TIDMUEN
RNS Number : 2199J
Urals Energy Public Company Limited
28 June 2011
28 June 2011
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, is pleased to
announce its audited financial results for the year ended 31
December 2010 and to provide an update on strategic and operational
progress.
Overview
-- stabilising the legacy issues
-- establishing plans to return the Company to growth
-- active discussions regarding the restructuring of the Taas
loan
-- increasing confidence in quality of acreage
-- closely monitoring activity in neighbouring blocks which the
Board anticipate may further de-risk the Company's acreage
Operational
-- current production at Petrosakh is 1,527 BOPD
-- current production at Arcticneft is 711 BOPD
-- on 20 June 2011 crude oil in stock at Arcticneft was 138,500
bbls
-- well #51 spudded in March 2011, with production expected by
the Board in early July 2011
-- following completion of drilling well #51 the Company will
start drilling well #41
-- 12 well workover program at Petrosakh started, expected by
the Board to increase production by early July 2011
-- commencement of marketing high octane gasoline led to
increase in profitability
Financial
-- in 2010 the Company continued to resolve the legacy financial
issues and strengthen its balance sheet in order to enable the
Company to implement the Company's ongoing strategy
-- net profit (including one-offs) in 2010 increased to $52.9
million from a loss of $304.0 million in 2009
-- restructuring of Petraco loan and successful private
placement in December 2010 raising US$9.24million
Corporate
-- appointment of Ingeborg Srenger as a Non-Executive Director
of the Company
Outlook
-- ongoing focus to ensure that the Company's remaining debts
are repaid, the balance sheet continues to be strengthened, and
that the cost reduction program is completed
-- the Company intends to optimise the existing assets, identify
ways of utilising the upside potential in downstream and marketing
and achieve a positive operating cash flow
-- focus on further increasing production from Petrosakh and
Arcticneft with plans to achieve target production of 3,400 BOPD by
the end of 2011 and 5,150 BOPD by the end of 2013 respectively
-- Urals will continue to consider and evaluate possible
acquisition targets with a view to expanding and optimising the
Company's asset portfolio
Alexei Maximov, Chief Executive, commented:
"We would like to thank our shareholders for their on going
support, and to reassure them that the Board is focused on
restoring the fortunes of this Company. 2010 has been a year of
stabilisation but the legacy issues are now largely behind us,
leaving Urals well positioned to create a leading Russian focused
E&P company. We look forward to updating the market with
innovations in due course.
The restructuring of the Petraco loan has been a major milestone
for Urals and, combined with the successful private placement, led
to a strengthening of our balance sheet. As we look to continue the
trend of increased profitability, we are committed to working
towards additional increases in production from our existing
portfolio, and potentially identifying new opportunities to expand
the reserve base."
Enquiries:
Allenby Capital Limited
Nominated advisor and broker +44 (0)20 3328 5656
Nick Naylor/Alex Price
Pelham Bell Pottinger +44 (0)20 7861 3232
Mark Antelme
Jenny Renton
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
2010 for Urals Energy, was a year of stabilising legacy issues
and keeping costs low, which has been a challenging task to
perform. The Company is now on the other side of this transition
period and the outlook looks positive in terms of growth for Urals.
There has been a strategic focus by the Board on the ways in which
to best develop the production on the two licenses while looking
for other opportunities in the region.
In April 2010 the Company and Petraco reached an agreement to
restructure the debt owed to Petraco. The agreed repayment schedule
allows for a more gradual repayment of the outstanding liability
and provides additional security to Petraco. Petraco also converted
$2.0 million of the liability to 8,693,006 new ordinary shares in
the capital of the Company and received an option to acquire
12,576,688 new ordinary shares in the capital of the Company for
$5.0 million.
In December 2010 the Company completed a successful share
placing raising US$9.24million. The placing provided the Company
with sufficient funds to increase production across its asset
portfolio and the revenues from the production increase in turn,
will facilitate the ongoing Petraco loan repayment agreement. Urals
is also in active discussions regarding the restructuring of the
Taas loan and the Board looks forward to updating the market on
this matter at the appropriate time.
Significant workovers of the onshore Petrosakh and Arcticneft
licenses commenced in 2011 focusing on exploring the potential of
the surrounding resources. For the past week production in
Petrosakh has increased by 114 BOPD as a result of additional
perforation in two wells and a moderate increase as a result of
back pressure reduction and draw down increase. We will continue to
perform these operations and planned two more acid stimulations
within the next week and the Board expects that this will result in
a further increase in production. All works are performed by
existing staff and using materials and equipment that is kept on
the field site, therefore without additional costs to the
Company.
Progress continues to be made in development drilling at
Petrosakh with the work over program beginning, and the spudding of
the first vertical well since 2008. Well #51 was spudded in March
2011 and results are expected in July 2011. The Company continues
to review some of the wells which have previously been suspended
with a view to reactivating the other promising wells over the
coming months. In addition the Company began the marketing of a new
product in the form of high octane gasoline, which made a positive
contribution to profitability in 2010.
Further potential may be identified in Arcticneft, as a result
of the planned drilling of a deep exploration well by
ArcticMorNefteGazRazvedka ("AMNGR") in the lower Paleozoic horizon
of Peschanoozerskoye field. Since both Arcticneft and AMNGR operate
the same field (however different blocks of it), the Board
anticipates that that the results will not only further de-risk the
field but will also provide a strong indication for the potential
for Urals to increase its reserves in the same area and
formation.
High oil prices in 2011 substantially increased the
profitability of the Company's operations, however at the same time
it also effected the Company's working capital position, especially
at Arcticneft, where oil is produced and production taxes are paid
at a higher tax rate, while delivery of crude oil is expected only
in October 2011.
The Board will continue to work hard in identifying further
opportunities to add value and to complement the current portfolio.
I would like to take this opportunity to thank our shareholders,
employees and partners for their on-going support of the Company
and its re-focussed strategy in this new period for Urals going
forward.
2010 Financial
Operating Environment
2010 was characterised by a stable crude oil market price at an
average level of $75 per barrel for the first ninth months of the
year and by a sharp increase in the last quarter which reached a
level of $90 per barrel in December 2010. Domestic prices for light
oil products ranged from $70 to $90 per barrel thus securing the
Company's operating cash flows at a level sufficient to maintain
its operations and comply with license requirements at both
fields.
The tankers from Arcticneft were shipped in the second half of
August 2010 and at the end of October 2010.
Operating Results
$ '000 Year ended 31 December:
--------------------------
2010 2009
------------------------------------------ ---------- --------------
Gross revenues before excise and export
duties 59,307 68,989
Net revenues after excise, export duties
and VAT 43,501 50,881
Gross profit/(loss) 79,193 (113,458)
Operating profit/(loss) 61,086 (169,195)
Normalised management EBITDA (unaudited) 2,400 (2,098)
Total net finance income/(expense) 1,709 (163,855)
Profit/(loss) for the year 52,909 (304,015)
------------------------------------------ ---------- --------------
Production
------------------
2010 2009
--------------------------- -------- --------
Petrosakh bbls 528,855 642,383
Arcticneft bbls 251,194 233,913
Petrosakh BOPD (average) 1,449 1,760
Arcticneft BOPD (average) 688 641
Summary table: Gross Revenues before excise and export duties
($'000)
Year ended 31 December:
------------------------------------------ --------------------------
2010 2009
------------------------------------------ ------------ ------------
Crude oil 34,332 52,370
Export sales 18,315 39,930
Export sales of purchased crude oil from
AMNGR 13,079 3,942
Domestic sales (Russian Federation) 2,938 8,498
Petroleum (refined) products - domestic
sales 24,130 15,592
Other sales 845 1,027
Total gross revenues 59,307 68,989
------------------------------------------ ------------ ------------
In 2010, total gross revenues declined by $9.7 million as a
result of decreased sales volumes totalling 905,000 barrels in 2010
(compared with 1,387,000 barrels in 2009) following the divestment
of Dulisma. The decline was partially off-set by a higher crude oil
net back price of $36.88 per barrel in 2010 ($26.89 per barrel in
2009) and higher average net back prices for petroleum (refined)
products of $43.51 per barrel in 2010 ($38.72 in 2009). Netback for
domestic product sales is defined as gross product sales minus VAT,
transportation costs, excise tax and refining costs.
The sharp decrease in domestic sales of crude oil was due to the
divestiture of Dulisma in 2009 and acceleration of refining of
crude oil and sales of refined products at Petrosakh.
In 2010 all domestic sales of crude oil and almost all petroleum
(refined) products related to Petrosakh. In 2010 Arcticneft sold
petroleum (refined) products for $875,000 ($762,000 in 2009).
Summary table: Net backs ($/bbl)
Year ended 31 December:
----------------------------------------------- --------------------------
2010 2009
----------------------------------------------- ------------ ------------
Crude oil 36.88 26.89
Export sales 40.59 33.46
Export sales (AMNGR crude oil) 32.45 37.47
Domestic sales (Russian Federation) 36.52 17.59
Petroleum (refined) products - domestic sales 43.51 38.72
Other sales N/A N/A
----------------------------------------------- ------------ ------------
Gross profit (net revenues less cost of sales) in 2010 increased
to $79.2 million from a loss of $113.5 million in 2009. The main
driver of the increased profit in 2010 was an impairment release of
$70.5 million associated with Arcticneft and Petrosakh in
comparison with impairment charges recognised by the Company in
2009. According to IFRS, these expenses were included in the cost
of sales. Without these releases and write-offs, the Gross Profit
in 2010 and 2009 would have been $8.7 million and $8.7 million
respectively.
Cost of sales (before impairment) in 2010 totaled $34.8 million
as compared with $42.2 million in 2009 of which $3.7 million and
$4.1 million respectively represented non-cash items, principally
Depreciation, Amortization and Depletion. Also included in these
costs are $5.4 million and $1.6 million in 2010 and 2009,
respectively of crude oil purchased from Arcticneft's neighboring
operator on Kolguyev Island, FGUP AMNGR. Urals Energy purchased
this oil from AMNGR and resold it together with its own produced
oil for a modest profit margin, but a lesser profit margin than
would be the case if Arcticneft had produced the oil itself. Other
increase in operating costs is due to the increase in unified
production tax by $2 million to $10.4 million from $8.4 million as
a result of increased world oil prices.
Selling, General and Administrative expenses decreased during
the year 2010 by $3.7 million to $17.6 million from $21.3 million
in 2009. Without the charge for the provision for doubtful accounts
receivable $5.3 million in 2010 and the recovery of doubtful
accounts receivable $1.3 million in 2009 Selling, General and
Administrative expenses would have decreased during the year 2010
by $10.2 million. This was primarily caused by the initiation of
cost reduction programme in the holding company and management
company. Headcount in the management company in Moscow was reduced
by more than 70%.
The net finance costs during the 2010 were $1.7 million and net
interest benefit was $3.1 million (for the 2009: net finance cost
of $163.9 million and net interest expense of $87.8 million). These
costs decreased substantially as result of the settlement of all
liabilities to Sberbank during 2009 through a sale of Dulisma and
Taas.
Net profit for the year attributable to shareholders in 2010 was
$52.9 million as compared with net loss of $304 million in 2009.
That was primarily driven by non-cash transactions associated with
the impairment release of property, plant and equipment in
Arcticneft and Petrosakh and divestiture of Dulisma and Taas
discussed above.
Decrease of Production expenses, Selling, General and
Administrative expenses in 2010 resulted in Consolidated normalized
management EBITDA increase by $5.1 million to $2.4 million in 2010
compared with negative $2.7 million in 2009, with EBITDA margins of
5.5 % and (5.2) % respectively.
Management EBITDA ($'000) - Unaudited
Year ended 31 December:
------------------------------------------------ --------------------------
2010 2009
------------------------------------------ ---- ---------- --------------
Profit for the year 52,909 (304,014)
Income tax charge/(benefit) 9,886 (29,035)
Net interest and foreign currency
(income)/expense (1,709) 163,855
Depreciation, depletion and
amortization 4,544 4,937
------------------------------------------ ---------------- --------------
Total non-cash expenses 12,721 139,757
Charge/(release) of bad debt
provision 5,250 (1,254)
Share-based payments 2,012 4,177
Release of inventory provision (892) -
(Release)/charge of impairment of
property, plant and equipment (70,476) 122,127
Gain from disposal of assets held
for sale - 31,647
Resignation fees to top-managers - 1,200
Other non-recurrent losses 876 3,695
------------------------------------------ ---------------- --------------
Total non-recurrent and non-cash
items (63,230) 161,592
Normalized EBITDA 2,400 (2,665)
------------------------------------------ ---------------- --------------
Net debt Position
At 31 December 2010 the Net debt position had substantially
improved following a restructuring with Petraco, positive cash
flows from operations and private placement at the end of December
2010.
As at 31 December 2010 the Company had net cash of $13.3 million
(calculated as Long-term and Short-term debt plus payables to
Finfund less cash in bank, receivables from private placement $8.8
million received in January 2011, loan receivable from Taas and
less Loans issued to related parties). As at 31 December 2009 net
cash was $1.9 million.
In April 2010 the Company and Petraco reached an agreement to
restructure the debt owed to Petraco with the repayment schedule
allowing for a more gradual repayment of the outstanding liability
and providing additional security to Petraco. Additionally, Petraco
converted $2.0 million of the liability to 8,693,006 new ordinary
shares in the capital of the Company and received an option to
acquire 12,576,688 new ordinary shares in the capital of the
Company for $5.0 million. The Company classified $12.0 million of
the $30.7 million as current portion of a long-term debt in its
financial statements and the remaining part as long-term debt. As
at 31 December 2010 the long-term part amounted to $18.7 million.
As part of this restructuring agreement, Petraco have the right to
appoint one non-executive to the board of the Company. As of the
date of this report liability to Petraco is $27.3 million.
The Company repaid the tranche of the loan $3.0 million to
Petraco in November 2010 and the tranche of the loan which was due
at the end of December 2010 in amount of $4.0 million in early
January 2011.
Accounts payable and accrued expenses of $10.7 million at the
end of 2010 mainly represented outstanding accounts payable to
Finfund with the maximum liability of $4.4 million at 31 December
2010 for the pledge fee and a liability to AMNGR in the amount of
$1 million for the crude oil.
On 4 June 2010 the Company announced that Finfund Limited had
exercised its rights to acquire 13,000,000 existing Urals Energy
shares with a nominal value of $0.0063 per share 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 "Pledge Shareholders")
pursuant to a share pledge agreement dated 26 November 2007 (the
"Share Pledge Agreement").
Under accounting rules the Company is required to record a
provision for the potential reimbursement to the Pledge
Shareholders. The Company has recorded this provision based on the
market value of 13,000,000 shares. The provision is equal to
$2,559,000 as of 31 December 2010.
The Share Pledge Agreement was entered into by entities
beneficially owned by the Pledge 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
Company's alleged defaults in respect of the payment of such 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 Pledge 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 (a market share price at
the date of the transaction). The Company disputes that it owes any
pledge fees to Finfund Limited and is in the process of formulating
a response to Finfund Limited.
During 2010 the Group impaired loan to related party by $5.2
million (interest income of $0.5 million for 2010). This amount
relates to a loan to shareholder and former member of management of
the Group. This loan is overdue and is secured by a pledge on an
entity whose primary asset is real estate properties located in
Moscow. In October 2010 management became aware of the fact that
the same real estate has been additionally pledged to secure
funding from external banks. This fact was divulged to management
and this was considered to be misconduct on behalf of the related
party resulting in a devaluation of the Group's collateral. The
Board has formally informed this related party that it is aware of
this fact and has demanded repayment of the full amount by 20 May
2011. By 20 May 2011 the Board had not received any response from
the related party and the Company therefore filed the claim to the
London Court of International Arbitration. For accounting purposes
management has reassessed the carrying value of the loan and has
impaired this fully. However, this does not reduce the validity of
the legal claim against this related party.
Operational update
Petrosakh
Current production at Petrosakh is 1,470 BOPD (well #47 is under
maintenance currently, together with this well production would be
1,527 BOPD). Recent flow rate tests on the sidetrack well 35b have
confirmed that the reservoir has the potential for a production
increase. In response to this new data, and with a strengthened
balance sheet following the successful private placement conducted
in December 2010, the decision has been made by the Board to drill
more vertical wells into the same area, in addition to sidetracks
from already proven wells on the field.
In order to capture the full potential of the Petrosakh field,
the vertical well will consist of a larger diameter and is expected
by the Board to achieve better flow rates than the previously
envisaged drilling programme would have achieved. In particular,
the updated strategy entails drilling two new vertical wells and
four sidetracks.
The first vertical well #51 on the Petrosakh field was
successfully spudded in the end of March 2011. The current depth of
this new well is approximately 1,330 metres and a further 200
meters are to be drilled. The delay in drilling and commissioning
of the well (originally planned to be completed in the end of May
2011) was caused by the complicated geological structure. However,
this does not impact anticipated flow rates and is planned to be
put into operations in July 2011.
Following completion of drilling and review of performance of
well #51, the Company will start drilling well #41.
Additionally, following a detailed review of the wells'
performance, on 23 June 2011 the Company has started workovers on
12 wells. Since 23 June 2011 production has been increased by 114
BOPD as a result of additional perforation of two wells (by 107
BOPD) and a moderate increase (7 BOPD) was due to back pressure
reduction and draw down increase on one well. Further 2 wells are
planned for acid stimulation, which the Board anticipate may
increase production and 8 further wells are targeted for back
pressure reduction and draw down increase may also add further
BOPD. All works are performed by in-house workover crew and with no
additional cost to the Company.
Downstream
Petrosakh continues to refine and sell 100% of its crude oil
production. Following an increase in world oil prices and
subsequent excise tax in Russia, prices for oil products in
Sakhalin have also increased.
Offshore License
The offshore exploration license at Petrosakh expired in
February 2011. As previously discussed above, after confirming a
lack of interest from potential farm-out partners, the Board took
the decision not to apply for an extension on account of the
substantial capital expenditure requirements and the high risk of
the exploration programme.
Arcticneft
Current production at Arcticneft stands at 711 BOPD. At 26 June
2011 crude oil in stock was 138,500 bbls.
Last year the Company engaged a respected oil industry institute
to review the current well performance and recommence water
injection, in order to increase production from the existing wells.
These recommendations will be tested during 2011 and, if results
prove to be economic, the Board anticipates that these
recommendations will be implemented on all wells.
In 2011 the Company not only plans to increase production from
the existing wells but also to drill new wells following the
approval of the field development plan by State Central Development
Committee. This approval process is in progress. Drilling is
scheduled for the second half of the year, since delivery of the
required materials to Arcticneft can be made only during the open
navigation period, which starts in June-July.
The first tanker is planned to be loaded in October 2011.
Auditors' Report
Emphasis of matter - Going Concern
The Auditors issued a qualified opinion for the year ending 31
December 2010 and the Board wish to draw attention to Note 3 to the
consolidated financial statements which indicate that the Group's
current liabilities exceed its current assets by US$11.2 million.
This condition, along with other matters as set forth in Note 3,
indicate the existence of a material uncertainty which may cast
significant doubt about the Group's ability to continue as a going
concern.
Urals Energy Public Company Limited Consolidated Financial
Statements As of and for the Year Ended 31 December 2010
Urals Energy Public Company Limited
Consolidated Statement of Financial Position
(presented in US$ thousands)
31 December:
----------------------
Note 2010 2009
------------------------------------------- ----- ---------- ----------
Assets
Current assets
Cash in bank and on hand 987 2,361
Accounts receivable and prepayments 8 14,928 11,264
Inventories 9 12,911 16,867
Total current assets 28,826 30,492
------------------------------------------- ----- ---------- ----------
Non-current assets
Property, plant and equipment 10 128,817 62,524
Supplies and materials for capital
construction 2,655 2,289
Other non-current assets 11 39,426 35,330
------------------------------------------- ----- ---------- ----------
Total non-current assets 170,898 100,143
------------------------------------------- ----- ---------- ----------
Total assets 199,724 130,635
------------------------------------------- ----- ---------- ----------
Liabilities and equity
Current liabilities
Accounts payable and accrued expenses 12 10,781 20,697
Provisions 12 2,559
Income tax payable 5,118 3,759
Other taxes payable 14 5,151 2,360
Short-term borrowings and current
portion of long-term borrowings 15 12,172 33,978
Advances from customers 13 4,259 2,090
Current liabilities before warrants
classified as liabilities 40,040 62,884
Warrants classified as liabilities - 56
------------------------------------------- ----- ---------- ----------
Total current liabilities 40,040 62,940
------------------------------------------- ----- ---------- ----------
Long-term liabilities
Long term borrowings 15 18,653 -
Long term finance lease obligations 329 610
Dismantlement provision 16 1,232 1,223
Deferred income tax liabilities 14 12,387 3,921
Total long-term liabilities 32,601 5,754
------------------------------------------- ----- ---------- ----------
Total liabilities 72,641 68,694
------------------------------------------- ----- ---------- ----------
Equity
Share capital 1,543 1,131
Share premium 656,444 644,135
Translation difference (28,858) (28,373)
Retained earnings (accumulated deficit) (503,016) (554,976)
------------------------------------------- ----- ---------- ----------
Equity attributable to shareholders
of Urals Energy Public Company Limited 126,113 61,917
------------------------------------------- ----- ---------- ----------
Non-controlling interest 970 24
------------------------------------------- ----- ---------- ----------
Total equity 17 127,083 61,941
------------------------------------------- ----- ---------- ----------
Total liabilities and equity 199,724 130,635
------------------------------------------- ----- ---------- ----------
Approved on behalf of the Board of Directors on 21 June 2011
A.D. Maximov G.B.Kazakov
Chief Executive Officer Chief Financial Officer
------------------------- -------------------------
Year ended 31 December:
--------------------------
Note 2010 2009
------------------------------- ----------------- ------------ ------------
Revenues
Gross revenues 18 59,307 68,989
Less: excise taxes (1,659) (345)
Less: export duties (14,147) (17,763)
------------------------------- ----------------- ------------ ------------
Net revenues after excise
taxes and export duties 43,501 50,881
Cost of sales 20 (34,784) (42,212)
Impairment release / (charges) 7 70,476 (122,127)
Gross profit/(loss) 79,193 (113,458)
------------------------------- ----------------- ------------ ------------
Selling, general and
administrative expenses 21 (17,639) (21,342)
Other operating loss (468) (2,748)
Loss from disposal of
subsidiaries 25 - (31,647)
Operating profit/(loss) 61,086 (169,195)
Interest income 15 4,395 4,175
Interest expense 15 (1,248) (91,968)
Foreign currency loss (1,438) (3,256)
Movement in value of
investment in joint venture - (234,106)
Movement in value of financial
derivatives - 161,300
------------------------------- ----------------- ------------ ------------
Total net finance
benefits/(costs) 1,709 (163,855)
Profit/(loss) before income
tax 62,795 (333,050)
Income tax (charge)/benefit 14 (9,886) 29,035
Profit/(loss) for the year 52,909 (304,015)
------------------------------- ----------------- ------------ ------------
Profit/(loss) for the year
attributable to: -
Non-controlling interest 949 (84)
- Shareholders of Urals
Energy Public Company
Limited 51,960 (303,931)
------------------------------- ----------------- ------------ ------------
Earnings/(loss) per share from
profit attributable to
shareholders of Urals Energy
Public Company Limited: 17
- Basic earnings/(loss) per
share (in US dollar per
share) 0.28 (1.69)
- Diluted earnings/(loss) per
share (in US dollar per
share) 0.27 (1.69)
Weighted average shares
outstanding attributable to:
- Basic shares 186,187,874 179,409,466
- Diluted shares 195,274,469 179,409,466
Profit/(loss) for the year 52,909 (304,015)
Other comprehensive
income/(loss):
- Effect of currency
translation (488) (19,616)
- Accumulative translation
adjustment relating to
disposed subsidiaries - 31,567
------------------------------- ----------------- ------------ ------------
Total comprehensive
profit/(loss) for the year 52,421 (292,064)
------------------------------- ----------------- ------------ ------------
Attributable to:
- Non-controlling interest 1.1.1 946 (81)
- Shareholders of Urals Energy
Public Company Limited 51,475 (291,983)
------------------------------- ----------------- ------------ ------------
Year ended 31 December:
--------------------------
Note 2010 2009
------------------------------------------- ----- ------------ ------------
Cash flows from operating activities
Profit/(loss) before income tax 62,795 (333,050)
Adjustments for:
Depreciation, amortization and
depletion 20 4,544 4,937
Change in fair value of financial
derivatives - (161,300)
Change in fair value of investment
in joint venture - 234,106
Share-based payments 17 2,012 4,177
Interest income 15 (4,395) (4,175)
Interest expense 15 1,248 91,968
Loss from disposal of subsidiaries - 31,647
Release of provision on inventory 9 (892) (2,462)
Impairment (release)/charges 7 (70,476) 122,127
Gain on disposal of property, plant
and equipment (1,151) -
Change in fair value of warrants 22
Bad debt write-off 22 5,250 (1,254)
Release of other taxes risk 14,
provision 20 - (199)
Foreign currency loss, net 1,438 3,256
Other non-cash transactions 3,954 999
Operating cash flows before changes
in working capital 4,349 (9,223)
Decrease in inventories 5,213 12,314
Increase in accounts receivables
and prepayments (5,780) (1,527)
Decrease in accounts payable and
accrued expenses (6,849) (169)
Increase in advances from customers 2,185 1,934
Increase in other taxes payable 2,791 546
------------------------------------------- ----- ------------ ------------
Cash generated from operations 1,909 3,875
Interest received - 72
Interest paid - (536)
Income tax (paid)/received (61) 382
------------------------------------------- ----- ------------ ------------
Net cash generated from operating
activities 1,848 3,793
Cash flows from investing activities
Purchase of property, plant and
equipment (1,608) (1,930)
Loans issued - (906)
Proceeds on loans issued - 984
Proceeds from sale of property,
plant and equipment 1,770 -
------------------------------------------- ----- ------------ ------------
Net cash generated from (used in)
investing activities 162 (1,852)
Cash flows from financing activities
Repayment of borrowings (3,000) -
Finance lease principal payments (392) (376)
Net cash used in financing activities (3,392) (376)
Effect of exchange rate changes
on cash in bank and on hand 8 (476)
------------------------------------------- ----- ------------ ------------
Net (decrease) /increase in cash
in bank and on hand (1,374) 1,089
Cash in bank and on hand at the
beginning of the year 2,361 1,272
------------------------------------------- ----- ------------ ------------
Cash in bank and on hand at the
end of the year 987 2,361
------------------------------------------- ----- ------------ ------------
The accompanying notes on pages 8 to 44 are an integral part of
these consolidated financial statements
Equity
attributable
to
Difference Shareholders
from of Urals
conversion Energy
of share Cumulative Retained earnings Public
Share Share capital Translation (accumulated Company Non-controlling Total
Notes capital premium into US$ Adjustment deficit) Limited interest equity
Balance at 31
December
2008 1,122 640,080 (113) (40,321) (251,045) 349,723 105 349,828
Effect of
currency
translation - - - (19,619) - (19,619) 3 (19,616)
Accumulative
translation
adjustment
relating to
disposed
subsidiaries - - - 31,567 - 31,567 - 31,567
Loss for the
year - - - - (303,931) (303,931) (84) (304,015)
-------- -------- ----------- ------------ ---------------------- ------------- ---------------- ----------
Total
comprehensive
loss - - - 11,948 (303,931) (291,983) (81) (292,064)
Issuance of
shares 17 9 (9) - - - - - -
Share-based
payment 17 - 4,177 - - - 4,177 - 4,177
Balance at 31
December
2009 1,131 644,248 (113) (28,373) (554,976) 61,917 24 61,941
--------------- ------ -------- -------- ----------- ------------ ---------------------- ------------- ---------------- ----------
Effect of
currency
translation - - - (485) - (485) (3) (488)
Profit for the
year - - - - 51,960 51,960 949 53,324
-------- -------- ----------- ------------ ---------------------- ------------- ---------------- ----------
Total
comprehensive
income - - - (485) 51,960 51,475 946 52,421
Issuance of
shares 17 71 1,929 - - - 2,000 - 2,000
Share-based
payment 17 - 2,012 - - - 2,012 - 2,012
Private
placement 17 341 8,840 - - - 9,181 - 9,181
Expenses
related to
private
placement 17 - (472) - - - (472) - (472)
Balance at 31
December
2010 1,543 656,557 (113) (28,858) (503,016) 126,113 970 127,083
--------------- ------ -------- -------- ----------- ------------ ---------------------- ------------- ---------------- ----------
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:
Effective ownership interest
Entity Jurisdiction at 31 December
-------------------------- ----------------- -------------------------------
2010 2009
-------------------------------------------- --------------- --------------
Exploration and
production
ZAO Petrosakh
("Petrosakh") Sakhalin 97.2% 97.2%
ZAO Arcticneft
("Arcticneft") Nenetsky Region 100% 100%
OOO Lenskaya
Transportnaya Kompaniya
("LTK") Irkutsk -(1) 100%
Management company
OOO Urals Energy Moscow 100% 100%
Urals Energy (UK) Limited
(dormant starting from
May 2007) (2) United Kingdom 100% 100%
Exploration
OOO Urals-Nord
("Urals-Nord") Nenetsky Region -(1) 100%
(1 ) LTK and Urals-Nord were merged with OOO Urals Energy in
November 2010.
(2 ) As at 5 January 2011 Urals Energy (UK) Limited is
considered a liquidated entity. From 6 January 2012 Urals Energy UK
will be struck off of Companies House and will be dissolved.
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) 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 assets and
liabilities denominated in foreign currencies are retranslated into
the functional currency at the rate of exchange ruling at the
reporting date. Any resulting exchange differences are included in
the profit or loss component of the consolidated statement of
comprehensive income. Non-monetary assets and liabilities that are
measured at historical cost and denominated
2 Summary of Significant Accounting Policies (Continued)
in a foreign currency are translated into the functional
currency using the rates of exchange as at the dates of the initial
transactions. The US dollar to Russian Rouble exchange rates were
30.48 and 30.24 as of 31 December 2010 and 2009, respectively.
Translation to presentation currency. The Group's consolidated
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. Monetary assets and
liabilities denominated in foreign currencies are translated into
the functional currency at the rate of exchange ruling at the
reporting date. Any resulting exchange differences are included in
the profit or loss component of the consolidated statement of
comprehensive income. Non-monetary assets and liabilities that are
measured at historical cost and denominated in a foreign currency
are translated into the functional currency using the rates of
exchange as at the dates of the initial transactions. 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.
Comparatives. Where necessary, comparative figures have been
adjusted to conform with changes in presentation in the current
year.
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. Identifiable assets acquired and
liabilities and contingent liabilities assumed in a business
combination are measured at their fair values at the acquisition
date, irrespective of the extent of any non-controlling
interest.
The Group measures non-controlling interest on a transaction by
transaction basis at the non-controlling interest's proportionate
share of net assets of the acquiree.
Goodwill is measured by deducting the net assets of the acquiree
from the aggregate of the consideration transferred for the
acquiree, the amount of non-controlling interest in the acquiree
and fair value of an interest in the acquiree held immediately
before the acquisition date. Any negative amount ("negative
goodwill") is recognised in profit or loss, after management
reassesses whether it identified all the assets acquired and all
liabilities and contingent liabilities assumed and reviews
appropriateness of their measurement.
The consideration transferred for the acquiree is measured at
the fair value of the assets given up, equity instruments issued
and liabilities incurred or assumed, including fair value of assets
or liabilities from contingent consideration arrangements but
excludes acquisition related costs such as advisory, legal,
valuation and similar professional services. Transaction costs
related to the acquisition and incurred for issuing equity
instruments are deducted from equity; transaction costs incurred
for issuing debt as part of the business combination are deducted
from the carrying amount of the debt and all other transaction
costs associated with the acquisition are expensed.
All intercompany transactions, balances and unrealised gains on
transactions between group companies are eliminated; unrealised
losses are also eliminated unless the cost cannot be recovered.
2 Summary of Significant Accounting Policies (Continued)
Non-controlling interest is that part of the net results and of
the equity of a subsidiary attributable to interests which are not
owned, directly or indirectly, by the Company. Non-controlling
interest forms a separate component of the Group's equity.
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.
Purchases and sales of non-controlling interests. The Group
applies the economic entity model to account for transactions with
owners of non-controlling interest. Any difference between the
purchase consideration and the carrying amount of non-controlling
interest acquired is recorded as a capital transaction directly in
equity. The Group recognises the difference between sales
consideration and carrying amount of non-controlling interest sold
as a capital transaction in the consolidated statement of changes
in equity.
The Group has changed its accounting policy for transactions
with non-controlling interests and the accounting for loss of
control or significant influence from 1 January 2010. Previously
transactions with non-controlling interests were treated as
transactions with parties external to the Group. Disposals
therefore resulted in gains or losses in profit or loss and
purchases resulted in the recognition of goodwill. On disposal or
partial disposal, a proportionate interest in reserves attributable
to the subsidiary was reclassified to profit or loss or directly to
retained earnings.
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 profit and loss section of
consolidated statement of comprehensive income.
The Group's share of its joint venture's post-acquisition
profits or losses is recognised in the profit and loss section of
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
comprehensive income.
2 Summary of Significant Accounting Policies (Continued)
Property, plant and equipment. Property, plant and equipment
acquired as part of a business combination is recorded at fair
value at the acquisition date and adjusted for accumulated
depreciation, depletion and impairment. All subsequent additions
are recorded at historical cost of acquisition or construction and
adjusted for accumulated depreciation, depletion and impairment.
Oil and gas exploration and production activities are accounted for
in a manner similar to the successful efforts method. Costs of
successful development and exploratory wells are capitalised. The
cost of property, plant and equipment includes provisions for
dismantlement, abandonment and site restoration (see Provisions
below).
The Group accounts for exploration and evaluation activities in
accordance with IFRS 6, Exploration for and Evaluation of Mineral
Resources. Geological and geophysical exploration costs are charged
against income as incurred. Costs directly associated with an
exploration well are initially capitalised as an intangible asset
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 Exploration and Evaluation (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 and related equipment 19
Buildings 20
Other assets 6 to 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 operating loss' in
the profit and loss section of 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.
2 Summary of Significant Accounting Policies (Continued)
Intangible assets are amortised using the straight-line method
over their useful lives:
Estimated useful
life
------------------------------------------- -----------------
Software licences 1-5
Capitalised internal software development
costs 3
Other licences 5 to 7
------------------------------------------- -----------------
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).
Reversal of impairment. Non-financial assets other than goodwill
that suffered an impairment are reviewed for possible reversal of
impairment at each reporting date.
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.
2 Summary of Significant Accounting Policies (Continued)
Cash and cash equivalents. Cash and cash equivalents includes
cash in hand, deposits held at call with banks, and other
short-term highly liquid investments with original maturities of
three months or less. Cash and cash equivalents are carried at
amortised cost using the effective interest method. Restricted
balances are excluded from cash and cash equivalents for the
purposes of the consolidated statement of cash flow. 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 consolidated 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 have been provided for in the
consolidated financial statements in accordance with legislation
enacted or substantively enacted by the end of the reporting
period. The income tax charge or benefit comprises current tax and
deferred tax and is recognised in profit or loss for the year
except if it is recognised in other comprehensive income or
directly in equity because it relates to transactions that are also
recognised, in the same or a different period, in other
comprehensive income or 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.
2 Summary of Significant Accounting Policies (Continued)
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 geographic segments disclosed in note
19.
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 at the grant date 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 derivative 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.
2 Summary of Significant Accounting Policies (Continued)
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.
3 Going Concern
A significant portion of the Group's consolidated net assets of
$127,498 thousand 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.
The Group had net current liabilities of $11.2 million as of 31
December 2010. The most significant creditor as of 31 December 2010
was an loan from Petraco - with $30.7 million of principal and
interest owed as of 31 December 2010 (Note 15).
As discussed further in Note 15, 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 was repayable in 2010, $8.0 million is repayable in
2011, $11.7 million is repayable in 2012, the remaining balance is
payable in 2013 (see Note 15).
In December 2010 the Company had placed 54,198,071 shares with a
nominal value of US$0.0063 each (the "Placing Shares") with
institutional and other investors at 11.0 pence per share (the
"Placing"). The Placing is conditional upon admission of the
54,198,071 Placing Shares being admitted to trading on AIM. The
Company raised approximately GBP6.0 million (being approximately
US$9.2 million) before expenses. The other details of the Placing
are discussed further in Note 17.
Management have prepared monthly cash flow projections for
periods throughout 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 $90 per
barrel has been used for 2011 and for 2012) and on continued
cooperation with Petraco.
Despite the above matters, the Group still has funding and
liquidity constraints. Management considers that there is a
material uncertainty which may cast doubt about the Group's ability
to continue as going concern.
Despite the 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
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. Furthermore, as a result of these
negotiations the Group was released from a Put Option for nil
consideration.
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 30,558
Movement in value of investment in joint venture 234,106
Movement in value of financial derivatives (release
from Put) (161,300)
Net charge on settlement of Sberbank obligations 225,491
------------------------------------------------------- ----------
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 Option terminated in 2009 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 2011 or later
and which the Group has not early adopted:
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. IFRS 9 has further audited in October 2010 to
address the classification and measurement of financial
instruments. 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.
- Most of the requirements in IAS 39 for classification and
measurement of financial liabilities were carried forward unchanged
to IFRS 9. The key change is that an entity will be required to
present the effects of changes in own credit risk of financial
liabilities designated as at fair value through profit or loss in
other comprehensive income.
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 2010 consolidated financial
statements.
IFRS 10, Consolidated Financial Statements. IFRS 10 was issued
in May 2011 and supersedes IAS 27 Consolidated and Separate
Financial Statements and SIC 12 Consolidation - Special Purpose
Entities.
- The objective of IFRS 10 is to have a single basis for
consolidation for all entities, regardless the nature of investee,
and that basis is control.
- The definition of control includes three elements: (i) power
over an investee, (ii) exposure or rights to variable returns of
the investee and (iii) ability to use power over investee to affect
the investor's returns.
- IFRS 10 replaces those parts of IAS 27 that address when or
how an investor should prepare the consolidated financial
statements and replaces SIC-12 in its entirety.
The effective date of IFRS 10 is 1 January 2013, with earlier
application permitted under certain circumstances. The Group is
currently assessing the impact of the amended standard on
disclosures in its financial statements.
IFRS 11, Joint Arrangements. IFRS 11 was issued in May 2011 and
supersedes IAS 31 Interests in Joint Ventures, and SIC-13 Jointly
Controlled Entities - Non-Monetary Contributions by Venturers.
- IFRS 11 classifies joint arrangements as either joint
operations (combining the existing concept of jointly controlled
operations) or joint ventures (equivalent of existing concept of a
jointly controlled entity).
- IFRS 11 requires the use of equity method of accounting for
interests in joint ventures thereby eliminating the proportionate
consolidation method.
The effective date of IFRS 11 is 1 January 2013, with earlier
application permitted under certain circumstances. The Group is
currently assessing the impact of the amended standard on
disclosures in its consolidated financial statements.
IFRS 12, Disclosure of Interests in Other Entities. IFRS 12 was
issued in May 2011. The standard requires extensive disclosures
relating to an entity's interests in subsidiaries, joint
arrangements, associates and unconsolidated structured entities. An
entity is required to disclose information that helps users of its
financial
5 New accounting pronouncements and interpretations
(Continued)
statements evaluate the nature of and risks associated with its
interests in other entities and effects of those interests on its
consolidated financial statements.
The effective date of IFRS 11 is 1 January 2013, entities are
permitted to incorporate any of the new disclosures into their
financial statements before that date. The Group is currently
assessing the impact of the amended standard on disclosures in its
consolidated financial statements.
IFRS 13, Fair Value Measurement. IFRS 13 was issued in May 2011.
The standards establishes s single source guidance for fair value
measurement under IFRS, it applies to both financial and
non-financial items measured at fair value.
IFRS 13 is effective for annual periods beginning or after 1
January 2013, with early application permitted, and applies
prospectively from the beginning of the annual period in which the
standard is adopted. The Group is currently assessing the impact of
the amended standard on disclosures in its financial
statements.
Consolidated and Separate Financial Statements - Amendment to
IAS 27 (issued on 12 May 2011, applicable to annual reporting
periods, beginning on or after 1 January 2013). IAS 27 applies when
an entity prepares separate financial statements that comply with
IFRS.The amendment is not expected to have any material impact on
the Group's financial statements. The amendment is not expected to
have any material impact on the Group's financial statements.
Investments in Associates - Amendment to IAS 28 (issued on 12
May 2011, applicable to annual reporting periods, beginning on or
after 1 January 2013). The standard prescribes accounting for
investments in associates and sets out the requirements for the
application of the equity method when accounting for investments in
associates and joint ventures.
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 consolidated
financial statements.
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 consolidated
financial statements.
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
consolidated financial statements.
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
consolidated financial statements.
Improvements to International Financial Reporting Standards
(issued in May 2010; effective dates from 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
5 New accounting pronouncements and interpretations
(Continued)
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
consolidated 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 relevant
for the Group's consolidated financial statements.
Disclosures - Transfers of Financial Assets - Amendments to IFRS
7 (issued in October 2010 and effective for annual periods
beginning on or after 1 July 2011). The amendment requires
additional disclosures in respect of risk exposures arising from
transferred financial assets. The amendment includes a requirement
to disclose by class of asset the nature, carrying amount and a
description of the risks and rewards of financial assets that have
been transferred to another party yet remain on the entity's
balance sheet. Disclosures are also required to enable a user to
understand the amount of any associated liabilities, and the
relationship between the financial assets and associated
liabilities. Where financial assets have been derecognised but the
entity is still exposed to certain risks and rewards associated
with the transferred asset, additional disclosure is required to
enable the effects of those risks to be understood. The Group is
currently assessing the impact of the amended standard on
disclosures in its consolidated financial statements.
Recovery of Underlying Assets - Amendments to IAS 12 (issued in
December 2010 and effective for annual periods beginning on or
after 1 January 2012). The amendment introduced a rebuttable
presumption that an investment property carried at fair value is
recovered entirely through sale. This presumption is rebutted if
the investment property is held within a business model whose
objective is to consume substantially all of the economic benefits
embodied in the investment property over time, rather than through
sale. SIC-21, Income Taxes - Recovery of Revalued Non-Depreciable
Assets, which addresses similar issues involving non-depreciable
assets measured using the revaluation model in IAS 16, Property,
Plant and Equipment, was incorporated into IAS 12 after excluding
from its scope investment properties measured at fair value. The
Group does not expect the amendments to have any material effect on
its consolidated financial statements.
Severe Hyperinflation and Removal of Fixed Dates for First-time
Adopters - Amendments to IFRS 1 (issued in December 2010 and
effective for annual periods beginning on or after 1 July 2011).
The amendment regarding severe hyperinflation creates an additional
exemption when an entity that has been subject to severe
hyperinflation resumes presenting or presents for the first time,
financial statements in accordance with IFRS. The exemption allows
an entity to elect to measure certain assets and liabilities at
fair value; and to use that fair value as the deemed cost in the
opening IFRS statement of financial position. The IASB has also
amended IFRS 1 to eliminate references to fixed dates for one
exception and one exemption, both dealing with financial assets and
liabilities. The first change requires first-time adopters to apply
the derecognition requirements of IFRS prospectively from the date
of transition, rather than from 1 January 2004. The second
amendment relates to financial assets or liabilities where the fair
value is established through valuation techniques at initial
recognition and allows the guidance to be applied prospectively
from the date of transition to IFRS rather than from 25 October
2002 or 1 January 2004. This means that a first-time adopter may
not need to determine the fair value of certain financial assets
and liabilities at initial recognition for periods prior to the
date of transition. IFRS 9 has also been amended to reflect these
changes. The Group does not expect the amendments to have any
effect on its 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 consolidated 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 21 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/(loss)
for the year.
Impairment provision for receivables. The impairment provision
for receivables (including loans issued) is based on management's
assessment of the probability of collection of individual
receivables. Significant financial difficulties of the
debtor/lender, probability that the debtor/lender 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/lender'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
6 Critical Accounting Estimates and Judgements in Applying
Accounting Policies (Continued)
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, 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/release.
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 2010
At the end of 2010 the Group's management reassessed the
impairment of production assets and cash generating units due to an
increase in the forecast crude oil prices. As at 31 December 2010
the Group has released the impairment provision of $32.8 million
and $37.7 million for Arcticneft and Petrosakh cash generating
units, respectively.
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. Given the nature of the Group's activities, information on the
fair value of an assets is usually difficult to obtain unless
negations with potential purchasers are taking place. Consequently,
unless indicated otherwise, the recoverable amount used in
assessing the impairment charges described below is value-in-use.
The Group estimated value-in-use using a discounted cash flow
model.
An average oil price of $90 for 2010 and $90 in real terms for
future sales was estimated for the impairment calculation and a
discount rate of 12% in real terms was used to discount the
estimated future cash flows. The discount rate of 12% in real terms
was derived from the Group's approximate pre-tax weighted average
cost of capital.
Estimated production volumes are based on detailed data for the
fields and take into account development plans for the fields
agreed by management as part of the long-term planning process. It
is estimated that, if all production were to be reduced by 15% for
the whole of the next 20 years, this would not be sufficient to
reduce the excess of recoverable amount over the carrying amounts
of the individual cash generating units to zero. Consequently,
management believes no reasonably possible change in the production
assumption would cause the carrying amount of non-current assets to
exceed their recoverable amount.
The Group estimates value-in-use using a discounted cash flow
model. The future cash flows are adjusted for risks specific to the
asset and discounted using a pret-tax discount rate of 12%
(2009:12%). This discount rate is derived from the group's pre-tax
weighted average cost of capital. Management also believes that
currently there is no reasonably possible change in discount rate
which would reduce the Group's impairment provision release.
It is estimated that the long-term price of Brent crude oil that
would cause the total recoverable amount to be equal to the total
carrying amount of non-current assets for individual
cash-generating units, would be in the range from US$62 to US$65
per barrel.
7 Impairment (Continued)
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 4) was calculated based on the net assets of Dulisma
after the impairment at the date of disposal.
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. 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 pre-tax weighted average cost of
capital.
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.
A summary of the impairment reverse for the year ended 31
December 2010 and impairment charges incurred by the Group for the
year ended 31 December 2009 is presented below:
Year ended 31 December:
----------- -------------------------
2010 2009
----------- ------------- ----------
Dulisma - 122,127
Articneft (32,815) -
Petrosakh (37,661) -
(70,476) 122,127
----------- ------------- ----------
8 Accounts Receivable and Prepayments
Year ended 31 December:
------------------------------------------- --------------------------
2010 2009
------------------------------------------- ------------ ------------
Due from shareholders (Note 17) 8,750 -
Loans issued to related parties (Note 24) 455 6,296
Trade accounts and notes receivable 794 86
Receivables from related parties (Note
24) 1 78
------------------------------------------- ------------ ------------
Total financial assets 10,000 6,460
------------------------------------------- ------------ ------------
Recoverable taxes including VAT 2,073 1,627
Prepaid expenses 1,156 1,141
Prepaid taxes - 601
Advances to suppliers 1,292 639
Other 407 796
Total accounts receivable and prepayments 14,928 11,264
------------------------------------------- ------------ ------------
Included in total accounts receivable and prepayments are $0.5
million and $7.3 million at 31 December 2010 and 2009,
respectively, denominated in US dollars and substantially all
remaining amounts are denominated in Russian Roubles, except
accounts receivable due from shareholders $8.75 million which
denominated in Great Britain Pounds (GBP).
8 Accounts Receivable and Prepayments (Continued)
Trade accounts receivable arise primarily from sales to ongoing
customers with standard payment terms. The category 'Other'
primarily relates to 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 are as follows:
Year ended 31 December:
--------------------------------------------- --------------------------
2010 2009
--------------------------------------------- ----------- -------------
At 1 January - 1,243
Accrual / (release) of additional provision
against related party (Note 23) 5,185 (1,254)
Accrual of provision against third party
accounts receivable 47 -
Effect of currency translation 18 11
At 31 December 5,250 -
--------------------------------------------- ----------- -------------
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 22 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
$0.4 million and $0.1 million at 31 December 2010 and 2009,
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:
--------------------------
2010 2009
--------------------------------- ------------ ------------
Up to 90 days past-due - 54
91 to 360 days past-due 375 32
Over 360 days past-due 73 -
--------------------------------- ------------ ------------
Total past due but not impaired 448 86
--------------------------------- ------------ ------------
The main part of past due receivables related to the members of
independent customers for whom there are no recent history of
defaults and was subsequently repaid.
No financial assets are considered to be impaired at 31 December
2009.
9 Inventories
Year ended 31 December:
--------------------------
2010 2009
------------------------ ------------ ------------
Crude oil 4,629 8,747
Oil products 2,135 1,586
Materials and supplies 6,147 6,534
------------------------ ------------ ------------
Total inventories 12,911 16,867
------------------------ ------------ ------------
Inventory provision
Year ended 31 December:
----------------------------------------- --------------------------
2010 2009
----------------------------------------- ----------- -------------
At 1 January 1,924 4,638
Additional provisions - -
Disposal of Dulisma - (2,104)
Release of provision (901) -
Release of adjustment on net realizable
value 9 (609)
Effect of currency translation (20) (1)
At 31 December 1,012 1,924
----------------------------------------- ----------- -------------
9 Inventories (Continued)
Release of inventory provision was triggered by the fact that
the company has made an updated analysis of market value of
inventories, impaired in 2009. In 2011 the company managed to
realize these at a price, higher than book value.
10 Property, Plant and Equipment
Refinery
Oil and and
gas related Other Assets under
Cost at properties equipment Buildings Assets construction Total
------------------ ----------- ---------- ---------- -------- ------------- ----------
1 January 2009 331,038 5,550 3,689 12,131 106,627 459,035
- PPE of the
Group, excluding
assets held for
sale 229,044 - 2,446 8,843 103,145 343,478
- PPE held for
sale 101,994 5,550 1,243 3,288 3,482 115,557
Translation
difference (17,783) (158) (175) (608) (5,973) (24,697)
Reclassification
as assets held
for sale - - - - (1,794) (1,794)
Additions - - - - 12,333 12,333
Capitalised
borrowing costs - - - - 7,567 7,567(*)
Transfers 8,033 3 380 34 (8,450) -
Impairment
provision (Note
7) (122,127) - - - - (122,127)
Disposals (2) (1) - (3,137) (187) (3,327)
Disposals of
assets held for
sale (Dulisma,
Chepetskoye) (107,168) - (2,687) (3,324) (106,680) (219,859)
31 December 2009 91,991 5,394 1,207 5,096 3,443 107,131
- PPE of the
Group, excluding
assets held for
sale 91,991 5,394 1,207 5,096 3,443 107,131
Translation
difference (907) (52) (8) (42) (40) (1,049)
Reclassification
as intangible
assets - - - - (283) (283)
Additions - - - 1 1,633 1,634
Capitalised
borrowing costs - - - - 234 234
Transfers 363 39 - 9 (411) -
Impairment
release (Note
7) 62,271 3,220 214 1,413 3,358 70,476
Disposals (107) - (485) (467) - (1,059)
31 December 2010 153,611 8,601 928 6,010 7,934 177,084
------------------ ----------- ---------- ---------- -------- ------------- ----------
(*)Total amount of interest capitalized relates to Dulisma
assets under construction which were disposed with transfer of
Dulisma to Sberbank.
Additions to assets under construction included capitalised
depreciation in the amount of $82 thousand (for the year ended 31
December 2009: nil). Average capitalisation rate for the year ended
31 December 2010 is 6.0%.
10 Property, Plant and Equipment (continued)
Refinery
Oil and and
gas related Other Assets under
properties equipment Buildings Assets construction Total
--------------- ----------- ---------- ---------- -------- ------------- ---------
Accumulated
Depreciation,
Amortization
and Depletion
at
--------------- ----------- ---------- ---------- -------- ------------- ---------
1 January 2009 (44,218) (1,920) (1,008) (4,211) - (51,357)
- PPE of the
Group,
excluding
assets held
for sale (3,361) - (424) (2,725) - (6,510)
- PPE held for
sale (40,857) (1,920) (584) (1,486) - (44,847)
Translation
difference 1,987 41 38 157 - 2,223
Depreciation (3,982) (293) (77) (225) - (4,577)
Disposals 2 1 - 347 - 350
Disposals of
assets held
for sale
(Dulisma,
Chepetskoye) 7,428 - 399 927 - 8,754
31 December
2009 (38,783) (2,171) (648) (3,005) - (44,607)
Translation
difference 309 17 5 24 - 355
Depreciation (3,830) (204) (14) (407) - (4,455)
Disposals 21 - 120 299 - 440
31 December
2010 (42,283) (2,358) (537) (3,089) (48,267)
--------------- ----------- ---------- ---------- -------- ------------- ---------
Refinery
Oil and and
gas related Other Assets under
properties equipment Buildings Assets construction Total
--------------- ----------- ---------- ---------- -------- ------------- ---------
Net Book Value
at
31 December
2009 53,208 3,223 559 2,091 3,443 62,524
31 December
2010 111,328 6,243 391 2,921 7,934 128,817
--------------- ----------- ---------- ---------- -------- ------------- ---------
10 Property, Plant and Equipment (continued)
Included within oil and gas properties at 31 December 2010 and
2009 were exploration and evaluation assets:
Transfers
to
tangible Disposals:
Cost at part of disposal Cost at
31 Oil and Additions: of assets 31
December Gas Impair-ment held for Translation December
2009 Additions properties reverse sale difference 2010
------------- --------- ---------- ----------- ------------ ----------- ------------ ---------
Exploration and evaluation assets
Arcticneft 7,414 - - 9,583 - (88) 16,909
Petrosakh 17,688 - - 13,273 - (178) 30,783
Total cost
of
exploration
and
evaluation
assets 25,102 - - 22,856 - (266) 47,692
------------- --------- ---------- ----------- ------------ ----------- ------------ ---------
Transfers
to
tangible Disposals:
Cost at part of disposal Cost at
31 Oil and Disposals: of assets 31
December Gas Impair-ment held for Translation December
2008 Additions properties loss sale difference 2009
------------- --------- ---------- ----------- ------------ ----------- ------------ ---------
Exploration and evaluation assets
Dulisma 144,256 - - (122,127) (13,531) (8,598) -
Arcticneft 7,632 - - - - (218) 7,414
Petrosakh 18,209 - - - - (521) 17,688
Chepetskoye 1,139 - - - (929) (210) -
------------- --------- ---------- ----------- ------------ ----------- ------------ ---------
Total cost
of
exploration
and
evaluation
assets 171,236 - - (122,127) (14,460) (9,547) 25,102
------------- --------- ---------- ----------- ------------ ----------- ------------ ---------
The Group's oil fields are situated in the Russian Federation on
land owned by the Russian government. The Group holds mining
licenses 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,
amount to $1.2 million and $1.2 million at 31 December 2010 and
2009, 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.
At 31 December 2010 and 2009, no property, plant and equipment
were pledged as collateral for the Group's borrowings.
11 Other Non-Current Assets
Year ended 31 December:
--------------------------------------------- --------------------------
2010 2009
--------------------------------------------- ------------ ------------
Loans receivable 37,810 34,438
Loans issued to related parties (Note 24) 834 -
Advances to contractors and suppliers for
construction in process 218 461
Intangible assets 564 431
Total other non-current assets 39,426 35,330
--------------------------------------------- ------------ ------------
Loans receivable represent US dollar denominated long-term loans
(interest inclusive) of $37.8 million and $34.4 million at 31
December 2010 and 2009, 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
11 Other Non Current assets (continued)
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 2010. The
loans are unsecured.
12 Accounts Payable and Accrued Expenses
Year ended 31 December:
------------------------------------------------- --------------------------
2010 2009
------------------------------------------------- ------------ ------------
Trade payables 1,588 9,430
Payable to Finfund Ltd. 4,412 6,572
Accounts payable for construction in process 691 710
Wages and salaries 1,227 1,634
Advances from and payables to related parties
(Note 24) 13 13
Other payable and accrued expenses 2,850 2,338
------------------------------------------------- ------------ ------------
Total accounts payable and accrued expenses 10,781 20,697
------------------------------------------------- ------------ ------------
Total accounts payable and accrued expenses in the amount of
$6.2 million and $9.1 million at 31 December 2010 and 2009,
respectively, are denominated in US dollars and substantially all
remaining amounts are denominated in Russian Roubles.
Provisions
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-Yuriakh Neftegazodobycha (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
Chairman) 3,422,000
Aleksey V. Ogarev (Executive Director) 1,568,000
---------------------------------------- -------------------------
Total 13,000,000
As a consequence of the exercise of Finfund Limited's rights as
described above, any liability owed by Urals to Finfund Limited was
reduced by the value of the shares transferred estimated to equal
$2.2 million. The Company has recorded a provision for the
potential reimbursement to these shareholders. The company has
recorded this provision based on the market value of 13,000,000
shares. The provision is equal to $2,559 thousand as of 31 December
2010 with a charge of $360 thousand reflected in the profit for the
year in the Consolidated Statement of Comprehensive Income.
13 Advances from customers
Year ended 31 December:
------------------------------- --------------------------
2010 2009
------------------------------- ------------ ------------
Kresov 1,855 1,171
Melnikov 1,728 -
Rusproduct - 202
Other 676 717
------------------------------- ------------ ------------
Total advances from customers 4,259 2,090
------------------------------- ------------ ------------
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR DKODNDBKBOAB
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