TIDMENW
RNS Number : 2599B
Enwell Energy PLC
30 September 2022
30 September 2022
ENWELL ENERGY PLC
2022 INTERIM RESULTS
Enwell Energy plc ("Enwell Energy" or the "Company", together
with its subsidiaries, the "Group"), the AIM-quoted (ENW) oil and
gas exploration and production group, announces its unaudited
results for the six month period ended 30 June 2022.
Highlights
Operational
-- Aggregate average daily production of 3,026 boepd (calculated
on the days when the Group's fields were actually in production)
(1H 2021: 4,917 boepd)
-- SV-31 development well successfully completed and brought
on production in May 2022
Financial
-- Revenue of $77.2 million (1H 2021: $41.1 million), up 88%
as a result of significantly higher gas prices offset by lower
production volumes
-- Gross profit of $51.5 million (1H 2021: $21.6 million), up
138%
-- Operating profit of $48.9 million (1H 2021: $18.1 million),
up 170%
-- Cash generated from operations of $12.5 million (1H 2021:
$19.2 million), down 35%
-- Net profit of $32.4 million (1H 2021: $13.8 million), up 135%
-- Cash, cash equivalents of $77.4 million as at 30 June 2022,
and of $76.2 million as at 28 September 2022 (31 December
2021: $92.5 million)
-- Average realised gas, condensate and LPG prices in Ukraine
were much higher, particularly gas prices, at $1,165/Mm(3)
(UAH33,524/Mm(3) ), $103/bbl and $165/bbl respectively (1H
2021: $249/Mm(3) (UAH6,897/Mm(3) ) gas, $74/bbl condensate
and $66/bbl LPG)
Outlook
-- The Russian invasion of Ukraine in February 2022 has had a
significant impact on all aspects of life in Ukraine, including
the Group's business and operations, with all field operations
being suspended from 24 February to 15 March 2022, after which
production operations and some field activities resumed at
the MEX-GOL and SV fields, and subsequently on the SC licence
area. At the VAS field all operations have remained suspended
since the invasion, but a resumption of production operations
is planned in October 2022. The scale and duration of disruption
to the Group's business is currently unknown, and there remains
significant uncertainty about the outcome of the conflict
in Ukraine.
-- The Group retains the majority (75% as at 28 September 2022)
of its cash outside Ukraine, which enhances the Group's ability
to navigate the current risk environment for the foreseeable
future, and provides a material buffer to any further disruptions
to the Group's operations.
-- Subject to the Group's ability to operate safely, development
work planned for the remainder of 2022 includes:
-- at the MEX-GOL and SV fields: investigating the deepening
of the MEX-109 well to explore a deeper horizon; investigating
the hydraulic fracturing of the SV-29 well; and planning
the drilling of two new wells, MEX-107 and MEX-114, at the
MEX-GOL field
-- at the SC licence: completing the testing of the SC-4 well;
completing the interpretation of the 150 km(2) of 3D seismic
data acquired over the 2021-2022 winter period; and planning
for the development of the licence area
-- at the VAS field: planning for the further development of
the field; planning for a new well to explore the VED prospect
within the VAS licence area; and maintenance of the gas
processing facilities and other field infrastructure
-- Development programme for the remainder of 2022 expected to
be funded from existing cash resources and operational cash
flow
Sergii Glazunov, CEO, commented : "The military conflict in
Ukraine is entirely overshadowing and hugely impacting all aspects
of life in Ukraine. Nevertheless, after a brief suspension, we were
able to restart production at our MEX-GOL and SV fields, although
production operations at our VAS field remained suspended.
Subsequently, we were also able to complete the drilling of the
SC-4 well on our SC licence area and are now testing this well, and
are planning to shortly resume production operations at the VAS
field. Our ability to continue to operate is testament to the
diligence and fortitude of our operations team.
Maintaining operations in the current environment is extremely
challenging, and the safety and well-being of our staff is
paramount, but, subject to that, we will endeavour to continue our
operations for the benefit of all our stakeholders and make our
best contribution to the economy in Ukraine."
This announcement contains inside information for the purposes
of Article 7 of EU Regulation No. 596/2014, which forms part of
United Kingdom domestic law by virtue of the European Union
(Withdrawal) Act 2018, as amended.
For further information, please contact:
Enwell Energy plc Tel: 020 3427
3550
Chris Hopkinson, Chairman
Sergii Glazunov, Chief Executive Officer
Bruce Burrows, Finance Director
Strand Hanson Limited Tel: 020 7409
3494
Rory Murphy / Matthew Chandler
Arden Partners plc Tel: 020 7614
5900
Ruari McGirr / Elliot Mustoe (Corporate
Finance)
Simon Johnson (Corporate Broking)
Citigate Dewe Rogerson Tel: 020 7638
9571
Ellen Wilton
Dr Gehrig Schultz, BSc Geophysical Engineering, PhD Geophysics,
Member of the European Association of Geophysical Engineers, Member
of the Executive Coordinating Committee of the Continental European
Energy Council, and a Non-Executive Director of the Company, has
reviewed and approved the technical information contained within
this announcement in his capacity as a qualified person, as
required under the AIM Rules for Companies.
Definitions/Glossary
Arkona LLC Arkona Gas-Energy
bbl barrel
bbl/d barrels per day
boe barrels of oil equivalent
boepd barrels of oil equivalent per day
Company Enwell Energy plc
EUR Euro
GDP gross domestic product
Group Enwell Energy plc and its subsidiaries
km kilometre
km(2) square kilometre
LPG liquefied petroleum gas
MEX-GOL Mekhediviska-Golotvshinska
m(3) cubic metres
Mm(3) thousand cubic metres
MMboe million barrels of oil equivalent
MMscf million scf
MMscf/d million scf per day
% per cent.
QHSE quality, health, safety and environment
SC Svystunivsko-Chervonolutskyi
scf standard cubic feet measured at 20 degrees Celsius
and one atmosphere
SV Svyrydivske
$ United States Dollar
UAH Ukrainian Hryvnia
VAS Vasyschevskoye
VED Vvdenska
Chairman's Statement
I present the results for the first half of 2022 in
circumstances that I wish were different. The invasion of Ukraine
by Russia in February 2022 and the ongoing conflict has created a
very challenging and worrying outlook for both the current and
future situation in Ukraine, and I am greatly saddened by the
terrible events occurring there.
The invasion has had a significant impact on all aspects of life
in Ukraine, including the Group's business and operations, with all
field operations being suspended from 24 February to 15 March 2022,
after which production operations and some field activities resumed
at the MEX-GOL and SV fields. Subsequently, in July 2022, drilling
operations on the SC-4 well resumed on the SC licence area to
complete the well. However, all operations have remained suspended
at the VAS field to date, although a resumption of production
operations is planned for October 2022. The overall scale and
duration of disruption to the Group's business is currently
unknown, and there remains significant uncertainty about the
outcome of the ongoing conflict in Ukraine.
Notwithstanding the disruption caused by the invasion, during
the period, the Group continued with some development activities at
the MEX-GOL, SV and VAS gas and condensate fields and SC licence in
north-eastern Ukraine. At the SV field, the SV-31 development well
was completed and brought on production in May 2022, and planning
has continued for the drilling of two new wells, MEX-107 and
MEX-114, in the MEX-GOL field, as well as the possible deepening of
the MEX-109 well to explore a deeper horizon. At the SV-29
development well, additional horizons were perforated and tested
but stabilised production was not established and consequently the
possible hydraulic fracturing of the well is under consideration.
Drilling of the SC-4 appraisal well on the SC licence area was
completed and testing of this well is now underway, alongside
ongoing planning for the further development of the VAS field.
Aggregate average daily production (calculated on the days when
the fields were actually in production) from the MEX-GOL, SV and
VAS fields during the first half of 2022 was 3,026 boepd, which is
lower than the aggregate daily production rate of 4,917 boepd
achieved during the first half of 2021 due to the disruption caused
by the invasion.
Although production volumes were lower, the dramatic rise in gas
prices during the period has meant that revenues were still strong
at $77.2 million (1H 2021: $41.1 million). The Group's net profit
was also higher at $32.4 million (1H 2021: $13.8 million) and
operating profit was $48.9 million (1H 2021: $18.1 million).
There is significant disruption to the fiscal and economic
environment in Ukraine due to the ongoing conflict resulting in a
contraction in GDP, an increase in the rate of inflation and a
weakening of the Ukrainian Hryvnia against other currencies.
Furthermore, it is likely that fiscal and economic uncertainties
will continue in the future until an acceptable resolution of the
conflict occurs.
The Ukrainian Government has implemented a number of reforms in
the oil and gas sector in recent years, which include the
deregulation of the gas supply market in late 2015, and
subsequently, reductions in the subsoil tax rates relating to oil
and gas production and a simplification of the regulatory
procedures applicable to oil and gas exploration and production
activities in Ukraine.
The deregulation of the gas supply market, supported by
electronic gas trading platforms and improved pricing transparency,
has meant that Ukrainian market gas prices broadly correlated with
imported gas prices. During 2022 to date, gas prices have increased
significantly, reflecting a similar trend in European gas prices,
substantially as a result of the disruption to worldwide oil and
gas supplies caused by the conflict. Condensate and LPG prices were
also much higher by comparison to last year for the same
reason.
However, in Q1 2022, the Ukrainian Government imposed two
material measures on oil and gas producers. Firstly, in January
2022, temporary partial gas price regulations were imposed until 30
April 2022, designed to support the production of certain
designated food products, further details of which were set out in
the Company's announcement dated 17 January 2022. Secondly, changes
to the subsoil production tax rates applicable to gas production
were introduced with effect from 1 March 2022, pursuant to which
the tax rates were linked to gas prices, the incentive rates for
new wells were extended for a further 10 years and improvements
were made to the regulatory environment. In addition, an excise tax
applicable to LPG sales was cancelled in February 2022, and the VAT
rate applicable to condensate and LPG sales was reduced in March
2022. Further details were set out in the Company's announcement
dated 13 April 2022.
Outlook
The invasion of Ukraine by Russia means that there is a
devastating humanitarian situation in Ukraine, as well as extreme
challenges to the fiscal, economic and business environment. These
circumstances mean that it is extremely difficult to plan future
investment and operational activities at the Group's fields, but
subject to it being safe to do so, the Group is planning to
undertake further development activities during the remainder of
2022 and beyond in order to continue the development of its fields.
However, in doing so, the Group is taking and will take all
measures available to protect and safeguard its personnel and
business, with the safety and wellbeing of its personnel and
contractors being paramount. The Group retains the majority (75% as
at 28 September 2022) of its cash outside Ukraine, and this has
enabled the Board to reach the opinion that the Group has
sufficient resources to navigate the current risk environment for
the foreseeable future.
In conclusion, on behalf of the Board, I would like to thank all
of our staff for their continued dedication and support they showed
during this year, especially their remarkable fortitude since the
invasion of Ukraine in February 2022.
Chris Hopkinson
Chairman
29 September 2022
Chief Executive's Statement
Introduction
The Russian invasion of Ukraine has materially disrupted the
Group's development activity at its Ukrainian fields during the
first half of 2022, with operations suspended at all fields
immediately after the invasion in February 2022. However,
production operations and some field activities resumed at the
MEX-GOL and SV fields in mid-March 2022, and this enabled the
completion of the SV-31 development well, which came on production
in May 2022. At the SV-29 development well, further intervals were
perforated, but it was not possible to establish a stabilised flow
rate, and the potential hydraulic fracturing of this well is now
under consideration. In addition, upgrades to the gas processing
facilities were completed.
On the SC licence area, drilling of the SC-4 appraisal well was
suspended for a period, but drilling resumed in July 2022, and the
well has now been completed and is undergoing testing. In addition,
the interpretation of the 150 km(2) of 3D seismic, which was
acquired over the 2021-2022 winter period, is nearing
completion.
At the VAS field, all operations have remained suspended since
the invasion, but a resumption of production operations is planned
for October 2022. In addition, planning for the further development
of the field, as well as for a proposed new well to explore the VED
prospect within the VAS licence area has continued.
Overall production in the first half of 2022 was lower than in
the corresponding period in 2021 due to the disruption to
production operations caused by the ongoing conflict in
Ukraine.
Production
The average daily production of gas, condensate and LPG for the
167 days that the MEX-GOL and SV fields were producing and for the
55 days that the VAS field was producing during the six month
period ended 30 June 2022 is shown below.
Field Gas Condensate LPG Aggregate
(MMscf/d) (bbl/d) (bbl/d) boepd
1H 2022 1H 2021 1H 2022 1H 2021 1H 2022 1H 2021 1H 2022 1H 2021
-------- -------- -------- -------- -------- -------- -------- --------
MEX-GOL
& SV 11.1 19.7 451 694 261 331 2,592 4,403
-------- -------- -------- -------- -------- -------- -------- --------
VAS 2.2 2.8 24 28 - - 434 514
-------- -------- -------- -------- -------- -------- -------- --------
Total 13.3 22.5 475 722 261 331 3,026 4,917
-------- -------- -------- -------- -------- -------- -------- --------
The average daily production of gas, condensate and LPG from the
MEX-GOL, SV and VAS fields over the entire six month period ended
30 June 2022 (inclusive of shut-in periods) is shown below.
Field Gas Condensate LPG Aggregate
(MMscf/d) (bbl/d) (bbl/d) boepd
1H 2022 1H 2021 1H 2022 1H 2021 1H 2022 1H 2021 1H 2022 1H 2021
-------- -------- -------- -------- -------- -------- -------- --------
MEX-GOL
& SV 10.2 19.7 416 694 241 331 2,392 4,403
-------- -------- -------- -------- -------- -------- -------- --------
VAS 0.7 2.8 7 28 - - 132 514
-------- -------- -------- -------- -------- -------- -------- --------
Total 10.9 22.5 423 722 241 331 2,524 4,917
-------- -------- -------- -------- -------- -------- -------- --------
The Russian invasion of Ukraine in February 2022 meant that the
Group suspended all field operations for the period from 24
February to 15 March 2022, after which production operations and
some field activities resumed at the MEX-GOL and SV fields, while
all operations remained suspended at the VAS field and on the SC
licence area. Subsequently, in July 2022, drilling resumed at the
SC-4 well on the SC licence area and this well has now been
completed, but all operations remained suspended at the VAS field
since it is located near Kharkiv in north-eastern Ukraine, which
has experienced significant military activity. However, a
resumption of production operations at this field is planned for
October 2022. As a result of the disruptions to operations caused
by the invasion, the Group's average daily production for 2022 to
date has been materially affected, although production is currently
continuing at the MEX-GOL and SV fields at a rate of approximately
2,700 boepd.
Operations
Notwithstanding the impact of the COVID-19 pandemic beginning in
2020, in the period leading up to the Russian invasion of Ukraine,
there was relative fiscal and economic stability in Ukraine, as
well as reductions in the subsoil tax rates and improvements in the
regulatory procedures in the oil and gas sector in Ukraine.
However, the Russian invasion has caused significant disruption to
the fiscal and economic conditions in Ukraine since then. During
the first half of 2022, the material increase in gas prices in
Europe did, however, feed through to the Group's realised prices in
Ukraine, and provided a significant boost to the Group's revenues
and profitability during the period.
During 2022 to date, the Group has continued to refine its
geological subsurface models of the MEX-GOL, SV and VAS fields, as
well as the SC licence area, in order to enhance its strategy for
the further development of such fields and licence area, including
the timing and level of future capital investment required to
exploit the hydrocarbon resources.
At the MEX-GOL and SV fields, the SV-31 development well was
completed in May 2022, having been drilled to a final depth of
5,240 metres. At that time, one interval, at a drilled depth of
5,210 - 5,219 metres, within the V-22 Visean formation was
perforated, and, following initial testing, the well was hooked up
to the gas processing facilities. The well has produced strongly
since then, and pursuant to the plans for this well, two additional
intervals, at drilled depths of 5,187 - 5,189 and 5,120 - 5,123
metres, respectively within the V-22 and V-21 Visean formations,
have recently been perforated to access additional reserves. These
additional intervals have also proved productive and materially
boosted production rates from this well, which are currently
approximately 3.53 MMscf/d of gas and 210 bbl/d of condensate (835
boepd in aggregate).
At the SV-29 development well, additional intervals, at drilled
depths of 4,955 - 4,960 and 5,037 - 5,046 metres, within the V-19
and V-20 Visean formation respectively were perforated, but such
intervals were not productive. This well was completed in August
2021, having been drilled to a final depth of 5,450 metres.
Previously, two intervals, at drilled depths of 5,246 - 5,249
metres and 5,228 - 5,232 metres respectively, within the V-22
Visean formation, were perforated, and although some gas flows were
achieved, a stabilised flow from these intervals was not
established. In light of the intermittent gas flows in these
intervals, the possible hydraulic fracturing of the well is now
under consideration.
The Group continued to operate each of the SV-2 and SV-12 wells
under joint venture agreements with NJSC Ukrnafta, the majority
State-owned oil and gas producer. Under the agreements, the gas and
condensate produced from the respective wells is sold under an
equal net profit sharing arrangement between the Group and NJSC
Ukrnafta, with the Group accounting for the hydrocarbons produced
and sold from the wells as revenue, and the net profit share due to
NJSC Ukrnafta being treated as a lease expense in cost of sales.
However, during Q4 2021, the SV-2 well experienced water ingress
and consequently had to be taken off production. A workover of this
well was commenced to remove and replace the production string, but
this work was suspended as a result of the Russian invasion of
Ukraine. However, workover operations have now re-commenced and are
ongoing.
In addition, in Q4 2021, the MEX-109 well also experienced water
ingress and as a result was taken off production. A workover of the
well was commenced, and steps were taken to seal the source of the
water ingress, but again the work was suspended as a result of the
Russian invasion. However, the workover operations have now been
completed, and the previously producing horizon has now been sealed
to prevent water ingress into that horizon, so as to avoid possible
disruption to another well which is producing from the same
horizon. As a result, further production from such horizon in this
well will not be possible, and the possible deepening of this well
to explore deeper horizons is now being considered.
Finally, at the MEX-GOL and SV fields, the upgrades to the gas
processing facilities have been completed. T hese works involved an
upgrade of the LPG extraction circuit, an increase to the flow
capacity of the facilities, and a significant increase to the
liquids tank storage capacity, which are designed to improve
overall plant efficiencies, improve the quality of liquids produced
and boost recoveries of LPG, while reducing environmental
emissions.
On the SC licence area, after a period of suspension, drilling
operations resumed at the SC-4 well in July 2022 and the well has
now been drilled to its final depth of 5,585 metres. The well is
primarily an appraisal well, targeting production from the V-22
horizon, as well as exploring the V-16 and V-21 horizons, in the
Visean formation. Currently, testing operations are underway at the
well. In addition , the interpretation of the 1 50 km(2) of 3D
seismic, that was acquired over the 2021 - 22 winter, is now
nearing completion.
At the VAS field, the resumption of production operations is
scheduled for October 2022, and planning for the further
development of the field, as well as for a proposed new well to
explore the VED prospect within the VAS licence area, has
continued.
In March 2019 (as set out in the Company's announcement made on
12 March 2019), a regulatory issue arose when the State Service of
Geology and Subsoil of Ukraine issued an order for suspension (the
"Order") of the production licence for the VAS field. Under the
applicable legislation, the Order would lead to a shut-down of
production operations at the VAS field, but the Group issued legal
proceedings to challenge the Order, and has obtained a ruling
suspending operation of the Order pending a hearing of the
substantive issues. The Group does not believe that there are any
grounds for the Order, and intends to pursue its challenge to the
Order through the Ukrainian Courts.
Outlook
The Russian invasion of Ukraine in February 2022 has caused
significant disruption to Ukraine as a whole and to the Group's
business activities, and until there is a satisfactory resolution
to the conflict, such disruption and uncertainty is likely to
continue. However, and subject to it being safe to do so, during
the remainder of 2022, the Group plans to continue to develop the
MEX-GOL, SV and VAS fields, as well as moving forward with the
appraisal and development of the SC licence area .
At the MEX-GOL and SV fields, the development programme includes
completing the workover of the SV-2 well, the possible deepening of
the MEX-109 well to explore deeper horizons in the Visean
formation, preparations for the drilling of two further wells,
MEX-107 and MEX-114, in the MEX-GOL field, installation of further
compression equipment, and remedial and upgrade work on existing
wells, the flow-line network and pipelines and other
infrastructure.
On the SC licence area, it is planned to complete the testing of
the SC-4 well, finalise the interpretation of the recently acquired
3D seismic, and continue planning for the development of the
licence area, including construction of gas processing
facilities.
At the VAS field, planning for the further development of the
field, as well as for a proposed new well to explore the VED
prospect within the VAS licence area will continue, and maintenance
of the gas processing facilities and other infrastructure is
planned.
Finally, I would like to add my thanks to all of our staff for
the continued hard work and dedication they have shown over the
course of 2022 to date, and to especially recognise their
continuing efforts and professionalism in the face of the extremely
challenging current situation in Ukraine.
Sergii Glazunov
Chief Executive Officer
Finance Review
Despite the significant disruption caused by the Russian
invasion of Ukraine earlier this year, and almost entirely as a
result of the well documented monumental increase in global gas
prices, the Group's financial performance in the first six months
of 2022 showed an improvement on the corresponding period in 2021,
with a net profit for the period of $32.4 million being an
approximate 135% increase on the first six months of 2021 (1H 2021:
$13.8 million).
Revenue for the period, derived from the sale of the Group's
Ukrainian gas, condensate and LPG production, was up at $77.2
million (1H 2021: $41.1 million). Most notably, within this total,
the revenue from gas sales alone was up approximately 125% at $64.1
million (1H 2021: $28.5 million).
Aggregate production for the first half of 2022 (calculated on
the days when the Group's fields were actually in production) was
down approximately 38% at 3,026 boepd (1H 2021: 4,917 boepd) due to
the disruption to operations as a result of the Russian invasion of
Ukraine.
As noted in the Group's 2021 Annual Report and as amplified
after the Russian invasion of Ukraine, rarely has natural gas, and
its pricing, been more of a focus of public attention, with the
significant global rise in the commodity's pricing being well
documented over recent months. These global, and particularly
European, price increases were also experienced in Ukraine during
the first half of 2022, and underpinned the 368% rise in average
gas price realisations in the period at $1,165/Mm(3)
(UAH33,524/Mm(3) ), with condensate and LPG average sales prices
also up by 39% and 150% at $103/bbl and $165/bbl respectively (1H
2021: $249/Mm(3) (UAH6,897/Mm(3) ), $74/bbl and $66/bbl
respectively).
During the period from 1 July 2022 to 31 August 2022, the
average realised gas, condensate and LPG prices were $729/Mm(3)
(UAH26,674/Mm(3) ), $44/bbl and $118/bbl respectively.
Cost of sales for the period was up approximately 32% at $25.7
million (1H 2021: $19.5 million). The major contributor to this
increase is the material rise in the revenue-related costs of taxes
and well rental (with their direct link to commodity prices), up
approximately 80% at a combined $18.4 million (1H 2021: $10.2
million), partially offset by the 40% decrease in Depreciation of
Producing Assets to $3.3 million (1H 2021: $5.5 million). The
decline in production drove a decline in depreciation but such
decline was more than offset by commodity prices to drive up the
revenue-related costs of taxes and well rental. Excluding these tax
expenses directly related to commodity prices, the residual cost of
sales is consistent at $12.8 million (1H 2021: $12.2 million).
Gross profit for the period was higher at $51.5 million (1H
2021: $21.6 million).
Cash generated from operations fell 35% to $12.5 million (1H
2021: $19.1 million), most significantly as a consequence of the
$36.4 million increase in receivables (1H 2021: $5.4 million).
The subsoil tax rates applicable to gas production were stable
during the first two months of 2022 at 29% for gas produced from
deposits at depths shallower than 5,000 metres and 14% for gas
produced from deposits deeper than 5,000 metres, except in respect
of gas produced from new wells drilled after 1 January 2018, where
the subsoil tax rates were reduced from 29% to 12% for gas produced
from deposits at depths shallower than 5,000 metres and from 14% to
6% for gas produced from deposits deeper than 5,000 metres for the
period between 2018 and 2022. The subsoil tax rates for condensate
were 31% for condensate produced from deposits shallower than 5,000
metres and 16% for condensate produced from deposits deeper than
5,000 metres.
However, with effect from 1 March 2022, changes to the subsoil
production tax rates applicable to gas production were introduced.
These changes modified the applicable tax rates based on gas
prices, extended the incentive rates for new wells for a further 10
years and made improvements to the regulatory environment. The
legislation which introduced these changes also included provisions
that these rates will not be increased for 10 years.
The new subsoil production tax rates applicable to gas
production are as follows:
(i) when gas prices are up to $150/Mm(3) , the rate for wells
drilled prior to 1 January 2018 ("old wells") is 14.5% for
gas produced from deposits at depths shallower than 5,000
metres and 7% for gas produced from deposits deeper than 5,000
metres, and for wells drilled after 1 January 2018 ("new wells")
is 6% for gas produced from deposits at depths shallower than
5,000 metres and 3% for gas produced from deposits deeper
than 5,000 metres;
(ii) when gas prices are between $150/Mm(3) and $400/Mm(3) , the
rate for old wells is 29% for gas produced from deposits at
depths shallower than 5,000 metres and 14% for gas produced
from deposits deeper than 5,000 metres, and for new wells
is 12% for gas produced from deposits at depths shallower
than 5,000 metres and 6% for gas produced from deposits deeper
than 5,000 metres;
(iii) when gas prices are more than $400/Mm(3) , for the first $400/Mm(3)
, the rate for old wells is 29% for gas produced from deposits
at depths shallower than 5,000 metres and 14% for gas produced
from deposits deeper than 5,000 metres, and for new wells
is 12% for gas produced from deposits at depths shallower
than 5,000 metres and 6% for gas produced from deposits deeper
than 5,000 metres, and for the difference between $400/Mm(3)
and the actual price, the rate for old wells is 65% for gas
produced from deposits at depths shallower than 5,000 metres
and 31% for gas produced from deposits deeper than 5,000 metres,
and for new wells is 36% for gas produced from deposits at
depths shallower than 5,000 metres and 18% for gas produced
from deposits deeper than 5,000 metres.
The tax rates applicable to condensate production were unchanged
and so remain at 31% for condensate produced from deposits
shallower than 5,000 metres and 16% for condensate produced from
deposits deeper than 5,000 metres, for both old and new wells.
As a direct result of the conflict in Ukraine, including the
significant decline in domestic consumption disrupting the previous
supply, demand and pricing dynamics, there has been a divergence
between domestic and European gas pricing, and accordingly, the
methodology (linked to European prices) used to determine the
reference gas price for the subsoil tax rates has had a
significantly detrimental effect for domestic gas producers. In
order to address this issue, the Ukrainian Parliament, in September
2022, approved draft legislation which modifies such methodology to
ensure that it operates as originally intended (with such reference
price being aligned with domestic prices). This legislation has not
yet completed all of the requisite procedural steps to be enacted
and brought into force, but the draft legislation envisages an
effective implementation date of 1 August 2022 if enacted.
In addition, the excise tax on LPG sales has been suspended
between 24 February 2022 and 30 September 2022, but is now being
reinstated, and the VAT rate applicable to condensate and LPG sales
was reduced to 7% (from 20%) with effect from 18 March 2022.
Finally, in early 2022, the Ukrainian Government imposed
temporary and partial gas price regulation to support the
production of certain food products through the supply of gas at
regulated prices to the producers of such products. Under this
scheme, all independent gas producers in Ukraine were required to
sell up to 20% of their natural gas production for the period until
30 April 2022 at a price set as the cost of sales of the relevant
gas producer (based on established accounting rules) for such gas,
plus a margin of 24%, plus existing subsoil production taxes (the
"Regulated Price"). This gas was then sold to specified producers
of designated socially important food products at the Regulated
Price, so as to reduce the energy costs of such producers during
the period through to 30 April 2022. The designated products were
certain types of flour, milk (with up to 2.5% fat), bread, eggs,
chicken and sunflower oil, for sale in the Ukrainian domestic
market. This temporary scheme has now concluded. Further details
are set out in the Company's announcement dated 17 January
2022.
Administrative expenses for the period were 13% lower at $3.4
million (1H 2021: $4.0 million), primarily as a result of a 19%
decrease in payroll and related taxes, and no performance related
payments being made in 2022.
Other expenses in the period increased significantly as a result
of the charitable donation of $5.0 million (1H 2021: nil) for
financial support to the Ukrainian war, security and relief effort
.
The tax charge for the six months ended 30 June 2022 increased
by 148% to $10.4 million (1H 2021: $4.2 million charge) mainly due
to the material increase in profit before tax, and comprised a
current tax charge of $8.7 million (1H 2021: $4.0 million charge)
and a deferred tax charge of $1.7 million (1H 2021: $0.2 million
charge).
A deferred tax asset relating to the Group's provision for
decommissioning as at 30 June 2022 of $0.5 million (31 December
2021: $0.5 million) was recognised on the tax effect of the
temporary differences of the Group's provision for decommissioning
at the MEX-GOL and SV fields, and its tax base. A deferred tax
liability relating to the Group's development and production assets
at the MEX-GOL and SV fields as at 30 June 2022 of $6.6 million (31
December 2021: $5.7 million) was recognised on the tax effect of
the temporary differences between the carrying value of the Group's
development and production asset at the MEX-GOL and SV fields, and
its tax base.
A deferred tax asset relating to the Group's provision for
decommissioning as at 30 June 2022 of $0.2 million (31 December
2021: $0.3 million) was recognised on the tax effect of the
temporary differences on the Group's provision on decommissioning
at the VAS field, and its tax base. A deferred tax liability
relating to the Group's development and production assets at the
VAS field as at 30 June 2022 of $0.2 million (31 December 2021:
$0.05 million) was recognised on the tax effect of the temporary
differences between the carrying value of the Group's development
and production asset at the VAS field, and its tax base.
Capital investment of $12.0 million reflects the investment in
the Group's oil and gas development and production assets during
the period (1H 2021: $13.0 million), primarily relating to the
drilling of the SV-29, SV-31 and SC-4 wells.
A review for any indicators of impairment of the carrying value
of the Group's assets was undertaken at the end of the period and
this review did conclude that the Russian invasion of Ukraine had
resulted in such an indicator. Impairment reviews were therefore
conducted on the carrying value of the Group's assets but resulted
in a conclusion that no impairment to carrying value had occurred
on any Group asset.
With the material increase in commodity prices during the
period, and necessary payment term accommodations that needed to be
agreed with the Group's largest indirect off-taker pursuant to a
contract facilitated by the Group's related party, LLC Smart
Energy, trade receivables were up materially at $39.5 million (1H
2021: $5.3 million). Since the period end, $7.1 million of those
trade receivables has been paid, and the balance is expected to be
fully received in the near term.
Cash, cash equivalents and short-term investments held as at 30
June 2022 were $77.4 million (31 December 2021: $92.5 million), the
decrease being predominantly a result of the $35.6 million increase
in Trade and Other Receivables. Cash, cash equivalents, short-term
investments and trade and other receivables combined totalled
$126.0 million (31 December: $105.6 million), a 19% increase. The
Group's cash and cash equivalents balance as at 28 September 2022
was $76.2 million, held as to $18.5 million equivalent in Ukrainian
Hryvnia and the balance of $57.7 million equivalent predominantly
in US Dollars, Euros and Pounds Sterling.
During the first six months of 2022, the Ukrainian Hryvnia was
relatively stable against the US Dollar, weakening modestly from
UAH27.3/$1.00 on 31 December 2021 to UAH29.3/$1.00 on 30 June 2022.
The impact of this was $7.9 million of foreign exchange loss (1H
2021: $3.9 million of foreign exchange gain). Increases and
decreases in the value of the Ukrainian Hryvnia against the US
Dollar affect the carrying value of the Group's assets. However,
since the period end, in July 2022, the National Bank of Ukraine
devalued the Ukrainian Hryvnia by 25% against the US Dollar in
order to protect its foreign exchange reserves as the ongoing war
continues to materially affect the Ukrainian economy, and currently
the official exchange rate of the Ukrainian Hryvnia to the US
Dollar is UAH36.57/$1.00. This is not expected to a have a material
net impact on the Group with its production and sales dictated by
(but not directly linked to) international commodity prices, and
should materially offset general price increases that will result
from such devaluation.
Cash from operations has funded capital investment during the
period, and the Group's current cash position and positive
operating cash flow are the sources from which the Group plans to
fund the development programmes for its assets over the remainder
of 2022 and beyond. This is coupled with the fact that the Group is
currently debt-free, and therefore has no debt covenants that may
otherwise impede its ability to implement contingency plans if
domestic and/or global circumstances dictate. This flexibility and
ability to monitor and manage development plans and liquidity is a
cornerstone of our planning, and underpins our assessments of the
future. With monetary resources at the end of the period of $77.4
million ($58.8 million of which was held outside Ukraine), and
annual running costs of less than $ 8 million, the Group remains in
a very strong position, notwithstanding the impact of the current
ongoing conflict in Ukraine, as well as any local or global shocks
that may occur to the industry and/or the Group.
Bruce Burrows
Finance Director
Principal Risks and How We Manage Them
The Group has a risk evaluation methodology in place to assist
in the review of the risks across all material aspects of its
business. This methodology highlights external, operational and
technical, financial and corporate risks and assesses the level of
risk and potential consequences. It is periodically presented to
the Audit Committee and the Board for review, to bring to their
attention potential risks and, where possible, propose mitigating
actions. Key risks recognised and mitigation factors are detailed
below:-
Risk Mitigation
External risks
----------------------------------------------
Military conflict in Ukraine
----------------------------------------------
On 24 February 2022, Russia invaded The Group has assets in the areas
Ukraine and there is currently of conflict in the east of Ukraine,
a serious and ongoing military and the conflict has disrupted its
conflict within Ukraine. This conflict operations in those areas. The Group
is having a huge impact on Ukraine has suspended all field operations
and its population, with significant at the VAS field to date, and is
destruction of infrastructure and only undertaking limited field and
buildings in the areas of conflict, production operations at the MEX-GOL
as well as damage in other areas and SV fields and SC licence area.
of Ukraine. The conflict is resulting At the MEX-GOL and SV fields, inventories
in significant casualties and has of hydrocarbons are being maintained
caused a huge humanitarian catastrophe at minimum levels. At the sites
and refugee influx into neighbouring where operations are suspended,
countries. The conflict is also there are no staff on site, except
impacting the fiscal and economic for necessary security staff. Where
environment in Ukraine, as well possible, all other staff work remotely
as the financial stability and and have been supplied with all
banking system in Ukraine, including necessary devices and software to
restrictions on the transfer of facilitate remote working. Additionally,
funds outside Ukraine. The conflict the Group aims to maintain the significant
is an escalation of the previous majority of its cash resources outside
Regional Conflict risk faced by Ukraine (being 75% as at 28 September
the business, a dispute that has 2022). The Group continues to monitor
been going on since 2014 in parts the situation and endeavours to
of eastern Ukraine, and, since protect its assets and safeguard
that time, Russia has continued its staff and contractors.
to occupy Crimea. The current conflict
is also having a significant adverse
effect on the Ukrainian financial
markets, hampering the ability
of Ukrainian companies and banks
to obtain funding from the international
capital and debt markets. The conflict
has disrupted the Group's business
and operations, causing the suspension
of field operations, albeit recommenced
in March 2022 at the MEX-GOL and
SV fields and July 2022 at the
SC licence area, and planned to
be recommenced at the VAS field
in October 2022, and has also impacted
the supply of materials and equipment
and the availability of contractors
to undertake field operations.
At present, the conflict is ongoing
and the scope and duration of the
conflict is uncertain.
----------------------------------------------
Risk relating to Ukraine
----------------------------------------------
Ukraine is an emerging market and The Group endeavours to minimise
as such the Group is exposed to this risk by continuously monitoring
greater regulatory, economic and the market in Ukraine and by maintaining
political risks than would be the a strong working relationship with
case in other jurisdictions. Emerging the Ukrainian regulatory authorities.
economies are generally subject The Group also maintains a significant
to a volatile political and economic proportion of its cash holdings
environment, which makes them vulnerable in international banks outside Ukraine.
to market downturns elsewhere in
the world and could adversely impact
the Group's ability to operate
in the market. Furthermore, the
military conflict in Ukraine is
impacting the fiscal and economic
environment, the financial and
banking system, and the economic
stability of Ukraine. As a result,
Ukraine will require financial
assistance and/or aid from international
financial agencies to provide economic
support and assist with the reconstruction
of infrastructure and buildings
damaged in the conflict.
----------------------------------------------
Banking system in Ukraine
----------------------------------------------
The banking system in Ukraine has The creditworthiness and potential
been under great strain in recent risks relating to the banks in Ukraine
years due to the weak level of are regularly reviewed by the Group,
capital, low asset quality caused but the geopolitical and economic
by the economic situation, currency events in Ukraine over recent years
depreciation, changing regulations have significantly weakened the
and other economic pressures generally, Ukrainian banking sector. This has
and so the risks associated with been exacerbated by the current
the banks in Ukraine have been military conflict in Ukraine. In
significant, including in relation light of this, the Group has taken
to the banks with which the Group and continues to take steps to diversify
has operated bank accounts. This its banking arrangements between
situation was improving moderately a number of banks in Ukraine. These
following remedial action by the measures are designed to spread
National Bank of Ukraine, but the the risks associated with each bank's
current military conflict has significantly creditworthiness, and the Group
affected such improvements, and endeavours to use banks that have
the National Bank of Ukraine has the best available creditworthiness.
imposed a number of restrictive Nevertheless, and despite the recent
measures designed to protect the improvements, the Ukrainian banking
banking system, including restrictions sector remains weakly capitalised
of the transfer of funds outside and so the risks associated with
Ukraine (albeit that the Group the banks in Ukraine remain significant,
aims to maintain the significant including in relation to the banks
majority of its cash resources with which the Group operates bank
outside Ukraine (being 75% as at accounts. As a consequence, the
28 September 2022). In addition, Group also maintains a significant
Ukraine continues to be supported proportion of its cash holdings
by funding from the International in international banks outside Ukraine.
Monetary Fund, and has requested
further funding support from the
International Monetary Fund.
----------------------------------------------
Geopolitical environment in Ukraine
----------------------------------------------
Although there were some improvements The Group continually monitors the
in recent years, there has not market and business environment
been a final resolution of the in Ukraine and endeavours to recognise
political, fiscal and economic approaching risks and factors that
situation in Ukraine, and the current may affect its business. In addition,
military conflict has had a severe the involvement of Smart Holding
detrimental effect on the economic (Cyprus) Limited, as an indirect
situation in Ukraine. The ongoing major shareholder with extensive
effects of this are difficult to experience in Ukraine, is considered
predict and likely to continue helpful to mitigate such risks.
to affect the Ukrainian economy However, the invasion of Ukraine
and potentially the Group's business. creates material challenges in planning
This situation is currently affecting future investment and operations.
the Group's production and field The Group is limiting its operational
operations, and the ongoing instability activities to minimise risk to its
is disrupting the Group's development staff and contractors, and to limit
and operational planning for its its financial exposure.
assets.
----------------------------------------------
Climate change
----------------------------------------------
Any near and medium-term continued The Group's plans include: assessing,
warming of the Planet can have reducing and/or mitigating its emissions
potentially increasing negative in its operations ; and identifying
social, economic and environmental climate change-related risks and
consequences, generally, globally assessing the degree to which they
and regionally, and specifically can affect its business, including
in relation to the Group. The potential financial implications. The HSE
impacts include: loss of market; Committee is specifically tasked
and increased costs of operations with overseeing measuring, benchmarking
through increasing regulatory oversight and mitigating the Group's environmental
and controls, including potential and climate impact, which will be
effective or actual loss of licences reported on in future periods. At
to operate. As a diligent operator, this stage, the Group does not consider
aware of and responsive to its climate change to have any material
good stewardship responsibilities, implications on the Group's financial
the Group not only needs to monitor statements, including accounting
and modify its business plans and estimates.
operations to react to changes,
but also to ensure its environmental
footprint is as minimal as it can
practicably be in managing the
hydrocarbon resources the Group
produces.
----------------------------------------------
Operational and technical risks
----------------------------------------------
Quality, Health, Safety and Environment
("QHSE")
----------------------------------------------
The oil and gas industry, by its The Group maintains QHSE policies
nature, conducts activities which and requires that management, staff
can cause health, safety, environmental and contractors adhere to these
and security incidents. Serious policies. The policies ensure that
incidents can not only have a financial the Group meets Ukrainian legislative
impact but can also damage the standards in full and achieves international
Group's reputation and the opportunity standards to the maximum extent
to undertake further projects. possible. As a consequence of the
The military conflict in Ukraine COVID-19 pandemic the Group has
poses significant risks to field implemented processes and controls
operations, by way of potential intended to ensure protection of
threat to the lives of employees all our stakeholders and minimise
and contractors, and damage to any disruption to our business.
equipment and infrastructure. As a consequence of the current
military conflict in Ukraine, operations
at the VAS field are currently suspended
entirely, and only limited field
and production operations are continuing
at the MEX-GOL and SV fields and
SC licence area. Only essential
staff are located at site, and all
other staff are working remotely,
either from areas away from the
conflict areas or outside Ukraine.
The Group has invested in technology
that allows many staff to work just
as effectively from remote locations.
----------------------------------------------
Industry risks
----------------------------------------------
The Group is exposed to risks which The Group has well qualified and
are generally associated with the experienced technical management
oil and gas industry. For example, staff to plan and supervise operational
the Group's ability to pursue and activities. In addition, the Group
develop its projects and undertake engages with suitably qualified
development programmes depends local and international geological,
on a number of uncertainties, including geophysical and engineering experts
the availability of capital, seasonal and contractors to supplement and
conditions, regulatory approvals, broaden the pool of expertise available
gas, oil, condensate and LPG prices, to the Group. Detailed planning
development costs and drilling of development activities is undertaken
success. As a result of these uncertainties, with the aim of managing the inherent
it is unknown whether potential risks associated with oil and gas
drilling locations identified on exploration and production, as well
proposed projects will ever be as ensuring that appropriate equipment
drilled or whether these or any and personnel are available for
other potential drilling locations the operations, and that local contractors
will be able to produce gas, oil are appropriately supervised.
or condensate. In addition, drilling
activities are subject to many
risks, including the risk that
commercially productive reservoirs
will not be discovered. Drilling
for hydrocarbons can be unprofitable,
not only due to dry holes, but
also as a result of productive
wells that do not produce sufficiently
to be economic. In addition, drilling
and production operations are highly
technical and complex activities
and may be curtailed, delayed or
cancelled as a result of a variety
of factors.
----------------------------------------------
Production of hydrocarbons
----------------------------------------------
Producing gas and condensate reservoirs In recent years, the Group has engaged
are generally characterised by external technical consultants to
declining production rates which undertake a comprehensive review
vary depending upon reservoir characteristics and re-evaluation study of the MEX-GOL
and other factors. Future production and SV fields in order to gain an
of the Group's gas and condensate improved understanding of the geological
reserves, and therefore the Group's aspects of the fields and reservoir
cash flow and income, are highly engineering, drilling and completion
dependent on the Group's success techniques, and the results of this
in operating existing producing study and further planned technical
wells, drilling new production work are being used by the Group
wells and efficiently developing in the future development of these
and exploiting any reserves, and fields. The Group has established
finding or acquiring additional an ongoing relationship with such
reserves. The Group may not be external technical consultants to
able to develop, find or acquire ensure that technical management
reserves at acceptable costs. The and planning is of a high quality
experience gained from drilling in respect of all development activities
undertaken to date highlights such on the Group's fields.
risks as the Group targets the
appraisal and production of these
hydrocarbons.
----------------------------------------------
Risks relating to the further
development and operation of the
Group's gas and condensate fields
in Ukraine
----------------------------------------------
The planned development and operation The Group's technical management
of the Group's gas and condensate staff, in consultation with its
fields in Ukraine is susceptible external technical consultants,
to appraisal, development and operational carefully plan and supervise development
risk. This could include, but is and operational activities with
not restricted to, delays in the the aim of managing the risks associated
delivery of equipment in Ukraine, with the further development of
failure of key equipment, lower the Group's fields in Ukraine. This
than expected production from wells includes detailed review and consideration
that are currently producing, or of available subsurface data, utilisation
new wells that are brought on-stream, of modern geological software, and
problematic wells and complex geology utilisation of engineering and completion
which is difficult to drill or techniques developed for the fields.
interpret. The generation of significant With regards to operational activities,
operational cash is dependent on the Group ensures that appropriate
the successful delivery and completion equipment and personnel are available
of the development and operation for the operations, and that operational
of the fields. The military conflict contractors are appropriately supervised.
in Ukraine is impacting planning In addition, the Group performs
and implementation of development a review of indicators of impairment
and operations at the Group's fields. of its oil and gas assets on an
annual basis, and considers whether
an assessment of its oil and gas
assets by a suitably qualified independent
assessor is appropriate or required.
----------------------------------------------
Drilling and workover operations
----------------------------------------------
Due to the depth and nature of The utilisation of detailed sub-surface
the reservoirs in the Group's fields, analysis, careful well planning
the technical difficulty of drilling and engineering design in designing
or re-entering wells in the Group's work programmes, along with appropriate
fields is high, and this and the procurement procedures and competent
equipment limitations within Ukraine, on-site management, aims to minimise
can result in unsuccessful or lower these risks.
than expected outcomes for wells.
----------------------------------------------
Maintenance of facilities
----------------------------------------------
There is a risk that production The Group's facilities are operated
or transportation facilities can and maintained at standards above
fail due to non-adequate maintenance, the Ukrainian minimum legal requirements.
control or poor performance of Operations staff are experienced
the Group's suppliers. and receive supplemental training
to ensure that facilities are properly
operated and maintained. Service
providers are rigorously reviewed
at the tender stage and are monitored
during the contract period.
----------------------------------------------
Financial risks
----------------------------------------------
Exposure to cash flow and liquidity
risk
----------------------------------------------
There is a risk that insufficient The Group maintains adequate cash
funds are available to meet the reserves and closely monitors forecasted
Group's development obligations and actual cash flow, as well as
to commercialise the Group's oil short and longer-term funding requirements.
and gas assets. Since a significant T he Group aims to maintain the
proportion of the future capital significant majority of its cash
requirements of the Group is expected resources outside Ukraine (being
to be derived from operational 75% as at 28 September 2022). The
cash generated from production, Group does not currently have any
including from wells yet to be loans outstanding, internal financial
drilled, there is a risk that in projections are regularly made based
the longer term insufficient operational on the latest estimates available,
cash is generated, or that additional and various scenarios are run to
funding, should the need arise, assess the robustness of the Group's
cannot be secured. The military liquidity. However, as the risk
conflict in Ukraine has disrupted to future capital funding is inherent
production operations at the Group's in the oil and gas exploration and
fields, and consequently reduced development industry and reliant
anticipated cash flows from those in part on future development success,
fields, and this has increased it is difficult for the Group to
the risk regarding sufficiency take any other measures to further
of capital for development. In mitigate this risk, other than tailoring
addition, the conflict may disrupt its development activities to its
the sales market for hydrocarbons available capital funding from time
that are produced. Currently, however, to time.
hydrocarbon prices are very high,
which is ameliorating the potential
reduction in cash flows resulting
from lower production, and the
Group's sales counterparties are
expected to meet their financial
obligations.
----------------------------------------------
Ensuring appropriate business
practices
----------------------------------------------
The Group operates in Ukraine, The Group maintains anti-bribery
an emerging market, where certain and corruption policies in relation
inappropriate business practices to all aspects of its business,
may, from time to time occur, such and ensures that clear authority
as corrupt business practices, levels and robust approval processes
bribery, appropriation of property are in place, with stringent controls
and fraud, all of which can lead over cash management and the tendering
to financial loss. and procurement processes. In addition,
office and site protection is maintained
to protect the Group's assets.
----------------------------------------------
Hydrocarbon price risk
----------------------------------------------
The Group derives its revenue principally The Group sells a proportion of
from the sale of its Ukrainian Its hydrocarbon production through
gas, condensate and LPG production. offtake arrangements, which include
These revenues are subject to commodity pricing formulae so as to ensure
price volatility and political that it achieves market prices for
influence. A prolonged period of its products, as well utilising
low gas, condensate and LPG prices the electronic market platforms
may impact the Group's ability in Ukraine to achieve market prices
to maintain its long-term investment for its remaining products. However,
programme with a consequent effect hydrocarbon prices in Ukraine are
on its growth rate, which in turn implicitly linked to world hydrocarbon
may impact the Company's share prices and so the Group is subject
price or any shareholder returns. to external price trends. In January
Lower gas, condensate and LPG prices 2022, the Ukrainian Government imposed
may not only decrease the Group's temporary partial gas price regulations
revenues per unit, but may also until 30 April 2022, designed to
reduce the amount of gas, condensate support the production of certain
and LPG which the Group can produce designated food products. Whilst
economically, as would increases an unhelpful interference in the
in costs associated with hydrocarbon functioning of the deregulated gas
production, such as subsoil taxes supply market in Ukraine, in its
and royalties. The overall economics stated form and duration, this temporary
of the Group's key assets (being scheme was not a material risk to
the net present value of the future the Company and its cash generation,
cash flows from its Ukrainian projects) and has now expired.
are far more sensitive to long
term gas, condensate and LPG prices
than short-term price volatility.
However, short-term volatility
does affect liquidity risk, as,
in the early stage of the projects,
income from production revenues
is offset by capital investment.
In addition, t he military conflict
in Ukraine may disrupt the sales
market for hydrocarbons, although,
currently, hydrocarbon prices are
very high, and the Group's sales
counterparties are expected to
meet their financial obligations.
----------------------------------------------
Currency risk
----------------------------------------------
Since the beginning of 2014 , the The Group's sales proceeds are received
Ukrainian Hryvnia significantly in Ukrainian Hryvnia, and the majority
devalued against major world currencies, of the capital expenditure costs
including the US Dollar, where for the current investment programme
it has fallen from UAH8.3/$1.00 will be incurred in Ukrainian Hryvnia,
on 1 January 2014 to UAH29.3/$1.00 thus the currency of revenue and
on 30 June 2022, and UAH36.57$1.00 costs are largely matched. In light
on 29 September 2022. This devaluation of the previous devaluation and
has been a significant contributor volatility of the Ukrainian Hryvnia
to the imposition of banking restrictions against major world currencies,
by the National Bank of Ukraine and since the Ukrainian Hryvnia
over recent years. In addition, does not benefit from the range
the geopolitical events in Ukraine of currency hedging instruments
over recent years and the current which are available in more developed
military conflict in Ukraine are economies, the Group has adopted
likely to continue to impact the a policy that, where possible, funds
valuation of the Ukrainian Hryvnia not required for use in Ukraine
against major world currencies. be retained on deposit in the United
Further devaluation of the Ukrainian Kingdom and Europe, principally
Hryvnia against the US Dollar will in US Dollars.
affect the carrying value of the
Group's assets.
----------------------------------------------
Counterparty and credit risk
----------------------------------------------
The challenging political and economic The Group monitors the financial
environment in Ukraine and current position and credit quality of its
military conflict means that businesses contractual counterparties and seeks
can be subject to significant financial to manage the risk associated with
strain, which can mean that the counterparties by contracting with
Group is exposed to increased counterparty creditworthy contractors and customers.
risk if counterparties fail or Hydrocarbon production is sold on
default in their contractual obligations terms that seek to limit supply
to the Group, including in relation credit and/or title transfer until
to the sale of its hydrocarbon payment is received .
production, resulting in financial
loss to the Group.
----------------------------------------------
Financial markets and economic
outlook
----------------------------------------------
The performance of the Group is The Group's sales proceeds are received
influenced by global economic conditions in Ukrainian Hryvnia and a significant
and, in particular, the conditions proportion of investment expenditure
prevailing in the United Kingdom is made in Ukrainian Hryvnia , which
and Ukraine. The economies in these minimises risks related to foreign
regions have been subject to volatile exchange volatility. However, hydrocarbon
pressures in recent periods, with prices in Ukraine are implicitly
the global economy having experienced linked to world hydrocarbon prices
a long period of difficulty, the and so the Group is subject to external
COVID pandemic, and more particularly price movements. The Group holds
the current military conflict in a significant proportion of its
Ukraine. This has led to extreme cash reserves in the United Kingdom
foreign exchange movements in the and Europe, mostly in US Dollars,
Ukrainian Hryvnia , high inflation with reputable financial institutions.
and interest rates, and increased The financial status of counterparties
credit risk relating to the Group's is carefully monitored to manage
key counterparties. counterparty risks. Nevertheless,
the overall exposure that the Group
faces as a result of these risks
cannot be predicted and many of
these are outside of the Group's
control.
----------------------------------------------
Corporate risks
----------------------------------------------
Ukrainian production licences
----------------------------------------------
The Group operates in a region The Group ensures compliance with
where the right to production can commitments and regulations relating
be challenged by State and non-State to its production licences through
parties. During 2010, this manifested Group procedures and controls or,
itself in the form of a Ministry where this is not immediately feasible
Order instructing the Group to for practical or logistical considerations,
suspend all operations and production seeks to enter into dialogue with
from its MEX-GOL and SV production the relevant Government bodies with
licences, which was not resolved a view to agreeing a reasonable
until mid-2011. In 2013, new rules time frame for achieving compliance
relating to the updating of production or an alternative, mutually agreeable
licences led to further challenges course of action. Work programmes
being raised by the Ukrainian authorities are designed to ensure that all
to the production licences held licence obligations are met and
by independent oil and gas producers continual interaction with Government
in Ukraine, including the Group. bodies is maintained in relation
In March 2019, a Ministry Order to licence obligations and commitments.
was issued instructing the Group
to suspend all operations and production
from its VAS production licence.
The Group is challenging this Order
through legal proceedings, during
which production from the licence
is able to continue (although the
Russian invasion caused production
to be suspended, with resumption
planned for October 2022), but
this matter remains unresolved.
In 2020, LLC Arkona Gas-Energy
("Arkona") faced a challenge from
PJSC Ukrnafta concerning the validity
of its SC production licence ,
which was ultimately resolved in
Arkona's favour by a decision of
the Supreme Court of Ukraine in
February 2021. All such challenges
affecting the Group have thus far
been successfully defended through
the Ukrainian legal system. However,
the business environment is such
that these types of challenges
may arise at any time in relation
to the Group's operations, licence
history, compliance with licence
commitments and/or local regulations.
In addition, production licences
in Ukraine are issued with and/or
carry ongoing compliance obligations,
which if not met, may lead to the
loss of a licence.
----------------------------------------------
Risks relating to key personnel
----------------------------------------------
The Group's success depends upon The Group periodically reviews the
skilled management as well as technical compensation and contractual terms
expertise and administrative staff. of its staff. In addition, the Group
The loss of service of critical has developed relationships with
members from the Group's team could a number of technical and other
have an adverse effect on the business. professional experts and advisers,
The current military conflict in who are used to provide specialist
Ukraine has meant that, as far services as required. As a result
as possible, the Group's staff of the military conflict, o nly
have needed to move away from areas essential staff are located at site,
of conflict and work remotely. and all other staff are working
remotely, either from areas away
from the conflict areas or outside
Ukraine. The Group has invested
in technology that allows many staff
to work just as effectively from
remote locations.
----------------------------------------------
Directors' Responsibility Statement
The Directors confirm that, to the best of their knowledge:
a) the unaudited condensed interim consolidated financial
statements have been prepared in accordance with UK-adopted
International Accounting Standard 34, 'Interim Financial Reporting'
("IAS 34") and the AIM Rules for Companies; and
b) these unaudited interim results include:
(i) a fair review of the information required (i.e. an
indication of important events and their impact and a description
of the principal risks and uncertainties for the remaining six
months of the financial year); and
(ii) a fair review of the information required on related party transactions.
A list of current Directors is maintained on the Group's
website, www.enwell-energy.com.
Condensed Interim Consolidated Income Statement
6 months
6 months ended ended
30 Jun 2 2 30 Jun 2
1
(unaudited) (unaudited)
Note $000 $000
Revenue 3 77,228 41,050
Cost of sales 4 (25,690) (19,452)
------------------------------------ ----- --------------- ------------
Gross profit 51,538 21,598
Administrative expenses (3,428) (3,953)
Other operating income , (net) 5 824 469
Operating profit 48,934 18,114
Net impairment losses on financial
assets (679) (1 9 )
Other expenses, (net) 6 (5,227) (39)
Finance income - 87
Finance costs (248) ( 197 )
Profit before taxation 42,780 17,94 6
Income tax expense 7 (10,408) (4,15 7 )
------------------------------------ ----- --------------- ------------
Profit for the period 32,372 13,7 89
------------------------------------ ----- --------------- ------------
Earnings per share (cents)
Basic and diluted 8 10.1c 4 .3c
------------------------------------ ----- --------------- ------------
The Notes set out below are an integral part of these unaudited
condensed interim consolidated financial statements.
Condensed Interim Consolidated Statement of Comprehensive
Income
6 months 6 months
ended ended
30 Jun 2 30 Jun 2
2 1
(unaudited) (unaudited)
$000 $000
Profit for the period 32,372 13,7 89
Other comprehensive income:
Items that may be subsequently reclassified
to profit or loss:
Equity - foreign currency translation (7,943) 3,9 27
--------------------------------------------- ------------ ------------
Total other comprehensive (loss)/ income (7,943) 3,9 27
Total comprehensive income for the period 24,429 17 , 716
--------------------------------------------- ------------ ------------
The Notes set out below are an integral part of these unaudited
condensed interim consolidated financial statements.
Condensed Interim Consolidated Balance Sheet
30 Jun 2 31 Dec 2
2 1
(unaudited) (audited)
Note $000 $000
Assets
Non-current assets
Property, plant and equipment 9 83,487 87 , 418
Intangible assets 10 11,206 12 , 340
Right-of-use assets 716 1,008
Deferred tax asset 7 375 361
95,784 101, 127
Current assets
Inventories 2,395 1 , 862
Trade and other receivables 1 1 48,678 13 , 059
Cash and cash equivalents 1 4 77,370 87,780
Other short-term investments 1 4 - 4, 762
------------------------------- ----- ------------ ------------
128,443 107 , 463
Total assets 224,227 208, 590
------------------------------- ----- ------------ ------------
Liabilities
Current liabilities
( 12 , 306
Trade and other payables (8,344) )
Lease liabilities (391) ( 455 )
( 5 , 445
Corporation tax payable (4,519) )
------------------------------- ----- ------------ ------------
( 18 , 206
(13,254) )
------------------------------- ----- ------------ ------------
Net current assets 115,189 8 9 , 257
------------------------------- ----- ------------ ------------
Non-current liabilities
( 5 , 467
Provision for decommissioning 1 2 (993) )
Lease liabilities (421) ( 648 )
Defined benefit liability (390) ( 427 )
Deferred tax liability 7 (6,119) (5, 197 )
Other non-current liabilities 1 3 (104) ( 128 )
(1 1 , 867
(8,027) )
( 3 0 , 073
Total liabilities (21,281) )
------------------------------- ----- ------------ ------------
Net assets 202,946 1 78 , 517
------------------------------- ----- ------------ ------------
Equity
Called up share capital 28,115 28,115
( 10 3 ,
Foreign exchange reserve (111,554) 611 )
Other reserve (3,204) (3,204)
Capital contribution reserve 7,477 7,477
Retained earnings 282,112 249, 740
------------------------------- ----- ------------ ------------
Total equity 202,946 1 78 , 517
------------------------------- ----- ------------ ------------
The Notes set out below are an integral part of these unaudited
condensed interim consolidated financial statements.
Condensed Interim Consolidated Statement of Changes in
Equity
Called Merger Capital Foreign
up share Share premium reserve contributions exchange Retained Total
capital account reserve reserve* earnings equity
$000 $000 $000 $000 $000 $000 $000
As at 1 January 202 2 ( 10 3 1 78
(audited) 28,115 - (3,204) 7,477 , 611 ) 249, 740 , 517
Profit for the period - - - - - 32,372 32,372
Other comprehensive income
- exchange differences - - - - (7,943) - (7,943)
---------------------------- ---------- -------------- --------- --------------- ---------- ---------- --------
Total comprehensive income - - - - (7,943) 32,372 24,429
As at 30 June 202 2
(unaudited) 28,115 - (3,204) 7,477 (111,554) 282,112 202,946
---------------------------- ---------- -------------- --------- --------------- ---------- ---------- --------
Accumulated
Capital Foreign losses/
Called up Share premium Merger contributions exchange Retained Total
share capital account reserve reserve reserve* earnings equity
$000 $000 $000 $000 $000 $000 $000
As at 1 January 20 2
1 (audited) 28,115 555,090 (3,204) 7,477 (105,222) (356,641) 125,615
Profit for the
period - - - - - 13,789 13,789
Other comprehensive
income
- exchange
differences - - - - 3,927 - 3,927
--------------------- --------------- -------------- --------- --------------- ---------- ------------ --------
Total comprehensive
income - - - - 3,927 13,789 17,716
Transactions with
owners
in their capacity as
owners:
Cancellation of
share premium
account - (555,090) - - - 555,090 -
As at 30 June 20 2 1
(unaudited) 28,115 - (3,204) 7,477 (101,295) 212,238 143,331
--------------------- --------------- -------------- --------- --------------- ---------- ------------ --------
* Predominantly as a result of exchange differences on
retranslation, where the subsidiaries ' functional currency is not
US Dollars
The Notes set out below are an integral part of these unaudited
condensed interim consolidated financial statements.
Condensed Interim Consolidated Statement of Cash Flows
6 months 6 months
ended ended
30 Jun 2 30 Jun 21
2
(unaudited) (unaudited)
Note $000 $000
Operating activities
1
Cash generated from operations 5 12 , 501 19,1 4 8
Charitable donations (4 , 996) (23)
Equipment rental income - 15
Income tax paid (9 , 143) (2,897)
Interest received 536 261
-------------------------------------------- ----- ------------ ------------
Net cash (outflow)/inflow from operating ( 1 , 102
activities ) 16,50 4
-------------------------------------------- ----- ------------ ------------
Investing activities
( 12 , 074
Purchase of property, plant and equipment ) (13,092)
Proceeds from disposal of other short-term
investments 4 , 762 -
Purchase of intangible assets (23) (2,233)
Proceeds from return of prepayments
for shares - 250
Proceeds from sale of property, plant
and equipment 2 9
( 7 , 333
Net cash outflow from investing activities ) (15,066)
-------------------------------------------- ----- ------------ ------------
Financing activities
Payment of principal portion of lease
liabilities (239) (330)
Net cash outflow from financing activities (239) (330)
Net (decrease)/increase in cash and ( 8 , 674
cash equivalents ) 1,10 8
Cash and cash equivalents at beginning
of the period 14 87 , 780 60,993
ECL* of cash and cash equivalents (223) (4)
Effect of foreign exchange rate changes (1,513) 7 60
Cash and cash equivalents at end of 1
the period 4 77 , 370 62,857
-------------------------------------------- ----- ------------ ------------
*ECL - Expected credit losses
The Notes set out below are an integral part of these unaudited
condensed interim consolidated financial statements.
Notes to the U naudited Condensed Interim Consolidated Financial
Statements
1. General Information and Operational Environment
Enwell Energy plc (the "Company") and its subsidiaries (together
the "Group") is a gas, condensate and LPG production group.
Enwell Energy plc is a public limited company incorporated in
England and Wales under the Companies Act 2006, whose shares are
quoted on the AIM Market of London Stock Exchange plc. The
Company's registered office is at 16 Old Queen Street, London SW1H
9HP, United Kingdom and its registered number is 4462555.
As at 30 June 202 2 , the Company's majority shareholder, with
82.65% of the issued share capital, and immediate parent company
was Smart Energy (CY) Ltd , which is 100% owned by Smart Holding
(Cyprus) Ltd, which is 100% owned by Mr Vadym Novynskyi.
Accordingly, the Company is ultimately controlled by Mr Vadym
Novynskyi.
The Group's gas, condensate and LPG extraction and production
facilities are located in Ukraine. Since 2013, there has been
ongoing political and economic instability in Ukraine, which has
led to a deterioration of Ukrainian State finances, volatility of
financial markets, illiquidity in capital markets, higher inflation
and a depreciation of the national currency against major foreign
currencies, although there had been some recent gradual
improvements.
Impact of the ongoing war in Ukraine
On 24 February 2022, Russia commenced a military invasion of
Ukraine. This was quickly followed by the enactment of martial law
by the Ukrainian President's Decree, approved by the Parliament of
Ukraine, and the corresponding introduction of related temporary
restrictions that impact, amongst other areas, the economic
environment and business operations in Ukraine.
Currently, seven months after the initial military attack,
fighting continues in and around several major Ukrainian cities,
causing very significant numbers of reported military and civilian
casualties and significant dislocation of the Ukrainian population.
As of the date hereof, the Russian army has occupied territories in
the east and south of Ukraine, including the majority of the
Kherson, Zaporizhzhia, Luhansk and Donetsk regions. Russian attacks
have targeted and destroyed civilian infrastructure over wide areas
of Ukraine, including hospitals and residential complexes. The
invasion caused, and continues to cause, significant turbulence and
disruption to the social and economic environment in Ukraine, with
many businesses being forced to suspend their operations. According
to a projection published by the International Monetary Fund
("IMF") in April 2022, Ukrainian GDP may fall 35% in 2022.
On 3 June 2022, the National Bank of Ukraine ("NBU") increased
the key policy interest rate to 25%, which was aimed at suspending
price increases and strengthening the Ukrainian Hryvnia exchange
rate. The NBU has also introduced temporary restrictions on foreign
currency trades and limited the ability to perform cross-border
payments for non-critical imports and repayment of debt to foreign
creditors, apart from international institutions. At that time, the
Ukrainian Hryvnia exchange rate with the US Dollar was effectively
fixed at UAH29.25:$1.00 on the foreign exchange market to ensure
the stable operation of Ukraine's financial system, and this was
increased to UAH36.57:$1.00 in July 2022. As a result, commercial
interbank quotes remain close to the officially imposed NBU
exchange rate. Despite the uncertainty and instability in the
general situation within Ukraine, the banking system remains
relatively stable, with sufficient liquidity even as martial law
continues, and banking services are available to both legal
entities and individual bank customers .
The Ukrainian Government is taking action to limit the negative
effects of the war on the Ukrainian economic environment during the
period of martial law and beyond, including but not limited to:
-- the Parliament of Ukraine has adopted a temporary easing of
the tax regime until the end of martial law, including the
suspension of tax audits and has cancelled penalties for violating
the tax law;
-- gasoline, heavy distillates, liquefied gas, oil and petroleum
are subject to VAT at a reduced rate of 7%, and the excise
tax rate for the imported fuel group of products' was suspended
between 24 February 2022 and 30 September 2022, although it
is now being reinstated at its previous level;
-- a number of measures were taken to limit prices for energy
resources, including prohibiting export of gas, setting a
level of electricity price on transactions a day ahead and
intraday markets; and
-- the Parliament of Ukraine passed a law ( 7038-d) to increase
the subsoil tax rate on natural gas production during martial
law. This law introduced a differentiated subsoil tax rate
on the production of natural gas depending on sale prices
for natural gas.
Additional financial support was received from a number of
international institutions, including from the IMF and European
Bank for Reconstruction and Development ("EBRD"), to support the
economy and the population. Such financial support is critical for
Ukraine to continue to service its debts in the foreseeable future,
including record high State debt repayments in 2022.
Given the fast-moving nature of the situation in Ukraine and the
unpredictability of the outcome, it is impracticable to assess the
full impact of the war on the economic environment.
Gas market developments
On 30 December 2021, the Cabinet of Ministers adopted Resolution
1433 and Resolution 1435, according to which all independent gas
producers in Ukraine (as identified by a Committee set up by the
Ukrainian Government (the "Committee")) were required to sell up to
20% of their natural gas production for the period until 30 April
2022 at a price set at the cost of sales of the relevant gas
producer (based on established accounting rules) for such gas, plus
a margin of 24%, plus existing production taxes (the "Regulated
Price"). This gas was then to be sold to specified producers of
designated socially important food products (as identified by the
Committee) at the Regulated Price to reduce the energy costs of
such producers during the period through to 30 April 2022. Although
the introduction of these measures pre-dated the military conflict
in Ukraine, their impact has coincided with the military conflict,
but nevertheless, the measures have not had a material financial
impact on the Group, given the modest volume of gas sold at
Regulated Prices and the reduced production during the applicable
period.
On 15 March 2022, the Ukrainian Parliament adopted the Law of
Ukraine 2139-IX "On amendments to the Tax Code of Ukraine and
certain legislative acts of Ukraine on the introduction of
differentiated rent (subsoil tax) for natural gas production",
which introduced changes to the subsoil production tax rates
applicable to natural gas production by modifying the applicable
rates based on gas prices, extending the incentive rates for new
wells for a further 10 years and making improvements to the
regulatory environment. These changes took effect on 1 March 2022,
and the legislation includes provisions that these rates will not
be increased for 10 years.
The new subsoil production tax rates are as follows:
(a) when gas prices are up to $150/Mm(3) , the rate for wells drilled
prior to 1 January 2018 ("old wells") is 14.5% for gas produced
from deposits at depths shallower than 5,000 metres and 7%
for gas produced from deposits deeper than 5,000 metres, and
for wells drilled after 1 January 2018 ("new wells") is 6%
for gas produced from deposits at depths shallower than 5,000
metres and 3% for gas produced from deposits deeper than 5,000
metres;
(b) when gas prices are between $150/Mm(3) and $400/Mm(3) , the
rate for old wells is 29% for gas produced from deposits at
depths shallower than 5,000 metres and 14% for gas produced
from deposits deeper than 5,000 metres, and for new wells is
12% for gas produced from deposits at depths shallower than
5,000 metres and 6% for gas produced from deposits deeper than
5,000 metres;
(c) when gas prices are more than $400/Mm(3) , for the first $400/Mm(3)
, the rate for old wells is 29% for gas produced from deposits
at depths shallower than 5,000 metres and 14% for gas produced
from deposits deeper than 5,000 metres, and for new wells is
12% for gas produced from deposits at depths shallower than
5,000 metres and 6% for gas produced from deposits deeper than
5,000 metres, and for the difference between $400/Mm(3) and
the actual price, the rate for old wells is 65% for gas produced
from deposits at depths shallower than 5,000 metres and 31%
for gas produced from deposits deeper than 5,000 metres, and
for new wells is 36% for gas produced from deposits at depths
shallower than 5,000 metres and 18% for gas produced from deposits
deeper than 5,000 metres.
Prior to the changes, the tax rate for old wells was 29% for gas
produced from deposits at depths shallower than 5,000 metres and
14% for gas produced from deposits deeper than 5,000 metres, and
for new wells was 12% for gas produced from deposits at depths
shallower than 5,000 metres and 6% for gas produced from deposits
deeper than 5,000 metres. The tax rates applicable to condensate
production were unchanged and remain at 31% for condensate produced
from deposits shallower than 5,000 metres and 16% for condensate
produced from deposits deeper than 5,000 metres, for both old and
new wells.
As a direct result of the conflict in Ukraine, including the
significant decline in domestic consumption disrupting the previous
supply, demand and pricing dynamics, there has been a divergence
between domestic and European gas pricing, and accordingly, the
methodology (linked to European prices) used to determine the
reference gas price for the subsoil tax rates has had a
significantly detrimental effect for domestic gas producers. In
order to address this issue, the Ukrainian Parliament, in September
2022, approved draft legislation which modifies such methodology to
ensure that it operates as originally intended (with such reference
price being aligned with domestic prices). This legislation has not
yet completed all the requisite procedural steps to be enacted and
brought into force, but the draft legislation envisages an
effective implementation date of 1 August 2022 if enacted.
COVID-19 impact
The COVID-19 pandemic had a significant impact on the economic
environment in Ukraine and throughout the world. The rapid spread
of the COVID-19 coronavirus pandemic, and the restrictions
introduced to counteract the pandemic significantly impacted global
commodity and financial markets. The overall impact of COVID-19
will largely depend on the duration and extent of the effects of
the pandemic on the global and Ukrainian economies. Businesses in
Ukraine adapted to operating in new realities, arranging remote
work, supply and sale modes of operation. At the date hereof, based
on the available information, management believes that the
uncertainties attributable to COVID-19 do not represent a key risk
factor that may materially affect the liquidity and continuity of
the Group's operations.
Overall, the final resolution and the ongoing effects of the
military conflict and political and economic situation in Ukraine
are difficult to predict, but they may have further severe effects
on the Ukrainian economy and the Group's business.
As at 29 September 2022, the official NBU exchange rate of the
Ukrainian Hryvnia against the US Dollar was UAH36.57/$1.00,
compared with UAH29.25/$1.00 as at 30 June 2022.
Further details of risks relating to Ukraine can be found within
the Principal Risks and Uncertainties section earlier in this
announcement.
2. Accounting Judgements and Estimates
Basis of preparation
These unaudited condensed interim consolidated financial
statements for the six month period ended 30 June 202 2 have been
prepared in accordance with UK-adopted International Accounting
Standard 34, 'Interim Financial Reporting' ("IAS 34") and the AIM
Rules for Companies. The accounting policies adopted are consistent
with those of the previous financial year and corresponding interim
reporting period.
These unaudited condensed interim consolidated financial
statements do not comprise statutory accounts within the meaning of
section 434 of the Companies Act 2006. Statutory accounts for the
year ended 31 December 202 1 were approved by the Board of
Directors on 28 June 2022 and subsequently filed with the Registrar
of Companies. The Auditors' Report on those accounts was not
qualified and did not contain any statement under section 498 of
the Companies Act 2006.
The unaudited condensed interim consolidated financial
statements should be read in conjunction with the annual
consolidated financial statements for the year ended 31 December
2021, which were prepared in accordance with UK-adopted
International Accounting Standards.
The accounting policies and methods of computation and
presentation used are consistent with those used in the Group's
Annual Report and Financial Statements for the year ended 31
December 2021, with the exception of the new or revised standards
and interpretations set out below.
New and amended standards adopted by the Group
The following new standards, amendments to standards and
interpretations became effective for the Group on 1 January 2022 or
afterwards (t hese standards, amendments to standards and
interpretations did not have a material impact on this unaudited
interim condensed consolidated financial information):
-- Amendments to IAS 16 Property, Plant and Equipment prohibit
the deduction from the cost of an item of property, plant
and equipment of any proceeds from selling items produced
while bringing that asset into operation and clarify that
these proceeds (and the corresponding costs of production)
are recognised in profit or loss;
-- Amendments to IAS 37 Provisions, Contingent Liabilities and
Contingent Assets clarify that the cost of fulfilling a contract
comprises the costs that relate directly to the contract.
These can either be incremental costs of fulfilling that contract
or the allocation of other costs that relate directly to fulfilling
contracts;
There are no other amended standards which the Group considers
to have a material impact on these financial statements.
Going Concern
The Group's business activities, together with the factors
likely to affect its future operations, performance and financial
position are set out in the Chairman's Statement, Chief Executive's
Statement and Finance Review. The financial position of the Group,
its cash flows and liquidity position are set out in these
unaudited condensed interim consolidated financial statements.
On 24 February 2022, Russia commenced a military invasion of
Ukraine. This was quickly followed by the enactment of martial law
by the Ukrainian President's Decree, approved by the Parliament of
Ukraine, and the corresponding introduction of related temporary
restrictions that impact the economic environment and business
operations in Ukraine.
The production assets of the Group are located in the central
and eastern part of the country (Poltava and Kharkiv regions) which
are controlled by the Ukrainian Government. Following a brief
period of suspension, production and field operations, as well as
construction work on upgrades to the gas processing facilities, at
the MEX-GOL and SV fields recommenced. As of the date hereof, no
assets of the Group have been damaged, and the Group continues to
operate its MEX-GOL, SV and SC assets in the Poltava region, while
all production and field operations at the VAS asset located in the
Kharkiv region are suspended, although the Group plans to resume
production operations at the VAS field in the near future. On the
SC licence area, completion of the testing of the SC-4 well is
ongoing. No military activities have occurred at the Group's field
locations. The Gas Transmission System Operator of Ukraine has
maintained complete operational and technological control over the
operations of the Ukrainian Gas Transmission System. However, as of
the date hereof, the military conflict has had, and continues to
have, a material impact on the production and sales levels of the
business and execution of the Group's 2022 budget.
The Group has no debt and funds its operations from its own cash
resources. Cash and cash equivalents were $76.2 million as at 28
September 2022, of which $57.5 million were held outside of
Ukraine, in currencies other than the Ukrainian Hryvnia. The
Directors maintain a significant level of flexibility to modify the
Group's development plans as may be required to preserve cash
resources for liquidity management. Absent the potential impact of
the military conflict in Ukraine, the Directors are satisfied that
the Group and the Company are a going concern and will continue
their operations for the foreseeable future.
In assessing the impact of the military conflict on the ability
of the Group and the Company to continue as a going concern, the
Directors have analysed a number of possible scenarios of economic
and military developments and their impact on the expected cash
flows of the Group and Company for the remainder of 2022 and 2023.
This includes considering a possible (but in the view of the
Directors, highly unlikely) worst case scenario in which the Group
has zero production as a result of possible future military
conflict dictating field operations being completely shut-in, and
all other non-production related costs being maintained at current
levels with no reduction or mitigating actions as would otherwise
be possible. Even in this worst-case scenario, the Directors are
satisfied that the Group and the Company have sufficient liquid
resources to be able to meet their liabilities as they fall due and
to be able to continue as a going concern for the foreseeable
future.
In respect of the Group's operations, staff and assets in
Ukraine, the potential short and long-term impact of the future
development of the military conflict is inherently uncertain.
Accordingly, this creates a material uncertainty related to events
or conditions that may cast significant doubt on the Group's
ability to continue as a going concern because of the potential
impact on its ability to continue its operations for the
foreseeable future and realise its assets in the normal course of
business. The unaudited condensed interim consolidated financial
statements do not include the adjustments that would result if the
Group were unable to continue as a going concern.
The Company is a UK-based investment holding company. The
Company had cash and cash equivalents of $57.5 million as at 28
September 2022, all of which are held outside of Ukraine, in US
Dollars, Pounds Sterling and Euros. The Directors are satisfied
that the Company is a going concern and will be able to continue
its operations for the foreseeable future, and there is no material
uncertainty in respect of its ability to do so.
Significant accounting judgements and estimates
The preparation of the unaudited condensed interim consolidated
financial statements requires management to make judgements,
estimates and assumptions that affect the application of accounting
policies and the reported amounts of assets and liabilities, income
and expenses. Actual results may differ from these estimates.
In preparing these unaudited condensed interim consolidated
financial statements, the significant judgements made by management
in applying the Group's accounting policies and the key sources of
estimation uncertainty were consistent with those that applied to
the consolidated financial statements for the year ended 31
December 2021 with certain updates described below.
Estimates
Depreciation of Development and Production Assets
Development and production assets held in property, plant and
equipment are depreciated on a unit of production basis at a rate
calculated by reference to proven and probable reserves at the end
of the period plus the production in the period, and incorporating
the estimated future cost of developing and extracting those
reserves. Future development costs are estimated using assumptions
about the number of wells required to produce those reserves, the
cost of the wells, future production facilities and operating
costs, together with assumptions on oil and gas realisations, and
are revised annually. The reserves estimates used are determined
using estimates of gas in place, recovery factors, future
hydrocarbon prices and also take into consideration the Group's
latest development plan for the associated development and
production asset. The latest development plan and therefore the
inputs used to determine the depreciation charge for the MEX-GOL,
SV and VAS fields continue until the end of the economic life of
the fields, which is assessed to be 2038, 2042 and 2028
respectively, based on the assessment contained in the DeGolyer
& MacNaughton reserves report for these fields. The licences
for the MEX-GOL and SV fields have recently been extended until
2044. Were the estimated reserves at the beginning of the year to
differ by 10% from previous assumptions, the impact on depreciation
for the period ended 30 June 2022 would be to increase it by
$1,302,000 or decrease it by $750,000 (31 December 2021: increase
by $1,195,000 or decrease by $975,000).
Provision for Decommissioning
The Group has decommissioning obligations in respect of its
Ukrainian assets. The full extent to which the provision is
required depends on the legal requirements at the time of
decommissioning, the costs and timing of any decommissioning works
and the discount rate applied to such costs.
A detailed assessment of gross decommissioning cost was
undertaken on a well-by-well basis using local data on day rates
and equipment costs. The discount rate applied on the
decommissioning cost provision at 30 June 202 2 was 22 . 97 % (31
December 202 1 : 6 . 29 %). The discount rate is calculated in real
terms based on the yield to maturity of Ukrainian Government bonds
denominated in the currency in which the liability is expected to
be settled and with the settlement date that approximates the
timing of settlement of decommissioning obligations.
The change in estimate applied to calculate the provision as at
30 June 202 2 resulted from the revision of the estimated costs of
decommissioning (increase of $ 114 ,000 in provision) and the
increase in the discount rate applied (decrease of $ 4, 4 29 ,000
in provision). The increase in discount rate at 30 June 202 2
resulted from the increase in the Ukrainian Eurobonds yield and the
respective increase of country risk premium. The costs are expected
to be incurred by 2038 on the MEX-GOL field, by 2042 on the SV
field, by 2028 on the VAS field, and by 2045 on the SC field, which
is the end of the estimated economic life of the respective
fields.
3. Segmental Information
In line with the Group's internal reporting framework and
management structure, the key strategic and operating decisions are
made by the Board of Directors, who review internal monthly
management reports, budgets and forecast information as part of
this process. Accordingly, the Board of Directors is deemed to be
the Chief Operating Decision Maker within the Group.
The Group's only class of business activity is oil and gas
exploration, development and production. The Group's operations are
located in Ukraine, with its head office in the United Kingdom.
These geographical regions are the basis on which the Group reports
its segment information. The segment results as presented represent
operating profit before depreciation and amortisation.
6 months ended 30 June 2022 (unaudited)
United
Ukraine Kingdom Total
$000 $000 $000
Revenue
Gas sales 64,106 - 64,106
Condensate sales 8,081 - 8,081
Liquefied Petroleum Gas sales 5,041 - 5,041
---------------------------------------------- ---------- --------- --------
Total revenue 77,228 - 77,228
52 ,
Segment result 53 , 588 (922) 666
Depreciation and amortisation of non-current (3 ,
assets (3 , 732) - 732)
Operating profit 48 934
---------------------------------------------- ---------- --------- --------
165 , 59 , 224 ,
Segment assets 139 088 227
Capital additions* 9 , 724 - 9 , 724
*Comprises additions to property, plant and equipment and
intangible assets (Notes 9 and 1 0 ).
6 months ended 30 June 20 2 1 (unaudited)
United
Ukraine Kingdom Total
$000 $000 $000
Revenue
Gas sales 28,514 - 28,514
Condensate sales 9,760 - 9,760
Liquefied Petroleum Gas sales 2,776 - 2,776
------------------------------- ---------- --------- --------
Total revenue 41,050 - 41,050
24,0
Segment result 25,6 41 (1,547) 94
Depreciation and amortisation (5,980) - (5,980)
------------------------------- ---------- --------- --------
Operating profit 18, 114
------------------------------- ---------- --------- --------
164,
Segment assets 127, 927 36,982 909
1 1 ,
Capital additions* 1 1 , 035 - 035
*Comprises additions to property, plant and equipment and
intangible assets (Notes 9 and 1 0 ).
There are no inter-segment sales within the Group and all
products are sold in the geographical region in which they are
produced. The Group is not significantly impacted by
seasonality.
4. Cost of Sales
6 months 6 months ended
ended 30 Jun 2 1
30 Jun 2
2
(unaudited) (unaudited)
$000 $000
Production taxes 12,931 7,273
Depreciation of property, plant and
equipment 3,251 5,529
Rent expenses 5,440 2,964
Staff costs 1,217 1,368
Cost of inventories recognised as an
expense 694 910
Transmission tariff for Ukrainian gas
system 267 436
Amortisation of mineral reserves 227 236
Other expenses 1,663 736
25,6 90 19, 452
5. Other operating income/(expenses), (net)
6 months 6 months ended
ended 30 Jun 2 1
30 Jun 2
2
(unaudited) (unaudited)
$000 $000
Interest income on cash and cash equivalents 536 312
Reversal of accruals 236 167
Contractor penalties applied 110 -
Other operating (losses)/income, net ( 5 8) ( 10 )
824 4 69
6. Other income/(expenses), (net)
6 months 6 months ended
ended 30 Jun 2 1
30 Jun 2
2
(unaudited) (unaudited)
$000 $000
Charitable donations (4,996) (23)
Net foreign exchange (losses)/gains (2) (26)
Other income/(expenses), (net) (229) 10
(5,227) (39)
Following the Russian invasion of Ukraine on 24 February 2022,
the Group has made a number of charitable donations totalling $
4,996,000 to State and volunteer organisations for humanitarian and
security assistance.
7. Taxation
The income tax charge of $10,408,000 for the six month period
ended 30 June 2022 relates to a urrent tax charge of $8,682,000 and
a deferred tax charge of $1,726,000 (1H 2021: current tax charge of
$4,003,000 and deferred tax charge of $154,000).
The movement in the period was as follows:
6 months 6 months
ended ended
30 Jun 2 30 Jun 2
2 1
(unaudited) (unaudited)
$000 $000
Deferred tax (liability)/asset recognised
relating to development and production
assets at MEX-GOL-SV fields and provision
for decommissioning
At beginning of the period (5,197) (2,705)
Charged to Income Statement - current
period (1,740) (249)
Effect of exchange difference 818 (146)
--------------------------------------------
At end of the period (6,119) (3,100)
-------------------------------------------- ------------ ------------
Deferred tax asset/( liability ) recognised
relating to development and production
assets at VAS field and provision for
decommissioning
At beginning of the period 361 167
Credited to Income Statement - current
period 14 95
Effect of exchange difference - 8
---------------------------------------------
At end of the period 375 270
--------------------------------------------- ---- ----
Taxes on income in the interim periods are accrued using the tax
rate that would be applicable to the expected total annual profit
or loss. The effective tax rate for the six month period ended 30
June 2022 was 25% (1H 2021: 23%).
The deferred tax asset relating to the Group's provision for
decommissioning at 30 June 2022 of $517,000 (31 December 2021:
$457,000) was recognised on the tax effect of the temporary
differences of the Group's provision for decommissioning at the
MEX-GOL and SV fields, and its tax base. The deferred tax liability
relating to the Group's development and production assets at the
MEX-GOL and SV fields at 30 June 2022 of $6,635,000 (31 December
2021: $5,654,000) was recognised on the tax effect of the temporary
differences between the carrying value of the Group's development
and production asset at the MEX-GOL and SV fields, and its tax
base.
The deferred tax asset relating to the Group's provision for
decommissioning at 30 June 2022 of $150,000 (31 December 2021:
$315,000) was recognised on the tax effect of the temporary
differences on the Group's provision on decommissioning at the VAS
field, and its tax base. The deferred tax liability relating to the
Group's development and production assets at the VAS field at 30
June 2022 of $225,000 (31 December 2021: $46,000) was recognised on
the tax effect of the temporary differences between the carrying
value of the Group's development and production asset at the VAS
field, and its tax base.
8. Earnings per Share
The calculation of basic and diluted earnings per ordinary share
has been based on the profit for the six month period ended 30 June
2022 and 30 June 2021 and 320,637,836 ordinary shares, being the
average number of shares in issue for the period. There are no
dilutive instruments.
9. Property, Plant and Equipment
6 months ended 30 Jun 22 6 months ended 30 Jun 2 1
(unaudited) (unaudited)
Oil and Oil and Other Total Oil and Oil and Other Total
gas gas fixed gas gas fixed
development exploration assets development exploration assets
and and and and
production evaluation production evaluation
assets assets assets assets
Ukraine Ukraine
$000 $000 $000 $000 $000 $000 $000 $000
Cost
At beginning of
the
period 1 63,170 10,110 2,631 175,911 135 ,966 2,362 2,217 140,545
Additions 6,469 3,027 185 9,681 10,604 80 55 10,739
Change in
decommissioning
provision (4,250) (63) - (4,313) (107) - - (107)
Disposals (57) - (25) (82) (36) - (70) (106)
Exchange
differences (12,166) (463) 857 (11,772) 5,850 97 75 6,022
At end of the
period 153,166 12,611 3,648 169,425 152,277 2,539 2,277 157,093
Accumulated
depreciation
and impairment
At beginning of
the
period 87,070 - 1,423 88,493 73,816 - 1,067 74,883
Charge for the
period 3,362 - 158 3,520 5,447 - 158 5,605
Disposals (21) - (23) (45) (7) - (9) (16)
Exchange
differences (5,933) - (98) (6,037) 3,072 - 48 3,120
At end of the
period 84,478 - 1,460 85,932 82,328 - 1,264 83,592
Net book value at
the beginning of
the period 76,100 10,110 1,208 87,418 62,150 2,362 1,150 65,662
------------------ ------------ ------------ ------- ------------ ------------ ------------ ------- -------------
Net book value at
end of the
period 68,668 12,611 2,189 83,487 69,949 2,539 1,013 73,501
------------------ ------------ ------------ ------- ------------ ------------ ------------ ------- -------------
At 30 June 2022, an impairment indicator (the Russian invasion
of Ukraine) was identified by the Group, and impairment tests were
performed for the MEX-GOL, SV, SC and VAS fields. These reviews
concluded that no impairment to carrying value had occurred on any
Group asset.
10. Intangible Assets
6 months ended 30 Jun 2 2 6 months ended 30 Jun 2 1
(unaudited) (unaudited)
----------------------------------------------- --------------------------------------------------
Mineral Exploration Other Total Mineral Exploration Other Total
reserve and intangible reserve and intangible
rights evaluation assets rights evaluation assets
intangible intangible
assets assets
$000 $000 $000 $000 $000 $000 $000 $000
Cost
At beginning
of the period 6,810 8,651 752 16,213 6,570 8,286 616 15,472
Additions - - 43 43 - 63 233 296
Disposals - - - - - - (137) (137)
Exchange
differences (460) (590) (50) (1,100) 265 335 26 626
--------------- --------- ------------ ------------ -------- --------- ------------ ------------ -----------
At end of the
period 6,350 8,061 745 15,156 6,835 8,684 738 16,257
--------------- --------- ------------ ------------ -------- --------- ------------ ------------ -----------
Accumulated
amortisation
and
impairment
At beginning
of the period 3,439 - 434 3,873 2,855 - 385 3,240
Amortisation
charge for
the
period 224 - 113 337 236 - 105 341
Disposals - - - - - - (136) (136)
Exchange
differences (232) - (28) (260) 99 - 15 114
--------------- --------- ------------ ------------ -------- --------- ------------ ------------ -----------
At end of the
period 3,431 - 519 3,950 3,190 - 369 3,559
--------------- --------- ------------ ------------ -------- --------- ------------ ------------ -----------
Net book value
at beginning
of the period 3,371 8,651 318 12,340 3,715 8,286 231 12,232
--------------- --------- ------------ ------------ -------- --------- ------------ ------------ -----------
Net book value
at end of the
period 2,919 8,061 226 11,206 3,645 8,684 369 12,698
--------------- --------- ------------ ------------ -------- --------- ------------ ------------ -----------
Intangible assets consist mainly of the hydrocarbon production
licence relating to the VAS gas and condensate field, which is held
by LLC Prom-Enerho Produkt, and the Svystunivsko-Chervonolutski
("SC") hydrocarbon exploration licence, which is held by LLC Arkona
Gas-Energy. The Group amortises the hydrocarbon production licence
relating to the VAS gas and condensate field using the
straight-line method over the term of the economic life of the VAS
field until 2028. The SC hydrocarbon exploration licence is not
amortised due to it being at an exploration and evaluation
stage.
As at 30 June 2022, an impairment indicator (the Russian
invasion of Ukraine) was identified by the Group, and impairment
tests were performed for the MEX-GOL, SV, SC and VAS fields. These
reviews concluded that no impairment to carrying value had occurred
on any Group asset.
11. Trade and Other Receivables
30 Jun 31 Dec 2
2 2 1
(unaudited) (audited)
$000 $000
Trade receivables 39,493 5 , 308
Other financial receivables 235 200
Less credit loss allowance (435) (1 40 )
----------------------------------- -------------- -----------
Total financial receivables 39 , 293 5 , 368
Prepayments and accrued income 6,550 5 , 231
Other receivables 2,835 2,460
Total trade and other receivables 48,678 13 , 059
Due to the short-term nature of the current trade and other
financial receivables, their carrying amount is assumed to be the
same as their fair value. All trade and other financial
receivables, except those provided for, are considered to be of
high credit quality.
The majority of the trade receivables are from a related party,
LLC Smart Energy, that purchases all of the Group's gas production.
The applicable payment terms are payment for all of the monthly
volume of gas by the 10(th) of the month following the month of
delivery (1H 2021: payment for one third of the monthly volume of
gas by the 15(th) of the month following the month of delivery, and
payment of the remaining balance by the end of that month).
Prepayments and accrued income mainly consist of prepayments of
$5,213,000 relating to the development of the MEX-GOL field,
$375,000 relating to the development of the SV field and $404,000
relating to the development of the SC licence (31 December 2021:
$1,366,000 relating to the development of the SV field, $1,210,000
relating to the development of the MEX-GOL field and $2,284,000
relating to the development of the SC licence).
12. Provision for Decommissioning
6 months ended 6 months ended
30 Jun 22 30 Jun 21
(unaudited) (unaudited)
$000 $000
At beginning of the period 5,467 6,819
Amounts provided - 127
Unwinding of discount 160 122
Change in estimate (4,313) (234)
Effect of exchange difference (321) 277
------------------------------- ---------------- ---------------
At end of the period 993 7,111
The provision for decommissioning is based on the net present
value of the Group's estimated liability for the removal of the
Ukrainian production facilities and well site restoration at the
end of production life.
The non-current provision of $ 993 ,000 (31 December 202 1 : $ 5
, 467 ,000) represents a provision for the decommissioning of the
Group's MEX-GOL, SV , VAS and SC production and exploration
facilities, including site restoration. None of the provision was
utilised during the reporting period.
As described in Note 2, the change in estimates applied to
calculate the provision as at 30 June 2022 resulted from the
revision of the estimated costs of decommissioning (increase of
$114,000 in the provision) and the increase in the discount rate
applied (decrease of $4,429,000 in the provision).
13. Other non-current liabilities
Other non-current liabilities as at 30 June 2022 and 31 December
2021 consist of the long-term obligations for the Ukrainian State
special purpose fund measured at amortised cost using an interest
rate of 20%
14. Financial Instruments
The Group's financial instruments comprise cash and cash
equivalents, o ther short-term investments and various items such
as debtors and creditors that arise directly from its operations.
The Group has bank accounts denominated in British Pounds, US
Dollars, Euros, and Ukrainian Hryvnia. The Group does not have any
borrowings. The main future risks arising from the Group's
financial instruments are currency risk, interest rate risk,
liquidity risk and credit risk.
The Group's financial assets and financial liabilities, measured
at amortised cost, which approximates their fair value, comprise
the following:
30 Jun 22 31 Dec 21
(unaudited) (audited)
$000 $000
Financial assets
Cash and cash equivalents 77,370 87,780
Other short-term investments - 4,762
Trade and other receivables 41,456 5,368
118,826 97,910
Financial liabilities
Lease liabilities 812 1,103
Trade and other payables 1,428 3,404
Other financial liabilities 2,228 2,244
---------------
4,468 6,751
At 30 June 2022, the Group held cash and cash equivalents and
other short-term investments in the following currencies:
30 Jun 22 (unaudited) 31 Dec 21
(audited)
$000 $000
US Dollars 58,763 63,247
Ukrainian Hryvnia 18,381 29,011
British Pounds 222 275
Euros 4 9
------------------- ----------------------- ------------
77,370 92,542
All of the cash and cash equivalents held in Ukrainian Hryvnia
are held in banks within Ukraine, and all other cash and cash
equivalents are held in banks within Europe, Ukraine and the United
Kingdom.
15. Reconciliation of Operating Profit to Operating Cash Flow
6 months 6 months ended
ended
30 Jun 22 30 Jun 21
(unaudited) (unaudited)
$000 $000
Operating profit 48,934 18,114
Depreciation and amortisation 3,882 6,164
Less interest income recorded within
operating profit (536) (312)
Fines and penalties received (110) (1)
Loss from write off of non-current assets - 90
Net (gain)/loss on sale of non-current (1) -
assets
Gain on sales of current assets, net - (12)
Decrease in provisions (228) ( 4 )
Increase in inventory (497) (93)
Increase in receivables (36,354) (5,426)
(Decrease)/increase in payables (2,589) 628
------------------------------------------- ------------ ---------------
Cash generated from operations 12,501 19,148
16. Contingencies and Commitments
Amounts related to works contracted but not yet undertaken in
relation to the Group's 2022 investment programme at the MEX-GOL,
SV, VAS and SC gas and condensate fields in Ukraine, but not
recorded in the unaudited condensed interim consolidated financial
statements at 30 June 2022, were $2,435,825 related to Oil and Gas
Exploration and Evaluation assets and $1,825,533 related to Oil and
Gas Development and Production assets (31 December 2021: $3,101,000
and $2,674,000 respectively).
Since 2010, the Group has been in dispute with the Ukrainian tax
authorities in respect of VAT receivables on imported leased
equipment, with a disputed liability of up to UAH8,487,000
($324,000) inclusive of penalties and other associated costs. There
is a level of ambiguity in the interpretation of the relevant tax
legislation, and the position adopted by the Group has been
challenged by the Ukrainian tax authorities, which has led to legal
proceedings to resolve the issue. The Group had been successful in
three court cases in respect of this dispute in ourts of different
levels. On 20 September 2016, a hearing was held in the Supreme
Court of Ukraine of an appeal of the Ukrainian tax authorities
against the decision of the Higher Administrative Court of Ukraine,
in which the appeal of the Ukrainian tax authorities was upheld. As
a result of this appeal decision, all decisions of the lower courts
were cancelled, and the case was remitted to the first instance
court for a new trial. On 1 December 2016 and 7 March 2017, the
Group received positive decisions in the first and second instance
courts, but further legal proceedings may arise. Since the Group
had been successful in previous court cases in respect of this
dispute in ourts of different levels, the date of the next legal
proceedings has not been set and as the management believes that
adequate defences exist to the claim, no liability has been
recognised in these unaudited condensed interim consolidated
financial statements for the six months ended 30 June 2022 (31
December 2021: nil).
On 12 March 2019, the Group announced the publication of an
Order for suspension (the "Order") by the State Service of Geology
and Subsoil of Ukraine affecting the production licence for its VAS
gas and condensate field. The Group is confident there are no
violations of the terms of the licence or in relation to the
operational activities of the Group that would justify the Order or
the suspension of the licence. The Group has issued legal
proceedings in the Ukrainian Courts to challenge the validity of
the Order, and in these proceedings, on 18 March 2019 the Court
made a ruling on interim measures to suspend the Order pending
hearings of the substantive issues of the case to be held
subsequently. The effect of this ruling is that the suspension of
operational activities at the VAS licence is deferred until the
result of the legal proceedings is determined. These legal
proceedings are continuing through the Ukrainian Court system and
the ultimate outcome is not yet known. However, the Group considers
that the Order is groundless and that the outcome of the legal
proceedings challenging the Order will ultimately be in favour of
the Group, and consequently, the Group does not expect any negative
effect on its operations in respect of this matter.
17. Related Party Disclosures
Key management personnel of the Group are considered to comprise
only the Directors. Remuneration of the Directors for the six month
period ended 30 June 2022 was $ 583 ,000 (1H 2021: $617,000, and
year ended 31 December 2021: $1,115,000).
During the period, Group companies entered into the following
transactions with related parties which are not members of the
Group:
6 months ended 6 months ended
30 Jun 22 30 Jun 21
(unaudited) (unaudited)
$000 $000
Sale of goods/services 63,182 28,417
Purchase of goods/services 515 585
Amounts owed by related parties 39,059 7,732
Amounts owed to related parties 627 825
All related party transactions were with subsidiaries of the
ultimate Parent Company, and primarily relate to the sale of gas to
LLC Smart Energy, the rental of office facilities and vehicles and
the sale of equipment. The amounts outstanding were unsecured and
have been or will be settled in cash.
As of 30 June 2022, the Company's immediate parent company was
Smart Energy (CY) Ltd, which is 100% owned by Smart Holding
(Cyprus) Ltd, which is 100% owned by Mr Vadym Novynskyi.
Accordingly, the Company was ultimately controlled by Mr Vadym
Novynskyi.
At the date of this announcement, none of the Company's
controlling parties prepares consolidated financial statements
available for public use.
18. Events occurring after the Reporting Period
The Russian invasion of Ukraine, which began on 24 February
2022, is ongoing, and has made the situation in Ukraine extremely
challenging. Nevertheless, after a suspension of all operations
immediately after the invasion, the Group was able to resume
production and some field operations at the MEX-GOL and SV fields
in March 2022, and the drilling of the SC-4 well at the SC licence
in July 2022, although operations at the VAS field have remained
suspended. However, with the eastward movement of the conflict area
in the Kharkiv region, the Group is planning to resume production
operations at the VAS field in October 2022.
The events described above constitute non-adjusting post balance
sheet events, and therefore they had no effect on the carrying
value of the Group's assets and liabilities as at 30 June 2022.
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END
IR FZGZLMLMGZZZ
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