Georgia Oil & Gas Limited. Consolidated Financial Statements for 2015

Transcription

1 Consolidated Financial Statements for 2015

2 Contents Independent Auditors Report 3 Consolidated Statement of Financial Position 4 Consolidated Statement of Profit or Loss and Other Comprehensive Income 5 Consolidated Statement of Changes in Equity 6 Consolidated Statement of Cash Flows 7 Notes to the Consolidated Financial Statements 8

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4 Consolidated Statement of Financial Position as at 31 December GEL Note 31 December December 2014 Assets Property, plant and equipment 7 4,096 3,035 Intangible assets Spare parts and servicing equipment 8 2,492 2,810 Exploration and evaluation assets 9 29,613 30,254 Non-current assets 36,543 36,441 Inventories 10 1, Trade and other receivables 900 1,571 Prepayments Cash and cash equivalents 11 1, Current assets 4,222 3,453 Total assets 40,765 39,894 Equity 12 Share capital 3 3 Share premium 18,768 18,768 (Accumulated loss)/retained earnings (3,849) 7,389 Share based payments reserve 2,218 2,218 Total equity 17,140 28,378 Liabilities Site restoration obligation Loans and borrowings 15 2,874 - Non-current liabilities 3, Loans and borrowings 15 11,645 5,656 Trade and other payables 16 8,339 5,547 Current liabilities 19,984 11,203 Total liabilities 23,625 11,516 Total equity and liabilities 40,765 39,894 The consolidated statement of financial position is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 8 to 26. 4

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6 Consolidated Statement of Changes in Equity for 2015 Share based payments reserve (Accumulated loss)/retained earnings 000 GEL Note Share capital Share premium Total Balance at 1 January , ,267 25,985 Share based payment - - 1,271-1,271 Profit and total comprehensive income for the year ,122 1,122 Balance at 31 December ,768 2,218 7,389 28,378 Balance at 1 January ,768 2,218 7,389 28,378 Loss and total comprehensive loss for the year (11,238) (11,238) Balance at 31 December ,768 2,218 (3,849) 17,140 6 The consolidated statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 8 to 26.

7 Consolidated Statement of Cash Flows for GEL Note Cash flows from operating activities (Loss)/profit before income tax (11,238) 1,122 Adjustments for: Impairment on exploration and evaluation assets 9 8,420 - Net finance costs 1, Depreciation Loss on disposal of property, plant and equipment Write-down of obsolete inventories Loss from measurement of shares at fair value through profit or loss - 1,757 Equity settled share-based payment - 1,271 Gain from farm-out agreement - (6,293) Cash used in operating activities before changes in working capital and provisions (443) (1,097) Change in prepayments (274) - Change in trade and other receivables 671 1,385 Change in inventories, spare parts and servicing equipment (5) 232 Changes in trade and other payables Cash flows from operations before interest paid 598 1,258 Interest paid (189) (1) Net cash from operating activities 409 1,257 Cash flows from investing activities Acquisition of exploration assets (5,470) (7,352) Acquisition of property, plant and equipment (875) (251) Acquisition of intangible assets - (49) Cash proceeds from disposal of shares - 1,425 Net cash used in investing activities (6,345) (6,227) Cash flows from financing activities Proceeds from borrowings 6,336 5,551 Repayment of borrowings - (448) Net cash from financing activities 6,336 5,103 Net increase in cash and cash equivalents Cash and cash equivalents at 1 January Effect of exchange rate fluctuations on cash and cash equivalents Cash and cash equivalents at 31 December 11 1, The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 8 to 26.

8 1. Reporting entity (a) Business environment The Group s operations are located in Georgia. Consequently, the Group is exposed to the economic and financial markets of Georgia which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in Georgia. The consolidated financial statements reflect management s assessment of the impact of the Georgian business environment on the operations and the financial position of the Group. The future business environment may differ from management s assessment. (b) Organisation and operations Georgia Oil and Gas Limited (the Company ) is a limited liability company as defined in the British Virgin Islands Business Companies Act, 2004 and was incorporated on 2 April The only significant subsidiary, Norio Operating Company LLC, is a limited liability company as defined in the Georgian Law on Entrepreneurs and was incorporated on 16 June The subsidiary and the Georgia Oil and Gas Limited Branch in Georgia, together with the Company comprise the Group as at 31 December The Company s registered office is Palm Grove House, P.O. Box 438, Road Town, Tortola, British Virgin Islands. The Group s principal activity is oil and gas exploration, development and production from oilfields located in Georgia. The Company owns 100% contractor party rights in the Norio, Martkhopi, Block XI G and Block VIII, 50% contractor party rights in the North Satskhenisi and 10% contractor party in Satskhenisi Production Sharing Agreements ( PSA ), covering Block XI C and 51% contractor party rights in Blocks XI A, XI M and XI N PSAs. The PSAs are concluded with the State of Georgia represented by the State Oil Company, Georgian Oil and Gas Corporation JSC ( GOGC ). As at 31 December 2015 the Group is 35.9% owned by Norio Oil and Gas S.A. (31 December 2014: 23.65%), 40.8% by Norio Oil Company JSC (31 December 2014: 54.18%) and 23.3% by others (31 December 2014: 22.17%). Related party transactions are disclosed in note 20. The Group is ultimately controlled by a single individual, Nikoloz Tevzadze, who has the power to direct the transactions of the Group at his own discretion and for his own benefit. 2. Basis of accounting Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRSs ). 3. Functional and presentation currency The national currency of Georgia is the Georgian Lari ( GEL ), which is the Company s and its subsidiary s functional currency and the currency in which these consolidated financial statements are presented. Management considers the Company s functional currency to be the GEL because of the high level of integration and co-dependency of cash flows between the Company and operating entities in Georgia. All financial information presented in GEL has been rounded to the nearest thousand, except when otherwise indicated. 8

9 4. Use of estimates and judgments The preparation of consolidated financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements is included in notes 9 and 23(a)(ii) related to joint arrangements. Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year is included in the note 9 impairment of exploration and evaluation assets and notes 14 and 19(c) environmental contingencies. Measurement of fair values A number of the Group s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities. When measuring the fair value of an asset or a liability, the Group uses market observable data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred. Further information about the assumptions made in measuring fair values is included in the following notes: Note 15 - loans and borrowings; and Note 17(a) - fair values of financial assets and liabilities. 5. Cost of sales 000 GEL Wages and salaries Depreciation Operating lease expense Write-down of obsolete inventories Utility expenses Repairs and maintenance 8 30 Material and consumables used Other production and overhead expenses Changes in inventories crude oil (322) (227) 473 1,470 9

10 6. Administrative expenses 000 GEL Wages and salaries 408 1,807 Professional fees Operating lease expense Depreciation Communication expenses Business trips Equity-settled share based payments - 1,271 Other ,584 4, Property, plant and equipment 000 GEL Oil and gas equipment Office equipment Total Cost Balance at 1 January , ,006 Additions Disposals (199) - (199) Balance at 31 December , ,058 Balance at 1 January , ,058 Additions 1, ,543 Disposals (65) (26) (91) Balance at 31 December , ,510 Depreciation Balance at 1 January Depreciation for the year Disposals (74) - (74) Balance at 31 December ,023 Balance at 1 January ,023 Depreciation for the year Balance at 31 December , ,414 Carrying amounts At 1 January , ,713 At 31 December , ,035 At 31 December , ,096 Depreciation expense of GEL 261 thousand (2014: GEL 371 thousand) has been charged to cost of sales, GEL 12 thousand (2014: GEL 328 thousand) has been capitalized to exploration and evaluation assets and GEL 118 thousand (2014: GEL 105 thousand) has been charged to administrative expenses. Security At 31 December 2015 property with a carrying amount of GEL 800 thousand (2014: nil) is pledged against the secured loan (see note 15). 8. Spare parts and servicing equipment Spare parts that are expected to be used for more than one period or can be used only in connection with development of exploration and evaluation assets are classified as non-current assets. Spare parts and servicing equipment of GEL 8 thousand (2014: GEL 152 thousand) was used in exploration and capitalised to exploration and evaluation assets. 10

11 9. Exploration and evaluation assets 000 GEL Wages and salaries Other expenditures Total Balance at 1 January ,570 16,185 19,755 Additions 943 9,556 10,499 Balance at 31 December ,513 25,741 30,254 Balance at 1 January ,513 25,741 30,254 Additions 724 7,055 7,779 Impairment loss (807) (7,613) (8,420) Balance at 31 December ,430 25,183 29,613 Other expenditures mainly include cost of gravity and other topographical works, cost of exploration materials, drilling costs and rent of facilities. Recoverability of assets Although the Group has re-established some preliminary oil production from the old wells drilled during the early Soviet times when the field was discovered, it still considers that it has not yet established the commercial viability of extracting oil and gas from the licence areas. The Group is in the process of obtaining new data, updating the information about reserves and resources based on international standards. During the Group conducted active geological works on XIA block which had negative results with no remaining potential for development. As at 31 December 2015 the XIA block was considered to be impaired resulted in GEL 233 thousand impairment loss recognised in the statement of profit and loss and other comprehensive income. In addition, based on the recent market transactions (see note 21), the management estimated the recoverable amount of Norio block as at 31 December 2015 is GEL 3,712 thousand and recognised an impairment loss of GEL 8,187 thousand in the statement of profit and loss and other comprehensive income. Apart from the Norio and XIA blocks, the Management believes that there are no facts and circumstances, which suggest that the carrying amount of the exploration and evaluation assets may exceed their recoverable amounts as at the reporting date. Production Sharing Agreements (PSAs) and joint arrangements On 14 June 2013, the Group signed a farm out agreement (FOA) with Iskander Energy (Georgia) Limited (Iskander). Under the agreement the Group assigned and transferred 50% interest in its rights and obligations in the Satskhenisi PSA. Under the FOA, Iskander has to finance an Earn-in program to obtain its participating interest. During 2015, Iskander invested around USD 848 thousand (2014: USD 4 million) for Earn-in program financing that has to be completed until December On 23 April 2015, Iskander purchased (through Purchase and Sale Agreement) the Group s 50% interest in Satkhenisi block for a consideration of USD 1 million. On 30 November 2015 the Group revised terms of the Purchase and Sale Agreement with Iskander and interests in respective Satskhenisi PSA were set as follows: 10% the Group and 90% Iskander. On 7 July 2013, the Group and Norio Oil Company JSC, representing the owner of 50% in the consortium for Blocks XI A, XI M and XI N signed a FOA with Tethys Petroleum Limited (Tethys) for development of Blocks XI A, XI N and XI M with minimum work program of USD 10 million investment. The parties have agreed to transfer each 28%-28% interest in respective PSAs to subsidiaries of Tethys in exchange of common shares of Tethys Petroleum Limited issued to the Group (6 million shares) and to Norio Oil Company JSD (6 million shares) for three PSA-s. Norio 11

12 Oil Company JSC and Georgia Oil & Gas Limited transferred remaining interest, 22%-22% to their respective affiliated companies in each respective PSA-s. Fair value of 6 million shares, GEL 6,292 thousand, was recognized by the Group as a gain on FOA arrangement in During 2014, the Group disposed 1.8 million Tethys shares, with a cash consideration of GEL 1,425 thousand and as a result recognized loss of GEL 463 thousand due to changes in fair value of Tethys shares held. On 30 January 2015, the Group revised terms of FOA with Tethys and due to its inability to fulfil the USD 10 million investment commitment interests in respective PSAs were set as follows: 51% the Group and 49% Tethys. On 21 February 2014, the Group signed sale and purchase agreement with Strait Oil and Gas Adjara LTD and acquired its 100% participating interest in Block VIII in exchange of the Group s shareholding (4.2 million shares) in Tethys Petroleum Limited. In Addition, the Group assumed commitment to pay failure to complete minimum work program within deadlines set in the respective PSA. Total purchase consideration for this acquisition, i.e. fair value of 4.2 million shares (GEL 3,110 thousand) and cash payment of USD 1 million penalty (GEL 1,864 thousand), was capitalized as an exploration and evaluation asset. As a result of the transaction the Group recognized loss of GEL 1,294 thousand due to changes in fair value of Tethys shares. When concluding a FOA the Group does not recognize any consideration in respect of the value of the work to be performed by the farmee and instead carries the remaining interest at the previous cost of the full interest reduced by the amount of any cash or other consideration received for entering the agreement. The Group does not recognize a liability for the funds received from farmees in the Earnin period in case the money has been spent on the exploration and evaluation works as the Group performs the activities in the Earn-in period on behalf of the farmee. On 21 February 2014, the Group signed a FOA with Georgia Energy Limited, representing the owner of 100% participating interest in Block XI G. Under the FOA, the Group took commitment to complete earn-in program to obtain its participating interest 57%. By 1 April 2014 the Group obtained 57% participating interest in Block XI G. On 29 April 2014, the Group acquired Zavala Limited, the wholly owned inactive subsidiary company of Georgia Energy Limited, having 43% participating interest in Block XI G, with purchase consideration of GEL 100 thousand. 10. Inventories 000 GEL Materials Crude oil , Cash and cash equivalents 000 GEL Cash in bank 1, Cash on hand Cash and cash equivalents in the consolidated statement of financial position and consolidated statement of cash flows 1, The Group s exposure to currency risk and a sensitivity analysis for financial assets and liabilities are disclosed in note

13 12. Capital and reserves (a) (b) Share capital and share premium The holders of ordinary shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at meetings of the Company. The Company s share capital comprised of 20,857,453 shares (2014: 20,857,453) with a nominal value of USD per share (2014: USD ). Equity settled share-based payment In 2014, the Group issued 276,784 shares to key management with no conditions and for nil consideration. The fair values of the shares granted, determined based on the recent transaction price USD 2.5 per share, were recognized in administrative expenses. 13. Capital management The Group has no formal policy for capital management but management seeks to maintain a sufficient capital base for meeting the Group s operational and strategic needs, and to maintain confidence of market participants. This is achieved with efficient cash management, constant monitoring of Group s revenues and profit, and long-term investment plans mainly financed by the Group s cash flows as a result of share issues and borrowings. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements. 14. Site restoration 000 GEL Balance as at 1 January Increase/(decrease) in provision 435 (96) Unwinding of discount Balance as at 31 December The Group establishes a provision for the future cost of decommissioning of oil and gas production facilities on a discounted basis. These costs are expected to be incurred around The provision has been estimated using existing technology at current prices and the number of wells to be abandoned discounted at real interest rates of 5.76% as at 31 December 2015 (2014: 5.95%). The costs and the timing of the site restoration obligation are dependent on Government legislation, commodity prices and the future production profiles of the projects. In addition, the estimated cash outflows are subject to inflationary and/or deflationary pressures in the cost of third party service provision. 15. Loans and borrowings '000 GEL Non-current liabilities Unsecured loans from related parties Secured loans from third parties 2,395-2,874 - Current liabilities Current portion of unsecured loans from related parties 5,865 5,656 Unsecured loans from third parties 2,466 - Secured loans from related parties 3,287 - Current portion of secured loans from third parties 27-11,645 5,656 13

14 '000 GEL Unsecured loans from related parties Secured loans from related parties Unsecured loans from third parties Secured loans from third party Total interest-bearing liabilities Currency Nominal interest rate Year of maturity Face value Carrying amount Face value Carrying amount USD 12% ,344 6,344 5,656 5,656 USD 12% ,287 3, USD 12% ,466 2, USD 9.5% ,422 2, ,519 14,519 5,656 5,656 At 31 December 2015 for the total amount of unsecured loans of GEL 8,810 thousand management contractually has an option to convert unpaid amount of principal and/or unpaid amount of interest into the Company s equity shares at other than fixed-for-fixed terms, when the principal and/or interest become due in accordance with the repayment schedules in the contracts signed between the Company and counterparties. At 31 December 2015 property with a carrying amount of GEL 800 thousand (2014: nil) is pledged against the secured loan of GEL 2,422 thousand from a state company (Georgian Oil & Gas Corporation), see note 7. At 31 December % shareholdings in wholly owned subsidiaries (GOG Kavtiskhevi Limited and Kartli Petroleum Limited) are pledged against the secured loans from related parties of GEL 3,287 thousand. At 31 December % of share capital of wholly owned subsidiaries (GOG Kavtiskhevi Limited, Kartli Petroleum Limited, GOG Varketili Limited, Tbilisi Petroleum Limited and Zavala Limited) have been pledged as collateral towards the borrowings. 16. Trade and other payables 000 GEL Note Payables for exploration and evaluation assets 6,169 2,973 Salary payables 1,093 1,159 Trade payables Tax payable Other payables ,339 5,547 The Group s exposure to currency and liquidity risk related to trade and other payables is disclosed in note Fair values and risk management (a) Fair values of financial assets and liabilities The estimates of fair value are intended to approximate the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. However given the uncertainties and the use of subjective judgment, the fair value should not be interpreted as being realizable in an immediate sale of the assets or transfer of liabilities. The Group has determined fair values of financial assets and liabilities using valuation techniques. The objective of valuation techniques is to arrive at a fair value determination that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. The valuation technique used is the discounted 14

15 cash flow model. Fair value of all financial assets and liabilities is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. Management believes that the fair value of the Group s financial assets and liabilities approximates their carrying amounts. (b) Financial risk management The Group has exposure to the following risks from its use of financial instruments: credit risk (see 17(b)(ii)); liquidity risk (see 17(b)(iii)); market risk (17(b)(iv)). (i) Risk management framework The Board of Directors has overall responsibility for the establishment and oversight of the Group s risk management framework. The Group s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Shareholder oversees how management monitors compliance with the Group s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. (ii) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group s cash and cash equivalents and trade and other receivables. None of the financial assets of the Group are overdue or impaired as at reporting date. (iii) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group s reputation. All of the Group s financial liabilities, except for borrowings, are payable on demand or within three months of the reporting date. Exposure to liquidity risk The following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted, and include estimated interest payments. 15

16 31 December 2015 Contractual cash flows 000 GEL Carrying amount Total Less than 2 mths 2-12 mths 1-5 yrs Non-derivative financial liabilities Loans and borrowings 14,519 15,764 3,965 8,726 3,073 Trade and other payables 6,870 6,870 6, ,389 22,634 10,835 8,726 3, December 2014 Contractual cash flows 000 GEL Carrying amount Total Less than 2 mths 2-12 mths 1-5 yrs Non-derivative financial liabilities Loans and borrowings 5,656 6, ,677 - Trade and other payables 3,559 3,559 3, ,215 9,653 3,976 5,677 - As at 31 December 2015 management analysed the overall financial results, financial position and cash flows from operating activities of the Group and considered mitigating actions listed below and concluded that the Group will have sufficient liquidity to meet its liabilities when due and that the management s going concern assumption as of the reporting date is appropriate. The management s above assumption is based on the following facts and estimates: (iv) _ GEL 9,631 thousand out of total loans and borrowings of GEL 14,519 thousand are due to the shareholders, maturing in 1-2 years period. out of total loans and borrowings of GEL 14,519 thousand, the management contractually has an option to convert GEL 8,813 thousand into the Company s equity shares rather than paying in cash. the shareholders have expressed their intention to provide further financial and other support to the Group in the foreseeable future, if necessary, to permit the Group to continue in operational existence. It is not expected that the cash flows included in the maturity analysis table above, could occur significantly earlier, or at significantly different amounts. Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Group s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, with optimising the return. Currency risk The Group is exposed to currency risk to the extent that there is a mismatch between currencies in which sales, purchases and borrowings are denominated and the respective functional currencies of Group entities. The currencies in which these transactions primarily are denominated is USD. Exposure to currency risk The Group s exposure to foreign currency risk was as follows: 000 GEL USD-denominated USD-denominated Trade receivables 653 1,026 Cash and cash equivalents 1, Trade and other payables (4,331) (3,196) Loans and borrowings (14,519) (5,656) Net exposure (16,460) (6,941) 16

17 The following significant exchange rates applied during the year: in GEL Average rate Reporting date spot rate USD Sensitivity analysis A reasonably possible strengthening (weakening) of the GEL, as indicated below, against USD at 31 December would have affected the measurement of financial instruments denominated in a foreign currency and affected equity and profit or loss before taxes by the amounts shown below. The analysis assumes that all other variables, in particular interest rates, remain constant. 000 GEL Strengthening Weakening Profit or loss Profit or loss 2015 USD (10%) 1,646 (1,646) 2014 USD (10%) 694 (694) 18. Significant subsidiaries Country of Subsidiary incorporation Ownership/voting Ownership/voting Norio Operating Company LLC Georgia 100% 100% 19. Contingencies (a) (b) (c) Taxation contingencies The taxation system in Georgia is relatively new and is characterised by frequent changes in legislation, official pronouncements and court decisions, which are sometimes unclear, contradictory and subject to varying interpretation. In the event of a breach of tax legislation, no liabilities for additional taxes, fines or penalties may be imposed by the tax authorities after six years have passed since the end of the year in which the breach occurred. These circumstances may create tax risks in Georgia that are more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Georgian tax legislation, official pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and the effect on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant. Environmental contingencies The Group is subject to various state laws and regulations related to environmental protection. In addition, the Group s environmental responsibilities are defined in the PSAs. Based on these PSAs the Group has an obligation to restore any damage caused by the Group to the environment and the earth s surface. As at the reporting dates management believes that the Group does not have legal or constructive environmental liabilities for old oil wells located in the licensed territories, except for those that the Group has started to use in active exploratory activities, for which a provision has been recognised (see note 14). Commercial Discovery Bonus under PSAs The Group has a commitment with joint operator of paying USD 5 million per block under Block XI A, XI M and XI N PSA and USD 5.5 million per block under Block XI G and VIII to the State of Georgia in case of Commercial Discovery within the contract area. Commercial Discovery means discovery of one or several yet unknown accumulations of oil and gas. No liability is recognised for this commitment in these consolidated financial statements. 17

18 20. Related parties (a) Parent and ultimate controlling party As at 31 December 2015 the Group is 35.9% owned by Norio Oil and Gas S.A. (2014: 23.65%), 40.8% by Norio Oil Company JSC (2014: 54.18%) and 23.3% by others (2014: 22.17%). The Group s ultimate controlling party is Nikoloz Tevzadze. No publicly available financial statements are produced by the Group s parent companies. (b) Transactions with key management personnel Key management remuneration (c) Key management received the following remuneration during the year, which is included in personnel costs: 000 GEL Salaries and bonuses Equity settled share based payment - 1, ,993 Other related party transactions Trade and other payables 000 GEL Transaction value Outstanding balance Fellow companies 1,925 2,304 1, Loans and borrowings 000 GEL Amount loaned Outstanding balance Shareholders 1,574 5,551 9,631 5,656 In 2015 interest expense accrued on the loans and borrowings from shareholders was GEL 687 thousand (2014: GEL 200 thousand), out of which GEL 68 thousand was accrued on loans and borrowings received from shareholders during 2015 (2014: GEL 200 thousand). 21. Subsequent events On 11 February 2016 the Group converted interest payable of USD 463 thousand into 7,636,318 equity shares of the Group. On 22 February 2016 a consultancy agreement about geological/geophysical survey and data dated 7 October 2015 between the Group and a citizen of the United Kingdom Andrew Clark has been settled in 17,888 equity shares at USD 0.75 per share of the Group. On 24 February 2016 GOG and Skyland Petroleum Group Limited signed the Share Purchase Agreement with respect to XIG Licence Block, according to which Skyland Petroleum Group Limited purchased 100% share in Tbilisi Petroleum Limited, a company holding a 20% participating interest XIG PSC, for the consideration of USD 2,000 thousand. On 14 July 2016 the Group converted principal payable of USD 500 thousand and interest payable of USD 22 thousand into 1,043,068 equity shares of the Group. On 17 July 2016 the Group converted principal payable of USD 4,110 thousand and interest payable of USD 249 thousand into 8,718,510 equity shares of the Group. 18

19 On 29 September 2016, as a part of cost-cutting program, the Group made a decision to liquidate all subsidiaries and assign rights and obligations of the subsidiaries to Georgia Oil & Gas Limited. Based on the Group management decisions dated 27 March 2017 and 5 April 2017, 38% participating interest in Norio PSA has been assigned to GOG Norioskhevi Ltd (100% subsidiary of the Group). On 7 April 2017 the Group made a share-purchase agreement with Block Energy PLC (Former Goldcrest Resources PLC) about the sale of 38% participating interest in Norio PSA for the consideration of USD 380 thousand cash payment, USD 300 thousand equity payment and USD 600 thousand capital expenditures to be incurred on wells within 18 months of the agreement with an option of purchasing the rest 62% participating interest with the certain conditions. The option by Block Energy PLC has been exercised in September 2017 for the consideration of USD 620 thousand cash payment andusd 250 thousand equity payment. Under Resolution #11/077 issued by the Head of the State Agency on 25 July 2017, the PSA for License Block XIA dated 25 November 2011 was terminated effective from 1 June Secured loan of GEL 2,422 thousand from a state company (Georgian Oil & Gas Corporation) as at 31 December 2015 was fully repaid by 20 October On 16 March 2018 GOG (the Borrower ), Georgian Oil & Gas Corporation (the Lender /Pledgee ) and JSC Norio Oil Company (the Pledger ) signed the Loan and Pledge Agreement for the consideration of USD 500 thousand, at 9.5%, maturing in two years from the date of the respective tranche. 22. Basis of measurement The consolidated financial statements are prepared on the historical cost basis. 23. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities. (a) (i) Basis of consolidation Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. (ii) Joint arrangements A joint operation is a joint arrangement where parties have joint control over the arrangement and have rights to the assets and obligation for the liabilities relating to the arrangement. The consolidated financial statements include the assets that the Group controls or share of assets held jointly, and the liabilities that it incurs in the course of pursuing the joint operation and the expenses that the Group incurs and its share of the income that it earns from the joint operation. The accounting policy adopted by the Group for accounting for farm out agreements is to recognize only cash or other payment received as consideration for disposing a share in PSA and do not recognize any consideration in respect of the value of the work to be performed by the farmee and instead carry the remaining interest at the previous cost of the full interest reduced by the amount of any cash or other consideration received for entering the agreement. The effect is that there is no gain 19

20 recognized on the disposal unless the cash or other consideration received exceeds the carrying value of the entire asset held. For farm-in agreements the Group only recognises costs as incurred, regardless of the stage of development of the asset. The Group is required to disclose their contractual obligations to construct the asset and meet the farmor s share of costs. The Group follows its normal accounting policies for capitalisation, and also applies them to those costs incurred to build the farmor s share. (iii) (b) (i) (ii) (c) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated. Revenue Crude oil sales Revenue from the sale of crude oil in the course of ordinary activities is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue is recognised when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. If it is probable that discounts will be granted and the amount can be measured reliably, then the discount is recognised as a reduction of revenue as the sales are recognised. Lease income Payments received under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Finance income and costs The Group s finance income and finance costs include: interest income; interest expense; the foreign currency gain or loss on financial assets and financial liabilities. Interest income or expense is recognised using the effective interest method. (d) (i) Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured based on historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising in translation are recognised in profit or loss. 20

21 (e) (i) Employee benefits Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. (ii) Share based payment transactions The grant-date fair value of equity-settled share-based payment awards granted to employees is generally recognised as an expense, with a corresponding increase in equity, over the vesting period of the awards. (f) Taxation under PSAs The taxation of the Group s oil exploration and production is determined under the PSAs that the Group has entered into with the State of Georgia. Under the PSAs, the Group is exempted from all taxes (being broadly defined as all levies, payments, fees, taxes, or contributions to the Georgian authorities), except for those set out under the PSAs. Under the PSAs, the Group is subject to Income tax and Mineral usage tax. GOGC, representing the State Oil Company, assumes, pays and discharges this liability on behalf of the Group from its own share of Profit Oil (representing the remaining oil following recovery of costs and expenses) received under the PSAs. Therefore, the Group considers that it is not subject to income taxes per IAS 12 Income taxes. (g) Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the first-in first-out principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Spare parts, stand-by equipment and servicing equipment held by the Group are generally classified as inventories. While, major spare parts, stand-by equipment and servicing equipment that are expected to be used for more than one period or can be used only in connection with an exploration and evaluation assets are presented as Spare parts and servicing equipment in non-current assets. (h) (i) Property, plant and equipment Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of selfconstructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and capitalised borrowing costs. If significant parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. 21

22 Any gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and is recognised net within other income/other expenses in profit or loss. (ii) Subsequent expenditure The cost of replacing a component of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the component will flow to the Group, and its cost can be measured reliably. The carrying amount of the replaced component is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. (iii) Depreciation Items of property, plant and equipment are depreciated from the date that they are installed and are ready for use, or in respect of internally constructed assets, from the date that the asset is completed and ready for use. Depreciation is based on the cost of an asset less its residual value. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. The estimated useful lives of significant items of property, plant and equipment for the current and comparative periods are as follows: Oil and gas equipment - 12 years; Office equipment - 7 years. Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate. (i) Oil and gas exploration and evaluation expenditure Exploration and evaluation expenditure relates to costs incurred on the exploration and evaluation of potential reserves and includes costs such as costs of acquisition of rights, geological and geophysical costs, exploratory drilling, sample testing, the costs of pre-feasibility studies, and overheads associated with exploration activities, and capitalised borrowing costs. Exploration and evaluation expenditure for each area of interest are capitalized and are carried forward as an asset provided that one of the following conditions is met: such costs are expected to be recovered through successful development and exploration of the area of interest or alternatively, by its sale; or exploration and evaluation activities in the area of interest have not yet reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in relation to the area are continuing or planned for the future. Exploration and evaluation assets are classified as tangible or intangible based on their nature. The exploration and evaluation assets are no longer classified as such when the technical feasibility and commercial viability of extracting a mineral resource are demonstrable and are reclassified as a property, plant and equipment or intangible assets. No depreciation and/or amortization is charged during the exploration and evaluation phase. 22

23 Activities prior to the acquisition of the license rights are pre-exploration. Pre-exploration costs are expensed as incurred. Exploration and evaluation assets are tested for impairment when reclassified to development tangible or intangible assets, or whenever facts and circumstances indicate an impairment. An impairment loss is recognised for the amount by which the exploration and evaluation assets carrying amount exceeds their recoverable amount. The recoverable amount is the higher of the exploration and evaluation assets fair value less costs to sell and their value in use. For the purposes of assessing impairment, the exploration and evaluation assets subject to testing are grouped with existing cash generating units of production fields that are located in the same geographical region. (j) Financial instruments The Group classifies non-derivative financial assets into trade and other receivables and cash and cash equivalents. The Group classifies non-derivative financial liabilities into the other financial liabilities category. (i) Non-derivative financial assets and financial liabilities recognition and derecognition The Group initially recognises financial assets on the date that they are originated. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Loans and receivables Loans and receivables are a category of financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Loans and receivables category comprise the following classes of financial assets: trade and other receivables and cash and cash equivalents. Cash and cash equivalents Cash and cash equivalents comprise cash balances, call deposits and highly liquid investments with maturities of three months or less from the acquisition date that are subject to insignificant risk of changes in their fair value. (ii) Non-derivative financial liabilities - measurement The Group classifies non-derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognised initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method. 23