TIDMUEN
RNS Number : 7616N
Urals Energy Public Company Limited
17 June 2010
17 June 2010
Urals Energy Public Company Limited
("Urals Energy", or the "Company")
Annual Report and Accounts
Urals Energy (LSE: UEN), an independent exploration and production company with
operations in Russia, today announces its audited financial results for the year
ended 31st December 2009.
Strategy
· Following the divestiture of Dulisma and Taas Yuriakh and the restructure
of the Petraco debt after the year end, Urals is now well positioned to
recommence development programmes at its two producing fields, Arcticneft and
Petrosakh
· Short-term strategy to investigate opportunities to increase
profitability of the Company and to develop a programme to increase production
· The Company continues to look at potential transactions if they can bring
synergy and additional value to the Company.
Operational
· As a result of the divestiture of the Dulisma asset in August 2009 and
the Chepetskoye asset ("CNGDU") in February 2009, average 2009 production
decreased to 4,409 BOPD (6,285 bopd in 2008)
· Production from Arcticneft and Petrosakh decreased to 876 thousand
barrels in 2009 from 1,126 thousand barrels in 2008
· Current daily levels of production at Arcticneft increased in 2010 to 725
BOPD from an average of 641 BOPD in 2009
· Current daily levels of production at Petrosakh decreased in 2010 to
1,577 BOPD from an average of 1,760 BOPD in 2009 and stabilized at this level
· In June 2010 the first of three sidetrack wells was spudded at Petrosakh
Financial
· Significant reduction of net debt from $658.2 as at 31 December 2008 to
give net cash of $4.5 million1 as at 31 December 2009
· In 2009 the Company sold Dulisma and Taas Yuriakh for the full discharge
of $630 million of debt owed to Sberbank.
· The Company also terminated a Put option agreement with Limenitis
Holdings (an affiliate of the Ashmore Funds).
· Gross Revenues, excluding crude oil purchased for resale, decreased by
$85 million to $65 million, largely due to the divestiture of the Dulisma in
August 2009 and decrease of crude oil resale activity at the end of 2008.
· An operating loss of $138 million was recorded, largely due to the
impairment losses recognized with respect to Dulisma's production assets of $122
million.
· Extensive cost reduction programme introduced during 2009 has resulted in
a decrease in Selling, General and Administrative expenses.
Corporate
· Completed significant corporate transactions:
o Divestiture of Dulisma and Taas Yuriakh for full discharge of $630 million of
debt
o Divestiture of Chepetskoye NGDU
· Significant Board and Senior Management changes including appointment of
Alexei Maximov as Chief Executive Officer and a Director and appointment of
Grigory Kazakov as Chief Financial Officer
_________________
1 calculated as short-term debt plus payables to Finfund less cash in bank, less
loan receivable from Taas and less Loans issued to related parties as at 31
December 2009 taking into account of the conversion of $2.0 million of Petraco
debt subsequent to year-end
Outlook
· Focused on early production increase from existing wells
· Complete geological studies in 2010 to develop a drilling program
· Assess potential growth opportunities to maximize synergies with current
asset portfolio
Alexei Maximov, Chief Executive, commented:
"As we look back on 2009, I am pleased to report the significant progress we
have made in restructuring our debts and streamlining the entire business.
Following the divestiture of several of our assets, we were able to return to
trading on AIM and build a healthier balance sheet following Petraco's
refinancing.
Having stabilized the business, we have also moved quickly to restart operations
across our remaining licenses and importantly increase our production."
Enquiries:
+-----------------------------------+---------------------------------+
| Allenby Capital Limited | +44 (0)20 3328 5656 |
| Nominated advisor and broker | |
+-----------------------------------+---------------------------------+
| Nick Naylor/Alex Price | |
+-----------------------------------+---------------------------------+
| | |
+-----------------------------------+---------------------------------+
| Pelham Bell Pottinger | +44 (0)20 7861 3232 |
+-----------------------------------+---------------------------------+
| Mark Antelme | |
+-----------------------------------+---------------------------------+
| Evgeniy Chuikov | |
+-----------------------------------+---------------------------------+
The annual report and accounts for the year ending 31 December 2010 will today
be posted to shareholders and will be available from the Company's website
www.uralsenergy.com in accordance with AIM Rule 20.
CEO STATEMENT AND ANNUAL REPORT TO SHAREHOLDERS
2009 was a challenging year for Urals Energy. Following the global financial
crisis and the dramatic fall in oil prices, Urals had to take a difficult
decision and divest some of its core assets in order to manage its debt and
streamline its business.
The process began with the divestiture of Komi and Chepetskoye assets in late
2008 and early 2009 and, following extended negotiations with Sberbank, we were
able to divest both Dulisma and Taas Yuriakh for the full discharge of the $630
million owed to Sberbank. With such significant financial commitment cleared, we
were also successful in canceling the Ashmore put option which allowed us to
retain our current assets at Petrosakh and Arcticneft.
With a slimmer but healthier balance sheet, in December 2009 we were able to
return to trading on AIM and start to deliver on our key shareholder promise of
rebuilding Urals' asset base and operations. This was a significant achievement
by Urals's management team, which had seen numerous changes during the year but
which nonetheless was able to deliver on its strategy.
As we entered 2010 our focus now moves to restarting operations and
renegotiating our remaining commitments with Petraco. Once again I am pleased to
report both of these objectives were delivered in the first few months of 2010.
With Petraco, we were able to reach an agreement which significantly extended
the repayment of the financing facility. The payment schedule has now been
extended through to the end of 2013 and which we are confident of meeting with
this from cashflows from our existing production.
At the same time as completing the Petraco refinancing, we have also recommenced
operations at both Arcticneft and Petrosakh were put on hold in 2009 as a result
of our constrained financial situation. Both licenses have a long history of
production and have combined proved and probable reserves of 58mmbbls.
On Petrosakh, we completed the workover on well 47, reperforated well 34 and
optimised water injection on well 42. This work programme produced immediate
results, reversing production decline and increasing daily production to 1,577
bopd. As reported on 4th June 2010 we also spudded the first sidetrack well 35b.
In May 2010 we have also began first deliveries of Gasoline 92 which
significantly increases Urals netbacks and allows for uninterrupted year round
gasoline sales by the Company. Urals along side Rosneft is the only supplier of
this type of fuel to Sakhalin where demand outstrips supply.
In May 2010, the Company filed an application for the exploration of the two
prospects located on the Kolguev Island. The two prospects are in the
undistributed state fund of resources with the total geological resources of
more than 29 million metric tons of C3+D1+D2 resources as per the Russian
classification of reserves (or about 230 million barrels). The results and exact
timing for the response for the application are yet to be specified. In addition
the Company is also planning to participate in the auction for the development
license for Tarkskoye field, which is expected to be announced in the fourth
quarter of 2010. The Tarkskoye field, which belongs to the State is also
located on Kolguyev Island and has Russian classification reserves C1+C2 for
this field amount to approximately 8.9 million metric tons (or about 70 million
barrels). The directors believe that Arcticneft is well positioned to explore
and develop the two aforementioned prospects and the Tarkskoye field given the
Company's existing operations and infrastructure on the Island.
Corporate
Since the year end, key management changes have been made allowing Urals to more
effectively meet the challenges presented by the adverse economic environment.
Following the resignations of Leonid Dyachenko as CEO in April 2009, Vladimir
Sidorovich as CFO in May and Vyatcheslav Ivanov in 2009, I assumed the role of
Chief Executive and Director, and Grigory Kazakov was appointed as CFO. Leonid
Dyachenko took on the role as Chairman of the Board. In June 2009, Vasiliy
Sechin was appointment as a Non-Executive director. In December 2009 both
Vladimir Sidorovich and Vasiliy Sechin were not re-elected for voting on the AGM
and retired by rotation. Pursuant to the restricting agreement with Petraco, the
Company is intending to appoint a non-executive director to the Board.
2009 Financial
Operating Environment
During most of the year the Company was affected by the uncertainties associated
with loans received by the Company in the end of 2007 for the acquisition of
Taas and refinancing of Goldman Sachs loans. These uncertainties resulted in
inability of the Company to attract external financing debt of equity to finance
operations of its production subsidiaries, which negatively effected production.
Also, these uncertainties resulted in suspension from trading of Company's
shares on AIM market from 30 June to 18 December 2009.
Following a sharp decrease in oil prices at the end of 2008 Brent prices started
a year at a rate or $43.59 per barrel, reached a level of $70 per barrel in June
2009 and stabilized at a level of $75 per barrel at the end of 2009. Despite low
crude oil prices on export domestic prices for light oil products didn't change
so much and were in a rage from $60 to $75 per barrel thus securing the
Company's operating cash flows at the level sufficient to maintain operations
and comply with license requirements at both fields.
Following the announcement of the Russian government in 2008 to depreciate
Russian Rouble by 20%, the Rouble continued to depreciate against the dollar in
2009 and reached its peak of RR/$ 35.76 in February 2009 and after that
smoothly decreased to RR/$ 30.24 at year end. Average exchanges rate for 2009
of RR/$ 31.72 was 27% higher than average 2008 exchange rate of RR/$ 24.86 which
resulted in lower operating costs for Russian oil companies.
Operating Results
+---------------------------------------------+-----------+-----------+
| $ '000 | Year ended 31 |
| | December: |
+---------------------------------------------+-----------------------+
| | 2009 | 2008 |
+---------------------------------------------+-----------+-----------+
| | | |
+---------------------------------------------+-----------+-----------+
| Gross revenues before excise, export duties | 68,989 | 222,291 |
| | | |
+---------------------------------------------+-----------+-----------+
| Net revenues after excise, export duties | 50,881 | 174,854 |
| and VAT | | |
+---------------------------------------------+-----------+-----------+
| Gross (loss)/profit | (113,458) | (86,822) |
+---------------------------------------------+-----------+-----------+
| Operating (loss)/profit | (137,547) | (132,092) |
+---------------------------------------------+-----------+-----------+
| Normalised management EBITDA (unaudited) | (3,811) | (8,920) |
+---------------------------------------------+-----------+-----------+
| Total net finance costs | 163,855 | 316,655 |
+---------------------------------------------+-----------+-----------+
| Profit for the year | (304,014) | (403,249) |
+---------------------------------------------+-----------+-----------+
In 2009, total gross revenues excluding crude oil for resale declined by $85
million as a result of: (i) a negative price variance resulting from lower
weighted average gross price per barrel of $48.71 (compared with $64.48 in
2008); and (ii) decrease in sales volumes totalling 1,336 thousand barrels in
2009 (compared with 2,183 thousand barrels in 2008). This was primarily due to
the divestment of the Dulisma and the CNGDU.
Following the divestiture of subsidiaries in the Komi Republic, the Company
continued to re-sell crude oil produced by these former subsidiaries on the
export and domestic markets. The total cost of this purchased crude oil amounted
to $98 million during the year ended 31 December 2008. The Company charged a
commission on these operations, which was included in gross revenues in the
financial statements. The profit margin on these operations is substantially
lower than for the self-produced oil, as the price of purchased crude oil also
includes a seller's mark-up. There were no such operations with the Komi
subsidiaries in 2009.
Gross Revenues ($'000)
+--------------------------------------------+--------------------------------------------+----------+
| | Year ended 31 |
| | December: |
+ +-------------------------------------------------------+
| | 2009 | 2008 |
+--------------------------------------------+--------------------------------------------+----------+
| Crude oil | 52,370 | 206,764 |
+--------------------------------------------+--------------------------------------------+----------+
| Export sales | 39,930 | 74,859 |
+--------------------------------------------+--------------------------------------------+----------+
| Export sales of purchased crude oil | 3,942 | 72,518 |
| from AMNGR in 2009 and from | | |
| AMNGR and Komi assets in 2008 | | |
+--------------------------------------------+--------------------------------------------+----------+
| Domestic sales (Russian Federation) | 8,498 | 59,387 |
+--------------------------------------------+--------------------------------------------+----------+
| Petroleum (refined) products - domestic | 15,592 | 12,163 |
| sales | | |
+--------------------------------------------+--------------------------------------------+----------+
| Other sales | 1,027 | 3,364 |
+--------------------------------------------+--------------------------------------------+----------+
| | 68,989 | 222,291 |
| Total gross revenues | | |
+--------------------------------------------+--------------------------------------------+----------+
In 2009, the Company's total net revenues decreased to $50.9 million from $174.9
million in 2008. Netback, in the case of exports, is gross oil sales less export
duty, customs charges, marketing costs and transportation, and, in the case of
domestic crude oil sales, the gross sales net of VAT. Netback for domestic
product sales is defined as gross product sales minus VAT, transportation,
excise tax and refining costs.
The weighted average netback price for crude oil sales during 2009 was $26.89
versus $43.74 per barrel in 2008. This decrease was as a result of the
seasonality of deliveries of crude from Arcticneft and Petrosakh, the majority
of sales in 2008 took place in the months when crude oil prices were above $100
per barrel.
In 2008, netbacks for export sales (excluding sales of purchased crude oil) were
$45.96 per barrel and $33.44 per barrel for domestic sales. Netback prices for
domestic product sales are defined as gross product sales price minus VAT,
transportation, excise tax and refining costs. The average products netback for
the year was $45.02 per barrel (all domestic, as the Company does not export
products).
Summary table: Net backs ($/bbl)
+----------------------------------------------+--------+--------+
| | Year ended 31 |
| | December: |
+ +-----------------+
| | 2009 | 2008 |
+----------------------------------------------+----------------------------------------------+--------+
| Crude oil | 26.89 | 43.74 |
+----------------------------------------------+--------+--------+
| Export sales | 33.46 | 45.96 |
+----------------------------------------------+--------+--------+
| Export sales (AMNGR crude oil) | 37.47 | 112.22 |
+----------------------------------------------+--------+--------+
| Domestic sales (Russian Federation) | 17.59 | 33.44 |
+----------------------------------------------+--------+--------+
| Petroleum (refined) products - domestic | 45.02 | 65.48 |
| sales | | |
+----------------------------------------------+--------+--------+
| Other sales | N/A | N/A |
+----------------------------------------------+--------+--------+
The gross loss of the Company for the year 2009 was $113 million comparing to
$87 million in 2008. The main drivers of the increased loss were impairment
charges recognized by the Company in 2009 in the amount of $122 million
associated with the impairment of Dulisma and Taas in comparison with impairment
charges in the amount of $95 million recognized in 2008 associated with
Arcticneft and Petrosakh. According to IFRS, those expenses were included in the
Cost of Sales. Without those write-offs the Gross Profit would have been $8.0
million in 2009 and $8.1 million in 2008. Cost of sales decreased by $125
million due to cancellation of operations related to purchases and further
re-sale of crude oil with subsidiaries in the Komi Republic, which were divested
in April 2008, as well as divestiture of Dulisma and Chepetskoye NGDU during
2009. Also this decrease was partially driven by implementation of a cost
reduction programme initiated in 2009.
Selling, General and Administrative expenses decreased during the year 2009 by
$23.0 million to $21.3 million from $44.3 million in 2008. This was primarily
due to initiation of cost reduction programme in the holding company and
management company and due to divestment of the Dulisma and the CNGDU during
2009. The Company anticipates to see the full results of the cost reduction
programme in 2010, when recurring expenses will not be effected by one-off costs
associated with severance payments made to retired personnel.
The net finance costs decreased substantially by $153 million due to write-off
of a liability associated with Put Option, which was cancelled by Limenitis in
December 2009 as part of the deal with Sberbank for the divestiture of Dulisma
and Taas for the full discharge of Sberbank loans.
Net loss for the year attributable to shareholders was $303.9 million as
compared to net loss of $401.2 million in 2008. That was primarily driven by
non-cash transactions associated with the divestiture of Dulisma and Taas
discussed above.
Consolidated normalized management EBITDA increased by $5.0 million to a
negative figure of $2.1 million in 2009 compared with negative $7.1 million in
2008, with EBITDA margins of (4.1) % and (4.1) % respectively. Management
EBITDA for 2009 includes cost and losses from operations of subsidiaries, which
were disposed during 2009. Costs include regular salaries of personnel and other
costs which were decreased or completely eliminated during 2009.
Management EBITDA ($'000) - Unaudited
+-------------------------------------+------------+------------+
| | Year ended 31 December |
+-------------------------------------+-------------------------+
| | 2009 | 2008 |
+-------------------------------------+------------+------------+
| | | |
+-------------------------------------+------------+------------+
| Profit for the year | (304,014) | (403,249) |
+-------------------------------------+------------+------------+
| | | |
+-------------------------------------+------------+------------+
| Net interest and foreign currency | 163,855 | 316,656 |
| (income)/expense | | |
+-------------------------------------+------------+------------+
| Income tax | (29,035) | (37,377) |
+-------------------------------------+------------+------------+
| Depreciation, depletion and | 5,504 | 16,514 |
| amortization | | |
+-------------------------------------+------------+------------+
| Total non-cash expenses | 140,324 | 295,793 |
+-------------------------------------+------------+------------+
| | | |
+-------------------------------------+------------+------------+
| Share-based payments | 4,177 | 8,971 |
+-------------------------------------+------------+------------+
| Impairment of property, plant and | 122,127 | 94,955 |
| equipment | | |
+-------------------------------------+------------+------------+
| Resignation fees to top-managers | 1,200 | - |
+-------------------------------------+------------+------------+
| (Release)/accrual of other taxes | (199) | (189) |
| risk provision | | |
+-------------------------------------+------------+------------+
| Gain from disposal of assets held | 31,647 | (8,121) |
| for sale | | |
+-------------------------------------+------------+------------+
| Write-off non-producing wells | - | 2,552 |
+-------------------------------------+------------+------------+
| | | |
+-------------------------------------+------------+------------+
| Other non-recurrent losses | 2,640 | 2,161 |
+-------------------------------------+------------+------------+
| Total non-recurrent and non-cash | 161,592 | 100,329 |
| items | | |
+-------------------------------------+------------+------------+
| | (2,098) | (7,127) |
| Normalized EBITDA | | |
+-------------------------------------+------------+------------+
Cash Flow
The 2009 cash position didn't change significantly as compared to 2008. The
Group generated $3.8 million from operations and used part of it on investing
activities, primarily at Dulisma to satisfy claims from contractors and
suppliers. In addition $0.2 million was used at both Arcticneft and Petrosakh
for license compliance activities.
In 2008 the cash position was negatively affected by the interest expense
accrued on outstanding borrowing (amounting to $78 million) and continuing
capital investment outflows for Dulisma development (amounting to $60 million).
Proceeds from sale of subsidiaries generated $93 million of positive cash flow
improving the cash position and providing additional resources to keep on track
with day-to-day operations.
Following the uncertainties associated with Sberbank loans the Company didn't
pay interest on these loans and all disposals of subsidiaries in 2009 were
non-cash transactions used to settle debt of the Company to third parties, such
Sberbank Capital (with respect to disposal of Dulisma and Taas) and repayment of
Galaform domestic prepayment received in 2008.
Net debt Position
As at 31 December 2009 the Company had net cash of $4.5 million (calculated as
Short-term debt plus payables to Finfund less cash in bank, less loan receivable
from Taas and less Loans issued to related parties) taking into account of the
conversion of $2.0 million of Petraco debt subsequent to year-end compared with
negative net debt of $658.2 million at 31 December 2008.
Towards the end of the 2007, the Company entered into two loan agreements with
Sberbank, aiming to finance the acquisition of Taas and to further develop the
Dulisma field. The principal amount outstanding as at 31 December 2008 was $630
million. As collateral for these loans, certain of the Company's major
non-institutional shareholders pledged UEPCL shares and the Company pledged 100%
of the Company's shares in Dulisma and Taas. As at 31 December 2008 both loans
were overdue. In December 2009 the Company transferred all of its shares of
Dulisma and Taas to Sberbank Capital for the full discharge of those loans. As
part of that deal, the Company was released of any obligations under a Put
option agreement with Ashmore, which was valued at $161 million in the
consolidated financial statements.
Accounts payable and accrued expenses of $20.7 million at the year end mainly
represented outstanding accounts payable to FGUP "ArcticMorNefteGazRazvedka" at
state owned company (" AMNGR") in the amount of $6.8 million for the crude oil,
which the Company acquired at the end of 2009 and couldn't load due to weather
conditions in December 2009. At year end the Company had 23,599 metric tons of
crude oil purchased from AMNGR, which will be loaded during the first loading
from Arcticneft in June - July 2010. The purchase price was RR 6,906.77 per ton
or $28.90 per barrel net of VAT.
The second largest creditor is Finfund with the maximum liability of $6.6
million at 31 December 2009 for the pledge fee, which was not paid by the
Company.
On 2 June 2010 the Company was notified that Finfund Limited has exercised its
rights to acquire 13,000,000 existing Urals shares with a nominal value of
US$0.0063 from entities beneficially owned by two directors (being Leonid Y.
Dyachenko and Aleksey V. Ogarev) and another significant shareholder (being
Vyacheslav V. Rovneiko) (together the "Shareholders") pursuant to a share pledge
agreement dated 26 November 2007 (the "Share Pledge Agreement").
The Share Pledge Agreement was entered into by entities beneficially owned by
the Shareholders and secured various obligations of the Company under the terms
of a sale and purchase agreement dated 26 November 2007 (the "SPA") relating to
the acquisition by Urals of Taas-YuriakhNeftegazodobycha (the "Acquisition").
Such obligations included certain pledge fees which Finfund Limited are now
claiming are owed by the Company. Based on Finfund Limited 's alleged defaults
by the Company in respect of such pledge fees, Finfund Limited has chosen to
exercise its rights under the Share Pledge Agreement to acquire 13,000,000
shares in the Company from entities beneficially owned by the Shareholders (the
"Pledged Shares").
In consequence of the exercise of Finfund Limited's rights as described above,
any liability owed by the Company to Finfund Limited has been reduced by $2.2
million. The Company understands however that this liability, whilst reducing
any obligation of the Company to Finfund Limited, has been transferred by
Finfund Limited to the Shareholders in proportion to the number of shares
transferred by them under the Share Pledge Agreement. The Company intends to
enter discussions with both Finfund Limited and the Shareholders shortly in
relation to the settlement of these outstanding claims.
Following a number of restructuring agreements signed between the largest
creditor Petraco Oil Company ("Petraco") and the Company, a prepayment received
from Petraco was reclassified in short-term debt in accordance with the nature
of these agreements. Through a series of repayments made by the Company during
2009 the total liability to Petraco decrease from $49.4 million at 31 December
2008 to $33.9 million but still the Company could not comply with repayment
schedule completely.
In April 2010 the Company and Petraco reached an agreement and restructured this
debt with the repayment schedule allowing for a more gradual repayment of the
outstanding liability and providing additional security to Petraco.
Additionally Petraco converted $2 million of the liability in the Company's
8,693,006 new ordinary shares and received an option to acquire further
12,576,688 new ordinary shares for $5 million. If that agreement was signed
before the year end, the Company would classify only $7 million of the $33.9
million as Current portion of a long-term debt in its financial statements and
the remaining part would be long-term debt.
Disposal of assets
In February 2009 Chepetskoye was sold to a domestic off-taker Galaform for the
full discharge of the domestic prepayment granted to the Group in the end of
2006. As part of the transaction the Group assigned to the buyer intercompany
loans amounting to $10.8 million. The sale consideration was equal to $5.2
million and included in the sales agreement was a call option for the Group to
repurchase Chepetskoye for $5.2 million. This call option expired in January
2010. The Group has assigned nil value to to the call option.
On 4 August 2009 the Company sold it's 100% interest in Dulisma for the
discharge of a portion of a $500 million loan to Sberbank in the amount of $50
million plus assumption of $130 million loan on the balance sheet of Dulisma and
plus assumption of all trade accounts payable accrued at the date of
transaction.
As of 18 November 2009 the mutual settlement agreement was signed with Sberbank
Capital. The Company settled total debt to Sberbank outstanding at the date of
agreement in the amount of $517.4 million (including $439.6 million of principal
amount and $77.8 million interest accrued to the date of disposal) in exchange
of 35.329% stake in OOO Taas Yurayakh Neftegazdobycha.
In April 2008, the Group completed the sale of Dinyu, Michayuneft and
Nizhneomrinskaya Neft for $93.1 million and CNPSEI was sold to the same buyer on
31 December 2008 for $13.9 million. This consideration from the sale of CNPSEI
was fully offset against outstanding unpaid liabilities of the Company under oil
sales and other agreements involving Komi assets sold in April 2008; therefore,
the Company had not received any cash proceeds from that transaction.
Cost reduction initiatives
The dramatic changes in the composition of the Group and significant
uncertainties associated with debt from Sberbank, forced the Company's
management to implement extensive cost reduction activities, capital investments
preservation and liquidity improving measures in order to mitigate these
challenges and be able to operate as effectively as possible in such an unstable
environment. The management of the Company has achieved significant progress in
2009 and expects to see further cost reductions in 2010.
Sincerely,
Alexei Maximov
Chief Executive Officer
Urals Energy Public Company Limited
Consolidated Financial Statements
As of and for the Year Ended 31
December 2009
Independent Auditors' Report
To the Members of Urals Energy Public Limited
INDEPENDENT AUDITOR'S REPORT
Report on the Financial Statements
We have audited the consolidated financial statements of Urals Energy Public
Limited (the "Company") and its subsidiaries (the "Group"), which comprise the
consolidated statement of financial position as at 31 December 2009, and the
consolidated statement of comprehensive income, consolidated statement of
changes in equity and consolidated cash flow statement for the year then ended
and a summary of significant accounting policies and other explanatory notes.
Board of Directors' Responsibility for the Financial Statements
The Company's Board of Directors is responsible for the preparation and fair
presentation of these financial statements in accordance with International
Financial Reporting Standards as adopted by the European Union (EU). This
responsibility includes: designing, implementing and maintaining internal
control relevant to the preparation and fair presentation of financial
statements that are free from material misstatement, whether due to fraud or
error; selecting and applying appropriate accounting policies; and making
accounting estimates that are reasonable in the circumstances.
Auditors' Responsibility
Our responsibility is to express an opinion on these financial statements based
on our audit. Except as discussed in the Basis for Qualified Opinion paragraph,
we conducted our audit in accordance with International Standards on Auditing.
Those Standards require that we comply with ethical requirements and plan and
perform the audit to obtain reasonable assurance whether the financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements. The procedures selected
depend on the auditor's judgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control
relevant to the entity's preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity's internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by the Board of Directors, as well
as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Basis for Qualified Opinion
The sale of one of the Company's subsidiaries, Chepetskoye NGDU ('Chepetskoye'),
was agreed to in substance prior to 31 December 2008 and was formally concluded
in January 2009. The sale agreement included a call option allowing the Group
to repurchase Chepetskoye. This call option expired in January 2010. The assets
and liabilities of Chepetskoye were classified as held-for-sale as of 31
December 2008 and Chepetskoye was de-consolidated in January 2009 and an
associated impairment loss reflected in the consolidated statement of
comprehensive income for the year ended 31 December 2009. In accordance with IAS
27 "Consolidated and Separate Financial Statements" the existence of the call
option meant that control over Chepetskoye was not relinquished in 2009.
Consequently, the Company should have consolidated all of the assets and
liabilities and the results of operations and cash flows of Chepetskoye in the
financial statements for the year ended 31 December 2009 and recorded an
associated non-controlling interest representing 100% of the net assets and the
net profit of this entity as of and for the year ended 31 December 2009.
Furthermore, with respect to 2008, as a result of the existence of the call
option, not all of the criteria under IFRS 5 "Non current assets held for sale
and discontinued operations" required for classification of Chepetskoye as an
asset held-for-sale were met as of 31 December 2008. As a result assets
held-for-sale and liabilities associated with non-current assets held-for-sale
were overstated by US$ 20.0 million and US$ 17.2 million, respectively as of 31
December 2008.
Qualified Opinion
In our opinion, except for the effect on the financial statements of the matter
described in the Basis for Qualified Opinion paragraph, the consolidated
financial statements give a true and fair view of the financial position of
Urals Energy Public Limited and its subsidiaries as of 31 December 2009, and of
its financial performance and its cash flows for the year then ended in
accordance with International Financial Reporting Standards as adopted by the
EU.
Emphasis of matter - Going Concern
Without further qualifying our audit opinion, we draw attention to Note 3 to the
consolidated financial statements which indicates that the Group incurred a net
loss of US$ 304.0 million during the year ended 31 December 2009 and, as of that
date, the Group's current liabilities exceed its current assets by US$ 32.5
million. This condition, along with other matters as set forth in Note 3,
indicate the existence of a material uncertainty which may cast significant
doubt about the Group's ability to continue as a going concern.
Other Matter
This report, including the opinion, has been prepared for and only for the
Company's members as a body and for no other purpose. We do not, in giving this
opinion, accept or assume responsibility for any other purpose or to any other
person to whose knowledge this report may come to.
+--------------------------------------+------+------------+-----------+
| Urals Energy Public Company Limited | | |
| Consolidated Statement of Financial | | |
| Position | | |
| (presented in US$ thousands) | | |
+--------------------------------------+------+------------------------+
| | | |
+--------------------------------------+------+------------------------+
| | | 31 December: |
+--------------------------------------+------+------------------------+
| |Note | 2009 | 2008 |
+--------------------------------------+------+------------+-----------+
| | | | |
+--------------------------------------+------+------------+-----------+
| Assets | | | |
+--------------------------------------+------+------------+-----------+
| Current assets | | | |
+--------------------------------------+------+------------+-----------+
| Cash and cash equivalents | | 2,361 | 912 |
+--------------------------------------+------+------------+-----------+
| Accounts receivable and prepayments | 11 | 11,264 | 28,912 |
+--------------------------------------+------+------------+-----------+
| Current income tax prepayments | | - | 15 |
+--------------------------------------+------+------------+-----------+
| Inventories | 12 | 16,867 | 4,100 |
+--------------------------------------+------+------------+-----------+
| Assets held for sale | 10 | - | 99,163 |
+--------------------------------------+------+------------+-----------+
| Total current assets | | 30,492 | 133,102 |
+--------------------------------------+------+------------+-----------+
| | | | |
+--------------------------------------+------+------------+-----------+
| Non-current assets | | | |
+--------------------------------------+------+------------+-----------+
| Property, plant and equipment | 13 | 62,524 | 336,968 |
+--------------------------------------+------+------------+-----------+
| Supplies and materials for capital | | 2,289 | 13,892 |
| construction | | | |
+--------------------------------------+------+------------+-----------+
| Investment in joint venture | 8 | - | 751,600 |
+--------------------------------------+------+------------+-----------+
| Other non-current assets | 14 | 35,330 | 39,885 |
+--------------------------------------+------+------------+-----------+
| Total non-current assets | | 100,143 | 1,142,345 |
+--------------------------------------+------+------------+-----------+
| | | 130,635 | 1,275,447 |
| Total assets | | | |
+--------------------------------------+------+------------+-----------+
| | | | |
+--------------------------------------+------+------------+-----------+
| Liabilities and equity | | | |
+--------------------------------------+------+------------+-----------+
| Current liabilities | | | |
+--------------------------------------+------+------------+-----------+
| Accounts payable and accrued | 15 | 20,697 | 26,030 |
| expenses | | | |
+--------------------------------------+------+------------+-----------+
| Income tax payable | | 3,759 | 3,810 |
+--------------------------------------+------+------------+-----------+
| Other taxes payable | 17 | 2,360 | 402 |
+--------------------------------------+------+------------+-----------+
| Financial instruments | 8 | - | 161,300 |
+--------------------------------------+------+------------+-----------+
| Short-term borrowings and current | 18 | 33,978 | 633,515 |
| portion of long-term borrowings | | | |
+--------------------------------------+------+------------+-----------+
| Advances from customers | 16 | 2,090 | 55,778 |
+--------------------------------------+------+------------+-----------+
| Liabilities associated with | 10 | - | 10,248 |
| non-current assets held for sale | | | |
+--------------------------------------+------+------------+-----------+
| Current liabilities before warrants | | 62,884 | 891,083 |
| classified as liabilities | | | |
+--------------------------------------+------+------------+-----------+
| Warrants classified as liabilities | | 56 | 177 |
+--------------------------------------+------+------------+-----------+
| Total current liabilities | | 62,940 | 891,260 |
+--------------------------------------+------+------------+-----------+
| | | | |
+--------------------------------------+------+------------+-----------+
| Long-term liabilities | | | |
+--------------------------------------+------+------------+-----------+
| Long term finance lease obligations | | 610 | - |
+--------------------------------------+------+------------+-----------+
| Dismantlement provision | 19 | 1,223 | 15 |
+--------------------------------------+------+------------+-----------+
| Deferred income tax liabilities | 17 | 3,921 | 34,344 |
+--------------------------------------+------+------------+-----------+
| Total long-term liabilities | | 5,754 | 34,359 |
+--------------------------------------+------+------------+-----------+
| | | 68,694 | 925,619 |
| Total liabilities | | | |
+--------------------------------------+------+------------+-----------+
| | | | |
+--------------------------------------+------+------------+-----------+
| Equity | | | |
+--------------------------------------+------+------------+-----------+
| Share capital | | 1,131 | 1,122 |
+--------------------------------------+------+------------+-----------+
| Share premium | | 644,135 | 639,967 |
+--------------------------------------+------+------------+-----------+
| Translation difference | | (28,373) | (40,321) |
+--------------------------------------+------+------------+-----------+
| Retained earnings (accumulated | | (554,976) | (251,045) |
| deficit) | | | |
+--------------------------------------+------+------------+-----------+
| Equity attributable to | | 61,917 | 349,723 |
| shareholders | | | |
| of Urals Energy Public Company | | | |
| Limited | | | |
+--------------------------------------+------+------------+-----------+
| Non-controlling interest | | 24 | 105 |
+--------------------------------------+------+------------+-----------+
| Total equity | 20 | 61,941 | 349,828 |
+--------------------------------------+------+------------+-----------+
| | | 130,635 | 1,275,447 |
| Total liabilities and equity | | | |
+--------------------------------------+------+------------+-----------+
Approved on behalf of the Board of Directors on 16 June 2010
+------------------------------------------+----------------------+
| | |
| A.D. Maximov | G.B.Kazakov |
| Chief Executive Officer | Chief Financial |
| | Officer |
+------------------------------------------+----------------------+
The accompanying notes on pages 9 to 58 are an integral part of these
consolidated financial statements
+--------------------------------------+------+---------------+---------------+
| Urals Energy Public Company Limited | | |
| Consolidated Statement of | | |
| Comprehensive Income | | |
| (presented in US$ thousands) | | |
+--------------------------------------+------+-------------------------------+
| | | |
+--------------------------------------+------+-------------------------------+
| | | Year ended 31 |
| | | December: |
+--------------------------------------+------+-------------------------------+
| |Note | 2009 | 2008 |
+--------------------------------------+------+---------------+---------------+
| | | | |
+--------------------------------------+------+---------------+---------------+
| Revenues | | | |
+--------------------------------------+------+---------------+---------------+
| Gross revenues | 21 | 68,989 | 222,291 |
+--------------------------------------+------+---------------+---------------+
| Less: excise taxes | | (345) | (287) |
+--------------------------------------+------+---------------+---------------+
| Less: export duties | | (17,763) | (47,150) |
+--------------------------------------+------+---------------+---------------+
| | | 50,881 | 174,854 |
| Net revenues after excise taxes, | | | |
| export duties and VAT | | | |
+--------------------------------------+------+---------------+---------------+
| | | | |
+--------------------------------------+------+---------------+---------------+
| Cost of sales | 22 | (42,212) | (166,721) |
+--------------------------------------+------+---------------+---------------+
| Impairment charges | 7 | (122,127) | (94,955) |
+--------------------------------------+------+---------------+---------------+
| Gross loss | | (113,458) | (86,822) |
+--------------------------------------+------+---------------+---------------+
| | | | |
+--------------------------------------+------+---------------+---------------+
| Selling, general and administrative | 23 | (21,342) | (44,331) |
| expenses | | | |
+--------------------------------------+------+---------------+---------------+
| Other operating loss | | (2,748) | (939) |
+--------------------------------------+------+---------------+---------------+
| | | (24,090) | (45,270) |
| Total operating costs | | | |
+--------------------------------------+------+---------------+---------------+
| | | | |
+--------------------------------------+------+---------------+---------------+
| Operating loss | | (137,548) | (132,092) |
+--------------------------------------+------+---------------+---------------+
| | | | |
+--------------------------------------+------+---------------+---------------+
| (Loss)/gain from disposal of | 9 | (31,647) | 8,121 |
| subsidiaries | | | |
+--------------------------------------+------+---------------+---------------+
| | | | |
+--------------------------------------+------+---------------+---------------+
| Interest income | 18 | 4,175 | 5,654 |
+--------------------------------------+------+---------------+---------------+
| Interest expense | 18 | (91,968) | (98,451) |
+--------------------------------------+------+---------------+---------------+
| Foreign currency loss | | (3,256) | (17,428) |
+--------------------------------------+------+---------------+---------------+
| Movement in value of investment in | 8 | (234,106) | (159,833) |
| joint venture | | | |
+--------------------------------------+------+---------------+---------------+
| Movement in value of financial | 8 | 161,300 | (46,597) |
| derivatives | | | |
+--------------------------------------+------+---------------+---------------+
| Total net finance costs | | (163,855) | (316,655) |
+--------------------------------------+------+---------------+---------------+
| | | (333,050) | (440,626) |
| Loss before income tax | | | |
+--------------------------------------+------+---------------+---------------+
| Income tax benefit | 17 | 29,035 | 37,377 |
+--------------------------------------+------+---------------+---------------+
| | | (304,015) | (403,249) |
| Loss for the year | | | |
+--------------------------------------+------+---------------+---------------+
| | | | |
+--------------------------------------+------+---------------+---------------+
| Loss for the year attributable | | (84) | (1,460) |
| to: | | | |
| - Non-controlling interest | | | |
+--------------------------------------+------+---------------+---------------+
| - Shareholders of Urals Energy | | (303,931) | (401,789) |
| Public Company Limited | | | |
+--------------------------------------+------+---------------+---------------+
| | | | |
+--------------------------------------+------+---------------+---------------+
| Loss per share of profit | 20 | | |
| attributable to | | | |
| shareholders of Urals Energy | | | |
| Public Company Limited: | | | |
+--------------------------------------+------+---------------+---------------+
| - Basic loss per share (in US | | (1.69) | (2.26) |
| dollar per share) | | | |
+--------------------------------------+------+---------------+---------------+
| - Diluted loss per share (in US | | (1.69) | (2.26) |
| dollar per share) | | | |
+--------------------------------------+------+---------------+---------------+
| | | | |
+--------------------------------------+------+---------------+---------------+
| Weighted average shares outstanding | | | |
| attributable to: | | | |
+--------------------------------------+------+---------------+---------------+
| - Basic shares | | 179,409,466 | 177,985,004 |
+--------------------------------------+------+---------------+---------------+
| - Diluted shares | | 179,409,466 | 177,985,004 |
+--------------------------------------+------+---------------+---------------+
| | | | |
+--------------------------------------+------+---------------+---------------+
| Loss for the year | | (304,015) | (403,249) |
+--------------------------------------+------+---------------+---------------+
| | | | |
+--------------------------------------+------+---------------+---------------+
| Other comprehensive income (loss): | | | |
+--------------------------------------+------+---------------+---------------+
| - Effect of currency translation | | (19,616) | (77,021) |
+--------------------------------------+------+---------------+---------------+
| - Accumulative translation | | 31,567 | (13,258) |
| adjustment relating to disposed | | | |
| subsidiaries | | | |
+--------------------------------------+------+---------------+---------------+
| Total comprehensive loss for the | | (292,064) | (493,528) |
| year | | | |
+--------------------------------------+------+---------------+---------------+
| | | (81) | (1,499) |
| Attributable to: | | | |
| - Non-controlling interest | | | |
+--------------------------------------+------+---------------+---------------+
| - Shareholders of Urals Energy | | (291,983) | (492,029) |
| Public Company Limited | | | |
+--------------------------------------+------+---------------+---------------+
The accompanying notes on pages 9 to 58 are an integral part of these
consolidated financial statements
+------------------------------------+--------+------------+-----------+
| Urals Energy Public Company | | |
| Limited | | |
| Consolidated Statement of Cash | | |
| Flows | | |
| (presented in US$ thousands) | | |
+------------------------------------+--------+------------------------+
| | | |
+------------------------------------+--------+------------------------+
| | | Year ended 31 |
| | | December: |
+------------------------------------+--------+------------------------+
| | Note | 2009 | 2008 |
+------------------------------------+--------+------------+-----------+
| | | | |
+------------------------------------+--------+------------+-----------+
| Cash flows from operating | | | |
| activities | | | |
+------------------------------------+--------+------------+-----------+
| Loss before income tax | | (333,050) | (440,626) |
+------------------------------------+--------+------------+-----------+
| Adjustments for: | | | |
+------------------------------------+--------+------------+-----------+
| Depreciation, | 22 | 4,937 | 16,514 |
| amortization and | | | |
| depletion | | | |
+------------------------------------+--------+------------+-----------+
| Change in fair | 8 | (161,300) | 46,597 |
| value of financial | | | |
| derivatives | | | |
+------------------------------------+--------+------------+-----------+
| Change in fair | 8 | 234,106 | 159,833 |
| value of investment | | | |
| in joint venture | | | |
+------------------------------------+--------+------------+-----------+
| Share-based | 20 | 4,177 | 8,971 |
| payments | | | |
+------------------------------------+--------+------------+-----------+
| Interest income | 18 | (4,175) | (5,654) |
+------------------------------------+--------+------------+-----------+
| Interest expense | 18 | 91,968 | 98,451 |
+------------------------------------+--------+------------+-----------+
| Loss/(Gain) from | 9 | 31,647 | (8,121) |
| disposal of assets | | | |
| held for sale | | | |
+------------------------------------+--------+------------+-----------+
| Accrual (release) | 12 | (2,462) | 4,307 |
| of provision on | | | |
| inventory | | | |
+------------------------------------+--------+------------+-----------+
| Impairment charges | 7 | 122,127 | 94,955 |
+------------------------------------+--------+------------+-----------+
| Write-off of | 22 | - | 2,552 |
| non-producing wells | | | |
+------------------------------------+--------+------------+-----------+
| Bad debt write-off | 23 | (1,254) | 2,161 |
+------------------------------------+--------+------------+-----------+
| Release of other |17, 22 | (199) | (189) |
| taxes risk | | | |
| provision | | | |
+------------------------------------+--------+------------+-----------+
| Foreign currency | | 3,256 | 17,428 |
| (gain) loss | | | |
+------------------------------------+--------+------------+-----------+
| Other non-cash | | 999 | (7) |
| transactions | | | |
+------------------------------------+--------+------------+-----------+
| | | | |
+------------------------------------+--------+------------+-----------+
| Operating cash flows before | | (9,223) | (2,828) |
| changes in working capital | | | |
+------------------------------------+--------+------------+-----------+
| Decrease/(Increase) in inventories | | 12,314 | (10,666) |
+------------------------------------+--------+------------+-----------+
| Increase in accounts receivables | | (1,527) | (12,848) |
| and prepayments | | | |
+------------------------------------+--------+------------+-----------+
| (Decrease)/Increase in accounts | | (169) | 25,781 |
| payable and accrued expenses | | | |
+------------------------------------+--------+------------+-----------+
| Increase in advances from | | 1,934 | 693 |
| customers | | | |
+------------------------------------+--------+------------+-----------+
| (Decrease)/Increase in other taxes | | 546 | (2,187) |
| payable | | | |
+------------------------------------+--------+------------+-----------+
| | | | |
+------------------------------------+--------+------------+-----------+
| Cash (used in) generated from | | 3,875 | (2,055) |
| operations | | | |
+------------------------------------+--------+------------+-----------+
| Interest received | | 72 | 2,389 |
+------------------------------------+--------+------------+-----------+
| Interest paid | | (536) | (78,022) |
+------------------------------------+--------+------------+-----------+
| Income tax received/(paid) | | 382 | (2,136) |
+------------------------------------+--------+------------+-----------+
| | | 3,793 | (79,824) |
| Net cash generated from/(used | | | |
| in) operating activities | | | |
+------------------------------------+--------+------------+-----------+
| | | | |
+------------------------------------+--------+------------+-----------+
| Cash flows from investing | | | |
| activities | | | |
+------------------------------------+--------+------------+-----------+
| Proceeds from sale of subsidiaries | 9 | - | 93,107 |
+------------------------------------+--------+------------+-----------+
| Acquisition of joint venture | | - | (589) |
+------------------------------------+--------+------------+-----------+
| Purchase of property, plant and | | (1,930) | (68,354) |
| equipment | | | |
+------------------------------------+--------+------------+-----------+
| Purchase of intangible assets | | - | (82) |
+------------------------------------+--------+------------+-----------+
| Loans issued | | (906) | (26,616) |
+------------------------------------+--------+------------+-----------+
| Proceeds on loans issued | | 984 | 774 |
+------------------------------------+--------+------------+-----------+
| Repayment of promissory notes | 18 | - | 64,247 |
+------------------------------------+--------+------------+-----------+
| Net cash generated from (used in) | | (1,852) | 62,487 |
| investing activities | | | |
+------------------------------------+--------+------------+-----------+
| | | | |
+------------------------------------+--------+------------+-----------+
| Cash flows from financing | | | |
| activities | | | |
+------------------------------------+--------+------------+-----------+
| Proceeds from borrowings | | - | 18,000 |
+------------------------------------+--------+------------+-----------+
| Repayment of borrowings | | - | (18,365) |
+------------------------------------+--------+------------+-----------+
| Repayment of loan organization | | - | (10,000) |
| fees | | | |
+------------------------------------+--------+------------+-----------+
| Finance lease principal payments | | (376) | (468) |
+------------------------------------+--------+------------+-----------+
| Cash proceeds from issuance of | 20 | - | 6,155 |
| ordinary shares gross | | | |
+------------------------------------+--------+------------+-----------+
| Expenses related to issuance of | 20 | - | (263) |
| ordinary shares | | | |
+------------------------------------+--------+------------+-----------+
| Cash proceeds from exercise of | 20 | - | 125 |
| options | | | |
+------------------------------------+--------+------------+-----------+
| Net cash (used in) generated from | | (376) | (4,816) |
| financing activities | | | |
+------------------------------------+--------+------------+-----------+
| Effect of exchange rate changes | | (476) | (5,354) |
| on cash and cash equivalents | | | |
+------------------------------------+--------+------------+-----------+
| Net increase/(decrease) in cash | | 1,089 | (27,507) |
| and cash equivalents | | | |
+------------------------------------+--------+------------+-----------+
| Cash and cash equivalents at the | | 1,272 | 28,779 |
| beginning of the year | | | |
+------------------------------------+--------+------------+-----------+
| Cash and cash equivalents at the | | 2,361 | 1,272 |
| end of the year | | | |
+------------------------------------+--------+------------+-----------+
| Cash and cash equivalents at the | | 2,361 | |
| end of the year of the Group, | | | 912 |
| excluding those classified as held | | | |
| for sale | | | |
+------------------------------------+--------+------------+-----------+
| Cash and cash equivalents at the | 10 | - | |
| end of the year of the assets | | | 360 |
| classified as held for sale | | | |
+------------------------------------+--------+------------+-----------+
The accompanying notes on pages 9 to 58 are an integral part of these
consolidated financial statements
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| Urals Energy Public Company Limited |
| Consolidated Statements of Changes in Shareholders's Equity |
| (presented in US$ thousands) |
+--------------------------------------------------------------------------------------------------------------------------------------+
| | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| | Notes | Share | Share | Difference | | Retained | Equity | Non-controlling | Total |
| | | capital | premium | from | | earnings | attributable | interest | equity |
| | | | | conversion | Cumulative | (accumulated | to | | |
| | | | | of share | Translation | deficit) | Shareholders | | |
| | | | | capital | Adjustment | | of Urals | | |
| | | | | into US$ | | | Energy | | |
| | | | | | | | Public | | |
| | | | | | | | Company | | |
| | | | | | | | Limited | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| Balance | | 990 | 625,111 | - | 49,919 | 150,744 | 826,764 | 1,604 | 828,368 |
| at 31 | | | | | | | | | |
| December | | | | | | | | | |
| 2007 | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| Effect | | - | - | - | (76,982) | - | (76,982) | (39) | (77,021) |
| of | | | | | | | | | |
| currency | | | | | | | | | |
| translation | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| Accumulative | | - | - | | (13,258) | - | (13,258) | - | (13,258) |
| translation | | | | - | | | | | |
| adjustment | | | | | | | | | |
| relating to | | | | | | | | | |
| disposed | | | | | | | | | |
| subsidiaries | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| Loss | | - | - | - | - | (401,789) | (401,789) | (1,460) | (403,249) |
| for | | | | | | | | | |
| the | | | | | | | | | |
| year | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| Total | | - | - | - | (90,240) | (401,789) | (492,029) | (1,499) | (493,528) |
| comprehensive | | | | | | | | | |
| loss | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| Issuance | 20 | 19 | 5,998 | - | - | - | 6,017 | - | 6,017 |
| of | | | | | | | | | |
| shares | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| Share-based | 20 | - | 8,971 | - | - | - | 8,971 | - | 8,971 |
| payment | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| Difference | 20 | 113 | - | | - | - | - | - | - |
| from | | | | (113) | | | | | |
| conversion | | | | | | | | | |
| of share | | | | | | | | | |
| capital | | | | | | | | | |
| into US$ | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| Balance | | 1,122 | 640,080 | (113) | (40,321) | (251,045) | 349,723 | 105 | 349,828 |
| at 31 | | | | | | | | | |
| December | | | | | | | | | |
| 2008 | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| Effect | | - | - | - | (19,619) | - | (19,619) | 3 | (19,616) |
| of | | | | | | | | | |
| currency | | | | | | | | | |
| translation | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| Accumulative | | - | - | - | 31,567 | - | 31,567 | - | 31,567 |
| translation | | | | | | | | | |
| adjustment | | | | | | | | | |
| relating to | | | | | | | | | |
| disposed | | | | | | | | | |
| subsidiaries | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| Loss | | - | - | - | - | (303,931) | (303,931) | (84) | (304,015) |
| for | | | | | | | | | |
| the | | | | | | | | | |
| year | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| Total | | - | - | - | 11,948 | (303,931) | (291,983) | (81) | (292,064) |
| comprehensive | | | | | | | | | |
| loss | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| Issuance | 20 | 9 | (9) | - | - | - | - | - | - |
| of | | | | | | | | | |
| shares | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| Share-based | 20 | - | 4,177 | - | - | - | 4,177 | - | 4,177 |
| payment | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| Balance | | 1,131 | 644,248 | (113) | (28,373) | (554,976) | 61,917 | 24 | 61,941 |
| at 31 | | | | | | | | | |
| December | | | | | | | | | |
| 2009 | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
| | | | | | | | | | |
+---------------+--------+---------+-----------+------------+-------------+--------------+--------------+-----------------+------------+
The accompanying notes on pages 9 to 58 are an integral part of these
consolidated financial statements
Urals Energy Public Company Limited
Notes to the Consolidated Financial Statements
(presented in US$ thousands)
1 Activities
Urals Energy Public Company Limited ("Urals Energy" or the "Company" or "UEPCL")
was incorporated as a limited liability company in Cyprus on 10 November 2003.
Urals Energy and its subsidiaries (the "Group") are primarily engaged in oil and
gas exploration and production in the Russian Federation and processing of crude
oil for distribution on both the Russian and international markets.
The registered office of Urals Energy is at 31 Evagorou Avenue, Suite 34,
CY-1066, Nicosia, Cyprus. UEPCL's shares are traded on the AIM Market operated
by the London Stock Exchange. The Company's shares were temporarily suspended
from trading between 30 June 2009 and 18 December 2009 due to non-compliance
with AIM rules 18 and 19, primarily due to the non-filing of audited financial
statements for the year ended 31 December 2008 and the non-filing of unaudited
interim financial information for the six-months ended 30 June 2009. The matters
giving rise to the suspension were resolved in full on 18 December 2009 and the
suspension was accordingly lifted.
The Group comprises UEPCL and the following main subsidiaries and joint venture
(Note 8, 9):
+--------------------+---------------+--------+--------+
| Entity | Jurisdiction | Effective |
| | | ownership |
| | | interest |
| | | at 31 December |
+ + +-----------------+
| | | 2009 | 2008 |
+--------------------+---------------+--------+--------+
| Exploration | | | |
| and | | | |
| production | | | |
+--------------------+---------------+--------+--------+
| OOO | Irkutsk | - | 100% |
| Oil | | | |
| Company | | | |
| Dulisma | | | |
| ("Dulisma") | | | |
| (i) | | | |
+--------------------+---------------+--------+--------+
| ZAO Petrosakh | Sakhalin | 97.2% | 97.2% |
| ("Petrosakh") | | | |
+--------------------+---------------+--------+--------+
| ZAO | Nenetsky | 100% | 100% |
| Arcticneft | | | |
| ("Arcticneft") | | | |
+--------------------+---------------+--------+--------+
| OOO | Irkutsk | 100% | 100% |
| Lenskaya | | | |
| Transportnaya | | | |
| Kompaniya | | | |
| ("LTK") | | | |
+--------------------+---------------+--------+--------+
| ZAO Chepetskoye | Udmurtia | - | 100% |
| NGDU | | | |
| ("Chepetskoye") | | | |
| (ii) | | | |
+--------------------+---------------+--------+--------+
| OOO | Sakha-Yakutia | - | 35.3% |
| Taas-Yuryakh | | | |
| Neftegazdobycha | | | |
| ("Taas") (i) | | | |
+--------------------+---------------+--------+--------+
| | | | |
+--------------------+---------------+--------+--------+
| Management | | | |
| company | | | |
+--------------------+---------------+--------+--------+
| OOO Urals | Moscow | 100% | 100% |
| Energy | | | |
+--------------------+---------------+--------+--------+
| Urals | United | | |
| Energy | Kingdom | 100% | 100% |
| (UK) | | | |
| Limited | | | |
| (dormant | | | |
| starting | | | |
| from May | | | |
| 2007) | | | |
+--------------------+---------------+--------+--------+
| | | | |
+--------------------+---------------+--------+--------+
| Exploration | | | |
+--------------------+---------------+--------+--------+
| OOO Urals-Nord | Nenetsky | 100% | 100% |
| ("Urals-Nord") | | | |
+--------------------+---------------+--------+--------+
| | | | |
+--------------------+---------------+--------+--------+
(i) On 3 August 2009 the Company sold its 100% interest in Dulisma
and on 19 November 2009 it sold its 35.3% interest in Taas in return for full
discharge of the Company's debt to Sberbank Capital plus assumption of all trade
accounts payable accrued by Dulisma and Taas at the date of the transaction
(Note 3).
(ii) In February 2009 Chepetskoye was sold to a domestic off-taker
Galaform for the full discharge of the domestic prepayment (Note 9).
2 Summary of Significant Accounting Policies
Basis of preparation. The consolidated financial statements of the Group have
been prepared in accordance with International Financial Reporting Standards
(IFRS), as adopted by the European Union (EU).
As of the date of the authorisation of the financial statements, all
International Financial Reporting Standards issued by the International
Accounting Standards Board (IASB) and effective as at 1 January 2009 have been
adopted by the EU through the endorsement procedure established by the European
Commission, with the exception of the following:
- certain provisions of IAS 39 "Financial Instruments: Recognition and
Measurement" relating to portfolio hedge accounting.
In addition, the following interpretations have been endorsed, however their
effective dates are not the same, although an entity may choose to early adopt
them:
- IFRIC 12 "Service Concession Arrangements";
- IFRIC 15 "Agreements for the construction of real estate"; and
- IFRIC 16 "Hedges of a Net Investment in a Foreign Operation".
These consolidated financial statements have been prepared under the historical
cost convention as modified by the change in fair value of financial
instruments. The preparation of consolidated financial statements in conformity
with IFRS requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the reporting date and the
reported amounts of revenues and expenses during the reporting period. These
policies have been consistently applied to all the periods presented, unless
otherwise stated. Critical accounting estimates and judgements are disclosed in
Note 6. Actual results could differ from the estimates.
Functional and presentation currency. The United States dollar ("US dollar or
US$ or $") is the presentation currency for the Group's operations as management
have used the US dollar accounts to manage the Group's financial risks and
exposures, and to measure its performance. Financial statements of the Russian
subsidiaries are measured in Russian Roubles, their functional currency.
The functional currency of the Company is the US Dollar as substantially all the
cash flows affecting the Company are in US Dollars.
Translation to functional currency. Monetary items of statement of financial
position denominated in foreign currencies have been remeasured using the
exchange rate at the respective reporting date. Exchange gains and losses
resulting from foreign currency translation are included in the determination of
profit or loss. The US dollar to Russian Rouble exchange rates were 30.24 and
29.38 as of 31 December 2009 and 2008, respectively.
Translation to presentation currency. The Group's financial statements are
presented in US dollars in accordance with IAS 21, The Effects of Changes in
Foreign Exchange Rates. The results and financial position of each group entity
having a functional currency different from the presentation currency are
translated into the presentation currency as follows:
(i) Assets and liabilities for each statement of financial position
presented are translated at the closing rate at the date of that statement of
financial position. Goodwill and fair value adjustments arising on the
acquisitions are treated as assets and liabilities of the acquired entity.
(ii) Income and expenses for each statement of comprehensive income are
translated at average exchange rates (unless this average is not a reasonable
approximation of the cumulative effect of the rates prevailing on the
transaction dates, in which case income and expenses are translated at the dates
of the transactions).
(iii) All resulting exchange differences are recognised as a separate
component of equity.
When a subsidiary is disposed of through sale, liquidation, repayment of share
capital or abandonment of all, or part of, that entity, the exchange differences
deferred in other comprehensive income are reclassified to the profit and loss..
Group accounting. Subsidiaries, which are those entities in which the Group has
an interest of more than one half of the voting rights, or otherwise has power
to exercise control over the operations, are consolidated. Subsidiaries are
consolidated from the date on which control is transferred to the Group and are
no longer consolidated from the date that control ceases. The purchase method of
accounting is used to account for the acquisition of subsidiaries by the Group.
The cost of an acquisition is measured as the fair value of the consideration
provided or liabilities incurred or assumed at the date of exchange plus costs
directly attributable to the acquisition.
All intercompany transactions, balances and unrealised gains on transactions
between group companies are eliminated; unrealised losses are also eliminated
unless the transaction provides evidence of an impairment of the asset
transferred.
Non-controlling interest at the reporting date represents the non-controlling
shareholders' portion of the fair values of the identifiable assets, liabilities
and contingent liabilities of the subsidiary at the acquisition date, and the
non-controlling interest's portion of movements in equity since the date of the
combination. Non-controlling interest is presented as a separate component of
equity. Where the losses applicable to the non-controlling in a consolidated
subsidiary exceed the non-controlling interest in the equity of the subsidiary,
the excess and any further losses applicable to the non-controlling interest are
charged against the majority interest except to the extent that the
non-controlling interest has a binding obligation to, and is able to, make good
the losses. If the subsidiary subsequently reports profits, the majority
interest is allocated all such profits until the non-controlling interest's
share of losses previously absorbed by the majority has been recovered.
The Group applies a policy of treating transactions with non-controlling
interests as transactions with parties external to the Group. Disposals to
non-controlling interests result in gains or losses for the Group that are
recorded in the consolidated statement of comprehensive income. Purchases from
non-controlling interests result in goodwill, being the difference between any
consideration paid and the relevant share acquired of the carrying value of net
assets of the subsidiary.
The Group accounts for the interest in a joint venture using the equity method
of accounting. Investments in joint ventures are initially recognised at fair
value. The group's investment in joint venture includes negative goodwill
identified on acquisition, and immediately recognised as income in the
consolidated statement of comprehensive income.
The Group's share of its joint venture's post-acquisition profits or losses is
recognised in the consolidated statement of comprehensive income, and its share
of post-acquisition movements in reserves is recognised in reserves. The
cumulative post-acquisition movements are adjusted against the carrying amount
of the investment. When the Group's share of losses in a joint venture equals or
exceeds its interest in the joint venture, including any other unsecured
receivables, the Group does not recognise further losses, unless it has incurred
obligations or made payments on behalf of the joint venture.
Unrealised gains on transactions between the Group and its joint venture are
eliminated to the extent of the Group's interest in the joint venture.
Unrealised losses are also eliminated unless the transaction provides evidence
of an impairment of the asset transferred. Accounting policies of joint venture
have been changed where necessary to ensure consistency with the policies
adopted by the Group.
Dilution gains and losses arising in investments in joint venture are recognised
in the consolidated statement of income.
Property, plant and equipment.Property, plant and equipment acquired as part of
a business combination is recorded at fair value at the acquisition date and
adjusted for accumulated depreciation, depletion and impairment. All subsequent
additions are recorded at historical cost of acquisition or construction and
adjusted for accumulated depreciation, depletion and impairment. Oil and gas
exploration and production activities are accounted for in a manner similar to
the successful efforts method. Costs of successful development and exploratory
wells are capitalised. The cost of property, plant and equipment includes
provisions for dismantlement, abandonment and site restoration (see Provisions
below).
The Group accounts for exploration and evaluation activities in accordance with
IFRS 6, Exploration for and Evaluation of Mineral Resources. Geological and
geophysical exploration costs are charged against income as incurred. Costs
directly associated with an exploration well are initially capitalised as an
intangible asset within oil and gas properties until the drilling of the well is
complete and the results have been evaluated. These costs include employee
remuneration, materials and fuel used, rig costs, delay rentals and payments
made to contractors. If hydrocarbons are not found, the exploration expenditure
is written off as a dry hole. If hydrocarbons are found and, subject to further
appraisal activity, which may include the drilling of further wells (exploration
or exploratory-type stratigraphic test wells), are likely to be capable of
commercial development, the costs continue to be carried as an asset. All such
carried costs are subject to technical, commercial and management review at
least once a year to confirm the continued intent to develop or otherwise
extract value from the discovery. When this is no longer the case, the costs are
written off. When proved reserves of oil and natural gas are determined and
development is sanctioned, the relevant expenditure is transferred to the
tangible part of oil and gas properties and an impairment review of the property
is undertaken at that time.
Development and production assets are accumulated generally on a field-by-field
basis and represent the cost of developing the commercial reserves discovered
and bringing them to production together with E&E expenditures incurred in
finding commercial reserves and transferred from the intangible E&E assets
described above. The cost of development and production assets also include the
costs of acquisitions and purchases of such assets, directly attributable
overheads, finance costs capitalised and the costs of recognising provisions for
future restoration and decommissioning.
Depletion of capitalized costs of proved oil and gas properties is calculated
using the unit-of-production method for each field based upon proved reserves
for property acquisitions and proved developed reserves for exploration and
development costs. Oil and gas reserves for this purpose are determined in
accordance with Society of Petroleum Engineers definitions and were last
estimated by DeGolyer and MacNaughton, the Group's independent reservoir
engineers in 2007. The DeGolyer and MacNaughton information from the 2007
reserves review is updated annually by management by reference to production
information and the equivalent Russian ABC reserves classification. Gains or
losses from retirements or sales of oil and gas properties are included in the
determination of profit for the year.
Depreciation of non oil and gas property, plant and equipment is calculated
using the straight-line method over their estimated remaining useful lives, as
follows:
+-----------+--------+-----------+
| | | Estimated |
| | | useful |
| | | life |
+-----------+--------+-----------+
| Refinery | | 19 |
| and | | |
| related | | |
| equipment | | |
+-----------+--------+-----------+
| Buildings | | 20 |
+-----------+--------+-----------+
| Other | | 6 to |
| assets | | 20 |
+-----------+--------+-----------+
The assets' residual values and useful lives are reviewed, and adjusted if
appropriate, at each reporting date. Gains and losses on disposals are
determined by comparing the proceeds with the carrying amount and are recognised
within 'Other (losses)/gains - net' in the consolidated statement of
comprehensive income.
Intangible assets. The Group measures intangible assets at cost less accumulated
amortisation and impairment losses. All of the Group's other intangible assets
have finite useful lives and primarily include capitalised computer software and
licences.
Acquired computer software licences are capitalised on the basis of the costs
incurred to acquire and bring them to use.
Development costs that are directly associated with identifiable and unique
software controlled by the Group are recorded as intangible assets if probable
future economic benefits will be generated. Capitalised costs include staff
costs of the software development team and an appropriate portion of relevant
overheads. All other costs associated with computer software, e.g. its
maintenance, are expensed when incurred.
Intangible assets are amortised using the straight-line method over their useful
lives:
+-----------------------------------------------+-----------------+
| | Estimated |
| | useful life |
+-----------------------------------------------+-----------------+
| Software licences | 1-5 |
+-----------------------------------------------+-----------------+
| Capitalised internal software development | 3 |
| costs | |
+-----------------------------------------------+-----------------+
| Other licences | 5 to 7 |
+-----------------------------------------------+-----------------+
Provisions. Provisions are recognised when the Group has a present legal or
constructive obligation as a result of past events and when it is probable that
an outflow of resources embodying economic benefits will be required to settle
the obligation, and a reliable estimate of the amount of the obligation can be
made.
Provisions, including those related to dismantlement, abandonment and site
restoration, are evaluated and re-estimated annually, and are included in the
consolidated financial statements at each reporting date at the present value of
the expenditures expected to be required to settle the obligation using pre -
tax discount rates which reflect the current market assessment of the time value
of money and the risks specific to the liability.
Changes in provisions resulting from the passage of time are reflected in the
consolidated statement of comprehensive income each year under financial items.
Other changes in provisions, relating to a change in the expected pattern of
settlement of the obligation, changes in the discount rate or in the estimated
amount of the obligation, are treated as a change in accounting estimate in the
period of the change. Changes in provisions relating to dismantlement,
abandonment and site restoration are added to, or deducted from, the cost of the
related asset in the current period. The amount deducted from the cost of the
asset should not exceed its carrying amount. If a decrease in the liability
exceeds the carrying amount of the asset, the excess is recognised immediately
in profit or loss.
The provision for dismantlement liability is recorded on the consolidated
statement of financial position, with a corresponding amount being recorded as
part of property, plant and equipment in accordance with IAS 16.
Leases. Leases of property, plant and equipment where the Group has
substantially all the risks and rewards of ownership are classified as finance
leases. Finance leases are capitalised at the commencement of the lease at the
lower of the fair value of the leased property or the present value of the
minimum lease payments. The corresponding rental obligations, net of finance
charges, are presented as finance lease obligations on the consolidated
statement of financial position. The interest element of the finance cost is
charged to the consolidated statement of comprehensive income over the lease
period. Property, plant and equipment acquired under finance leases are
depreciated over the shorter of the useful life of the asset or the lease term.
Leases in which a significant portion of the risks and rewards of ownership are
retained by the lessor are classified as operating leases. Payments made under
operating leases are charged to the consolidated statement of comprehensive
income on a straight-line basis over the period of the lease.
Impairment of assets. Assets that are subject to depreciation and depletion are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. An impairment loss is
recognised for the amount by which the asset's carrying amount exceeds its
recoverable amount. The recoverable amount is the higher of an asset's fair
value less costs to sell or value in use. For the purposes of assessing
impairment, assets are grouped by license areas, which are the lowest levels for
which there are separately identifiable cash flows (cash-generating units).
Inventories. Inventories of extracted crude oil, materials and supplies and
construction materials are valued at the lower of the weighted-average cost and
net realisable value. General and administrative expenditure is excluded from
inventory costs and expensed in the period incurred.
Trade receivables. Trade receivables are recognised initially at fair value and
subsequently measured at amortised cost using the effective interest method, net
of provision for impairment. A provision for impairment of trade receivables is
established when there is objective evidence that the Group will not be able to
collect all amounts due according to the original terms of receivables. Such
objective evidence may include significant financial difficulties of the debtor,
an increase in the probability that the debtor will enter bankruptcy or
financial reorganization, and actual default or delinquency in payments. The
amount of the provision is the difference between the asset's carrying amount
and the present value of estimated future cash flows, discounted at the original
effective interest rate. The change in the amount of the provision is
recognised in the consolidated statement of comprehensive income.
Cash and cash equivalents. Cash and cash equivalents includes cash in hand,
deposits held at call with banks, and other short-term highly liquid investments
with original maturities of three months or less. Cash and cash equivalents are
carried at amortised cost using the effective interest method. Restricted
balances are excluded from cash and cash equivalents for the purposes of the
consolidated cash flow statement. Balances restricted from being exchanged or
used to settle a liability for at least twelve months after the reporting date
are included in other non-current assets. Restricted cash balances are
segregated from cash available for the business to use until such time as
restrictions are removed.
Value added tax. Output value added tax related to sales is payable to tax
authorities on the earlier of (a) collection of receivables from customers or
(b) delivery of goods or services to customers. Input VAT is generally
recoverable against output VAT upon receipt of the VAT invoice. The tax
authorities permit the settlement of VAT on a net basis. VAT related to sales
and purchases is recognised in the statement of financial position on a gross
basis and disclosed separately as an asset and liability. Where provision has
been made for impairment of receivables, impairment loss is recorded for the
gross amount of the debtor, including VAT.
Borrowings. Borrowings are recognised initially at the fair value of the
liability, net of transaction costs incurred. In subsequent periods, borrowings
are stated at amortised cost using the effective yield method; any difference
between amount at initial recognition and the redemption amount is recognised as
interest expense over the period of the borrowings. Borrowings are classified as
current liabilities unless the Group has an unconditional right to defer
settlement of the liability for at least 12 months after the reporting date.
Interest costs on borrowings to finance the construction of property, plant and
equipment are capitalised during the period of time that is required to complete
and prepare the asset for its intended use.
Loans receivable. The loans advanced by the Group are classified as "loans and
receivables" in accordance with IAS 39 and stated at amortised cost using the
effective interest method. These loans are individually tested for impairment at
each reporting date.
Income taxes. Income taxes related to the Group's operations in the Russian
Federation have been provided for in the consolidated financial statements in
accordance with Russian legislation enacted or substantively enacted by the
reporting date. The income tax charge or benefit comprises current tax and
deferred tax and is recognised in the consolidated statement of comprehensive
income unless it relates to transactions that are recognised, in the same or a
different period, directly in equity.
Current tax is the amount expected to be paid to or recovered from the taxation
authorities in respect of taxable profits or losses for the current and prior
periods. Taxes other than on income are recorded within operating expenses.
Deferred income tax is calculated at rates enacted or substantively enacted by
the reporting date, using the balance sheet liability method, for all temporary
differences between the tax bases of assets and liabilities and their carrying
values for financial reporting purposes. The principal temporary differences
arise from depreciation on property, plant and equipment, provisions and other
fair value adjustments to long-term items, and expenses which are charged to the
consolidated statement of comprehensive income before they become deductible for
tax purposes.
Deferred income tax assets attributable to deducible temporary differences,
unused tax losses and credits are recognised only to the extent that it is
probable that future taxable profit or taxable temporary differences will be
available against which they can be utilised.
Deferred income tax assets and liabilities are offset when the Group has a
legally enforceable right to set off current tax assets against current tax
liabilities, when deferred tax balances relate to the same regulatory body, and
when they relate to the same taxable entity.
The Group's uncertain tax positions are reassessed by management at every
reporting date. Liabilities are recorded for income tax positions that are
determined by management as more likely than not to result in additional taxes
being levied if the positions were to be challenged by the tax authorities. The
assessment is based on the interpretation of tax laws that have been enacted or
substantively enacted by the reporting date and any known court or other rulings
on such issues. Liabilities for penalties, interest and taxes other than on
income are recognized based on management's best estimate of the expenditure
required to settle the obligations at the reporting date.
Employee benefits. Wages, salaries, social insurance funds, paid annual leave
and sick leave, bonuses, and non-monetary benefits (such as health services and
kindergarten services) are accrued in the year in which the associated services
are rendered by the employees of the Group.
The Group makes required contributions to the Russian Federation state pension
scheme on behalf of its employees. Mandatory contributions to the governmental
pension scheme are expensed or capitalized to inventories on a basis consistent
with the associated salaries and wages.
Social costs. The Group incurs employee costs related to the provision of
benefits such as health insurance. These amounts principally represent an
implicit cost of employing production workers and, accordingly, are included in
the cost of inventory.
Prepayments. Prepayments are carried at cost less provision for impairment. A
prepayment is classified as non-current when the goods or services relating to
the prepayment are expected to be obtained after one year, or when the
prepayment relates to an asset which will itself be classified as non-current
upon initial recognition. Prepayments to acquire assets are transferred to the
carrying amount of the asset once the Group has obtained control of the asset
and it is probable that future economic benefits associated with the asset will
flow to the Group. Other prepayments are written off to profit or loss when the
goods or services relating to the prepayments are received. If there is an
indication that the assets, goods or services relating to a prepayment will not
be received, the carrying value of the prepayment is written down accordingly
and a corresponding impairment loss is recognised in profit or loss.
Revenue recognition. The Group recognises revenue when the amount of revenue
can be reliably measured and it is probable that economic benefits will flow to
the entity, typically when crude oil or refined products are dispatched to
customers and title has transferred. Gross revenues include export duties and
excise taxes but exclude value added taxes.
Interest income is recognised on a time-proportion basis using the effective
interest method. When a receivable is impaired, the Group reduces the carrying
amount to its recoverable amount, being the estimated future cash flow
discounted at the original effective interest rate of the instrument, and
continues unwinding the discount as interest income. Interest income on
impaired loans is recognised using the original effective interest rate.
Segments. The Group operates in one business segment which is crude oil
exploration and production. The Group assesses its results of operations and
makes its strategic and investment decisions based on the analysis of its
profitability as a whole. The Group operates within one geographic segment,
which is the Russian Federation.
Warrants. Warrants issued that allow the holder to purchase shares of the
Group's stock are recorded at fair value at issuance and recorded as liabilities
unless the number of equity instruments to be issued to settle the warrants and
the exercise price are fixed in the issuing entities' functional currency at the
time of grant, in which case they are recorded within shareholders' equity.
Changes in the fair value of warrants recorded as liabilities are recorded in
the consolidated statement of comprehensive income.
Financial derivatives. The fair value of options is evaluated using market
prices if available, taking into account the terms and conditions of the
options, upon which those derivative instruments were issued. If market prices
are not available, the fair value of the equity instruments granted is estimated
using a valuation technique to estimate what the price of those equity
instruments would have been on the measurement date in an arm's length
transaction between knowledgeable, willing parties.
Share capital. Ordinary shares are classified as equity. Incremental costs
directly attributable to the issue of new shares are shown in equity as a
deduction, net of tax, from the proceeds. Any excess of the fair value of
consideration received over the par value of shares issued is presented in the
notes as a share premium.
Share-based payments. The fair value of the employee services received in
exchange for the grant of options is recognised as an expense. The total amount
to be expensed over the vesting period is determined by reference to the fair
value of the options granted, using market prices, taking into account the terms
and vesting conditions upon which those equity instruments were granted.
Earnings per share. Earnings per share are determined by dividing the profit or
loss attributable to equity holders of the Group by the weighted average number
of participating shares outstanding during the reporting year.
Non-current assets classified as held for sale. Non-current assets and disposal
groups (which may include both non-current and current assets) are classified in
the consolidated statement of financial position as 'Non-current assets held for
sale' if their carrying amount will be recovered principally through a sale
transaction within twelve months after the reporting date. Assets are
reclassified when all of the following conditions are met: (a) the assets are
available for immediate sale in their present condition; (b) the Group's
management approved and initiated an active programme to locate a buyer; (c) the
assets are actively marketed for a sale at a reasonable price; (d) the sale is
expected to occur within one year and (d) it is unlikely that significant
changes to the plan to sell will be made or that the plan will be withdrawn.
Non-current assets or disposal groups classified as held for sale in the current
period's consolidated statement of financial position are not reclassified or
re-presented in the comparative consolidated statement of financial position to
reflect the classification at the end of the current period.
A disposal group is assets (current or non-current) to be disposed of, by sale
or otherwise, together as a group in a single transaction, and liabilities
directly associated with those assets that will be transferred in the
transaction. Goodwill is included if the disposal group includes an operation
within a cash-generating unit to which goodwill has been allocated on
acquisition. Non-current assets are assets that include amounts expected to be
recovered or collected more than twelve months after the reporting date. If
reclassification is required, both the current and non-current portions of an
asset are reclassified.
Held for sale property, plant and equipment, intangible assets or disposal
groups as a whole are measured at the lower of their carrying amount and fair
value less costs to sell. Held for sale property, plant and equipment and
intangible assets are not depreciated or amortised. Reclassified non-current
financial instruments and deferred taxes are not subject to the write down to
the lower of their carrying amount and fair value less costs to sell.
Liabilities directly associated with the disposal group that will be transferred
in the disposal transaction are reclassified and presented separately in the
consolidated statement of financial position.
Where assets cease to qualify as held for sale (Arcticneft, Petrosakh) assets
are reinstated on the consolidated statement of financial position at the lower
of:
· The carrying amount prior to the asset being classified as held-for-sale,
adjusted for any depreciation, amortisation or revaluation that would have been
recognized if the asset had not been classified as held for sale.
· The recoverable amount of the assets at the date of decision not to sell.
The depreciation for the fixed assets which ceased to be classified as assets
held for sale was accrued from the moment the decision was made to treat these
assets as held for sale. (October 2008). The profit and loss for the comparative
period was not restated and depreciation charge for the period October-December
2008 was recognised in the reporting period. (USD 0.9 million)
Comparatives. Where necessary, comparative figures have been adjusted to conform
with changes in presentation in the current year.
3 Going Concern
A significant portion of the Group's consolidated net assets of $61.9 million
comprises undeveloped mineral deposits requiring significant additional
investment. The Group is dependent upon external debt to fully develop the
deposits and realise the value attributed to such assets.
During 2007, the Group attracted $630 million in short term financing in the
form of two separate loans ($500 million and $130 million) from Sberbank to
finance acquisitions and mineral development. Despite detailed discussions with
Sberbank, these loans were not re-financed during 2008. As of 31 December 2008
the Group was in default of its financing arrangement with Sberbank and the
Group's current liabilities exceeded its current assets by $758.2 million.
During 2009 the Group entered into a series of negotiations with Sberbank, OOO
Sberbank Capital ('Sberbank Capital') (a 100% subsidiary of OAO Sberbank), and
other entities. As a result of these negotiations the Group agreed to dispose of
its 100% ownership interest in Dulisma and its 35.3% ownership in Taas in
exchange for a release of its debt obligations of $190 million (plus interest of
$2.3 million) and $439.6 million (plus interest of $77.8 million), respectively
(see further discussion in Notes 7,8 and 9).
Furthermore, as a result of these negotiations the Group was released from a Put
Option for nil consideration (see Note 8).
Despite the settlement of the aforementioned debt and put obligations the Group
had net current liabilities of $32.4 million as of 31 December 2009. The most
significant creditor as of 31 December 2009 was an advance for future oil sales
from Petraco - with $33.9 million of principal and interest owed as of 31
December 2009.
As discussed further in Note 27, on 29 April 2010 an Extraordinary General
Meeting was held, whereby it was agreed to authorise the restructuring of the
Petraco advance. As a consequence of the restructuring the debt was restructured
so that $7.0 million in repayable by 31 December 2010 and $8.0 million is
repayable by 31 December 2011. The other terms and conditions of the
restructuring are discussed further in Note 27;
Management have prepared monthly cash flow projections for periods throughout
2010, 2011 and 2012. Judgements with regard to future oil prices and planned
production were required for the preparation of the cash flow projections and
model. Positive overall cash flows are crucially dependant on future oil prices
(a price of $75 per barrel has been used for 2010 and for 2011).
Despite the above matters, the Group still has funding and liquidity
constraints. Management considers that there is a material uncertainty which may
cast significant doubt about the Group's ability to continue as a going concern.
Despite these uncertainties and based on cash flow projections performed,
management considers that the application of the going concern assumption for
the preparation of these consolidated financial statements is appropriate.
4 Settlement with Sberbank
As discussed in Note 3, the Group entered into a number of transactions with
Sberbank, Sberbank Capital and other parties to settle the Group's overdue debt
obligations. No cash was paid or received as a result of the settlement
transactions. As a consequence of these non-cash settlement transactions the
Group incurred a net loss of $225.5 million in 2009. This net loss is comprised
of:
+----------------------------------------------------------+------------+
| | 2009 |
+----------------------------------------------------------+------------+
| | |
+----------------------------------------------------------+------------+
| Impairment charge for Dulisma - see Note 7 | 122,127 |
+----------------------------------------------------------+------------+
| Subsequent loss on disposal of Dulisma - see Note | 30,558 |
| 9 | |
+----------------------------------------------------------+------------+
| Movement in value of investment in joint venture - | 234,106 |
| see Note 8 | |
+----------------------------------------------------------+------------+
| Movement in value of financial derivatives | (161,300) |
| (release from Put) - see Note 8 | |
+----------------------------------------------------------+------------+
| Net charge on settlement of Sberbank obligations | 225,491 |
+----------------------------------------------------------+------------+
As discussed in note 8 the Company had no access to financial information of
Taas for the period and accordingly did not account for the income from Taas
under the equity method of accounting. Similarly the Company did not reassess
the fair value of the put option prior to the release of the Company's
obligations under the agreement. As Taas was disposed and the Put opinion
terminated in the period there is no impact on the recognised loss for the year
ended 31 December 2009 from the non-recording of these items.
5 New accounting pronouncements and interpretations
Since the Group has published its last annual consolidated financial statements,
certain new standards and interpretations have been issued that are mandatory
for the Group's annual accounting periods beginning on or after 1 January 2010
or later and which the Group has not early adopted:
(i) Adopted by the European Union
New standards
IFRS 3, Business Combinations (revised January 2008; effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after 1 July 2009). The revised
IFRS 3 will allow entities to choose to measure non-controlling interests using
the existing IFRS 3 method (proportionate share of the acquiree's identifiable
net assets) or at fair value. The revised IFRS 3 is more detailed in providing
guidance on the application of the purchase method to business combinations. The
requirement to measure at fair value every asset and liability at each step in a
step acquisition for the purposes of calculating a portion of goodwill has been
removed. Instead, in a business combination achieved in stages, the acquirer
will have to remeasure its previously held equity interest in the acquiree at
its acquisition-date fair value and recognise the resulting gain or loss, if
any, in profit or loss. Acquisition-related costs will be accounted for
separately from the business combination and therefore recognised as expenses
rather than included in goodwill. An acquirer will have to recognise at the
acquisition date a liability for any contingent purchase consideration. Changes
in the value of that liability after the acquisition date will be recognised in
accordance with other applicable IFRSs, as appropriate, rather than by adjusting
goodwill. The revised IFRS 3 brings into its scope business combinations
involving only mutual entities and business combinations achieved by contract
alone. IFRS 3 is not relevant to the Group as it does not expect a business
combination to occur.
IAS 27, Consolidated and Separate Financial Statements (revised January 2008;
effective for annual periods beginning on or after 1 July 2009). The revised IAS
27 will require an entity to attribute total comprehensive income to the owners
of the parent and to the non-controlling interests (previously "minority
interests") even if this results in the non-controlling interests having a
deficit balance (the current standard requires the excess losses to be allocated
to the owners of the parent in most cases). The revised standard specifies that
changes in a parent's ownership interest in a subsidiary that do not result in
the loss of control must be accounted for as equity transactions. It also
specifies how an entity should measure any gain or loss arising on the loss of
control of a subsidiary. At the date when control is lost, any investment
retained in the former subsidiary will have to be measured at its fair value.
The Group does not expect the amended standard to have a material effect on its
financial statements.
IFRS 1, First-time Adoption of International Financial Reporting Standards
(following an amendment in December 2008, effective for the first IFRS financial
statements for a period beginning on or after 1 July 2009; restructured IFRS 1
as adopted by the EU is effective for annual periods beginning after 31 December
2009, with early adoption permitted). The revised IFRS 1 retains the substance
of its previous version but within a changed structure in order to make it
easier for the reader to understand and to better accommodate future changes.
The Group does not expect the amendments to have any material effect on its
financial statements.
Amendments
IFRS 5, Non-current Assets Held for Sale and Discontinued Operations (and
consequential amendments to IFRS 1) (effective for annual periods beginning on
or after 1 July 2009). The amendment clarifies that an entity committed to a
sale plan involving loss of control of a subsidiary would classify the
subsidiary's assets and liabilities as held for sale. The revised guidance
should be applied prospectively from the date at which the entity first applied
IFRS 5. The amendment is not expected to have any impact on the Company's
financial statements.
Eligible Hedged Items - Amendment to IAS 39, Financial Instruments: Recognition
and Measurement (effective with retrospective application for annual periods
beginning on or after 1 July 2009). The amendment clarifies how the principles
that determine whether a hedged risk or portion of cash flows is eligible for
designation should be applied in particular situations. The amendment is not
expected to have any impact on the Company's financial statements as the Group
does not apply hedge accounting.
Embedded Derivatives - Amendments to IFRIC 9 and IAS 39 (effective for annual
periods ending on or after 30 June 2009). The amendments clarify that on
reclassification of a financial asset out of the 'at fair value through profit
or loss' category, all embedded derivatives have to be assessed and, if
necessary, separately accounted for. The amendment is not expected to have any
impact on the Company's financial statements.
Classification of Rights Issues - Amendment to IAS 32 (issued 8 October 2009;
effective for annual periods beginning on or after 1 February 2010). The
amendment exempts certain rights issues of shares with proceeds denominated in
foreign currencies from classification as financial derivatives. The amendment
is not expected to have any material impact on the Group's financial statements.
Group Cash-settled Share-based Payment Transactions - Amendments to IFRS 2
Share-based Payment (effective for annual periods beginning on or after 1
January 2010). The amendments provide a clear basis to determine the
classification of share-based payment awards in both consolidated and separate
financial statements. The amendments incorporate into the standard the guidance
in IFRIC 8 and IFRIC 11, which are withdrawn. The amendments expand on the
guidance given in IFRIC 11 to address plans that were previously not considered
in the interpretation. The amendments also clarify the defined terms in the
Appendix to the standard. The Group does not expect the amendments to have a
material effect on its financial statements.
Improvements to International Financial Reporting Standards (issued in April
2009; amendments to IFRS 2, IAS 38, IFRIC 9 and IFRIC 16 are effective for
annual periods beginning on or after 1 July 2009; amendments to IFRS 5, IFRS 8,
IAS 1, IAS 7, IAS 17, IAS 36 and IAS 39 are effective for annual periods
beginning on or after 1 January 2010). The improvements consist of a mixture of
substantive changes and clarifications in the following standards and
interpretations: clarification that contributions of businesses in common
control transactions and formation of joint ventures are not within the scope of
IFRS 2; clarification of disclosure requirements set by IFRS 5 and other
standards for non-current assets (or disposal groups) classified as held for
sale or discontinued operations; requiring to report a measure of total assets
and liabilities for each reportable segment under IFRS 8 only if such amounts
are regularly provided to the chief operating decision maker; amending IAS 1 to
allow classification of certain liabilities settled by entity's own equity
instruments as non-current; changing IAS 7 such that only expenditures that
result in a recognised asset are eligible for classification as investing
activities; allowing classification of certain long-term land leases as finance
leases under IAS 17 even without transfer of ownership of the land at the end of
the lease; providing additional guidance in IAS 18 for determining whether an
entity acts as a principal or an agent; clarification in IAS 36 that a cash
generating unit shall not be larger than an operating segment before
aggregation; supplementing IAS 38 regarding measurement of fair value of
intangible assets acquired in a business combination; amending IAS 39 (i) to
include in its scope option contracts that could result in business
combinations, (ii) to clarify the period of reclassifying gains or losses on
cash flow hedging instruments from equity to profit or loss and (iii) to state
that a prepayment option is closely related to the host contract if upon
exercise the borrower reimburses economic loss of the lender; amending IFRIC 9
to state that embedded derivatives in contracts acquired in common control
transactions and formation of joint ventures are not within its scope; and
removing the restriction in IFRIC 16 that hedging instruments may not be held by
the foreign operation that itself is being hedged. The Group does not expect the
amendments to have any material effect on its financial statements.
New IFRICs
IFRIC 12, Service Concession Arrangements (effective for annual periods
beginning on or after 30 March 2009, with early adoption permitted). The
interpretation contains guidance on applying the existing standards by service
providers in public-to-private service concession arrangements. Application of
IFRIC 12 will not have any impact on the Group's financial statements because it
is not subject to any service concession arrangements.
IFRIC 15, Agreements for the Construction of Real Estate (effective for annual
periods beginning on or after 1 January 2009; IFRIC 15 as adopted by the EU is
effective for annual periods beginning after 31 December 2009, with early
adoption permitted). The interpretation applies to the accounting for revenue
and associated expenses by entities that undertake the construction of real
estate directly or through subcontractors, and provides guidance for determining
whether agreements for the construction of real estate are within the scope of
IAS 11 or IAS 18. It also provides criteria for determining when entities should
recognise revenue on such transactions. IFRIC 15 does not have any material
impact on these financial statements.
IFRIC 16, Hedges of a Net Investment in a Foreign Operation (effective for
annual periods beginning on or after 1 October 2008; IFRIC 16 as adopted by the
EU is effective for annual periods beginning after 30 June 2009, with early
adoption permitted). The interpretation explains which currency risk exposures
are eligible for hedge accounting and states that translation from the
functional currency to the presentation currency does not create an exposure to
which hedge accounting could be applied. The IFRIC allows the hedging instrument
to be held by any entity or entities within a group except the foreign operation
that itself is being hedged. The interpretation also clarifies how the gain or
loss recycled from the currency translation reserve to profit or loss is
calculated on disposal of the hedged foreign operation. Reporting entities will
apply IAS 39 to discontinue hedge accounting prospectively when their hedges do
not meet the criteria for hedge accounting in IFRIC 16. IFRIC 16 does not have
any impact on these financial statements as the Group does not apply hedge
accounting.
IFRIC 17, Distributions of Non-Cash Assets to Owners (effective for annual
periods beginning on or after 1 July 2009). The interpretation clarifies when
and how distribution of non-cash assets as dividends to the owners should be
recognised. An entity should measure a liability to distribute non-cash assets
as a dividend to its owners at the fair value of the assets to be distributed. A
gain or loss on disposal of the distributed non-cash assets will be recognised
in profit or loss for the year when the entity settles the dividend payable.
IFRIC 17 is not relevant to the Group's operations because it does not
distribute non-cash assets to owners.
IFRIC 18, Transfers of Assets from Customers (effective for annual periods
beginning on or after 1 July 2009). The interpretation clarifies the accounting
for transfers of assets from customers, namely, the circumstances in which the
definition of an asset is met; the recognition of the asset and the measurement
of its cost on initial recognition; the identification of the separately
identifiable services (one or more services in exchange for the transferred
asset); the recognition of revenue, and the accounting for transfers of cash
from customers. IFRIC 18 is not expected to have any impact on the Group's
financial statements.
(ii) Not adopted by the European Union
New standards
Amendment to IAS 24, Related Party Disclosures (issued in November 2009 and
effective for annual periods beginning on or after 1 January 2011). IAS 24 was
revised in 2009 by: (a) simplifying the definition of a related party,
clarifying its intended meaning and eliminating inconsistencies; and by (b)
providing a partial exemption from the disclosure requirements for
government-related entities. The Group is currently assessing the impact of the
amended standard on disclosures in its financial statements.
IFRS 9, Financial Instruments Part 1: Classification and Measurement. IFRS 9 was
issued in November 2009 and replaces those parts of IAS 39 relating to the
classification and measurement of financial assets. Key features are as follows:
Financial assets are required to be classified into two measurement categories:
those to be measured subsequently at fair value, and those to be measured
subsequently at amortised cost. The decision is to be made at initial
recognition. The classification depends on the entity's business model for
managing its financial instruments and the contractual cash flow characteristics
of the instrument.
An instrument is subsequently measured at amortised cost only if it is a debt
instrument and both (i) the objective of the entity's business model is to hold
the asset to collect the contractual cash flows, and (ii) the asset's
contractual cash flows represent only payments of principal and interest (that
is, it has only "basic loan features"). All other debt instruments are to be
measured at fair value through profit or loss.
All equity instruments are to be measured subsequently at fair value. Equity
instruments that are held for trading will be measured at fair value through
profit or loss. For all other equity investments, an irrevocable election can be
made at initial recognition, to recognise unrealised and realised fair value
gains and losses through other comprehensive income rather than profit or loss.
There is to be no recycling of fair value gains and losses to profit or loss.
This election may be made on an instrument-by-instrument basis. Dividends are to
be presented in profit or loss, as long as they represent a return on
investment.
While adoption of IFRS 9 is mandatory from 1 January 2013, earlier adoption is
permitted. The Group does not expect to early apply the standard in its annual
2009 financial statements.
Amendments
Prepayments of a Minimum Funding Requirement - Amendment to IFRIC 14 (effective
for annual periods beginning on or after 1 January 2011). This amendment will
have a limited impact as it applies only to companies that are required to make
minimum funding contributions to a defined benefit pension plan. It removes an
unintended consequence of IFRIC 14 related to voluntary pension prepayments when
there is a minimum funding requirement. The amendment is not expected to have
any impact on the Group's financial statements.
Additional Exemptions for First-time Adopters - Amendments to IFRS 1, First-time
Adoption of IFRS (effective for annual periods beginning on or after 1 January
2010). The amendments exempt entities using the full cost method from
retrospective application of IFRSs for oil and gas assets and also exempt
entities with existing leasing contracts from reassessing the classification of
those contracts in accordance with IFRIC 4, 'Determining Whether an Arrangement
Contains a Lease' when the application of their national accounting requirements
produced the same result. The amendments will not have any impact on the Group's
financial statements.
Limited exemption from comparative IFRS 7 disclosures for first-time adopters -
Amendment to IFRS 1 (effective for annual periods beginning on or after 1 July
2010). Existing IFRS preparers were granted relief from presenting comparative
information for the new disclosures required by the March 2009 amendments to
IFRS 7 'Financial Instruments: Disclosures'. This amendment to IFRS 1 provides
first-time adopters with the same transition provisions as included in the
amendment to IFRS 7. The amendment is not expected to have any impact on the
Group's financial statements.
Improvements to International Financial Reporting Standards (issued in May 2010;
effective dates vary standard by standard, most improvements are effective for
annual periods beginning on or after 1 January 2011). The improvements consist
of a mixture of substantive changes and clarifications in the following
standards and interpretations: IFRS 1 was amended (i) to allow previous GAAP
carrying value to be used as deemed cost of an item of property, plant and
equipment or an intangible asset if that item was used in operations subject to
rate regulation, (ii) to allow an event driven revaluation to be used as deemed
cost of property, plant and equipment even if the revaluation occurs during a
period covered by the first IFRS financial statements and (iii) to require a
first-time adopter to explain changes in accounting policies or in the IFRS 1
exemptions between its first IFRS interim report and its first IFRS financial
statements; IFRS 3 was amended (i) to require measurement at fair value (unless
another measurement basis is required by other IFRS standards) of
non-controlling interests that are not present ownership interest or do not
entitle the holder to a proportionate share of net assets in the event of
liquidation, (ii) to provide guidance on acquiree's share-based payment
arrangements that were not replaced or were voluntarily replaced as a result of
a business combination and (iii) to clarify that the contingent considerations
from business combinations that occurred before the effective date of revised
IFRS 3 (issued in January 2008) will be accounted for in accordance with the
guidance in the previous version of IFRS 3; IFRS 7 was amended to clarify
certain disclosure requirements, in particular (i) by adding an explicit
emphasis on the interaction between qualitative and quantitative disclosures
about the nature and extent of financial risks, (ii) by removing the requirement
to disclose carrying amount of renegotiated financial assets that would
otherwise be past due or impaired, (iii) by replacing the requirement to
disclose fair value of collateral by a more general requirement to disclose its
financial effect, and (iv) by clarifying that an entity should disclose the
amount of foreclosed collateral held at the reporting date and not the amount
obtained during the reporting period; IAS 1 was amended to clarify that the
components of the statement of changes in equity include profit or loss, other
comprehensive income, total comprehensive income and transactions with owners
and that an analysis of other comprehensive income by item may be presented in
the notes; IAS 27 was amended by clarifying the transition rules for amendments
to IAS 21, 28 and 31 made by the revised IAS 27 (as amended in January 2008);
IAS 34 was amended to add additional examples of significant events and
transactions requiring disclosure in a condensed interim financial report,
including transfers between the levels of fair value hierarchy, changes in
classification of financial assets or changes in business or economic
environment that affect the fair values of the entity's financial instruments;
and IFRIC 13 was amended to clarify measurement of fair value of award credits.
The Group does not expect the amendments to have any material effect on its
financial statements.
New IFRICs
IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments (effective
for annual periods beginning on or after 1 July 2010). This IFRIC clarifies the
accounting when an entity renegotiates the terms of its debt with the result
that the liability is extinguished through the debtor issuing its own equity
instruments to the creditor. A gain or loss is recognised in the profit and loss
account based on the fair value of the equity instruments compared to the
carrying amount of the debt. The Group is currently assessing the impact of the
interpretation on its financial statements.
Certain new standards and interpretations became effective for the Group from 1
January 2009:
IFRS 8, Operating Segments. The standard applies to entities whose debt or
equity instruments are traded in a public market or that file, or are in the
process of filing, their financial statements with a regulatory organisation for
the purpose of issuing any class of instruments in a public market. IFRS 8
requires an entity to report financial and descriptive information about its
operating segments, with segment information presented on a similar basis to
that used for internal reporting purposes. The standard did not have any impact
on the Group's financial statements.
Puttable Financial Instruments and Obligations Arising on Liquidation - IAS 32
and IAS 1 Amendment. The amendment requires classification as equity of some
financial instruments that meet the definition of financial liabilities. The
amendment did not have any impact on the Group's financial statements.
IAS 23, Borrowing Costs revised in March 2007. The main change is the removal of
the option of immediately recognising as an expense borrowing costs that relate
to assets that take a substantial period of time to get ready for use or sale.
Borrowing costs that are directly attributable to the acquisition, construction
or production of an asset that is not carried at fair value and that necessarily
takes a substantial period of time to get ready for its intended use or sale (a
qualifying asset) form part of the cost of that asset, if the commencement date
for capitalisation is on or after 1 January 2009. Other borrowing costs are
recognised as an expense using the effective interest method. The Group
previously capitalised borrowing costs, this revision had no significant impact
on the Group's financial statements.
IAS 1, Presentation of Financial Statements revised in September 2007. The main
change in IAS 1 is the replacement of the income statement by a statement of
comprehensive income which will also include all non-owner changes in equity,
such as the revaluation of available-for-sale financial assets. Alternatively,
entities will be allowed to present two statements: a separate income statement
and a statement of comprehensive income. The Group has elected to present a
single statement of comprehensive income. The revised IAS 1 also introduces a
requirement to present a statement of financial position (balance sheet) at the
beginning of the earliest comparative period whenever the entity restates
comparatives due to reclassifications, changes in accounting policies, or
corrections of errors. The revised IAS 1 had an impact on the presentation of
the Group's financial statements but had no impact on the recognition or
measurement of specific transactions and balances.
Vesting Conditions and Cancellations - Amendment to IFRS 2, Share-based Payment.
The amendment clarifies that only service conditions and performance conditions
are vesting conditions. Other features of a share-based payment are not vesting
conditions. The amendment specifies that all cancellations, whether by the
entity or by other parties, should receive the same accounting treatment. The
amendment does not have any material impact on these financial statements.
IFRIC 13, Customer Loyalty Programmes. IFRIC 13 clarifies that where goods or
services are sold together with a customer loyalty incentive (for example,
loyalty points or free products), the arrangement is a multiple-element
arrangement and the consideration receivable from the customer is allocated
between the components of the arrangement using fair values. IFRIC 13 does not
have any material impact on these financial statements.
IFRIC 14, IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction. (effective for annual periods beginning on
or after 1 January 2008; adopted by the EU with an effective date postponed to
annual period beginning on or after 1 January 2009).
Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate -
IFRS 1 and IAS 27 Amendment issued in May 2008. The amendment allows first-time
adopters of IFRS to measure investments in subsidiaries, jointly controlled
entities or associates at fair value or at previous GAAP carrying value as
deemed cost in the separate financial statements. The amendment also requires
distributions from pre-acquisition net assets of investees to be recognised in
profit or loss rather than as a recovery of the investment. The amendment did
not have an impact on the Group's financial statements.
Improvements to International Financial Reporting Standards (issued in May
2008). In 2008, the International Accounting Standards Board decided to initiate
an annual improvements project as a method of making necessary, but non-urgent,
amendments to IFRS. The amendments issued in May 2008 consist of a mixture of
substantive changes, clarifications, and changes in terminology in various
standards. The substantive changes relate to the following areas: possibility of
presentation of financial instruments held for trading as non-current under IAS
1; accounting for sale of IAS 16 assets which were previously held for rental
and classification of the related cash flows under IAS 7 as cash flows from
operating activities; clarification of definition of a curtailment under IAS 19;
accounting for below market interest rate government loans in accordance with
IAS 20; making the definition of borrowing costs in IAS 23 consistent with the
effective interest method; clarification of accounting for subsidiaries held for
sale under IAS 27 and IFRS 5; reduction in the disclosure requirements relating
to associates and joint ventures under IAS 28 and IAS 31; enhancement of
disclosures required by IAS 36; clarification of accounting for advertising
costs under IAS 38; amending the definition of the fair value through profit or
loss category to be consistent with hedge accounting under IAS 39; introduction
of accounting for investment properties under construction in accordance with
IAS 40; and reduction in restrictions over manner of determining fair value of
biological assets under IAS 41. Further amendments made to IAS 8, 10, 18, 20,
29, 34, 40, 41 and to IFRS 7 represent terminology or editorial changes only,
which the IASB believes have no or minimal effect on accounting. The amendment
did not have an impact on the Group's financial statements except:
Improving Disclosures about Financial Instruments - Amendment to IFRS 7,
Financial Instruments: Disclosures issued in March 2009. The amendment requires
enhanced disclosures about fair value measurements and liquidity risk. The
entity will be required to disclose an analysis of financial instruments using a
three-level fair value measurement hierarchy. The amendment (a) clarifies that
the maturity analysis of liabilities should include issued financial guarantee
contracts at the maximum amount of the guarantee in the earliest period in which
the guarantee could be called; and (b) requires disclosure of remaining
contractual maturities of financial derivatives if the contractual maturities
are essential for an understanding of the timing of the cash flows. An entity
will further have to disclose a maturity analysis of financial assets it holds
for managing liquidity risk, if that information is necessary to enable users of
its financial statements to evaluate the nature and extent of liquidity risk.
The enhanced disclosures are included in these financial statements.
Unless otherwise stated above, the amendments and interpretations did not have
any significant effect on the Group's consolidated financial statements.
6 Critical Accounting Estimates and Judgements in Applying Accounting
Policies
The Group makes estimates and assumptions that affect the reported amounts of
assets and liabilities. Estimates and judgements are continually evaluated and
are based on management's experience and other factors, including expectations
of future events that are believed to be reasonable under the circumstances.
Management also makes certain judgements, apart from those involving
estimations, in the process of applying the accounting policies. Judgements
that have the most significant effect on the amounts recognised in the financial
statements and estimates that can cause a significant adjustment to the carrying
amount of assets and liabilities are outlined below.
Tax legislation. Russian tax and customs legislation is subject to varying
interpretations, and changes, which can occur frequently. Management's
interpretation of such legislation as applied to the transactions and activity
of the Group may be challenged by the relevant authorities. Please see Note 24
for more details.
Estimation of oil and gas reserves.Engineering estimates of hydrocarbon reserves
are inherently uncertain and are subject to future revisions. Accounting
measures such as depreciation, depletion and amortization charges, impairment
assessments and asset retirement obligations that are based on the estimates of
proved reserves are subject to change based on future changes to estimates of
oil and gas reserves.
Proved reserves are defined as the estimated quantities of hydrocarbons which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic
conditions. Proved reserves are estimated by reference to available reservoir
and well information, including production and pressure trends for producing
reservoirs. Furthermore, estimates of proved reserves only include volumes for
which access to market is assured with reasonable certainty. All proved reserves
estimates are subject to revision, either upward or downward, based on new
information, such as from development drilling and production activities or from
changes in economic factors, including product prices, contract terms or
development plans. In some cases, substantial new investment in additional
wells and related support facilities and equipment will be required to recover
such proved reserves. Due to the inherent uncertainties and the limited nature
of reservoir data, estimates of underground reserves are subject to change over
time as additional information becomes available.
In general, estimates of reserves for undeveloped or partially developed fields
are subject to greater uncertainty over their future life than estimates of
reserves for fields that are substantially developed and depleted. As those
fields are further developed, new information may lead to further revisions in
reserve estimates. Reserves have a direct impact on certain amounts reported in
the consolidated financial statements, most notably depreciation, depletion and
amortization as well as impairment expenses. Depreciation rates on production
assets using the units-of-production method for each field are based on proved
developed reserves for development costs, and total proved reserves for costs
associated with the acquisition of proved properties. Assuming all variables are
held constant, an increase in proved developed reserves for each field decreases
depreciation, depletion and amortization expenses. Conversely, a decrease in the
estimated proved developed reserves increases depreciation, depletion and
amortization expenses. Moreover, estimated proved reserves are used to calculate
future cash flows from oil and gas properties, which serve as an indicator in
determining whether or not property impairment is present.
The possibility exists for changes or revisions in estimated reserves to have a
significant effect on depreciation, depletion and amortization charges and,
therefore, reported net profit for the year.
Impairment provision for receivables. The impairment provision for receivables
is based on management's assessment of the probability of collection of
individual receivables. Significant financial difficulties of the debtor,
probability that the debtor will enter bankruptcy or financial reorganization,
and default or delinquency in payments are considered indicators that the
receivable is potentially impaired. Actual results could differ from these
estimates if there is deterioration in a debtor's creditworthiness or actual
defaults are higher than the estimates.
When there is no expectation of recovering additional cash for an amount
receivable, the expected amount receivable is written off against the associated
provision.
Future cash flows of receivables that are evaluated for impairment are estimated
on the basis of the contractual cash flows of the assets and the experience of
management in respect of the extent to which amounts will become overdue as a
result of past loss events and the success of recovery of overdue amounts. Past
experience is adjusted on the basis of current observable data to reflect the
effects of current conditions that did not affect past periods and to remove the
effects of past conditions that do not exist currently.
Asset retirement obligations. Management makes provision for the future costs of
decommissioning hydrocarbon production facilities, pipelines and related support
equipment based on the best estimates of future cost and economic lives of those
assets. Estimating future asset retirement obligations is complex and requires
management to make estimates and judgments with respect to removal obligations
that will occur many years in the future. Changes in the measurement of existing
obligations can result from changes in estimated timing, future costs or
discount rates used in valuation.
Useful lives of non-oil and gas properties. Items of non-oil and gas properties
are stated at cost less accumulated depreciation. The estimation of the useful
life of an asset is a matter of management judgement based upon experience with
similar assets. In determining the useful life of an asset, management
considers the expected usage, estimated technical obsolescence, physical wear
and tear and the physical environment in which the asset is operated. Changes in
any of these conditions or estimates may result in adjustments to future
depreciation rates. Useful lives applied to oil and gas properties may exceed
the licence term where management considers that licences will be renewed.
Assumptions related to renewal of licences can involve significant judgment of
management.
Impairment. As discussed further in Note 7 and 8, management have estimated the
recoverable amount of cash generating units. Changes in the assumptions used
can have a significant impact on the amount of any impairment charge.
Fair values of acquired assets and liabilities. Since its inception, the Group
has completed several significant acquisitions. IFRS 3 requires that, at the
date of acquisition, all identifiable assets (including intangible assets),
liabilities and contingent liabilities of an acquired entity be recorded at
their respective fair values. The estimation of fair values requires management
judgement. For significant acquisitions, management engages independent experts
to advise as to the fair values of acquired assets and liabilities. Changes in
any of the estimates subsequent to the finalisation of acquisition accounting
may result in losses in future periods.
Going Concern. These consolidated financial statements have been prepared on the
basis that the Group will continue as a going concern (Note 3). Preparation of
the consolidated financial statements on a basis other than going concern can
have a significant impact on the balances recorded in respect of assets and
liabilities.
7 Impairment
Year ended 31 December 2009
During the first half 2009 the Group continued negotiations with Sberbank with
regard to the transfer of its share in Dulisma to Sberbank as part of loan
assignment agreement. In July 2009 the Group transferred Dulisma to Sberbank.
At 30 June 2009 management assessed Dulisma for impairment using the information
regarding the proposed transaction which was available at that date as an
indicator of the fair value of the asset. As a result of this analysis, an
impairment charge of $122.1 million was recognized in the consolidated statement
of comprehensive income in the six months ended 30 June 2009. The full amount of
the impairment loss was allocated to the carrying value of oil and gas
properties of Dulisma. The loss on disposal of Dulisma to Sberbank on 4 August
2009 (Note 9) was calculated based on the net assets of Dulisma after the
impairment at the date of disposal.
Year ended 31 December 2008
Following a sharp decrease in actual and forecast crude oil prices at the end of
2008 management identified that there were indicators of impairment of
production assets and cash generating units and consequently performed
impairment calculations to assess their recoverable amounts.
In assessing whether a write-down is required in the carrying value of a
potentially impaired item of property, plant and equipment or an
equity-accounted investment, its carrying value is compared with its recoverable
amount. The recoverable amount is the higher of the asset's fair value less
costs to sell and value in use. As the Group is in the process of actively
marketing three businesses it is unlikely that there will be significant future
use. Consequently, unless indicated otherwise, the recoverable amount used in
assessing the impairment charges described below is fair value less cost to
sell. Additionally, management estimated the recoverable amount of other cash
generating units. The Group estimated fair value less cost to sell using
discounted cash flow models. An average oil price of $75 for 2010 and $75 in
real terms for future sales was estimated for the impairment calculation and a
real discount rate of 12% was used to discount the estimated future cash flows.
The discount rate of 12% in real terms was derived from the Group's approximate
post-tax weighted average cost of capital.
The Group recognized an impairment loss for the year ended 31 December 2008 of
$34.6 million and $39.1 million for the Arcticneft and Petrosakh cash generating
units, respectively. As discussed in Note 10 these cash generating units were
classified as held for sale as of 31 December 2008. During 2009 the Management
changed strategic plans to sell these assets. As at 31 December 2009 these cash
generating units are recorded as long-term assets of the Group.
If the oil price used in the calculation was reduced to $65 per barrel in real
terms from 2010 onwards an additional impairment charge of $11.3 million and
$3.1 million would be required for Arcticneft and Petrosakh, respectively. If
the discount rate used in the calculation was increased to 14% in real terms an
additional impairment charge of $7.8 million and $8.2 million would be required
for Arcticneft and Petrosakh, respectively.
If the oil price used in the calculation was reduced to $65 per barrel in real
terms from 2010 onwards an impairment charge of $32.2 million would be required
for cash generating units other than the two aforementioned entities. If the
discount rate used in the calculation was increased to 14% in real terms an
impairment charge of $18.8 million would be required for cash generating units
other than the two aforementioned entities.
Following a recovery of oil prices in 2009, the Group has neither booked nor
reversed previously recognized impairments of assets, since the crude oil price
performance confirmed originally applied assumptions.
A summary of the impairment charges incurred by the Group for the year ended 31
December 2008 is presented below:
+----------------------------------------+----+------------+---------+
| | | Year ended 31 |
| | | December: |
+----------------------------------------+----+----------------------+
| | | 2009 | 2008 |
+----------------------------------------+----+------------+---------+
| | | | |
+----------------------------------------+----+------------+---------+
| Dulisma | | 122,127 | - |
+----------------------------------------+----+------------+---------+
| Articneft | | - | 34,561 |
+----------------------------------------+----+------------+---------+
| Petrosakh | | - | 39,136 |
+----------------------------------------+----+------------+---------+
| Chepetskoye | | - | 16,499 |
+----------------------------------------+----+------------+---------+
| Write off of exploration and | | - | 4,759 |
| evaluation expenditures | | | |
+----------------------------------------+----+------------+---------+
| | | 122,127 | 94,955 |
+----------------------------------------+----+------------+---------+
Refer to Note 8 for detail of the impairment analysis of the Group's investment
in joint ventures.
8 Investments in joint venture
Acquisition of equity interest of 35.3% in Taas Yuraykh Neftegazdobycha
("Taas") In December 2007, the Group acquired a 35.329% stake in OOO Taas
Yurayakh Neftegazdobycha. Taas is a privately-held Russian exploration and
production company with oil development operations in East Siberia and licences
to develop two adjacent blocks of the Srednebotuobinskoye oil, gas and
condensate field in the region (the "SRB field"). The SRB field is essentially
undeveloped. Taas holds (1) an oil production licence for the central block of
the SRB field (the "Central Block"); and (2) a licence for geological
prospecting, exploration and production of hydrocarbons in the adjacent
Kurungsky allotment in East Siberia (the "Southern Block").
As part of the transaction the Company also acquired a call option and wrote a
put option for additional interests in Taas of 4.182% and 10.479%, respectively.
The exercise price for the call option to acquire an additional 4.2% of Taas,
exercisable in January 2009, was $70.0 million, plus 11.95% per annum payable at
the Seller's selection either in cash or in equivalent shares of the Company -
this call option was not exercised. The put option was exercisable from
November 2008 and had an expiry date in December 2012 and allowed the holder to
put a 10.5% stake in Taas to the Group for $175.0 million plus accrued interest
at 14.0% from December 2008 to the exercise date, or, at the holder's option,
50% in cash and 50% in shares of Urals Energy valued at a price determined by
the average closing price in the two-week period following the initial closing.
As of 18 November 2009 the mutual settlement agreement was signed with Sberbank
Capital. The Company settled total debt to Sberbank outstanding at the date of
agreement in the amount of $517.4 million (including $439.6 million of principal
amount and $77.8 million interest accrued to the date of disposal) in exchange
of 35.329% stake in OOO Taas Yurayakh Neftegazdobycha. An impairment loss in the
amount of $234.1 million was recognized in these consolidated financial
statements (excess of carrying value of investment over amount of outstanding
debt).
The table below summarises the movements in the carrying amount of the Group's
investment in Taas.
+----------------------------------------+----+------------+-----------+
| | | Year ended 31 |
| | | December: |
+----------------------------------------+----+------------------------+
| | | 2009 | 2008 |
+----------------------------------------+----+------------+-----------+
| | | | |
+----------------------------------------+----+------------+-----------+
| Carrying amount at 1 January | | 751,600 | 911,433 |
+----------------------------------------+----+------------+-----------+
| | | | |
+----------------------------------------+----+------------+-----------+
| Share of profit of joint venture* | | - | (7,313) |
+----------------------------------------+----+------------+-----------+
| Movement in value of investment in | | (234,106) | (152,520) |
| joint venture | | | |
+----------------------------------------+----+------------+-----------+
| Assignment amount with Sberbank | | (517,494) | - |
+----------------------------------------+----+------------+-----------+
| Carrying amount at 31 December | | - | 751,600 |
+----------------------------------------+----+------------+-----------+
* The Company had no access to the financial information of Taas for the
period ended 31 December 2009 as the interest in Taas had been disposed and Taas
historically prepared financial information on an annual basis only. Prior to
its disposal, Taas was accounted for under the equity method of accounting..
Any gain/loss from equity method earnings recognized in the year ended 31
December 2009 would have had an equal and opposite effect on the gain/loss on
disposal recognized.
Additionally, subsequent to the disposal of 35.329% stake in OOO Taas Yurayakh
Neftegazdobycha the Company was released from any obligations under Taas
Shareholder's agreement and terminated the Put Option agreement with Ashmore for
nil consideration. The corresponding effect of financial liablity release
constituted USD 161.3 million. The Company did not reassess the fair value of
the put prior to termination as termination extinguished all liabilities of the
Company under the Put option and reassessment of fair value at the date of
termination would not affect the recognised loss for the year.
9 Disposal of subsidiaries
Chepetskoye. In February 2009 Chepetskoye was sold to a domestic off-taker
Galaform for the full discharge of the domestic prepayment granted to the Group
in the end of 2006 (see Note 16). As part of the transaction the Group assigned
to the buyer intercompany loans amounting to $10.8 million. The sale
consideration was equal to $5.2 million and included in the sales agreement was
a call option for the Group to repurchase Chepetskoye for $5.2 million. This
call option expires in January 2010. The Group has assigned nil value to the
call option. An additional loss from disposal in the amount of $1.1 million was
recognized in the consolidated statement of comprehensive income for the year
ended 31 December 2009.
Dulisma. On 4 August 2009 the Company sold it's 100% interest in Dulisma for the
full discharge of the Company's debt to Sberbank capital plus assumption of all
trade acounts payable accrued at the date of transaction. Details of the assets
and liabilities disposed of are disclosed below:
+---------------+------------+-------------+------------+
| | Dulisma |Chepetskoye | Total |
+---------------+------------+-------------+------------+
| Book | | | |
| value | | | |
| of net | | | |
| assets | | | |
| sold | | | |
+---------------+------------+-------------+------------+
| Current | 13,198 | 850 | 14,048 |
| assets | | | |
+---------------+------------+-------------+------------+
| Non-current | 242,038 | 3,730 | 245,768 |
| assets | | | |
+---------------+------------+-------------+------------+
| Current | (172,843) | (4,487) | (177,330) |
| liabilities | | | |
+---------------+------------+-------------+------------+
| Non-current | (20,835) | (11,576) | (32,411) |
| liabilities | | | |
+---------------+------------+-------------+------------+
| Net | 61,558 | (11,483) | 50,075 |
| assets | | | |
| disposed | | | |
| of | | | |
+---------------+------------+-------------+------------+
| | | | |
+---------------+------------+-------------+------------+
| Consideration | | | |
+---------------+------------+-------------+------------+
| Cash | - | (700) | (700) |
| received | | | |
+---------------+------------+-------------+------------+
| Loans | (60,534) | 10,810 | (49,724) |
| settled | | | |
+---------------+------------+-------------+------------+
| Other | - | 429 | 429 |
| adjustments | | | |
+---------------+------------+-------------+------------+
| Currency | 29,534 | 2,033 | 31,567 |
| translation | | | |
| loss | | | |
+---------------+------------+-------------+------------+
| Loss | 30,558 | 1,089 | 31,647 |
| on | | | |
| disposals | | | |
+---------------+------------+-------------+------------+
In April 2008, the Group completed the sale of Dinyu, Michayuneft and
Nizhneomrinskaya Neft for $93.1 million and CNPSEI was sold to the same buyer on
31 December 2008 for $13.9 million. This consideration from the sale of CNPSEI
was fully offset against outstanding unpaid liabilities of the Company under oil
sales and other agreements involving Komi assets sold in April 2008; therefore,
the Company had not received any cash proceeds from that transaction. The Group
recognised a net gain on the above sales in the amount of $8.1 million.
10 Non-current assets held for sale
During 2008 the Group's Board of Directors approved a plan to divest what it
considered to be non-core assets - Arcticneft, Petrosakh and Chepetskoye. The
assets and liabilities of those subsidiaries have been presented as held for
sale as of 31 December 2008. In February 2009 the Company completed the sale of
Chepetskoye (Note 9).
During 2009 due to improvement of economic situation on the world oil market the
management made a strategic decision not to sell Arcticneft and Petrosakh and to
resume development and extraction of oil reserves of these Group entities. In
the reporting period both assets and liabilities of Arcticneft and Petrosakh
were reclassified from assets held for sale into appropriate categories of the
consolidated statement of financial position. For the purposes of comparability
the reclassification is shown separately in each disclosure.
Below is a breakdown of assets and liabilities of non-current assets of
Arcticneft, Chepetskoye, and Petrosakh that are classified as held for sale at
31 December 2008.
+---------------------------------------------+---------------------+
| | |
+---------------------------------------------+---------------------+
| | 31 December 2008 |
+---------------------------------------------+---------------------+
| | |
+---------------------------------------------+---------------------+
| Cash and cash equivalents | 360 |
+---------------------------------------------+---------------------+
| Accounts receivable and prepayments | 5,545 |
+---------------------------------------------+---------------------+
| Current income tax prepayments | 551 |
+---------------------------------------------+---------------------+
| Inventories | 18,426 |
+---------------------------------------------+---------------------+
| Property, plant and equipment | 70,710 |
+---------------------------------------------+---------------------+
| Supplies and materials for capital | 2,487 |
| construction | |
+---------------------------------------------+---------------------+
| Other non-current assets | 1,084 |
+---------------------------------------------+---------------------+
| Total assets held for sale | 99,163 |
+---------------------------------------------+---------------------+
| | |
+---------------------------------------------+---------------------+
| Accounts payable and accrued expenses (net | 2,881 |
| of provision of $0 thousand and $664 | |
| thousand at 31 December 2009 and 2008, | |
| respectively) | |
+---------------------------------------------+---------------------+
| Other taxes payable | 1,518 |
+---------------------------------------------+---------------------+
| Advances from customers | 150 |
+---------------------------------------------+---------------------+
| Long -term finance lease obligations | 846 |
+---------------------------------------------+---------------------+
| Dismantlement provision | 1,423 |
+---------------------------------------------+---------------------+
| Deferred tax liability | 3,430 |
+---------------------------------------------+---------------------+
| Total liabilities associated with | 10,248 |
| non-current assets classified as held for | |
| sale | |
+---------------------------------------------+---------------------+
During the year ended 31 December 2008 these assets had the following cash
flows.
+--------------------------------------------+----------+----------+
| | | Year |
| | | ended |
| | | 31 |
| | |December |
| | | 2008 |
+--------------------------------------------+----------+----------+
| Operating cash flows | | 3,443 |
+--------------------------------------------+----------+----------+
| Investing cash flows | | (7,053) |
+--------------------------------------------+----------+----------+
| | | |
+--------------------------------------------+----------+----------+
| Total cash flows | | (3,610) |
+--------------------------------------------+----------+----------+
At 31 December 2008 an inventory provision of $2.1 million related to assets
held for sale was charged to record oil and oil products inventory at net
realizable value (Note 12). Additionally, impairment charges discussed in Note
7 related to the Arcticneft and Petrosakh assets were recognized.
11 Accounts Receivable and Prepayments
+--------------------------------------------+--------------------------------------------+----------+
| | Year ended 31 |
| | December: |
+ +-------------------------------------------------------+
| | 2009 | 2008 |
+--------------------------------------------+--------------------------------------------+----------+
| Loans issued to related parties (Note 26) | 6,296 | 4,882 |
+--------------------------------------------+--------------------------------------------+----------+
| Recoverable taxes including VAT | 1,627 | 1,874 |
+--------------------------------------------+--------------------------------------------+----------+
| Prepaid expenses | 1,141 | 2,557 |
+--------------------------------------------+--------------------------------------------+----------+
| Prepaid taxes | 601 | 13,883 |
+--------------------------------------------+--------------------------------------------+----------+
| Advances to suppliers | 639 | 542 |
+--------------------------------------------+--------------------------------------------+----------+
| Trade accounts and notes receivable | 86 | 2,043 |
+--------------------------------------------+--------------------------------------------+----------+
| Receivables from related parties (Note 26) | 78 | 73 |
+--------------------------------------------+--------------------------------------------+----------+
| Other | 796 | 3,058 |
+--------------------------------------------+--------------------------------------------+----------+
| | | |
+--------------------------------------------+--------------------------------------------+----------+
| Total accounts receivable and prepayments, | 11,264 | 28,912 |
| excluding assets held for sale | | |
+--------------------------------------------+--------------------------------------------+----------+
| Included in assets held for sale (Note 10) | - | 5,545 |
+--------------------------------------------+--------------------------------------------+----------+
| Total accounts receivable and prepayments: | 11,264 | 34,457 |
+--------------------------------------------+--------------------------------------------+----------+
Included in total accounts receivable and prepayments are $7.3 million and $7.9
million at 31 December 2009 and 2008, respectively, denominated in US dollars
and substantially all remaining amounts are denominated in Russian Roubles.
Trade accounts receivable arises primarily from sales to ongoing customers with
standard payment terms. The category 'Other' primarily relates to short-term
prepaid expenses, which will be expensed during 2010 and prepaid amounts to
customs and tax authorities, which will be returned to the Group either in cash
or through an off-set against future payments.
Changes in the provision for impairment of trade and other receivables related
to the recognition of a provision against receivables from related parties and
disposal of assets held for sale as follows:
+--------------------------------------------+----------+---------+
| | Year ended 31 |
| | December: |
+ +--------------------+
| | 2009 | 2008 |
+--------------------------------------------+--------------------------------------------+----------+
| | 1,243 | 664 |
| At 1 January | | |
+--------------------------------------------+----------+---------+
| Disposals of assets held for sale | - | (555) |
+--------------------------------------------+----------+---------+
| (Release) accrual of additional provision | (1,254) | 1,243 |
| against related party (Note 26) | | |
+--------------------------------------------+----------+---------+
| Effect of currency translation | 11 | (109) |
+--------------------------------------------+----------+---------+
| | - | 1,243 |
| At 31 December | | |
+--------------------------------------------+----------+---------+
The carrying values of trade and other receivables approximate their fair value.
The maximum exposure to credit risk at the reporting date is the carrying value
of each class of receivables mentioned above. The Group does not hold any
collateral as security for trade and other receivables (see Note 25 for credit
risk disclosures).
Trade and other receivables that are less than three months past due are
generally not considered for impairment unless other indicators of impairment
exist, such as indication of significant financial difficulty or bankruptcy.
Trade and other receivables of $0.1 million and $0.1 million at 31 December 2009
and 2008, respectively were past due but not impaired. The ageing analysis of
these past due but not impaired trade and other receivables are as follows:
+---------------------------------------------+---------+---------+
| | Year ended 31 |
| | December: |
+---------------------------------------------+-------------------+
| | 2009 | 2008 |
+---------------------------------------------+---------+---------+
| | | |
+---------------------------------------------+---------+---------+
| Up to 90 days past-due | 54 | - |
+---------------------------------------------+---------+---------+
| 91 to 360 days past-due | 32 | 137 |
+---------------------------------------------+---------+---------+
| Total past due but not impaired | 86 | 137 |
+---------------------------------------------+---------+---------+
No financial assets are considered to be impaired at 31 December 2009.
12 Inventories
+---------------------------------------------+----------+---------+
| | Year ended 31 |
| | December: |
+---------------------------------------------+--------------------+
| | 2009 | 2008 |
+---------------------------------------------+----------+---------+
| Crude oil (net of adjustment on net | 8,747 | 10,556 |
| realisable value of $0 million and $2.3 | | |
| million at 31 December 2009 and 2008, | | |
| respectively) | | |
+---------------------------------------------+----------+---------+
| Oil products (net of adjustment on net | 1,586 | 2,264 |
| realisable value of $0 million and $0.1 | | |
| million at 31 December 2009 and 2008, | | |
| respectively) | | |
+---------------------------------------------+----------+---------+
| Materials and supplies (net of allowances | 6,534 | 9,706 |
| of $0 million and $2.3 million at | | |
| 31 December 2009 and 2008, respectively) | | |
+---------------------------------------------+----------+---------+
| | 16,867 | 22,526 |
| Total inventories | | |
+---------------------------------------------+----------+---------+
| - Inventories of the Group, excluding the | 16,867 | 4,100 |
| portion classified as assets held for sale | | |
+---------------------------------------------+----------+---------+
| - Inventories classified as assets held for | - | 18,426 |
| sale | | |
+---------------------------------------------+----------+---------+
Inventory provision
+---------------------------------------------+---------------------------------------------+---------+
| | Year ended 31 |
| | December: |
+ +-------------------------------------------------------+
| | 2009 | 2008 |
+---------------------------------------------+---------------------------------------------+---------+
| | 4,638 | 397 |
| At 1 January | | |
+---------------------------------------------+---------------------------------------------+---------+
| Additional provisions | - | 4,307 |
+---------------------------------------------+---------------------------------------------+---------+
| Disposal of Dulisma | (2,104) | - |
+---------------------------------------------+---------------------------------------------+---------+
| Release of adjustment on net realizable | (2,462) | - |
| value | | |
+---------------------------------------------+---------------------------------------------+---------+
| Effect of currency translation | (2) | (66) |
+---------------------------------------------+---------------------------------------------+---------+
| At 31 December | 70 | 4,638 |
+---------------------------------------------+---------------------------------------------+---------+
| - Inventory provision of the Group, | 70 | 2,584 |
| excluding the portion classified as assets | | |
| held for sale | | |
+---------------------------------------------+---------------------------------------------+---------+
| - Inventory provision classified as assets | - | 2,054 |
| held for sale | | |
+---------------------------------------------+---------------------------------------------+---------+
13 Property, Plant and Equipment
+------------------+------------+-----------+-----------+----------+--------------+------------+
| | Oil | Refinery | Buildings | Other | Assets | Total |
| | and | and | | Assets | under | |
| | gas | related | | | construction | |
| | properties | equipment | | | | |
+------------------+ + + + + + +
| Cost | | | | | | |
| at | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| | 596,254 | 10,627 | 5,434 | 16,629 | 77,848 | 706,792 |
| 1 | | | | | | |
| January | | | | | | |
| 2008 | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| - PPE | 458,952 | 10,627 | 5,434 | 15,278 | 71,247 | 561,538 |
| of the | | | | | | |
| Group, | | | | | | |
| excluding | | | | | | |
| assets | | | | | | |
| held for | | | | | | |
| sale | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| - PPE | 137,302 | - | - | 1,351 | 6,601 | 145,254 |
| held | | | | | | |
| for | | | | | | |
| sale | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| Translation | (76,824) | (1,748) | (884) | (2,662) | (20,433) | (102,551) |
| difference | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| Additions | 93 | | | | 100,136 | 100,229 |
| | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| Capitalised | | | | | 5,863 | 5,863 |
| borrowing | | | | | | |
| costs (Note | | | | | | |
| 18) | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| Transfers | 38,303 | - | - | 1,871 | (40,174) | - |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| Changes | 128 | - | - | - | - | 128 |
| in | | | | | | |
| estimates | | | | | | |
| of | | | | | | |
| dismantlement | | | | | | |
| provision | | | | | | |
| (Note 19) | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| Impairment | (84,702) | (3,329) | (793) | (1,675) | (4,456) | (94,955) |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| Disposals | (108) | - | (68) | (593) | (5,332) | (6,101) |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| Disposals | (142,106) | - | - | (1,439) | (6,825) | (150,370) |
| of assets | | | | | | |
| held for | | | | | | |
| sale | | | | | | |
| (KOMI) | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| | 331,038 | 5,550 | 3,689 | 12,131 | 106,627 | 459,035 |
| 31 | | | | | | |
| December | | | | | | |
| 2008 | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| - PPE | 229,044 | - | 2,446 | 8,843 | 103,145 | 343,478 |
| of the | | | | | | |
| Group, | | | | | | |
| excluding | | | | | | |
| assets | | | | | | |
| held for | | | | | | |
| sale | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| - PPE | 101,994 | 5,550 | 1,243 | 3,288 | 3,482 | 115,557 |
| held | | | | | | |
| for | | | | | | |
| sale | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| Translation | (17,783) | (158) | (175) | (608) | (5,973) | (24,697) |
| difference | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| Reclassification | - | - | - | - | (1,794) | (1,794) |
| as assets held | | | | | | |
| for sale | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| Additions | - | - | - | - | 12,333 | 12,333 |
| | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| Capitalised | - | - | - | - | 7,567 | 7,567(*) |
| borrowing | | | | | | |
| costs (Note | | | | | | |
| 18) | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| Transfers | 8,033 | 3 | 380 | 34 | (8,450) | - |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| Impairment | (122,127) | - | - | - | - | (122,127) |
| provision | | | | | | |
| (Note 7) | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| Disposals | (2) | (1) | - | (3,137) | (187) | (3,327) |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| Disposals | (107,168) | - | (2,687) | (3,324) | (106,680) | (219,859) |
| of assets | | | | | | |
| held for | | | | | | |
| sale | | | | | | |
| (Dulisma, | | | | | | |
| Chepetskoye) | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
| | 91,991 | 5,394 | 1,207 | 5,096 | 3,443 | 107,131 |
| 31 | | | | | | |
| December | | | | | | |
| 2009 | | | | | | |
+------------------+------------+-----------+-----------+----------+--------------+------------+
(*)Total amount of interest capitalized relates to Dulisma assets under
construction which were disposed with transfer of Dulisma to Sberbank.
13 Property, Plant and Equipment (continued)
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| | Oil | Refinery | Buildings | Other | Assets | Total |
| | and | and | | Assets | under | |
| | gas | related | | | construction | |
| | properties | equipment | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| Accumulated | | | | | | |
| Depreciation, | | | | | | |
| Amortization | | | | | | |
| and Depletion | | | | | | |
| at | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| | (55,722) | (1,792) | (964) | (3,939) | - | (62,417) |
| 1 | | | | | | |
| January | | | | | | |
| 2008 | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| - PPE | (36,831) | (1,792) | (964) | (3,628) | - | (43,215) |
| of the | | | | | | |
| Group, | | | | | | |
| excluding | | | | | | |
| assets | | | | | | |
| held for | | | | | | |
| sale | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| - PPE | (18,891) | - | - | (311) | - | (19,202) |
| held | | | | | | |
| for | | | | | | |
| sale | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| Translation | 7,797 | 372 | 196 | 812 | - | 9,177 |
| difference | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| Depreciation | (15,935) | (500) | (254) | (1,754) | - | (18,443) |
| | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| Disposals | 43 | - | 14 | 346 | - | 403 |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| Disposals | 19,599 | - | - | 324 | - | 19,923 |
| of assets | | | | | | |
| held for | | | | | | |
| sale | | | | | | |
| (KOMI) | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| | (44,218) | (1,920) | (1,008) | (4,211) | - | (51,357) |
| 31 | | | | | | |
| December | | | | | | |
| 2008 | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| - PPE | (3,361) | - | (424) | (2,725) | - | (6,510) |
| of the | | | | | | |
| Group, | | | | | | |
| excluding | | | | | | |
| assets | | | | | | |
| held for | | | | | | |
| sale | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| - PPE | (40,857) | (1,920) | (584) | (1,486) | - | (44,847) |
| held | | | | | | |
| for | | | | | | |
| sale | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| Translation | 1,987 | 41 | 38 | 157 | - | 2,223 |
| difference | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| Depreciation | (3,982) | (293) | (77) | (225) | - | (4,577) |
| | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| Disposals | 2 | 1 | - | 347 | - | 350 |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| Disposals | 7,428 | - | 399 | 927 | - | 8,754 |
| of assets | | | | | | |
| held for | | | | | | |
| sale | | | | | | |
| (Dulisma, | | | | | | |
| Chepetskoye) | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| 31 | (38,783) | (2,171) | (648) | (3,005) | - | (44,607) |
| December | | | | | | |
| 2009 | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| | Oil | Refinery | Buildings | Other | Assets | Total |
| | and | and | | Assets | under | |
| | gas | related | | | construction | |
| | properties | equipment | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| Net | | | | | | |
| Book | | | | | | |
| Value | | | | | | |
| at | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| | 286,820 | 3,630 | 2,681 | 7,920 | 106,627 | 407,678 |
| 31 | | | | | | |
| December | | | | | | |
| 2008 | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| - PPE | 225,683 | - | 2,022 | 6,118 | 103,145 | 336,968 |
| of the | | | | | | |
| Group, | | | | | | |
| excluding | | | | | | |
| assets | | | | | | |
| held for | | | | | | |
| sale | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| - PPE | 61,137 | 3,630 | 659 | 1,802 | 3,482 | 70,710 |
| held | | | | | | |
| for | | | | | | |
| sale | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
| | 53,208 | 3,223 | 559 | 2,091 | 3,443 | 62,524 |
| 31 | | | | | | |
| December | | | | | | |
| 2009 | | | | | | |
+-------------------+------------+-----------+-----------+----------+--------------+-----------+
Included within oil and gas properties at 31 December 2009 and 2008 were
exploration and evaluation assets:
13 Property, Plant and Equipment (continued)
+----------------------------+----------------+-----------+------------+------------+----------+--------+----------+----------+----------+----------+----------+
| | Cost at 31 | Additions | Transfers | | Disposals; disposal of | Translation | Cost | |
| | December 2008 | | to | Disposals: | assets held for sale | difference | at 31 | |
| | | | tangible | Impairment | | | December | |
| | | | part of | loss | | | 2009 | |
| | | | Oil and | | | | | |
| | | | Gas | | | | | |
| | | | properties | | | | | |
+----------------------------+----------------+-----------+------------+------------+------------------------------+---------------------+----------+----------+
| | | | |
+----------------------------------------------------------------------------------------------+--------+---------------------+--------------------------------+
| Exploration and evaluation assets | | | |
+----------------------------------------------------------------------------------------------+--------+---------------------+--------------------------------+
| | | | | | | | | |
+----------------------------+----------------+-----------+------------+------------+------------------------------+---------------------+----------+----------+
| Dulisma | 144,256 | - | - | (122,127) | (13,531) | (8,598) | - | |
+----------------------------+----------------+-----------+------------+------------+------------------------------+---------------------+----------+----------+
| Arcticneft | 7,632 | - | - | - | - | (218) | 7,414 | |
+----------------------------+----------------+-----------+------------+------------+------------------------------+---------------------+----------+----------+
| Petrosakh | 18,209 | - | - | - | - | (4,837) | 13,372 | |
+----------------------------+----------------+-----------+------------+------------+------------------------------+---------------------+----------+----------+
| Chepetskoye | 1,139 | - | - | - | (929) | (210) | - | |
+----------------------------+----------------+-----------+------------+------------+------------------------------+---------------------+----------+----------+
| Total cost of exploration | 171,236 | - | - | (122,127) | (14,460) | (13,863) | 20,786 | |
| and evaluation assets | | | | | | | | |
+----------------------------+----------------+-----------+------------+------------+------------------------------+---------------------+----------+----------+
| | | | | | | | | | | | |
+----------------------------+----------------+-----------+------------+------------+----------+--------+----------+----------+----------+----------+----------+
+----------------------------+----------------+-----------+------------+------------+--------+----------+----------+----------+--------+----------+
| | Cost at 31 | Additions | | | Disposals; | Translation | Cost at 31 |
| | December 2007 | | Transfers | Disposals: | disposal of | difference | December 2008 |
| | | | to | Impairment | assets held for | | |
| | | | tangible | loss | sale | | |
| | | | part of | | | | |
| | | | Oil and | | | | |
| | | | Gas | | | | |
| | | | properties | | | | |
+----------------------------+----------------+-----------+------------+------------+-------------------+---------------------+-------------------+
| | | | | |
+-----------------------------------------------------------------------------------+--------+---------------------+-------------------+----------+
| Exploration and evaluation assets | | | | |
+-----------------------------------------------------------------------------------+--------+---------------------+-------------------+----------+
| | | | | | | | |
+----------------------------+----------------+-----------+------------+------------+-------------------+---------------------+-------------------+
| Dulisma | 172,666 | - | - | - | - | (28,410) | 144,256 |
+----------------------------+----------------+-----------+------------+------------+-------------------+---------------------+-------------------+
| Arcticneft | 20,995 | - | - | (9,908) | - | (3,455) | 7,632 |
+----------------------------+----------------+-----------+------------+------------+-------------------+---------------------+-------------------+
| Petrosakh | 43,351 | - | - | (18,478) | - | (6,664) | 18,209 |
+----------------------------+----------------+-----------+------------+------------+-------------------+---------------------+-------------------+
| Chepetskoye | 8,461 | - | - | (5,930) | - | (1,392) | 1,139 |
+----------------------------+----------------+-----------+------------+------------+-------------------+---------------------+-------------------+
| Dinyu | 71,878 | 90 | - | - | (75,269) | 3,301 | - |
+----------------------------+----------------+-----------+------------+------------+-------------------+---------------------+-------------------+
| CNPSEI | 92 | - | - | - | (77) | (15) | - |
+----------------------------+----------------+-----------+------------+------------+-------------------+---------------------+-------------------+
| Total cost of exploration | 317,443 | 90 | | (34,316) | (75,346) | (36,635) | 171,236 |
| and evaluation assets | | | - | | | | |
+----------------------------+----------------+-----------+------------+------------+-------------------+---------------------+-------------------+
| | | | | | | | | | | |
+----------------------------+----------------+-----------+------------+------------+--------+----------+----------+----------+--------+----------+
Cash flows associated with exploration and evaluation assets during the years
ended 31 December 2009 and 2008 were as follows:
+------------------------------------+--------------+-------------+
| | Year ended 31 December: |
+------------------------------------+----------------------------+
| | 2009 | 2008 |
+------------------------------------+--------------+-------------+
| Cash flows used in operating | - | 90 |
| activities | | |
+------------------------------------+--------------+-------------+
| Cash flows used in investing | - | - |
| activities | | |
+------------------------------------+--------------+-------------+
| Total cash used for exploration | - | 90 |
| and evaluation of assets | | |
+------------------------------------+--------------+-------------+
The Group's oil fields are situated in the Russian Federation on land owned by
the Russian government. The Group holds licenses and associated mining plots and
pays production taxes to extract oil and gas from the fields. The licenses
expire between 2012 and 2067, but may be extended. Management intends to renew
the licences as the properties are expected to remain productive subsequent to
the license expiration date.
Estimated costs of dismantling oil and gas production facilities, including
abandonment and site restoration costs, amounting to $0.2 million and $0.3
million (including $0.0 million and $0.3 million recorded within assets held for
sale) at 31 December 2009 and 2008, respectively, are included in the cost of
oil and gas properties. The Group has estimated its liability based on current
environmental legislation using estimated costs when the expenses are expected
to be incurred.
Following a sharp decrease in crude oil prices at the end of 2008 the Group
recognised an impairment in respect of property plant and equipment of
Arcticneft as of 31 December 2008 in the amount of $73.7 million (see Note 7)
and wrote off exploration and evaluation costs in the amount of $4.8 million.
The write off of the exploration and evaluation costs relates to exploration
expenses previously capitalised on the license block on Petrosakh for which the
Group has no further plans as reserves were confirmed to be non-economic for
further exploration and development.
Included within disposals of assets under construction were costs related to
unsuccessful drilling in the amount of $2.6 recorded within assets held for sale
in 2008.
At 31 December 2009 and 2008, no property, plant and equipment were pledged as
collateral for the Group's borrowings.
14 Other Non-Current Assets
+----------------------------------------------+----------------------------------------------+----------+
| | Year ended 31 |
| | December: |
+ +---------------------------------------------------------+
| | 2009 | 2008 |
+----------------------------------------------+----------------------------------------------+----------+
| | | |
+----------------------------------------------+----------------------------------------------+----------+
| Loans receivable | 34,438 | 31,066 |
+----------------------------------------------+----------------------------------------------+----------+
| Advances to contractors and suppliers | 461 | 8,195 |
| for construction in process | | |
+----------------------------------------------+----------------------------------------------+----------+
| Intangible assets | 431 | 624 |
+----------------------------------------------+----------------------------------------------+----------+
| Other Non-Current Assets, excluding the | 35,330 | 39,885 |
| portion classified as assets held for sale | | |
+----------------------------------------------+----------------------------------------------+----------+
| Other Non-Current Assets, excluding the | - | 1,084 |
| portion classified as assets held for sale | | |
+----------------------------------------------+----------------------------------------------+----------+
| Total other non-current assets | 35,330 | 40,969 |
+----------------------------------------------+----------------------------------------------+----------+
Loans receivable represent US dollar denominated long-term loans (interest
inclusive) of $34.4 million and $31.1 million at 31 December 2009 and 2008,
respectively, issued by UEPCL to Taas, as part of the Taas acquisition
agreement. The loans were used to pay organisation fees for a $600.0 million
project finance loan facility provided by Savings Bank of Russian Federation
("Sberbank") for the development of the SRB field, financing of interest
payments and repayment of third party loans at Taas. The loans bear interest of
12% and mature in February 2015. The fair value of the loans approximates the
carrying value at the reporting date. These loans are considered to be fully
performing as of 31 December 2009. The loans are unsecured.
15 Accounts Payable and Accrued Expenses
+---------------------------------------------+---------------------------------------------+----------+
| | Year ended 31 |
| | December: |
+ +--------------------------------------------------------+
| | 2009 | 2008 |
+---------------------------------------------+---------------------------------------------+----------+
| | | |
+---------------------------------------------+---------------------------------------------+----------+
| Trade payables | 9,430 | 949 |
+---------------------------------------------+---------------------------------------------+----------+
| Payable to Finfund Ltd. | 6,572 | 3,607 |
+---------------------------------------------+---------------------------------------------+----------+
| Accounts payable for construction in | 710 | 18,823 |
| process | | |
+---------------------------------------------+---------------------------------------------+----------+
| Wages and salaries | 1,634 | 624 |
+---------------------------------------------+---------------------------------------------+----------+
| Advances from and payables to related | 13 | 74 |
| parties (Note 26) | | |
+---------------------------------------------+---------------------------------------------+----------+
| Other payable and accrued expenses | 2,338 | 1,953 |
+---------------------------------------------+---------------------------------------------+----------+
| Accounts payable and accrued expenses, | 20,697 | 26,030 |
| excluding the portion classified as | | |
| liabilities held for sale | | |
+---------------------------------------------+---------------------------------------------+----------+
| Accounts payable and accrued expenses, | - | 2,881 |
| classified as liabilities held for sale | | |
+---------------------------------------------+---------------------------------------------+----------+
| Total accounts payable and accrued | 20,697 | 28,911 |
| expenses | | |
+---------------------------------------------+---------------------------------------------+----------+
Total accounts payable and accrued expenses in the amount of $9.1 million and
$9.1 million at 31 December 2009 and 2008, respectively, are denominated in US
dollars and substantially all remaining amounts are denominated in Russian
Roubles.
16 Advances from customers
+---------------------------------------------+----------+--------+
| | Year ended 31 |
| | December: |
+ +-------------------+
| | 2009 | 2008 |
+---------------------------------------------+---------------------------------------------+----------+
| Kresov | 1,171 | - |
+---------------------------------------------+----------+--------+
| Rusproduct | 202 | - |
+---------------------------------------------+----------+--------+
| Petraco | - | 49,418 |
+---------------------------------------------+----------+--------+
| Galaform | - | 5,474 |
+---------------------------------------------+----------+--------+
| Other | 717 | 886 |
+---------------------------------------------+----------+--------+
| | 2,090 | 55,778 |
| Advances from customers, excluding the | | |
| portion classified as liabilities held for | | |
| sale | | |
+---------------------------------------------+----------+--------+
| Advances from customers, classified as | - | 150 |
| liabilities held for sale | | |
+---------------------------------------------+----------+--------+
| Total advances from customers | 2,090 | 55,928 |
+---------------------------------------------+----------+--------+
Petraco Revolving Prepayment Agreement. In July 2007, the Group entered into a
five year revolving prepayment agreement with Petraco. Under the terms of the
agreement, US dollar denominated prepayments shall be made to the Group in one
or more advances against specified future deliveries of agreed volumes of crude
oil to be sold to Petraco. Interest accrues at LIBOR plus 5.00% on prepayments
for which the related volumes have not been delivered, and LIBOR plus 1% on
prepayments where Petraco pays 30 days before the bill of lading, in order to
mirror normal commercial payment terms. During 2008 the maximum borrowing base
was increased from $50.0 million to $60.0 million.
In December 2008 the original repayment schedule has been modified to take into
account decreased oil prices and Company's financial position. Under this
schedule Company would have to decrease the amount outstanding to USD 25 million
by July 1, 2009 with the remaining balance payable by deliveries to be made in
2009 and 2010. Subsequent to the year-end management realized that the proposed
repayment schedule was not feasible, and the Company proposed an amendment to
the repayment schedule allowing for a more gradual repayment of the currently
outstanding USD 33.9 million in 2009 and 2010 and providing additional security
to the Lender. At the date of preparation of these consolidated financials
statements the Company and Petraco have agreed on the restructuring of that
liability (Note 27). For the purposes of these financials the balance
outstanding to Petraco as of 31 December 2009 was reclassified into short-term
borrowings as the balance must now be paid in cash only.
Galaform domestic crude oil prepayment agreement.In February 2009 the Group
transferred its interest in Chepetskoye to Galaform in return for the discharge
of the remaining amount of the prepayment (Note 9).
17 Taxes
Income taxes for the years ended 31 December 2009 and 2008 comprised the
following:
+----------------+-----------+----------+
| | Year ended 31 |
| | December: |
+ +----------------------+
| | 2009 | 2008 |
+----------------+-----------+----------+
| | (564) | 901 |
| Current | | |
| tax | | |
| expense | | |
+----------------+-----------+----------+
| Accrual | - | 1,862 |
| (release) | | |
| of income | | |
| tax | | |
| provision | | |
+----------------+-----------+----------+
| Deferred | (28,471) | (40,140) |
| tax | | |
| benefit | | |
+----------------+-----------+----------+
| | (29,035) | (37,377) |
| Income | | |
| tax | | |
| benefit | | |
+----------------+-----------+----------+
Below is a reconciliation of profit before taxation to income tax charge
(benefit):
+----------------------------------------------+----------------------------------------------+------------+
| | Year ended 31 |
| | December: |
+ +-----------------------------------------------------------+
| | 2009 | 2008 |
+----------------------------------------------+----------------------------------------------+------------+
| | (333,050) | (440,626) |
| Loss before income tax | | |
+----------------------------------------------+----------------------------------------------+------------+
| Theoretical tax (benefit) charge at the | (66,610) | (105,750) |
| statutory rate of 20% (2008: 24%) | | |
+----------------------------------------------+----------------------------------------------+------------+
| Effect of recalculation at 31 December 2008 | - | (7,712) |
| DTA/DTL at 20% | | |
+----------------------------------------------+----------------------------------------------+------------+
| | | |
+----------------------------------------------+----------------------------------------------+------------+
| Income tax refund | (564) | - |
+----------------------------------------------+----------------------------------------------+------------+
| Reversal of previously recognized DTA on | - | 1,974 |
| loss carry forward | | |
+----------------------------------------------+----------------------------------------------+------------+
| Unrecognised tax loss carry forward for the | 26,646 | 40,104 |
| year | | |
+----------------------------------------------+----------------------------------------------+------------+
| Accrual of income tax provision | - | 1,862 |
+----------------------------------------------+----------------------------------------------+------------+
| Effect of tax penalties | - | 46 |
+----------------------------------------------+----------------------------------------------+------------+
| Expenses taxable at other tax rate | 9,033 | 29,903 |
+----------------------------------------------+----------------------------------------------+------------+
| Other non-deductible expenses | 2,460 | 2,196 |
+----------------------------------------------+----------------------------------------------+------------+
| | (29,035) | (37,377) |
| Income tax benefit | | |
+----------------------------------------------+----------------------------------------------+------------+
The movements in deferred tax assets and liabilities during the years ended 31
December 2009 were as follows:
+--------------------+--------+-------------+---------------+-----------+--------+
| | 2008 | Recognized | Credited | Effect | 2007 |
| | | in equity | (charged) | of | |
| | | for | to the | disposals | |
| | | translation | consolidated | | |
| | | differences | statement of | | |
| | | | comprehensive | | |
| | | | income | | |
+--------------------+--------+-------------+---------------+-----------+--------+
| Deferred | | | | | |
| income | | | | | |
| tax | | | | | |
| liabilities | | | | | |
+--------------------+--------+-------------+---------------+-----------+--------+
| Inventories | - | (4) | - | 74 | (70) |
+--------------------+--------+-------------+---------------+-----------+--------+
| Property, | (91) | 20 | (111) | - | - |
| plant and | | | | | |
| equipment | | | | | |
+--------------------+--------+-------------+---------------+-----------+--------+
| | | | | | |
+--------------------+--------+-------------+---------------+-----------+--------+
| Deferred | | | | | |
| income | | | | | |
| tax | | | | | |
| assets | | | | | |
+--------------------+--------+-------------+---------------+-----------+--------+
| Property, | - | 12 | 156 | (263) | 95 |
| plant and | | | | | |
| equipment | | | | | |
+--------------------+--------+-------------+---------------+-----------+--------+
| Receivables | - | (2) | (85) | - | 87 |
+--------------------+--------+-------------+---------------+-----------+--------+
| Payables | 38 | (9) | 47 | - | - |
+--------------------+--------+-------------+---------------+-----------+--------+
| Dismantlement | - | 25 | - | (565) | 540 |
| provision | | | | | |
+--------------------+--------+-------------+---------------+-----------+--------+
| Other | 53 | 30 | 23 | - | - |
| deductible | | | | | |
| temporary | | | | | |
| differences | | | | | |
+--------------------+--------+-------------+---------------+-----------+--------+
| Tax | - | (25) | (1,974) | - | 1,999 |
| losses | | | | | |
+--------------------+--------+-------------+---------------+-----------+--------+
| | - | 47 | (1,944) | (754) | 2,651 |
| Net | | | | | |
| deferred | | | | | |
| income | | | | | |
| tax | | | | | |
| assets | | | | | |
+--------------------+--------+-------------+---------------+-----------+--------+
| Net | - | 14 | (1,939) | - | 1,925 |
| deferred | | | | | |
| tax | | | | | |
| assets | | | | | |
| of the | | | | | |
| Group, | | | | | |
| excluding | | | | | |
| those | | | | | |
| classified | | | | | |
| as assets | | | | | |
| held for | | | | | |
| sale | | | | | |
+--------------------+--------+-------------+---------------+-----------+--------+
| Net | - | - | - | - | - |
| deferred | | | | | |
| tax | | | | | |
| assets | | | | | |
| classified | | | | | |
| as assets | | | | | |
| held for | | | | | |
| sale at 31 | | | | | |
| December | | | | | |
| 2008 | | | | | |
+--------------------+--------+-------------+---------------+-----------+--------+
| Net | - | 33 | (5) | (754) | 726 |
| deferred | | | | | |
| tax | | | | | |
| assets | | | | | |
| classified | | | | | |
| as assets | | | | | |
| held for | | | | | |
| sale at 31 | | | | | |
| December | | | | | |
| 2007 | | | | | |
+--------------------+--------+-------------+---------------+-----------+--------+
17 Taxes (continued)
+--------------------+----------+-------------+---------------+-----------+-----------+
| | 2008 | Recognized | Credited | Effect | 2007 |
| | | in equity | (charged) | of | |
| | | for | to the | disposals | |
| | | translation | consolidated | | |
| | | differences | statement of | | |
| | | | comprehensive | | |
| | | | income | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Deferred | | | | | |
| income | | | | | |
| tax | | | | | |
| liabilities | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Property, | (48,262) | 15, 304 | 31,199 | 20,400 | (115,165) |
| plant and | | | | | |
| equipment | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Inventories | (1,474) | 435 | (169) | 20 | (1,760) |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Payables | - | - | 54 | 4 | (58) |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Other | (34) | (146) | 450 | - | (338) |
| taxable | | | | | |
| temporary | | | | | |
| differences | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Deferred | | | | | |
| income | | | | | |
| tax | | | | | |
| assets | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Receivables | 209 | (70) | 172 | (192) | 299 |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Dismantlement | 288 | (68) | 4 | (89) | 441 |
| provision | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Payables | 315 | (73) | 18 | - | 370 |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Inventories | 645 | (36) | 726 | (45) | - |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Other | 5 | 2 | 3 | | |
| deductible | | | | | |
| temporary | | | | | |
| differences | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Tax | 10,534 | (2,343) | 9,627 | - | 3,250 |
| losses | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| | (37,774) | 13,005 | 42,084 | 20,098 | (112,961) |
| Net | | | | | |
| deferred | | | | | |
| income | | | | | |
| tax | | | | | |
| liabilities | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Net | (34,344) | 8,277 | 17,825 | - | (60,446) |
| deferred | | | | | |
| tax | | | | | |
| liabilities | | | | | |
| of the | | | | | |
| Group, | | | | | |
| excluding | | | | | |
| the portion | | | | | |
| classified | | | | | |
| as | | | | | |
| liabilities | | | | | |
| directly | | | | | |
| associated | | | | | |
| with | | | | | |
| non-current | | | | | |
| assets | | | | | |
| classified | | | | | |
| as held for | | | | | |
| sale | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Net | (3,430) | 5,387 | 24,572 | - | (33,389) |
| deferred | | | | | |
| tax | | | | | |
| liabilities | | | | | |
| classified | | | | | |
| as | | | | | |
| liabilities | | | | | |
| directly | | | | | |
| associated | | | | | |
| with | | | | | |
| non-current | | | | | |
| assets | | | | | |
| classified | | | | | |
| as held for | | | | | |
| sale at 31 | | | | | |
| December | | | | | |
| 2008 | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Net | - | (659) | (313) | 20,098 | (19,126) |
| deferred | | | | | |
| tax | | | | | |
| liabilities | | | | | |
| classified | | | | | |
| as | | | | | |
| liabilities | | | | | |
| directly | | | | | |
| associated | | | | | |
| with | | | | | |
| non-current | | | | | |
| assets | | | | | |
| classified | | | | | |
| as held for | | | | | |
| sale at 31 | | | | | |
| December | | | | | |
| 2007 | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
17 Taxes (continued)
+--------------------+----------+-------------+---------------+-----------+-----------+
| | 2009 | Recognized | Credited | Effect | 2008 |
| | | in equity | (charged) | of | |
| | | for | to the | disposals | |
| | | translation | consolidated | | |
| | | differences | statement of | | |
| | | | comprehensive | | |
| | | | income | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Deferred | | | | | |
| tax | | | | | |
| liabilities | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Property, | (4,631) | 2,825 | 22,436 | 18,461 | (48,353) |
| plant and | | | | | |
| equipment | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Inventories | 54 | 77 | 1,335 | (529) | (829) |
+--------------------+----------+-------------+---------------+-----------+-----------+
| | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Deferred | | | | | |
| tax | | | | | |
| assets | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Receivables | 43 | (12) | (27) | (127) | 209 |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Dismantlement | 245 | (17) | 27 | (53) | 288 |
| provision | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Payables | 276 | (13) | (51) | (14) | 354 |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Tax | - | (545) | 5,375 | (15,365) | 10,535 |
| losses | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Other | 92 | (8) | (624) | 702 | 22 |
| | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| | (3,921) | 2,307 | 28,471 | 3,075 | (37,774) |
| Net | | | | | |
| deferred | | | | | |
| tax | | | | | |
| liabilities | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Net | - | - | - | 3,430 | (3,430) |
| deferred | | | | * | |
| tax | | | | | |
| liabilities | | | | | |
| classified | | | | | |
| as | | | | | |
| liabilities | | | | | |
| directly | | | | | |
| associated | | | | | |
| with | | | | | |
| non-current | | | | | |
| assets | | | | | |
| classified | | | | | |
| as held for | | | | | |
| sale at 31 | | | | | |
| December | | | | | |
| 2008 | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
| Net | (3,921) | 2,307 | 28,471 | (355) | (34,344) |
| deferred | | | | | |
| tax | | | | | |
| liabilities | | | | | |
| of the | | | | | |
| Group, | | | | | |
| excluding | | | | | |
| the portion | | | | | |
| classified | | | | | |
| as | | | | | |
| liabilities | | | | | |
| directly | | | | | |
| associated | | | | | |
| with | | | | | |
| non-current | | | | | |
| assets | | | | | |
| classified | | | | | |
| as held for | | | | | |
| sale | | | | | |
+--------------------+----------+-------------+---------------+-----------+-----------+
*The amount includes reversal of deferred tax liability in relation to change of
treatment for the assets held for sale.
The Group is subject to corporation tax on taxable profits at the rate of 10%.
Most of the individual operating entities are taxed in the Russian Federation at
the rate of 20%. Under certain conditions interest may be subject to defence
contribution at the rate of 10%. In such cases 50% of the same interest will be
exempt from corporation tax thus having an effective tax rate burden of
approximately 15%. In certain cases dividends received from abroad may be
subject to defence contribution at the rate of 15%.
There is no concept of consolidated tax returns in the Russian Federation and,
consequently, tax losses and current tax assets of different subsidiaries cannot
be set off against tax liabilities and taxable profits of other subsidiaries.
Accordingly, taxes may accrue even where there is a net consolidated tax loss.
Similarly, deferred tax assets of one subsidiary cannot be offset against
deferred tax liabilities of another subsidiary. At 31 December 2009 and 2008,
deferred tax assets of $71.6 million and $45.6 million, respectively, have not
been recognized for deductible temporary differences for which it is not
probable that sufficient taxable profit will be available to allow the benefit
of that deferred tax assets to be utilised. Accumulated tax losses were $584.9
million and $409.6 million at 31 December 2009 and 2008, respectively; of which
$453.7 million in 2009 and $363.4 million in 2008 can be carried forward
indefinitely. The remaining $131.1 million of the accumulated tax losses at 31
December 2009 expire in 2014-2019 years and of the remaining $46.2 million at 31
December 2008 expire in 2014-2018.
An income tax rate of 20% has been enacted in the Russian Federation in November
2008 which becomes effective starting from 1 January 2009. As this tax rate was
enacted by 31 December 2008, the effect of the change on closing deferred tax
liabilities (assets) amounted to $7.7 million has been recognised in previous
reporting period.
Other taxes payable at 31 December 2009 and 2008 were as follows:
+------------------------------------------------+------------------------------------------------+--------+
| | Year ended 31 |
| | December: |
+ +---------------------------------------------------------+
| | 2009 | 2008 |
+------------------------------------------------+------------------------------------------------+--------+
| Unified production tax | 2,227 | 940 |
+------------------------------------------------+------------------------------------------------+--------+
| Other taxes payable | 133 | 728 |
+------------------------------------------------+------------------------------------------------+--------+
| Other tax provisions | - | 252 |
+------------------------------------------------+------------------------------------------------+--------+
| | 2,360 | 1,920 |
| Total other taxes payable | | |
+------------------------------------------------+------------------------------------------------+--------+
| Net other taxes payable of the Group, | 2,360 | 402 |
| excluding that classified as held for sale | | |
+------------------------------------------------+------------------------------------------------+--------+
| Net other taxes payable classified as held for | - | 1,518 |
| sale | | |
+------------------------------------------------+------------------------------------------------+--------+
Other tax provisions
+------------------------------------------------+--------+--------+
| | Year ended 31 |
| | December: |
+------------------------------------------------+-----------------+
| | 2009 | 2008 |
+------------------------------------------------+--------+--------+
| Tax provision at 1 January | 252 | 529 |
+------------------------------------------------+--------+--------+
| Release of tax provision: | | |
+------------------------------------------------+--------+--------+
| Excise tax | (199) | - |
+------------------------------------------------+--------+--------+
| VAT | - | (167) |
+------------------------------------------------+--------+--------+
| Other | - | (22) |
+------------------------------------------------+--------+--------+
| Effect of currency translation | (53) | (88) |
+------------------------------------------------+--------+--------+
| | - | 252 |
| Tax provisions at 31 December | | |
+------------------------------------------------+--------+--------+
| Net tax provisions of the Group, excluding | - | 38 |
| that classified as held for sale | | |
+------------------------------------------------+--------+--------+
| Net tax provisions classified as held for sale | - | 214 |
+------------------------------------------------+--------+--------+
In 2009 and 2008 the Group released $0.2 and $0.2 million tax risks due to
expiration of limitation period.
18 Borrowings
Short-term borrowings. Short-term borrowings were as follows at 31 December
2009 and 2008:
+-------------------------------------------------+-------------------------------------------------+-----------+
| | Year ended 31 |
| | December: |
+ +-------------------------------------------------------------+
| | 2009 | 2008 |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Sberbank acquisition loan | - | 499,635 |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Sberbank field development loan | - | 130,000 |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Sberbank loan interest | - | 2,337 |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Petraco | | |
+-------------------------------------------------+-------------------------------------------------+-----------+
| - principal | 30,722 | - |
+-------------------------------------------------+-------------------------------------------------+-----------+
| - interest | 3,195 | 1,429 |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Other | 61 | 114 |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Total short-term borrowings | 33,978 | 633,515 |
+-------------------------------------------------+-------------------------------------------------+-----------+
Sberbank. As of 31 December 2008 both loans were overdue. In 2009 the Company
sold its 100% interest in Dulisma (August 2009) and 35.3% interest in Taas
(November 2009) for the full discharge of the Company's debt to Sberbank Capital
plus assumption of all trade accounts payable accrued by Dulisma and Taas at the
date of the transaction.
Petraco. The outstanding amount of USD 33.9 million (including USD 3.2 million
of interest) due to Petraco was recorded as short-term debt as of 31 December
2009.
Weighted average interest rate. The Group's weighted average interest rates on
short-term borrowings were 17.2% and 14.0% at 31 December 2009 and 2008,
respectively.
Interest expense and income. Interest expense and income for the years ended 31
December 2009 and 2008, respectively, comprised the following:
+----------------------------------------+-----------+-----------+
| | Year ended 31 |
| | December: |
+----------------------------------------+-----------------------+
| | 2009 | 2008 |
+----------------------------------------+-----------+-----------+
| | | |
+----------------------------------------+-----------+-----------+
| Short-term borrowings | | |
+----------------------------------------+-----------+-----------+
| Sberbank | | |
+----------------------------------------+-----------+-----------+
| - interest at coupon rate | - | 77,959 |
+----------------------------------------+-----------+-----------+
| - accretion of issuance costs | - | 16,005 |
+----------------------------------------+-----------+-----------+
| - interest at penalty rate | 86,244 | - |
+----------------------------------------+-----------+-----------+
| Evrofinance | - | 408 |
+----------------------------------------+-----------+-----------+
| | | |
+----------------------------------------+-----------+-----------+
| Total interest expense associated with | 86,244 | 94,372 |
| short-term borrowings | | |
+----------------------------------------+-----------+-----------+
| | | |
+----------------------------------------+-----------+-----------+
| Finfund pledge fee | 3,083 | 3,636 |
+----------------------------------------+-----------+-----------+
| Interest on advance from Petraco Oil | 2,211 | 5,661 |
| Company Limited | | |
+----------------------------------------+-----------+-----------+
| Finance leases | 189 | 271 |
+----------------------------------------+-----------+-----------+
| Change in dismantlement provision due | 134 | 138 |
| to passage of time (Note 19) | | |
+----------------------------------------+-----------+-----------+
| Interest on advance from Galaform | 107 | 175 |
+----------------------------------------+-----------+-----------+
| Less capitalised borrowing costs (*) | - | (5,863) |
+----------------------------------------+-----------+-----------+
| Other interest | - | 61 |
+----------------------------------------+-----------+-----------+
| Total interest expense | 91,968 | 98,451 |
+----------------------------------------+-----------+-----------+
| | | |
+----------------------------------------+-----------+-----------+
| Interest income | | |
+----------------------------------------+-----------+-----------+
| Interest on loan issued to TYNGD | (3,372) | - |
+----------------------------------------+-----------+-----------+
| Related party loans issued (Note 26) | (686) | (3,704) |
+----------------------------------------+-----------+-----------+
| Sberbank promissory notes | - | (1,737) |
+----------------------------------------+-----------+-----------+
| Bank deposit | - | (70) |
+----------------------------------------+-----------+-----------+
| Other | (117) | (143) |
+----------------------------------------+-----------+-----------+
| Total interest income | (4,175) | (5,654) |
+----------------------------------------+-----------+-----------+
| | 87,793 | 92,797 |
| Total finance costs | | |
+----------------------------------------+-----------+-----------+
The capitalisation rates used to determine the amount of borrowing costs
eligible for capitalisation were 16.5% and 14.0% in 2009 and 2008, respectively.
(*) Total capitalized interest in Dulisma for the period January - July 2009 in
the amount of $7.6 million was shown net with loss from the disposal of Dulisma.
19 Dismantlement Provision
The dismantlement provision represents the net present value of the estimated
future obligation for dismantlement, abandonment and site restoration costs
which are expected to be incurred at the end of the production lives of the oil
and gas fields, which vary from 10 to 40 years depending on the field and type
of assets. The discount rate used to calculate the net present value of the
dismantling liability was 13.0%.
+------------------------------------------------+------------------------------------------------+---------+
| | Year ended 31 |
| | December: |
+ +----------------------------------------------------------+
| | 2009 | 2008 |
+------------------------------------------------+------------------------------------------------+---------+
| Opening dismantlement provision | 1,438 | 4,086 |
+------------------------------------------------+------------------------------------------------+---------+
| Translation difference | (49) | (311) |
+------------------------------------------------+------------------------------------------------+---------+
| Additions | - | 2 |
+------------------------------------------------+------------------------------------------------+---------+
| Disposals | (300) | (2,605) |
+------------------------------------------------+------------------------------------------------+---------+
| Changes in estimates | - | 128 |
+------------------------------------------------+------------------------------------------------+---------+
| Change due to passage of time | 134 | 138 |
+------------------------------------------------+------------------------------------------------+---------+
| | 1,223 | 1,438 |
| Closing dismantlement provision | | |
+------------------------------------------------+------------------------------------------------+---------+
| Dismantlement provision, excluding that | 1,223 | 15 |
| classified as held for sale | | |
+------------------------------------------------+------------------------------------------------+---------+
| Dismantlement provision classified as held for | - | 1,423 |
| sale | | |
+------------------------------------------------+------------------------------------------------+---------+
As further discussed in Note 24, environmental regulations and their enforcement
are being developed by governmental authorities. Consequently, the ultimate
dismantlement, abandonment and site restoration obligation may differ from the
estimated amounts, and this difference could be significant.
20 Equity
Redenomination of shares. Following the adoption of the Euro on 1 January 2008
as the official currency of the Republic of Cyprus, replacing the Cyprus Pound,
the Company was obliged to convert its authorised and issued share capital first
to Euro and subsequently was permitted to change to any other approved currency.
On 22 January 2008 following the Extraordinary General Meeting, the Company
converted its shares first into Euro at a conversion rate of 1.71 Euro to 1
Cypriot Pound and subsequently into US dollars at a conversion rate of $1.48 to
1 Euro. As a result of this at 22 January 2008 the authorised share capital was
changed to $1,890 thousand divided into 300 million shares of $0.0063 each and
the issued share capital was changed to $1,103 thousand divided into 175.1
million shares of $0.0063 each. The effect of this redenomination was to
increase share capital by $113 thousand.
At 31 December 2009 authorised share capital was $1,890 thousand divided into
300 million shares of $0.0063 each and issued share capital was $1,132 thousand
divided into 179.6 million shares of $0.0063 each.
Shares issued for cash. In January 2008, Morgan Stanley, the Group's nominated
adviser of a private placement in December 2007, executed an option for 5% of
overallotment of UEPCL shares in the amount of 1,643,000 shares. Proceeds from
the overallotment issuance totalled $5.9 million net of transaction costs of
$0.3 million.
+-------------------------+----------+-----------+---------+-----------+------------+
| | | Number | Share | Share | Difference |
| | | of | capital | premium | from |
| | | shares | | | conversion |
| | | (thousand | | | of share |
| | | of | | | capital to |
| | | shares) | | | USD |
+-------------------------+----------+-----------+---------+-----------+------------+
| | | | | | |
+-------------------------+----------+-----------+---------+-----------+------------+
| Balance at 1 January | | 175,121 | 990 | 625,111 | - |
| 2008 | | | | | |
+-------------------------+----------+-----------+---------+-----------+------------+
| | | | | | |
+-------------------------+----------+-----------+---------+-----------+------------+
| Shares issued for cash | | 1,643 | 10 | 5,882 | - |
+-------------------------+----------+-----------+---------+-----------+------------+
| Shares issued under | | 753 | 5 | (5) | |
| restricted stock plans | | | | | |
+-------------------------+----------+-----------+---------+-----------+------------+
| Early vested shares | | 460 | 3 | (3) | |
| issued under restricted | | | | | |
| stock plans | | | | | |
+-------------------------+----------+-----------+---------+-----------+------------+
| Share issued under | | 167 | 1 | 124 | - |
| option agreement | | | | | |
+-------------------------+----------+-----------+---------+-----------+------------+
| Share-based payment | | - | - | 8,971 | |
| under restricted stock | | | | | |
+-------------------------+----------+-----------+---------+-----------+------------+
| Difference from | | - | 113 | - | (113) |
| conversion of share | | | | | |
| capital to USD | | | | | |
+-------------------------+----------+-----------+---------+-----------+------------+
| Balance at 31 December | | 178,144 | 1,122 | | (113) |
| 2008 | | | | 640,080 | |
+-------------------------+----------+-----------+---------+-----------+------------+
| | | | | | |
+-------------------------+----------+-----------+---------+-----------+------------+
| Shares issued for cash | | - | - | - | - |
+-------------------------+----------+-----------+---------+-----------+------------+
| Shares issued under | | 1,141 | 7 | (7) | - |
| restricted stock plans | | | | | |
+-------------------------+----------+-----------+---------+-----------+------------+
| Early vested shares | | 363 | 2 | (2) | - |
| issued under restricted | | | | | |
| stock plans | | | | | |
+-------------------------+----------+-----------+---------+-----------+------------+
| Share issued under | | - | - | - | - |
| option agreement | | | | | |
+-------------------------+----------+-----------+---------+-----------+------------+
| Share-based payment | | - | - | 2,810 | - |
| under restricted stock | | | | | |
+-------------------------+----------+-----------+---------+-----------+------------+
| Share-based payment | | - | - | 1,367 | - |
| related to immediate | | | | | |
| vesting | | | | | |
+-------------------------+----------+-----------+---------+-----------+------------+
| Balance at 31 December | | 179,648 | 1,131 | 644,248 | (113) |
| 2009 | | | | | |
+-------------------------+----------+-----------+---------+-----------+------------+
Restricted Stock Plan. In February 2006, the Group's Board of Directors
approved a Restricted Stock Plan (the "Plan") authorizing the Compensation
Committee of the Board of Directors to issue restricted stock of up to five
percent of the outstanding shares of the Group. Restricted stock grants entitle
the holder to shares of stock for no consideration upon vesting. There are no
performance conditions beyond continued employment with the Group. The Plan
which was authorized in 2006 expired in 2008. Additionally, of the restricted
stock of 3,075,393 shares initially granted in 2007, 93,901 and 75,275 granted
shares were cancelled as a result of retirement of certain employees of the
Company during years 2008 and 2007.
In March 2008, the Group substantially granted an additional 2,281,677 shares of
restricted stock of which 16,966 and 71,796 granted shares were cancelled as a
result of retirement of certain employees of the Company during 2009 and 2008
correspondingly.
During the years ended 31 December 2009 and 2008, $4.2 million and $9.0 million,
respectively, of expense related to share-based payments were recognized in the
consolidated statements of comprehensive income.
At 31 December 2009 and 31 December 2008, restricted stock grants for 1,504,561
shares and 1,213,407 shares were fully issued.
As of 31 December 2009, the number of unvested restricted stock grants and their
respective vesting dates are presented in the table below.
+------------------+------+--------------+-------------+-----------+--------------+
| Date of | | January | January | January | Total |
| Grant | | 2009 | 2010 | 2011 | |
+------------------+------+--------------+-------------+-----------+--------------+
| | | | | | |
+------------------+------+--------------+-------------+-----------+--------------+
| Unvested | | 1,495,575 | 1,401,724 | | 3,675,787 |
| Restricted Stock | | | | | |
| Granted as of 31 | | | | 778,488 | |
| December 2008 | | | | | |
+------------------+------+--------------+-------------+-----------+--------------+
| Restricted Stock | | - | - | | - |
| Granted in 2009 | | | | | |
| | | | | - | |
+------------------+------+--------------+-------------+-----------+--------------+
| Forfeitured in | | - | - | (16,966) | (16,966) |
| 2009 | | | | | |
+------------------+------+--------------+-------------+-----------+--------------+
| Vesting in 2009 | | (1,141,479) | - | | (1,141,479) |
| | | | | - | |
+------------------+------+--------------+-------------+-----------+--------------+
| Immediately | | - | (266,679) | (96,402) | (363,081) |
| vested during | | | | | |
| the period | | | | | |
+------------------+------+--------------+-------------+-----------+--------------+
| | | 354,096 | 1,135,045 | | 2,154,261 |
| Total Restricted | | | | | |
| Stock Granted as | | | | | |
| of 31 December | | | | 665,120 | |
| 2009 | | | | | |
+------------------+------+--------------+-------------+-----------+--------------+
During the reporting period, the Group issued 1,504,561 shares which included
early vesting of grants of 363,081 shares to the retired employees during 2009
as part of severance payments and issue of 1,141,479 shares as a result of
normal vesting of previously issued restricted stock grants.
Loss per share. Basic loss per share is calculated by dividing the loss
attributable to equity holders of the company by the weighted average number of
ordinary shares in issue during the year.
The weighted average number of ordinary shares issued was calculated as
following:
+-------------------------------------------------+---------------+-------------+
| | Year ended 31 |
| | December: |
+-------------------------------------------------+-----------------------------+
| | 2009 | 2008 |
+-------------------------------------------------+---------------+-------------+
| Balance at 1 January | 178,143,987 | 175,120,478 |
+-------------------------------------------------+---------------+-------------+
| | | |
+-------------------------------------------------+---------------+-------------+
| Shares issued for cash | - | 1,607,087 |
+-------------------------------------------------+---------------+-------------+
| Shares issued under restricted stock plans | 960,094 | 704,174 |
+-------------------------------------------------+---------------+-------------+
| Early vested shares under restricted stock | 305,385 | 405,797 |
| plans | | |
+-------------------------------------------------+---------------+-------------+
| Exercise of options | - | 147,468 |
+-------------------------------------------------+---------------+-------------+
| | | |
+-------------------------------------------------+---------------+-------------+
| Weighted average number of ordinary shares in | 179,409,466 | 177,985,004 |
| issue | | |
+-------------------------------------------------+---------------+-------------+
20 Equity(continued)
+------------------------------------------------+------------+------------+
| | Year ended 31 |
| | December: |
+------------------------------------------------+-------------------------+
| | 2009 | 2008 |
+------------------------------------------------+------------+------------+
| Loss attributable to equity holders of the | (303,931) | (401,789) |
| Company | | |
+------------------------------------------------+------------+------------+
| Weighted average number of ordinary shares in | 179,409 | 177,985 |
| issue (thousands) | | |
+------------------------------------------------+------------+------------+
| | | |
+------------------------------------------------+------------+------------+
| Basic loss per share (in US dollar per share) | (1.69) | (2.26) |
+------------------------------------------------+------------+------------+
The company has two categories of potential ordinary shares: warrants, share
options and restricted stock plan. Diluted earnings per share is calculated by
adjusting the weighted average number of ordinary shares outstanding and the
profit attributable equity holders of the Company to assume conversion of all
dilutive potential ordinary shares. For the year ended 31 December 2009 and 31
December 2008, basic and diluted earnings per share and the corresponding
weighted average shares outstanding used in each calculation are identical as
all potentially dilutive instruments are antidilutive.
21 Revenues
+-------------------------------------------------+-------------------------------------------------+---------+
| | Year ended 31 |
| | December: |
+ +-----------------------------------------------------------+
| | 2009 | 2008 |
+-------------------------------------------------+-------------------------------------------------+---------+
| Crude oil | | |
+-------------------------------------------------+-------------------------------------------------+---------+
| Export sales | 43,872 | 147,377 |
+-------------------------------------------------+-------------------------------------------------+---------+
| Domestic sales (Russian Federation) | 8,498 | 59,387 |
+-------------------------------------------------+-------------------------------------------------+---------+
| Petroleum (refined) products - domestic sales | 15,592 | 12,163 |
+-------------------------------------------------+-------------------------------------------------+---------+
| Other sales | 1,027 | 3,364 |
+-------------------------------------------------+-------------------------------------------------+---------+
| | 68,989 | 222,291 |
| Total gross revenues | | |
+-------------------------------------------------+-------------------------------------------------+---------+
Substantially all of the Group's export sales are made to third party traders
with title passing at the Russian border. Accordingly, management does not
monitor the ultimate consumers and geographic markets of its export sales.
Segment information
Effective 1 January 2009, the Group adopted IFRS 8, Operating Segments ("IFRS
8"), which replaces IAS 14, Segment Reporting. IFRS 8 introduces new
requirements and guidelines regarding the disclosures of operating segments.
Operating segments are defined as components of the Group where separate
financial information is available and reported regularly to the chief operating
decision maker (hereinafter referred to as "CODM", represented by the Board of
Director of the Company), which decides how to allocate resources and assesses
operational and financial performance using the information provided.
The CODM receives monthly IFRS based financial information for its production
entities. There were three production entities for all of 2008 and for the first
seven months of 2009, and two for the last five months of 2009 (following the
disposal of Dulisma). Management has determined that the operations of these
production entities are sufficiently homogenous for these to be aggregated for
the purpose of IFRS 8. The Group has other entities that engage as either head
office / corporate or as holding companies. Consequently, management has
concluded that due to the above aggregation criteria that separate financial
information for segments is not required.
Geographical information. The Group operates in three major geographical areas
of the world. In the Russian Federation, its home country, the Group is mainly
engaged in the exploration, development, extraction and sales of crude oil, and
refining and sale of oil products. Activities outside the Russian Federation are
restricted to sales activities where title passes upon tanker loading. Sales are
made to Europe (sales of crude oil), and in Asia (sales of crude oil in Korea
and China). Information on the geographical location of the Group's revenues is
set out below.
For the year ended 31 December 2009:
+-----------------------------+------------+--------+---------+--------+
| | Russian | Europe | Asia | Total |
| | Federation | | (Korea, | |
| | | | China) | |
+-----------------------------+------------+--------+---------+--------+
| | | | | |
+-----------------------------+------------+--------+---------+--------+
| Crude oil | 8,498 | 27,385 | 16,487 | 52,370 |
+-----------------------------+------------+--------+---------+--------+
| Petroleum (refined) | 15,592 | | | 15,592 |
| products | | | | |
+-----------------------------+------------+--------+---------+--------+
| Other sales | 1,027 | | | 1,027 |
+-----------------------------+------------+--------+---------+--------+
| | | | | |
+-----------------------------+------------+--------+---------+--------+
| Total gross revenues | | | | 68,989 |
+-----------------------------+------------+--------+---------+--------+
For the year ended 31 December 2008:
+-----------------------------+------------+--------+---------+---------+
| | Russian | Europe | Asia | Total |
| | Federation | | (Korea) | |
+-----------------------------+------------+--------+---------+---------+
| | | | | |
+-----------------------------+------------+--------+---------+---------+
| Crude oil | 59,387 | 92,437 | 54,940 | 206,764 |
+-----------------------------+------------+--------+---------+---------+
| Petroleum (refined) | 12,163 | | | 12,163 |
| products | | | | |
+-----------------------------+------------+--------+---------+---------+
| Other sales | 3,364 | | | 3,364 |
+-----------------------------+------------+--------+---------+---------+
| | | | | |
+-----------------------------+------------+--------+---------+---------+
| Total gross revenues | | | | 222,291 |
+-----------------------------+------------+--------+---------+---------+
Revenue from external customers is based on the geographical location of
customers although all revenues are generated by assets in the Russian
Federation. Substantially all of the Group's assets are located in the Russian
Federation.
Major customers. For the year 2009, the Group has one major customer to whom
individual revenues represent 64 percent of total external revenues (2008: one
major customer that represented 66 percent).
22 Cost of Sales
+-------------------------------------------------+-------------------------------------------------+-----------+
| | Year ended 31 |
| | December: |
+ +-------------------------------------------------------------+
| | 2009 | 2008 |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Wages and salaries (including payroll taxes of | | |
| $1.9 million and | | |
+-------------------------------------------------+-------------------------------------------------+-----------+
| $3.5 million for the years ended 31 December | 12,926 | 22,175 |
| 2009 and 2008, respectively) | | |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Unified production tax | 8,372 | 37,952 |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Depreciation | 4,937 | 16,514 |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Cost of purchased products | 1,636 | 70,799 |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Materials | 3,436 | 7,184 |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Other taxes | 1,869 | 2,721 |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Rent, utilities and repair services | 457 | 1,534 |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Oil treating, storage and other services | 381 | 6,571 |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Energy services | 26 | 774 |
+-------------------------------------------------+-------------------------------------------------+-----------+
| (Release) accrual provision on inventory (Note | (2,462) | 4,307 |
| 12) | | |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Write-off non-producing wells | - | 2,552 |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Release of other taxes risk provision | (199) | (189) |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Other | 1,361 | 4,203 |
+-------------------------------------------------+-------------------------------------------------+-----------+
| Change in finished goods | 9,472 | (10,376) |
+-------------------------------------------------+-------------------------------------------------+-----------+
| | 42,212 | 166,721 |
| Total cost of sales | | |
+-------------------------------------------------+-------------------------------------------------+-----------+
23 Selling, General and Administrative Expenses
+-------------------------------------------------+-------------------------------------------------+----------+
| | Year ended 31 |
| | December: |
+ +------------------------------------------------------------+
| | 2009 | 2008 |
+-------------------------------------------------+-------------------------------------------------+----------+
| Wages and salaries | 7,215 | 13,431 |
+-------------------------------------------------+-------------------------------------------------+----------+
| Share based payments | 4,177 | 8,971 |
+-------------------------------------------------+-------------------------------------------------+----------+
| Transport and storage services | 3,869 | 2,244 |
+-------------------------------------------------+-------------------------------------------------+----------+
| Office rent and other expenses | 1,531 | 2,411 |
+-------------------------------------------------+-------------------------------------------------+----------+
| Professional consultancy fees | 1,463 | 3,350 |
+-------------------------------------------------+-------------------------------------------------+----------+
| Audit fees | 916 | 1,479 |
+-------------------------------------------------+-------------------------------------------------+----------+
| Loading services | 757 | 3,331 |
+-------------------------------------------------+-------------------------------------------------+----------+
| Trip expenses and communication services | 558 | 1,630 |
+-------------------------------------------------+-------------------------------------------------+----------+
| Bad debt (recovery)/write-off | (1,254) | 2,161 |
+-------------------------------------------------+-------------------------------------------------+----------+
| Other expenses | 2,110 | 5,323 |
+-------------------------------------------------+-------------------------------------------------+----------+
| | 21,342 | 44,331 |
| Total selling, general and administrative | | |
| expenses | | |
+-------------------------------------------------+-------------------------------------------------+----------+
Directors' fees for the years ended 31 December 2009 and 2008 were $0.03 million
and $0.172 million, respectively, and do not include amounts related to
share-based payments provided to the Group's directors (Note 26).
24Contingencies, Commitments and Operating Risks
Operating environment. The Russian Federation continues to display some
characteristics of an emerging market economy. These characteristics include,
but are not limited to, the existence of a currency that is not yet fully
convertible in many countries outside of the Russian Federation, and relatively
high inflation. Tax and customs legislation within the Russian Federation is
subject to varying interpretations, and changes can occur frequently.
The Russian economy was impacted significantly by the recent economic crisis and
resultant global recession. Impacts included a dramatic fall in consumer and
industrial output demand resulting in significant decreases in energy commodity
prices in late 2008 and early 2009. In addition, the crisis resulted in a lack
of available financing and liquidity in the capital markets and, where financing
was available, a significant increase in borrowing costs and interest rates. In
the second half of 2009 energy commodity prices appeared to stabilise and have
increased through 2010. In addition, access to capital markets and the cost of
debt has eased.
Whilst there have been improvements in the Russian economic situation generally,
Russia continues to develop economic reforms and improve its legal, tax and
regulatory frameworks to bring it more in line with a stable market economy. The
future stability of the Russian economy is largely dependent upon these reforms
and developments and the effectiveness of economic, financial and monetary
measures undertaken by the government.
Oilfield licenses.The Group is subject to periodic reviews of its activities by
governmental authorities with respect to the requirements of its oil field
licenses. Management of the Group correspond with governmental authorities to
agree on remedial actions, if necessary, to resolve any findings resulting from
these reviews. Failure to comply with the terms of a license could result in
fines, penalties or license limitations, suspension or revocations. Management
believes any issues of non-compliance will be resolved through negotiations or
corrective actions without any materially adverse effect on the financial
position or the operating results of the Group.
Management believes that proved reserves should include quantities that are
expected to be produced after the expiry dates of the Group's production
licenses. These licenses expire between 2012 and 2067.
The principal licenses of the Group and their expiry dates are:
+----------------------+---------------------+--------------------+
| Field | License holder | License expiry |
| | | date |
+----------------------+---------------------+--------------------+
| | | |
+----------------------+---------------------+--------------------+
| Okruzhnoye | Petrosakh | 2012 |
+----------------------+---------------------+--------------------+
| Peschanozerskoye | Arcticneft | 2067 |
+----------------------+---------------------+--------------------+
| | | |
+----------------------+---------------------+--------------------+
Management believes the licenses may be extended at the initiative of the Group
and management intends to extend such licenses for properties expected to
produce subsequent to their license expiry dates.
As of 31 December 2009 the Group was not in compliance with all of the
conditions as set forth in its license agreements. As a result, the Group is
exposed to potential penalties, but not revocation of the license. Management
does not believe that any of its significant exploration or production licenses
are at risk of being withdrawn by the licensing authorities because subsequent
to year end, management has taken steps to amend license agreements with the
relevant authorities. Management plans to complete all the required exploration
and development work, in accordance with the timetables established in the
amended licenses. At 31 December 2009 management is unable to reliably estimate
the amount of any penalty that may be levied by the authorities in respect of
license non-compliance if such penalty were to be levied.
Taxation. Russian tax and customs legislation is subject to varying
interpretations, and changes, which can occur frequently. Management's
interpretation of such legislation as applied to the transactions and activity
of the Group may be challenged by the relevant authorities. The Russian tax
authorities may be taking a more assertive position in their interpretation of
the legislation and assessments, and it is possible that transactions and
activities that have not been challenged in the past may be challenged. The
Supreme Arbitration Court issued guidance to lower courts on reviewing tax cases
providing a systemic roadmap for anti-avoidance claims, and it is possible that
this will significantly increase the level and frequency of tax authorities
scrutiny. As a result, significant additional taxes, penalties and interest may
be assessed. Fiscal periods remain open to review by the authorities in respect
of taxes for three calendar years preceding the year of review. Under certain
circumstances reviews may cover longer periods.
Russian transfer pricing legislation introduced 1 January 1999 provides the
possibility for tax authorities to make transfer pricing adjustments and impose
additional tax liabilities in respect of all controllable transactions, provided
that the transaction price differs from the market price by more than 20%.
Controllable transactions include: transactions with interdependent parties, as
determined under the Russian Tax Code; all cross-border transactions
(irrespective whether performed between related or unrelated parties);
transactions where the price applied by a taxpayer differs by more than 20% from
the price applied in similar transactions by the same taxpayer within a short
period of time; and barter transactions. There is no formal guidance as to how
these rules should be applied in practice. In the past, the arbitration court
practice with this respect has been contradictory.
Tax liabilities arising from intercompany transactions are determined using
actual transaction prices. It is possible with the evolution of the
interpretation of the transfer pricing rules in the Russian Federation and the
changes in the approach of the Russian tax authorities, that such transfer
prices could potentially be challenged in the future. Given the brief nature of
the current Russian transfer pricing rules, the impact of any such challenge
cannot be reliably estimated; however, it may be significant to the financial
condition and/or the overall operations of the entity.
The Group includes companies incorporated outside of Russia. Tax liabilities of
the Group are determined on the assumptions that these companies are not subject
to Russian profits tax because they do not have a permanent establishment in
Russia. Russian tax laws do not provide detailed rules on taxation of foreign
companies. It is possible that with the evolution of the interpretation of these
rules and the changes in the approach of the Russian tax authorities, the
non-taxable status of some or all of the foreign companies of the Group may be
challenged. The impact of any such challenge cannot be reliably estimated;
however, it may be significant to the financial condition and or the overall
operations of the Group.
Russian tax legislation does not provide definitive guidance in certain areas.
From time to time, the Group adopts interpretations of such uncertain areas that
reduce the overall tax rate of the Group. As noted above, such tax positions
may come under heightened scrutiny as a result of recent developments in
administrative and court practices; the impact of any challenge by the tax
authorities cannot be reliably estimated; however, it may be significant to the
financial condition and/or the overall operations of the entity.
Management regularly reviews the Group's taxation compliance with applicable
legislation, laws and decrees as well as interpretations published by the
authorities in the jurisdictions in which the Group has operations. However,
from time to time potential exposures and contingencies are identified and at
any point in time a number of open matters exist, management believes that its
tax positions are sustainable. Management estimates that possible tax exposures
that are more than remote but for which no liability is required to be
recognised under IFRS, could be up to $12.6 million of the Group's profit before
tax for the current year. These exposures primarily relate to income tax, VAT
and other taxes. This estimation is provided for the IFRS requirement for
disclosure of possible taxes and should not be considered as an estimate of the
Group's future tax liability.
Insurance policies.The Group insured all of its major assets, including oil in
stock, plant and equipment, transport and machinery with a total limit of $2.0
million. Also, a liability insurance policy covering property, plant and
equipment, hazardous objects, including environmental liability, was put in
place with a total limit of $0.5 million and directors and officers liability
with total limit of $79.4 million. Staff and personal insurance includes
casualty, medical and travel insurance for losses of $0.3 million. The
associated expenses are included within selling, general and administrative
expenses in the consolidated statement of comprehensive income.
Restoration, rehabilitation and environmental costs.The Group companies have
operated in the upstream and refining oil industry in the Russian Federation for
many years, and their activities have had an impact on the environment. The
enforcement of environmental regulations in the Russian Federation is evolving
and the enforcement posture of government authorities is continually being
reconsidered. The Group periodically evaluates its obligations related thereto.
The outcome of environmental liabilities under proposed or future legislation,
or as a result of stricter enforcement of existing legislation, cannot
reasonably be estimated at present, but could be material. Under the current
levels of enforcement of existing legislation, management believes there are no
significant liabilities in addition to amounts which are already accrued and
which would have a material adverse effect on the financial position of the
Group.
Legal proceedings.The Group is involved in a number of court proceedings (both
as a plaintiff and a defendant) arising in the ordinary course of business. In
the opinion of management, there are no current legal proceedings or other
claims outstanding, which could have a material effect on the result of
operations or financial position of the Group and which have not been accrued or
disclosed in these consolidated financial statements.
Impact of the ongoing global financial and economic crisis. The ongoing global
financial and economic crisis that emerged out of the severe reduction in global
liquidity which commenced in the middle of 2007 (often referred to as the
"Credit Crunch") has resulted in, among other things, a lower level of capital
market funding, lower liquidity levels across the banking sector and wider
economy, and, at times, higher interbank lending rates and very high volatility
in stock and currency markets. The uncertainties in the global financial markets
have also led to failures of banks and other corporate entities, and to bank
rescues in the United States of America, Western Europe, Russia and elsewhere.
The full extent of the impact of the ongoing financial crisis is proving to be
difficult to anticipate or completely guard against.
The availability of external funding in financial markets has significantly
reduced since August 2007. Such circumstances may affect the ability of the
Group to obtain new borrowings and re-finance its existing borrowings at terms
and conditions similar to those applied to earlier transactions.
Management is unable to reliably determine the effects on the Group's future
financial position of any further deterioration in the liquidity of the
financial markets and the increased volatility in the currency and equity
markets. Management believes it is taking all the necessary measures to support
the sustainability and development of the Group's business in the current
circumstances.
Other capital commitments. At 31 December 2009, the Group had no significant
contractual commitments for capital expenditures.
25 Financial Risk Management
The accounting policies for financial instruments have been applied to the line
items below:
+------------------------------------------+-----------+-----------+
| | At 31 December: |
+------------------------------------------+-----------------------+
| | 2009 | 2008 |
+------------------------------------------+-----------+-----------+
| Financial assets | | |
+------------------------------------------+-----------+-----------+
| | | |
+------------------------------------------+-----------+-----------+
| Loans and receivables: current assets | | |
+------------------------------------------+-----------+-----------+
| Loans receivable: current | 6,296 | 4,882 |
+------------------------------------------+-----------+-----------+
| Cash and cash equivalents | 2,361 | 912 |
+------------------------------------------+-----------+-----------+
| Trade receivables | 164 | 2,116 |
+------------------------------------------+-----------+-----------+
| Total loans and receivables: current | 8,821 | 7,910 |
| assets | | |
+------------------------------------------+-----------+-----------+
| Loans and receivables: non-current | | |
| assets | | |
+------------------------------------------+-----------+-----------+
| Loans receivable: non-current | 34,438 | 31,066 |
+------------------------------------------+-----------+-----------+
| Total loans and receivables | 43,259 | 38,976 |
+------------------------------------------+-----------+-----------+
| | | |
+------------------------------------------+-----------+-----------+
| Financial liabilities | | |
+------------------------------------------+-----------+-----------+
| | | |
+------------------------------------------+-----------+-----------+
| Measured at fair value - current | | |
| liabilities | | |
+------------------------------------------+-----------+-----------+
| Financial instruments | - | 161,300 |
+------------------------------------------+-----------+-----------+
| Warrants classified as liabilities | 56 | 177 |
+------------------------------------------+-----------+-----------+
| Total current liabilities measured at | 56 | 161,477 |
| fair value | | |
+------------------------------------------+-----------+-----------+
| | | |
+------------------------------------------+-----------+-----------+
| Measured at amortized cost: current | | |
| liabilities | | |
+------------------------------------------+-----------+-----------+
| Trade and other payables | 19,050 | 25,332 |
+------------------------------------------+-----------+-----------+
| Short-term borrowings and current | 33,978 | 633,515 |
| portion of long-term borrowings | | |
+------------------------------------------+-----------+-----------+
| Total current liabilities measured at | 53,028 | 658,847 |
| amortized cost | | |
+------------------------------------------+-----------+-----------+
| | | |
+------------------------------------------+-----------+-----------+
Financial risk management objectives and policies. In the ordinary course of
business, the Group is exposed to market risks from fluctuating prices on
commodities purchased and sold, credit risk, liquidity risk, currency exchange
rates and interest rates. Depending on the degree of price volatility, such
fluctuations in market price may create volatility in the Group's financial
results. As an entity focused upon the exploration and development of oil and
gas properties, the Group's overriding strategy is to maintain a strong
financial position by securing access to capital to meet its capital investment
needs.
The Group's principal risk management policies are established to identify and
analyze the risks faced by the Group, to set appropriate risk limits and
controls, and to monitor risks and adherence to these limits. Risk management
policies and systems are reviewed regularly to reflect changes in market
conditions and the Group's activities.
Market risk. Market risk is the risk that changes in market prices and rates,
such as foreign exchange rates, interest rates, commodity prices and equity
prices, will affect the Group's financial results or the value of its holdings
of financial instruments. The primary objective of mitigating these market risks
is to manage and control market risk exposures. The Group is exposed to market
price movements relating to changes in commodity prices such as crude oil, gas
condensate, petroleum products and natural gas (commodity price risk), foreign
currency exchange rates, interest rates, equity prices and other indices that
could adversely affect the value of the Group's financial assets, liabilities or
expected future cash flows.
(a) Foreign exchange risk
The Group is exposed to foreign exchange risk arising from various exposures in
the normal course of business, primarily with respect to the US dollar. Foreign
exchange risk arises primarily from commercial transactions, and recognized
assets and liabilities when such transactions, assets and liabilities are
denominated in a currency other than the functional currency.
The Group's overall strategy is to have no significant net exposure in
currencies other than the Russian rouble or the US dollar.
The carrying amounts of the Group's financial instruments are denominated in the
following currencies (all amounts expressed in thousands of US dollars at the
appropriate 31 December 2009 and 2008 exchange rates):
+-----------------------------+-----------+-----------+-------+-----------+
| At 31 December 2009 | Russian | US |Other | Total |
| | rouble | dollar | | |
+-----------------------------+-----------+-----------+-------+-----------+
| | | | | |
+-----------------------------+-----------+-----------+-------+-----------+
| Financial assets | | | | |
+-----------------------------+-----------+-----------+-------+-----------+
| | | | | |
+-----------------------------+-----------+-----------+-------+-----------+
| Non-current | | | | |
+-----------------------------+-----------+-----------+-------+-----------+
| Loans receivable | - | 34,438 | - | 34,438 |
+-----------------------------+-----------+-----------+-------+-----------+
| | | | | |
+-----------------------------+-----------+-----------+-------+-----------+
| Current | | | | |
+-----------------------------+-----------+-----------+-------+-----------+
| Loans receivable | - | 6,296 | - | 6,296 |
| | | | | |
+-----------------------------+-----------+-----------+-------+-----------+
| Cash and cash equivalents | 2,350 | 3 | 8 | 2,361 |
+-----------------------------+-----------+-----------+-------+-----------+
| Accounts receivable | 164 | - | - | 164 |
| | | | | |
+-----------------------------+-----------+-----------+-------+-----------+
| | | | | |
+-----------------------------+-----------+-----------+-------+-----------+
| Financial liabilities | | | | |
+-----------------------------+-----------+-----------+-------+-----------+
| | | | | |
+-----------------------------+-----------+-----------+-------+-----------+
| Current | | | | |
+-----------------------------+-----------+-----------+-------+-----------+
| Accounts payable and | (10,034) | (9,016) | - | (19,050) |
| accrued expenses | | | | |
+-----------------------------+-----------+-----------+-------+-----------+
| Derivative financial | - | - | - | - |
| instruments | | | | |
+-----------------------------+-----------+-----------+-------+-----------+
| Short-term borrowings and | - | (33,978) | - | (33,978) |
| current portion of | | | | |
| long-term borrowings | | | | |
+-----------------------------+-----------+-----------+-------+-----------+
| Warrants classified as | | | (56) | (56) |
| liabilities | | | | |
+-----------------------------+-----------+-----------+-------+-----------+
| Net exposure at 31 December | (7,520) | (2,257) | (48) | (9,825) |
| 2009 | | | | |
+-----------------------------+-----------+-----------+-------+-----------+
25 Financial Risk Management (continued)
+-----------------------------+-----------+------------+--------+------------+
| At 31 December 2008 | Russian | US | | Total |
| | rouble | Dollar | Other | |
+-----------------------------+-----------+------------+--------+------------+
| | | | | |
+-----------------------------+-----------+------------+--------+------------+
| Financial assets | | | | |
+-----------------------------+-----------+------------+--------+------------+
| | | | | |
+-----------------------------+-----------+------------+--------+------------+
| Non-current | | | | |
+-----------------------------+-----------+------------+--------+------------+
| Loans receivable | - | 31,066 | - | 31,066 |
+-----------------------------+-----------+------------+--------+------------+
| | | | | |
+-----------------------------+-----------+------------+--------+------------+
| Current | | | | |
+-----------------------------+-----------+------------+--------+------------+
| Cash and cash equivalents | 396 | 491 | 25 | 912 |
+-----------------------------+-----------+------------+--------+------------+
| Accounts receivable | 2,043 | 4,955 | - | 6,998 |
+-----------------------------+-----------+------------+--------+------------+
| | | | | |
+-----------------------------+-----------+------------+--------+------------+
| Financial liabilities | | | | |
+-----------------------------+-----------+------------+--------+------------+
| | | | | |
+-----------------------------+-----------+------------+--------+------------+
| Current | | | | |
+-----------------------------+-----------+------------+--------+------------+
| Accounts payable and | (19,950) | (5,382) | - | (25,332) |
| accrued expenses | | | | |
+-----------------------------+-----------+------------+--------+------------+
| Derivative financial | - | (161,300) | - | (161,300) |
| instruments | | | | |
+-----------------------------+-----------+------------+--------+------------+
| Short-term borrowings and | (53) | (633,462) | - | (633,515) |
| current portion of | | | | |
| long-term borrowings | | | | |
+-----------------------------+-----------+------------+--------+------------+
| Warrants classified as | - | - | (177) | (177) |
| liabilities | | | | |
+-----------------------------+-----------+------------+--------+------------+
| Net exposure at 31 December | (17,564) | (763,632) | (152) | (781,348) |
| 2008 | | | | |
+-----------------------------+-----------+------------+--------+------------+
In accordance with IFRS requirements, the Group has provided information about
market risk and potential exposure to hypothetical loss from its use of
financial instruments through sensitivity analysis disclosures. The sensitivity
analysis depicted in the table below reflects the hypothetical income (loss)
that would occur assuming a 15% change in exchange rates and no changes in the
portfolio of instruments and other variables held at 31 December 2009 and 2008,
respectively.
+-----------------------+------------------+-----------+------------+
| | Year ended 31 |
| | December: |
+------------------------------------------+------------------------+
| Effect on pre-tax | Increase in | 2009 | 2008 |
| profit | exchange rate | | |
+-----------------------+------------------+-----------+------------+
| | | | |
+-----------------------+------------------+-----------+------------+
| $/RUS | 15% | (339) | (114,545) |
+-----------------------+------------------+-----------+------------+
| $/Other | 15% | (7) | (23) |
+-----------------------+------------------+-----------+------------+
The effect of a corresponding 15% decrease in exchange rate is approximately
equal and opposite.
(b) Commodity price risk
The Group's overall commercial trading strategy in crude oil and related
products is centrally managed. Changes in commodity prices could negatively or
positively affect the Group's results of operations.
The Group sells all its crude oil and petroleum products under spot contracts.
Crude oil sold internationally is based on benchmark reference crude oil prices
of Brent dated, plus or minus a discount for quality and on a
transaction-by-transaction basis for volumes sold domestically. As a result, the
Group's revenues from the sales of liquid hydrocarbons are subject to commodity
price volatility based on fluctuations or changes in the crude oil benchmark
reference prices. Presently, the Group does not use commodity derivative
instruments for trading purposes to mitigate price volatility.
(c) Cash flow and fair value interest rate risk
The Group is not significantly exposed to cash flow interest rate risk on its
financial liabilities as most of its financial liabilities bear fixed rates of
interest. However, changes in market interest rates impact the fair values of
fixed rate financial liabilities or future cash flows in the case of variable
financial liabilities. Management does not have a formal policy on the
proportion of the Group's exposure interest rate risk on its financial
liabilities.
At 31 December 2009 and 2008, the Group's interest rate profiles for
interest-bearing financial liabilities were:
+-----------------------------------------+----------+-----------+
| | Year ended 31 |
| | December: |
+-----------------------------------------+----------------------+
| | 2009 | 2008 |
+-----------------------------------------+----------+-----------+
| At fixed rate | - | 629,749 |
+-----------------------------------------+----------+-----------+
| At floating rate | 30,783 | - |
+-----------------------------------------+----------+-----------+
| Total interest bearing financial | 30,783 | 629,749 |
| liabilities | | |
+-----------------------------------------+----------+-----------+
To the degree possible, the Group centralizes the cash requirements and
surpluses of controlled subsidiaries and the majority of their external
financing requirements, and applies, on its consolidated net debt position, a
funding policy to optimize its financing costs and manage the impact of
interest-rate changes on its financial results in line with market conditions.
Credit risk. Credit risk refers to the risk exposure that a potential financial
loss to the Group may occur if a counterparty defaults on its contractual
obligations.
Credit risk is managed on a Group level and arises from cash and cash
equivalents, including short-term deposits with banks, promissory notes, loans
issued as well as credit exposures to customers, including outstanding trade
receivables and committed transactions. Cash and cash equivalents are deposited
only with banks that are considered by the Group at the time of deposit to
minimal risk of default.
The Group's domestic trade and other receivables consist of a large number of
customers, spread across diverse industries mainly on Sakhalin Island. All of
the Group's export crude oil sales are made to one customer, Petraco, with whom
the Group was trading for the past several years (see Note 16). A majority of
domestic sales of petroleum products are made on a prepayment basis. Although
the Group does not require collateral in respect of trade and other receivables,
it has developed standard credit payment terms and constantly monitors the
status of trade receivables and the creditworthiness of the customers. The
maximum exposure to credit risk is represented by the carrying amount of each
financial asset exposed to credit risk. As the majority of customers pay in
advance (including Petraco currently) credit risk related to trade debtors is
not considered to be significant.
Liquidity risk. Liquidity risk is the risk that the Group will not be able to
meet its financial obligations as they fall due. The Group's approach to
managing liquidity has been to ensure that it will always have sufficient
liquidity to meet its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage to the
Group's reputation.
The Group prepares various financial and operational plans (monthly, quarterly
and annually) to ensure that the Group has sufficient cash on demand to meet
expected operational and administrative expenses.
The following tables summarize the maturity profile of the Group's financial
liabilities based on contractual undiscounted payments, including interest
payments:
+--------------------+----------+---------+---------+-------+----------+
| At 31 December | Less |Between |Between |After | Total |
| 2009 | than 1 |1 and 2 |2 and 5 | 5 | |
| | year | years | years |years | |
+--------------------+----------+---------+---------+-------+----------+
| | | | | | |
+--------------------+----------+---------+---------+-------+----------+
| Debt at floating | | | | | |
| rate | | | | | |
+--------------------+----------+---------+---------+-------+----------+
| Principal | 30,783 | - | - | - | 30,783 |
+--------------------+----------+---------+---------+-------+----------+
| Interest | 3,195 | - | - | - | 3,195 |
+--------------------+----------+---------+---------+-------+----------+
| | | | | | |
+--------------------+----------+---------+---------+-------+----------+
| Warrants | 56 | - | - | - | 56 |
| classified as | | | | | |
| liability | | | | | |
+--------------------+----------+---------+---------+-------+----------+
| Financial | - | - | - | - | - |
| instruments | | | | | |
+--------------------+----------+---------+---------+-------+----------+
| Accounts payable | 19,050 | - | - | - | 19,050 |
| and accrued | | | | | |
| expenses | | | | | |
+--------------------+----------+---------+---------+-------+----------+
| Total financial | 53,084 | - | - | - | 53,084 |
| liabilities | | | | | |
+--------------------+----------+---------+---------+-------+----------+
Subsequent to the reporting date the debt liabilities on borrowings have been
restructured in April 2010 (Note 27).
+--------------------+-----------+---------+---------+-------+-----------+
| At 31 December | Less |Between |Between |After | Total |
| 2008 | than 1 |1 and 2 |2 and 5 | 5 | |
| | year | years | years |years | |
+--------------------+-----------+---------+---------+-------+-----------+
| | | | | | |
+--------------------+-----------+---------+---------+-------+-----------+
| Debt at fixed rate | | | | | |
+--------------------+-----------+---------+---------+-------+-----------+
| Principal | 629,749 | - | - | - | 629,749 |
+--------------------+-----------+---------+---------+-------+-----------+
| Interest | 2,337 | - | - | - | 2,337 |
+--------------------+-----------+---------+---------+-------+-----------+
| Debt at floating | | | | | |
| rate | | | | | |
+--------------------+-----------+---------+---------+-------+-----------+
| Interest | 1,429 | - | - | - | 1,429 |
+--------------------+-----------+---------+---------+-------+-----------+
| Warrants | 177 | - | - | - | 177 |
| classified as | | | | | |
| liability | | | | | |
+--------------------+-----------+---------+---------+-------+-----------+
| Financial | 161,300 | - | - | - | 161,300 |
| instruments | | | | | |
+--------------------+-----------+---------+---------+-------+-----------+
| Accounts payable | 25,332 | - | - | - | 25,332 |
| and accrued | | | | | |
| expenses | | | | | |
+--------------------+-----------+---------+---------+-------+-----------+
| Total financial | 820,324 | - | - | - | 820,324 |
| liabilities | | | | | |
+--------------------+-----------+---------+---------+-------+-----------+
Capital management. The primary objectives of the Group's capital management
policy is to ensure a strong capital base to fund and sustain its business
operations through prudent investment decisions and to maintain investor, market
and creditor confidence to support its business activities.
The capital as defined by management at 31 December 2009 and 2008 was as
follows:
+-------------------------------------------+----------+-----------+
| | 2009 | 2008 |
+-------------------------------------------+----------+-----------+
| Total borrowings | 33,978 | 633,515 |
+-------------------------------------------+----------+-----------+
| Less loan to Taas | (34,438) | (31,066) |
+-------------------------------------------+----------+-----------+
| Less loan to certain shareholders | (4,289) | (2,899) |
+-------------------------------------------+----------+-----------+
| Add payable to Finfund Ltd. | 6,572 | 3,607 |
+-------------------------------------------+----------+-----------+
| Less cash and cash equivalents | (2,361) | (912) |
+-------------------------------------------+----------+-----------+
| Net debt | (538) | 602,245 |
+-------------------------------------------+----------+-----------+
| Total equity | 61,941 | 349,828 |
+-------------------------------------------+----------+-----------+
| | | |
+-------------------------------------------+----------+-----------+
Management considers capital to represent net debt and total equity. Management
does not use a specific target debt to equity or gearing ratio when managing the
business
For the capital management, the Group manages and monitors its liquidity on a
corporate-wide basis to ensure adequate funding to sufficiently meet group
operational requirements. The Group controls all external debts at the Parent
level, and all financing to Group entities for the operating and investing
activity is facilitated through inter-company loan arrangements, except for the
specific project financing, which are taken on the subsidiary level.
There were no changes to the Group's approach to capital management during the
year.
26 Balances and transactions with Related Parties
Parties are generally considered to be related if one party has the ability to
control the other party, is under common control, or can exercise significant
influence over the other party in making financial or operational decisions as
defined by IAS 24 Related Party Disclosures. Key management personnel are
considered to be related parties. In considering each possible related party
relationship, attention is directed to the substance of the relationship, not
merely the legal form.
Substantially all related party balances at 31 December 2009 relate to balances
with a shareholder and former director of the Company.
+------------------------------------------------+------------------------------------------------+---------+
| | As of or for |
| | the year |
| | ended 31 |
| | December |
+ +----------------------------------------------------------+
| | 2009 | 2008 |
+------------------------------------------------+------------------------------------------------+---------+
| Interest income | 686 | 3,704 |
+------------------------------------------------+------------------------------------------------+---------+
| Rental expenses (included in selling, | 6 | 56 |
| general and administrative expense) | | |
+------------------------------------------------+------------------------------------------------+---------+
| | | |
+------------------------------------------------+------------------------------------------------+---------+
| Loan issued to other related parties | 5,781 | 5,250 |
+------------------------------------------------+------------------------------------------------+---------+
| Interest receivable from other related | 515 | 875 |
| parties | | |
+------------------------------------------------+------------------------------------------------+---------+
| Accounts and notes receivable | 78 | 73 |
+------------------------------------------------+------------------------------------------------+---------+
| Impairment of receivables from related | - | (1,243) |
| parties (Notes 11) | | |
+------------------------------------------------+------------------------------------------------+---------+
| Receivables from related parties (Note | 6,374 | 4,955 |
| 11) | | |
+------------------------------------------------+------------------------------------------------+---------+
| | | |
+------------------------------------------------+------------------------------------------------+---------+
| Loan issued to Taas | - | 28,099 |
+------------------------------------------------+------------------------------------------------+---------+
| Interest receivable from Taas | - | 2,967 |
+------------------------------------------------+------------------------------------------------+---------+
| | | |
+------------------------------------------------+------------------------------------------------+---------+
| Advances from and payables to related | (13) | (13) |
| parties (Note 15) | | |
+------------------------------------------------+------------------------------------------------+---------+
| Loans payable (Note 15) | - | (61) |
+------------------------------------------------+------------------------------------------------+---------+
| | | |
+------------------------------------------------+------------------------------------------------+---------+
Compensation to senior management. The Group's senior management team
compensation totaled $8.5 million and $15.0 million for the periods ended 31
December 2009 and 2008, respectively, including salary, bonuses and severance
payments of $1.2 million and $0.9 million respectively. Stock compensation of
$4.2 million and $9.0 million, respectively, included in the senior management
team compensation. Additionally, included in loans receivable at 31 December
2009 and 2008 were loans receivable of $5.8 million and $4.1 million,
respectively from the Group's senior management team.
Within loans receivable the largest part relates to a short-term loan provided
to a shareholder and former senior manager of the company in the amount of $4.3
million, including accrued interest. The loan bears 15% interest and matures on
30 September 2008. The loan is secured with real estate properties located in
Moscow. The loan receivable was past-due and impaired at 31 December 2008 by
$1.2 million as a result of valuation of the pledge which decreased following
lack of liquidity in the real estate market in Moscow. This impairment was
reversed in these financial statements as a result of recovery of the real
estate market in Moscow. Additionally, this shareholder pledged their own shares
to secure the Company's obligation to Finfund to pay pledge fees (see Note 15).
Additionally, loans receivable include amounts due by OOO Komineftegeophysica in
the amount of $0.866 million, where major shareholders of the Group hold the
majority of shares. The loans bear interest from 5% to 15% and are short term in
nature. These loans are not secured, however, in the ordinary course of business
and on market terms Komineftegeophysica provides geological and geophysical
services to the Group companies.
Interest income is earned from the loan provided by the Group to Taas (Note 18)
and the loans provided to senior management of the Group as described above.
Other loans and receivable balances are short-term in the nature, immaterial
individually and expire during 2008.
27 Events after the reporting period
Petraco debt restructuring
An April 2010 the Company has reached agreement with Petraco relating to the
restructuring of the Petraco Facility (the "Restructuring Agreement"). The
principal terms of the Restructuring Agreement are as follows:
Total indebtedness owed by the Company to Petraco, as at 31 March 2010, was
US$34.3 million, made up as follows:
- capital amount outstanding (the "Capital Outstanding") of: US$30.7 million
- accrued interest outstanding (the "Accrued Interest") of: US$3.6 million
At 1 April 2010, the Capital Outstanding and Accrued Interest was be added
together and carried forward as principal ("Principal"). After 1 April 2010
interest will be accrued on the Principal and will not be compounded. All
accrued interest from 1 April 2010 will be paid once the Principal has been
repaid and all payments made by the Company according to the payment schedule
set out below will be applied against the Principal outstanding. Interest will
be charged on the Principal at a rate of 6 month LIBOR plus 5% per annum,
non-compounding.
As part of the restructuring agreement Petraco converted US$2.0 million of the
Capital Outstanding into 8,693,006 Urals Energy ordinary shares and received an
option to acquire additional new ordinary shares in the amount of 12,576,688
for $5.0 million .
The repayment schedule of the balance for the Capital Outstanding and the
Accrued Interest is:
Payment date Amount to be paid by Urals Energy to Petraco
30 September 2010 US$3.0 million
31 December 2010** US$3.0 million*
31 December 2011 US$8.0 million
31 December 2012 US$11.7 million
31 December 2013 Outstanding balance
Notes
*In the event that Urals Energy does not export any oil from Petrosakh (Urals
Energy's operations on Sakhalin Island), the amount of this tranche is to be
increased to US$4.0 million.
**Urals Energy and Petraco as part of the Restructuring Agreement have also
agreed a distribution schedule of the Taas-Yuriakh Neftegazodobycha loan (the
"Taas loan") proceeds based on the amount of any early repayment received by the
Company. In the event of early repayment of the Taas Loan in 2010, the maximum
payment by the Company to Petraco is to be not more than US$10.0 million. If the
Taas Loan is repaid earlier than maturity, but later than 31 December 2010,
Urals Energy and Petraco have agreed to a schedule of settlement.
Urals Energy will pledge 100% of the shares it currently holds in CJSC
Arcticneft and 97.2% of shares it currently holds in CJSC Petrosakh to Petraco
as security against the restructured Petraco Facility.
Directors' Dealings
On 2 June 2010 the Company was notified that Finfund Limited has exercised its
rights to acquire 13,000,000 existing Urals shares with a nominal value of
US$0.0063 from entities beneficially owned by two directors (being Leonid Y.
Dyachenko and Aleksey V. Ogarev) and another significant shareholder (being
Vyacheslav V. Rovneiko) (together the "Shareholders") pursuant to a share pledge
agreement dated 26 November 2007 (the "Share Pledge Agreement").
The Share Pledge Agreement was entered into by entities beneficially owned by
the Shareholders and secured various obligations of the Company under the terms
of a sale and purchase agreement dated 26 November 2007 (the "SPA") relating to
the acquisition by Urals of Taas-YuriakhNeftegazodobycha (the "Acquisition").
Such obligations included certain pledge fees which Finfund Limited are now
claiming are owed by the Company. Based on Finfund Limited's alleged defaults by
the Company in respect of such pledge fees, Finfund Limited has chosen to
exercise its rights under the Share Pledge Agreement to acquire 13,000,000
shares in the Company from entities beneficially owned by the Shareholders (the
"Pledged Shares"). The Shares beneficially owned and transferred to Finfund
Limited as a result of such exercise of its rights against each Shareholder are
as follows:
+-----------------------------------+-----------------------------+
| Name | Number of Pledged Shares |
+-----------------------------------+-----------------------------+
| Vyacheslav V. Rovneiko | 8,010,000 |
+-----------------------------------+-----------------------------+
| | |
+-----------------------------------+-----------------------------+
| Leonid Y. Dyachenko (Executive | 3,422,000 |
| Chairman) | |
+-----------------------------------+-----------------------------+
| | |
+-----------------------------------+-----------------------------+
| Aleksey V. Ogarev (Executive | 1,568,000 |
| Director) | |
+-----------------------------------+-----------------------------+
| | |
+-----------------------------------+-----------------------------+
| Total | 13,000,000 |
+-----------------------------------+-----------------------------+
In consequence of the exercise of Finfund Limited's rights as described above,
any liability owed by Urals to Finfund Limited would be reduced by the value of
the shares transferred. The Company understands however that this liability
(equal to the transferred share value), whilst reducing any obligation of the
Company to Finfund Limited, has been transferred by Finfund Limited to the
Shareholders in proportion to the number of shares transferred by them under the
Share Pledge Agreement. The Company intends to enter discussions with both
Finfund Limited and the Shareholders shortly in relation to the settlement of
these outstanding claims.
The Company has also been notified by Finfund Limited that it has subsequently
sold the 13,000,000 Pledged Shares to VR Trade Limited, a company incorporated
in the British Virgin Islands. The Board believe that the Pledge Shares
represent VR Trade Limited's entire interest in the Company's issued shares and,
in the event that this is the case, VR Trade Limited have a notifiable interest
in 13,000,000 Urals shares with a nominal value of US$0.0063 in the Company,
representing approximately 6.90 per cent of the Company's issued share capital.
Following the transfer of the Pledged Shares, the number of Urals shares held by
the following directors is as follows:
+------------------------+---------------------+------------------+
| | Number of shares | Percentage of |
| | beneficially held | the Company's |
| Name of director | following the | issued share |
| | transfer of the | capital |
| | Pledged Shares | |
+------------------------+---------------------+------------------+
| Leonid Y. Dyachenko | | |
| (Executive Chairman) | 3,676,760 | 1.95% |
+------------------------+---------------------+------------------+
| Aleksey V. Ogarev | 1,278,351 | 0.68% |
| (Executive Director) | | |
+------------------------+---------------------+------------------+
| | | |
+------------------------+---------------------+------------------+
In addition, Vyacheslav V. Rovneiko has notified the board of Urals that as a
result of the transfer of the Pledged Shares he now has a beneficial notifiable
interest in 11,374,963 Urals shares with a nominal value of US$0.0063 in the
Company representing approximately 6.03 per cent of the Company's issued share
capital.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR KKADNNBKBNAD
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