousand cubic feet), the movement in
the Ruble/US Dollar exchange rate which offset the increase in the
Ruble selling prices. In 2019, as in 2018, the Group's gas sales
were direct to Gazprom.
In 2019, the total cost of production decreased to US$7.2
million (2018: US$8.3 million), driven mainly by cost savings from
chemicals used for gas sweetening and improved operational
efficiency at the gas processing plant. Unit field operating costs
were lower at US$4.07 per boe (2018: US$4.61 per boe), for similar
reasons.
Production-based taxes increased to US$14.3 million (2018:
US$13.2 million) reflecting the impact of higher oil Mineral
Extraction Tax ("MET") rates as well as the impact of further
formula changes that came into effect on 1 January 2019. MET paid
in 2019 represented 33.8% of netback revenues, defined as revenues
less selling expenses as shown in the Income statements (2018:
30.4% of netback revenues), reflecting a greater proportion of oil
and condensate relative to gas in the oil equivalent sales volumes.
Higher rates of MET apply to oil and condensate relative to
gas.
The Depletion, Depreciation and Amortisation ("DD&A") charge
in 2019 was US$14.9 million (2018: US$8.2 million) reflecting the
higher unit DD&A rate applied to comparable production
volumes.
As a consequence principally of higher DD&A, production
activities generated a gross profit of US$9.6 million in 2019
(2018: US$16.1 million).
Operating and administrative expenses in 2019 were US$4.8
million (2018: US$4.9 million).
The Group experienced a 6% decrease in EBITDA (defined in the
operational and financial summary on page 11 as operating profit
before non-cash charges, including exploration expenses, depletion
and depreciation) to US$15.9 million (2018: US$16.9 million).
There were no significant exploration and evaluation expenses in
2019 (2018: nil) or other provisions (2018: nil). However, as a
result of the revision to reserves in the VM and Dobrinskoye
fields, the Group recorded an asset impairment charge of US$8.3
million mainly against the PP&E associated with those fields.
In addition, there was a US$2.6 million write off of development
assets in 2019 (2018: US$1.5 million), primarily as a result of
unsuccessful development drilling operations on sidetracks to the
VM#2 and the Uzen #4 wells. Consequently, the Group made an
operating loss of US$9.9 million in 2019 (2018: operating profit of
US$10.3 million).
Including net interest income of US$0.3 million (2018: US$0.4
million) and other net losses of US$0.9 million (2018: net losses
of US$0.2 million) the Group recognised a loss before tax of
US$10.5 million (2018: profit before tax of US$10.6 million).
The net loss after tax was US$10.0 million (2018: net profit
after tax US$8.4 million) after a current tax charge of US$2.2
million (2018: US$2.2 million) and a deferred tax credit of US$2.7
million (2018: deferred tax credit of US$0.1 million).
For the year ending 31 December 2019, the Group recorded a
currency retranslation gain of US$6.1 million (2018: expense of
US$11.8 million) in its other comprehensive income, relating to the
movements of the Ruble against the US Dollar.
Profitability by product
While the Group operates as a single business segment, as
described in Note 2.7 to the accounts on page 40, management
estimates the relative profitability, which for this purpose is
defined to be gross profit less selling expenses, by product to be
as follows:
2019 2018
US$ 000 Oil Gas, LPG Oil Gas and
and condensate condensate
-------- ---------------- -------- ------------
Revenue 7,023 38,933 10,473 35,402
MET (4,039) (10,218) (5,575) (7,619)
Depreciation (1,010) (13,846) (944) (7,276)
Other Cost of sales (1,321) (5,910) (1,325) (7,023)
Selling expenses (40) (3,731) (59) (2,414)
-------- ---------------- -------- ------------
Gross profit net of selling
expenses 613 5,228 2,570 11,070
======== ================ ======== ============
Cash flow
Group cash flow from operating activities decreased by 18%
US$15.0 million (2018: US$18.3 million). Net working capital
movements contributed cash inflow of US$1.1 million in 2019 (2018:
net outflow of US$0.7 million). Included in cash flow from
operations was the receipt during 2018 was a sum of US$3.1 million
(2019: nil) being a court awarded settlement of a legal dispute.
During 2019 there were payments of profit tax of US$2.4 million
(2018: US$1.8 million).
With increased capital expenditures in 2019, the net outflow
from investing activities was US$9.6 million (2018: US$2.1
million).
Cash outflow from financing activities was US$7.2 million in
2019 (2018: US$6.7 million), comprising equity dividend payments of
US$5.2 million (2018: US$4.9 million), loan repayments of US$1.8
million (2018: US$1.8 million) and a net sum of US$159,000 (2018:
nil) spent on purchasing the Company's own shares which are held in
treasury.
After a positive adjustment of US$0.7 million for the exchange
rate effects on cash and cash equivalents (2018: negative
adjustment of US$2.7 million), there was a net decrease in cash by
US$1.1 million (2018: net increase of US$6.6 million), taking the
year end cash balance to US$14.1 million (2018:15.2 million).
Dividend
In May 2019 the Company paid a final dividend of US$0.065 per
ordinary share. No interim dividend was declared during 2019 (2018:
interim dividend of US$0.06 per Ordinary share, totaling US$4.9
million). The Directors do not propose a final dividend in respect
of 2019.
Capital expenditure
During 2019 expenditure of US$9.4 million was capitalized (2018:
US$2.8 million), of which US$9.0 million was added to PP&E in
development and producing assets (2018: US$2.6 million) and US$0.4
million on exploration and evaluation (2018: US$0.2 million).
The main capital expenditure in 2019 comprised the costs of
drilling of slim hole wells of US$3.4 million, installation of a
turbo expander at the LPG plant of US$2.0 million, drilling of well
#4 sidetrack on Uzen field of US$1.2 million, drilling of well #2
sidetrack on VM field of US$0.6 million, the acquisition of a slim
hold drilling rig of US$0.6 million.
Balance sheet and financing
As at 31 December 2019, the Group held cash and bank deposits of
US$14.1 million (2018: US$15.2 million). All of the Group's cash
balances are held in bank accounts in the UK and Russia.
Approximately 68% (2018: 61%) of the Group's cash is held in US
Dollars and 32% (2018: 38%) held in Russian Rubles.
In February 2019, the remaining balance of a bank facility,
which was utilised to fund purchases of equipment for the LPG
project, was repaid in full. There were no other finance loans or
leases outstanding either in 2019 or 2018.
As at 31 December 2019, the Group's intangible assets were
US$3.4 million (2018: US$3.3 million). Property, plant and
equipment decreased to US$34.0 million (2018: US$45.1 million),
reflecting higher depreciation charges, asset write offs and asset
impairments as outlined above. The carrying values of the Group's
assets relating to its main cash-generating units have been subject
to impairment testing. The impairment tests, including sensitivity
analysis around the central economic assumptions and taking into
account the reduction in oil and gas reserves are detailed in note
4(b) to the accounts. Based on this analysis, the Directors have
decided to take an impairment charge of US$8.3 million in the year
to 31 December 2019 (2018: nil).
The Group's committed capital expenditures are less than
expected cash flow from operations and cash-on-hand and such
expenditures can be managed in light of the volatility in
international oil prices and the Ruble. The Group may consider
additional debt facilities to fund the longer-term development of
its existing licences and operational facilities as appropriate.
However, management expects for the foreseeable future to maintain
capital expenditure within the level of operating cash flow and to
maintain an adequate level of liquidity to meet all of the Group's
commitments as and when they arise.
The Group's financial statements are presented on a going
concern basis, as outlined in Note 2.1 to the accounts.
Vadim Son
Chief Financial Officer
Five-year operational and financial summary
Sales volumes 2019 2018 2017 2016 2015
------------------------------- --------- --------- --------- --------- -------------------
Oil & condensate (barrels
'000) 729 650 644 828 439
Gas (mcf) 5,674 6,471 6,378 9,320 4,545
LPG ('000 tonnes) 8.803 6.904 - - -
Total (boe) 1,778 1,809 1,707 2,381 1,196
Operating Results (US$ 2019 2018 2017 2016 2015
000)
------------------------------- --------- --------- --------- --------- -------------------
Oil and condensate sales 32,093 30,154 23,952 25,380 11,041
Gas sales 11,228 12,880 13,114 14,032 6,786
LPG sales 2,635 2,841 - - -
------------------------------- --------- --------- --------- --------- -------------------
Revenue 45,956 45,875 37,066 39,412 17,827
Field operating expenses (5,026) (5,865) (6,379) (9,367) (6,016)
Production based taxes (14,257) (13,194) (10,936) (10,255) (5,876)
Depletion, depreciation
and other (14,856) (8,220) (8,580) (5,037) (2,345)
Other production costs (2,204) (2,483) (2,941) (1,601) (1,352)
------------------------------- --------- --------- --------- --------- -------------------
Cost of sales (36,343) (29,762) (28,836) (26,260) (15,589)
Gross profit 9,613 16,113 8,230 13,152 2,238
Selling expenses (3,771) (2,473) (2,221) (4,052) (319)
Exploration expense - - - (265) (635)
Write-off of development
assets (2,608) (1,513) (65) (1,798) -
Impairment charge (8,335) - - - -
Operating, administrative
& other expenses (4,822) (4,921) (5,831) (4,525) (3,377)
Other operating income - 3,120 - - -
------------------------------- --------- --------- --------- --------- -------------------
Operating (loss)/profit (9,923) 10,326 113 2,512 (2,093)
Net realisation 2019 2018 2017 2016 2015
------------------------------- --------- --------- --------- --------- -------------------
Oil & condensate (US$/barrel) 44.02 46.39 37.19 30.65 25.16
Gas (US$/mcf) 1.98 1.99 2.06 1.51 1.49
LPG (US$/tonne) 299.33 411.50 - - -
Operating data (US$/boe) 2019 2018 2017 2016 2015
------------------------------- --------- --------- --------- --------- -------------------
Production costs 4.07 4.61 5.46 4.61 6.16
Production based taxes 8.02 7.29 6.40 4.31 4.91
Depletion, depreciation
and other 8.42 4.54 5.02 2.11 1.96
EBITDA calculation (US$ 2019 2018 2017 2016 2015
000)
------------------------------- --------- --------- --------- --------- -------------------
Operating profit/(loss) (9,923) 10,326 113 2,512 (2,093)
Exploration expense - - - 265 635
DD&A and other non-cash
expense 25,799 9,733 8,645 6,835 2,345
Other operating income - (3,120) - - -
------------------------------- --------- --------- --------- --------- -------------------
EBITDA 15,876 16,939 8,758 9,611 887
EBITDA per boe 8.93 9.36 5.13 4.04 0.74
Principal Risks and Uncertainties
The Group is subject to various risks relating to political,
economic, legal, social, industry, business and financial
conditions. The following risk factors, which are not exhaustive,
are particularly relevant to the Group's business activities. The
additional specific risks to which the Group is exposed as a result
of the Covid-19 pandemic are detailed separately.
Volatility of oil prices
The supply, demand and prices for oil are influenced by factors
beyond the Group's control. These factors include global and
regional demand and supply, exchange rates, interest and inflation
rates and political events. A significant prolonged decline in oil
and gas prices would impact the profitability of the Group's
activities.
All of the Group's revenues and cash flows come from the sale of
oil, gas and condensate. If sales prices should fall below and
remain below the Group's cost of production for any sustained
period, the Group may experience losses and may be forced to
curtail or suspend some or all of the Group's production, at the
time such conditions exist. In addition, the Group would also have
to assess the economic impact of low oil and gas prices on its
ability to recover any losses the Group may incur during that
period and on the Group's ability to maintain adequate
reserves.
The Group does not currently hedge its crude oil production to
reduce its exposure to oil price volatility as the structure of
taxes applied to oil and condensate production in Russia
effectively reduce the exposure to international market prices for
oil. In addition, the Ruble exchange rate has tended to move with
the oil price, reducing the overall volatility of oil prices when
translated into Russian Rubles.
In particular, the recent and sudden collapse in international
oil prices triggered by a fall in global oil demand resulting from
the Covid-19 pandemic have a material impact on the Group's short
term revenue and profitability outlook. The Directors have examined
the impact of current low oil prices in preparing the financial
statements:
-- In assessment of the Group as a going concern should oil
prices remain at US$20 per barrel for an extended period. For
details refer to note 2.1;
-- Impairment testing. A significant drop in oil prices were
considered in the sensitivity analysis conducted in relation to
impairment testing. For details refer to note 4.
Market risks
The Group's revenues generated from oil and condensate
production have typically been from sales to local domestic
customers. There have been periods when the local market has been
unable to purchase condensate, causing temporary suspension of
production and loss of revenues. The Group has access to export
channels for its condensate into regional export markets to
mitigate this risk. Gas sales are currently made to Gazprom. While
the arrangement is formalised annually rather than as a long term
contract, the Directors believe the risk of renewal is low as the
region in which the Group operates is reliant on external gas
supplies. Gas sales have generally been conducted as expected,
subject to occasional constraints during pipeline maintenance
operations.
Oil and gas production taxes
The Group's sales generated from oil and gas production are
subject to Mineral Extraction Taxes ("MET"), which form a material
proportion of the total costs of sales. The rates of these taxes
are subject to changes by the Russian government, which relies
heavily on such taxes for its revenues. Changes to rate formulas
which came into effect during in recent years have materially
increased the rates on crude oil, condensate and, to a lesser
extent, natural gas. As of 2019, the Russian government's policy is
to transfer the burden of taxes from export taxes to MET and the
formulas for both taxes are being changed over a five-year period
from 2019. It is not certain that domestic oil sales prices will
rise sufficiently to reflect in full the reduction in export taxes
to compensate for the increase in MET on oil production sold in the
domestic market.
Exploration and reserve risks
Whilst the Group will seek to apply the latest technology to
assess exploration licences, the exploration for, and development
of, hydrocarbons involves a high degree of risk. In relation to the
exploration activities, these risks include the uncertainty that
the Group will discover sufficient commercially exploitable oil or
gas resources in unproven areas of its licences. Unsuccessful
exploration efforts may result in impairment to the balance sheet
value of exploration assets.
In July 2019, as detailed in the Operations Review on pages 7
and 8 management commissioned an extensive reservoir study on the
VM field which concluded with an updated reserve evaluation of the
VM and Dobrinskoye fields completed in February 2020. The reserve
report, delivered to and adopted by management on 7 February 2020,
resulted in a downward revision by approximately 48% to the Group's
Proved Reserves as at 31 December 2019. Management also
commissioned an updated geological resource estimate on the Uzen
oil field, completed in March 2020. Management considers the
independent reserve estimate to be in line with the currently
available field data and accordingly has chosen to adopt the
estimates as the statement of the Group's oil, gas and condensate
reserves. The Group's reserve statement is shown in the Operational
Review on pages 7 and 8. The impact of the reserve revision in 2019
has been to increase the depletion, depreciation and amortisation
charge of the Group with consequent reductions in the profit and
net book value of the Group's assets and to trigger an impairment
of the net book value of Group's Property Plant and Equipment.
These impacts are reflected in the Group's financial statements for
the year ended 31 December 2019.
The Group's estimated reserves include substantial volumes that
are expected to be produced from wells that have yet to be
drilled:
On the VM and Dobrinskoye fields: 2.0 mmboe of reserves are
expected to be extracted from existing wells in 2020-2021, while
with the drilling of the new VM5 and VM6 wells an additional 1.5
mmboe of reserves are recovered from VM5 and VM6 and the production
profile extended to mid-2023. Management's expectations have been
formed on the basis of independent studies by Schlumberger and
Panterra. Should the drilling of new wells be unsuccessful, the
incremental reserves may not be extracted. This scenario was
considered in sensitivity analysis in impairment testing. See note
4a.
On the Uzen field, 75% of the reserves are expected to be
recovered from new wells from a multi-year slim hole drilling
programme.
If the costs of drilling these wells, of the results of these
wells differ significantly from expectations, there may be further
changes in the future estimates of reserves and to the value in use
of the related cash generating units. These may impact both the
future profitability and the balance sheet carrying values of the
Group's property, plant and equipment. Such scenarios are
considered in the impairment testing process. See note 4a.
Environmental risk
The oil and gas industry is subject to environmental hazards,
such as oil spills, gas leaks, ruptures and discharges of petroleum
products and hazardous substances, including waste materials
generated by the sweetening process formerly in use at the
Dobrinskoye gas processing plant. These environmental hazards could
expose the Group to material liabilities for property damages,
personal injuries, or other environmental harm, including costs of
investigating and remediating contaminated properties.
The Group is subject to stringent environmental laws in Russia
with regard to its oil and gas operations. Failure to comply with
such laws and regulations could subject the Group to material
administrative, civil, or criminal penalties or other liabilities.
Additionally, compliance with these laws may, from time to time,
result in increased costs to the Group's operations, impact
production, or increase the costs of potential acquisitions.
The Group liaises closely with the Federal Service of
Environmental, Technological and Nuclear Resources of the Saratov
and Volgograd Oblasts on potential environmental impact of its
operations and conducts environmental studies both as required by,
and in addition to, its licence obligations to mitigate any
specific risk. The Group's operations are regularly subject to
independent environmental audit. The Group did not incur any
material costs relating to the compliance with environmental laws
during the period.
Risk of operating oil and gas properties
The oil and gas business involves certain operating hazards,
such as well blowouts, cratering, explosions, uncontrollable flows
of oil, gas or well fluids, fires, pollution and releases of toxic
substances. Any of these operating hazards could cause serious
injuries, fatalities, or property damage, which could expose the
Group to liabilities. The settlement of these liabilities could
materially impact the funds available for the exploration and
development of the Group's oil and gas properties. The Group
maintains insurance against many potential losses and liabilities
arising from its operations in accordance with customary industry
practices, but the Group's insurance coverage cannot protect it
against all operational risks. The Group has established a rigorous
risk identification and reporting system throughout its operations
as a key risk mitigation activity.
Foreign currency risk
The Group's capital expenditures and operating costs are
predominantly in Russian Rubles ("RUR") while a minority of
administrative expenses is in US Dollars, Euros and Pounds
Sterling. Revenues are predominantly received in RUR, so the
operating profitability is not materially exposed to moderate
short-term exchange rate movements. The functional currency of the
Group's operating subsidiaries is the RUR and the Group's assets
and liabilities are predominantly RUR denominated. As the Group's
presentational currency is the US Dollar, fluctuations in the
exchange rate of the RUR against the US Dollar impact the Group's
financial statements.
Business in Russia
Amongst the risks that face the Group in conducting business and
operations in Russia are:
-- Economic instability, including in other countries or the
global economy that could lead to consequences such as
hyperinflation, currency fluctuations and a decline in per capita
income in the Russian economy.
-- Governmental and political actions that could disrupt, delay
or curtail economic and regulatory reform, increase centralised
authority or result in nationalisations.
-- Social instability from any ethnic, religious, historical or
other divisions that could lead to a rise in nationalism, social
and political disturbances or conflict.
-- Uncertainties in the legal and regulatory environment,
including, but not limited to, conflicting laws, decrees and
regulations applicable to the oil and gas industry and foreign
investment.
-- Unlawful or arbitrary action against the Group and its
interests by the regulatory authorities, including the suspension
or revocation of their oil or gas contracts, licences or permits or
preferential treatment of their competitors.
-- Lack of independence and experience of the judiciary,
difficulty in enforcing court or arbitration decisions and
governmental discretion in enforcing claims.
-- Unexpected changes to the federal and local tax systems.
-- Laws restricting foreign investment in the oil and gas
industry.
-- The imposition of sanctions upon certain entities in
Russia.
The Group's operations and financial management have not been
impacted directly by any sanctions to date.
Legal systems
Russia, and other countries in which the Group may transact
business in the future, have or may have legal systems that are
less well developed than those in the United Kingdom. This could
result in risks such as:
-- Potential difficulties in obtaining effective legal redress
in the court of such jurisdictions, whether in respect of a breach
of contract, law or regulation, including an ownership dispute.
-- A higher degree of discretion on the part of governmental authorities.
-- The lack of judicial or administrative guidance on
interpreting applicable rules and regulations.
-- Inconsistencies or conflicts between and within various laws,
regulations, decrees, orders and resolutions.
-- Relative inexperience and lack of transparency of the judiciary and courts in such matters.
In certain jurisdictions, the commitment of local business
people, government officials and agencies and the judicial system
to abide by legal requirements and negotiated agreements may be
more uncertain, creating particular concerns with respect to
licences and agreements for business. These may be susceptible to
revision or cancellation and legal redress may be uncertain or
delayed. There can be no assurance that joint ventures, licences,
licence applications or other legal arrangements will not be
adversely affected by the jurisdictions in which the Group
operates.
Liquidity risk
At 31 December 2019, the Group had US$14.1 million (2018:
US$15.2 million) of cash and cash equivalents, of which US$4.8
million was held in bank accounts in Russia (2018: $13.8 million).
As at 31 December 2019, there was no bank debt (2018: US$1.7
million), the balance of bank debt having been repaid in January
2019. The Group intends to fund its ongoing operations and
development activities from its cash resources and cash generated
by its established operations. At 31 December 2019 the Group had
budgeted capital expenditures of US$8.3 million, comprising
primarily expenditures on drilling production wells on the Group's
proven fields but also including up to US$1.0 million of
exploration expenditure. There were approximately US$1.0 million of
accounts payable relating to capital expenditures and other
expenses incurred in the year ended 31 December 2019 (2018: US$1.1
million). The Group's cash flow projections have been tested for
the ability to withstand an extended period of oil prices at US$30
per barrel.
The Board considers that the Group will have sufficient
liquidity to meet its obligations and to weather an extended period
of low oil prices. All current and planned capital expenditures are
discretionary and may be deferred or cancelled in the light of the
Group's cash generation and liquidity position.
Through the ordinary course of its activities, the Group is
exposed to legal, operational and development risk that could delay
growth in its cash generation from operations or may require
additional capital investment that could place increased burden on
the Group's available financial resources. However, with its asset
bsse already in production, this risk would not impede its ability
to continue as a going concern.
Capital risk
The Group manages capital to ensure that it is able to continue
as a going concern whilst maximising the return to shareholders.
The Group is not subject to any externally imposed capital
requirements. The Board regularly monitors the future capital
requirements of the Group, particularly in respect of its ongoing
development programme. Management expects that the cash generated
by the operating fields and the Group's existing cash reserves will
be sufficient to sustain the Group's operations and committed
capital investment for the foreseeable future. The Group has a
policy of maintaining a minimum level of liquidity to cover forward
obligations. Further short-term debt facilities may be arranged to
provide financial headroom for future development activities.
Bribery
The Company is subject to numerous requirements and standards,
including the UK Bribery Act. In addition the Group is subject to
anti-bribery and anti-corruption laws and regulations in all
jurisdictions in which it operates. Failure to comply with
regulations and requirements, such as failure to implement adequate
systems to prevent bribery and corruption, could result in
prosecution, fines or penalties imposed on the Company or its
officers or suspension of operations. The Group's mitigation
measures include compliance-related activities, training,
monitoring, risk management, due diligence and regular review of
policies and procedures. We prohibit bribery and corruption in any
form by all employees and by those working for, or connected with
the business. Employees are expected to report actual, attempted or
suspected bribery or other issues related to compliance to their
line managers or through our confidential reporting process, which
is available to all staff as well as third parties.
Fraud
The Group has been exposed to fraudulent transfers of funds from
its bank accounts and is at various times at risk to attempted
fraud. The Group has established enhanced protections of its
information technology infrastructure, operational systems and
procedures against fraudulent activities.
Covid 19
The direct impact of Covid-19 has as of the date of this report
not been significant. No members of staff or contractors have
tested positive for the disease. Although there have been some
periods when production was suspended due to low demand for
condensate, there have not been any interruptions to the operations
of the Group's facilities imposed by regulators or as a result of
actions taken to reduce spread of Covid-19. In light of the
enhanced risk and oil price volatility, the directors decided to
reduce capital expenditures in 2020 and to reduce operating costs.
The Directors believe the Group, may still be materially impacted
by several factors that arise as a result of the Covid 19 pandemic.
The following table sets out the specific business risk issues
identified by the Group, the potential impact and risk mitigation
action plans enacted by the Group. Where possible, the scale of the
exposure is indicated along with the probability. However, the
ultimate exposure and scale of impact depends on many factors such
as the scale and duration of the pandemic, which are presently
unknown. While the full range of possible effects are unknown, the
Directors considered the several severe adverse scenarios and are
satisfied that the Group has adequate resources to continue as
going concern. For details refer to Note 2.1.
Category Risk/probability Impact Mitigating Action
----------- ----------------- -------------------- --------------------------------------------------------
Industry Low oil pricing Revenues from
specific is already oil, condensate * Market monitoring, regularly updating forecasts.
risks, a reality and and LPG sales
primarily further falls and consequences
relating are possible. for profitability, * Deferral of capital expenditures as necessary
to oil cash flow and
prices liquidity. The
impact is partly * Management of costs
offset by lower
production taxes.
Customers Reduction of Possible need
demand in the to shut-in * Diversity of customer relationships
regional markets. producing
(probability: wells once
uncertain) storage * Access to export markets Close contacts with
tanks are full. customers, flexible and quick price correction to
Failure of continue sale of products.
customers to
buy contracted
volume * Close monitoring our stock capacity to avoid shutting
(probability: down the wells
uncertain)
----------------
Credit default Delay with
(probability: payment * Continue sale of products only after prepayment is
low) or non-payment done
---------------- ------------------ ------------------ ------------------------------------------------------------
Supply Catering in High demand on
Chain, the field: food stuff can * Made upfront payment to catering company to make some
for production lack of food lead to catering buffer stock
and drilling provision. issues. Need to
and plant (Probability: find alternatives
maintenance unknown) to feed personnel
at field sites.
Drilling Delay in drilling
chemicals * Contracting & testing local alternatives
non-delivery
from Kazakhstan
(Probability:
unknown)
Cross border Delays in
/ logistics delivery * LPG parts (compressor parts from China) - change to
restrictions sea delivery from air. Looking for opportunities to
(Probability: local manufacture.
unknown)
---------------- ------------------ ------------------ ------------------------------------------------------------
Employees Illness due Office staff:
(including to being infected have been ordered * Following government advice on self-isolation and
production or quarantined to work remotely. reporting of symptoms.
(probability: Not expecting
moderate to severe impact.
high) * Online office working facilitated.
Production staff
have been ordered
to maintain safe * Disinfections in the office, installation of
distance from disinfecting dispensers
each other at
all times.
* First aid kits check
Drilling staff
is more at risk
due to living * Ventilate the rooms
in remote
locations
across Russia * Travel restrictions
and CIS
* Undertaking additional training of local staff
Financing Availability No impact in the
of external near future. Not * Close monitoring company liquidity and get ready in
finance anticipated to case own funding required from abroad.
(probability: be required
not known)
Other risks/Brexit
The Company is not significantly commercially exposed to the
outcome of the future trade negotiations between the UK and EU
following the departure of the UK from the EU.
-- Customers and supply chain : The Company conducts no trade between the UK and the EU.
-- Employees : The Group has no employees based in the UK or the EU.
-- Financing : The Company does not have significant external
financing in place and the day to day requirements are met from its
cash balances in Russia.
-- Regulations : There are no specific regulations which could
potentially have significant impact on the Company arising from
Brexit.
The Company continues to monitor the political and economic
events and forecasts to manage any potential impacts to its
business including its employees.
Vadim Son,
Chief Financial Officer
Engaging with stakeholders
Effective and high-quality engagement with stakeholders is vital
for the success of the company. Therefore, the Company regularly
engages with employees, customers, suppliers, shareholders, and
other relevant stakeholders. Effective engagement with key
stakeholders enables two-way dialogue, stakeholders are informed on
a regular basis on Company's key activities and strategies which
may potentially impact them and Company obtains valuable
information from key stakeholders which helps to shape company's
plans and strategies to ensure sustainability and future growth of
the Company.
Senior leaders of the Company regularly participate in face to
face meetings with clients, industry events and conferences. By
carefully listening to the concerns of key stakeholders, the
Company could successfully deliver bespoke solutions to its
customers and improved the way it works with its customers, which
serves as an invaluable differentiating factor in the competitive
market.
Listening to the concerns of stakeholders, the Company rolled
out digitalisation initiative in the year, which has significantly
improved the efficiency of communication with various
stakeholders.
The Strategic Report, which comprises pages 2 to 15, was
approved by the Board on 4 September 2020 and signed on its behalf
by
Andrey Zozulya
Chief Executive Officer
Board of Directors
Mikhail Ivanov
Non-executive Chairman
Appointed to the Board: 25 July 2006
Appointed as Chairman: 5 June 2015
Committee membership: n/a
Mr Ivanov was Chief Executive Officer of the Company from its
foundation until 5 May 2015. Mr Ivanov was also a partner and
director of Oil and Gas Projects at Baring Vostok Capital Partners.
He has a long history of involvement in the oil sector. He worked
for over ten years at Schlumberger, the international oil services
company, where he served as head of its Iran operations and was
responsible for business development in Russia. Prior to joining
Schlumberger, he founded and headed two companies that focused on
oil production and service. Mr Ivanov holds an MS degree in
Geophysics from Novosibirsk State University and an MBA from the
Kellogg School of Management of Northwestern University. He is an
elected member of the Society of Petroleum Engineers.
Andrey Zozulya
Chief Executive Officer, Executive Director
Appointed to the Board: 5 May 2015
Committee membership: n/a
Mr Zozulya is a Russian citizen and has over 20 years'
experience in the oil sector in Russia, both with major oil and oil
service companies, including over ten years with Schlumberger. He
also has experience of operating in the Saratov region in which
Volga Gas' operations are based. He has a degree in Geophysics and
Engineering from the Groznensky Oil & Gas Institute and is a
member of the Society of Petroleum Engineers.
Michael Calvey
Non-executive Director
Appointed to the Board: 29 September 2006
Committee membership: Audit, Nomination
Mr Calvey is a senior partner of Baring Vostok Capital Partners
and a director of Baring Private Equity International and is on the
boards of several of Baring Vostok's portfolio companies. He began
working in Moscow in 1994 as one of the members of the consulting
committee of the First NIS Regional Fund. He is a member of the
investment committees of three Baring Vostok funds. He is also a
member of the Investment Committees of the Baring Asia and Baring
India funds. Before 1994, Mr Calvey lived in London and New York,
where he worked at the European Bank for Reconstruction and
Development ("EBRD") and Salomon Brothers. At EBRD he was
responsible for investments in the energy sector of Central and
Eastern Europe. At Salomon Brothers, Mr Calvey worked on mergers
and acquisitions and capital market projects in the oil and gas
sector. Mr Calvey is due to retire by rotation and does not offer
himself for re-election at the next Annual General Meeting.
Ronald Freeman
Non-executive Director
Appointed to the Board: 14 March 2007
Retired from the Board on 31 December 2019
Committee membership: Audit, Nomination, Remuneration
Mr Freeman is a member of the Executive Committee of the
Atlantic Council of the United States (Washington DC), and a past
independent director on the Boards of Sberbank, Severstal and
Troika Dialog. From 1973 to 1991 and from 1997 until his retirement
from Citigroup as co-head of European Investment Banking in 2000,
he was an investment banker specialising in financing and mergers
and acquisitions for companies in the oil and gas industry with
Salomon Brothers, now a unit of Citigroup. From 1991 to 1997, he
was head of the Banking Department of the European Bank for
Reconstruction and Development (London).
Aleksey Kalinin
Non-executive Director
Appointed to the Board: 29 September 2006
Committee membership: Remuneration
Mr Kalinin served as Chairman of the Board from 14 March 2007
until 5 June 2015, remaining as a Non-executive Director. Mr
Kalinin is a senior partner of Baring Vostok Capital Partners. He
joined Baring Vostok in 1999 from Alfa Capital, where he served for
six years as the director of the Department for Direct Investments.
Aleksey represents the interests of Baring Vostok's funds on the
board of directors of a wide range of portfolio companies. He has a
doctorate from the Moscow Power Engineering Institute, where he
conducted scientific research, lectured for 12 years and served as
the director of the Youth Center for Scientific and Technical
Creativity.
Vladimir Koshcheev
Non-executive Director
Appointed to the Board: 29 September 2006
Committee membership: n/a
Mr Koshcheev currently acts as president of Joint Stock Company
"NPO POG". Until 2009 he was president of Pervaya
Investizionno-Stroitelnaya Company LLC, Spinaker LLC. Mr Koshcheev
received a specialist diploma from Moscow State Technical
University in 1978 and he is a member of the Russian Academy of
Natural Sciences. Mr Koshcheev has advised his intention to retire
from the Board at the next AGM.
Stephen Ogden
Non-executive Director
Appointed to the Board: 14 March 2007
Committee membership: Audit, Nomination, Remuneration
Mr Ogden was previously a non-executive director of United
Confectioneries (Russia), Heineken Russia, Metropolis Media (former
Yugoslavia) ) and the Prospera Property Fund (Turkey) . Mr Ogden
was chief financial officer of the Bochkarev Brewery in St
Petersburg from 1997 to 2002. Prior to becoming chief financial
officer of Bochkarev, Mr Ogden was an auditor with KPMG and
PricewaterhouseCoopers, and financial controller of CS First Boston
(Moscow). Mr Ogden has a joint honours degree in economics and
politics from Durham University, England, and is a qualified
British chartered accountant.
Stewart Dickson
Non-executive Director
Appointed to the Board: 16 March 2020
Committee membership: Audit, Nomination, Remuneration
Mr Dickson has significant corporate and commercial experience
across the natural resources and financial services sectors. He is
currently Chief Executive Officer of ASX listed Variscan Mines
Limited and is a non-executive director of LSE listed
Trans-Siberian Gold plc. He previously worked as a corporate
finance director for over ten years, advising on equity capital
markets and M&A in the mining and oil sectors, working at
Daniel Stewart & Co, Seymour Pierce and latterly at Cantor
Fitzgerald Europe. Prior to his finance career, he served as an
officer in the British Army.
Andrei Yakovlev
Non-executive Director
Appointed to the Board: 16 March 2020
Committee membership: Audit, Nomination, Remuneration
Dr. Yakovlev is a City lawyer with 25 years of experience with
leading international law firms in corporate finance, M&A,
corporate governance and dispute resolution in the areas of foreign
investment, M&A, joint ventures and fraud. He is qualified in
law in Russia, New York and England. He is currently a partner at
King & Wood Mallesons, having joined his present firm in 2014.
He has dual Russian and British citizenship.
Corporate Governance Statement
Introduction
In recognition of the importance of good corporate governance,
the Directors have chosen to apply the Quoted Companies Alliance
Corporate Governance Code (the 'QCA Code'). The QCA Code was
developed by the QCA in consultation with a number of significant
institutional small company investors, as an alternative corporate
governance code applicable to AIM companies. The underlying
principle of the QCA Code is that "the purpose of good corporate
governance is to ensure that the company is managed in an
efficient, effective and entrepreneurial manner for the benefit of
all shareholders over the longer term". To see how the Company
addresses the key governance principles defined in the QCA Code,
please refer to the section on corporate governance on our
website.
The Board
The Group's business is international in scope and carries
political, commercial and technical risks. Accordingly, particular
attention is paid to the composition and balance of the Board to
ensure that it has wide experience of the sector and regulatory
environment in which the Group operates and appropriate financial
and risk management skills. In each Board appointment, whether
executive or nonexecutive, the Board considers that objectivity and
integrity, as well as skills, experience and ability which will
assist the Board in its key functions, are pre-requisites for
appointment. The Board currently comprises the non-executive
Chairman, the Chief Executive Officer and six other non-executive
Directors, three of which are deemed independent while the other
non-executives are deemed non-independent.
Role of the Chairman
The Chairman is responsible for leadership of the Board and
ensuring its effectiveness on all aspects of its role. The Chairman
with the assistance of the Chief Executive Officer sets the Board's
agenda and ensures that adequate time is available for discussion
of all agenda items, in particular strategic issues. including
managing Board appointments/removals, delegation of Board's powers,
agreeing membership and terms of reference of Board Committees and
task forces, and addressing matters referred to the board by the
Board Committees.
The Chairman promotes a culture of openness and debate by
facilitating the effective contribution of Non-executive Directors
in particular and ensuring constructive relations between Executive
and Non-executive Directors. The Chairman is also responsible for
ensuring that the Directors receive accurate, timely and clear
information.
Role of the Chief Executive Officer and the Chief Financial
Officer
The Chief Executive Officer (CEO) is responsible for running the
business and implementing the decisions and policies of the Board.
The CEO is also responsible for ensuring the Company's
communication with shareholders is timely, informative and accurate
with due regard to commercial sensitivity and regulatory
requirements.
The Chief Financial Officer (CFO) is responsible for the
Company's finances. Currently, the CFO is not part of the
Board.
Role of the non-executive directors
The Non-executive Directors are appointed not only to provide
independent oversight and constructive challenge to the Executive
Directors but are also chosen to provide strategic advice and
guidance.
All Directors are able to allocate sufficient time to the
Company to discharge their duties. There is a formal, rigorous and
transparent procedure for the appointment of new Directors to the
Board. The search for Board candidates is conducted, and
appointments made, on merit, against objective criteria and with
due regard for the benefits of diversity on the Board.
The Board has established the following committees:
Audit Committee
The Audit Committee was established in March 2007 and comprises
three Directors:
Mr Ogden - Chairman
Mr Dickson
Dr Yakovlev
The Audit Committee is responsible for selecting the Group's
independent auditors, pre-approving all audit and non-audit related
services, reviewing with management and the independent auditors
the Group's financial statements, significant accounting and
financial policies and practices, audit scope and adequacy of
internal audit and control systems. The Audit Committee keeps the
independence and objectivity of the auditor under review and a
formal statement of independence is received from the external
auditor each year. The Audit Committee meets at least twice each
year.
Remuneration Committee
The Remuneration Committee was also established in March 2007
and comprises three Directors:
Mr Ogden - Chairman
Mr Dickson
Dr Yakovlev
The Remuneration Committee is responsible for reviewing the
performance of the Directors and for determining compensation of
the Company's key employees, including the Chief Executive Officer,
Chief Financial Officer, and other key personnel as may be
determined from time to time by the Remuneration Committee. The
Remuneration Committee meets at least twice each year.
The Directors' Remuneration Report is set out on pages 24 to
25.
Nomination Committee
The Nomination Committee was established in March 2007 and
comprises three Directors:
Mr Ogden - Chairman
Mr Dickson
Dr Yakovlev
The Nomination Committee is responsible for reviewing the
structure, size and composition of the Board, making
recommendations to the Board concerning plans for succession for
both Executive and Non-executive Directors, including the Chief
Executive Officer and other senior management, preparing a
description of the role and capabilities required for a particular
appointment and identifying and nominating candidates to fill Board
positions as and when they arise.
Board meetings
The Board met six times during the year ended 31 December 2019
(2018: five times) with the following attendance:
2019 2018
Mikhail Ivanov 6 5
Andrey Zozulya 6 5
Michael Calvey 1 5
Ronald Freeman 5 5
Aleksey Kalinin 6 5
Vladimir Koshcheev 5 5
Stephen Ogden 6 5
Indemnification of Directors
In accordance with the Company's Articles of Association and to
the extent permitted by the law of England and Wales, Directors are
granted an indemnity from the Company in respect of liabilities
incurred as a result of their office. In respect of those matters
for which the directors may not be indemnified, the Company
maintained a Directors' and Officers' liability insurance policy
throughout the financial year. This policy has been renewed for the
next financial year.
Re-election of Directors
The Company requires that all Directors stand for re-election at
intervals of no more than three years. Accordingly, Messrs Calvey
and Kalinin will retire at the forthcoming AGM and will seek
re-election by shareholders. As newly appointed directors, Mr
Dickson and Dr Yakovlev will retire in accordance with the Article
21.7 of the Company's Articles of Association and will seek
re-election by shareholders.
Internal controls
The Directors acknowledge their responsibility for the system of
internal controls for the Group and for reviewing its
effectiveness.
Any system of internal control can only provide reasonable, and
not absolute, assurance that material financial irregularities will
be detected or that the risk of failure to achieve business
objectives is eliminated.
The Group's risk and controls framework covers all material
risks and controls including those of an operational, financial,
and compliance nature. Internal control procedures consist, inter
alia, of formal delegations of expenditure authority by the Board
to executive management, and controls relating to key stages of
transactions including supplier approval, contract signature and
payment release.
The Directors consider that the frequency of Board meetings and
level of detail presented to the Board for its consideration in
relation to the operations of the Group provide an appropriate
process to identify, evaluate and manage significant risks relevant
to its operations on a continuous basis, and this process is
considered to be in accordance with the revised guidance on
internal control published in October 2005 ("Turnbull
Guidance").
In addition to formal Board meetings, management prepare
detailed financial and operational reports on a monthly basis which
are disseminated and discussed within the Board.
Investor relations
The Board is committed to maintaining good communication and
having constructive dialogue with the Company's shareholders and
engages them on a wide range of issues. The Group has an ongoing
programme of dialogue and meetings between the Executive Directors
and institutional investors, fund managers and analysts as well as
private investors. At these meetings a wide range of relevant
issues, including strategy, performance, management and governance
are discussed within the constraints of the information already
made public.
Significant developments are disseminated through the Regulatory
Information Service (RIS) and timely updates of the Company's
website. In addition to compliance with the requirement to
disseminate all information on a timely basis, the Company issues
monthly reports on production and provides regular operational
updates on the RNS. The Company retains a financial public
relations adviser and an investor relations consultant, whose
contact details are reproduced on each RNS announcement and inside
the back cover of this Annual Report.
Shareholders would normally have the opportunity to meet and
question the Board at the Annual General Meeting which will be held
on 30 September 2020, but with the Covid-19 pandemic the 2020 AGM
will be held with minimal attendance. The notice of the AGM is
posted to all shareholders at least 21 working days before the
meeting. Financial and other information is available on the
Company's website (www.volgagas.com).
By order of the Board
Caros Consulting Ltd
Company Secretary
4 September 2020
Report of the Directors
The directors present their report together with the Group's
audited consolidated financial statements for the period from 1
January 2019 to 31 December 2019.
Results and dividend
The Group's results are set out on pages 32 to 37 and show a net
loss of US$10.0 million for the year ended 31 December 2019 (2018:
net profit of US$8.4 million). On 28 May 2019, the Company paid an
final dividend of $0.065 per ordinary share. The Directors do not
propose a final dividend in respect of 2019, given the priority to
re-build the Group's production base. The Board's standing policy
of distributing up to 75% of the Group free cash flow, being the
sum of cash generated from operating activities less the cash
utilised in investing activities, is subject to the financial
requirements of the Group which are for the time being concentrated
on re-building its production base.
Principal activities, business model and future developments
Volga Gas is a public limited company registered in England and
Wales with registered number 5886534, was incorporated in the
United Kingdom on 25 July 2006 and admitted to trading on the AIM
market of the London Stock Exchange on 25 April 2007. Volga Gas
operates primarily through subsidiary companies as set out in Note
21 to the accounts. The principal activity of the Group is the
exploration, development and production of its gas, condensate and
oil fields in the Volga Region of European Russia. During the year,
the Group owned 100% interests in five licence areas in the
Saratov, Volgograd and Bashkiriya regions: Karpenskiy, Vostochny
Makarovskoye, Dobrinskoye, Urozhainoye-2 and Muradymosky.
The Group's business model is to provide returns to shareholders
through both dividends and value appreciation. Its strategy is to
maximise the economic production of oil, gas, condensate and LPG
from its fields and to explore the potentially prospective
structures on the Group's licence areas. During 2020 and 2021, the
Group's envisages exploration activity to be at a higher level than
in the recent past, as it seeks to re-establish growth in its
reserve base and production profile. The Group also evaluates
acquisition opportunities as part of its overall strategy of
growing value for its shareholders. It will also be seeking
opportunities for utilisation of its spare processing capacity at
its gas plant, either by tolling third party gas production or by
acquiring fields that could utilise the processing plant.
Key events in the Group's activities for the period ended 31
December 2019 were:
-- Re-evaluation of recoverable reserves in the VM and
Dobrinskoye fields, following the finding of significantly higher
than anticipated gas:water contacts within the main reservoir pf
VM. As detailed in pages 6 and 7, this led to a reduction of the
Group's estimated reserves.
-- Continued improvement in the efficiency of the Redox gas
sweetening process and the LPG extraction plant.
-- Commencement of a successful programme of slim hole drilling
on the Uzen field. Management plans a sustained programme of slim
hole drilling during 2020-2021, to embrace exploration and
appraisal drilling as well as development wells on the Group's main
fields.
The Group's activities are described in greater detail in the
Chief Executive's Report on page 5 and in the Operational Review on
pages 6 to 8. The principal risks associated with the Group's
activities are set out in the Principal risks and uncertainties
section on pages 12 to 15.
Key performance indicators
Given the nature of the business and that the Group has only
three operating fields, the Directors are of the opinion that
further analysis using KPIs is not appropriate for an understanding
of the development, performance or position of our business at this
time. The directors are of the opinion that the Operational Review
on pages 6 to 8 provides the relevant information.
Going concern
Having made appropriate enquiries and having examined the major
areas that could affect the Group's financial position, the
Directors are satisfied that the Group has adequate resources to
continue in operation for the foreseeable future. Accordingly, they
consider it appropriate to adopt the going concern basis in
preparing the financial statements as described in Note 2.1.
Directors
The Directors who served during the year were:
Mikhail Ivanov, Chairman Andrey Zozulya, Chief Executive
Officer
Michael Calvey, Non-executive Ronald Freeman, Non-executive
Aleksey Kalinin, Non-executive Vladimir Koshcheev,
Non-executive
Stephen Ogden, Non-executive
On 31 December 2019, Mr freeman retired from the Board. Mr
Koshcheev has advised the Board of his intention to retire as a
Director at the next Annual General Meeting. On16 March 2020, Mr
Stewart Dickson and Dr Andrei Yakovlev were appointed to the Board
to replace Mr Freeman and to strengthen the Board. The biographies
of each director can be found on pages 16 and 17.
Of the eight Board members, the following are considered to be
independent: Stewart Dickson, Vladimir Koshcheev, Stephen Ogden and
Andrei Yakovlev. Although Messrs Koshcheev and Ogden have each
served for over nine years, they meet all the other criteria of
independence as defined in the Corporate Governance Code and have
performed in an independent manner. Moreover, their experience with
the Company is considered by the Board to be of value.
By virtue of being representatives of major shareholders,
Michael Calvey and Aleksey Kalinin are deemed to be
non-independent. By virtue of being respectively former and current
Chief Executive Officer, Mikhail Ivanov and Andrey Zozulya are also
deemed to be non-independent.
The record of Board meetings and attendances in 2019 are
detailed on page 19.
Messrs Calvey and Kalinin will retire by rotation. Only Mr
Kalinin will offer himself for re-election. Mr Dickson and Dr
Yakovlev will retire in accordance article 21.7 of the Company's
Articles of Association and offer themselves for re-election.
Share capital
Details of the issued share capital, together with details of
the movements in the Company's issued share capital during the year
are shown in note 16 to the accounts. Each ordinary share carries
the right to one vote at general meetings of the Company. Shares
held by the Company in treasury are excluded from the number of
voting rights.
Directors' interests
The Directors serving during the year and appointed since the
year end had the following beneficial interests in the shares of
the Company:
Ordinary shares of 1p each
31 December 31 December
2019 2018
Mikhail Ivanov 1,000,000 1,000,000
Andrey Zozulya 521,652 271,000
Michael Calvey(1) - -
Stewart Dickson - -
Ronald Freeman 55,000 55,000
Aleksey Kalinin(1)
- -
Vladimir Koshcheev 269,210 269,210
Stephen Ogden 205,000 205,000
Andrei Yakovlev - -
1 Mr Calvey and Mr Kalinin are Co-Managing Partners of Baring
Vostok Capital Partners Limited, a related party to Baring Vostok
Investments PCC Limited , Baring Vostok Nominees Limited and Dehus
Dolmen Nominees Limited. As such Mr Calvey and Mr Kalinin have an
indirect beneficial interest in the Company.
Substantial shareholders
On 4 September 2020, the following parties had notifiable
interests of 3% or greater in the nominal value of the Company's
issued 1p ordinary shares:
Number of Percentage
shares of voting rights(1)
Dehus Dolmen Nominees Ltd(2) 47,526,889 58.81
Mr Nicholas Mathys 12,163,000 15.05
Baring Vostok Investments PCC Limited(3) 4,800,460 5.94
Genesis Development Holdings Co., Limited
2,828,089 3.50
1 The company holds 199,348 shares in Treasury therefore the
total number of shares with voting rights is 80,818,452.
2 Dehus Dolmen Nominees Ltd is a nominee vehicle which holds the
interests of the limited partnerships which comprise Baring Vostok
Private Equity Funds III and IV.
3 Baring Vostok Investments PCC Limited is a closed-end
investment company registered in Guernsey and advised by Baring
Vostok Capital Partners Group Limited, which also advises the
Baring Vostok Private Equity Funds.
There is a relationship agreement between Volga Gas plc and
Baring Vostok. The terms of this agreement, which have not been
varied, are set out on page 164 in the Volga Gas Admission Document
which may be downloaded from the website.
Options granted
N o options were granted during either of the years ended 31
December 2019 or 2018 and no options are outstanding .
Interests in contracts
There were no contracts or arrangements during the period in
which a Director of the Company was materially interested and which
were significant in relation to the business of the Group.
Political and charitable contributions
No political or charitable contributions were made in the year
(2018: nil).
Business principles and values
It is the Board's view that the Company's corporate culture is
consistent with its objectives, strategy and business model and a
good example of this is how Principle 3 of the QCA Code (Wider
Stakeholder and Social Responsibilities) has been adopted by the
Company. The Board has the means to determine that ethical values
and behaviours are recognised and respected via the management
team.
The Group's corporate and social responsibility policy may be
found on the Company's website: https://volgagas.com/investors from
which it is also possible to download the detailed policy documents
covering the Group's Code of Business Conduct and Statement of
Ethics.
Stakeholder engagement
The directors regularly and actively engaged with the Company's
employees, customers, suppliers, shareholders, and other relevant
stakeholders to understand relevant stakeholder views. This is to
ensure that all decision making is sufficiently informed and is
supportive of directors' duties under Section 172 of Companies Act
2006. Further details on how Company's relationships with
stakeholders shapes and influences strategic consideration around
issues material to them can be found in the Strategic Report on
pages 2 to 15.
Employees
The Company regards its employees as its most valued asset and
puts great emphasis on the wellbeing and morale of the employees.
Regular engagement with employees helps the Company understand the
areas of importance with regards to the working environment and
Company culture. Directors conduct regular face to face engagement
sessions with employees to inform them on the latest developments
and to hear employees' concerns and suggestions.
Customers and suppliers
The Company and relevant directors proactively and continuously
engage with its customers and suppliers through both face to face
meetings and digital platforms. Business trips to office locations
of key customers and suppliers ensure loyalty and expansion of the
Company's business relationships. Directors also regularly
participate in industry events specific to the Russian petroleum
inductry, to meet new customers and suppliers and foster new
business relationships.
Shareholders
The Company regularly engages with its shareholder, Baring
Vostok, with representation at the shareholder's board of directors
meetings, providing regular updates on business performance,
strategies and plans for future years, as well as participating in
other regular meetings and workshops at the Barin Vostok
headquarters in Moscow.
Other stakeholders
The Company also regularly engages with its bankers, government
agencies and service providers to provide them with the required
regulatory information to comply with laws and regulations.
Creditors payment policy and practice
The Group aims to pay all its creditors promptly. For trade
creditors it is the Group's policy to:
(i) agree the terms of the payment at the start of the business with that supplier;
(ii) ensure that suppliers are aware of the terms of the
payment; and
(iii) pay in accordance with contractual and other
obligations.
Employment policies
The Group is committed to pursuing an equal opportunities
employment policy, covering recruitment and selection, training,
development, appraisal and promotion. The Group recognises the
diversity of its employees, its customers, and the community at
large and seeks to use employees' talents to the fullest. This
approach extends to the fair treatment of people with disabilities,
in relation to their recruitment, training and development. Full
consideration is given to staff members who become disabled during
employment.
Employee communication
The Group is committed to effective communications, which it
maintains through regular information releases and staff briefings.
Formal communications with employees take place through these
channels. With respect to the Group's operations in Russia and the
recruitment of Russian employees, announcements, contracts,
interviews and advertisements are conducted in the English and
Russian languages, as applicable.
Health, safety and the environment
The Group's policy and practice is to comply with health, safety
and environmental regulations and requirements of the countries in
which it operates, to protect its employees, contractors, assets
and the environment.
The Group closely monitors its environmental obligations under
the terms of its licence agreements. In particular, portions of the
Karpenskiy Licence Area are located in the Saratovskiy Federal
Nature Reserve and Tulipannaya Steppe Natural Sanctuary, which are
protected by Russian environmental law. In accordance with Russian
environmental law, all economic activity within the protected area
is approved by the Russian government. The Group has ensured that
all its activities minimise the impact on this sensitive
environment.
UK Bribery Act
The Company has adopted Anti-Corruption and Anti-Bribery
Policies and a framework of adequate procedures for managing the
Volga Gas Group's responsibilities in relation to the UK Bribery
Act 2010.
Market Abuse Regime ("MAR")
On 1 July 2016 the MAR came into effect. The Company has updated
its procedures and records in respect of insider information and
dealings by persons discharging managerial responsibilities
("PDMRs"), or their connected persons in compliance with the new
regime.
Share capital
The Company has authorised ordinary share capital of 330,720,100
shares of 1p each. Under a special resolution by the shareholders
of the Company on 20 May 2019, the Directors have authority to
allot shares up to an aggregate nominal value of GBP1,000,000 of
which GBP150,000 could be issued non pre-emptively, in accordance
with Sections 570 and 573 of the Companies Act 2006. This authority
will expire the earlier of (i) 15 months from the passing of the
Resolution, or (ii) the conclusion of the Annual General Meeting of
the Company to be held in 2020. The Company's total issued share
capital consists of 81,017,800 ordinary shares of 1p each, each
share having equal voting rights. The Company holds 199,348 shares
in Treasury therefore the total number of shares with voting rights
is 80,818,452.
Capital risk management
The Group's objectives when managing the balance of equity and
debt capital are (a) to safeguard the Group's ability to continue
as a going concern, (b) provide returns for shareholders and
benefits for other stakeholders and (c) to maintain an optimal
capital structure to reduce the cost of capital. In order to
maintain or adjust the capital structure, the Group may adjust the
amount of dividends paid to shareholders, return capital to
shareholders, issue new shares or sell assets to reduce debt. To
date the Group has been funded primarily by equity capital. It is
the Group's policy to fund its capital investments primarily from
retained cash and cash generated from operations, although modest
levels of debt may continue to be utilised when the Board considers
it appropriate.
Corporate Governance
The Company's statement on Corporate Governance can be found in
the Corporate Governance Statement on pages 18 and 19 of these
financial statements and forms part of this report by
reference.
Statement of disclosure of information to auditor
As at the date of this report the serving Directors confirm
that;
-- so far as the Directors are aware, there is no relevant audit
information of which the Company's auditor is unaware; and
-- they have taken all steps that they ought to have taken as
Directors in order to make themselves aware of any relevant audit
information and to establish that the Company's auditor is aware of
that information.
Auditor
The Group's auditor, KPMG LLP, has indicated that it will
resign. The Board has reached agreement with PKF Littlejohn LLP to
be appointed as the Group's auditor. In accordance with Section 489
of the Companies Act 2006, a resolution concerning the appointment
of the new auditor will be proposed at the 2020 Annual General
Meeting.
Statement of Directors' responsibilities in respect of the
Annual Report and the financial statements
The directors are responsible for preparing the Annual Report
and the Group and parent Company financial statements in accordance
with applicable law and regulations.
Company law requires the directors to prepare Group and parent
Company financial statements for each financial year. Under the AIM
Rules of the London Stock Exchange they are required to prepare the
Group financial statements in accordance with International
Financial Reporting Standards as adopted by the EU (IFRSs as
adopted by the EU) and applicable law and they have elected to
prepare the parent Company financial statements on the same
basis.
Under company law the directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and parent Company and of
their profit or loss for that period. In preparing each of the
Group and parent Company financial statements, the directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable, relevant and reliable;
-- state whether they have been prepared in accordance with IFRSs as adopted by the EU;
-- assess the Group and parent Company's ability to continue as
a going concern, disclosing, as applicable, matters related to
going concern; and
-- use the going concern basis of accounting unless they either
intend to liquidate the Group or the parent Company or to cease
operations, or have no realistic alternative but to do so.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the parent
Company's transactions and disclose with reasonable accuracy at any
time the financial position of the parent Company and enable them
to ensure that its financial statements comply with the Companies
Act 2006. They are responsible for such internal control as they
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error, and have general responsibility for taking such
steps as are reasonably open to them to safeguard the assets of the
Group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the directors are also
responsible for preparing a Strategic Report and a Directors'
Report that complies with that law and those regulations.
The directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
company's website. Legislation in the UK governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
Electronic communications
The maintenance and integrity of the Volga Gas plc website
(www.volgagas.com) is the responsibility of the Directors; the work
carried out by the auditor does not involve consideration of these
matters and, accordingly, the auditor accepts no responsibility for
any changes that may have occurred to the financial statements
since they were initially presented on the website.
The Company's website is maintained in compliance with Rule 26
of the AIM Rules for Companies.
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
On behalf of the Board
Caros Consulting Ltd
Company Secretary
4 September 2020
Directors' Remuneration Report
In common with the Board's commitment to compliance with the
appropriate aspects of the QCA Corporate Governance Code 2018 , the
Company has adopted the Principles of Good Governance relating to
Directors' remuneration. The Company discloses certain information
relating to Directors' remuneration in this report, which is not
audited.
Remuneration Committee
The Company established a Remuneration Committee in April 2007,
as set out in the Corporate Governance Statement on page 18.
The Remuneration Committee advises the Board on Group
compensation policy as it relates to Executive Directors and other
key members of management, and may obtain advice from independent
remuneration consultants appointed by the Company. The Remuneration
Committee comprises Stephen Ogden (Chairman), Stewart Dickson and
Andrei Yakovlev, who are all independent non-executive Directors.
Executive Directors may be invited to attend meetings of the
Remuneration Committee but do not vote on their own remuneration or
incentives. The Remuneration Committee meets as required.
Remuneration policy
The Company's policy is to maintain levels of compensation for
the Group that are comparable and competitive with peer group
companies, so as to attract and retain individuals of the highest
calibre, by rewarding them as appropriate for their contribution to
the Group's performance.
Executive Directors' employment agreement and terms of
appointment
The terms of each Executive Director's appointment are set out
in their service agreements. Each Executive Director's agreement is
based on similar terms, with no fixed duration. Each service
agreement sets out details of basic salary and share options as
applicable.
All Executive Director employment agreements can be terminated
either by the Director concerned or by the Company on giving six
months' notice during the first 24 months of service and thereafter
by giving three months' notice.
The Executive Directors do not participate in any Group pension
scheme and their remuneration is not pensionable. The Executive
Directors are eligible for payment of cash bonuses and
participation in any share-based incentive plan the Board
implements. For the year ended 31 December 2019, the Chief
Executive Officer may, on meeting certain specified operational and
financial objectives agreed with the Remuneration Committee, be
awarded a bonus payment of up to 100% of his basic salary.
Basic salaries
The basic salary of each Executive Director is established by
reference to their responsibilities and individual performance.
Non-executive Directors' terms, conditions and fees
The Non-executive Directors have been engaged under the terms of
their letters of appointment. These engagements are for two years
and can be terminated upon one month's notice by either party.
Reappointment is subject to the Company's Articles of Association,
which provide that one-third of the Directors shall be required to
retire each year.
Fees
The fees paid to Non-executive Directors are determined by the
Board and reviewed periodically to reflect current rates and
practice commensurate with the size of the Company and their
roles.
The remuneration of the Non-executive Directors is a matter for
the Chairman of the Board and the Chief Executive Officer. In the
event of the appointment of an independent Non-executive Chairman
his remuneration would be a matter for the Chairman of the
Remuneration Committee and the Chief Executive Officer.
Directors' detailed emoluments
Aggregate Aggregate
Remuneration Remuneration
for the Year for the Year
31 December 31 December
Salary Benefits Bonus Fees 2019 2018
US$ 000 US$ 000 US$ 000 US$ 000 US$ 000
Executive directors
A. Zozulya 185 13 198 - 396 356
Non-executive directors
M. Calvey - - - - - -
R. Freeman - - - 50 50 50
M. Ivanov - - - 120 120 120
A. Kalinin - - - - - -
V. Koshcheev - - - - - -
S. Ogden - - - 50 50 50
Directors' emoluments comprised salaries and benefits of
US$198,000 (2018: US$194,000), bonuses of US$197,539 (2018:
US$162,000) and Non-executive Directors' fees of US$220,000 (2018:
US$220,000). During the year ended 31 December 2019, Mr Zozulya was
awarded a performance-related bonus of US$197,539 (2018:
US$162,000) which was settled by the transfer of 250,652 Ordinary
Shares of the Company held in Treasury. The bonus award of 2018 was
settled in cash.
Directors' interests in the share capital of the Company
The Directors' interests in the share capital of the Company are
disclosed in the Report of the Directors on page 21. There have
been no changes in the interest of any Director between 1 January
2020 and the date of this report.
Directors' share options
The Company currently has no share option scheme in operation
and there are no share options in issue currently nor were there
any in issue during the years ended 31 December 2018 and 2019.
By order of the Board
Caros Consulting Ltd
Company Secretary
4 September 2020
INDEPENT AUDITOR'S REPORT TO THE MEMBERS OF VOLGA GAS PLC
1 Our opinion is qualified
We have audited the financial statements of Volga Gas Plc ("the
Company") for the year ended 31 December 2019 which comprise the
Group Income Statement, Group Statement of Comprehensive Income,
Group Balance Sheet, Group Cash Flow Statement, Company Balance
Sheet, Company Cash Flow Statement, Group Statement of Changes in
Shareholders' Equity, Company Statement of Changes in Shareholders'
Equity, and the related notes, including the accounting policies in
note 2.
In our opinion except for the possible effects of the matter
described in the basis for qualified opinion section of our
report:
-- the financial statements give a true and fair view of the
state of the Group's and of the parent Company's affairs as at 31
December 2019 and of the Group's loss for the year then ended;
-- the Group financial statements have been properly prepared in
accordance with International Financial Reporting Standards as
adopted by the European Union (IFRSs as adopted by the EU);
-- the parent Company financial statements have been properly
prepared in accordance with IFRSs as adopted by the EU and as
applied in accordance with the provisions of the Companies Act
2006; and
-- the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006.
Basis for qualified opinion
We have been unable to obtain satisfactory audit evidence or
explanations in respect of the following matter.
During the course of our audit we noted there were payments made
to sales agents to provide consultancy services and act on behalf
of the Group in certain transactions with a major customer. These
payments totalled an amount of $1.4m in the period from 2017 -
2019. During 2019 a taxation assessment was undertaken by The
Federal Tax Service of Russia ("FTS") for the Group's subsidiary
Gaznefteservice LLC ("GNS"). Based on their assessment the FTS
concluded that these payments were not substantiated and raised
queries over why the arrangements were in place. The Audit
Committee commissioned an independent investigation led by legal
counsel in the UK and Russia to examine the process of appointment
of these sales agents, the manner in which these payments were made
and to investigate the nature of such payments and the services
provided. In our view, the investigation identified breakdowns in
the Group's Corporate Governance and in its internal control
environment in relation to the engagement and contracting with
these sales agents and was limited by a lack of certain information
and access to one individual which would be necessary to conclude
on the nature of the payments made, and the extent to which these
were valid payments for the services provided. In our view, the
content and background to the contract and the transactions give
rise to the possibility of non-compliance with the legal and
regulatory frameworks applicable to the Group, the impact of which
could be material to the Group's Financial Statements and
Directors' Report.
The Group's view is that the contract and the transactions do
not give rise to this possibility and are neither material to the
Group's Financial Statements nor disclosure in the Corporate
Governance Statement. However, due to the limitations imposed by
circumstances of the investigation, we have been unable to obtain
sufficient appropriate audit evidence to determine compliance with
the legal and regulatory frameworks applicable to the Group nor if
any adjustments might have been necessary to the Group's financial
information and disclosures as a result of the contracts and the
transactions.
We conducted our audit in accordance with International
Standards on Auditing (UK) ("ISAs (UK)") and applicable law. Our
responsibilities are described below. We have fulfilled our ethical
responsibilities under, and are independent of the Group in
accordance with, UK ethical requirements including the FRC Ethical
Standard as applied to listed entities.
We believe that the audit evidence we have obtained is a
sufficient and appropriate basis for our qualified opinion.
2 Key audit matters: our assessment of risks of material
misstatement
Key audit matters are those matters that, in our professional
judgment, were of most significance in the audit of the financial
statements and include the most significant assessed risks of
material misstatement (whether or not due to fraud) identified by
us, including those which had the greatest effect on: the overall
audit strategy; the allocation of resources in the audit; and
directing the efforts of the engagement team. These matters were
addressed in the context of our audit of the financial statements
as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters. In arriving at our
audit opinion above, the key audit matters, in decreasing order of
audit significance, were as follows:
Management Effects of irregularities Our procedures included:
override of
controls (Risk Management is in a * Policies and procedures assessment: We assessed the
v 2018: new) unique position to appropriateness of the Group's policies over laws and
perpetrate fraud because regulations, including anti-bribery and corruption,
Refer to pages of their ability to and procedures including evaluating the tone set by
12 to 15 (Principal manipulate accounting the Board and by senior management, the
risks and records and prepare implementation and oversight thereof across the
uncertainties) fraudulent financial Group.
statements by overriding
controls that otherwise
appear to be operating
effectively. * Controls design and operation: Assessing the design
and operating effectiveness of the Group's controls
We have identified over the selection of third-party suppliers in
additional risks in particular those relating to the major capital
respect of bribery expenditure projects and provision of consultancy
and corruption due services.
to the Group's operations
in Russia and its
transactions with
the government owned
customer. All gas * Tests of detail:
is sold to Gazprom
mezhregiongaz Volgograd.
* Selecting a sample of bonus payments for management
Transparency International's made or approved during the period to ensure that
Corruption Perceptions these payments were appropriately supported,
Index 2019 and our economically justified and approved;
own experience indicates
that corruption risks
remain significant * Selecting a sample of transactions and journals, in
in Russia. particular relating to third party suppliers and
using external sources to complete suppliers' checks;
In addition, companies
in the oil and gas
sector are inherently * Selecting a sample of transactions to check the
at higher risk from acceptance of services and equipment provided by
bribery and corruption suppliers;
due to the significant
level of government
regulation and their * Selecting any unusual journals across the Group in
procurement profile. particular relating to payments to third party
Significant amounts suppliers;
of expenditure continue
to be incurred on
the existing and new * Making enquiries of senior management about each of
development projects. the samples selected and validating such explanations
given by inspecting related documentation or making
The risk for our audit further enquiries to investigate the nature of the
was whether the control instance and where relevant evaluate the business
environment maintained rationale for the transactions or events, confirming
by the Board and management that appropriate approvals had been in place.
was adequate that
no instances of breaches
of laws and regulations * As a result of the identification of the matter
have arisen or could referred to under the "basis for qualified opinion"
have arisen that had above, the Audit Committee commissioned an
not been identified independent investigation. We used KPMG forensic
and could result in specialists to review the scope and independence of
material losses to the investigation by independent legal counsel and to
the Group, or potential assist in our analysis of its findings and
non-compliance with conclusions. We also used KPMG Forensic specialists
laws and regulations to perform due diligence procedures over the sales
which might result agents.
in possible penalties
and material improper
payments made to suppliers * Assessing transparency: To ensure that where
or employees not being necessary for transparency purposes any such
identified or appropriately instances or payments as applicable have been
disclosed. appropriately disclosed.
------------------------- ------------------------------------------------------------- ------------------------------------------------------------------
Impairment Forecast-based estimate Our procedures included:
of tangible
and intangible
assets (Risk
v 2018: Ý
)
A sustained low oil
Tangible assets: and gas price environment * Impairment triggers analysis: We assessed the
US$36.2 million combined with ongoing directors' judgments in considering if any impairment
(2018: US$ 45.1 changes in the Group's indicators were present by considering whether the
million) production operations appropriate business developments during the year
Intangible assets: could have a significant were incorporated in that analysis.
US$3.3 million impact on the recoverable
(2018: US$3.3). amount of the Group's
tangible and intangible
Refer to page assets. Forecasting * Historical comparisons: We assessed the
41 (Summary the recoverable amount reasonableness of the budgets considering historical
of significant of the Group's cash-generating accuracy of previous forecasts.
accounting policies) units, both of which
and pages 52-53 have had impairment
(financial disclosures) indicators identified,
is a highly subjective * Our sector experience: We challenged whether the
area due to the inherent Group's key assumptions, such as oil and gas prices,
uncertainty involved USD/RUB exchange rates and reserve estimates ,
in forecasting and reflect our knowledge of the business and market,
discounting future including known or probable changes in the business
cash flows, specifically environment.
around oil and gas
prices, USD/RUB exchange
rates, reserve estimates,
especially taking * Benchmarking assumptions: We challenged, using our
into account a significant own valuation specialists, the key inputs used in the
decrease in gas and Group's calculation of the discount rate by comparing
gas condensate proved them to externally derived data, including available
reserves during the sources for comparable companies.
period, and future
cost estimates. The
effect of these matters
is that, as part of * Evaluating reserves estimation: We assessed
our risk assessment, competence and objectivity of the Group's external
we determined that experts to satisfy ourselves they were appropriately
the value in use of qualified to carry out estimation of reserves
US$ 35.9 million has included in the model. We assessed, using our own
a high degree of estimation valuation specialists, the reliability of the data
uncertainty, with provided to the external expert.
a potential range
of reasonable outcomes
greater than our materiality
for the financial * Sensitivity analysis: We performed sensitivity
statements as a whole. analysis on the key assumptions noted above.
The financial statements
(Note 4a) disclose
the sensitivity estimated
by the Group. * Assessing transparency: We assessed whether the
Group's disclosures about the sensitivity of the
outcome of the impairment assessment to changes in
key assumptions reflected the risks inherent in the
valuation of tangible and intangible assets.
Going concern Disclosure quality Our procedures included:
(Risk v 2018:
new) Note 2.1 of the financial * Benchmarking assumptions : We challenged the
statements explains appropriateness of key assumptions in the cash flow
Refer to page how the Board has projections (including prices, production costs,
38 (Summary formed a judgement foreign exchange, production volumes, committed and
of significant that it is appropriate other planned capital expenditure) applying our
accounting policies) to adopt the going sector knowledge and experience based on historical
concern basis of preparation production information, internal drilling plans and
for the group and project plans, together with market and other
parent company. externally available information.
That judgement is
based on an evaluation
of the inherent risks * Sensitivity analysis : We considered sensitivities
to the Group's and over the level of available financial resources
Company's business indicated by the Group's financial forecasts and
model and how those taking account of possible downside scenarios that
risks might affect could arise from these risks individually and
the Group's and Company's collectively.
financial resources
or ability to continue
operations over a * Funding assessment : We considered the ability and
period of at least requirement for additional funding.
a year from the date
of approval of the
financial statements. * Evaluating directors' intent : We evaluated the
achievability of the actions the Directors consider
The risks most likely they would take to improve the position should the
to adversely affect risks materialise.
the Group's and Company's
available financial
resources over this * Assessing transparency : We considered the
period were: appropriateness of relevant disclosures, including
* significant reduction in the estimated remaining both the going concern disclosure in note 2.1 of the
reserves of GNS, one of the two operating companies; financial statements and also the commentary
elsewhere in the annual report on the timing and
scope of the future growth projects and the need for
* GNS estimated reserves include substantial volumes financing to progress these.
that are expected to be produced from VM5 and VM6
wells, that have yet to be drilled and management
relies on successful drilling;
* the management relies on success of new developments
of PGK, the other operating company, for the Group's
ability to continue as a going concern in the mid- to
long-term. We determined that future developments
have a high degree of uncertainty;
* subsequent to year-end, oil prices have fallen to
their lowest level since Company's incorporation in
2006. We determined that a sustained low oil price
environment could have a significant impact on the
Group's ability to continue as a going concern;
* challenges posed by the Covid-19 pandemic, including
potential disruption to production operations.
The risk for our audit
was whether or not
those risks were such
that they amounted
to a material uncertainty
that may have cast
significant doubt
about the ability
to continue as a going
concern. Had they
been such, then that
fact would have been
required to have been
disclosed.
Recoverability Low risk, high value Our procedures included:
of Parent Company's The carrying amounts
investment in of the Parent * Tests of detail: Comparing the carrying amount of all
subsidiaries Company's investments and intercompany debtors with the
and receivables investments in relevant subsidiaries' draft financial statements to
due from Group subsidiaries identify whether their net assets, being an
companies (Risk and receivables due approximation of their minimum recoverable amount,
v 2018: Ý from Group companies were in excess of their carrying amount and assessing
) represent 78% (2018: whether those subsidiaries have historically been
Investments 99%) of the Company's profit-making.
in subsidiaries: total assets. The
US$25.4 million recoverability is
(2018: US$27.5 not at a high risk
million). of significant * Subsidiary audits: The Group engagement team has
Loans due from misstatement performed the audit work for the trading subsidiaries
Group companies: or subject to of the Group, including the impairment review of
US$3.6 million significant tangible and intangible assets as described above,
(2018: US$17 judgement. However, and considered the implication of that work on those
million) due to their subsidiaries' profits and net assets.
materiality
Refer to page in the context of
40 (Summary the Parent Company
of significant financial statements,
accounting policies) this is considered
and pages 50-51 to be the area that
(financial disclosures) had the greatest
effect
on our overall Parent
Company audit.
3 Our application of materiality and an overview of the scope of
our audit
Materiality for the Group financial statements as a whole was
set at US$390k (2018: US$460k), determined with reference to a
benchmark of Group revenues, of which it represents 1% (2018: 1%).
We consider Group revenues to be the most appropriate benchmark for
overall levels of activity within the business are measured in
terms of revenue which is also considered one of the more prominent
metrics in assessing overall Group performance.
We agreed to report to the Audit Committee any corrected or
uncorrected identified misstatements exceeding US$21k (2018:
US$23k), in addition to other identified misstatements that
warranted reporting on qualitative grounds.
For both the current and prior year, the Group audit team
performed the audit of the Group (including the Parent Company
financial information) as if it was a single aggregated set of
financial information.
The Parent Company materiality determined as 5% of the Parent
Company net assets exceeded the level of the materiality determined
for the Group as the whole and, as such, materiality for the Parent
Company financial statements was set at US$343k (2018: US$414k) to
allow for aggregation risk on consolidation.
4 We have nothing to report on going concern
The Directors have prepared the financial statements on the
going concern basis as they do not intend to liquidate the Company
or the Group or to cease their operations, and as they have
concluded that the Company's and the Group's financial position
means that this is realistic. They have also concluded that there
are no material uncertainties that could have cast significant
doubt over their ability to continue as a going concern for at
least a year from the date of approval of the financial statements
("the going concern period").
Our responsibility is to conclude on the appropriateness of the
Directors' conclusions and, had there been a material uncertainty
related to going concern, to make reference to that in this audit
report. However, as we cannot predict all future events or
conditions and as subsequent events may result in outcomes that are
inconsistent with judgements that were reasonable at the time they
were made, the absence of reference to a material uncertainty in
this auditor's report is not a guarantee that the group or the
company will continue in operation.
We identified going concern as a key audit matter (see section 2
of this report). Based on the work described in our response to
that key audit matter, we are required to report to you if we have
concluded that the use of the going concern basis of accounting is
inappropriate or there is an undisclosed material uncertainty that
may cast significant doubt over the use of that basis for a period
of at least a year from the date of approval of the financial
statements.
We have nothing to report in these respects.
5 Other information
The directors are responsible for the other information
presented in the Annual Report together with the financial
statements. Our opinion on the financial statements does not cover
the other information and, accordingly, we do not express an audit
opinion or, except as explicitly stated below, any form of
assurance conclusion thereon.
Our responsibility is to read the other information and, in
doing so, consider whether, based on our financial statements audit
work, the information therein is materially misstated or
inconsistent with the financial statements or our audit knowledge.
Based solely on that work, except for the possible consequential
effects of the matter described in the basis for qualified opinion
section our report on the related disclosures in the other
information, we have not identified material misstatements in the
other information.
Strategic report and directors' report
Based solely on our work on the other information:
-- except for the possible consequential effects of the matter
described in the basis for qualified opinion section of our report
on the related disclosures in the Strategic Report and Directors'
Report:
-- we have not identified material misstatements in the
strategic report and the directors' report;
-- in our opinion those reports have been prepared in accordance
with the Companies Act 2006; and
-- in our opinion the information given in those reports for the
financial year is consistent with the financial statements.
6 Matters on which we are required to report by exception
In respect solely of the limitation on the scope of our work
described above
-- we have not obtained all the information and explanations
that we considered necessary for the purpose of our audit: and
-- we were unable to determine if adequate accounting records have been kept.
We have nothing to report in respect of the following matters
where the Companies Act 2006 requires us to report to you if, in
our opinion:
-- returns adequate for our audit have not been received from branches not visited by us; or
-- the parent Company financial statements are not in agreement
with the accounting records and returns; or
-- certain disclosures of directors' remuneration specified by law are not made.
We have nothing to report in these respects.
7 Respective responsibilities
Directors' responsibilities
As explained more fully in their statement set out on page 23,
the directors are responsible for: the preparation of the financial
statements including being satisfied that they give a true and fair
view; such internal control as they determine is necessary to
enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error; assessing the
Group and parent Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern; and
using the going concern basis of accounting unless they either
intend to liquidate the Group or the parent Company or to cease
operations, or have no realistic alternative but to do so.
Auditor's responsibilities
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue our
opinion in an auditor's report. Reasonable assurance is a high
level of assurance, but does not guarantee that an audit conducted
in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in aggregate,
they could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial
statements.
A fuller description of our responsibilities is provided on the
FRC's website at www.frc.org.uk/auditorsresponsibilities .
8 The purpose of our audit work and to whom we owe our
responsibilities
This report is made solely to the Company's members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
Company's members those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company's members, as a body,
for our audit work, for this report, or for the opinions we have
formed.
Mark Smith (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London E14 5GL
7 September 2020
Group Income Statement
(presented in US$ 000)
Year ended 31 December Notes 2019 2018
Continuing Operations
Revenue 5 45,956 45,875
Cost of sales 6 (36,343) (29,762)
------------------ -------------------
Gross profit 9,613 16,113
Selling expenses 6(b) (3,771) (2,473)
Operating and administrative expenses 6 (4,822) (4,921)
Write-off of development and producing
assets 6 (2,608) (1,513)
Impairment charge (8,335) -
Other operating income 6 - 3,120
------------------ -------------------
Operating (loss)/profit (9,923) 10,326
Interest income 7 292 425
Interest expense (18) -
Other net losses 8 (853) (192)
------------------ -------------------
(Loss)/profit for the year before
tax (10,502) 10,559
Current income tax 9 (2,224) (2,254)
Deferred income tax 9 2,709 99
------------------ -------------------
(Loss)/profit for the year before
non-controlling interests (10,017) 8,404
Attributable to:
The owners of the Parent Company (10,017) 8,404
================== ===================
Basic and diluted (loss)/profit per
share (in US Dollars) 10 (0.1239) 0.1037
Weighted average number of shares
outstanding 10 80,823,327 81,017,800
The Company has elected to take the exemption under Section 408
of the Companies Act 2006 to not present the Parent Company income
statement. The loss for the Parent Company for the year was
US$1,841,000 (2018: profit of US$3,158,000).
Group Statement of Comprehensive Income
(presented in US$ 000)
Year ended 31 December Notes 2019 2018
(Loss)/profit for the year attributable
to equity shareholders of the Company (10,017) 8,404
Other comprehensive income:
Items that are or may be reclassified subsequently
to profit or loss
Currency translation differences 6,094 (11,786)
Reversal of share grant reserve -
--------- ----------------
Total comprehensive income for the
year (3,923) (3,382)
Attributable to:
The owners of the Parent Company (3,923) (3,382)
========= ================
Group Balance Sheet
(presented in US$ 000)
At 31 December Notes 2019 2018
ASSETS
Non-current assets
Intangible assets 11 3,374 3,304
Property, plant and equipment 12 33,957 45,109
Deferred tax assets 9 1,459 804
------------------ ----------------
Total non-current assets 38,790 49,217
Current assets
Cash and cash equivalents 13 14,116 15,186
Inventories 14 594 938
Trade and other receivables 15 1,752 2,381
------------------ ----------------
Total current assets 16,462 18,505
Total assets 55,252 67,722
================== ================
EQUITY AND LIABILITIES
Equity
Share capital 16 1,485 1,485
Other reserves 17 (83,095) (89,189)
Accumulated profits 18 129,917 145,330
------------------ ----------------
Equity attributable to the shareholders
of the Parent Company 48,307 57,626
Non-current liabilities
Asset retirement obligation 315 361
Deferred tax liabilities 9 - 2,028
------------------ ----------------
Total non-current liabilities 315 2,389
Current liabilities
Trade and other payables 19 6,630 6,047
Current portion of bank loans 20 - 1,660
------------------ ----------------
Total current liabilities 6,630 7,707
Total equity and liabilities 55,252 67,722
================== ================
Approved by the Board of Directors of Volga Gas plc,
registration number: 05886534, on 4 September 2020 and signed on
its behalf by
Andrey Zozulya
Chief Executive Officer
Group Cash Flow Statement
(presented in US$ 000)
Year ended 31 December Notes 2019 2018
(Loss)/profit for the year before tax (10,502) 10,559
Adjustments to loss before tax:
Depreciation 12 14,833 8,324
Write off of development and producing
assets 8 2,608 1,574
Impairment charge 8,335 -
Provision for obsolete inventory 16 391
Other non-cash operating (gains)/losses 6(c) 456 (251)
Foreign exchange differences 8 575 133
----------------- -----------------
Operating cash flow prior to working
capital 16,321 20,730
Working capital changes
Decrease/(increase) in trade and other
receivables 768 (417)
(Decrease)/increase in payables (78) (138)
Decrease/(increase) in inventory 439 (112)
----------------- -----------------
Cash flow from operations 17,450 20,063
Income tax paid (2,444) (1,811)
Government subsidies refunded (37) -
Net cash flow generated from operating
activities 14,969 18,252
----------------- -----------------
Cash flows from investing activities
Expenditure on exploration and evaluation 11 (399) (211)
Purchase of property, plant and equipment 12 (9,190) (2,059)
----------------- -----------------
Net cash used in investing activities (9,589) (2,270)
----------------- -----------------
Cash flows from financing activities
Equity dividends paid (5,237) (4,861)
Purchase of treasury shares (159)
Bank loans drawn/(repaid) (1,799) (1,839)
----------------- -----------------
Net cash provided by financing activities (7,195) (6,700)
----------------- -----------------
Effect of exchange rate changes on cash
and cash equivalents 745 (2,713)
Net (decrease)/increase in cash and
cash equivalents (1,070) 6,569
Cash and cash equivalents at beginning
of the year 13 15,186 8,617
Cash and cash equivalents at end of
the year 13 14,116 15,186
================= =================
Company Balance Sheet
(presented in US$ 000)
Company registration number: 05886534
At 31 December Notes 2019 2018
ASSETS
Non-current assets
Investments 21 25,421 27,473
Intercompany loans receivable 23 3,030 15,514
------- -------
Total non-current assets 28,451 42,987
Current assets
Cash and cash equivalents 13 8,960 337
Intercompany receivables 23 143 1,465
Trade and other receivables 15 60 69
------- -------
Total current assets 9,163 1,871
Total assets 37,614 44,858
======= =======
EQUITY AND LIABILITIES
Equity
Share capital 16 1,485 1,485
Accumulated profit 18 36,121 43,358
------- -------
Total equity 37,606 44,843
Current liabilities
Trade and other payables 19 8 15
------- -------
Total current liabilities 8 15
Total equity and liabilities 37,614 44,858
======= =======
Approved by the Board of Directors on 4 September 2020 and
signed on its behalf by
Andrey Zozulya
Chief Executive Officer
Company Cash Flow Statement
(presented in US$ 000)
Year ended 31 December 2019 2018
Loss for the period before tax (1,841) (3,158)
Adjustments to loss before tax:
Interest income accrued (535) (1,646)
Write off of investment in subsidiary 2,052 -
Other non-cash income - (264)
Foreign exchange differences (1,002) 4,010
-------- -------------
Operating cash flow prior to working
capital (1,326) (1,058)
Working capital changes
Decrease in intercompany receivables 1,349 -
(Increase)/decrease in other receivables - (25)
Increase/(decrease) in payables (9) (102)
-------- -------------
Cash flow from operations 14 (1,175)
Income tax paid - -
Net cash flow generated from operating
activities 14 (1,175)
-------- -------------
Cash flows from investing activities
Decrease/(increase) in intercompany
loan receivables 14,005 5,695
-------- -------------
Net cash from investing activities 14,005 5,695
-------- -------------
Cash flows from financing activities
Equity dividends paid (5,237) (4,861)
Purchase of treasury shares (159) -
-------- -------------
Cash flows from financing activities (5,396) (4,861)
-------- -------------
Effect of exchange rate changes on -
cash and cash equivalents
Net decrease in cash and cash equivalents 8,623 (341)
Cash and cash equivalents at the
beginning of the year 13 337 678
Cash and cash equivalents at end
of the year 13 8,960 337
======== =============
Group Statement of Changes in Shareholders' Equity
(presented in US$ 000)
Notes Share Currency Accumulated Total Equity
Capital Translation Profit/(Loss
Reserves )
Opening equity at 1 January
2019 1,485 (89,189) 145,330 57,626
Profit for the year - - (10,017) (10,017)
Currency translation differences - 6,094 - 6,094
--------- --------------------- ----------------------- -----------------
Total comprehensive income - 6,094 (10,017) (3,923)
--------- --------------------- ----------------------- -----------------
Transactions with owners
Equity dividends paid (5,237) (5,237)
Purchase of treasury shares (159) (159)
--------- --------------------- ----------------------- -----------------
Total transactions with
owners - - (5,396) (5,396)
Closing equity at 31 December
2019 1,485 (83,095) 129,917 48,307
========= ===================== ======================= =================
Opening equity at 1 January
2018 1,485 (77,403) 141,787 65,869
Profit for the year - - 8,404 8,404
Currency translation differences - (11,786) - (11,786)
--------- --------------------- ----------------------- -----------------
Total comprehensive income - (11,786) 8,404 (3,382)
--------- --------------------- ----------------------- -----------------
Transactions with owners
Equity dividends paid - - (4,861) (4,861)
--------- --------------------- ----------------------- -----------------
Total transactions with
owners - - (4,861) (4,861)
Closing equity at 31 December
2018 1,485 (89,189) 145,330 57,626
========= ===================== ======================= =================
Company Statement of Changes in Shareholders' Equity
(presented in US$ 000)
Notes Share Currency Accumulated Total Equity
Capital Translation Profit/(loss)
Reserves
Opening equityat 1 January
2019 1,485 - 43,358 44,843
Loss for the year - - (1,841) (1,841)
Equity dividends paid - - (5,237) (5,237)
Purchase of treasury shares - - (159) (159)
--------- -------------------------- --------------------- ---------------
Closing equity at 31 December
2019 1,485 - 36,121 37,606
========= ========================== ===================== ===============
Opening equityat 1 January
2018 1,485 - 51,377 52,862
Loss for the year - - (3,158) (3,158)
Equity dividends paid - - (4,861) (4,861)
--------- -------------------------- --------------------- ---------------
Closing equity at 31 December
2018 1,485 43,358 44,843
========= ========================== ===================== ===============
Notes to the financial statements for the year ended 31 December
2019
1. General information
Volga Gas plc (the "Company" or "Volga") is a public limited
company registered in England and Wales with registered number
5886534. The Company was incorporated on 25 July 2006. The
principal activities of the Company and its subsidiaries (the
"Group") are the acquisition, exploration and development of
hydrocarbon assets and production of hydrocarbons in the Volga
Region of the Russian Federation. Its registered office is 6(th)
floor, 65 Gresham Street, London EC2V 7NQ. The Company's shares are
admitted to trading on the AIM market of the London Stock
Exchange.
These Group consolidated financial statements were authorised
for issue by the Board of Directors on 6 April 2020.
2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of
these consolidated financial statements are set out below. These
policies have been consistently applied to all the years presented,
unless otherwise stated.
2.1 Basis of preparation
Both the Parent Company financial statements and the Group
financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRSs"), as adopted
by the European Union ("EU"), International Financial Reporting
Interpretations Committee ("IFRIC") interpretations, and the
Companies Act 2006 applicable to companies reporting under IFRS.
The consolidated financial statements have been prepared under the
historical cost convention and in accordance with applicable
accounting standards.
The preparation of financial statements in conformity with IFRSs
requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of
applying the Group's accounting policies. The areas involving a
higher degree of judgement or complexity, or areas where
assumptions and estimates are significant to the consolidated
financial statements, are disclosed in Note 4.
No income statement is presented for Volga Gas plc as permitted
by Section 408 of the Companies Act 2006.
The Group's business activities, together with the factors
likely to affect its future development, performance and position
are set out in the Strategic Report on pages 2 to 15; the financial
position of the Group, its cash flows, liquidity position and
borrowing facilities are described in the Financial Review on pages
9 and 10. In addition, the Group's objectives, policies and
processes for measuring capital, financial risk management
objectives, details of financial instruments and exposure to credit
and liquidity risks are described in Note 3.
Going Concern
Having reviewed the future cash flow forecasts of the Group in
the light of the reductions in oil and gas reserves, the recent
developments in the international oil prices and markets, and in
consideration of the current financial condition of the Group, the
Directors have concluded that the Group will continue to have
sufficient funds in order to meet its obligations as they fall due
for at least the 12 months from the approval of the financial
statements and thus continue to adopt the going concern basis of
accounting in preparing the annual financial statements.
In reaching this conclusion, the Directors have reviewed cash
flow projections using actual realised values from 1 January to 31
July 2020, current spot and futures oil prices in the period
2020-2022 and operational assumptions on production, operating and
capital costs in line with those used for impairment testing (see
Note 4). The Directors have also considered the sensitivity of cash
flow forecasts under a variety of scenarios that have arisen and
may arise as a result of the Covid-19 pandemic and the economic
impact of government measures taken to deal with the outbreak in
various countries in addition to risk factors that are specific to
the Group's operations. Included in these are:
-- Extended oil price weakness with the Urals oil price US$20
per barrel for the months of August to December inclusive in 2020
and US$30 per barrel in 2021;
-- Disruption arising from Covid-19 that leads to a period of
shut-in for the Group's entire production of varying durations, up
to 2 months, combined with the above mentioned lower oil
prices;
-- Unsuccessful outcomes from the drilling of the VM5 and VM6 wells;
-- A lower case outturn for slim hole development drilling on the Uzen field.
The Directors recognise that the long term viability of the
Group depends on successful development of oil reserves in the Uzen
field and on the discovery of new oil and gas reserves to replace
those that will be produced in the short and medium term. If these
activities are unsuccessful for a sustained period, it may be
necessary to reduce the ongoing overheads of the Group and may
reduce the Group's future ability to continue as going concern.
On 7 April 2020, the Company announced that its board of
directors (the "Board") had decided to conduct a formal review of
the various strategic options available to the Company to maximise
value for shareholders, including the potential sale of the Company
through a formal sale process or the farm-out or sale of one or
more of the Company's assets. This process is continuing and to
date, no formal offers have been received.
2.2 Financial instruments
i. Recognition and initial measurement
A financial asset or a financial liability is recognised in the
statement of financial position when, and only when, the Company
becomes a party to the contractual provisions of the
instrument.
A financial asset (unless it is a receivable without a
significant financing component) or a financial liability is
initially measured at fair value plus or minus, in the case of a
financial instrument not at fair value through profit or loss, any
directly attributable transaction costs incurred at the acquisition
or issuance of the financial instrument. A trade receivable that
does not contain a significant financing component is initially
measured at the transaction price.
ii. Classification and subsequent measurement
-- Financial Assets
Financial assets are classified as measured at: amortised cost,
fair value through other comprehensive income (FVOCI) and fair
value through profit or loss (FVTPL), as appropriate.
The Company determines the classification of financial assets at
initial recognition and they are not subsequently reclassified
unless the Company changes its business model for managing
financial assets in which case all affected financial assets are
reclassified on the first day of the first reporting period
following the change of the business model.
In 2019 all Company's financial assets were measured at
amortised cost.
Amortised cost category comprises financial assets that are held
within a business model whose objective is to hold assets to
collect contractual cash flows and its contractual terms give rise
on specified dates to cash flows that are solely payments of
principal and interest on the principal amount outstanding. The
financial assets are not designated as fair value through profit or
loss.
Subsequent to initial recognition, these financial assets are
measured at amortised cost using the effective interest method.
Interest income and foreign exchange gains and losses are
recognised in profit or loss.
-- Financial liabilities
All the Company's financial liabilities at initial recognition
are recognised at amortised cost. Subsequent to initial
recognition, financial liabilities are subsequently measured at
amortised cost using the effective interest method. Gains and
losses are recognised in the profit or loss when the liabilities
are derecognised as well as through the amortisation process.
-- Offsetting of financial instruments
Financial assets and financial liabilities are offset and the
net amount is reported in the statement of financial position if,
and only if, there is a currently enforceable legal right to offset
the recognised amounts and there is an intention to settle on a net
basis, or to realise the assets and settle the liabilities
simultaneously.
-- Amortised cost of financial instruments
Amortised cost is computed using the effective interest method.
This method uses the effective interest rate that exactly discounts
estimated future cash receipts or payments through the expected
life of the financial instrument to the net carrying amount of the
financial instrument. Amortised cost takes into account any
transaction costs and any discount or premium on settlement.
-- Derecognition of financial instruments
A financial asset is derecognised when the rights to receive
cash flows from the asset have expired or the Company has
transferred their rights to receive cash flows from the asset or
have assumed an obligation to pay the received cash flows in full
without material delay to a third party under a "pass-through"
arrangement without retaining control of the asset or substantially
all the risks and rewards of the asset.
On derecognition of a financial asset, the difference between
the carrying amount and the sum of the consideration received
(including any new asset obtained less any new liability assumed)
and any cumulative gain or loss that had been recognised in equity
is recognised in the profit or loss, except for equity investments
at fair value through other comprehensive income where the gain or
loss are recognised in other comprehensive income.
A financial liability is derecognised when the obligation under
the liability is discharged or cancelled or expired. On
derecognition of a financial liability, the difference between the
carrying amount of the financial liabilities extinguished or
transferred to another party and the consideration paid, including
any non-cash assets transferred or liabilities assumed, is
recognised in the profit or loss. In the case of waiver of debt
from owners, the gain is recognised in equity as capital
reserve.
-- Impairment
The Company recognises loss allowances for expected credit
losses on financial assets measured at amortised cost and contract
assets. The Company measures loss allowances at an amount equal to
lifetime expected credit loss, except for debt securities that are
determined to have low credit risk at the reporting date, other
debt securities for which credit risk has not increased
significantly since initial recognition and finance lease
receivables, which are measured as 12-month expected credit
loss.
Loss allowances for trade receivables and contract assets are
always measured at an amount equal to lifetime expected credit
loss. When determining whether the credit risk of a financial asset
has increased significantly since initial recognition and when
estimating expected credit loss, the Company considers reasonable
and supportable information that is relevant and available without
undue cost or effort. This includes both quantitative and
qualitative information and analysis, based on the Company's
historical experience and informed credit assessment and including
forward-looking information.
The Company assumes that the credit risk on a financial asset
has increased significantly if it is past due. The Company
considers a financial asset to be in default when the borrower is
unlikely to pay its credit obligations to the Company in full,
without recourse by the Company to actions such as realising
security.
Lifetime expected credit losses are the expected credit losses
that result from all possible default events over the expected life
of a financial instrument, while 12-month expected credit losses
are the portion of expected credit losses that result from default
events that are possible within the 12 months after the reporting
date.
The maximum period considered when estimating expected credit
losses is the maximum contractual period over which the Company is
exposed to credit risk.
2.4 Adoption of new and revised pronouncements
As of 1 January 2019, the Company adopted the following
pronouncements that have been issued by the International
Accounting Standards Board (IASB) and are applicable as listed
below:
Effective for annual periods beginning on or after 1 January
2019
IFRS 16 Leases The principal changes in accounting policies and
their effects are set out below:
IFRS 16 Leases
On transition to IFRS 16, the Company reassessed all contracts
to determine whether the contracts are, or contain a lease at the
date of initial application.
Where the Company are a lessee, the Company applied the
requirements of IFRS 16 retrospectively with the cumulative effect
of initial application as an adjustment to the opening balance of
retained earnings at 1 January 2019. At 1 January 2019, for leases
that were classified as operating lease under IAS 17, lease
liabilities were measured at the present value of the remaining
lease payments, discounted at the Company's incremental borrowing
rate as at 1 January 2019. Right-of-use assets are measured at
their carrying amount as if IFRS 16 had been applied since the
commencement date, discounted using the Company's incremental
borrowing rate at 1 January 2019.
The Company used the following practical expedients when
applying IFRS 16 to leases previously classified as operating lease
under IAS 117:
-- applied the exemption not to recognise right-of-use assets
and liabilities for leases with less than 12 months of lease term
as at 1 January 2019;
-- applied the exemption not to recognise low value assets.
Company defines the threshold for low assets as USD5,000 or
less;
-- excluded initial direct costs from measuring the right-of-use
asset at the date of initial application;
-- used hindsight when determining the lease term if the
contract contains options to extend or terminate the lease; and
-- adjusted the right-of-use assets by the amount of provision
for onerous contract under IAS 37 immediately before the date of
initial application, as an alternative to an impairment review.
The initial application of the above mentioned pronouncement
does not have any material impact to the financial statements of
the Company.
2.5 Adopted IFRS not yet applied
The following standards pronouncements that have been issued by
the IASB will become effective in future financial reporting
periods and have not been adopted by the Company in these financial
statements:
Effective for annual periods beginning on or after 1 January
2020
-- Amendments to IAS 1 Presentation of Financial Statements (Definition of Material)
-- Amendments to IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors (Definition of Material)
-- Amendments to References to the Conceptual Framework in IFRS Standards
-- Amendment to IFRS 3 Business Combinations (Definition of business)
-- Amendments to IFRS 7, IFRS 9 and IAS 39 (Addressing issues
affecting financial reporting in the period leading up to IBOR
reform)
The Company is expected to apply the abovementioned
pronouncements beginning from the respective dates the
pronouncements become effective. The initial application of the
abovementioned pronouncements is not expected to have any material
impact to the financial statements of the Company.
2.6 Consolidation
Subsidiaries
The consolidated financial statements include the financial
statements of the Company and its subsidiaries. Subsidiaries are
entities controlled by the Group. The Group controls an entity when
it is exposed to, or has rights to, variable returns from its
involvement with the entity and has the ability to affect those
returns through its power over the entity. In assessing control,
the Group takes into consideration potential voting rights that are
currently exercisable. The acquisition date is the date on which
control is transferred to the acquirer. The financial statements of
subsidiaries are included in the consolidated financial statements
from the date that control commences until the date that control
ceases. Losses applicable to the non-controlling interests in a
subsidiary are allocated to the non-controlling interests even if
doing so causes the non-controlling interests to have a deficit
balance.
Investments in subsidiaries are accounted for at cost less
impairment. Cost is adjusted to reflect changes in consideration
arising from contingent consideration amendments. Cost also
includes direct attributable costs of investment.
Inter-company transactions, balances and unrealised gains on
transactions between Group companies are eliminated; unrealised
losses are also eliminated unless the cost cannot be recovered.
The Company and its subsidiaries outside the Russian Federation
maintain their financial statements in accordance with IFRSs as
adopted by the EU. The Russian subsidiaries of the Group maintain
their statutory accounting records in accordance with the
Regulations on Accounting and Reporting of the Russian Federation.
The consolidated financial statements are based on these statutory
accounting records, appropriately adjusted and reclassified for
fair presentation in accordance with International Financial
Reporting Standards as adopted by the EU.
A list of the Company's subsidiaries is provided in Note 21.
2.7 Segment reporting
Segmental reporting follows the Group's internal reporting
structure.
Operating segments are defined as components of the Group where
separate financial information is available and reported regularly
to the chief operating decision maker ("CODM"), which is determined
to be the Board of Directors of the Company. The Board of Directors
decides how to allocate resources and assesses operational and
financial performance using the information provided.
The CODM receives monthly IFRS-based financial information for
the Group and its development and production entities. There were
two development and production entities during both 2018 and 2019.
These entities both engage in upstream production, gathering and
sale of hydrocarbons, with common operational management and
control. Management has determined that the operations of these
production and development entities are sufficiently homogenous
(all are concerned with upstream oil and gas development and
production activities) for these to be aggregated for the purpose
of IFRS 8, "Operating Segments". Common economic drivers for the
operations are international oil prices, export and Mineral
Extraction Taxes and the costs of drilling, completing and
operating wells and production facilities. The Group has other
entities that engage as either head office or in a corporate
capacity or as holding companies. Management has concluded that due
to application of the aggregation criteria that separate financial
information for segments is not required.
No geographic segmental information is presented as all of the
Group's operating activities are based within a localised area of
the Russian Federation.
Management has determined, therefore, that the operations of the
Group comprise one class of business, being oil and gas
exploration, development and production and the Group operates in
only one geographic area - the Volga region of the Russian
Federation.
The Group's gas sales, representing a substantial proportion of
revenues, are made to a single customer. Details are provided in
Note 3.1 (b).
2.8 Foreign currency translation
(a) Functional and presentation currency
Items included in the financial statements of each of the
Group's entities are measured using the currency of the primary
economic environment in which the entity operates ("the functional
currency"). The consolidated financial statements are presented in
US Dollars, which is the Company's functional and the Group's
presentation currency.
The functional currency of the Group's subsidiaries that are
incorporated in the Russian Federation is the Russian Rouble
("RUR"). It is management's view that the RUR best reflects the
financial results of its Cyprus subsidiaries because they are
dependent on entities based in Russia that operate in an RUR
environment in order to recover their investments. As a result, the
functional currency of the subsidiaries continues to be the
RUR.
(b) Transactions and balances
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation at
year-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the income
statement.
Foreign exchange gains and losses that relate to cash and cash
equivalents, borrowings and other foreign exchange gains and losses
are presented in the income statement within "Other gains and
losses".
(c) Group companies
The results and financial position of all the Group entities
(none of which has the currency of a hyper-inflationary economy)
that have a functional currency different from the presentation
currency are translated into the presentation currency as
follows:
(i) assets and liabilities for each balance sheet item presented
are translated at the closing rate at the date of that balance
sheet;
(ii) income and expenses for each income statement are
translated at average exchange rates (unless this average is not a
reasonable approximation of the cumulative effect of the rates
prevailing on the transaction dates, in which case income and
expenses are translated at the rate on the dates of the
transactions); and
(iii) all resulting exchange differences are recognised in other
comprehensive income.
The major exchange rates used for the revaluation of the closing
balance sheet at 31 December 2019 were:
-- GBP 1: US$1.3108 (2018: 1.2708)
-- EUR 1: US$1.2101 (2018: 1.1438)
-- US$ 1: RUR61.9057 (2018: 69.4706)
2.9 Oil and gas assets
The Company and its subsidiaries apply the successful efforts
method of accounting for exploration and evaluation ("E&E")
costs, in accordance with IFRS 6, "Exploration for and Evaluation
of Mineral Resources". Costs are accumulated on a field-by-field
basis.
Capital expenditure is recognised as property, plant and
equipment or intangible assets in the financial statements
according to the nature of the expenditure and the stage of
development of the associated field, i.e. exploration, development,
production.
(a) Exploration and evaluation assets
Costs directly associated with an exploration well, including
certain geological and geophysical costs, and exploration and
property leasehold acquisition costs, are capitalised as intangible
assets until the determination of reserves is evaluated. If it is
determined that a commercial discovery has not been achieved, these
costs are charged to expense after the conclusion of appraisal
activities. Exploration costs such as geological and geophysical
costs that are not directly related to an exploration well are
expensed as incurred.
Once commercial reserves are found, exploration and evaluation
assets are tested for impairment and transferred to development
assets. No depreciation or amortisation is charged during the
exploration and evaluation phase.
(b) Development assets
Expenditure on the construction, installation or completion of
infrastructure facilities, such as platforms, pipelines and the
drilling of development wells into commercially proven reserves, is
capitalised within property, plant and equipment. When development
is completed on a specific field, it is transferred to producing
assets as part of property, plant and equipment. No depreciation or
amortisation is charged during the development phase.
(c) Oil and gas production assets
Production assets are accumulated generally on a field by field
basis and represent the cost of developing the commercial reserves
discovered and bringing them into production together with E&E
expenditures incurred in finding commercial reserves and
transferred from the intangible E&E assets as described
above.
The cost of production assets also includes the cost of
acquisitions and purchases of such assets, directly attributable
overheads, finance costs capitalised and the cost of recognising
provisions for future restoration and decommissioning.
Where major and identifiable parts of the production assets have
different useful lives, they are accounted for as separate items of
property, plant and equipment. Costs of minor repairs and
maintenance are expensed as incurred.
(d) Depreciation/amortisation
Oil and gas properties are depreciated or amortised using the
unit-of-production method. Unit-of-production rates are based on
proved reserves, which are oil, gas and other mineral reserves
estimated to be recovered from existing facilities using current
operating methods. Oil and gas volumes are considered produced once
they have been measured through meters at custody transfer or sales
transaction points at the outlet valve on the field storage
tank.
(e) Impairment - exploration and evaluation assets
Exploration and evaluation assets are tested for impairment
prior to reclassification to development tangible assets, or
whenever facts and circumstances indicate that an impairment
condition may exist. An impairment loss is recognised for the
amount by which the exploration and evaluation assets' carrying
amount exceeds their recoverable amount. The recoverable amount is
the higher of the exploration and evaluation assets' fair value
less costs to sell and their value in use. For the purposes of
assessing impairment, the exploration and evaluation assets subject
to testing are grouped with existing cash-generating units of
production fields that are located in the same geographical
region.
(f) Impairment - proved oil and gas production properties
Proven oil and gas properties are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. An impairment loss is
recognised for the amount by which the asset's carrying amount
exceeds its recoverable amount. The recoverable amount is the
higher of an asset's fair value less costs to sell and value in
use. The cash-generating unit applied for impairment test purposes
is generally the field, except that a number of field interests may
be grouped together where the cash flows of each field are
interdependent, for instance where surface infrastructure is used
by one or more field in order to process production for sale.
(g) Decommissioning
Provision is made for the cost of decommissioning assets at the
time when the obligation to decommission arises. Such provision
represents the estimated discounted liability (the discount rate
used currently being at 10% per annum) for costs which are expected
to be incurred in removing production facilities and site
restoration at the end of the producing life of each field. A
corresponding item of property, plant and equipment is also created
at an amount equal to the provision. This is subsequently
depreciated as part of the capital costs of the production
facilities. Any change in the present value of the estimated
expenditure attributable to changes in the estimates of the cash
flow or the current estimate of the discount rate used are
reflected as an adjustment to the provision and the property, plant
and equipment. The unwinding of the discount is recognised as a
finance cost.
2.10 Other business and corporate assets
Property, plant and equipment not associated with exploration
and production activities are carried at cost less accumulated
depreciation. These assets are also evaluated for impairment when
circumstances dictate.
Land is not depreciated. Depreciation of other assets is
calculated on a straight line basis as follows:
Machinery and equipment 6-10 years
Office equipment in excess of US$5,000 3-4 years
Vehicles and other 2-7 years
Depreciation methods, useful lives and residual values are
reviewed at each balance sheet date.
2.11 Share capital
Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of new
shares or options are shown in equity as a deduction, net of tax,
from the proceeds.
2.12 Current and deferred income tax
The tax expense for the period comprises current and deferred
tax. Tax is recognised in the income statement, except to the
extent that it relates to items recognised in other comprehensive
income or directly in equity. In this case, the tax is also
recognised in other comprehensive income or directly in equity,
respectively.
The current income tax charge is calculated on the basis of the
tax laws enacted or substantively enacted at the end of the
reporting period in the countries where the Company's subsidiaries
operate and generate taxable income. Management periodically
evaluates positions taken in tax returns with respect to situations
in which applicable tax regulation is subject to interpretation. It
establishes provisions where appropriate on the basis of amounts
expected to be paid to the tax authorities.
Deferred income tax is recognised, using the liability method,
on temporary differences arising between the tax bases of assets
and liabilities and their carrying amounts in the consolidated
financial statements. However, the deferred income tax is not
accounted for if it arises from initial recognition of an asset or
liability in a transaction other than a business combination that
at the time of the transaction affects neither accounting nor
taxable profit or loss. Deferred income tax is determined using tax
rates (and laws) that have been enacted or substantially enacted by
the end of the reporting period and are expected to apply when the
related deferred income tax asset is realised or the deferred
income tax liability is settled.
Deferred income tax assets are recognised to the extent that it
is probable that future taxable profit will be available against
which the temporary differences can be utilised.
Deferred income tax assets and liabilities are offset when there
is a legally enforceable right to offset current tax assets against
current tax liabilities and when the deferred income taxes assets
and liabilities relate to income taxes levied by the same taxation
authority on either the same taxable entity or different taxable
entities where there is an intention to settle the balances on a
net basis.
2.13 Employee benefits
(a) Share-based compensation
The fair value of the employee services received in exchange for
the grant of the options is recognised as an expense. The total
amount to be expensed over the vesting period is determined by
reference to the fair value of the options granted, excluding the
impact of any non-market vesting conditions (for example,
profitability and sales growth targets). Non-market vesting
conditions are included in assumptions about the number of options
that are expected to vest. The option plan currently in place for
certain of the Directors is an equity-settled share option
plan.
The Company measures the equity instruments granted to employees
at the fair value at grant date. The fair value of fully vested
shares is expensed immediately. The fair value of shares with
vesting requirements is estimated using the Black-Scholes option
pricing model. This value is recognised as an expense over the
vesting period on a straight-line basis. The estimate is revised,
as necessary, if subsequent information indicates that the number
of equity instruments expected to vest differs from previous
estimates.
(b) Social obligations
Wages, salaries, contributions to the Russian Federation state
pension and social insurance funds, paid annual leave, sick leave
and bonuses are accrued in the year in which the associated
services are rendered by the employees of the Group.
2.14 Revenue recognition
Revenue is measured based on the consideration specified in a
contract with a customer and excludes amounts collected on behalf
of third parties. The Company recognises revenue when or as it
transfers control over a product or service to customer. An asset
is transferred when (or as) the customer obtains control of the
asset. Details of the revenue recognition policies are disclosed in
Note 5.
2.15 Prepayments
Prepayments are carried at cost less provision for impairment. A
prepayment is classified as non-current when the goods or services
relating to the prepayment are expected to be obtained after one
year, or when the prepayment relates to an asset which will itself
be classified as non-current upon initial recognition. Prepayments
to acquire assets are transferred to the carrying amount of the
asset once the Group has obtained control of the asset and it is
probable that future economic benefits associated with the asset
will flow to the Group. Other prepayments are written off to profit
or loss when the goods or services relating to the prepayments are
received. If there is an indication that the assets, goods or
services relating to a prepayment will not be received, the
carrying value of the prepayment is written down accordingly and a
corresponding impairment loss is recognised in profit or loss for
the year.
2.16 Provisions
Provisions for environmental restoration, restructuring costs
and legal claims are recognised when: the Group has a present legal
or constructive obligation as a result of past events; it is
probable that an outflow of resources will be required to settle
the obligation; and the amount has been reliably estimated.
Restructuring provisions comprise lease termination penalties and
employee termination payments. Provisions are not recognised for
future operating losses.
Where there are a number of similar obligations, the likelihood
that an outflow will be required in settlement is determined by
considering the class of obligations as a whole. A provision is
recognised even if the likelihood of an outflow with respect to any
one item included in the same class of obligations may be
small.
Provisions are measured at the present value of the expenditures
expected to be required to settle the obligation using a pre-tax
rate that reflects current market assessments of the time value of
money and the risks specific to the obligation. The increase in the
provision due to passage of time is recognised as interest
expense.
3. Financial risk management
3.1 Financial risk factors
The Group's activities expose it to a variety of financial
risks: market risk (including foreign exchange risk, price risk and
cash flow interest rate risk), credit risk, and liquidity risk. The
Group's overall risk management programme focuses on the
unpredictability of financial markets and seeks to minimise
potential adverse effects on the Group's financial performance.
(a) Market risk
(i) Foreign exchange risk
The Group is exposed to foreign exchange risk arising from
currency exposures, primarily with respect to the RUR. Foreign
exchange risk arises from future commercial transactions,
recognised assets and liabilities.
At 31 December 2019, if the US Dollar had weakened/strengthened
by 5% against the RUR with all other variables held constant,
post-tax profit for the year would have been US$57,797 (2018:
US$49,885) higher/lower, mainly as a result of foreign exchange
gains/losses on translation of RUR-denominated trade payables and
financial assets. At 31 December 2019, if the US Dollar had
weakened/strengthened by 5% against the Euro ("EUR") with all other
variables held constant, post-tax profit for the year would have
been US$30,658 (2018: nil) higher/lower, mainly as a result of
foreign exchange gains/losses on translation of EUR denominated
interest charges and financial liabilities. At 31 December 2019, if
the US Dollar had weakened/strengthened by 5% against the Pound
Sterling ("GBP") with all other variables held constant, post-tax
profit for the year would have been US$3,150 (2018: US$13,303)
higher/lower, mainly as a result of foreign exchange gains/losses
on translation of GBP-denominated trade payables and financial
assets.
I f the US Dollar had weakened/strengthened by 5% against the
RUR with all other variables held constant, shareholders' equity
would have been US$2.2 million (2018: US$2.5 million) higher/lower,
as a result of translation of RUR-denominated assets. The
sensitivity of shareholders' equity to changes in the exchange
rates between US Dollar against GBP or EUR is immaterial.
The following table shows the currency structure of financial
assets and liabilities:
At 31 December 2019 Rubles US Dollars Sterling Total
US$ 000 US$ 000 US$ 000 US$ 000
Financial assets
Cash and cash equivalents 4,486 9,535 95 14,116
Trade and other financial
receivables 1,471 1,471
-------- --------------- --------- --------
Total financial assets 5,957 9,535 95 15,587
Financial liabilities (before
provision for UK taxes) 4,222 - - 4,222
======== =============== ========= ========
At 31 December 2018 Rubles US Dollars Sterling Total
US$ 000 US$ 000 US$ 000 US$ 000
Financial assets
Cash and cash equivalents 5,737 9,231 218 15,186
Trade and other financial
receivables 1,823 - - 1,823
-------- --------------- --------- --------
Total financial assets 7,560 9,231 218 17,009
Financial liabilities (before
provision for UK taxes) 5,523 - - 5,523
======== =============== ========= ========
(ii) Price risk
The Group is not exposed to price risk as it does not hold
financial instruments of which the fair values or future cash flows
will be affected by changes in market prices. The Group is not
directly exposed to the levels of international marker prices of
crude oil or oil products, although these clearly influence the
prices at which it sells its oil and condensate. Mineral Extraction
Taxes ("MET") are calculated by reference to Urals oil prices and
are therefore directly influenced by this. Taking into account the
marginal rates of export taxes and MET, management estimates that
if international oil prices had been US$5 per barrel higher or
lower and all other variables been unchanged, the Group's profit
before tax would have been US$1.2 million higher or lower (2018:
$1.6 million).
(iii) Cash flow and fair value interest rate risk
As the Group currently has no significant interest-bearing
assets and liabilities, the Group's income and operating cash flows
are substantially independent of changes in market interest
rates.
(b) Credit risk
The Group's maximum credit risk exposure is the fair value of
each class of assets, presented in Note 3.1(a)(i) of US$15,587,000
and US$ US$17,009,000 at 31 December 2019 and 2018
respectively.
The Group's principal financial assets are cash and trade
receivables. Trade receivables relate to one customer Gazprom
Mezhregiongas Volgograd. This customer has been transacting with
the Group since 2017. To date this customer's balance has not been
ever written off and is not deemed credit-impaired at the reporting
date. The probability of default of Gazprom Mezhregiongas Volgograd
was assessed as low risk. Payments are made within 30 days and
there is no history of defaults. All trade receivables at the
reporting date were classified as current (less than 30 days) and
therefore no impairment was deemed required.
Credit risk also arises from cash and cash equivalents and
deposits with banks and financial institutions. It is the Group's
policy to monitor the financial standing of these assets on an
ongoing basis. Bank balances are held with reputable and
established financial institutions. Any impairment on cash and cash
equivalents has been measured on a 12-month expected loss basis and
reflects the short maturities of the exposures. The Group considers
that its cash and cash equivalents have low credit risk based on
the external credit ratings of the counterparties.
Rating of financial institution 31 December 31 December
(Fitch) 2019 2018
US$ 000 US$ 000
Barclays Bank A 9,299 1,412
ZAO Raiffeisenbank BBB- 4,784 13,769
Other 33 5
------------------ ------------
Total bank balance 14,116 15,186
================== ============
The Group's oil, condensate and LPG sales are normally
undertaken on a prepaid basis and accordingly the Group has no
trade receivables and consequently no credit risk associated with
the related trade receivables.
(c) Interest rate risk
The Group's sole interest rate exposure has been related to its
bank loan which as of 1 February 2019 was repaid in full.
(d) Liquidity risk
The remaining contractual maturities as at 31 December 2019 and
31 December 2018 are as follows:
Maturity period at 0 to 3 months 3 to 12 Over 1 year Total
31 December 2019 months
-------------- -------- ------------ ------
Trade and other payables 4,222 - - 4,222
-------------- -------- ------------ ------
Total 4,222 - - 4,222
Maturity period at 0 to 3 months 3 to 12 Over 1 year Total
31 December 2018 months
-------------- -------- ------------ ------
Trade and other payables 3,863 - - 3,863
Bank loan 1,660 - - 1,660
-------------- -------- ------------ ------
Total 5,523 - - 5,523
Cash flow forecasting is performed by Group finance. Group
finance monitors rolling forecasts of the Group's liquidity
requirements to ensure it has sufficient cash to meet operational
needs. The Group believes it has sufficient liquidity headroom to
fund its currently planned exploration and development
activities.
The Group expects to fund its capital investments, as well as
its administrative and operating expenses, through 2020 using a
combination of cash generated from its oil and gas production
activities, existing working capital and, when appropriate,
medium-term bank borrowings. If the Group is unsuccessful in
generating enough liquidity to fund its expenditures, the Group's
ability to execute its long-term growth strategy could be
significantly affected. The Group may need to raise additional
equity or debt finance as appropriate to fund investments beyond
its current commitments.
(e) Capital risk management
The Group manages capital to ensure that it is able to continue
as a going concern whilst maximising the return to shareholders.
The Group is not subject to any externally imposed capital
requirements. The Board regularly monitors the future capital
requirements of the Group, particularly in respect of its ongoing
development programme. Management expects that the cash generated
by the operating fields will be sufficient to sustain the Group's
operations and future capital investment for the foreseeable
future. During December 2016, one of the Group's operating
subsidiaries entered into a loan agreement of RUR 240 million to
fund its LPG project (see Note 20). This loan, which has a
three-year amortising term, was repaid in full on 1 February 2019.
Further short-term debt facilities may be arranged to provide
financial headroom for future development activities.
(f) Fair value measurement
The Company's financial instruments consist of cash and cash
equivalents, trade and other receivables, and trade and other
payables.
The carrying amounts of cash and cash equivalents, trade and
other receivables and trade and other payables reasonably
approximate their fair values due to the relatively short-term
nature of these financial instruments.
3.2 Fair value estimation
Effective 1 January 2009, the Group adopted the amendment to
IFRS 7 for financial instruments that are measured in the balance
sheet at fair value. This requires disclosure of fair value
measurements by level of the following fair value measurement
hierarchy:
-- Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
-- Inputs other than quoted prices included within level 1 that
are observable for the asset or liability, either directly (that
is, as prices) or indirectly (that is, derived from prices) (level
2).
-- Inputs for the asset or liability that are not based on
observable market data (that is, unobservable inputs) (level
3).
The Group has no financial assets and liabilities that are
required to be measured at fair value.
4. Critical accounting estimates and judgements
The Group makes estimates and assumptions concerning the future.
The resulting accounting estimates will, by definition, seldom
equal the related actual results. The estimates and assumptions
that have a significant risk of causing a material adjustment to
the carrying amounts of assets and liabilities within the next
financial year are discussed below.
a) Carrying value of fixed assets, intangible assets and
impairment
Fixed assets and intangible assets are assessed for impairment
when events and circumstances indicate that an impairment condition
may exist. The carrying value of fixed assets and intangible assets
are evaluated by reference to their value in use and primarily
looks to the present value of management's best estimate of the
cash flows expected to be generated from the asset. In identifying
cash flows, management firstly determines the cash-generating unit
or group of assets that give rise to the cash flows. The
cash-generating unit ("CGU") is the lowest level of asset at which
independent cash flows can be generated. For this purpose, the
Directors consider the Group to have two CGUs: the VM and
Dobrinskoye fields with the Dobrinskoye gas processing plant are
treated as a single CGU, known as "GNS" and the Uzen oil field is a
separate CGU, known as "PGK".
The estimation of forecast cash flows involves the application
of a number of significant estimates to a number of variables
including production volumes, commodity prices, operating costs,
capital investment, hydrocarbon reserves estimates and discount
rates. Key assumptions and estimates in the impairment models
relate to:
-- International oil prices: flat real prices reflecting the
average levels pertaining during the period 1 December 2019 to 31
January 2020, a Urals oil price of US$63 per barrel. No forward
price escalation is assumed.
-- Selling prices for oil, condensate and LPG that reflect
international oil prices, less export taxes at the applicable
official rates and a price differential of $5 per barrel. Russian
export taxes are being phased out over a five-year period starting
in 2019 - with the same levy being added to the Mineral Extraction
tax formula. It is assumed that domestic prices will continue to
track the netback pricing. Based on actual commercial experience
since May 2018, when production commenced LPG sales prices have on
average been similar to those for condensate. The models assume the
LNG sales price is 10% lower per tonne than condensate.
-- Gas sales price of RUR 4,289 per mcm excluding VAT and net of transportation costs.
-- Production profiles based on remaining reserves in the proved
category and approved field development plans. For the purposes of
impairment testing, the level of reserves used are those
established by the independent consultancy Panterra as at 31
December 2019, in relation to the VM and Dobrinskoye fields. In
respect of the Uzen field, the reserves were estimated by
management and supported by an independent geological review of the
impact of the results of wells drilled during 2019 that was
produced in March 2020. A further evaluation of reserves in Uzen
will be conducted during 2020, to include incremental reserves
discovered in the course of 2019 during development drilling as
detailed in the Operations Report on pages 7 and 8. Meanwhile,
management considers that the after adjusting for subsequent
production, the Uzen reserves estimates remain in line with
internal estimates.
-- Capital expenditures required to deliver the above production
profiles and to maintain the production assets throughout the field
life. Total development capital expenditure assumed for the period
2020-2024 is approximately US$14.2 million, primarily on drilling
of development wells, with future capital expenditure beyond that
time of up to US$0.2-1.0 million per annum. The calculation in use
excludes and positive contribution from successful exploratory
drilling or other improvements to the assets.
-- Cost assumptions are based on current experience and
expectations and are broadly in line with unit costs experienced in
the year ended 31 December 2019. The costs included in the analysis
include all field operating and production costs and allocated
overheads of the operating entities.
-- Total overheads of RUR 220m are assumed, in line with the
2020 budget for the operating entities. This has been allocated
between GNS and PGK in approximate proportion to their revenues.
The same level of G&A is carried through to 2022. For 2023 and
beyond, it is assumed that with the presumed closure of GNS, the
overall G&A would reduce commensurately. For the remainder of
field life of Uzen it is assumed that reductions in G&A would
match eventual declines in field production
-- Export and mineral extraction taxes reflect rates set by
current legislation, including the phased transfer of export taxes
(levied on oil exports) to Mineral Extraction Tax (levied on all
oil and condensate production).
-- The model reflects real terms cash flows with no inflationary
escalation of revenues or costs.
-- A real discount rate of 10% per annum is utilised in the models.
-- An exchange rate reflecting the average levels pertaining
during the period 1 December 2019 to 31 January 2020 of RUR62 to
US$1.00 is assumed.
In addition to the base case, a number of sensitivity cases have
been carried out:
-- Varying gas prices by 10%,
-- Varying operating expenditure by 10%,
-- varying administrative expenditure by 10%,
-- varying the RUR/US$ assumed exchange rate by 10%,
-- Varying capital expenditure by 20%,
-- Varying reserves by 20% and
-- Using a 12% real discount rate.
-- A lower oil price scenario using flat Urals prices of
US$25.00 per barrel for 2020, US$35.00 for 2021 and US$50.00 for
2022 onwards was conducted.
-- As an further sensitivity scenario relating to the VM field a
further set of cases were conducted on the GNS CGU on the basis
that the two new wells on the field, VM#5 and VM#6 were
unsuccessful.
The calculated values in use of the CGUs have been compared to
the net book values of the PP&E associated with the CGUs. The
table below summarises the results of this analysis, indicating the
level of impairment reflected in the Base Case and the potential
additional impairments that may arise from each of the sensitivity
cases described above:
Cash generating GNS PGK
unit
(US$000) (US$000)
Net book value as at 31
December 2019
(prior to impairment)
Comprising: 28,786 14,797
* Property, plant and equipment
28,786 14,797
* Intangible assets - -
Value in use 20,451 15,439
Calculated impairment from 8,335 -
value in use
Additional impairment (US$
million) if:
Reserves -20% 7,531 8,184
VM 5,6 unsuccessful 11,528 -
Low oil price 17,399 8,891
Gas price -10% 873 -
Opex +10% 817 531
Administrative
expenses +10% 423 97
Capex +20% 791 2,706
RUR exchange rate
-10% 3,035 4,086
NPV 12% 373 947
Based on the above analysis, the book value of the GNS assets is
clearly impaired. Given the relatively short remaining field life
and the fact that the operating and capital costs are not
especially high, the cost sensitivities are not major, while the
oil price sensitivities are significantly more material. The value
in use, additionally, is significantly dependent on the reserve
sensitivities - especially in relation to the recognised risk
attached to the outcomes of VM#5 and VM#6. However, while
recognising the sensitivity to this risk factor, management does
not believe that there is a basis for expecting the new wells to be
unsuccessful.
Therefore, the Directors believe an impairment of RUR 516
million or approximately US$8.3 million is indicated and have
decided to include a charge of this amount in the financial
statements for the year ended 31 December 2019.
For the PGK assets, the value in use, under the base case
scenarios show a moderate level of headroom above the carrying
value of the assets. However, the analysis indicates that a very
small reduction in the Uzen field reserves could lead to asset
impairment. The 20% reserve downside case suggests a significant
reduction in value in use. However, management considers that in
event of lower than expected success with development wells, a
modification to development plans involving a reduction in future
capital expenditure would be implemented. This may mitigate the
impact suggested by the single variable sensitivity analysis.
Therefore the directors consider that while there is risk of
substantial future impairment, no impairment is currently indicated
for the PGK assets.
Should there be material adverse changes to the assumptions used
in future impairment tests, or should there be further reductions
in reserve estimates, there may be impairment of one or both of the
CGUs.
(b) Estimation of oil and gas reserves
Estimates of oil and gas reserves are inherently subjective and
subject to periodic revision. In addition, the results of drilling
and other exploration or development or production activity will
often provide additional information regarding the Group's reserve
base that may result in increases or decreases to reserve volumes.
Such revisions to reserves can be significant and are not
predictable with any degree of certainty. Management considers the
estimation of reserves to represent a significant estimate in the
context of the financial statements as reserve volumes are used as
the basis for assessing the useful life of oil and gas assets,
applying depreciation to oil and gas assets and in assessing the
carrying value of oil and gas assets. Decreases in reserve
estimates can lead to significant impairment of oil and gas assets
where revisions (positive or negative) can have a significant
effect on depreciation rates from period to period. Variation of
20% from the base level of reserves is among the sensitivity tests
carried out in impairment testing as described in Note 4(a)
above.
An independent assessment of the reserves and net present value
of future net revenues ("NPV") attributable to the Group's
Dobrinskoye and Vostochny Makarovskoye fields as at 31 December
2019, was prepared in accordance with reserve definitions set by
the Oil and Gas Reserves Committee of the Society of Petroleum
Engineers ("SPE"). The catalyst for this revision was the
indication of a significantly higher than anticipated level of
gas:water contact in the main reservoir of the VM field. Management
considered these revised estimates to be reasonable and adopted
them as the Group's reserves. The revisions to reserves are
presented in detail at the end of the Operational Review on page
8.
Independent reserves estimates of the Sobolevskoye and
Uzenskoye, as at 31 December 2017, were prepared in accordance with
reserve definitions set by the Oil and Gas Reserves Committee of
the Society of Petroleum Engineers ("SPE"). The reserve estimate as
at 31 December 2019 is accordingly only adjusted for the volumes
produced in the two years to 31 December 2019. An independent
geological review by Panterra Group, based on the updated data
provided from 2019 drilling activity on the Uzen field, supports
management's current estimates.
5. Revenue from contracts with customers
(i) Revenue streams
The Group generates revenue primarily from sales of oil, gas,
gas condensate and LPG. Initial application of IFRS 15 Revenue from
Contracts with Customers does not have material impact on the
Company. The Group has following main revenue streams:
-- Oil and condensate - The customers for oil and condensate are
independent oil traders purchasing supplies which ultimately are
delivered to oil refineries either in the Russian Federation or in
neighbouring states in Europe.
-- Gas - The Group's gas sales are to OOO Gazprom Mezhregiongaz
Volgograd, the regional subsidiary of the Russian gas major, which
uses the gas for onward sale to consumers.
-- LPG - The customers for oil and condensate are independent
traders purchasing supplies which ultimately are marketed to
retail, commercial and industrial consumers in the Russian
Federation
Revenue is measured based on the consideration specified in a
contract with a customer. The Group recognises the revenue at a
time when it transfers the title to the products to a customer.
This revenue recognition criterion applies to all revenue streams
of the Group. Control over a product or service is passed to a
customer according to the contract terms:
Revenue Timing of recognition or method Significant payment terms
stream used to recognise revenue
Oil, condensate Title to the products is transferred The Group receives full
and LPG to a customer at the point payment in advance of
of sale. For the majority of collection of the product
domestic sales this is the or delivery at an external
Uzen field facility (in the point as applicable.
case of oil) or the Dobrinskoye
gas plant (in the case of condensate
or LPG), in which case title
passes to the purchaser when
the product is loaded into
the purchaser's tanker truck.
For export sales and occasionally
certain domestic sales title
transfers at an agreed cross-border
railway station, or when the
product arrives at the export
terminal (according to terms
of each purchase order).
---------------------------------------- ----------------------------
Gas The Group's sales of natural Payment is to be received
gas are all made via Gazprom. no later than the 27th
Delivery of the gas is based day of the month following
on the fiscal metering point each contract month.
at an interface between the
gas plant and the Gazprom pipeline
system located within the plant
site.
Gas is delivered evenly to
the customer through the pipeline
connected with the Client gas
production facilities. This
means that the customer simultaneously
receives and consumes the benefits
provided by the entity.
---------------------------------------- ----------------------------
There are no variable elements in consideration, obligation for
returns or refunds nor warranty in the provision of goods and
services by the Group.
Year ended 31 December 2019 2018
US$ 000
Revenue from contract with customers 45,956 45,875
------- --------
Total revenues 45,956 45,875
======= ========
(ii) Disaggregation of revenue
In the following table, revenue is disaggregated by primary
geographical market, major products/service lines and timing of
revenue recognition.
Year ended 31 December 2019 2018
Major products lines US$ 000 US$ 000
Oil 7,023 10,473
Condensate 25,070 19,681
LPG 2,635 2,841
Gas 11,228 12,880
-------- --------
Total revenues 45,956 45,875
======== ========
Year ended 31 December 2019 2018
Primary geographical markets US$ 000 US$ 000
Russia 34,726 42,281
Europe 11,230 3,594
--------
Total revenues 45,956 45,875
--------
Year ended 31 December 2019 2018
Timing of transfer of goods or services US$ 000 US$ 000
Products and services transferred
at a point in time 34,728 32,995
Products and services transferred
over time 11,228 12,880
--------
Total revenues 45,956 45,875
--------
(iii) Contract balances
The following table provides information about opening and
closing receivables and contract liabilities from contracts with
customers.
As at 31 December Note 2019 2018
US$000 US$000
Receivables 15 875 1,411
Contract liabilities 19 1,538 1,577
The contract liabilities primarily relate to the advance
consideration received from customers for oil, condensate and (in
2018 only) LPG. Receivables relate primarily to gas sales.
6. Cost of sales and administrative expenses - Group
Cost of sales and administrative expenses are as follows:
Year ended 31 December 2019 2018
US$ 000 US$ 000
Production expenses 7,230 8,348
Mineral Extraction Taxes 14,257 13,194
Depletion, depreciation and amortisation (a) 14,856 8,220
-------------------- -----------------------
Cost of Sales 36,343 29,762
==================== =======================
Total expenses are analysed as follows:
Year ended 31 December 2019 2018
US$ 000 US$ 000
Sales related expenses (b) 3,771 2,473
Field operating expenses (c) 5,026 5,865
Mineral extraction tax 14,257 13,194
Depreciation & amortization (a) 14,865 8,237
Write off of development and producing
assets (g) 2,608 1,513
Impairment charge 8,335 -
Inventory write off 16 391
Salaries & staff benefits (d) 4,671 4,632
Directors' emoluments and other benefits (e) 616 677
Audit fees (f) 240 281
Taxes other than payroll and mineral
extraction 658 716
Legal & consulting 651 586
Other 165 104
-------------------- -----------------------
Total 55,879 38,669
==================== =======================
(a) Depreciation: Substantially all depreciation relates to oil
and gas assets and is included within cost of sales.
(b) Selling expenses: Comprise pipeline transit costs and fees
related to gas sales as well as export taxes and costs associated
with delivering gas condensate sales to export customers.
(c) Field operating expenses: Field operating expenses include
certain non-cash items. In the year ended 31 December 2018,
provisions for the cost of waste removal were reversed, partly
offset by other accrued expenses. The resulting net non-cash
operating gain in the year ended 31 December 2018 was US$251,000.
In the year ended 31 December 2109 there were no such
reversals.
(d) Staff and salaries: The average monthly number of employees
(including Executive Directors) employed by the Group was:
Year ended 31 December 2019 2018
Exploration and production 146 161
Administration and support 55 59
----- -----
Total 201 220
===== =====
Their aggregate remuneration (excluding executive directors)
comprised:
2019 2018
US$ 000 US$ 000
Wages and salaries 3,664 3,568
Payroll taxes and social contribution 956 992
Staff benefits 51 72
-------- --------
Total 4,671 4,632
======== ========
The average monthly number of employees employed by the Company
was:
Year ended 31 December 2019 2018
Chief Executive 1 1
Non-executive Directors 6 6
Total 7 7
===== =====
Only Directors are employed by the Company.
(e) Directors' emoluments and other benefits:
Aggregate Aggregate
Remuneration Remuneration
for the Year for the Year
31 December 31 December
Salary Benefits Bonus Fees 2019 2018
US$ 000 US$ 000 US$ 000 US$ 000 US$ 000
Executive Directors
A. Zozulya 185 13 198 - 396 356
Non-executive Directors
M. Calvey - - - - - -
R. Freeman - - - 50 50 50
M. Ivanov - - - 120 120 120
A. Kalinin - - - - - -
V. Koshcheev - - - - - -
S. Ogden - - - 50 50 50
Chief Financial Officer (non-Board)
V. Son 72 11 30 - 113 101
(f) Audit fees - Group and Company: Disclosure of the fees paid
to the Company's auditor and its associates is given in note
22.
(g) Write-off of development and producing assets - During the
year ended 31 December 2019, the Group wrote off assets of
US$2,608,000 (2018: US$1,513,000) of capitalised costs, primarily
relating to unsuccessful drilling operations on two development
wells. The write off in 2018 related to the subject of a legal
dispute with a drilling contractor in which the Group received a
court settlement totalling US$3,120,000. This settlement was
recognised as other operating income in 2018.
7. Finance income - Group
Finance income comprises interest earned during the period on
cash balances with different banks (Note 13).
8. Other gains and losses - Group
Year ended 31 December 2019 2018
US$ 000 US$ 000
-------- --------
Foreign exchange loss ( 575) ( 133)
Other losses (278) ( 59)
-------- --------
Total other gains and losses ( 853) (192)
======== ========
9. Current and deferred income tax - Group
Year ended 31 December 2019 2018
US$ 000 US$ 000
--------- ---------
Current tax:
Current income tax ( 2,052) ( 2,172)
Adjustments to tax charge in respect
of prior periods ( 172) (82)
--------- ---------
Total current tax ( 2,224) (2,254)
Deferred tax:
Origination and reversal of timing
differences 2,709 99
--------- ---------
Total deferred tax 2,709 99
Total tax credit/(charge) 485 (2,155)
========= =========
The tax charge in the Group income statement differs from the
theoretical amount that would arise using the weighted average tax
rate applicable to profits of the consolidated entities as
follows:
Year ended 31 December 2019 2018
US$ 000 US$ 000
---------- ------------------
(Loss)/profit before income tax
and minority interest ( 10,502) 10,559
Tax calculated at domestic tax
rates applicable to (profits)/losses
in the respective countries 2,100 ( 2,131)
Tax effect of items which are not deductible
or assessable for taxation purposes:
Non-deductible expenses ( 54) (44)
Tax losses for which no deferred
tax asset was recognised ( 916) (25)
Recognition of tax effect of previously
unrecognised tax losses - 154
Other tax adjustments ( 645) ( 109)
---------- ------------------
Income tax charge 485 (2,155)
========== ==================
The weighted average applicable tax rate was 21.0% (2018:
21.0%).
Deferred taxation is attributable to the temporary differences
that exist between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for tax
purposes. The tax effects of temporary differences that give rise
to deferred taxation are presented below:
31 December Differences 31 December Differences 31 December
2019 recognised 2018 recognised 2017
in profit in profit
or loss or loss
US$ 000 US$ 000 US$ 000 US$ 000 US$ 000
------------ ----------------- ------------------ ------------ ------------
Tax effect of taxable temporary
differences:
Property, plant
& equipment ( 645) 2,658 ( 3,303) 1,593 ( 4,896)
------------ ----------------- ------------------ ------------ ------------
Total ( 645) 2,658 ( 3,303) 1,593 ( 4,896)
Tax effect of deductible
temporary differences:
Tax losses carry
forward 1,942 442 1,500 ( 746) 2,246
Provisions 162 ( 417) 579 ( 487) 1,066
------------ ----------------- ------------------ ------------ ------------
Total 2,104 25 2,079 ( 1,233) 3,312
Net tax effect
of temporary differences 1,459 2,683 ( 1,224) 360 ( 1,584)
============ ================= ================== ============ ============
Deferred income tax assets are recognised for tax loss carry
forwards to the extent that the realisation of the related tax
benefit through the future taxable profits is probable. As at 31
December 2019, deferred tax assets of US$1,459,000 (2018:
US$804,000) and deferred tax liabilities of nill(2018:
US$2,028,000) have been recognised. Tax losses in respect of Cyprus
and the UK do not expire.
10. Basic and diluted profit per share - Group
Profit per share is calculated by dividing the profit
attributable to equity holders of the Company by the weighted
average number of ordinary and diluted shares in issue during the
year.
Year ended 31 December 2019 2018
Net (loss)/profit per share attributable
to equity shareholders (0.1239) 0.1037
Diluted net (loss)/profit per share attributable
to equity shareholders (0.1239) 0.1037
Net profit attributable to equity shareholders ( 10,017) 8,404
Basic weighted average number of shares 80,823,327 81,017,800
Dilutive share options in issue - -
Diluted number of shares 80,823,327 81,017,800
Since 1 January 2018 there have been no options outstanding. On
17 April 2019, the Company purchased 450,000 of its own Ordinary
shares, which were held in treasury. On 4 July 2019, 250,652
treasury shares were transferred to Andrey Zozulya in settlement of
his bonus award. The number of treasury shares was therefore
reduced to 199,348. For the year ended 31 December 2019, the
weighted average number of shares in issue, less treasury shares,
was 80,823,327 (2018: 81,017,800). As at 31 December 2019, the
total voting rights, being the number of shares in issue less
treasury shares was 80,818,452 (2018: 81,017,800).
11. Intangible assets - Group
Intangible assets represent exploration and evaluation assets
such as licences, studies and exploratory drilling, which are
stated at historical cost, less any impairment charges or
write-offs.
Work in progress: Exploration Total
exploration and
and evaluation evaluation
At 1 January 2019 122 3,182 3,304
Additions - 451 451
Write offs - (32) (32)
Transfers - (738) (738)
------------------ ------------- -------------
At 31 December 2019 122 2,863 2,985
Exchange adjustments 15 374 389
------------------ ------------- -------------
At 31 December 2019 137 3,237 3,374
================== ============= =============
Work in progress: Exploration Total
exploration and
and evaluation evaluation
At 1 January 2018 147 3,609 3,756
Additions 211 211
Write-offs and impairments - - -
------------------ ------------- -------------
At 31 December 2018 147 3,820 3,967
Exchange adjustments (25) (638) (663)
------------------ ------------- -------------
At 31 December 2018 122 3,182 3,304
================== ============= =============
12. Property, plant and equipment - Group
Movements in property, plant and equipment for the year ended 31
December 2019 are as follows:
Cost Development Land & Producing Other Total
assets buildings assets
US$ 000 US$ 000 US$ 000 US$ 000 US$ 000
At 1 January 2019 1,038 718 72,295 722 74,773
Additions 8,966 - - - 8,966
Write-offs (2,067) (255) (720) (145) (3,187)
Transfers (4,653) 311 4,786 294 738
Exchange adjustments 229 91 9,021 96 9,437
------------ ----------- ---------- -------- ---------
At 31 December 2019 3,513 865 85,382 967 90,727
Accumulated depreciation
At 1 January 2019 - (61) (28,929) (674) (29,664)
Depreciation - (25) (14,689) (119) (14,833)
Adjustment for assets
written off - - 239 111 350
Impairments (123) (92) (8,084) (36) (8,335)
------------ ----------- ---------- -------- ---------
Exchange adjustments - (9) (4,196) (83) (4,288)
------------ ----------- ---------- -------- ---------
At 31 December 2019 (123) (187) (55,659) (801) (56,770)
Net book value at
31 December 2019 3,390 678 29,723 166 33,957
============ =========== ========== ======== =========
Movements in property, plant and equipment for the year ended 31
December 2018 are as follows:
Cost Development Land and Producing Other Total
assets buildings assets
US$ 000 US$ 000 US$ 000 US$ 000 US$ 000
At 1 January 2018 6,483 820 80,993 747 89,043
Additions 2,390 - 231 - 2,621
Write-offs (1,574) - - - (1,574)
Transfers (5,621) 42 5,465 114 -
Exchange adjustments (640) (144) (14,394) (139) (15,317)
--------------------- ----------- ---------- -------- ---------
At 31 December 2018 1,038 718 72,295 722 74,773
Accumulated depreciation
At 1 January 2018 - (42) (25,934) (738) (26,714)
Depreciation - (29) (8,227) (68) (8,324)
Exchange adjustments - 10 5,232 132 5,374
--------------------- ----------- ---------- -------- ---------
At 31 December 2018 - (61) (28,929) (674) (29,664)
--------------------- ----------- ---------- -------- ---------
Net book value
At 31 December 2018 1,038 657 43,366 48 45,109
===================== =========== ========== ======== =========
13. Cash and cash equivalents - Group and Company
Group Company
At 31 December 2019 2018 2019 2018
----------- -------- ------------ --------
US$ 000 US$ 000 US$ 000 US$ 000
Cash at bank and on
hand 14,116 15,186 8,960 337
Total cash and cash
equivalents 14,116 15,186 8,960 337
An analysis of Group cash and cash equivalents by bank and
currency is presented in the table below:
Group Company
At 31 December 2019 2018 2019 2018
-------------- --------------- -------------- -----------------
Bank Currency US$ 000 US$ 000 US$ 000 US$ 000
United Kingdom
Barclays Bank PLC USD 9,204 1,193 8,865 119
Barclays Bank PLC GBP 95 218 95 218
Russian Federation
ZAO Raiffeisenbank RUR 4,453 5,731 - -
ZAO Raiffeisenbank USD 331 8,038 - -
Other banks and cash
on hand RUR 33 6 - -
Total cash and cash equivalents 14,116 15,186 8,960 337
============== =============== ============== =================
14. Inventories - Group
At 31 December 2019 2018
US$ 000 US$ 000
Production consumables
and spare parts 441 603
Crude oil inventory 153 335
------------- --------
Total inventories 594 938
============= ========
Inventory recognised as cost of sales in the year amounted to
US$2,526,000 (2018: US$2,474,000 ). In the year to 31 December 2019
there was a US$65,000 reversal of previous write-down of
inventories to net realisable value (2018: write down of
US$378,000). This is included in operating and administrative
expenses.
15. Trade and other receivables - Group and Company
Group Company
At 31 December 2019 2018 2019 2018
US$ 000 US$ 000 US$ 000 US$ 000
Taxes recoverable 430 399 42 53
Prepayments 280 558 18 -
Trade receivables 875 1,411 - 16
Other accounts receivable 167 13 - -
------------- -------------- -------- --------
Total other receivables 1,752 2,381 60 69
============= ============== ======== ========
Prepayments are to contractors and relate to initial advances
made in respect of drilling, construction and other projects. Trade
receivables relate to sales of gas and condensate. The receivables
were settled on schedule subsequent to the balance sheet date.
16. Share capital and share premium - Group
The following summarises the movement in the share capital and
share premium of the Company for the years ended 2019 and 2018.
Number of Share capital Total voting
shares rights
US$ 000
-------------------------------- ------------------------------ --------------------------------
At 1 January 2019 81,017,800 1,485 81,017,800
Issues of shares - - -
Shares held in
treasury - - 199,348
-------------------------------- ------------------------------ --------------------------------
At 31 December
2019 81,017,800 1,485 80,818,452
================================ ============================== ================================
At 1 January 2018 81,017,800 1,485 81,017,800
Issues of shares - - -
Shares held in - - -
treasury
-------------------------------- ------------------------------ --------------------------------
At 31 December
2018 81,017,800 1,485 81,017,800
================================ ============================== ================================
The total number of authorised ordinary shares is 330,720,100
(2018: 330,720,100) with a par value of GBP0.01 per share (2018:
GBP0.01 per share). Subject to the terms of the Company's Articles
of Association, each ordinary share has the right of one vote at a
General Meeting of the Company and to receive dividends declared by
the directors. As at 31 December 2019, the Company held 199,348 of
its own Ordinary shares in treasury (2019: nil). The number of
total voting rights is adjusted accordingly. See Note 10. There are
no other classes of shares in the Company either issued or
authorised.
17. Other reserves - Group
At 31 December 2019 2018
US$ 000 US$ 000
Currency translation
reserves (83,095) (89,189)
--------- ---------
Total other reserves (83,095) (89,189)
========= =========
Currency translation reserve
The currency translation reserve comprises all foreign exchange
differences arising from the translation of the financial
statements of foreign operations to the presentation currency.
18. Accumulated profit - Group and Company
Group Company
At 31 December 2019 2018 2019 2018
US$ 000 US$ 000 US$ 000 US$ 000
--------- -------- -------- --------
Retained profits 145,330 141,787 43,358 51,377
(Loss)/profit for
the year (10,017) 8,404 (1,841) (3,158)
Equity dividends paid (5,237) (4,861) (5,237) (4,861)
Purchase of own shares (159) - (159) -
Accumulated profit 129,917 145,330 36,121 43,358
========= ======== ======== ========
Dividends
In November 2018, the Company paid an interim dividend of $0.06
per ordinary share. In May 2019, the Company paid a final dividend
of US$0.065 per share . No dividends are proposed in respect of the
year ended 31 December 2019. Dividends are not recognised as
liabilities and there are no tax consequences.
19. Trade and other payables
Group Company
At 31 December 2019 2018 2019 2018
US$ 000 US$ 000 US$ 000 US$ 000
-------- -------- -------- --------
Trade payables 993 1,085 8 -
Taxes other than
profit tax 3,140 2,740 - -
Customer advances 1,538 1,577 - -
Other payables 959 645 - 15
-------- -------- -------- --------
Total 6,630 6,047 8 15
======== ======== ======== ========
The maturity of the Group's and the Company's financial
liabilities are all between zero to three months. Customer advances
are prepayments for oil and condensate sales, normally one month in
advance of delivery.
20. Bank loan
At 31 December 2019 2018
US$ 000 US$ 000
Current liabilities
Secured bank loan - 1,660
-------- --------
Total Bank Loan - 1,660
======== ========
In December 2016, one of the Group's operating subsidiaries
received bank loan of a total amount of RUR 240 million (US$3.96
million). The loan was repaid in full on 1 February 2019. Interest
had been charged at a fixed rate of 11.45% per annum. The bank loan
as at 31 December 2018 was secured by charges over the shares of
the Group's Russian operating subsidiaries as detailed in Note 21
below.
Changes in liabilities from financing activities
Bank loans
US$ 000 US$ 000
2019 2018
Balance at 1 January 1,660 4,004
Changes from financing cash flows
Repayment of borrowings (1,780) (1,839)
-------- --------
Total changes from financing cash flows (1,780) (1,839)
The effect of changes in foreign exchange rates 120 (505)
Other changes:
Capitalised borrowing costs - 186
Interest expense 19 137
Interest paid (19) (323)
-------- --------
Total other changes - -
Balance at 31 December - 1,660
======== ========
21. Investments - Company
Investments in subsidiaries, comprising ordinary share capital,
are accounted for at cost. The Company's subsidiaries are as
follows:
Name Jurisdiction Nature of operations % Owned From
------------------------ ------------- --------------------------------------- -------- ---------------
Woodhurst Holdings Ltd Cyprus Intermediate holding company 100% October 2005
Pre-Caspian Gas Company Russia Oil and gas exploration and production 100% May 2006
Gaznefteservice Russia Oil and gas exploration and production 100% September 2006
Shropak Investments Ltd Cyprus Dormant 100% June 2007
Volga Gas (Cyprus) Ltd Cyprus Intermediate holding company 100% August 2007
Geopotential Russia Special purpose entity 100% October 2008
Volga Gas Finance Ltd* UK Intermediate holding company 100% March 2010
======================== ============= ======================================= ======== ===============
The registered office addresses of the subsidiaries are as
follows:
Name Registered office address
------------------------- -----------------------------------------------------------------------------
Woodhurst Holdings Ltd all at:
Shropak Investments Ltd Archbishop Makarios Avenue, Capital Centre, 9th Floor, 1505 Nicosia, Cyprus
Volga Gas (Cyprus) Ltd
Pre-Caspian Gas Company both at:
Geopotential 65, Ulitsa Kiseleva, Saratov, 410012, Russia
Gaznefteservice 24. Ulista Pushkina, Zhirnovsk, Volgograd Region, 403790, Russia
Volga Gas Finance Ltd* 6(th) floor, 65 Gresham Street, London EC2V 7NQ, UK
========================= =============================================================================
* On 28 May 2019, application was made to Companies House for
Volga Gas Finance Ltd to be struck off. On 3 September 2019 it was
dissolved.
Company 31 December Additions Write 31 December
2018 off 2019
US$ 000 US$ 000 US$ 000 US$ 000
Investments in Woodhurst
Holdings 25,421 - - 25,421
Investments in Volga Gas
(Cyprus) 2,052 - (2,052) -
------------ ---------- -------- ------------
Total investments 27,473 - (2,052) 25,421
============ ========== ======== ============
The Company funds its activities in the Russian Federation via
Woodhurst Holdings ("Woodhurst"), the Company's Cyprus registered
subsidiary. As at 31 December 2019 no impairment was considered
necessary as carrying amount of the investment and intercompany
loan receivables is lower than combined value in use of production
assets, as described in Note 4. As at 31 December 2019 the balance
of the Company's investment in Volga Gas (Cyprus) was written
off.
22. Audit fees - Group and Company
During the year, the Group (including its overseas subsidiaries)
obtained the following services from the Company's auditor and
associates:
Year ended 31 December 2019 2018
US$ 000 US$ 000
-------- --------
Fees payable to Company's auditor for the
audit of Parent Company and consolidated financial
statements 234 234
Fees payable to Company's auditor for the
audit of Parent Company and its associated
firms for other services 4 10
Audit of the Company's subsidiaries pursuant
to legislation 6 47
Other services pursuant to legislation 14 13
Total 258 304
======== ========
23. Related party transactions - Group and Company
The Group is controlled by Baring Vostok Private Equity Funds
III and IV (registered office address for both companies: 1 Royal
Plaza, Royal Avenue, St Peter Port, Guernsey GY1 2HL), which
respectively own 48.9% and 9.76% (in aggregate 58.66%) of the
Company's shares. The Baring Vostok Private Equity Funds exercise
their control through a number of nominee holding companies. The
remaining 41.34% of the shares are widely held.
There were no transactions carried out by the Group with related
third party entities during either of the years ended 31 December
2019 or 31 December 2018, nor were there any outstanding balances
from transactions carried out in previous years.
The following transactions were carried out between the Company
and its wholly-owned subsidiaries:
Group company Relationship Nature of transactions Year ended 31
December
2019 2018
US$ 000 US$ 000
----------------- ----------------------- ----------------------------- -------- --------
Woodhurst
Holdings 100% directly owned Reduction of receivables
Limited subsidiary due - (953)
Reduction of payables
due (offset against
receivables) - 953
Increase in receivables
from Share premium
reduction. - 950
Payment received
from Woodhurst to
settle receivables (950)
Reduction of payables
offset against Share
premium reduction - 403
Offset of receivables
due from Volga Gas
Volga Gas (Cyprus) against
(Cyprus) 100% directly owned unpaid share premium
Limited subsidiary by Volga Gas plc. - (501)
Increase in receivables
for management fees
invoiced by Volga
Gas plc 129 129
Payment received
from Volga Gas (Cyprus)
for management fee. (64)
Investment written
off (2,052)
Provision for unrecoverable
receivables (435)
Payment of income
tax for the year
ended 31 December
2017 by Volga Gas
Volga Gas plc on behalf of
Finance 100% directly owned Volga Gas Finance
Limited subsidiary Ltd. - (79)
Write-off of receivables
due for income tax
paid by Volga Gas
plc. - 79
----------------------------------------------------------------------- -------- --------
Pre-Caspian 100% indirectly owned Repayment of loans
Gas Company subsidiary and accrued interest 2,718 408
New loan granted
by the Company (3,000)
Interest accrued 209 220
----------------------------------------------------------------------- -------- --------
100% indirectly owned Repayment of loans
Gaznefteservice subsidiary and accrued interest 14,286 5,287
Interest accrued 326 1,426
----------------------------------------------------------------------- -------- --------
Shropak
Investments 100% indirectly owned Write off receivables
Ltd subsidiary from Shropak (14)
Offset receivables
against payables (3)
Offset payables against
receivables 3
----------------------------------------------------------------------- -------- --------
On 2 November 2018, by resolution, Woodhurst Holdings undertook
a reduction of its share premium by a cash payment of US$ 950,000,
which was paid in January 2019, and by offsetting a receivable from
Volga Gas plc of the amount of US$402,900.76.
For the year ended 31 December 2017, Volga Gas Finance was
assessed for income tax of US$79,000. This liability was covered by
an advance from Volga Gas plc which was simultaneously expensed by
the Company. On 28 May 2019, application was made to Companies
House for Volga Gas Finance Ltd to be struck off. On 3 September
2019, it was dissolved.
Year-end balances arising from transactions with
subsidiaries
31 December 2019 31 December 2018
US$ 000 US$ 000
--------------------------------------- ----------------- -----------------
Accounts receivable from subsidiaries
Woodhurst Holdings Limited - 950
Volga Gas (Cyprus) Ltd. 143 497
Shropak Investments Ltd - 18
Loans receivable from subsidiaries
Pre-Caspian Gas Company 3,000 2,287
Gaznefteservice - 12,878
Interest receivable from subsidiaries
Pre-Caspian Gas Company 30 53
Gaznefteservice - 296
Accounts payable to subsidiaries
Woodhurst Holdings Limited 1 1
Volga Gas (Cyprus) Ltd - 3
======================================= ================= =================
Key management
Key management of the Company is considered to comprise the
Directors and the Chief Financial Officer, who is not a Director.
Details of key management compensation are summarised below.
Year ended 31 December 2019 2018
US$ 000 US$ 000
-------- --------
Salaries and short-term benefits 509 457
Fees paid to Non-executive
Directors 220 220
-------- --------
Total key management compensation 729 677
======== ========
24. Contingencies and Commitments
24.1 Capital commitments
As of the balance sheet date all material licence work
obligations have been met and all of the Group's capital
expenditures and work programmes are discretionary. As of the
balance sheet date, the Board had approved a work programme for
2019 with a total capital expenditure budget of US$8.3 million, of
which US$0.6 million had been contracted. The remainder is expected
to be incurred but had not been committed to or contracted as at
the balance sheet date.
24.2 Operating leases
The Group has no non-cancellable lease rental obligations.
24.3 Taxation
Russian tax, currency and customs legislation is subject to
varying interpretations and changes which can occur frequently.
Management's interpretation of such legislation as applied to the
transactions and activity of the Group may be challenged by the
relevant regional and federal authorities. Recent events within the
Russian Federation suggest that the tax authorities may be taking a
more assertive position in their interpretation of the legislation
and assessments, and it is possible that transactions and
activities that have not been challenged in the past may be
challenged. As a result, significant additional taxes, penalties
and interest may be assessed. Fiscal periods remain open to review
by the authorities in respect of taxes for three calendar years
preceding the year of review, but under certain circumstances,
reviews may cover longer periods.
At 31 December 2019, management believes that its interpretation
of the relevant legislation is appropriate and the Group's tax,
currency and customs positions will be sustained.
24.4 Restoration, rehabilitation, and environmental costs
The Group operates in the upstream oil industry in the Russian
Federation and its activities may have an impact on the
environment. The enforcement of environmental regulations in the
Russian Federation is evolving and the enforcement posture of
government authorities is continually being reconsidered. The Group
periodically evaluates its obligations related thereto. The outcome
of environmental liabilities under proposed or future legislation,
or as a result of stricter interpretation and enforcement of
existing legislation, cannot reasonably be estimated at present,
but could be material.
Under the current levels of enforcement of existing legislation,
management believes there are no significant liabilities in
addition to amounts which are already accrued and which would have
a material adverse effect on the financial position of the
Group.
24.5 Oilfield licences
The Group is subject to periodic reviews of its activities by
governmental authorities with respect to the requirements of its
oilfield licences. Management of the Group corresponds with
governmental authorities to agree on remedial actions, if
necessary, to resolve any findings resulting from these reviews.
Failure to comply with the terms of a licence could result in
fines, penalties, licence limitation, suspension or revocation. The
Group's management believes any issues of non-compliance would be
resolved through negotiations or corrective actions without any
materially adverse effect on the financial position or the
operating results of the Group.
The principal licences of the Group and their expiry dates
are:
Field Licence holder Licence expiry date
----------------------- ---------------------------- --------------------
Karpenskiy OOO Pre-Caspian Gas Company 2031
Urozhainoye-2 OOO Pre-Caspian Gas Company 2032
Muradymosky OOO Pre-Caspian Gas Company 2023
Vostochny-Makarovskoye OOO Gaznefteservice 2026
Dobrinskoye OOO Gaznefteservice 2026
25. Post balance sheet events
COVID-19 is a non-adjusting post balance sheet event for the
Group. The Group has considered the impact of COVID-19 as at the
date of signing these financial statements. As noted below, the key
area of impact is in regards to Impairment.
Between 1 January 2020 and the date of signing of these
accounts, the Urals oil price ranged between US$62 and $16 per
barrel and averaged approximately US$40 per barrel. In response to
this volatility, the Board suspended capital expenditure on the VM
field and focused investment on the slim hole drilling in the Uzen
field. Consequently management estimates capital expenditure for
the year ended 31 December 2020 to total US$6.4 million, compared
to the original budget of US$8.3 million.
Based on the sensitivity analysis outlined in Note 4a, the
directors expect there will be additional impairments to the
carring value of fixed assets. The directors have yet to quantify
all of the impairment and effects resulting from the Covid-19
pandemic, however there is no impact on going concern
assumption
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END
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