JKX Oil & Gas plc Annual Report 2014

Transcription

1 JKX Oil & Gas plc Annual Report

2 Welcome to our Report and Accounts. We want to be recognised as one of the leading independent upstream exploration and production companies in central and eastern Europe. The Company s commitment to Ukraine and Russia is currently being tested with heightened levels of political risk and the commercial uncertainties noted on page 12. The region continues to offer development opportunities in the medium to long term. In the short to medium term, the Company is focusing on maintaining its liquidity by minimising capital expenditure and operating costs in Ukraine and Russia.

3 Inside: Strategic report Overview Our business at a glance 4 Market overview 8 Performance summary 13 Chairman s statement 14 Strategy Chief Executive s statement 17 Strategic priorities 20 Priority 1 22 Priority 2 26 Priority 3 30 Performance Performance in 34 Financial review 36 Operational review 42 Principal risks and how we manage them 48 Corporate Social Responsibility 62 Governance Board composition 82 Corporate governance 84 Audit Committee Report 92 Directors Remuneration Report 98 Directors report other disclosures 116 Financial statements Independent auditors report Group 122 Group financial statements 128 Independent auditors report Company 171 Company financial statements 173

4 JKX Oil & Gas plc Annual Report 2

5 Strategic report 2-79 Governance Financial statements Strategic report Overview Our business at a glance 4 Market overview 8 Performance summary 13 Chairman s statement 14 Strategy Chief Executive s statement 17 Strategic priorities 20 Priority 1 22 Priority 2 26 Priority 3 30 Performance Performance in 34 Financial review 36 Operational review 42 Principal risks and how we manage them 48 Corporate Social Responsibility 62

6 JKX Oil & Gas plc Annual Report 4 Our business at a glance What we do We are an upstream oil and gas exploration and production company with significant oil and gas assets in Ukraine and southern Russia. Where we operate Our head office is in London which employs 25 staff. Our operational areas are shown below: Ukraine Staff 629 Fields 6 Wells 51 Production 4,810 boepd Reserves 28.9 MMboe Moscow Russia Staff 257 Fields 1 Wells 5 Production 5,109 boepd Reserves 68.8 MMboe Ukraine Kiev Elizavetovskoye Poltava Russia Novo-Nikolaevskoye Complex Black Sea Maikop Koshekhablskoye Koshekhablskoye Caspian Sea

7 Strategic report 2-79 Governance Financial statements Strategic objective Our objective is to maximise long term shareholder value. To achieve that we have three strategic priorities: Strategic priorities 1 Profitable production growth 2 Oil and gas reserves growth 3 Operating safely and responsibly Production volumes (boepd) Group reserves (MMboe) Lost Time Injuries 8,218 9,731 9, Group analysis Production 9,919 boepd -$ Russia 52% Ukraine 48% Reserves 97.7MMboe Russia 70% Ukraine 30% Revenue $146.2m Russia 19% Ukraine 81%

8 JKX Oil & Gas plc Annual Report 6 Our business at a glance Our business model Our business model is driven by our three strengths which set us apart: Investment Strength -$ Benefit We invest in exploration and development of oil and gas fields Visionary marketplace analysis and First to move GOVER VERN RNAN ANCE Cash Sustainable generative low cost operations production subsurface expertise +$ Return Cash is reinvested to achieve our three strategic priorities Stakeholder management Operational and organisational l excellence ce +$ Sales We generate revenue from sales of oil, gas, condensate and LPG

9 Strategic report 2-79 Governance Financial statements Strength Visionary marketplace analysis and subsurface expertise Operational and organisational excellence Stakeholder management Allows us to explore for new oil and gas reserves and develop oil and gas production. Our local knowledge and on the ground intelligence is supported by our strong, established relationships in the oil and gas industry. Our subsurface expertise in Ukraine, Russia and London is supported by the latest western technologies. We have over 20 years experience of operating in eastern and central Europe. Our Ukrainian and Russian companies are led by a native General Director who is empowered to build a stable business platform through investment in a locally employed workforce. Strong western governance standards are applied to our local operations through close working relationships between the Board and our management teams in Ukraine and Russia. We build long-term, trusting relationships with local staff, authorities, customers and other stakeholders which provide our business with a stable platform in a volatile emerging market. We sell our gas under long-term contracts to reputable customers improving the reliability of our revenue streams. Benefit First to move Sustainable low cost production Cash generative operations Ukraine and southern Russia are significant net consumers of oil and gas. A significant gas demand gap will remain for the foreseeable future. We use skilled expatriate teams to support local employees. We sell our oil and gas at our own local processing facilities. We use our extensive operational experience and continuous improvement to our corporate governance across all operations to effectively manage and mitigate risk. Strategic priority 1 Profitable production growth 1 Profitable production growth 3 Operating safely and responsibly 2 Oil and gas reserves growth 3 Operating safely and responsibly

10 JKX Oil & Gas plc Annual Report 8 Market overview Ukraine Why are we here? Because of the huge demand for energy in Ukraine and the lack of local supply. Ukraine continues to be a significant net consumer of oil and gas mainly relying on expensive imports from Russia. Due to lack of investment and availability of the latest exploration and production technology, there remain good opportunities to develop additional oil and gas reserves in Ukraine. A significant demand gap will remain in Ukraine for the foreseeable future. Our commercial advantage Our licence areas and major pipelines Oil and gas demand POLTAVA Annual gas productionconsumption gap in Ukraine (Bcf) Annual oil production-consumption gap in Ukraine ( 000bpd) Elizatetovskoye field 1,856 1, , Novo-Nikolaevskoye Complex km Gas production (Bcf) 1 1 Oil production ( 000 bpd) Gas consumption (Bcf) 1 Oil consumption ( 000 bpd) 1 JKX invested in Ukraine 20 years ago to help meet the demand gap and was rewarded with licences covering some of the best oil and gas fields in Ukraine. Our six producing fields and two Gas Processing Facilities ( GPFs ) are located in the Poltava region of Ukraine. Annual oil and gas demand in Ukraine is three times more than the country is presently producing. 1 Source: USA Energy Information Administration Gas pricing and realisations Gas realisations in Ukraine in $10 per Mcf Gas prices in Ukraine are regulated. The maximum price at which we can sell our gas is set monthly by NKRE (electricity regulator) in Hryvna and takes into account the tariff being charged by Russia and the current Hryvna/USD exchange rate. In recent years, the high gas price has encouraged significant investment from nonstate companies. Net back analysis Netback analysis of Ukranian oil sales (at $60/bbl) Production costs $4.67 (8%) Production taxes $23.05 (38%) Net margin $32.28 (54%) Production costs Production taxes Net Netback analysis of Ukranian gas sales (at $10 /Mcf) Production costs $6.21 (10%) Production taxes $23.82 (40%) Net margin $29.97 (50%) Production costs $1.17 (12%) Production taxes $3.55 (35%) Net margin $5.28 (53%) Production costs $1.29 (13%) Production taxes $2.36 (24%) Net margin $6.35 (63%) On 2 August the Ukrainian government increased gas production taxes to 55% (from 28%) and oil production taxes to 45% (from 39%) initially for 3 months but now extended until 31 December This was proposed to cover the costs of the conflict with Russia. The netback on our gas and oil sold in Ukraine is approximately $5.28/Mcf (based on $10/Mcf) and $32.28/bbl (based on $60/bbl).

11 Strategic report 2-79 Governance Financial statements Our business assets in Ukraine Novo-Nikolaevskoye Complex Novo-Nikolaevskoye Complex project life cycle 20 years of commercial production 1995 Total project life cycle Molchanovskoye Ignatovskoye 2032 Novo-Nikolaevskoye Rudenkovskoye Zaplavskoye Our Novo-Nikolaevskoye Complex reserves comprise five distinct fields producing in to one GPF. In addition we have a Liquefied Petroleum Gas ( LPG ) facility which converts some of our gas into LPG for sale into the expanding Ukrainian market. Elizavetovskoye field Elizatetovskoye field project life cycle 1 year of commercial production Our Elizavetovskoye field and GPF, which are only 45km from our Novo-Nikolaevskoye Complex, began commercial production in. Our investment Our investment and production in Ukraine Investment ($m) Production (MMboe) ,000 4,000 3,000 2,000 1,000 We have invested in Ukrainian oil and gas development for 21 years. We have produced and sold gas, oil and condensate locally for the past 20 years. Ukrainian reserves Ukrainian reserves split Oil Gas 90% Gas At the end of, our 2P reserves in Ukraine comprised Bcf of gas and 2.8 MMbbl of oil (total 28.9 MMboe). Reserves reassessment Ukrainian reserves 1 January 31 December Revisions Production Oil MMbbl 3.1 (0.0) (0.3) 2.8 Gas Bcf (15.2) (8.4) Oil + Gas MMboe 33.1 (2.5) (1.7) 28.9 Total 2P reserves 28.9 MMboe During the year our estimation of remaining 2P reserves decreased by 15.2 Bcf of gas (total 2.5 MMboe). Our reserves were independently reviewed by DeGolyer & MacNaughton.

12 JKX Oil & Gas plc Annual Report 10 Market overview southern Russia Why are we here? Because of the huge demand for energy in southern Russia and the lack of local supply. In southern Russia, gas demands are partially met by transporting gas long distances (at high cost) from production centres in the north of Russia. In Russia, historical Gazprom gas fields are now all in decline. To replace lost production, most investment into gas fields is in the development of the Yamal peninsula gas fields which are more than 4,000km north of our gas reserves at Koshekhablskoye, Adygea, southern Russia. In our Koshekhablskoye field produced 11.1 Bcf of gas and this is expected to grow. Our commercial advantage Gas demand Forecast gas demand Russia Western Siberia oil and gas basin Krasnodar-Adygea region annual production-consumption gap (Bcf) 385 Southern Russia regional gas consumption forecast (Bcm)³ ,000 km Ukraine Black Sea Koshekhablskoye Koshekhablskoye gas field is located in the Republic of Adygea, southern Russia where gas resource is scarce, and there are high transportation costs from Russia s main gas production area in the far north, some 4,000km away. Gas production (Bcf) 1 Gas consumption (Bcf) 2 Annual industrial consumption of gas in the Krasnodar and Adygea regions is more than four times gas production. Sources for supply and demand figures: 1 Rosnedra 2 Central Dispatching Unit of the Energy Sector (TsDU TEK) 5 0 Three Republics of Northern Caucasus Rostov By 2030 By In southern Russia, due to a rapid industrialisation of the region, by 2020 gas demands are expected to double. 3 Source: ERTA consult 2010 Stavropol Krasnodar & Adygea Gas realisations Russian gas realisations ($ per Mcf) Net back analysis Southern Russia netback analysis gas (at $2.7/Mcf) Production costs $1.18 (44%) Production taxes $0.33 (12%) Net margin $1.18 (44%) 2013 Production costs $1.41 (52%) Production taxes $0.30 (11%) Net margin $0.99 (37%) 2007 The average increase in Russian gas prices since 2007 has been 18%. There was no official increase in the regulated maximum industrial price in, however the Group was successful in achieving a 4.2% increase in the gas sales price from our buyer. Production costs Production taxes Net The gas production tax rate in southern Russia is 12% which is approximately one third of the rate in Ukraine.

13 Strategic report 2-79 Governance Financial statements Our business asset in southern Russia Koshekhablskoye project life cycle 2.8 years of commercial production Koshekhablskoye project life cycle 2012 Total project life cycle 2060 In 2007 we purchased the licence to rehabilitate and develop the Koshekhablskoye field in order to participate in the rapidly growing independent gas market. Our investment Our investment and production in southern Russia Russian reserves Russian reserves split Reserves reassessment Russian reserves 120 Investment ($m) Production (MMboe) 5,000 4,000 Oil Gas 1 January 31 December Revisions Production Oil MMbbl (0.0) 0.7 Gas Bcf (11.1) ,000 Oil + Gas MMboe (1.9) ,000 1,000 We have worked over five existing wells, installed a state-ofthe-art Gas Processing Facility and expanded processing capacity to 60 MMcfd (approximately 10,000 boepd). 99% Gas At the end of, after production, our assessment of 2P oil and gas reserves in Russia comprised 0.7 MMbbl of oil and Bcf of gas (total 68.8 MMboe). Total 2P reserves 68.8 MMboe During the year our estimation of remaining 2P reserves increased by 58.9 Bcf of gas and 0.1 MMbbl of oil (total 9.9 MMboe). Our reserves were independently reviewed by DeGolyer & MacNaughton.

14 JKX Oil & Gas plc Annual Report 12 Market overview latest developments Future strategy The Company s commitment to Ukraine and Russia is currently being tested with heightened levels of political risk and the commercial uncertainties noted below. The region continues to offer development opportunities in the medium to long term, in the short to medium term, the Company is focusing on maintaining its liquidity by minimising capital expenditure and operating costs in Ukraine and Russia. Ukrainian gas market Ukrainian government decrees During the second half of, three Ukrainian government decrees were issued without warning and with immediate legal effect which: directed major industrial gas buyers to acquire their gas solely from the Ukraine state-owned gas company from 1 December through to 28 February 2015; increased the rate of gas production tax to 55% (from 28%), initially for 3 months but now extended until 31 December 2015; and implemented currency restrictions, initially until 1 December but later extended to 2 March These decrees have had, and continue to have, a significant adverse financial impact on independent gas producing companies in Ukraine. Throughout the period of these significant gas sales restrictions imposed on private companies in Ukraine, the Group s gas sales in Ukraine reduced to approximately 50% of its production capacity and necessitated a shut-in of a proportionate level of gas production. Furthermore, the effective doubling of the rate of gas production tax has made gas sales in Ukraine only marginally profitable after streamlining of the organisation (see below). Impact on our Ukrainian operations in 2015 In 2015 strategic changes have been made to streamline the organisation in the most practical way possible, commensurate with the need to make significant cuts in production, but without compromising safety and reliability. This has resulted in staff and cost reductions in all key operational and administrative areas with the potential to swiftly restore production to near-normal levels. The criteria for further investment in Ukraine is an ability for the Company to exchange and repatriate dividends, the commitment to maintain an open gas market for independent producers and a production tax regime which permits producers to generate commensurate returns with the risks that they are taking. Until such time as the aforementioned conditions return, further investment in Ukraine will be minimised. Southern Russia gas market Industrial output in Russia has declined in 2013 and and with this decline there has been a proportionate reduction in domestic gas demand. However the south of Russia is defying the general trend and in the Krasnodar region, where YGE gas is used in a broad range of industrial outlets, there has been a sustained increase in gas demand in recent years. The Sochi effect Part of the reason for this is the population growth (and hence energy demands) of Sochi initially as an Olympic Venue, but more latterly as an expanding city and a favoured tourist destination. Gas is used locally in cement production, steel construction, glass manufacturing, heating and air conditioning all of which is now abundant in Sochi. Growth of the agricultural sector The south of Russia enjoys a climate similar to the north of Italy and with fertile soils and local fertiliser manufacturing, is experiencing a rapid expansion in intensive agriculture under glass. Within the Republic of Adygea only a few kilometres from our gas production site, a long established agricultural enterprise growing a range of vegetables and cut flowers is doubling its area under glass from 20 to 40 Hectares (approximately 90 acres). This sizeable enterprise supplies fresh products by air on a daily basis to the hotels, restaurants and supermarket chains in Moscow, St Petersburg and elsewhere in Russia. All greenhouses are heated and all irrigation water is pre-heated using gas boilers. We are in discussions to become a local supplier of gas for this expanding endeavour which would broaden our customer base and could improve our gas realisations. The growing demand for domestic agricultural products has been strengthened by recent Russian imposed sanctions on American and European agricultural products. The food halls in Moscow and St Petersburg are now filled exclusively by Russian fruit and vegetables. Impact on our Russian operations in 2015 Despite the growth in opportunities in the gas market in southern Russia, the combination of Russian Rouble currency devaluation and a minimal gas tariff increase in the near term has reduced the projected returns on our Russian project. More recently Russia s credit rating downgrading to sub-investment grade and the threat of currency controls has a negative effect on our plans to expand our current licence portfolio there.

15 Performance summary Strategic report 2-79 Governance Financial statements Key financials 2013 Revenue $146.2m $180.7m Operating profit before exceptionals $11.6m $9.2m Pre-tax exceptional charges $72.5m nil (includes a non-cash impairment charge of $69.1m) Loss after exceptionals $79.5m profit of $6.5m Loss per share cents earnings 3.78 cents Operating cash flow $58.4m $74.8m Capital expenditure $42.3m $64.4m Cash resources and undrawn bank facilities $38.9m $40.9m Operating highlights 2013 Average oil and gas production increased by 2% 9,919 boepd 9,731 boepd New Elizavetovskoye field development in Ukraine brought on-stream Stable gas production maintained in Russia Obtained control of Hernad licences and Hajdunanas production facility in Hungary Agreement to drill two exploration wells in Slovakia Group 2P reserves increased to 97.7 MMboe, a reserves replacement ratio of 196% Despite the increasingly challenging political and commercial environment over the past year, we made good operational progress which resulted in achieving our production target for. Although we are encouraged by the lifting of restrictions on gas sales to industrial customers in Ukraine, we expect the performance of both our Ukrainian and Russian subsidiaries to remain under pressure for Our focus will be on cash conservation and asset protection, but with our solid production assets and reserves we have the potential to make significant increases in production once existing tensions ease. Dr Paul Davies Chief Executive

16 JKX Oil & Gas plc Annual Report 14 Chairman s statement Notwithstanding the operating difficulties encountered, significant progress was made by your Company in with the new development of the Elizavetovskoye field being brought on-stream in Ukraine and stable gas production from the Koshekhablskoye field in Russia being maintained. Also, we have been able to complete a favourable asset swap in Hungary which gives the Company control and operatorship of both the Hajdunanas production facility and the Hernad licence areas. Finally, agreement has been reached with our partners in Slovakia to drill two exploration wells in our licence in the first half of this year. Oil, gas and LPG realisations in Ukraine fell during the period, exacerbated by a significant weakening of the Hryvna/US Dollar exchange rate. However, Ukraine remains a large gas importer and the cost of imported gas, whether directly from Russia or by reverse flow from Europe, should underpin the level of realisations JKX can achieve from domestic gas production in the future. Nigel Moore Chairman Solid production performance in a difficult political environment Your Company has succeeded in achieving its production targets in despite a deteriorating political and commercial environment in its main operating locations. The overall operating environment in Ukraine in particular has worsened since my mid-year statement with the introduction of punitive rates of production tax, foreign exchange controls and government imposed restrictions on sales of the Company s gas production to industrial customers. Gas realisations in Russia were impacted during the year by the weakening of the Rouble/US Dollar exchange rate. Although the effect of western sanctions is not having a significant impact on our ongoing operations, the overall state of the Russian economy will probably result in limited escalation of domestic gas prices in US dollar terms. In line with the rest of our industry, we also suffered from the dramatic fall in international oil prices in the latter part of. We continue to monitor the impact of all of these commercial challenges to our business model closely and are modifying our operating cost base accordingly. Strategy Your Company s commitment to eastern and central Europe is currently being tested with heightened levels of political risk and commercial uncertainty in our chosen emerging market economies. Although we believe that the region continues to offer development opportunities in the medium to long term, we are constraining deployment of capital in the area until the investment environment improves. In Ukraine, we have experienced an unusual combination of aggressive fiscal demands and operating restrictions by the government on our well-established operations. We are vigorously lobbying the Ukrainian Government, the UK Government, the EU and various multi-lateral

17 Strategic report 2-79 Governance Financial statements agencies to restore a positive investment climate for independent oil and gas producers. We believe that the recent counter-intuitive actions of the current Ukrainian Government in halting foreign investment in the upstream oil and gas industry should be reversed as part of conditions attached to the large western financing package being provided by the IMF and western governmental institutions. The growth in the independent gas sector in Russia has slowed, in parallel with an apparent move away by the Russian Government from its mediumterm goal of European net-back parity for domestic gas pricing. Political east-west tensions and the imposition of sanctions by the west are undoubtedly a significant contributory factor. Our Russian subsidiary continues to benefit from a stable, albeit flat, commercial market for gas sales in Rouble terms and a constructive rapport with the state regulatory authorities. Despite the recent fall in international oil prices, our exploration and appraisal prospects in Hungary and Slovakia remain attractive. Politically and commercially, both economies are robust and we believe our licence positions warrant continued investment in JKX is justly proud of its excellent record for health, safety, environmental matters and community liaison ( HSEC ). Although the environmental incident frequency rate in was again well below the industry benchmark, we failed to maintain the high standards of accident prevention that we have achieved in each of the previous nine years. We will endeavour to maintain our strong health and safety culture across the Group going forward, and seek to again exceed the standards of our industry in this critical area. Performance Group operations in Russia and Ukraine during the year resulted in a modest rise in both production and operating profit before exceptional charges. These increases were below our earlier expectations primarily due to tubing failures in two of our five production wells in Russia, but also because of shut-in of a proportion of our production capacity in Ukraine in December as a result of government imposed restrictions on sales of our gas production to industrial customers; these restrictions were lifted at the end of February In Ukraine, the new Elizavetovskoye field development was brought on-stream in the first quarter of the reporting period with two further development wells subsequently added. Two appraisal wells were drilled and completed in the Novo-Nikolaevskoye Complex, together with a number of well workovers. The Koshekhablskoye field in Russia continued to produce at approximately 80% of nominal plant capacity despite tubing failures early in. Rig mobilisation began at the year-end to perform the remedial works required. An independent reserve review of our licence portfolio by DeGolyer & MacNaughton as of 31 December concluded that we have again increased our 2P reserve base. After a total production of 3.6 MMboe, the Group 2P reserves increased to 97.7 MMboe (a reserves replacement ratio of 196%). Your Board The Board has remained unchanged with five independent non-executive members and four executive members. Dividend The Board is monitoring closely the Company s liquidity and cash flow in this period of geopolitical uncertainty and falling energy prices. It has concluded that it is not appropriate to recommend a dividend at this time. The Board will continue to review its dividend policy going forward. Outlook Our wholly-owned operating subsidiary, Poltava Petroleum Company ( PPC ), is located in central Ukraine, 200 miles south-east of Kiev. Our whollyowned operating subsidiary, Yuzhgazenergie ( YGE ), is located in the southern Russian Republic of Adygea. Although the political situation between Ukraine and Russia has deteriorated further since my mid-year statement, there have been no physical disruptions to JKX s operations in either of these locations. However, the commercial performance of both subsidiaries is under pressure and I expect will remain so for the rest of this year. In Ukraine, the unfavourable investment climate (including the introduction of punitive rates of production tax, foreign exchange controls and government imposed restrictions on sale of our gas production during the three months to 28 February 2015) has forced the Company to severely curtail its planned 2015 capital investment programme

18 JKX Oil & Gas plc Annual Report 16 Chairman s statement in Ukraine until the economic parameters for investment improve. The unfavourable investment climate includes risks which, if realised, may impact the going concern status of the Company and is addressed in note 2 to the financial statements. I will inform shareholders promptly of changes to the Ukrainian Government s position with regard to foreign investors. We have begun international arbitration proceedings against Ukraine under the Energy Charter Treaty and the bilateral investment treaties between Ukraine and the United Kingdom and the Netherlands respectively. In these proceedings, JKX is seeking, among other things, compensation for losses suffered due to Ukraine s treaty violations. The Company has already been granted an Emergency Award under the Energy Charter Treaty, but has not yet received financial relief for this in Ukraine. In Russia, production is anticipated to be maintained at current levels until the first of the tubing replacements in the Koshekhablskoye field is completed. This is anticipated to be in the third quarter of In Hungary, the Company anticipates securing a number of production permits encompassing its most promising discoveries within its Hernad licences (JKX: 100%) during the second half of In Slovakia, the Company plans to participate in drilling two exploration wells (JKX: 25%) during the first half of Finally, I must acknowledge the work of our dedicated staff, particularly in Poltava, during this very difficult time. I am proud of their commitment to the Company and its goals. I would also like to extend my thanks to our loyal shareholders for their continuing support. Nigel Moore Chairman

19 Chief Executive s statement Strategic report 2-79 Governance Financial statements Dr Paul Davies Chief Executive Maintaining liquidity in a rapidly changing environment Our performance Following start-up of production from the new Elizavetovskoye field development in Ukraine at the beginning of, appraisal and development drilling continued throughout the year in both the Elizavetovskoye field and the Novo- Nikolaevskoye Complex. Production from the Koshekhablskoye field in Russia was maintained at approximately 80% of nominal plant capacity throughout the year. No drilling or work-overs were undertaken on our Hungary and Slovakia licences in the period. Average oil and gas production for the year increased by 2% to 9,919 boepd (2013: 9,731 boepd), despite an increasingly challenging political and commercial environment. Group revenue for the year was 19% lower at $146.2m (2013: $180.7m) and reflected lower oil and gas realisations in Ukraine and Russia, lower LPG realisations in Ukraine and significantly lower oil and condensate production in Ukraine. Operating profit before exceptional charges increased by 26% to $11.6m (2013: $9.2m), despite the significant rise in Ukrainian production tax levels in the second half of the year. This tax increase approximately halved the pre-exceptional operating profit figure. An impairment charge of $69m on the carrying value of our oil and gas assets has been made in the results to reflect the impact of lower international oil prices and reduced domestic gas realisations in the near to medium term. Approximately two-thirds of this charge relates to gas assets in the Koshekhablskoye field in Russia as a result of our reduced expectations of the level of near term increases in the regulated gas price. Our progress In Ukraine, two additional development wells were drilled and completed in the Elizavetovskoye field, making a total of three wells currently in production on the field. Two new appraisal wells were drilled and completed in the Novo-Nikolaevskoye Complex, with a third well drilled but completed in Five well-workovers were also completed in. Ukraine production averaged 4,810 boepd in the reporting period. Good progress was made during the year on securing and extending our Ukrainian licence position. In the third quarter, the existing 5-year Elizavetovskoye exploration licence was converted to a 20-year production licence. In the fourth quarter, the Zaplavskoye exploration licence was extended and renewed for a further five years. In southern Russia, production from the Koshekhablskoye field was constrained at around 30 MMcfd from three production wells only. Tubing problems in two additional wells resulted in production levels below expectations over the period. A Russian operated rig has been mobilised to the field and is currently preparing to commence the tubing replacement programme. The programme for the first well is expected to be completed in

20 JKX Oil & Gas plc Annual Report 18 Chief Executive s statement the third quarter of the year. Russia production averaged 5,109 boepd in the reporting period. Completion of the evaluation of our large Georgievskoye exploration licence has shown that the few leads identified are deep and, in the current commercial environment, uneconomic to drill. Consequently, the licence was relinquished at the end of the year. Progress has been made in on the Company s licence positions in Hungary and Slovakia. In Hungary, the Company exchanged its 25% interest in the Sarkad production licence for an increased (100%) interest in the Hajdunanas production licence and production facility, and the two Hernad exploration licences. In Slovakia, the Company is participating (JKX: 25%) in two exploration wells scheduled to be drilled in the Medzilaborce licence in the first half of Our organisation Our Ukrainian subsidiary, PPC, continued to demonstrate its strong organisational and technical ability throughout, with the start-up and subsequent development of the new Elizavetovskoye field development, ongoing development and field optimisation of the Novo-Nikolaevskoye Complex and retention and extension of our production and licence positions. PPC is currently facing a difficult year with the need to reduce operating costs and staffing to reflect the severe reduction in the 2015 capital expenditure budget. Our Russian subsidiary, YGE, has matured as an organisation over the year with an impressive range of technical capability and expertise, notably in the area of plant operation and optimisation. The forthcoming tubing replacement programme on HP/HT wells of more than 5,000m depth will be demanding and place additional pressures on the organisation to complete the work successfully within tight budget constraints. Managing our risks We are very conscious that a wide spectrum of risk is intrinsic to our industry. The last year has demonstrated its particular relevance in the areas of the world where we operate, with technical risk always accompanied by elevated political and commercial uncertainty. We continue to expend considerable resources and expertise in managing risk, and seek to provide our personnel with research, methodology and tools to manage risk efficiently and effectively. During, we have further enhanced our internal control and risk management processes to ensure they are embedded across all operations in the Group. Regular scheduled revision of our risk register and review of our procedures are fundamental to this process, with continued oversight at Board level. Existing policies and procedures are followed so that we comply with the UK Bribery Act and its guidance. Outlook We were focused last year on driving forward our development programmes in Ukraine and Russia with the goal of achieving a rising level of Group production over the short to medium term. However, the political events in meant that we have had to reformulate our strategy for 2015 to one of sustainability of operations, cash conservation and asset protection. In Ukraine, our immediate focus for JKX is maintaining and optimising our operations to ensure we are capable of delivering maximum production of oil, gas and LPG from the existing well stock at the lowest cost. We are encouraged that the restrictions on sales to industrial customers have recently been lifted, and that currently we do not need to shut-in production. Capital expenditure in Ukraine is budgeted at the minimum required to maintain existing operations for the rest of the year; no further drilling is planned in 2015 and the Skytop drilling rig has been demobilised. Further exploration and development drilling prospects can only be considered if production tax levels significantly reduce from the current elevated levels, foreign exchange controls are eased and the overall investment climate improves. In Russia, we anticipate maintaining production from the current three producing wells at around 80% of nominal plant capacity, with periodic acid stimulations as required. In parallel, the tubing replacement programme on well-27 will proceed with completion scheduled for the third quarter. Plant modifications to increase throughput capacity to 60 MMcfd are scheduled to coincide with the annual plant shut-down in late May and should provide sufficient capacity to handle the additional production from well-27 when it comes back on-stream later in the year. In Hungary, we are developing a work programme to restart production from the Hajdunanas field and to secure production permits within our Hernad exploration licences. I hope to provide

21 Strategic report 2-79 Governance Financial statements an update on progress in the third quarter. Furthermore, we are scheduled to drill two wells in one of our Slovakia exploration licences in the first half of the year, and anticipate reporting results in the third quarter. Your Company has solid production assets with substantial independently verified 2P reserves, the potential to significantly increase production and the organisation and personnel committed to growing shareholder value. I remain hopeful that an early easing of the political tension between Ukraine and Russia will allow your Company to resume its production growth trajectory for the benefit of all its shareholders. I must thank all employees for their dedication to our common goals. The Board, management and employees extend their gratitude to our shareholders for their belief and support of the Company. Dr Paul Davies Chief Executive

22 JKX Oil & Gas plc Annual Report 20 Strategic priorities Performance dashboard Our performance dashboard for our three strategic priorities provides a snapshot of our progress in, our focus through 2015 and the associated risks. On the following pages (22 through 33) we provide more detail on the dashboard information. 1 Profitable production growth Progress Ukrainian production up 3% to 4,810 boepd Elizavetovskoye field development on-stream contributing an additional 1,511 boepd Russian production maintained at 5,109 boepd Gas realisations maintained at $5.74/Mcf ($9.93/Mcf in Ukraine, $2.60/Mcf in Russia) Production costs reduced to $8.70/boe Focus 2015 and beyond 2015 capital investment programme suspended in Ukraine Ukrainian government-imposed restrictions on gas sales and a punitive rate of gas production tax limits opportunities for production growth Tubing replacement at well-27 at Koshekhablskoye field to increase production Expansion of the GPF capacity in Russia to 60 MMcfd Risks Further Ukrainian government-imposed decrees making future investment uneconomic Decline in production in Ukraine due to lack of investment Tubing replacements at Koshekhablskoye field are deep and technically complex Gas prices in Russia and Ukraine are controlled by their respective governments Performance measures Production volumes 9,919 boepd 2% Gas realisations $5.74 per Mcf 15% Return on average capital employed (23.0)% Production costs $8.70 per boe 37%

23 Strategic report 2-79 Governance Financial statements Oil and gas reserves growth 3 Operating safely and responsibly Progress Reserves replacement ratio of 196% After production: Russian reserves increased by 9.9 MMboe to 68.8 MMboe Novo-Nikolaevskoye Complex reserves increased by 1.5 MMboe to 26.5 MMboe Elizavetovskoye reserves down to 2.4 MMboe Focus 2015 and beyond Investment in Ukraine to expand reserves is currently suspended pending more favourable economic parameters Russian reserves could expand through appraisal of the deeper Callovian horizons Risks The Ukrainian government control the economic parameters for investment If future oil and gas prices are predicted to remain low, reserves could be reduced The wells to the Callovian horizon at Koshekhablskoye are deep and complex Progress An All Injury Frequency Rate of 0.99 Lost Time Injuries of 0.84 An Environmental Incident Frequency Rate of 0.71 Focus 2015 and beyond To exceed internal and industry targets for AIFR, LTI and EIFR An AIFR of 0.40 or below LTI of 0.25 or below EIFR of 0.70 or below Maintain OHSAS 18001, ISO and ISO 9001 accreditations Risks Containment of hydrocarbons and other hazardous materials which are frequently used Ensuring that all staff and contractors comply with approved rules, standards and regulations at all times Performance measures Performance measures Reserves 97.7 MMboe All Injury Frequency Rate ( AIFR ) 0.99 Lost Time Injuries ( LTI ) 0.84 Reserves replacement ratio 196% Environmental Incident Frequency Rate ( EIFR ) 0.71

24 JKX Oil & Gas plc Annual Report 22 Strategic priorities 1 Profitable production growth The Elizavetovskoye development took less than 12 months to complete and added 8.9 MMcfd of gas to production Visionary marketplace analysis and subsurface expertise Vladimir Taran Operations Manager, Poltava Petroleum Company Our business model see page 6

25 Strategic report 2-79 Governance Financial statements Why is profitable production growth important? We produce our oil, gas and condensate from fields in Ukraine and southern Russia where demand for oil and gas significantly exceeds the local supply. All the oil and gas, and condensate that we produce we sell locally. In Ukraine, some of our gas and condensate production is converted into LPG and sold into the expanding Ukrainian LPG market. This increases overall revenues from the gas produced. Profitable production growth from our fields will increase our revenue, profits and shareholder value. Our future production profile underpins the value of the Group. 99% and 72% of our production in Russia and Ukraine, respectively, is gas. Our gas production is limited by the performance of our gas reservoirs and also by the processing capacity of the three Gas Processing Facilities ( GPFs ) at our Koshekhablskoye field in Russia, and the Novo-Nikolaevskoye Complex and Elizavetovskoye fields in Ukraine. How we go about it Flexibility We own and control 100% of all our producing fields therefore we have the flexibility to regularly reprioritise field developments to grow Group production in the most effective way. Local expertise Our highly skilled local Russian and Ukrainian technical teams are experts in local laws and regulations which ensure that we can quickly obtain the permits required to continue with planned field developments. Having this expertise in-house ensures efficient day-to-day drilling, development and construction operations at minimum cost. In at the Elizavetovskoye field in Ukraine, we drilled three new wells, doubled the gas processing capacity at the new GPF and converted our exploration licence into a 20 year production licence. Stability The gas markets in which we can sell our gas in Ukraine and Russia are broadly regulated by Government. We maximise stability and predictability within these markets by selling our gas under long term contracts to reputable customers. For example, when gas sales restrictions are not in place (see page 12), most of our gas production in Ukraine is sold to Shell. Transferable knowledge Our low cost operating model using local employment and expertise has been learnt from 20 years of operating in Ukraine. This experience and knowledge is transferable across central and eastern Europe. Our expertise in local laws and regulations ensures that we develop our assets quickly and efficiently. Long term sales contracts to reputable customers. 20 years of low cost production in Ukraine is transferable.

26 JKX Oil & Gas plc Annual Report 24 Strategic priorities Progress in We increased Group production by 2% in to 9,919 boepd (5,109 boepd in Russia; 4,810 boepd in Ukraine). Production costs reduced by 37% at $8.70/boe mainly as a result of Hryvna and Rouble devaluations; gas realisations also reduced to $5.74/Mcf. Ukraine In Ukraine, production increased by 3% to 4,810 boepd, gas realisations reduced to $9.93/Mcf, as did production costs at $7.65/bopd. At our Elizavetovskoye field, three new wells were drilled and brought onto production during, contributing an additional 1,511 boepd (8.9 MMcfd of gas and 20 bopd). We completed the production facility upgrade in its Elizavetovskoye field and were awarded a 20-year production licence for the field. Performance measures Production volumes 9,919 boepd Gas realisations $5.74 per Mcf 2% 15% 9,731 9,919 8, The upgrade doubled the GPF capacity to 30 MMcfd (approximately 5,000 boepd) and doubled the condensate yield from the production stream. Continuous development drilling at our mature fields in the Novo-Nikolaevskoye Complex maintained production at 3,277 boepd. Production costs $8.70 per boe 37% Russia In Russia, production was maintained at 5,109 boepd and our local gas price improved 4.2% on 1 July. In work continued to expand the capacity of our Russian GPF by a further 20% taking the nominal processing capacity to close to 60 MMcfd (approximately 10,000 boepd). Return on capital employed (23.0)% 2012 (2.2) The certification and licencing of the expansion plant continues and we are confident that it will be achieved in (23.0) Unfortunately tubing failures in two of our five wells (well-5 and well-27) during Q1 have constrained production in the period to approximately 30 MMcfd (70% of capacity). A rig is on location to complete the tubing replacement operation which is expected to restore production in Q

27 Strategic report 2-79 Governance Financial statements Outlook for 2015 and beyond Production in 2015 is expected to increase following the installation of new tubing in well-27 in Russia, the costs of which are covered by insurance proceeds. Replacing the tubing to restore production from the suspended well-5 will be completed as soon as practicable, and will further increase plateau production from the Koshekhablskoye field. In Ukraine, our investment programme is currently suspended (see page 12). Without investment, gas, oil, condensate and LPG production in Ukraine will decline. If the investment programme restarts, we expect the decline in the mature fields at the Novo- Nikolaevskoye Complex to be more than offset by increasing production from our Elizavetovskoye field. Gas realisations are anticipated to remain at current levels in Ukraine through 2015, with Rouble-denominated gas realisations in Russia expected to remain flat and to decrease in US$terms if the Rouble devalues further. Risks Ukraine Further investment in Ukraine to increase our production is currently suspended due to the punitive rate of gas production tax introduced by the government. Production growth is therefore not possible until the economic parameters for investment improve in Ukraine. Russia In Russia, tubing replacements at our wells are complex and the chances of success are reduced due to the depth of the wells and the high temperatures and high pressures at which they operate. Accessing reserves from the underlying Callovian reservoir at Koshekhablskoye field to enhance production will also require deep and technically complex wells. These wells may only be commercial with higher local gas prices and a strengthening of the Rouble against the US$. The Russian gas prices are controlled by the government and therefore may not increase in line with current expectations. In addition, the Rouble could weaken against the US$ and both of these factors could reduce the value of future projects in Russia and their net returns.

28 JKX Oil & Gas plc Annual Report 26 Strategic priorities 2 Oil and gas reserves growth We focus on geologies that we know best to boost reserves from existing assets Visionary marketplace analysis and subsurface expertise Dmitriy Makarov Senior Geophysicist, Poltava Petroleum Company Our business model see page 6

29 Strategic report 2-79 Governance Financial statements Why is oil and gas reserves growth important? Production from our oil and gas reserves in Ukraine and southern Russia will continue to generate cash to fund future development and exploration in the region. The reserves replacement ratio measures the amount of new oil and gas reserves we have discovered during the year compared with what we have produced from existing reserves. Our ability to replenish and grow our reserves base is a good indicator of the success of our exploration and appraisal programme. How we go about it To ensure we can continue to grow our oil and gas reserves we maintain a balance of investment in: exploration appraisal and development projects. Exploration includes acquiring new oil and gas exploration and production licences when they arise in the region and continuing with our exploration programme across our existing portfolio of licences. We continue to screen a lot of potential opportunities in central and eastern Europe that fit with the Company s strategy. We continue to focus on geographies and geologies that we understand in central and eastern Europe. Our three technical teams in London, Poltava (Ukraine) and Maikop (southern Russia) all have important roles to get the highest quality results from subsurface. Our UK-based technical team focus on refining the Group s short, medium and long term plans to maximise value from existing reserves and to increase the reserves in our licence areas. This requires applying the latest Western technologies to interpret the subsurface data and production results. We use this to regularly reschedule our drilling targets and field development plans to maximise our cash flows and chances of success. In addition the UK team oversee the day-today technical challenges that arise at our fields and support the Group s business development activities with technical due diligence when new opportunities arise. We regularly use independent engineering firms to estimate our reserves and resources which provides a certain level of assurance over our own assessments. We share technical knowledge and resources between our projects in Ukraine and Russia. Our three technical teams in London, Poltava (Ukraine) and Maikop (southern Russia) all have important roles which combine to achieve the best subsurface analysis and performance.

30 JKX Oil & Gas plc Annual Report 28 Strategic priorities Progress in Our 2P reserves have increased to 97.7 MMboe (Russia 68.8 MMboe; Ukraine 28.9 MMboe). Our reserves replacement ratio increased to 196%. In Russia, the reserves increase was mainly due to our reassessment of the most recent production data from the Koshekhablskoye field. In Ukraine, the reserves decreased following disappointing production rates from the third well E-303 at our Elizavetovskoye field, which was drilled to the deeper G sands reservoirs. Outlook for 2015 and beyond Future reserves replacement in Ukraine requires capital investment and our planned 2015 capital investment programme is currently suspended until the economic parameters for investment improve. Should our investment programme recommence, reserves could be expanded at our Elizavetovskoye field through more testing of the different horizons and through exploration drilling on prospects at our Novo-Nikolaevskoye Complex fields and, in particular, on the Zaplavskoye exploration licence. Performance measures Reserves 97.7 MMboe Reserves replacement ratio 196% 4% In Russia, reserves could be expanded through the appraisal of the deeper Callovian horizons at our Koshekhableskoye field. Risks Ukraine The calculations to measure oil and gas reserves require an estimate of expected future oil and gas prices. If a prolonged period of low oil and gas prices is forecast, the commercial returns from development projects reduce, which can reduce the reserves assessments. The Ukrainian government control the economic parameters for investment and therefore it is difficult to predict whether these will improve in the foreseeable future to allow commercial rates of return for investments into oil and gas projects. Russia Wells to the Callovian horizon are deep, complex and expensive, and will require significant technical analysis in advance to de-risk the project.

31 Strategic report 2-79 Governance Financial statements Our business model see page 6 Operational and organisational excellence Strong local networks provide essential services at short notice Our subsidiary in Ukraine, Poltava Petroleum Company, is licensed by the Government to design and control all our engineering, drilling and construction activities.

32 JKX Oil & Gas plc Annual Report 30 Strategic priorities 3 Operating safely and responsibly 20 years of building relations in the region means valuable insight and transferable low cost operating skills Operational excellence, and stakeholder management Local schools benefit from our success through our charitable projects. Our business model see page 6

33 Strategic report 2-79 Governance Financial statements Why is operating safely and responsibly important? At the year end, our Russian and Ukrainian operations employed 257 and 622 personnel, respectively. Our London office has 25 staff. This puts people as a top priority for the Board. We work in environments that are challenging and hazardous by nature. As well as operating efficiently, it is vital that we also operate safely and responsibly. Our behaviour impacts on our employees, our shareholders, the wider community and the environment. Our performance in the society in which we operate, and the environment, have become a critical part of measuring our overall performance. How we go about it People We aim to attract and retain the best people, supporting them with appropriate HSECQ systems and supporting the local communities in which we operate. We attract the best people by offering attractive remuneration packages and working environments, by providing daily challenges, and opportunities for personal development. We have over 850 staff in Ukraine and Russia of which more than 98% are local people. This provides us with a deeper understanding of local cultures which we respect and work with to get the best from our staff. Ensuring the welfare and human rights of our employees is an important consideration in our dayto-day activity, both in the UK and internationally. We use the United Nations rights frameworks as guiding principles throughout our Code of Conduct, our employment practices and our relationships with suppliers, wherever we do business. Community We aim to invest in, and improve, the communities in which we operate. We do this by providing local taxes, local employment and stability, which are highly valued by employees, local communities and governments. Environment We operate an Environmental Management System ( EMS ) accredited to ISO to reduce our impact on the environment. Our EMS requires ongoing training to staff and promoting a thorough understanding of our environmental policy to our business partners and suppliers. We have 879 staff in Ukraine and Russia of which more than 98% are local people. We provide local taxes, employment and stability. We aim to invest in, and improve, the communities in which we operate.

34 JKX Oil & Gas plc Annual Report 32 Strategic priorities Progress in During our performance against our health and safety targets resulted in: an All Injury Frequency Rate ( AIFR ) of , the target set was 0.40; Lost Time Injuries ( LTI ) 2 frequency rate of 0.84, the target set was This year we have not achieved the high standards of accident prevention achieved in each of the last nine years. A Root Cause Analysis was carried out for each of the incidents with the lessons learned distributed across the Group. We measure our environmental performance using Environment Incident Frequency Rate ( EIFR ). In our EIFR 3 was 0.71 which exceeded our target set of Outlook for 2015 and beyond We expect to maintain our strong Health and Safety culture throughout the Group and exceed our industry AIFR and LTI performance targets. Our internal AIFR and LTI performance targets for 2015 are set at 0.40 and 0.25 respectively, well below the industry benchmarks. Our internal EIFR performance target has been set at 0.70 for We will continue to invest in local training and skills development and appropriate community development projects and will maintain a regular dialogue with local stakeholders and authorities regarding our future plans. We will maintain our OHSAS Health & Safety accreditation, our ISO Environmental accreditation and our ISO 9001 Quality Management accreditation. Performance measures All Injury Frequency Rate ( AIFR ) 0.99 Lost Time Injuries ( LTI ) 0.84 Environmental Incident Frequency rate ( EIFR ) 0.71 Greenhouse Gas Emissions Scope 1 direct emissions 317,441 tonnes CO 2 e Scope 2 indirect emissions 827 tonnes CO 2 e The AIFR, representing the health and safety incidents per 200,000 hours worked, is a direct measure of safety performance. 2 The LTI represents the number of lost time or recordable incidents per 200,000 hours worked and is a direct measure of safety performance. 3 The EIFR is the number of environmental incidents per 200,000 hours worked. Intensity ratio 88 tonnes CO 2 e / MMboe of production

35 Strategic report 2-79 Governance Financial statements Risks Development and monetisation of our oil and gas reserves, exposes us to a wide range of significant health, safety, security and environmental risks. On a daily basis, there is a risk of the loss of containment of hydrocarbons and other hazardous material, as well as the risk of fires, explosions or other incidents. Continuous improvement of our procedures and our identification and recording systems is needed to mitigate our health, safety and environmental risks, and these need to be subject to regular external audit. Russia The tubing replacements planned at our Koshekhablskoye field are to repair wells that are deep, high temperature and high pressure, so are inherently difficult and require significant planning to de-risk the safety and success of the project. JKX people data Staff by region 906 Staff: Male/Female Directors and Senior Managers 13 Russia 257 Ukraine 622 Rest of the world 27 Male 81% Female 19% Directors 1 9 Senior managers 2 4 Directors and Senior Managers, Male/Female 1 Male 92% Female 8% 12 1 Company Directors consist of the Company s Board as detailed on pages 82 and Senior Managers are directors of subsidiary companies or who otherwise have responsibility for planning, directing or controlling the activities of the company or a strategically significant part of it.

36 JKX Oil & Gas plc Annual Report 34 Performance in PRODUCTION SUMMARY Total Second half First half Total 2013 Production Oil (Mbbl) Gas (Bcf) Oil equivalent (Mboe) 3,620 1,787 1,833 3,552 Daily production Oil (bopd) 1, ,049 1,352 Gas (MMcfd) Oil equivalent (boepd) 9,919 9,715 10,126 9,731 OPERATING RESULTS Total $m Second half $m First half $m Total 2013 $m Revenue Oil Gas Liquefied petroleum gas Other Cost of sales Operating costs (31.5) (15.6) (15.9) (48.7) Depreciation, depletion and amortisation oil and gas assets (32.4) (12.7) (19.7) (55.3) Production based taxes (45.5) (27.9) (17.6) (41.8) Exceptional item provision for impairment of oil and gas assets (69.1) (69.1) - - Exceptional item well control operations (3.5) (0.2) (3.3) - (182.0) (125.5) (56.5) (145.8) Write off of exploration and evaluation costs (1.5) Total cost of sales (182.0) (125.5) (56.5) (147.3) Gross profit before exceptional item Gross (loss)/profit after exceptional item (35.8) (53.6) Operating expenses Administrative expenses (19.5) (9.4) (10.1) (24.1) Loss on foreign exchange (5.7) (0.4) (5.3) (0.1) Profit from operations before exceptional items (Loss)/profit from operations after exceptional items (60.9) (63.3)

37 Strategic report 2-79 Governance Financial statements EARNINGS Total Second half First half Total 2013 Net (loss)/profit ($m) (79.5) (88.0) Net (loss)/profit before exceptional item ($m) (7.0) (18.2) Basic weighted average number of shares in issue (m) (Loss)/earnings per share before exceptional item (basic, cents) (12.76) (19.26) (Loss)/earnings per share after exceptional item (basic, cents) (46.21) (51.16) Pre-exceptional earnings before interest, tax, depreciation and amortisation ($m) REALISATIONS Total Second half First half Total 2013 Oil (per bbl) $88.80 $84.56 $92.39 $92.12 Gas (per Mcf) $5.74 $5.84 $5.64 $6.73 LPG (per tonne) $807 $806 $808 $898 COST OF PRODUCTION ($/boe) Total Second half First half Total 2013 Production costs (excluding exceptional item) $8.70 $8.73 $8.67 $13.71 Depreciation, depletion and amortisation $8.93 $7.08 $10.72 $15.62 Production based taxes $12.57 $15.62 $9.60 $11.77 CASH FLOW Total Second half First half Total 2013 Cash generated from operations ($m) Operating cash flow per share (cents) STATEMENT OF FINANCIAL POSITION Total Second half First half Total 2013 Total cash 2 ($m) Borrowings ($m) Net debt 3 ($m) (10.5) (10.5) (4.9) (6.3) Net (debt)/cash to equity (%) (3.8) (3.8) (1.0) 0.0 Return on average capital employed (%) 4 (23.0) (25.2) Increase in property, plant and equipment/intangible assets ($m) Ukraine Russia Other Total Earnings before interest, tax, depreciation and amortisation ( EBITDA ) is a non-ifrs measure and calculated using Loss from operations of $60.9m (2013: $9.2m profit) and adding back depletion, depreciation, amortisation and exceptional items of $106.9m (2013: $57.0m). EBITDA is an indicator of the Group s ability to generate operating cash flow that can fund its working capital needs, service debt obligations and fund capital expenditures. 2 Total cash is Cash and cash equivalents plus Restricted cash. 3 Net debt is Total cash less Borrowings. 4 Return on average capital employed is the annualised profit/(loss) for the period divided by average capital employed.

38 JKX Oil & Gas plc Annual Report 36 Financial review Production Gas production in increased as a result of the investment and drilling programme of the last two years which was funded with the proceeds of the convertible bond placement in Q Unfortunately, gas production in Russia remained constrained for most of the year as two out of five wells in the portfolio were shut-in from January due to tubing connection failures. Tubing replacement operations are underway for the first of these two wells with a return to production anticipated in Q In Ukraine, oil and gas production volumes from our mature Novo-Nikolaevskoye fields continued to follow a natural decline profile with our new Elizavetovskoye field development providing predominantly additional gas production. In Ukraine, the split of gas and oil production for was at 80% / 20% (2013: 71% / 29%). 99% of production in Russia was gas (2013: 99%). Cynthia Dubin Finance Director Results for the year The Group recorded a loss for the year of $79.5m (2013: profit $6.5m) after exceptional charges of $72.5m which comprised: a non-cash impairment charge of $69.1m (2013: nil) for the Group s oil and gas assets in Ukraine, Russia and Hungary; and an exceptional charge of $3.5m as a result of one-off costs incurred in Russia to kill well-27. Loss for the year before exceptional charges was $22.0m (2013: profit $6.5m). Revenue Group revenues in by region comprised: Ukraine $118.8m and Russia $27.4m (2013: Ukraine $151.0m, Russia $28.9m and Hungary $0.8m). Group revenues Ukrainian revenues 2013 Change % ($m) ($m) ($m) Change Ukraine (32.2) (21.3%) Russia (1.5) (5.2%) Hungary (0.8) (100%) Total (34.5) (19.1%) 2013 Change ($m) ($m) ($m) Gas (15.6) Oil (10.9) Liquefied Petroleum Gas ( LPG ) (4.4) Other (1.3) Total (32.2) Lower Ukrainian gas revenue was primarily the result of a reduction in realisations, while the reduction in Ukrainian oil revenues was mainly due to lower production.

39 Strategic report 2-79 Governance Financial statements Average Group sales volume declined by 3.2% to 9,188 boepd (2013: 9,489 boepd), with 48.8% (4,482 boepd) sold in Ukraine and 51.2% (4,706 boepd) attributable to Russia. Realisations 2013 Ukraine Gas ($/Mcf) Oil ($/bbl) LPG ($/tonne) Russia Gas ($/Mcf) Hungary Gas ($/Mcf) N/A Group Gas ($/Mcf) Oil ($/bbl) LPG ($/tonne) Gas sales Whilst Ukrainian gas sales volumes were stable year on year, gas prices declined 17.0% over the period from $11.96/Mcf to $9.93/Mcf due to lower market prices achieved as a result of reduced import prices and the devaluation of the Hryvna from UAH8.0/$ to UAH15.8/$. Whilst the Ukrainian state regulator makes periodic adjustments for Hryvna/$ exchange rate fluctuations, there is a time lag between devaluation and adjustments to the official industrial gas tariff. Our gas realisations in Russia increased by 4.2% from 1 July ; however, due to the devaluation of the Russian Rouble in from RR32.73/$ to RR56.26/$, average gas realisations dropped by 6.1% from $2.77/Mcf to $2.60/Mcf. The combination of lower realisations in Russia and Ukraine resulted in an overall average reduction in gas realisations of 14.7% to $5.74/Mcf (2013: $6.73/Mcf). Oil sales Reduction in oil sales was driven by a 28.6% decline in volumes rather than realisations, as Ukrainian oil realisations held relatively firm at $90.79/bbl (2013: $91.03/bbl), due to local demand for oil offsetting international oil price trends to yield only a small diminishment in our realisation. Liquefied Petroleum Gas ( LPG ) sales Gas production volumes from the Novo- Nikolaevskoye Complex decreased by 27.8%, and directly affected LPG production and sales. The $4.4m (31.7%) decline in LPG revenues was due to lower production volumes combined with a reduction in the domestic market price, resulting from increased competition through both imports and other domestically produced supplies. Significant new gas production in Ukraine came on-stream from the Elizavetovskoye field which is remote from the LPG plant location at the Novo- Nikolaevskoye Complex and therefore did not impact LPG production. Average LPG realisations reduced approximately 10% to $807/tonne (2013: $898/tonne) with the Ukrainian plant contributing $9.5m (2013: $13.9m) to Group revenue in the reporting period. Loss from operations Loss from operations was $60.9m which included exceptional charges of $72.5m. Profit from operations before exceptional charges was $11.6m (2013: $9.2m) which was the result of $34.5m decrease in revenues to $146.2m (2013: $180.7m), a decrease in cost of sales by $37.9m and an increase in other costs by $1m. Total cost of sales for the year (before exceptional charges) decreased by $37.9m to $109.4m (2013: $147.3m) mainly due to decreases in: Russian operating costs of $4.5m Ukrainian operating costs of $3.6m Ukrainian oil and gas inventory movements and product purchases of $8.3m depreciation, depletion and amortisation ( DD&A ) charge of $23.0m Rest of World costs of $2.2m offset by an increase in production based taxes of $3.7m, predominantly related to Ukraine. The decrease in Russian operating costs of $4.5m is largely due to reduced spending on raw materials and supplies following significant purchases made in 2013, lower field support activities and costs, and lower property tax payments due to the reduced value of the Russian assets used for property tax purposes. Additionally, the Rouble devaluation from RR32.73/$ to RR56.26/$ reduced the US Dollar reported cost base for Russia throughout the year.

40 JKX Oil & Gas plc Annual Report 38 Financial review Ukrainian operating costs decreased by $3.6m, mainly due to the devaluation of the Hryvna from UAH8.0/$ to UAH15.8/$. Ukrainian sales from inventory and product purchases decreased by $8.3m to $1.1m (2013: $9.4m), as a result of production meeting sales demand throughout the year, thus obviating the need to purchase additional gas to meet sales commitments. The DD&A charge reduced by $23.0m mainly due to the upward revision of reserves at Ignatovskoye, Molchanovskoye, Novo-Nikolaevskoye and Elizavetovskoye fields in Ukraine at the end of 2013 which led to lower DD&A rates in $/boe as the cost of amortising our oil and gas assets is now spread over a larger reserve base. The Group s DD&A rate reduced to $8.93/boe (2013: $15.62/boe). Rest of World cost savings are mainly as a result of reduced exploration and evaluation costs written off during the year which were $1.5m lower at $0.02m (2013: $1.5m). Production taxes Production based taxes for the Group increased by $3.7m to $45.5m (2013: $41.8m), mainly as a result of higher oil and gas production tax rates in Ukraine (see Other Taxation Ukraine section for details). The material increase in production tax rates in August and the resultant financial effect was somewhat offset by lower amounts of tax due as a result of reduced gas sales prices, lower oil production and the devaluation of the Hryvna. Average gas production tax in Ukraine increased from $99.60/Mcm to $124.40/Mcm whilst average oil production tax decreased from $36.14/bbl to $34.90/bbl. Average gas production tax in Russia increased from $10.90/Mcm to $11.39/Mcm in due to implementation of a new Mineral Extraction Tax regime (see Other Taxation Russia ), contributing to the Group s effective gas production tax increase from $46.51/Mcm to $60.20/Mcm. Although not material to the Group, this increase together with the increase in Ukraine resulted in production tax on a boe basis of$12.57/boe (2013: $11.77/boe). The Group s administrative costs decreased by $4.6m to $19.5m (2013: $24.1m) during the year. Reduction in costs is largely due to decreases in: Group staff costs of $3.0m mainly driven by costs incurred in local currencies (Hryvna and Rouble) which devalued significantly against the US Dollar; the share option charge of $1.3m; legal and professional fees of $1.4m; offset by a $1.1m increase in various other cost categories. The Group s exchange losses increased by $5.6m to $5.7m (2013: $0.1m) due to the Rouble and Hryvna devaluations previously noted. Other taxation Ukraine On 1 April, the Ukrainian government increased production tax rates for gas from 25% to 28%. This rate is then applied to the actual average import price for gas as communicated by the Ministry of Economic Development and Trade of Ukraine. The oil tax rate at this time remained constant at 39%. On 1 August, the Ukrainian government passed emergency budget legislation to increase the gas production tax rate from 28% to 55% of the maximum gas price published monthly by the Ministry of Economy. Oil tax rates also increased from 39% to 45% from 1 August. Other taxation Russia A new mineral extraction tax ( MET ) formula approved in September 2013 was implemented from 1 July. The new formula is based on gas prices, gas production as a share of total hydrocarbon output and complexity of gas reservoirs (depletion rates, depth of the producing horizons and geographical location of producing fields). In addition to production taxes, we are subject to a 2.2% property tax which is based on the net book value of our Russian assets as calculated for property tax purposes. This amounted to $2.5m in (2013: $3.7m). The figure is included in other cost of sales in the consolidated income statement. Finance costs Finance costs are largely represented by the convertible bond interest at $3.1m (2013: $3.6m). The $9.1m gain on movement in the fair value of the derivative liability represents the change in fair value of the conversion option associated with the convertible bond since its completion on 19 February The bonds have a conversion option which becomes more valuable to the bond holder as the Company s share price nears or exceeds the fixed conversion strike price (76.29 pence). As the Company s share price has

41 Strategic report 2-79 Governance Financial statements decreased from pence as at 31 December 2013 to pence at 31 December, a credit has been recognised that represents the decrease in fair value of the potential liability of the Company to settle any conversion options that may be exercised in future periods. Earnings per share Basic loss per share before exceptional items were cents (2013: earnings 3.78 cents) in line with the pre-exceptional loss. Basic loss per share after exceptional items was cents (2013: earnings 3.78 cents) reflecting the Group loss after exceptional items net of their related tax effects of $57.6m (2013: nil). Taxation The total tax charge for the year was $25.8m (2013: credit $2.5m) comprising a current tax charge of $9.5m (2013: $8.6m), a deferred tax charge before exceptional items of $31.3m (2013: credit $11.1m) and a deferred tax credit of $15.0m in respect of exceptional items (2013: nil). The current tax charge comprises: a foreign exchange loss of $5.7m Hryvnabased prepaid tax of the prior year, following devaluation of the currency; a $4.7m charge in respect of our Ukrainian profit for the year (2013: $8.6m), which has reduced as a result of lower profitability in Ukraine; a $0.9m credit in respect of Hungarian and UK tax. The total deferred tax charge of $16.3m (2013: $11.1m credit) comprises: $31.4m charge reflecting the derecognition of the Russian deferred tax asset in respect of losses carried forward to future periods (2013: $11.1m credit) and the related foreign exchange loss on the balance due to Rouble devaluation. Under Russian tax law corporate tax losses expire after 10 years and following our reduced expectations of the level of near term increases in the regulated gas price in Russia, forecast profits in the near term do not reflect the Company being able to utilise these losses; $15.0m credit (2013: nil) relating to impairments to our oil and gas assets; and $0.1m net credit for changes in other short term timing differences and the related foreign exchange effects. In Ukraine, the corporate tax rate for was 18% and remains at this level for Loss for the year after tax The result for the year, after exceptional charges of $57.6m (net of deferred tax effect on exceptional charges), was a loss of $79.5m (2013: profit of $6.5m). On a pre-exceptional basis, loss for the year was $22.0m (2013: profit $6.5m). On a pre-exceptional basis, the $28.5m change is the combined result of: a $34.5m decrease in revenues mainly due to reduced Ukrainian gas realisations; a decrease in cost of sales of $37.9m to $109.4m (2013: $147.3m) as a result of reduced charges related to sales from inventory in Ukraine, a decrease in Ukrainian production taxes and a decrease in DD&A charges; an increase in foreign exchange losses of $5.6m; a net decrease in administrative and net finance charges of $5.8m; a $0.2m gain from the Hungarian asset swap; a $11.0m change in the fair value impact of the derivative attached to the convertible bond; and a $43.3m increase in the total taxation charge. Exceptional charges Exceptional charges of $72.5m in the year consist of: $3.5m charge relating to well control operations in Russia (see note 5 to the financial statements); an $69.1m impairment charge against our oil and gas assets. The impairment charge for the year of $69.1m comprises: $46.3m in respect of Russian oil and gas assets mainly as a result of our lower expectations for near term increases in the regulated gas price in the domestic gas market; $10.0m in respect of our Hungarian oil and gas assets due to the sharp decline in international oil and gas prices; $12.8m in respect of our Elizavetovskoye field in Ukraine mainly as a result of the 71% decline in assessed 2P reserves at the end of the year. See note 5 to the financial statements for full impairment disclosures.

42 JKX Oil & Gas plc Annual Report 40 Financial review Cash flows The Group generated cash from operations was lower at $58.4m (2013: $74.8m), mainly due to lower production in Ukraine and lower gas sales realisations in both Ukraine and Russia. In parallel, both the Hryvna and Rouble devalued sharply against the US dollar through the year and we experienced sudden and significant increases to production tax rates in Ukraine from August onwards. Financial resources were mainly spent on new drilling and work-over projects to maintain future production levels. Interest and bond charges paid were $1.1m higher at $3.3m (2013: $2.2m) because of a full year s interest payment on the bonds and less interest expense paid to Credit Agricole for the working capital facility. Corporation tax paid was 52% lower at $7.6m (2013: $15.9m), predominantly due to lower profitability in Ukraine and the utilisation of prepaid tax in Ukraine at the end of last year. Net cash generated from operating activities was lower at $47.5m (2013: $56.7m) as a result of the $16.4m reduction in cash from operations and a $1.1m increase in interest payments offset by a reduction of $8.4m in Ukrainian corporation tax payments. Investment in property plant and equipment in was $21.5m lower than the prior year at $40.0m (2013: $61.5m). Investment in Russian plant and equipment accounted for $4.8m (2013: $20.2m) of the Group s capital spend in the year, representing 12.2% (2013: 31.6%) of the total for the year. The cost mainly relates to work-over activity and acidisation of wells to maintain the performance of the wells throughout the year. At the end of the year, the carrying value of the Group s oil and gas assets in Russia was $115.4m (2013: $286.3m) after an impairment of $46.3m (2013: nil). The focus of the ongoing and future work is to increase the Russian plant capacity by a minimum of 50% to 60 MMcfd and have a suite of producing wells which fill this capacity, in addition to providing a level of redundancy during periods of well intervention. Capital expenditure in Ukraine during was $35.4m (2013: $41.7m). Our Ukrainian capital investments included completion of Elizavetovskoye wells E301, E302 and E303, appraisal wells NN80, IG-140 and IG-141 at our Novo-Nikolaevskoye Complex, and the work-over of wells on the mature fields using the Skytop N-75 and TW-100 rigs respectively. These projects all comprise part of the investment programme outlined at the beginning of 2013 to increase production from our existing production licences and new appraisal opportunities. Net cash inflow from financing activities decreased dramatically to $1.4m (2013: inflow $19.2m), comprised mainly of the $1.5m of cash inflow from the working capital facility provided by Credit Agricole. The decline is explained by the $37.8m of bond proceeds received in 2013 which was offset by the repayment of the Credit Agricole capital facility ($15.0m) and $4.0m for the purchase of employee trust shares. To assist with Group liquidity, the Company purchased $8.7m of selected Ukrainian government US$ treasury bills in October with a fixed coupon and which matured in January and February Cash Cash at the end of the year (excluding restricted cash) was $25.4m (2013: $25.7m). This resulted from a cash balance at the beginning of the year of $25.7m (2013: $12.0m) enhanced by an increase in cash and cash equivalents during the year of $7.0m (2013: $14.3m increase), before the negative effects of foreign exchange on cash balances of $7.3m (2013: decrease $0.6m). Liquidity The Group employs a number of financial instruments to manage the liquidity associated with the Group s operations. These include cash and cash equivalents, together with receivables and payables that arise directly from our operations. Separate from these, the main financial instrument of the Group is the $40 million guaranteed unsubordinated convertible bond which was placed in Q with institutional investors which matures in The bonds have an annual coupon of 8 per cent per annum payable semi-annually in arrears. The bonds terms and conditions contain an annual put option each February until maturity. None of the bondholders exercised their option to put 10% of the outstanding principal of the bonds in February. Bonds with a principal amount of $4m were redeemed on 19 February 2015 in addition to an early redemption premium of $0.2m

43 Strategic report 2-79 Governance Financial statements in accordance with the terms and conditions of the bond. Further information on the terms and conditions of the bonds is included in notes 13 and 14 to the financial statements. The Group renewed the Credit Agricole working capital facility in Q2 and continues to benefit from the flexibility that this financing provides our Ukrainian subsidiary, in particular to manage its working capital needs. The facility is available until 30 June 2015 with the maximum facility reducing to $10 million and $5 million on 30 April 2015 and 30 May 2015, respectively. Drawings of $1.5m were outstanding at 31 December. In addition, and as noted above, as a consequence of Ukrainian currency controls and in order to maintain liquidity across the Group, the Company purchased Ukrainian government US$ treasury bills with a fixed coupon and short maturity dates. The Company is focusing on maintaining its liquidity by minimisation of capital expenditure and reduction of operating costs in Ukraine and Russia. However, a limited amount of financial resources will be spent in 2015 to progress development of our Slovakian and Hungarian assets with a view to maintaining appraisal and development programmes in these locations. Cynthia Dubin Finance Director Dividends No dividends have been paid or proposed during the year, and the Board will not be recommending the payment of a dividend at the forthcoming AGM. Outlook The Company s financial position has been severely impacted by the deteriorating economic conditions in Ukraine and Russia. The ramifications are significant. The criteria for further investment in Ukraine is an ability to exchange and repatriate dividends, currency stability, continuation of an open gas market for independent producers and a production tax regime which permits producers to generate commensurate returns with the risks taken. Although the Company has made a significant investment in Ukraine over the last 20 years, the Board currently considers it prudent to minimise further capital investment in Ukraine until such time as the aforementioned conditions return. In Russia, the combination of currency devaluation and a minimal gas tariff increase in the near term has reduced the projected returns on our Russian project. The Board also considers that the recent downgrading of the country to sub-investment grade and the threat of currency controls has a negative effect on our plans to expand our current licence portfolio there. Consequently, ongoing capital expenditure in Russia is limited to the re-instatement of production from well-27 which the Company expects to be funded from insurance proceeds.

44 JKX Oil & Gas plc Annual Report 42 Operational review saw start-up of production in the Elizavetovskoye gas field and steady production in the Novo-Nikolaevskoye group of fields in Ukraine, and constrained production from the Koshekhablskoye field in Russia. Production levels were adversely affected in the second half of the year due to production tax increases in Ukraine which significantly reduced funds available for investment. Group production In, production in Ukraine from the Novo- Nikolaevskoye group of fields was supplemented by the start-up of the Elizavetovskoye gas field at the beginning of the period. Unfortunately, Ukrainian production was constrained in the fourth quarter by government restrictions on access to our industrial customer base. Production from the Koshekhablskoye field in Russia remained steady through the period. No oil and gas was produced by the Hajdunanas field in Hungary in. Martin Miller Technical Director Group average production in was 9,919 boepd, comprising 53.4 MMcfd of gas and 1,003 bpd of oil and condensate, a 1.5% increase on the average for Asset life cycle Country UKRAINE Licence area Exploration Appraisal Development Production Ignatovskoye Molchanovskoye North Molchanovskoye Main Novo-Nikolaevskoye Rudenkovskoye Molchanovskoye Wedge Zone Elizavetovskoye Zaplavskoye 2P reserves MMboe 28.9 RUSSIA Koshekhablskoye Callovian Koshekhablskoye Oxfordian 68.8 HUNGARY Hajdunanas Gorbehaza Turkeve* SLOVAKIA Svidnik** Medzilaborce** Snina** JKX has 100% interest in its licences except for the following: * JKX has a 50% interest in this licence area ** JKX has a 25% interest in this licence area

45 Strategic report 2-79 Governance Financial statements Ukraine Kiev Ukraine Dnieper-Donets Basin POLTAVA Russia Elizavetovskoye field Black Sea Ukraine licence areas and major pipelines Dnieper-DonetsDonets Basin border Soyuz pipeline Gas pipeline Gas/oil field Licence area Roads Novo-Nikolaevskoye Complex 0 20 km Novo-Nikolaevskoye licences Production Average production from the Novo-Nikolaevskoye group of fields in was 3,277 boepd comprising 14.1 MMcfd of gas and 932 bpd of oil and condensate, a 28% decrease on the average for Development drilling and other well activity The Skytop N-75 rig moved to the Novo- Nikolaevskoye area to start drilling operations in mid-march while the TW-100 workover rig was active throughout the period, carrying out five recompletions, one well repair and six abandonments. Appraisal well NN-80 was drilled to a depth of 1,794m and targeted the upper V-15 Visean sandstone in the Novo-Nikolaevskoye field. Initial results were considerably above expectations with a flow rate of 4.98 MMcfd and 51 bcpd. Production has since stabilised at around 1 MMcfd with 8 bcpd. Appraisal well IG-141 was drilled to a depth of 2,802m and targeted the Devonian sandstone in a downthrown fault block on the northern flank of the Ignatovskoye field. Initial flow rates exceeded expectations, but decline was rapid and the well, after additional perforations, is now producing around 30 bopd. Appraisal well IG-140 was drilled to a total measured depth of 3,200 metres (2,354m TVD) in an untested downthrown fault block on the west flank of the Ignatovskoye field with the final 400 metres section in the Visean carbonate reservoir being drilled close to horizontal. The well was completed in the first quarter of 2015 using a predrilled liner and then an acid squeeze. Gas lift is being used to bring oil to the surface and the well continues to clean up. The low permeability suggests that the reservoir in this fault block has not undergone the same degree of diagenetic change as the main field fault block. Recompletions using the TW-100 rig in period included wells M-170 and IG-129 to allow for additional perforations in the Devonian sandstone and the Tournaisian T2 sandstone respectively. In addition, well NN-09 was recompleted for gas lift, NN74 was recompleted to produce the V15 Visean sandstone and additional perforations were made in IG-141. A pilot waterflood project on Ignatovskoye was kicked off in 2012 with the injection of produced water into the Visean carbonate reservoir well IG-126 and was boosted by the injection of excess water from the Rudenkovskoye R-103 frac operation in The aim of the project was to verify fault barriers and establish which wells were in direct communication. Well IG-138 reacted positively and it was evident that, once pressure had been partially restored in the fault

46 JKX Oil & Gas plc Annual Report 44 Operational review block, production was rising slowly reaching almost three times its historical low point on natural decline. Water breakthrough in the third quarter of led to a reduction in oil production from the well and confirmed the model. An additional 10 metres of perforation were added near the top of the reservoir at the end of the period giving a further boost to oil production. Work continues on planning for the Molchanovskoye North sandstone reservoir waterflood with a pilot project being prepared. Wells M-163, M-164, M-168, M-170 and M-205 on the Molchanovskoye field were plugged and abandoned along with IG-107 and IG-129 on the Ignatovskoye field, well NN-75 on the Novo-Nikolaevskoye field and the Zaplavskoye Z-05 exploration well. A smaller diameter velocity string was installed within the production tubing of the multi-fracced well R-103 in the Rudenkovskoye field using a coiled tubing unit. The velocity string aids fluid recovery and minimises the risk of liquid loading which may inhibit gas production, particularly in the lower frac zones. This has proved moderately successful and is now being supplemented by a gas lift system. Wireline operations have focussed on the clearance of wax and salt build-up in the production tubing of many wells. A more aggressive programme in the period has yielded improved oil production above expectations. Production facilities Operations at the main production facility and the LPG plant continued smoothly through the year. Work continues on plant optimisation, re-routing flowlines to reduce back pressure, and wax clearance of flowlines to enhance production from the available well stock. Elizavetovskoye field Elizavetovskoye production licence The Elizavetovskoye gas field commenced production in January. A new production licence covering an area of 70.8 square kilometres was awarded in the third quarter. It is valid for 20 years and replaces the existing 5-year exploration licence which had been due to expire at the fourth quarter. Production Average production from the Elizavetovskoye field in the period was 1,511 boepd comprising 8.9 MMcfd of gas and 20 bpd of condensate. There was no production in Drilling and development activity The Skytop rig drilled well E-301 at the end of 2013 and the well was completed in early. The second well E-302 was completed in March and the third well E-303 was completed in September. Both E-301 and E-302 were completed in the Permian A2 carbonate reservoir and are each producing at stabilised rates of around 5 MMcfd and 10 bpd condensate. The third well E-303 on the field targeted the deeper Carboniferous G7 to G12 sandstone reservoirs and was drilled to a total depth of 4,406 metres. It was initially completed in the G7-12 sandstone reservoirs only. Production from the deeper reservoirs, whilst steady, is not economic in the current punitive production tax regime in Ukraine. Consequently, following additional perforations in the shallower A2 carbonate reservoir and acid treatment, comingled production with the G7-12 sandstone reservoirs was 5.2 MMcfd of gas with 18 bpd of condensate. The 145 sq. km 3D seismic programme was completed in early March and interpretation completed in August with the data being used to refine further drilling locations and aid the updating of the field reserves. The early production facility ( EPF ) was completed at the end of 2013 and took first gas from the E301 well in January. It has subsequently been upgraded with the doubling of its capacity from 15 MMcfd to 30 MMcfd to cater for the recently revised hydrocarbon dew point specifications in the export pipeline. Compression has now also been installed to ensure maximum possible input to the export line. Zaplavskoye exploration licence activity Following the earlier success of the two exploration wells Z-04 and Z-05 in the northwest of the licence, attention has been focussed on identifying new prospects in the area using data from the recent 3D seismic acquisition programme and logs from the historic well stock. Amplitude analysis of the Visean sandstones has already contributed to good development drilling and recompletion results in the Novo-Nikolaevskoye field, and ongoing amplitude studies indicate further potential for Visean V25/26 sandstone traps in addition to more conventional Devonian sandstone and Visean carbonate structural closures. Up to seven new prospects or leads have been identified with prospective resources ranging from 5 to 60 Bcf

47 Strategic report 2-79 Governance Financial statements unrisked with the aim of working these up for future drilling. The Zaplavskoye exploration licence surrounds four of the Company s adjoining production licences in Poltava on their western, southern and eastern sides and was due to expire at the end of. The Ukrainian authorities have extended the licence term by a further five years with an area to the south of the licence being relinquished and an area to the west of the licence added. The licence area now totals 173 square kilometres and is valid until 31 December Russia Ukraine Russia Rostov-on-Don Krasnodar REPUBLIC OF ADYGEA Maikop Black Sea Koshekhablskoye field Koshekhablskoye licence area and major pipeline KURGANINSK Gas pipeline Gas field Licence area Roads 0 10 km Koshekhablskoye licence Production Average production from the Koshekhablskoye field in was 5,109 boepd comprising 30.3 MMcfd of gas and 51 bpd of condensate, a 1% increase on the average for The production figures are steady, but are below expectations due to the loss of predicted additional production from well-27 and well-05 in the period. Workover and well stimulation activity Production from crestal well-20 in the period ranges from MMcfd, subject to routine acid treatment, while production from the north flank well-25 ranges from MMcfd. Both wells have benefited from coiled tubing acid treatments and it appears that a 4 to 6 month cycle of treatment is the most cost effective. The deep east flank well-15, originally thought to have been tight, now cycles from MMcfd with fluid build-up being cleared periodically. Early in the period, it was observed that pressure had started to build in the annulus of well-27 and there appeared to be communication with the casing annuli. The well was diverted to the flare pit to minimise the pressure on the casing and a coiled tubing unit mobilised to kill the well. This operation was completed successfully in the second quarter and a rig is now on location preparing to restore the pressure integrity of the well and replace the tubing. Completion and restoration of production is expected in the third quarter of At the same time, drifting of the tubing in the newly completed well-05 indicated an obstacle at around 2,600m which appeared to be a joint of damaged tubing. The well was suspended and the tubing will be replaced as soon as practicable. Facilities The Gas Processing Facility ( GPF ) has been operating comfortably within its current design capacity of 40 MMcfd.

48 JKX Oil & Gas plc Annual Report 46 Operational review The plant performance has been reviewed and work is underway to increase the capacity to 60 MMcfd. This entails changes to some of the vessels, replacement of some valves and pipework and improvements to the operating procedures. A Russian design institute has been contracted to prepare the submissions for government approval which is scheduled for the second quarter of Plant modifications are currently scheduled for late May. Licence obligations The obligation to re-enter and sidetrack well-09 to re-drill the full Callovian reservoir sequence and, if successful, test the Callovian V unit has been deferred until Georgievskoye exploration licence Our wholly-owned Russian subsidiary, Yuzhgazenergie LLC ( YGE ), was awarded the sq. km Georgievskoye exploration licence in The largest part of the licence lies adjacent to, and immediately south of the Koshekhablskoye production licence but a significant part of it also runs to the northwest of the Koshekhablskoye field as well as covering the western and eastern flanks of the field. Recovery, reprocessing and interpretation of all the existing 2D seismic is complete, the original 3D cube has been reprocessed and evaluation of the data is complete. Disappointingly, the few leads identified are deep and, under current economic conditions, uneconomic to drill. Consequently the decision to relinquish the licence has been made. Hungary Licences In November JKX exchanged its 25% beneficial interest in a 15.6 sq km section of the Sarkad Mining Plot for a further 50% interest in the Hernad I & II Exploration Licences and the Hajdunanas IV Mining Plot. JKX now operates these three licences with 100% equity and is developing a work programme to restart production and complete exploration activities. Hajdunanas field Production Production from the Hajdunanas and Gorbehaza fields (JKX now 100%) was suspended in JKX has taken full ownership of the licences in an asset swap and is currently preparing plans for further development of the Hajdunanas field. Hernad licences Exploration and appraisal JKX now holds a 100% equity interest in the two Hernad licences in the northern Pannonian Basin. Although these are due for relinquishment in 2015, the Company is in discussion with the Hungarian authorities with the aim of obtaining a number of mining plots, which are effectively production licences, to permit further appraisal of the most promising discoveries in the licences. Sarkad I Mining Plot JKX has transferred its 25% interest in the 15.6 sq. km farm-in area around the Nyekpuszta-2 gas condensate discovery well to its joint venture partner, in exchange for 100% ownership of the Hernad/Hajdunanas licences. Turkeve IV Mining Plot The Turkeve IV Mining Plot (JKX 50%) of 10 sq. km has been approved for the productive area around the Ny-7 well. The operator continues to look for an economic solution to produce from the Ny-7 well where the high CO 2 content has prevented direct access to the pipeline network. Slovakia Exploration JKX continues to hold a 25% equity interest in the Svidnik, Medzilaborce and Snina exploration licences in the Carpathian fold belt in north east Slovakia. Following a change in operator, the Cierne-1 exploration well has been deferred. A programme of magneto-telluric geophysical surveys combined with seismic re-interpretation has led to the identification of a number of shallower prospects across the licences and drilling is planned on two of these in the first half of Bulgaria Exploration JKX s withdrawal from the Provadia licence became effective in January and the Company no longer has any licence interests in Bulgaria. Martin Miller Technical Director

49 Strategic report 2-79 Governance Financial statements Reserves Total 2P reserves 97.7MMboe Russia 70% Ukraine 30% Reserves replacement ratio 196% Group reserves have increased by 7.1 MMboe, after Group production of 3.6 MMboe Total remaining reserves as at 31 December 31 December 2013 Revisions Production 31 December Total Oil MMbbl (0.4) 3.4 Gas Bcf (19.5) Oil + Gas MMboe (3.6) 97.7 Ukraine Oil MMbbl 3.1 (0.0) (0.3) 2.8 Gas Bcf (15.2) (8.4) Oil + Gas MMboe 33.1 (2.5) (1.7) 28.9 Russia Oil MMbbl (0.0) 0.7 Gas Bcf (11.1) Oil + Gas MMboe (1.9) 68.8 Hungary Oil MMbbl 0.1 (0.1) Gas Bcf 1.8 (1.8) Oil + Gas MMboe 0.4 (0.4) At 31 December we updated our estimation of the Group s proved and probable reserves. The estimations have been reviewed by an independent engineer, DeGolyer & MacNaughton.

50 JKX Oil & Gas plc Annual Report 48 Principal risks and how we manage them Our framework of internal controls is supported by a culture that promotes good risk management processes and which underpins the success of delivering on our strategic priorities; we continue to develop our risk management systems on that basis. Responsibilities The Board is responsible for the Group s system of internal control and risk management systems and for reviewing their effectiveness. Risk management process A risk management process, which involves the Risk Committee, has been in place throughout and up to the date of approval of this Annual Report. The process is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable, not absolute, assurance against material misstatement or loss. Risk Committee The Risk Committee assists the Executive Directors in the operation and implementation of the risk management process, and provides a source of assurance to the Audit Committee that the process is operating effectively. This approach aims to actively manage risk in a transparent and accountable way. The Risk Committee meets at least three times a year and reports into each Audit Committee meeting. Risk assessment The Board monitors the risk profile of the Group using four risk categories: 1. External 2. Financial 3. Strategic 4. Operational The Board acknowledges that it will be subject to residual risk in pursuit of achieving its strategic priorities even after mitigating actions. Risk Committee work in At the Group level, work continued with the Audit Committee to review the overall process of business risk management and to validate the risk register. This resulted in increasing the analysis and mitigation plans for the highest risks. In addition the Risk Committee introduced Risk Velocity as a factor in grading the identified risks which is explained as part of our Risk management framework below. At the subsidiary company level: we established local Risk Committees at our operations in Ukraine and Russia and provided local training to implement regular Risk Committee meetings there. This pushed down the risk identification and management process to our local Ukrainian and Russian operations and ensured greater visibility between the risks associated with delivering the Board s strategic priorities and our activities on the ground; we incorporated the output from our Ukrainian and Russian Risk Committee meetings, including their updated Risk Registers, into the Group s Risk Committee meetings; and representatives from our Ukrainian and Russian Risk Committees attended each of the Group Risk Committee meetings to expand on the risks identified locally and their related mitigation plans. Strategic objectives (reminder) 1 Profitable production growth 2 Oil and gas reserves growth 3 Operating safely and responsibly

51 Strategic report 2-79 Governance Financial statements Risk profiles of our principal risks HIGH The graph represents our current assessment of the potential impact and likelihood of occurrence of each of the principal risks noted below Potential impact K L H F G C I F I D C E A,B J J A,B LOW Likelihood of occurrence and risk velocity HIGH What is the risk External risks Risk profile KPIs affected Change from 2013 Strategic objective impacted Responsibility Geopolitical Ukraine A Return on average capital employed 1,2 The Board 52 Geopolitical Group B Return on average capital employed 1,2 The Board 52 Tax legislation C Production costs 1 Chief Executive 54 Return on average capital employed Commodity prices D Gas realisations 1 Finance Director 54 Foreign exchange exposure E Return on average capital employed 1 Finance Director 56 Financial risks Liquidity F Return on average capital employed 1,2 Finance Director 56 Strategic risks Over exposure to a single market G Return on average capital employed 1,2 Chief Executive 58 Investment decisions H Return on average capital employed 1,2 The Board 58 Operational risks Reservoir performance I Production volumes 1,2 Technical Director 58 Reserves Reserves replacement J Reserves replacement ratio 2 Technical Director 60 Environmental, asset integrity K All Injury Frequency Rate 3 Chief Executive 60 and safety incidents Lost Time Injuries Environmental Incident Frequency Rate Bribery and corruption L Return on average capital employed 1 The Board 60 < < I < < < I I I < I I Page

52 JKX Oil & Gas plc Annual Report 50 Principal risks and how we manage them Risk management framework The key elements of the risk management process are as follows: Risk identification risks faced by the Group are identified by senior management and risk owners, who periodically review the risks to ensure that the risk management processes and controls in their area are appropriate and effective, and that new risks are identified. Risk assessment the consequence and likelihood of each risk materialising is assessed. Risk registers are used to document the risks identified, the level of severity of its impact, and probability of occurrence, ownership and mitigation measures for each risk. During the year, the Risk Committee built in a Risk Velocity measure into its assessment of the impact of each risk. Risk Velocity is the time to impact and is as an estimate of the time frame within which a risk may occur. Risks are then logged with reference to consequence rating, multiplied by the likelihood plus velocity rating as shown below: The Board has completed a robust assessment of the most significant risks and uncertainties which could impact the business model, longterm performance, solvency or liquidity, and the results are summarised below. Also presented is an assessment of the likelihood of each risk occurring, its potential impact should it occur, the Key Performance Indicators ( KPIs ) and strategic priorities most affected as each risk increases, how each risk is being managed or mitigated and whether the overall business risk has increased or decreased since the last Annual Report. risk update The principal risks facing the Group have increased from those detailed in the 2013 Annual Report, mainly due to events in Ukraine and the decline in international oil prices. Our overall assessment of those risks has changed in as follows: Geopolitical risk has increased significantly in Ukraine as the heightened political tensions in the region and the military conflict in the east of Ukraine continue. The military conflict has not impacted the Group s operations to date but the situation continues to be closely monitored. Risk assessment table Impact Likelihood + velocity Insignificant Minor Moderate Major Catastrophic Highly likely Very high Very high LOW MED HIGH HIGH HIGH Likely High High LOW MED MED HIGH HIGH Possible Medium Medium LOW MED MED MED HIGH Likelihood Unlikely Low Low LOW LOW MED MED MED Rare Velocity Very low Very low LOW LOW LOW LOW LOW High risk Medium risk Low risk

53 Strategic report 2-79 Governance Financial statements In an attempt to fund Ukraine s deficit, its external debt and the ongoing military conflict, the government issued three decrees in the second half of which were issued without warning and were effective immediately for a number of months. These had the effect of: doubling the rate of gas production tax until 31 December 2015; implementing currency restrictions, initially until 1 December, and subsequently extended to 2 March 2015 and again to 3 June 2015; and directing major industrial gas buyers to acquire their gas solely from the Ukraine state-owned gas company from 1 December to 28 February The associated risk to the Group s future gas sales volumes, prices and taxes in Ukraine has therefore increased as a result of these decrees which remain in place and continue to have a significant adverse financial impact on the Group and liquidity. As a result of the decrees, the Board has suspended its planned 2015 capital investment programme in Ukraine until the economic parameters for investment improve, which increases the risk of declining production from our mature fields there. In addition the commodity price risk has increased following the halving of global oil prices during. We sell the oil that we produce at prices determined by the global oil market. The price at which we can sell our gas in Ukraine is set quarterly according to the Russia-Ukraine gas border price which in turn is based on the price of a basket of oil-related products. The reduction in global oil prices has therefore reduced the regulated gas price in Ukraine at which we can sell our gas. Foreign exchange risk has increased following the continued gradual devaluation of the Ukrainian Hryvna through and, more recently, the sharp devaluation of the Russian Rouble. As a result, in US$ terms, the Group s operating costs and Russian gas sales value decreased, in addition the Group reported a foreign exchange loss of $5.7m in the income statement, a $5.7m foreign exchange loss in the current tax charge related to the revaluation of the Hryvnadenominated prepaid tax and a devaluation of the Group s net assets of $130.3m in the statement of comprehensive income.continued volatility in the Rouble and Hryvna will affect the US$ value of future profits, assets and cash flows of the Group, and may impact future investment decisions in Russia and Ukraine. Reserves replacement risk has increased this year as the decline in international oil and gas prices has resulted in previously identified reserves becoming uneconomic at lower oil prices. In addition, key projects planned that may have materially enhanced the Group s reserves and production at the Elizavetovskoye and Rudenkovskoye fields in Ukraine, and at our deeper Callovian reserves in Russia, may no longer be commercial due to the local investment parameters, combined with lower future oil and gas price expectations. The principal risks set out in the following tables are not set out in any order of priority, are likely to change and do not comprise all the risks and uncertainties that the Group faces.

54 JKX Oil & Gas plc Annual Report 52 Principal risks and how we manage them What is the risk? Likelihood + Velocity Impact Change from 2013 KPI affected External risks Geopolitical Ukraine Description: 81% of the Group s revenues and all of its profits from operations are derived from its activities in Ukraine. Increased political and social tensions started in 2013 in Ukraine and have continued in and Military conflict has continued through in the east of Ukraine. The Group s facilities are located in the Poltava region which is in the centre of the country. Operationally the Group has been unaffected to date. Ukraine has a high current account deficit funded by foreign borrowings, while foreign reserves were reported to be at their lowest level for a decade, reported to be at less than US$7 billion as of 21 January and will probably need additional external financial support in In an attempt to fund the deficit, the external debt and the ongoing military conflict, in the second half of the year, three government decrees were issued without warning and that were effective immediately (see page 12), and which remain in place. These decrees continue to have a significant adverse financial impact on the Group and its liquidity (see Liquidity Risk page 56). Impact: If the country does not peacefully resolve the current conflict as well as secure additional financing, there is a risk it may default on its obligations and/or introduce new decrees to increase government funds from independent companies in Ukraine. This would reduce the Group s profits and cash flows. Geopolitical Group Description: Most of the Group s operations and more than 97% of our oil and gas assets are located in Ukraine and Russia and the gas that we produce is sold into their domestic markets. Both countries display emerging market characteristics. HIGH HIGH HIGH HIGH < < Return on average capital employed Return on average capital employed This means that the legislation is constantly evolving as the government attempt to manage the economies and business practices regarding taxation, banking operations and foreign currency transactions. Other risks inherent in conducting business in an emerging market economy include, but are not limited to, volatility in the financial markets and the general economy. Impact: The Group s operations and financial position may be adversely affected by these uncertainties.

55 Strategic report 2-79 Governance Financial statements Strategic priority impacted How do we manage it? Responsibility Further information 1 Profitable production growth 2 Oil and gas reserves growth To date, our operations have not been directly impacted by the unrest in Ukraine or the military conflict in the east. The combination of Ukrainian Government-imposed restrictions on selling its gas to industrial clients, the punitive rate of gas production tax and the foreign exchange controls has required the Group to suspend its planned 2015 capital investment programme in Ukraine until the economic parameters for investment improve (see page 12). The Board frequently reviews announcements by national and local governments in Ukraine and Russia on their future plans with regard to certain economic factors, in particular those that impact future oil and gas prices and related costs and taxes. The Group engages established legal, tax and accounting advisers to assist the Group in complying with applicable statutory, employment and environmental regulation and laws, and to ensure its tax and duty obligations are properly assessed and paid when due. The Board Chairman s statement P14 We also take all reasonable measures to reduce and limit our commercial exposure in Russia and Ukraine through the use of, for example, careful selection of contracting parties, advanced payments and careful cash management. 1 Profitable production growth The Board and management recognise the constant need for expert advice to ensure full compliance with local and international regulations and laws. Our strategy is to employ skilled local staff working in the countries of operation and provide them with on-going training opportunities. The Board 2 Oil and gas reserves growth We ensure that good relationships are maintained with all key stakeholders in our significant assets in Ukraine and Russia through regular dialogue and on-going communications locally.

56 JKX Oil & Gas plc Annual Report 54 Principal risks and how we manage them What is the risk? Likelihood + Velocity Impact Change from 2013 KPI affected Tax legislation Description: The Group is exposed to changes in local tax laws, particularly in Ukraine. In Ukraine, PPC has at times sought clarification of their status regarding a number of production related taxes. PPC continues to defend itself in court against action initiated by the tax authorities regarding production related taxes for certain periods through to 31 December 2010 (see note 27 to the financial statements). The Group is exposed to the Russian mineral extraction tax ( MET ), calculated using production volumes. MET rates are changed periodically by the Russian government to encourage new investment but also to support the government s financial needs. MED MED Production costs Return on average capital employed The Ukrainian and Russian governments are playing an increasingly active role in the oil and gas industry in regulation, protectionism and increased taxation. Emerging markets sometimes bring in new tax laws which are subject to varying interpretations and changes, which may be applied retrospectively. Other risks include a weak judicial system that is susceptible to outside influence. Impact: Management s interpretation of tax legislation may at times not coincide with that of the tax authorities. As a result, the tax authorities in the countries of operation may challenge transactions which could result in additional taxes, penalties and fines which could have a material adverse effect on the Group s financial position and results of operations. Commodity prices Description: We are exposed to international oil and gas price movements and political developments in Russia and Ukraine. MED MED < Gas realisations In Russia and Ukraine, all our gas is sold in local industrial markets and the government control the gas prices at which we can sell our gas. In Ukraine, the regulated gas price is set quarterly and is based on a border price determined by a long-term gas purchase contract between Ukraine and Russia, which in turn is based on the price of a basket of oil-related products. Following a temporary reduction in gas prices charged by Gazprom (Russia) in December 2013, the regulated industrial gas price in Ukraine was reduced by 10% for Q1 but the discount was removed in Q2. In addition oil prices halved during and remain low, at levels not experienced since 2009 which has reduced the regulated gas price in Ukraine. We sell the oil that we produce at prices determined by the global oil market. The Group s policy is not to hedge commodity price exposure on oil, gas, LPG or condensate and therefore any change in prices will have a direct effect on the Group s trading results. Impact: A period of low oil and/or gas prices has led to impairment of the Group s oil and gas assets (see note 5 to the financial statements) and may impact the Group s ability to support its long-term capital investment programme (see Liquidity Risk below) and reduce shareholder returns including dividends and share price. Previous oil and gas price increases have resulted in increased local taxes, cost inflation and more onerous terms for access and to produce resources. As a result, increased oil and gas prices may not improve the Group results.

57 Strategic report 2-79 Governance Financial statements Strategic priority impacted How do we manage it? Responsibility Further information 1 Profitable production growth The Board continues to receive legal advice that the case against PPC regarding calculation and payment of various production related taxes to 31 December 2010 has little legal merit under Ukrainian law for legal and technical reasons and the three year statute of limitation. In addition the Company has commenced international arbitration proceedings against Ukraine under the Energy Charter Treaty to recover Rental Fees of more than $180m paid by PPC since 2011 (see note 27 to the financial statements). Chief Executive Financial review P36 The Group takes regular advice on tax matters from Ukraine tax experts to comply with all known requirements and to actively defend its legal position. The Group maintains a transparent and open relationship with local, regional and national tax authorities in Ukraine and Russia. The Group s financial information does not include any adjustments to reflect the possible future effects on the recoverability, and classification of assets or the amounts or classifications of liabilities that may result from these tax uncertainties. 1 Profitable production growth Except during the period when our gas sales were restricted by the Ukrainian government (from 1 December to 28 February 2015), most of our gas sold in Ukraine is sold to Shell through market related contracts. This minimises exposure to abrupt price movements, ensuring sales are as closely matched as possible, in terms of timing and volume, to production. Finance Director Strategic report P8-12 The balance of oil and gas production in Ukraine is sold by way of auctions, conducted with a frequency aimed to achieve as close as practicable the aforementioned matching principle. In Russia, we sell our gas to a local gas trading company through a gas sales contract which remains in place through The sales price was negotiated using current and expected future oil and gas prices and production volumes. The Group does not usually enter into hedge agreements unless required for borrowing purposes as may occur from time to time. The Board continues to monitor announcements by governments in Ukraine and Russia regarding the gas price charged by Gazprom (Russia) to Ukraine, its impact on the Ukrainian industrial gas price and its sustainability. In Russia, there was no official increase in the regulated maximum industrial price in, however the Group was successful in achieving a 4.2% increase in the gas sales price from our buyer. This is equivalent to the increase in the price of gas to Russian consumers.

58 JKX Oil & Gas plc Annual Report 56 Principal risks and how we manage them What is the risk? Likelihood + Velocity Impact Change from 2013 KPI affected Foreign exchange exposure Description: The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to Ukrainian Hryvna and the Russian Rouble. The US Dollar is the currency which influences the majority of the Group s revenues and capital costs. HIGH LOW < Return on average capital employed Although a proportion of costs are incurred in US Dollars, most operating costs are influenced by the local currencies of the countries where the Group operates, principally Ukrainian Hryvna and Russian Rouble. During the year, the Hryvna and Rouble devalued by 97% and 72% respectively, against the US Dollar. The average exchange rate for the Hryvna and Rouble for was UAH11.4/$ and RR36.6/$ compared to UAH8.1/$ and RR31.5/$ in As a result, the Group s operating costs in US$ terms including the cost of production, operating and general admin costs decreased however the Group reported a foreign exchange loss of $5.7m in the income statement as a result of the devaluation of the Rouble and Hryvna, and a $5.7m loss in the current tax charge as a result of the revaluation of the Hryvna-denominated prepaid tax at the local subsidiary. The devaluation in the Rouble reduced the carrying value of the assets held in Russia, resulting in the Group s net assets decreasing by $130.3m. Impact: Appreciation of the Ukrainian Hryvna or depreciation of the Russian Rouble against the US Dollar or prolonged periods of exchange rate volatility may adversely affect the Group s business results. Financial risks Liquidity Description: 81% of the Group s revenues and all of its profits from operations are derived from its activities in Ukraine. The Ukrainian Government issued a decree on 29 November directing major industrial buyers to acquire their gas solely from the Ukraine state-owned gas company Naftogaz during the three month period to 28 February HIGH HIGH < Return on average capital employed The Group s gas sales in Ukraine reduced to approximately 50% of production capacity whilst the sales restriction remained in force and necessitated the shut-in of a proportionate level of gas production. In addition, an increase in Ukrainian gas production tax from 28% to 55% has been incorporated into the Ukrainian tax code for 2015, and currency control restrictions in Ukraine were extended to 3 June 2015 (see note 37 to the Group financial statements). The Board has now suspended its planned 2015 capital investment programme in Ukraine until the economic parameters for investment improve. Suspending investment in appraisal and development activities in Ukraine and shutting-in gas production will have a significant adverse impact on the Group s future oil and gas production, sales, profits, cash flow, liquidity and working capital and has resulted in the delay and cancellation of capital projects. Future capital investments in exploration, appraisal and development activities become more difficult to predict and finance as they are driven by the results of the Group s reduced ongoing exploration and development programmes. Impact: The risks relating to currency restrictions and restrictions to gas sales imposed by the Ukrainian Government are material uncertainties that may cast significant doubt on the Group s ability to meet its financial obligations as they fall due and continue as a going concern. In addition, deviations in the timing and quantum of exploration and development expenditures can expose the Group to funding challenges. Unplanned well remediation activity at our Russian field can increase capital expenditure and reduces revenue whilst the wells remain suspended thereby reducing available funds for investment in other projects.

59 Strategic report 2-79 Governance Financial statements Strategic priority impacted How do we manage it? Responsibility Further information 1 Profitable production growth Foreign exchange risk arises in the Group from commercial transactions, financing arrangements and assets and liabilities denominated in foreign currencies and net investments in foreign operations. We attempt to match, as far as practicable, receipts and payments in the same currency and also follow a range of commercial policies to minimise exposures to foreign exchange gains and losses. These include minimising exposure to the Hryvna denominated sales, which continue to account for more than 80% of Group revenues, and the Rouble-based operating and capital costs. Finance Director Financial review P36 All our gas sales and most of our costs in Russia are denominated in Roubles which mitigates the Group s exposure to any Rouble/US Dollar fluctuations, however the recent devaluation of the Rouble has reduced the value of Group revenues and costs which are reported in US$. The Group s normal policy is not to hedge foreign exchange risk but to continually monitor internal and external guidance on expected future currency exchange movements and manage the currency of the Group s major cash flows and holdings to minimise our potential exposure. 1 Profitable production growth Liquidity risk has increased significantly during the year due to the Ukrainian government decrees restricting our sales, doubling our production taxes and implementing currency controls (see note 2 to the Group financial statements). The Board manages liquidity risk by attempting to maintain an adequate level of liquidity in the form of readily available cash or committed credit facilities at all times. Finance Director Financial review P36 2 Oil and gas reserves growth The Group finances current exploration and development activities with existing cash balances and operating cash flow generated from the sale of gas, condensate, LPG and crude oil production. The Group also has a $15m working capital facility with Credit Agricole which currently expires in June Management monitors rolling forecasts of the Group s liquidity on the basis of expected cash flow to ensure that any remedial action can be taken with as much lead time as possible. In 2015 the Board made immediate strategic changes to streamline the organisation in the most practical way possible, and without compromising safe, reliable operations. A downsizing programme has commenced with staff and cost reductions in all key operational and administrative areas. This exercise will continue should the need arise and the Company believes further cost reductions can be identified. Through these reductions, the Group maintains a competitive cost base, which enables it to produce and remain profitable during periods of declining commodity prices. The timing and nature of almost all of the Group s exploration and development activities are discretionary and therefore the Group prioritises these activities according to the available finance. Following successful streamlining of the organisation and a cost reduction programme, as well as the availability of additional courses of action should the need arise, the Directors believe that the Company remains a going concern. Our options for additional debt financing are limited by our Ukrainian focus and our current shareholder base.

60 JKX Oil & Gas plc Annual Report 58 Principal risks and how we manage them What is the risk? Likelihood + Velocity Impact Change from 2013 KPI affected Strategic risks Over exposure to a single market Description: Our portfolio extends to 12 licences or licence interests in four different countries and the Group s focus continues to be our projects in Russia and Ukraine. We own 100% of all our oil and gas assets in Ukraine and Russia. Our strategy is focused on the development of these two wholly-owned production bases and exploration portfolios. MED MED Return on average capital employed The Group s success in monetising its Ukrainian and Russian assets underpins the Group s long-term value. Impact: All of the risks and rewards associated with the commercialisation of our Ukrainian and Russian licences are attributable to the Group alone and therefore the Group is vulnerable to the impact of any changes in the Russian and Ukrainian operating and economic environments. Investment decisions Description: Our growth is dependent on us investing in the best options from our portfolio of oil and gas assets, which are potentially value accretive to the Company and can reduce future operating risk. In addition the Board continues to seek value enhancing production and exploration acquisitions through our business development activity. MED MED Return on average capital employed Impact: Ineffective investment modelling, selection and development could lead to investing in projects which may not be accretive to earnings, overpaying for assets, loss of value and higher capital expenditure. Operational risks Reservoir performance Description: The hydrocarbon reservoirs that we operate in Ukraine and Russia generate the cash flow that underpins the Group s growth. These reservoirs may not perform as expected, exposing the Group to lower profits and less cash to fund planned development. MED MED Production volumes Production from our mature fields at the Novo-Nikolaevskoye Complex in Ukraine require a high level of maintenance to maintain production at recent levels. Production from our shallower wells at the Elizavetovskoye field has been higher than originally anticipated. Production from the well drilled in to the deeper reservoir was steady, but not economic in the current punitive production tax regime; the well was successfully completed to the shallower carbonate reservoir. In Russia, acidization of wells and other well maintenance procedures to increase stabilised production continued through the year however well integrity issues arose requiring two wells to be shut-in. Impact: Accurate reservoir performance forecasts from fields in Ukraine and Russia are critical in achieving the desired economic returns. These performance forecasts are also used to determine the availability and allocation of funds for investment into the exploration for, or development of, other oil and gas reserves and resources.

61 Strategic report 2-79 Governance Financial statements Strategic priority impacted How do we manage it? Responsibility Further information 1 Profitable production growth The Board produces an annual business plan supported by a rigorous budgeting procedure which is reviewed monthly against current information. Periodically the Board updates the Group s 3-Year Plan to ensure that the plan remains relevant and material risks, including asset concentration, and sensitivities have been considered. The Board Chief Executive s statement P17 2 Oil and gas reserves growth Commercial production from our Russian gas plant diversified our producing assets, which spread the geographical risk away from the previously very high concentration which was solely in Ukraine. We continue to proactively seek and investigate value-enhancing production and exploration acquisitions and farm-outs/ins through our business development managers across central and eastern Europe. We have regular, open and transparent communications with all stakeholders to ensure there is a clear understanding of the Group strategy, its risks and the potential rewards. 1 Profitable production growth 2 Oil and gas reserves growth The Board reviews, prioritises and approves all significant investment decisions after careful consideration and uses financial modelling and technical analysis from our specialist in-house teams to prioritise its investment opportunities. The net present values and internal rates of return for each project are considered as part of the review process. In Ukraine, the key investment decisions during the year have been the balancing of new investment in development projects to enhance our short-term production against the sudden deterioration in economic parameters for investment due to government decrees (see page 12). In addition, the Rouble devaluation and lower than expected gas price increase in Russia in requires the Company to prepare more detailed analysis of potential returns from investments prior to approving well maintenance and other capital expenditure to increase stabilised production. The Board Chairman s statement P14 1 Profitable production growth 2 Oil and gas reserves growth The design and construction of our Elizavetovskoye wells, plant and processing facilities was completed by industry specialists and after months of planning by our drilling, construction and subsurface teams. The monitoring of the Elizavetovksoye field performance continues on a daily basis with production data being analysed by our in-house technical expertise. This could support further field development, when more favourable economic parameters for investment in Ukraine return. Our processing of the Elizavetovskoye field data from our first well has resulted in production rates from our second well being in excess of expectations. Using our specialist engineers, we anticipate that tubing replacement at well-27 in Russia to resolve well integrity problems will be completed Q3 2015; this should restore plateau production to levels achieved through Technical Director Operational review P42 Our subsurface specialists and industry-recognised personnel are part of the daily monitoring and reservoir management process of our fields in Ukraine and Russia. Our London-based in-house team of drilling, engineering and subsurface experts continue to be closely involved in the remediation work in Russia, well prioritisation on mature fields in Ukraine and our other field development plans. Our team is supported by skilled and experienced local technical teams, in addition to external consultants, when necessary; this interaction is key to mitigating our reservoir performance risk.

62 JKX Oil & Gas plc Annual Report 60 Principal risks and how we manage them What is the risk? Likelihood + Velocity Impact Change from 2013 KPI affected Reserves replacement Description: Future oil and gas production depends on our ability to access new reserves. Future reserves replacement depends on geological success through exploration and appraisal work and/or asset acquisitions through negotiations with governments and other owners of reserves. MED HIGH < Reserves replacement ratio The decline in international oil and gas prices has resulted in previously identified reserves becoming uneconomic at lower prices. Key projects previously planned in Ukraine that could have materially enhanced the Group s reserves and production may no longer be commercial due to increases in production tax rates and sales restrictions imposed, combined with lower future oil and gas price expectations. In Russia, the investment required to materially grow reserves there will be dependent on an improvement to the local regulated gas prices and the Rouble-US$ exchange rate. Impact: Prolonged low oil and gas prices, failures in exploration and lack of asset transactions to access new potential reserves could slow our oil and gas production and replacement of reserves. Environmental, asset integrity or safety incidents Description: We are exposed to a wide range of significant health, safety, security and environmental risks influenced by the geographic range, operational diversity and technical complexity of our oil and gas exploration and production activities. LOW HIGH All Injury Frequency Rate During, a pressure build in the annulus of well-27 at the Koshekablskoye field in Russia required a coiled tubing unit to be mobilised to kill the well. The operation was completed successfully. Impact: Technical failure, accidents, natural disasters and other adverse conditions where we operate, which could lead to injury, loss of life, damage to the environment, loss of containment of hydrocarbons and other hazardous material, as well as the risk of fires and explosions. Failure to manage these risks effectively, could result in and/or loss of certain facilities, with the associated loss of production, or costs associated with mitigation, recovery, compensation and fines. Lost Time Injuries Environmental Incident Frequency Rate Poor performance in mitigating these risks could also result in damaging publicity for the Group. Bribery and corruption Description: The UK Bribery Act places onerous requirements on UK companies to demonstrate the effectiveness of their anti-bribery measures. Impact: Failing to implement adequate systems to prevent bribery and corruption could result in prosecution of the Company and its officers. MED HIGH Return on average capital employed

63 Strategic report 2-79 Governance Financial statements Strategic priority impacted How do we manage it? Responsibility Further information 2 Oil and gas reserves growth The Board manages this risk using proactive project planning on existing licences and through extensive business development activity across central and eastern Europe. Assuming the economic parameters for investment in Ukraine improve, key projects that may enhance the Group reserves and production include the assessment of our prospects on the Zaplavskoye exploration licence and the full development of our Rudenkovskoye field. The Ukrainian projects are only likely to add to Group reserves if tax rates are reduced to normal levels. Technical Director Chief Executive s statement P17 In Russia the assessment of our deeper Callovian reserves could materially increase Group reserves. We use experienced and skilled business development managers for each of the regions in which we operate to identify and pursue new potential opportunities to build our reserves and cash flow. For exploration, effective peer reviews by our various technical staff and thorough diligence on new opportunities mitigates some of the risk of failure. 3 Operating safely and responsibly We treat health, safety and the environment as a priority of the Board and have a Londonbased HSECQ manager who reports directly to the Chief Executive Officer. Supported by the Board, the Group HSECQ manager is responsible for maintaining a strong culture of health, safety and environmental awareness in all our operational and business activities. Chief Executive Corporate Social Responsibility P62 The HSECQ Manager reports to the Board on a monthly basis with details of our performance. Our locations in Ukraine, Russia and Hungary all have a dedicated HSECQ Team of local employees, led by an HSECQ Manager who reports to the HSECQ Director for that particular region. All locations have HSE Management Systems modelled on the ISO 9000 series, OHSAS and ISO These locations are regularly visited and reviewed by the Group HSECQ manager. The Board participate in an annual review of the Group s HSECQ performance and the planning of continuous improvement initiatives and objectives for the coming year. Appropriate insurances are maintained to manage the Group s financial exposure to any unexpected adverse events arising out of the normal operations. 1 Profitable production growth We prohibit bribery and corruption in any form by all employees and by those working for and/or connected with the business. Our Group Compliance Manager is responsible for anti-bribery and corruption matters and, with the support of the Board, to implement an Annual Compliance Plan. The Board Corporate Social Responsibility P62 The compliance programme includes components which recognise the requirements of the UK Bribery Act 2010 and which focus on training, monitoring, risk management and due diligence. We annually refresh our Global Code of Conduct and Statement of Ethics which is compliant with the UK Bribery Act and its guidance and communicate this throughout the Group. Employees are expected to report actual, attempted or suspected bribery to their line managers or through our independently managed confidential reporting process, which is available to all employees as well as third parties. We will continue to regularly review the operation and impact of the Group s policies and procedures to ensure a consistent application of the Global Code of Conduct in all business activities and throughout the supply chain processes.

64 JKX Oil & Gas plc Annual Report 62 Corporate Social Responsibility ( CSR ) review Our understanding JKX is committed to understanding, monitoring and managing the social, environmental and economic impact to enable it to contribute to society s wider goal of sustainable development. The Company s aim is to demonstrate these responsibilities through its actions and within its corporate policies. JKX has developed a deep sense of purpose which is reflected in its core values. CSR requires accountability by all leaders, individuals, organisations, stakeholders, customers, and community members. Responsible leaders must have the highest integrity and a deep understanding of sustainable development. They must remain committed to building enduring organisations in association with others. The Engineering and Construction ( E&C ) department at Poltava Petroleum Company being awarded ISO 9001 accreditation From left to right: Alex Krivenko, PPC Operations Manager; Sergey Ryzhiy, E&C Foreman; Oksana Leshchenko, E&C Lead Engineer/Quality Officer; Andrey Pruglo, E&C Lead Engineer; Dmitriy Fefelov, Bureau Veritas Certification Commercial Manager; Aleksandr Lysenko, Bureau Veritas Certification Lead Auditor and Consultant

65 Strategic report 2-79 Governance Financial statements Our vision What we do has an impact on the people who work for, and with us, on the planet as a whole and on the communities of which we are part. The aim is to ensure that our operations have the most positive effect, while reducing any negative effects to the absolute minimum. For JKX, CSR is about doing business ethically and in an environmentally and socially responsible manner. ISO provides guidance on how businesses and organisations can operate in a socially responsible way that contributes to the health and welfare of society. The standard has been implemented across JKX and the Company has joined the Global Reporting Initiative on Sustainability Reporting, the international guidance on social responsibility. Our approach Our approach is to act responsibly and with integrity, conducting our global business as a responsible employer, corporate citizen and neighbour, and to maintain commitment and sustainability by: Our approach is action to create alignment and to maintain commitment and sustainability by: Reducing the impact of unemployment Engaging in Continuous Professional Development Addressing inequality in recruitment, pay and promotion Creating healthier, happier and more productive employees Supporting charities and communities Helping local people into work Improving impact on the environment Acknowledging the International Labour Organisation Health & Safety principles Developing a globally responsible mind-set throughout the Group Our impact CSR forms the basis for doing business and building an entity to which both the public and staff can relate. The philosophy of making a difference is evident through the various local projects we get involved in which enables us to give back to the different communities we work with. While economics is important, the global landscape is changing. The increasing concern for environmental and social impact means that to achieve long-term success, the Company must continue looking towards the triple bottom line profit, people and planet. CSR can positively impact these three elements and is therefore aligned with our business strategy. Our CSR achievements in Environmental Incident Frequency Rate ( EIFR ) of 0.71 Maintained our ISO 9001 Quality Management accreditation Being recognised with an International Corporate Social Responsibility Silver Award at the International CSR Excellence Awards Maintaining our ISO Environmental accreditation Maintaining our OHSAS Health and Safety accreditation Established and maintained the recording and monitoring process for our greenhouse gas reporting requirements Prepared and submitted our annual report to the Carbon Disclosure Project Prepared and submitted our annual report to the Global Reporting Initiative Implemented the requirements of ISO guidance on social responsibility Prepared and submitted our annual Global Reporting Initiative report on sustainability Carried out enhanced risk assessment training for overseas staff Completed enhanced stakeholder management procedures

66 JKX Oil & Gas plc Annual Report 64 Corporate Social Responsibility review Our CSR process is Board led CSR is led by Dr Paul Davies, the Chief Executive Officer who: Provides leadership and guidance Sets the strategy and objectives Ensures that human and financial resources are available to achieve objectives Reviews management performance Identifies our values and standards Ensures that the Company s obligations to shareholders and other stakeholders are understood and met The Group s Health, Safety, Environment, Community and Quality ( HSECQ ) Manager reports directly to the CEO and is responsible for creating and maintaining the HSECQ Management System, which sets the framework for the management of the Group s non-financial impacts. The Board is provided with quarterly updates relating to the major CSR issues. A management review of all HSECQ systems is carried out every year. A full Board level review of progress was completed in December and our plans for 2015 were agreed. Local responsibility In both Ukraine and Russia we have fully trained HSECQ teams which deliver a high standard of HSECQ management and reporting. Our teams report to the General Director of the local operating company and to the Group HSECQ Manager. Within each operating company a nominated individual has executive responsibility for implementing HSECQ management systems. Local staff received extensive training in risk assessment in and, where operational requirements have required enhanced skills, HSECQ management staff have been replaced. These representatives have the added benefit of bringing a deep knowledge of local culture, regulations and working practices to the Company. Our CSR Objectives Strategy: Integrating long-term economic, environmental, and social aspects in business strategies while maintaining global competitiveness and technical excellence. Financial: Meeting shareholders demands for sound financial returns, long-term economic growth, open communication, and transparent financial accounting. Customer and product: Fostering loyalty by investing in customer relationship management, and product and service innovation that focuses on technologies and systems to deliver in economic manner over the long-term. Governance and stakeholder: Setting the highest standards of corporate governance and stakeholder engagement, including corporate codes of conduct and public reporting. Human: Managing human resources to maintain workforce capabilities and employee satisfaction through best-in-class organisational learning and knowledge management practices, and remuneration and benefit programs. CSR policies, procedures and standards Compliance with all local laws and regulations is fundamental and we aim to exceed them where possible. Our partners are expected to reach the same standards. Environment, social, governance and other risks facing the Company are included in the JKX Risk Register and KPI s are agreed each year. Our policies and standards cover: Safety reporting and incident management Exposure hours Occupational health provision and record keeping Environmental reporting and incident management including climate change Behavioural based safety programmes Continuing Professional Development and implementation Human resources practices, covering areas such as equal opportunities Handling of charitable requests Local community relations Reference to the International Labour Organisation Reporting to local Russian, Ukrainian and UK authorities Risk management programmes Business sustainability Anti-bribery and corruption Business ethics Equality and Diversity Human Rights

67 Strategic report 2-79 Governance Financial statements Employee surveys Fair Employment Practices Setting annual targets and objectives CSR targets and achievements Our strategy for has been to continue consolidating our existing systems for managing our HSECQ aims and objectives. Targets Achievements Targets 2015 Keep our AIFR to 0.40 or below Continue to beat the performance benchmark set by the International Association of Oil & Gas Producers ( IOGP ) The AIFR was 0.99 (2013: 0.25) per 200,000 hours worked 4.95 (2013: 1.25) injuries per million hours worked, the IOGP perf ormance benchmark was 1.74 per million hours for Keep our AIFR to 0.40 or below and exceed the IOGP performance benchmark Environmental Incident Frequency Rate ( EIFR ) of 0.80 per 200,000 hours worked Exceeded target EIFR of 0.71 EIFR of 0.70 or below Maintain ISO 9001 accreditation Achieved Maintain ISO 9001 accreditation Maintain ISO accreditation for JKX Oil & Gas plc Achieved Maintain ISO accreditation Maintain OHSAS accreditation for JKX Oil & Gas plc Achieved Maintain OHSAS accreditation Complete OHSAS accreditation for our Ukrainian subsidiary Poltava Petroleum Company ( PPC ) The first assessment has been rescheduled for Q Complete OHSAS accreditation for PPC ISO 9001 accreditation for PPC Achieved Evaluate assessors recommendations and apply to the PPC Management System Continue to improve our Stakeholder engagement and Community Liaison Plan Progress made, improving levels of communication with local stakeholders, their interests forming part of the decision-making process for all our significant operations Continue to update and improve our Stakeholder Engagement and Community Liaison Plan in all locations Continue to improve local engagement in our Group Risk Management Systems and reporting into our Group Risk Register Achieved Risk management strategy has been updated and a Risk Committee established at our operations in Ukraine and Russia supported by staff training in risk identification and mitigation Improve our Risk Management and Assessment activities across the Group Continue to improve incident reporting, using safety moments, workshops, site campaigns, training sessions, toolbox talks and briefings Achieved 47 incidents were reported in (2013: 97) which included near-miss reports, unsafe acts and hazards Continue to improve incident reporting, using safety moments, workshops, site campaigns, training sessions, tool-box talks and briefings Continues overleaf

68 JKX Oil & Gas plc Annual Report 66 Corporate Social Responsibility review Targets Achievements Targets 2015 Further improve Emergency Response ( ER ) arrangements and plans with simulated exercises, drills and training in each of our operational areas Achieved During we have improved ER in Ukraine and Russia and continued with regular ER drills and observations of the process. Plans have been established which include rescue of personnel and actions to minimise damage and business disruption Further improve ER arrangements and plans with simulated exercises, drills and training in each of our operational areas during 2015 Update the Carbon Management Plan and reports Ensure the initial assessment of our Carbon Management Submission by the Carbon Disclosure Project is confirmed for Q The performance report is included in this Annual Report, with improvements planned for 2015 (see page 72) Comply with the Greenhouse Gas ( GHG ) Emissions (Directors Reports) Regulations Achieved An independent company, Tru-Cost, has been engaged to analyse and report our GHGs All emissions sources that are owned, operated or controlled by the Group are included in our report The baseline measurement is included in this Annual Report, with improvements planned for 2015 (see page 72) Carry out a Management Training Needs Analysis Identified current competencies within the JKX Senior Management Team including Directors, and have proposed a program of Continuing Professional Development including Corporate Governance and Environmental matters Revise current arrangements with improvements planned for 2015

69 Strategic report 2-79 Governance Financial statements Health and safety Our approach The Company s Health, Safety, Environment, Community and Quality ( HSECQ ) philosophies are embodied in its Policy Statements, which are endorsed by the Board and communicated to all employees and business partners; they represent the Company s commitment to a safe and healthy, incident free, working environment and its collective responsibility to prevent damage to the environment, its employees and neighbours. We will never knowingly compromise our health, safety, environmental or quality standards to meet our operational objectives. All Injury Frequency Rate ( AIFR ) HSECQ statistical analysis for Fatal Accident Case Lost Time Injuries Medical Treatment / Restricted Work Cases Near miss / Loss / Hazards / Property Damage / Unsafe Act or Conditions 47 Health and safety statistics In, JKX implemented and communicated its improved HSECQ policy at all operations worldwide. The policy represents a clear statement of core principles and the approach to health and safety management at all group companies. The priority is to ensure that all staff and contractors work in a safe environment, where effective systems of work are maintained and appropriate procedures and processes are followed. Continuous improvement to health and safety Annual HSECQ targets are set for all levels within the organisation. During the AIFR was 0.99 per 200,000 hours worked, with 84 days away from work recorded. The industry benchmark set by the International Association of Oil & Gas Producers ( IOGP ) is an AIFR of 1.74 per million hours worked. During JKX had 4.95 health and safety incidents per million hours worked. The commitment to reporting all incidents continued to improve during, with the number of reported incidents demonstrating that all statistics are captured, whether positive or negative. With more than 900 employees during, we reported 47 incidents.

70 JKX Oil & Gas plc Annual Report 68 Corporate Social Responsibility review Safety statistics for This year JKX did not match the normally high standards of accident prevention achieved in the last 9 years. We sadly suffered a fatality during cement unloading operations and in addition, there were six recorded lost time injuries. A Root Cause Analysis was carried out for each of these incidents with the lessons learned distributed across the Group. Measurement and analysis of our safety statistics is carried out on a monthly basis with results communicated to senior management of all group companies and the Board. Employees are included in structured training and behavioural programs which promote open discussion and annual employee surveys regarding their perception of the health and safety culture. We have a clear Safety Management System, which provides a comprehensive and systematic vision of our objectives. Each site has its own HSECQ Management System identifying all major hazards and risks to personnel specific to the unique nature of the country of operation. In occupational health, the drug and alcohol policy continues to be successful throughout the Group with no instances of breaches noted. The policy applies to all our staff and contractors and forbids the possession and/or use of defined prohibited substances which includes drugs and alcohol. Our policy also clarifies our testing and inspection procedures. Drilling risks We recognise that the safety and efficiency of our drilling operations depends on the performance of our employees and contractors. We mainly use local staff on our drilling rigs, with decades of local experience. These are supported by expatriate supervisors who provide additional expertise and oversight. This has enabled us to define and manage drilling risk more clearly using Western methodologies. Drilling employees and contractors all have the necessary training and certification in well safety and well control, and all personnel have the authority to stop any job that they deem unsafe. Supervisors are selected for their familiarity with the regions where we operate, as well as for their expertise. They understand and are sensitive to local working practices and culture, and work to enhance the education and training of local staff and contractors alike. We make the best use of our resources by sharing expertise between our operating companies in Russia and Ukraine, and we have a strong collaborative environment where everybody contributes to analyse the risks and develop mitigating strategies in order to minimise it. Before drilling commences, we follow industry best practice to identify and address the inherent risks in each drilling or workover operation. This ensures that: health, safety and environment issues are clearly identified and assessed; regulatory requirements and JKX standards will be met; risks have been removed or mitigated according to a structured, systematic process, with any remaining risks demonstrated to be both tolerable and as low as reasonably practicable; critical safety items and procedures are identified to manage remaining risks; a comprehensive environmental management plan has been developed; social, health, and environmental benefits and opportunities are identified; and personnel roles and responsibilities are indicated. We have a Lead Drilling Engineer based in our London office who is responsible for the planning, reviewing and authorising of Group drilling operations, which significantly strengthens our capability to identify and manage drilling risk. A written daily drilling update is provided to JKX management for all our operations which includes all drilling progress and issues to date, and expectations for the following 24 hours. In addition, when drilling and/or workovers are in progress, there is a daily operations call between our managers in London and key operational staff in Russia and/or Ukraine, as appropriate, to discuss latest developments and agree immediate actions.

71 Strategic report 2-79 Governance Financial statements Health and safety risk management JKX is proud to maintain its OHSAS Health & Safety accreditation, which is now accompanied by ISO Environmental accreditation and ISO 9001 Quality Management accreditation. These are all internationally-recognised specifications for occupational health and safety environmental and quality management systems monitored by experienced auditors biannually to ensure compliance to the internationally recognised standards. The list below is a sample of 3rd party inspection activities in. A report of all inspections is available on request. Carpathian Expert and Technical Centre industrial safety inspection Ukrexpert industrial safety inspection Sanzhary District Service of the Board of State Service of Ukraine for Emergency Situations in Poltava region Ukraine Ministry for Emergency Response (3 inspections) Territorial Administration of the State Mining and Industrial Supervision in Poltava region industrial safety inspection (3 inspections) State Inspection for Land Transport of Ukraine State Emergency Service of Ukraine Ministry of Emergency Situations (Civil Defence and Emergency Situations) Ministry of Emergency Situations (State Firefighting Service Administration) Rosprirodnadzor (Federal Service for Supervision of Natural Resource Usage) Rospotrebnadzor (Federal Service on Customers Rights Protection and Human Well-being Surveillance) Consistent Hazard Assessment Processes In both Russia and Ukraine, we continued to carry out risk management studies using our proven Hazard and Operability ( HAZOP ), Hazard Identification ( HAZID ) and As Low as Reasonably Practical ( ALARP ) methodologies. We have developed an integrated assessment process for the safety assurance of development proposals which are potentially hazardous. These assessments combined with the essential features of the JKX Safety Management Programme complete the safety circle. Health and safety training Each location has a health and safety training budget which has been established after the Training Needs Analysis has been carried out, which includes legally required training from the host country s health and safety regulations. Additional training is provided according to operational requirements.

72 JKX Oil & Gas plc Annual Report 70 Corporate Social Responsibility review Environmental Management System The JKX Environmental Management System is a comprehensive, systematic, planned and documented management process. It includes the organisational structure, planning and resources for developing, implementing and maintaining a policy for environmental protection. We strive to reduce impact on the environment, conserve energy, recycle resources and eliminate environmental pollution, while placing a high priority on preserving the environment. Our approach JKX is proud to have maintained ISO Environmental Management accreditation in. ISO is the principal management system standard which specifies the requirements for the formulation and maintenance of an Environmental Management System. Our impact JKX complies with all relevant environmental requirements, including environmental laws and regulations and industry guidelines. We enhance environmental awareness among employees by providing environmental training and promoting a thorough understanding of our environmental policy. In, we continued to make good progress and are pleased to continue the ongoing work with The Carbon Disclosure Project. The Environmental Report for on the Group s annual performance, in conjunction with TruCost, has identified reduction measure targets for the 2015 campaign. Environmental objectives Achievements Targets 2015 Reducing emissions In managing emissions throughout the exploration, and production of oil and gas, the Company adopts the principle of reducing emissions. In particular, reduced emissions completions ( REC ) or green completions are assessed at all stages Continuously monitored on-site fuel consumption measured more efficiently Greenhouse Gas ( GHG ) emission levels recorded and analysed through latest software and reporting purchased electricity records improved purchased heating/cooling records improved release/leakage of other chemicals causing greenhouse gas emissions recorded, reported and analysed fugitive emissions assessed and recorded fuel used for vehicles reduction by journey management official travel of staff reduced Continuous monitoring Robust monitoring is vital. Improved monitoring will be carried out before, during and after operations to detect contaminants in groundwater and potential leakages into the atmosphere. Revised and updated emission reduction strategies for 2015 are likely to include: current carbon footprint reduction methods identify opportunities for a 5% reduction in C0 2 emissions identification of technical requirements for more efficient monitoring and recording estimated emission reduction through any proposed interventions estimated cost for the interventions estimated savings from the intervention (e.g. through reduced energy use, reduced travel costs, and reduced offset costs) responsibility for implementation implementation schedule quantitative objectives and targets

73 Strategic report 2-79 Governance Financial statements Environmental objectives Achievements Targets 2015 The Greenhouse Gas Emissions Regulations We have complied with our obligations to record and report our annual Greenhouse Gas ( GHG ) emissions in this Annual Report (see page 72) Continue to comply and improve GHG recording and reporting Zero discharge of chemicals to land or surface waters Achieved in Continuously monitored Continuous monitoring Restored habitat and hydrological regime to pre-construction state as soon as reasonably practical Achieved in Continuously monitored Continuous monitoring Establish group-wide and site-level Biodiversity Action Plan (BAP) Production operations may adversely affect site level ecosystems, cause pollution in surrounding areas and allow access to previously undisturbed areas Develop the policy in line with the Convention on Biological Diversity key principles include protection of biological diversity within protected areas, and the sustainable use of biological resources continue to develop and monitor progress throughout 2015 No loss of containment of product Achieved in Continuously monitored Continuous monitoring Reduction in water use Recycling water from drilling operations has helped us to reduce the use of this valuable resource in Continue to improve the measurement of water use and its recycling from our drilling operations and aim to reduce water usage by 5% annually Consulting with Stakeholders (local communities, workforce, NGOs and government agencies) to implement and monitor supply chain initiatives for emissions reduction Achieved in Established Stakeholder Management Plans Risk assessed the Stakeholder Priority levels Openly communicated with stakeholders about their respective concerns Adopted processes and modes of behaviour that are sensitive to the concerns and capabilities of each stakeholder Our approach in 2015 will: measure return on community investment to both the Company and the community use outcome and impact indicators to measure the quantity and quality of change track changes in community perceptions to gain real-time feedback on performance use participatory methods of monitoring and evaluation to build trust and local ownership of outcomes proactively communicate the value generated by the Group to internal and external audiences Reduce waste to landfill We have continued to improve the recording and measurement of the waste sent to landfill during Improvement opportunities being considered for include: improving waste segregation efforts further engagement with the local communities on recycling initiatives where economic and practical update of our purchasing policy to encourage use of regular supplies which are recyclable improve monitoring of waste and recycling and reduce waste to landfill by 5% annually

74 JKX Oil & Gas plc Annual Report 72 Corporate Social Responsibility review Environmental performance in Carbon Disclosure Project scores Environmental Incident Frequency Rate ( EIFR ) Company score 2013 score British Gas (BG Group) Wood Group Shell Cairn Energy Petrofac BP AMEC Afren Tullow JKX Oil & Gas Premier Oil Heritage Oil Hunting Lamprell Caracal 33 Essar 33 A.R.M EnQuest J Fisher & Sons The EIFR Target for was not to exceed 0.80 environmental incidents per 200,000 hours worked; we achieved Recordable incidents are classified using a qualitative risk assessment process based on the maximum reasonable consequence and the likelihood of an incident occurring is an indicator of environmental safety performance. Ophir Energy We again made good progress and we were pleased to continue the ongoing work with The Carbon Disclosure Project. Reproduced by kind permission of the Carbon Disclosure Project GHG emissions by scope Scope 1 direct emissions 317,441 tonnes CO 2 e Scope 2 indirect emissions 827 tonnes CO 2 e Intensity ratio 88 tonnes CO 2 e / MMboe of production

75 Strategic report 2-79 Governance Financial statements Greenhouse Gas ( GHG ) emissions reporting All emissions sources owned, operated or controlled by the Group are included in our reporting. Our approach At our operational sites in Poltava, Ukraine, and Koshekhablskoye, Russia, our terminals are selfsufficient and can maintain operations without the need for grid electricity therefore improving the security of supply. We used the Greenhouse Gas Protocol methodology for compiling our GHG data. GHG emissions by scope The GHG Protocol categorises direct and indirect GHG emissions as follows: Scope 1: all direct GHG emissions Scope 2: indirect GHG emissions from consumption of purchased electricity, heat or steam. The table opposite discloses our Scope 1 and 2 GHG emissions and an emissions intensity ratio of tonnes CO 2 per million barrels of oil equivalent that we produced in. The Greenhouse Gas Protocol methodology has been used for compiling the GHG data which includes the following material GHGs: CO 2, N 2 O and CH 4. As required by our ISO 9001 certification, operating procedures, our prequalification process and Stakeholder Management Plans ensure that major suppliers, products and services are evaluated for their environmental compliance and commitment. Outlook The Energy Savings Opportunity Scheme ( ESOS) is now law in the UK. The Company will complete mandatory energy efficiency audits which will require measuring energy consumption to identify areas of significant consumption, responding to recommendations to decrease consumption and reporting to the Environment Agency. Also planned for 2015 is the enhancement of the JKX Code of Conduct to include more specific policies, procedures and guidelines for purchasing and contracting activities undertaken by Group companies to reduce our impact on the environment. Our other environmental initiatives Global Reporting Initiative ( GRI ) The GRI Reporting Framework is intended to provide a generally accepted framework for reporting on an organisation s economic, environmental, and social performance. The Framework consists of the Sustainability Reporting Guidelines, the Indicator Protocols, Technical Protocols, and the Sector Supplements. During the year we reported according to the GRI s Sustainability Reporting Guidelines. Supply chain management At the heart of our sustainable supply chain is a policy of localising supply by fabricating, manufacturing and sourcing as much as possible as close to the point of use by using indigenous companies. Our achievements During some advances were made in our Supply Chain Initiative, and this will continue in 2015 with a more focused approach to procurement and supply.

76 JKX Oil & Gas plc Annual Report 74 Corporate Social Responsibility review Employment By creating employment JKX makes a contribution to reducing poverty and promoting economic and social development. Our strategy is to employ local staff and provide them with ongoing training. Our approach We provide career development, international opportunities, a non-discriminatory workplace and competitive remuneration within a decentralised culture. Our decentralised model is underpinned by a robust governance framework and empowers local management to make key business decisions locally. Staff training and skills development is an essential component of our employment proposition and assists people to secure decent and productive jobs. Our achievements JKX employs more than 900 staff in five different countries which puts people as a top priority, and this is strongly reflected in our approach to people matters and management. At year-end, Yuzhgazenergie LLC, our Russian subsidiary, employed 257 staff (2013: 272) at our Koshekhablskoye production facilities and our Maikop administrative office. Our Ukrainian subsidiary, Poltava Petroleum Company, employed 622 personnel (2013: 618) at the production site and at our Poltava office. The London office has 25 employees (2013: 25). Employment policies The Company s employment policies aim to attract the best people in the belief that a diverse and inclusive culture is a key factor in being a successful business. It remains committed to equality of opportunity in all of its employment practices. It selects employees for appointment, career development and promotion based solely on the skills and attributes which are relevant to the job and which are in accordance with the laws of the country concerned. We use a long-term, career-oriented approach that begins with global recruitment of outstanding talent and continues with development from within through a wide range of assignments and experiences.

77 Strategic report 2-79 Governance Financial statements JKX Health and Safety culture survey Good % Cumulative scores (%) Acceptable 50-80% 20 0 Not acceptable 0-50% Training & supervision Safe work procedures Consultation Reporting safety Management commitment Injury management & return to work Diversity and equality Access to work opportunities is based on merit, equality, fairness and need, and no one is treated less favourably on the basis of their sex, racial or ethnic origin, colour, religion, disability, marital status, sexuality or age. This approach ensures that diversity and equality is reflected in all our policies, practices and procedures, where practicable. JKX will not tolerate any form of discrimination either direct or indirect. Acts of discrimination, prejudice, harassment and victimisation which occur within the workplace or within the communities in which we work is not tolerated. Employee engagement We aim to communicate openly with our employees. Operating across a number of different countries, cultures and environments, we have a decentralised management structure, with employment policies designed to suit the needs of individual locations. Each Group company complies with certain key principles, including: providing safe and healthy working conditions for all employees creating an open, challenging, rewarding and participative environment which, through development and training, aims to maximise the talent, skills and abilities of all employees communicating to provide the fullest possible understanding of our goals, directions and performance of the business providing compensation and benefits which reflect good current local practices and which reward collective and individual abilities and personal performance providing a working environment, development opportunities and incentives to promote team effort and commitment to the performance of the Group referencing the International Labour Organisation to verify standards and best practice. Our Group-wide values of Integrity, Teamwork, Excellence and Respect, are essential in helping to guide our employees in the way that they behave. Employee feedback A health and safety employee satisfaction survey was carried out again in to obtain feedback from staff on our health and safety culture and success in applying group health and safety policy. The survey was in the form of a questionnaire which was translated and completed on an anonymous basis by a range of employees from different locations across the Group. The results of the employee satisfaction survey show that there have been perceived improvements in management commitment and consultation during. These areas will be the focus of our work in Sharing our expertise JKX commenced commercial gas production in Russia in Three years later we continue to transfer knowledge, people, operational expertise and ways of working from our Ukrainian operations to southern Russia to improve the efficiency of our operations.

78 JKX Oil & Gas plc Annual Report 76 Corporate Social Responsibility review Community Our approach JKX is committed to engaging with the community to share the benefits of our success at our operating plants. During the year we assisted with improvements to school facilities that were local to our Russian operations. Community engagements Various activities are conducted to improve relations with local communities through participation in forums established by local authorities and residents associations, or by creating such forums. Employees from all over the Group take part in cleaning up areas around our plants and the neighbourhood. The number of employees participating in these clean-up activities is increasing year by year. We contribute to improving local education by conducting plant tours, and providing employment and work experience, and we contribute to raising environmental awareness by actively participating in various environmental events in regions. Assistance in our local communities In practical terms, our community support frequently involves using the Company s plant and machinery as well as manpower to provide much-needed assistance. Working with the local authorities, we deployed available vehicles including our fire engines, personnel and safety equipment on a number of occasions during the year. In addition, during the year, we assisted communities local to our operations in Ukraine by providing the use of our cranes, trucks, excavators and road clearing equipment to assist in a number of small isolated tasks which benefited the local community.

79 Strategic report 2-79 Governance Financial statements Charitable donations Each operation has a limited budget for good causes and we handle charitable donations at a local level. Locally, donations from the Group during amounted to: Ukraine $245,457 (2013: $208,266) Russia $105,809 (2013: $137,502) Georgia $2,160 (2013: $1,907) Subject to management approval, staff may be given additional time off in order to join in certain charity related activities. Local charitable projects The financial aid is allocated to qualifying organisations using a formal applications process. Applications for funding are made to our local companies specifying how funds will be used. A full list of charitable donations is available. Below is a sample of charity projects that are local to our operations and that we have supported during the year. Ukraine Provision of a water facility upgrade for the Nekhvoroshcha agricultural communal services Provision of economic support for facilities in Sokolova Balka village Financial aid to disabled persons in Sokolova Balka village Help to refugees from the East of Ukraine in Novy Sanzhary district Purchase of products, accessories and materials for the Sokolova Balka village school and kindergarten Russia Assisted with the repair to buildings and the improvement of school facilities in the Koshekhablskoye District Assisted and coordinated the local response as a result of flooding in Koshekhablskoye rural areas Assisted with improvement and clean-up of the grounds surrounding Koshekhablskoye Hospital Assisted with improvement and clean-up of various local community areas in the Koshekhablskoye District Our stakeholder engagement JKX works closely with outside interest groups and maintains an open-door policy to better understand local issues and avoid problems. We consult widely on our business proposals before making final decisions. We have recently reviewed our stakeholder engagement and implemented an improved system which focusses on: customers and communities business customers environment services and planning stakeholder feedback surveys. These consultations with stakeholders feed into the business planning process to ensure that stakeholders needs are prioritised in our business plan. Our performance We continued to make progress by improving our stakeholder communications in Poltava, Ukraine, and in Koshekhablskoye, Russia. The mapping of stakeholders was carried out in by creating an Influence-Interest-Matrix to identify our key stakeholders. This stakeholder involvement strategy is of key importance to the Company and we are planning to further develop the skills of staff and employees to continually improve our stakeholder management capabilities. Outlook Internal and external stakeholder surveys were conducted in to understand whether we were meeting stakeholder and customer expectations. The results of the surveys were discussed with senior management and reviewed as part to the JKX Annual Management Review.

80 JKX Oil & Gas plc Annual Report 78 Corporate Social Responsibility review Quality ISO 9001 accreditation The Company was accredited to ISO 9001 in March The Company s Integrated Management System has ISO 14001, OHSAS and ISO 9001 accreditations. The Construction and Engineering departments in our Ukrainian subsidiary, Poltava Petroleum Company, achieved accreditation to ISO 9001 in January 2015 after meeting the requirements of the standards as assessed by Bureau Veritas. Achieving ISO 9001 accreditation ensures that the quality management systems that JKX has adopted work to improve the efficiency of business and are not just a set of procedures. External assessors and an internal resource are used to carry out regular audits of the management system. The support of the Board and senior management has been the driver of this management system, so that all areas of the organisation are aware of the importance of the ISO accreditation process. Investor engagement JKX seeks to enhance shareholder value through responsible and effective communication with its shareholders through various channels (see page 90). The Chief Executive Officer is responsible for maintaining our ongoing relations with the investor and shareholder community, acting as the primary point of contact for members of this community. In the Board carried out various meetings with potential and existing investors and with the wider investment community through analyst presentations and other events. We communicate the latest relevant company information and future investor events through our website at Outlook A new version of ISO 9001 is expected in 2015, which will be a complete revision of the standard. We are planning to hold practical workshops to support the organisation to get acquainted with the new standard.

81 Strategic report 2-79 Governance Financial statements

82 JKX Oil & Gas plc Annual Report 80

83 Strategic report 2-79 Governance Financial statements Governance Board composition 82 Corporate governance 84 Audit Committee Report 92 Directors Remuneration Report 98 Directors report other disclosures 116

84 JKX Oil & Gas plc Annual Report 82 Board composition The Group is led by an experienced board of directors consisting of a Non-Executive Chairman, the Chief Executive Officer, three further Executive Directors and four independent Non-Executive Directors Board composition 5 4 Board expertise Executive Directors Non-Executive Directors Russia and Ukraine Financial Energy Engineering Geology 1) Dr Paul Davies Chief Executive (65) Year appointed 1998 Key biographical data Civil engineer, PhD in Structural Mechanics Co-founder of the JP Kenny Group of Companies (forerunner of JKX Oil & Gas plc) Relevant experience Extensive experience of business in the former Soviet Union Oil and gas engineering, exploration and production projects Board responsibility Chief Executive Officer Stewardship of the Group and its business Developing an appropriate business strategy for Board approval Leadership to the Executive team and subsidiary Directors Investor relations 2) Richard Murray Non-Executive Director (66) Year appointed 2013 Key biographical data Chartered Accountant Audit partner at Ernst & Young with more than 35 years of service Relevant experience Advisor to major international companies on various corporate finance activities Board responsibility Non-Executive Director Chairman of the Audit Committee Member of the Remuneration Committee 3) Peter Dixon Commercial Director (60) Year appointed 2007 Key biographical data 15 years working in geophysical roles within Schlumberger Joined JKX in 1995 as Asset Manager for Ukraine General Director of Poltava Petroleum Company for 3 years Relevant experience Significant experience in the upstream oil and gas industry in the former Soviet Union In-depth knowledge of working in Ukraine and Russia Board responsibility Commercial Director Trading of oil, gas and condensate New business development

85 Strategic report 2-79 Governance Financial statements ) Cynthia Dubin Finance Director (53) Year appointed 2011 Key biographical data Investment banker Co-founder and Chief Financial Officer of Canamens Energy Limited Finance Director for EMEA at Edison Mission Energy Relevant experience Significant project finance and banking experience Board responsibility Finance Director Financial management of the Group City relationships Risk management, IT and facilities 5) Alastair Ferguson Non-Executive Director (57) Year appointed 2011 Key biographical data Former President of New Gas Projects, Upstream, TNK-BP Former Executive Vice-President of Gas & Power with TNK-BP Senior positions with BP Non-Executive Director JSC KazMunaiGas Exploration Production Relevant experience 30 years experience in oil and gas sector Extensive experience of the gas and power business in Russia and Ukraine Board responsibility Non-Executive Director Member of the Audit Committee 6) Martin Miller Technical Director (67) Year appointed 2007 Key biographical data Geologist, Chartered Engineer Senior positions with Mobil and BP Joined JKX in 1994 as Chief Geologist Non-Executive Director of Independent Resources plc Relevant experience 40 years of experience working in the oil and gas industry Board responsibility Technical Director Subsurface and technical teams Drilling and operations 7) Nigel Moore Chairman (71) Year appointed 2007 Key biographical data Chartered Accountant Non-Executive Director of Hochschild Mining plc, The Vitec Group plc and Ascent Resources plc Relevant experience Previously a London-based partner of Ernst & Young from 1973 to 2003 Extensive financial experience in international oil and gas and mining groups FTSE-listed company experience Board responsibility Chairman of the Board Chairman of the Nomination Committee Member of the Remuneration Committee Leadership of the Board ensuring cohesion between the Executive and Non-Executive Directors 8) Dipesh Shah, OBE Non-Executive Director (61) Year appointed 2008 Key biographical data Former CEO of several businesses in BP and the UK Atomic Energy Authority Former Chairman of Viridian Group plc Non-Executive Director at Thames Water, Canaccord Genuity Group Inc, The Crown Estate and Marguerite Fund Former Non-Executive Director of Babcock International Group PLC and Lloyd s of London Relevant experience More than 30 years experience in oil and gas sector Significant FTSE-listed company experience Board responsibility Senior Independent Director Chairman of the Remuneration Committee Member of the Audit Committee 9) Lord Oxford Non-Executive Director (62) Year appointed 1997 Key biographical data Joined the Foreign Office in 1980 Counsellor at the British Embassy in Kiev from 1992 to 1997 Director of Hansa Trust PLC Relevant experience Unrivalled knowledge and experience of doing business in Ukraine FTSE-listed company experience Board responsibility Non-Executive Director Member of the Nominations Committee

86 JKX Oil & Gas plc Annual Report 84 Corporate governance Governance principles The Company has a premium listing on the London Stock Exchange, and is therefore subject to the Listing Rules of the UK Listing Authority. The Board is committed to applying the principles of the UK Corporate Governance Code ( the Code ) and relevant institutional shareholder guidelines. This section explains in more detail how we have applied these provisions. JKX s Group-wide policies and procedures provide a framework for governance and are underpinned by the Group s Code of Conduct. Good governance is taken seriously throughout the JKX Group and the Board set the tone and take the lead to ensure that good practice flows throughout the Group. During, we continued to strengthen our internal controls and risk management processes and we continue to embed an effective risk management culture at all our operations. Board effectiveness How the Board functions The effective working of the Board is crucial to the long-term prospects and strategic objectives of the Company. This is achieved through strong and open working relationships between the Directors. The principal matters reserved for the Board are set out in the table opposite. Day-to-day operational decisions are managed by the Executive Directors, led by the Chief Executive. The Board has six scheduled meetings each year, and arranges additional meetings if the need arises. During, in addition to the six scheduled meetings there were two unscheduled Board meetings (2012: five). In addition, the Board meets at least annually to consider strategy in depth as well as reviewing the strategic objectives at each of its Board meetings. The Chairman, in consultation with the Executive Directors, sets the agenda for Board meetings. All Directors receive comprehensive documentation prior to each meeting on the matters to be discussed. In addition to Board meetings, the Non-Executive Directors met twice during in private session, with an open agenda to discuss the current issues affecting the Group. Role of the Board The Board provides leadership to the Group. Key matters reserved for the consideration and the approval of the Board are: setting and monitoring Group strategy; review of Group business plans, trading performance and costs; review and approval of the annual operating and capital expenditure budgets approval of capital investment projects across the Group; examination of acquisition opportunities, divestment possibilities and significant financial and operational issues; remuneration policy (through the Remuneration Committee); appointments to the Board (through the Nominations Committee) and senior management, Committee membership and remuneration for Directors and senior management; review and approval of the Company s financial statements (through the Audit Committee); setting any interim dividend and recommendation of the final dividend; and ensuring that the significant business risks are actively monitored and managed using robust control and risk management systems. All other authorities are delegated by the Board, supported by appropriate controls, to the Chief Executive Officer on behalf of senior management. Monthly Board reporting The Group provides the Board with consolidated monthly management reports 10 working days after the month end. The reports outline all material operational, financial, commercial and strategic developments. The monthly financial reports consolidate all financial information from all parts of the Group and include actual performance against budget and forecast for oil and gas production, sales and costs. These reports provide the Board with the latest information on receivables, cash, cash flow forecast and the implications of key sensitivities including changes in production, commodity prices, production taxes and exchange rates. These monthly reports ensure that members remain properly briefed on the performance and financial position of the Group.

87 Strategic report 2-79 Governance Financial statements Board meeting documents Prior to each set of meetings the Executive Directors ensure that all the relevant papers and other information is delivered at least five working days in advance of the meeting date so that all Directors have the necessary time to review in detail the latest information. Support for Directors The Board has adopted a policy whereby Directors may, in the furtherance of their duties, seek independent professional advice at the Company s expense. During, no Director sought independent legal advice pursuant to the policy. Each Director has the benefit of a deed of indemnity from the Company and its subsidiaries in respect of claims made and liabilities incurred, in either case arising out of the bona fide discharge by the director of his or her duties. The Company has also arranged appropriate insurance cover in respect of legal action against Directors of the Company and its subsidiaries. Committees of the Board The Board has three committees to assist the Board by focusing on specialist areas, which are ultimately accountable to it. These comprise: the Audit Committee the Nominations Committee the Remuneration Committee The Board committees meet independently and provide feedback to the main Board through their chairmen. Committee memberships in Nigel Moore Dipesh Shah OBE Lord Oxford Alastair Ferguson Richard Murray Chairman Member Audit Remuneration Nomination Committee Committee Committee The roles and activities of each of these committees during the year are noted on pages 92, 98 and 88. Board composition, independence and commitment Throughout, the Board comprised: a Non-Executive Chairman; four Executive Directors and; four Non-Executive Directors. There were no changes to the Board during. The Board has reviewed the independence of each Non-Executive Director. None of the Non-Executive Directors who served during the year had any material business or other relationship with the Group, and there were no other matters that were likely to affect their independence of character and judgement. It is the Board s view that the Non-Executive Directors have sufficient time to fulfil their commitments to the Company and no Executive Director holds a Non-Executive Directorship, or Chairmanship, in a FTSE 100 company. Board skills, experience and responsibilities The Directors have extensive knowledge and experience of the oil and gas industry including expertise in geology, engineering and financial matters. In addition the Board has significant experience of working in central and eastern Europe, particularly Ukraine and Russia, which is vital for JKX to achieve its strategic goals. Director key biographical details, relevant experience and responsibilities are provided on pages 82 and 83. The Non-Executive Directors bring a broad range of skills, experience and expertise which allows them to challenge effectively, independently and constructively the performance of the Executive Board and their strategy. Board diversity The Board comprises eight men (89%) and one woman (11%). Gender is only one aspect of diversity, and there are many other attributes and experience that can improve the Board s ability to act effectively. Our policy is to search for the highest quality people with the most appropriate experience for the requirements of the business, be they men or women. The Board supports the longer term aspirations of Lord Davies report regarding gender diversity on appointment of directors to boards and will maintain its practice of embracing diversity in all its forms, but has chosen not to set any measurable

88 JKX Oil & Gas plc Annual Report 86 Corporate governance objectives. Details of our current gender diversity statistics are set out on page 33. Senior Independent Director Dipesh Shah is the Senior Independent Director ( SID ). Dipesh is available for discussions with other Non-Executive Directors who may have concerns which they believe have not been properly considered by the Board as a whole. He also acts as an alternative point of contact for the Executive Directors, if required, in addition to the normal channels of the Chairman and Chief Executive Officer. A key responsibility of the SID is to ensure he is available to shareholders if they have concerns that have not been resolved by contact through the normal channels of Chairman, Chief Executive Officer or other Executive Directors, or where such contact is inappropriate. Board evaluation The effectiveness and performance of the Board is vital to our continuing success. evaluation process The process of evaluating the performance of the Directors, the Board and its committees was undertaken through one to one interviews conducted by the Chairman with all other Board members. This was followed by the Senior Independent Director reviewing the performance of the Chairman with the other Board members. These reviews centred around: the composition of the Board and Committees and the skill-sets required to fulfil their responsibilities; identifying scope for innovation to generate enhanced shareholder value; searching for improvements to the risk management process and governance; and the scheduling of presentations from senior personnel focused on the Company s key business areas. The Board as a whole evaluated its own performance by consolidating and discussing the reviews set out above. Throughout, the Board and individual Directors have managed the Group through very difficult circumstances with the crisis in Ukraine. In the second half of the year, three government decrees were issued without warning and that were effective immediately, and which continue to have a significant adverse financial impact on the Group. In these circumstances, the Chairman is firmly of the view that all Directors are fully committed to respond to this situation and does not consider it appropriate to make changes at Board level at this time. External evaluation As the Company is outside of the FTSE 350 there is no requirement for an externally-facilitated evaluation of the Board at least every three years. Following a number of changes to Board responsibilities during 2012 and the appointment of Richard Murray on 1 January 2013, the Board will consider the relevance of an externally facilitated evaluation during Development of the Board All Directors are provided opportunities for further development and training updates and, during the year, the Chairman discusses a development plan with each Director. In addition to the regular updates on governance, legal and regulatory matters, the Board also receives detailed briefings from advisers and at their seminars on a variety of topics that are relevant to the Group and its strategy. The annual Board evaluation includes a review of governance where the Directors have an opportunity to assess their effectiveness and that of the Board as a whole. Board activities Attendance at meetings In addition to six scheduled Board meetings, there were two other meetings to deal with ad-hoc procedural matters relating to granting formal approvals that did not necessarily require full attendance. When a Director is unable to participate in a meeting either in person or remotely because of another engagement they are provided with the briefing materials and the Chairman will solicit their views on key items of business ahead of time, in order that these can be presented at the meeting and influence the debate. The number of meetings of the Board and its committees during and individual attendance by director is shown on the following page:

89 Strategic report 2-79 Governance Financial statements Scheduled Board and Committee meetings attendance in Audit Remuneration Nomination Board Committee Committee Committee Number of meetings Attendance: Nigel Moore 6/6 3/3 1/1 Dr Paul Davies 6/6 Cynthia Dubin 6/6 Martin Miller 6/6 Peter Dixon 6/6 Dipesh Shah 2 OBE 6/6 2/3 3/3 Lord Oxford 5/6 1/1 Alastair Ferguson 6/6 3/3 Richard Murray 6/6 3/3 3/3 1 In addition to the six scheduled meetings, two unscheduled meeting were convened at short notice to deal with procedural matters. All Directors were given notice of the meeting and some of them were unable to attend due to prior commitments which could not be rearranged. Both meetings were attended by Messrs Moore, Davies, Miller, Dixon and Mrs Dubin, one of the meetings was also attended by Messrs Murray and Ferguson. 2 Due to illness, Dipesh Shah was not able to attend one Audit Committee meeting. Senior management from across the Group, and advisers, attend some of the meetings for the discussion of specific items in greater depth. This is important to the Board as it further enhances the Board s understanding of operations and the implementation of strategy. During the General Directors of both of our significant operating subsidiaries in Ukraine and Russia attended Board meetings to lead on important issues specific to their operations. Board s work during The Chairman, in consultation with his fellow Directors, sets the agenda for Board meetings. The Board uses a rolling agenda of strategy, finance, operations, commercial matters, corporate governance and compliance. All Directors have the authority to add any item to the Board agenda. At each of the six scheduled Board meetings during the year matters considered include: the Chief Executive s report on strategic, HSECQ and performance matters; the Finance Director s report which includes the latest available management accounts; the Technical Director s operations and exploration update; the Commercial Director s report on oil, gas and condensate prices, macroeconomic issues and business development activity; and where applicable, reports from the Nominations Committee, Audit Committee and Remuneration Committee. In addition to the standing agenda items and annual Board responsibilities in respect of Group reporting, other topics covered by the Board during the year included: the political and economic developments in Ukraine and managing the associated risks to our operations; responding to the three Ukrainian government decrees on doubling of gas production taxes, currency controls and gas sales restrictions, and managing the impact on the Group; managing the Group s liquidity following the Ukrainian government decrees; prioritisation, review and approval of significant capital expenditure in Russia and Ukraine and changes to expenditure plans; the European Union sanctions against Russia, the impact on the Group s operations and our response; protecting the Company and shareholders from arrangements and actions of two significant shareholders and dealing with legal proceedings brought against the Company by those shareholders.

90 JKX Oil & Gas plc Annual Report 88 Corporate governance Restrictions on voting rights On 29 May 2013 the Chairman wrote to shareholders explaining why the Board of JKX considered that Eclairs Group Ltd ( Eclairs ) in collaboration with Glengary Overseas Limited ( Glengary ), who together own 38.9 per cent of the issued share capital of the Company, were acting only in their own interests and not in the interests of all shareholders. In addition, the exact nature of the relationship between the owners of Eclairs and Glengary was unclear and the Board had reasonable cause to believe that information provided by them in response to requests from JKX for particulars of their respective interests was false or materially incorrect. On 31 May 2013, the Board issued restriction notices to each of: (a) Eclairs, their shareholders and nominees in respect of 47,287,027 shares in JKX (representing 27.5 per cent of the issued share capital of the Company) held by nominees on behalf of Eclairs; and (b) Glengary, their shareholders and nominees in respect of the 19,656,344 shares in JKX (representing 11.4 per cent of the issued share capital of the Company) held by nominees on behalf of Glengary. Subsequently Eclairs and Glengary and their nominees initiated Court proceedings against the Company in respect of the validity of the restriction notices. On 30 August 2013, the High Court held that, in deciding to issue the restriction notices, the Board had acted in good faith with the intention of protecting the Company and its shareholders as a whole and that the Board had reasonable cause to believe that information provided by Eclairs and Glengary in response to requests from JKX for particulars of their respective interests in JKX was false or materially incorrect. However, the Court ruled that the Board s power to restrict Eclairs and Glengary from exercising their voting rights as shareholders could be used only for the limited purpose of extracting information from the shareholders. JKX appealed against the High Court s finding regarding the Board s power to restrict Eclairs and Glengary from exercising their voting rights and on 13 May the Court of Appeal allowed JKX s appeal and did not disturb any other parts of the judgment. In consequence, the restrictions imposed by the Board on Eclairs and Glengary are wholly valid. Eclairs and Glengary were given permission to appeal to the Supreme Court limited to the issue of the Board s purpose, which is expected to be heard in May Pending the outcome of that appeal, Eclairs and Glengary will be entitled to attend and vote at any general meeting of the Company, however where Eclairs and/or Glengary s votes would be determinative of a resolution, the voting figures for that resolution will be announced on two bases one including the votes cast by Eclairs and Glengary and the other excluding these votes but the resolutions will not be declared or minuted pending the Supreme Court decision. Re-electing your Board The Board contains a broad range of experience and skills from a variety of industries and advisory roles, which fully complement each other and have continued to be extremely important to JKX during. As the Company is outside of the FTSE 350 there is no requirement for all Board members to be subject to annual re-election by shareholders. In accordance with the Articles of Association Cynthia Dubin, Alastair Ferguson and Dipesh Shah will stand for re-election at the 2015 Annual General Meeting. Full biographies of all the Directors can be found on pages 82 and 83 and in the Notice of AGM. Nomination Committee The role of the Nomination Committee is to review the structure, size, skills and composition of the Company Board and the Boards of companies owned by JKX Oil & Gas plc. The Committee also considers succession planning and suitable nominations for appointments to the Boards, and makes appropriate recommendations based on qualifications and experience. The Committee meets as often as it determines is appropriate and generally meets at least once a year and more frequently if required. No appointments were made to the Board during (2013: none). Membership and process The Nomination Committee comprises two Non-Executive Directors. During the year the Committee comprised Lord Oxford and Nigel Moore (Chairman). The Nomination Committee met once during (2013: none) to review the structure, size and composition of the Board and consider succession planning. The Chairman ensures that any new Directors are provided with a full induction on joining the Board. The letters of appointment of each Non-

91 Strategic report 2-79 Governance Financial statements Executive Director are available for inspection at the registered office of the Company. Succession planning The Board is responsible for succession planning for directorships and key management roles. This requires performance and talent assessment, to ensure that able successors for key roles are identified and then provided with suitable opportunities through career and personal development plans. It is crucial that we remunerate our most talented people fairly and properly, such that they are more likely to stay in our employment. During the year, the Remuneration Committee reviewed the status of our succession planning. That Committee s views were summarised to the Board. Remuneration Committee Details of the work of the Remuneration Committee is given in the Remuneration report on pages 98 to 115. Compliance Compliance with the UK Corporate Governance Code The Board believes the Company has been in full compliance with the provisions set out in the UK Corporate Governance Code, with the following minor exceptions: B.2.3. The terms of appointment of the Non- Executive Directors are set out in their service contracts, which for Nigel Moore is dated 13 July 2012, for Lord Oxford is dated 1 January 2002, for Dipesh Shah is dated 1 June 2008, for Alastair Ferguson is dated 1 November 2011 and for Richard Murray is dated 1 January 2013 and includes a termination notice of three months by either party. However, the service contracts are for an indefinite term, not a finite term, subject to re-election on an as required basis. The Board continues to believe this is appropriate given the Company size, Non-Executive skill set, and evaluation of performance and independence on an ongoing basis with regards to Non-Executives. The Company continues to believe the unspecified term is reasonable. B.7.1. Non-Executive Directors who have served longer than nine years should be subject to annual re-election. Lord Oxford has served on the Board for more than nine years and was re-elected a Director at the last AGM on 4 June. Lord Oxford continues to make a unique and unrivalled contribution to the Board and it is anticipated he will be up for re-election at the 2017 AGM. In considering that the Company is, other than as noted above, in full compliance, the Board notes that excluding the Chairman, independent Non- Executive Directors comprise 50% of the Board as the Board considers that the four other Non- Executive Directors are wholly independent. The Executive Directors have undertaken a review of the independence of each of the Non-Executive Directors and Chairman. The review addressed the matters highlighted at Section B.1.1 of the Code, which could appear to affect a Director s judgment. In undertaking the review, one specific matter addressed was that Lord Oxford has served on the Board for more than nine years. Following the review, the Executive Directors do not consider that this matter in any way influences the independent judgment of Lord Oxford. Accordingly the Executive Directors believe each of the Non-Executive Directors and Chairman to be independent in accordance with Section B 1.1 of the Code both during the period under review and subsequently. In addition the Board supports the continued appointment of Lord Oxford as a Non-Executive Director because of his unrivalled knowledge and experience of doing business in Ukraine. Internal control and risk management The Board is responsible for identifying and evaluating the major business risks faced by the Company and for determining and monitoring the appropriate course of action to manage these risks. The Audit Committee reviews the Company s internal control processes and risk management systems and reports its conclusions to the Board. The Board has reviewed, for the year under review and up to the date of approval of the Annual Report, the effectiveness of the Company s systems of internal control and risk management and has concluded that the Company s procedures, policies and systems are appropriate and suitable to enable the Board to safeguard shareholders investment and the Company s assets, and comply with Turnbull Guidance. In addition, the Board has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or

92 JKX Oil & Gas plc Annual Report 90 Corporate governance liquidity. Details of the principal risks and how they are managed or mitigated is included on pages 48 to 61. Further information on internal control and risk management is set out in the Audit Committee Report on page 92. Budgetary process Each year the Board reviews and approves the Group s annual budget with key risk areas identified. The preparation of the annual Group budget is a multi-stage comprehensive process led by the Finance Director who works closely with local finance directors for operating subsidiaries in Russia and Ukraine and other senior management with specific responsibilities for our Hungarian, Slovakian and other operations. Performance is monitored through the monthly reporting to the Board of variances from the budget. Relevant action is taken by the Board throughout the year based on updated forecasts which are prepared using current information on the key risk areas and sensitivities. Investment appraisal For each capital intensive project there is a rigorous project analysis and risk and return appraisal completed using technical, financial, commercial, and operational specialists across the Group. We have a subsurface technical team in our London Head Office to monitor, assess, appraise and oversee all ongoing Group projects and potential opportunities. Having this expertise in-house improves our ability to quickly identify the potential risks, rewards and value in new capital intensive opportunities and efficiently utilise the available resources to maximise returns from our portfolio of oil and gas assets. Capital investment is regulated by the budgetary process, our automated authorisation for expenditure ( AFE ) system and pre-defined authorisation levels. For expenditure beyond specified levels, detailed written proposals are submitted to the Board. Using our AFE system Group capital expenditures are reviewed monthly on a project-by-project basis by the Finance Director and overruns, actual or foreseen, are investigated, and approved by the Board where appropriate. Whistleblowing The Board reviews the arrangements by which employees can raise any concerns they may have about workplace fraud or mismanagement with local management on a confidential basis. Whistleblowing incidents are taken very seriously by the Board. As part of the Board s commitment to support our employees in the work place, we have a confidential process for reporting Concerns at Work. This is a confidential service for reporting delicate matters that sometimes arise in the work place. In addition this service forms part of the Company s commitment to comply with best practice under the UK Bribery Act. As disclosed in our Anti-Bribery and Corruption policy, all individuals who work on behalf of the Group have a responsibility to help detect, prevent and report instances not only of bribery but also of any other suspicious activity or wrongdoing. Employees are expected to make complaints to their line managers or, if this is not appropriate, through our independently managed confidential reporting process, which is available to all employees as well as third parties. Complaints made under the confidential reporting service are sent to the Finance Director and are investigated in the first instance prior to a decision being taken about further steps. Feedback is provided to the person making the complaint, if necessary. The Board is absolutely committed to ensuring that all employees have a safe, reliable, and confidential way of reporting any suspicious activity. Communication with shareholders Communication with shareholders is a high priority for the Board. A number of formal communication channels are used to account to shareholders for the performance of the Group, which include the Annual Report, AGMs and periodic reports to the London Stock Exchange. Presentations given at appropriate intervals to representatives of the investor community are available to all shareholders to download from the Group s website ( Less formal processes include contacts with institutional shareholders for which the Board as a whole takes responsibility.

93 Strategic report 2-79 Governance Financial statements Extensive information about the Group s activities is provided in the Annual Report and the Halfyearly Report which are provided to shareholders. The Chief Executive and Finance Director had a number of meetings with institutional and other shareholders during the year, as did the Chairman. In addition, in April through June the Chairman sent three letters to shareholders to update them on the Group s progress and other important matters affecting them and the Group. Where practicable, the Board maintains an open relationship with the Group s major shareholders, and communicates directly with them, offering the opportunity to meet in order that their views on the Group can be understood. Enquiries from individuals on matters relating to their shareholding and the business of the Group are welcomed and are dealt with in an informative and timely manner. Shareholders are encouraged to attend the Annual General Meeting to discuss the progress of the Group. Conflicts of interest The Company complies with the provisions on conflicts of interest in the Companies Act The Company has in place procedures for the disclosure and review of any conflicts, or potential conflicts, of interest which the Directors may have and for the authorisation of such conflicting matters by the Board. In deciding whether to authorise a conflict or potential conflict the Directors must have regard to their general duties under the Companies Act The procedure operates to ensure the disclosure of conflicts, and for the consideration and if appropriate, the authorisation of them by non-conflicted Directors. The authorisation of a conflict matter, and the terms of authorisation, may be reviewed at any time by the Board. The Nomination Committee supports the Board in this process, both by reviewing requests from Directors for authorisations of situations of actual or potential conflict and making recommendations to the Board and by reviewing any situations of actual or potential conflict that have been previously authorised by the Board, and making recommendations regarding whether the authorisation remains appropriate. Going concern The Board closely monitors and manages its liquidity risk using cash flow forecasts which are regularly produced and applies sensitivities for different scenarios including, but not limited to, changes in oil and gas prices, changes in Rouble and Hryvna exchange rates, changes to production and other tax rates in relation to the Group s producing assets, increased operating and capital expenditure and delays to additional future revenue. Capital and operating costs are based on approved budgets and latest forecasts in the case of 2015 and current development plans in the case of In addition, the Directors have made enquiries into and considered the Ukrainian and Russian business environments and future expectations regarding country and currency risks that the Group may encounter. At the date of this report, there is a combination of circumstances which results in the existence of a material uncertainty that may cast significant doubt about the Group s and Company s ability to continue as a going concern. The combination of circumstances giving rise to the material uncertainty is discussed in note 2 to the financial statements. After making enquiries and considering the circumstances discussed in note 2 to the financial statements, the Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and Group will have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. On behalf of the Board Nigel Moore Chairman 19 March 2015

94 JKX Oil & Gas plc Annual Report 92 Audit Committee Report Audit Committee Members Committee Number member of meetings since in Richard Murray (as Chairman) January /3 Dipesh Shah 1 OBE June /3 Alastair Ferguson November /3 1 Due to illness, Dipesh Shah was not able to attend one Audit Committee meeting. Dear Shareholder has been a very challenging year for the Group with the political and economic developments in Ukraine and Russia adversely affecting the Group. The decrees announced by the Ukrainian government in the second half of the year had a material adverse financial impact on the Group and necessitated that the Board undertake an immediate review of capital and operational expenditure. This swift response to the unfolding crisis was aimed at maintaining an operating capability whilst protecting the Group s cash resources. In particular, the focus on liquidity has been effective in ensuring that the group remains solvent and that it continues to be appropriate to prepare the Financial Statements on a going concern basis. The consequences of the decline in the Russian and Ukrainian economies has been central to the Committee s work in, with particular focus on cash management and liquidity issues, the valuation of the Group s assets (including the impairment reviews undertaken by management) and an ongoing review of the results of the cost cutting programme. In these circumstances, the Committee has considered it appropriate that the Annual Report and Accounts should contain detailed disclosures setting out the challenges, risks and actions taken by management. In addition, you will note that our Auditors have understandably drawn attention, in their Report, to the uncertainties that lie beyond the control of management, as an Emphasis of Matter paragraph. In addition the Committee s role continues to be that of ensuring that the Group s governance, financial risk management and financial reporting processes provide the requisite assurance framework. The report that follows, expands on the matters that I have referred to above and we have detailed three such issues which relate to the financial statements. Each of these issues was reviewed as part of the year end audit and at the half year review and this section of our report is designed to provide you with an understanding as to how the Committee s review and oversight process has been conducted. In 2015, in addition to matters which coincide with key events in our financial reporting calendar and supporting the internal audit programme, the Committee will continue to support the development of a sound risk management culture and the improvement of risk management processes across the Group. In accordance with the governance requirements the Committee has assessed the Annual Report, on behalf of the Board, and has advised the Board that, in the Committee s opinion, the Annual Report taken as a whole is fair, balanced and understandable. Yours faithfully Richard Murray Chairman of the Audit Committee 19 March 2015

95 Strategic report 2-79 Governance Financial statements Role of the Audit Committee The Audit Committee has delegated authority from the Board set out in its written terms of reference, available on the Company s website, which were last reviewed by the Board in June. The principal objectives of the Audit Committee are: to monitor the integrity of the financial statements of the Group and regulatory announcements, and to review any significant financial reporting judgements; to monitor the adequacy and effectiveness of the Group s internal control, risk management and financial reporting processes; to provide the Board with an independent assessment of the Group s accounting affairs and financial position; to provide the Board with assurance that the Annual Report and Accounts are presented in a manner that is fair, balanced and understandable, so as to enable shareholders to assess the Group s performance, business model and strategy; to recommend the (re-)appointment of the external auditors to the Board and annually assesses their independence, objectivity, effectiveness, quality, remuneration and terms of engagement, as well as ensuring that the policy with regard to their appointment for non-audit services is appropriately applied. Thereafter, the Committee provides a recommendation to the Board regarding the auditors appointment to be put to the shareholders in the forthcoming annual general meeting; and to monitor the adequacy and effectiveness of the internal audit function and the Risk Committee and to review any significant matters arising. Composition of the Audit Committee During, the Audit Committee was chaired by Richard Murray, a Chartered Accountant and a former audit partner with Ernst & Young LLP. The Board has determined that Richard Murray has considerable recent and relevant financial experience through his previous and current roles. In addition, Richard maintains a regular pattern of attendance at relevant seminars and courses. The Committee also includes two other Independent Non-Executive Directors, Dipesh Shah and Alastair Ferguson, providing it with an appropriate balance between those individuals with a financial or accounting background and those with wider experience of the oil and gas sector in which we operate. In practice, the Committee achieves its objectives by a process of regular interaction with management and the external auditors, as well as by reviewing the work of Internal Audit and the Risk Committee, and other advisory firms. Together with the collective financial and commercial skills and experience of the other Committee members the Committee has the appropriate experience to fulfil its responsibilities and oversee the activities of the Company s auditors. Attendance at meetings The Audit Committee met three times during the year (2013: six). The Committee s meetings are always attended by the Chief Executive, the Finance Director, the lead partner of our external auditors, and by certain senior managers who are responsible for specific topics, such as risk management, financial control, and internal compliance procedures. Other Directors are invited to attend the meetings from time to time when appropriate. The Committee Chairman maintains contact with those other attendees throughout the year. Twice during the year (2013: twice), the Committee met with the external auditors to discuss matters which the auditors and Audit Committee may wish to raise without Executive Directors being present. The Committee s activities during The Committee has an annual work plan, developed from its terms of reference, with standing items that the Committee considers at each meeting in addition to any specific matters arising and topical items on which the Committee has chosen to focus. The work of the Audit Committee during the year principally fell under three main areas and is summarised on the following page. Significant issues considered by the Audit Committee After discussion with management and the external auditors, the Committee determined that the key risk of misstatement in relation to the Group s financial statements related to: The going concern basis of accounting; The carrying value of the Group s Oil and Gas assets; and The Group s exposure to production-related taxes in Ukraine. These issues were discussed with management and the external auditors at the time the Committee reviewed and agreed the auditors Group Audit Plan, during the review of the half year interim financial statements in July and at the conclusion of the audit of these financial statements.

96 JKX Oil & Gas plc Annual Report 94 Audit Committee Report Internal controls and risks External auditors Accounting, tax & financial reporting Considered reports from KPMG in relation to their audits and assessment of the control environment in Russia and Ukraine Considered reports from the external auditors on their assessment of the control environment Considered feedback from both of these reports as submitted by local and Group management Reviewed Risk Committee reports, which required management to identify risks and evaluate them, and ensured appropriate mitigating controls were agreed and implemented Approved the scope of the internal audit programme for the year Considered the effectiveness of the internal audit function Assessed the effectiveness of the Group s internal control environment Assessed the effectiveness of the Group s Anti-Bribery and Corruption Annual Plan Considered and approved the audit approach and scope of the audit work to be undertaken by the external auditors and the fees for the same Reviewed auditor s reports on their audit findings at the half year review and at the year end Reviewed and updated the policy governing non-audit services Considered the independence of the auditors and their effectiveness, taking into account: (a) non-audit work undertaken by the external auditors and compliance with the policy; (b) FRC guidance; (c) feedback from a survey targeted at various stakeholders; and (d) the Committee s own Assessment Considered the recommendations in the UK Corporate Governance Code regarding the tender of the external audit contract Considered and approved letters of representation issued to the external auditors Reviewed the half year and annual financial statements and the significant financial reporting judgements made therein Considered the liquidity risk and the basis for preparing the Group half yearly and full year accounts on a going concern basis and reviewed the related disclosures in the Annual Report Reviewed the external auditor s report on audit and accounting judgements, including consideration of relevant accounting standards and underlying assumptions Reviewed disclosures in the Annual Report in relation to internal controls, risk management, principal risks and uncertainties and the work of the Committee Received a corporate governance update relating to changes to the UK Corporate Governance Code Misstatements Management reported to the Committee that they were not aware of any material or immaterial misstatements made intentionally to achieve a particular presentation. The auditors reported the misstatements that they had found in the course of their work to the Committee and confirmed that no material amount remained unadjusted. Internal control and risk management The Audit Committee monitors the integrity of the financial statements and related announcements, reviews the Company s internal control processes and risk management systems, and reports its conclusions to the Board. The Committee regularly reviews the effectiveness of the Company s systems of internal control and risk management. The Risk Committee, which comprises the Finance Director and senior management, assists the Board in discharging their responsibility to review on an ongoing basis the risks potentially facing the Group, their potential impact, the strategies available to mitigate those risks and the costs of such mitigation. The Risk Committee met three times in. The Chairman of the Risk Committee reports to the Audit Committee and the Board at relevant meetings on matters it has reviewed and material changes to the Group s risk environment, in addition to making recommendations when appropriate. Following each Risk Committee meeting, the Committee reviews the minutes, the latest Risk Register and related output and challenge the Group s high-rated risks and the mitigating actions identified by each risk owner. An updated list of principal risks is included within the Strategic Report on pages 2 to 79. For each high-rated risk the Committee reviews the Group s current level of exposure and considers the appropriateness of the mitigating actions being taken by management. The Committee was comfortable with the processes in place for risk management. Additional information on risk management is included in the risks section on pages 48 to 51.

97 Strategic report 2-79 Governance Financial statements Matters considered Response The impact of political and economic uncertainty in Ukraine on the going concern basis of accounting In the second half of, three government decrees were issued without warning and were effective immediately for a number of months. The decrees had the effect of: doubling the rate of gas production tax; implementing currency restrictions until 2 December, subsequently extended to 2 March 2015 and again to 3 June 2015; and directing major industrial gas buyers to acquire their gas solely from the Ukraine state-owned gas company through to 28 February All three of these decrees have had a significant adverse financial impact on the Group. The majority of the Group s revenues, profits and cash flow from operations are currently derived from its oil and gas production in Ukraine. Accordingly, the Group s going concern assessment is sensitive to the realisations that we achieve from our oil and gas sales in Ukraine our ability to have access to the market for our gas and the amount of cash that we are permitted to repatriate to the UK. Under guidelines set out by the UK Financial Reporting Council the Board is required to consider whether the going concern basis is the appropriate basis of preparation for the Financial Statements, and furthermore, is required to include appropriate disclosure of any significant considerations or uncertainties relevant to the going concern assumption. The Committee has been in discussion throughout the year with management and the external auditors (PwC) in order to assess the impact of government decrees and economic difficulties in Ukraine on our people, operations and assets located in that territory. The Committee received reports prepared by management outlining their assessment of the ability of the Group to continue as a going concern, subject to the reprioritisation of capital expenditure and the cost reduction programme, and challenged the appropriateness of the key assumptions used. The Committee was also fully briefed on discussions between the Board, local management and advisors regarding the potential for further unforeseen decrees in Ukraine affecting the Group and the likelihood of current decrees in place being extended. In addition, PwC provided a detailed report on this issue to the Committee. The audit opinion, provided by them, includes an emphasis of matter paragraph referencing specific risks relating to further legislation from the Ukrainian government affecting the energy industry, material deterioration of our oil and gas realisations and the extension of currency controls through 2016 which represent material uncertainties. Whilst it is unclear whether any or all of these risks will be realised, if realised, they may cast significant doubt about the Group s ability to meet its obligations as they fall due and continue as a going concern. The Committee has advised the Board that, on the basis of management s reasonable expectations as to the likely outcome and impact of these risks, including consideration of mitigating measures, the Group has adequate resources to continue in operational existence for the foreseeable future and therefore the going concern basis is the appropriate basis of preparation for the financial statements. However, this notwithstanding, the Committee has advised the Board that the current political and economic uncertainties that exist, particularly those relating to market access, oil and gas realisations and currency restrictions, together represent a material uncertainty which should be, and is, appropriately disclosed in the financial statements (see note 2 to the Group financial statements). Continues overleaf

98 JKX Oil & Gas plc Annual Report 96 Audit Committee Report Matters considered Response The carrying value of the Group s oil and gas assets As more fully explained in note 5 to the accounts, JKX s oil and gas assets are grouped into cash generating units ( CGUs ) for the purpose of assessing the recoverable amount. Each period these assets are reviewed for indications of impairment. If any assets are considered to have been impaired, the carrying value is adjusted downwards by an appropriate amount, with a corresponding charge made to the Income Statement. An impairment review necessarily involves the use of assumptions such as long-term production forecasts, gas prices, production-related taxes, capital expenditure, discount rates, and other macroeconomic assumptions underlying the valuation process. This is particularly challenging in relation to the Group s interests in Ukraine and southern Russia due to the lower medium term visibility of gas prices which are set by the respective governments and are vulnerable to unexpected short-term political manoeuvering. The Committee received reports from management outlining the basis for each of the key assumptions used, and these assumptions were reviewed by the Committee to ensure reasonableness and consistency e.g. with the Group s 2015 Budget which is approved by the Board. In addition, this area is a prime source of audit focus and accordingly our auditors provide detailed reporting to the Committee. Management also brought to the attention of the Committee the sensitivity analysis disclosed in note 5 to the financial statements. The Committee agreed that, on the basis of the evidence available, the projected future cash flows from the Group s CGUs adequately supported the carrying value of the associated oil and gas assets after impairment, and noted that full disclosure of the key assumptions (including a sensitivity analysis in note 5) had been appropriately disclosed in the financial statements. The Group s exposure to production-related taxes in Ukraine In recent years, the Group has been in receipt of a number of unexpected claims for additional taxes, mainly retrospective in nature, all of which have been strongly contested by management and which have been/are being contested in the Law Courts of Ukraine. The outcome of legal challenges concerning additional production tax liabilities in Ukraine for the period to 31 December 2010 is underpinned by a range of judgements (see note 27). The Committee addressed this issue, as in previous periods, by reviewing reports from senior management and examining the degree to which these are supported by professional advice from external legal and other advisory firms. This is also an area of elevated audit risk and accordingly the Committee received detailed verbal and written reporting from PwC on these matters. Having reviewed these reports and submissions, the Committee was satisfied that no provision was required for these tax claims. Furthermore the Committee noted that the disclosures made in note 27 to the Financial Statements appropriately reflected the uncertainties that necessarily persist. Internal audit During the year, KPMG were retained to build on their prior year assessment on the adequacy of the Group s procedures and controls in Russia and Ukraine as well as providing assistance with the development of a Group internal audit function. KPMG s assessment of our processes and controls allowed management to prioritise the work programme so as to address the recommendations made by them, thereby strengthening the financial and operating controls in these key operating subsidiaries. Our internal audit function continued to develop in with KPMG building on their work of the prior year in addition to assessing and testing management s responses to their previous findings. The Audit Committee is fully supportive of the development of the internal audit programme which is intended to ensure that the necessary processes and controls are firmly embedded within our organisation making the control environment stronger and more efficient. External audit The Audit Committee maintains an objective and professional relationship with the Company s auditors, PricewaterhouseCoopers LLP ( PwC ), who have been auditors to the Group since 2006, and meets in private session with them on a periodic basis. PwC were reappointed as the Company s auditors in 2011 following a competitive tender process. The audit partner rotated in PwC are required to rotate the audit partner responsible for the Group audit every five years.

99 Strategic report 2-79 Governance Financial statements The Audit Committee are fully supportive of the Code s requirement that the audit should be put out to tender at least once in every ten years. Any decision to open the external audit to tender within ten years is taken on the recommendation of the Audit Committee based on the results of the annual performance review. Non-audit services During the year the Committee reviewed and updated their policy governing the engagement of the external auditor to provide non-audit services. The policy precludes PwC from providing certain services such as valuation work or the provision of accounting services and also sets a presumption that the external auditor should only be engaged for non-audit services where there is no legal or practical alternative supplier. In such instances, the continued objectivity and independence of the auditors in their capacity of auditor is an objective of the Group. Under the policy, the Committee has delegated authority to the Finance Director for the approval of non-audit services from PwC of up to $20,000 per project and an aggregate amount of not more than $50,000 in any year. Decisions above these thresholds must be referred to the Audit Committee for pre-approval of the services and be supported by appropriate documentation detailing management s reasons for selecting PwC. In addition to the statutory audit fee, PwC and member firms charged the Group $112,000 for audit-related assurance services in in connection with statutory and regulatory filings and a further $5,000 for other non-audit services, primarily staff training and development and tax advice. Further details of the fees paid, for both audit and non-audit services, can be found in note 23 to the consolidated financial statements. The Committee is satisfied that the quantum of the non-audit services provided by PwC is such that the objectivity and independence of the external auditor has not been compromised. Reappointment of Auditors During the year the performance of the auditor was formally assessed by the Committee in conjunction with the senior management team. In making this assessment the Committee focussed on the robustness of the audit, the quality of delivery of audit services and the quality of the auditor s staff. Having reviewed the capability and effectiveness of PwC s performance during the year, and having satisfied itself as to their continuing independence and objectivity within the context of applicable regulatory requirements and professional standards, the Committee has invited the Board to recommend the reappointment of PwC as auditor at the forthcoming AGM and a resolution to that effect will appear in the notice of the AGM.

100 JKX Oil & Gas plc Annual Report 98 Directors Remuneration Report Annual Statement Remuneration Committee Members Committee Number member of meetings since in Dipesh Shah OBE (as Chairman) 1 June /3 Nigel Moore 26 June /3 Richard Murray 17 January /3 Dear Shareholder On behalf of the Board of Directors, I am pleased to present the Directors Remuneration Report for the year ending 31 December for which we will be seeking your approval at the Annual General Meeting on Wednesday, 3 June Throughout, the Board and individual Directors have been working under extremely challenging circumstances given the geo-political situation in Ukraine and Russia. Moreover, in the second half of the year in Ukraine, three government decrees were issued without warning which were with immediate effect, and which continue to have a significant adverse financial impact on the Group. Management have devoted intense and exceptional effort on a daily basis to mitigate the impact of such difficult circumstances. The Committee has reviewed performance and incentive plan outcomes in the light of such actions whilst remaining cognisant of the financial circumstances facing the Company. In these challenging times, it is particularly important for the success of our strategy that we attract and continue to retain the best people with appropriate skills at every level. The Company has built a team which is highly experienced in the region, a considerable benefit in the present circumstances. Our remuneration structure and underlying philosophy continues to be robust and focused on ensuring alignment of Executive and senior management with shareholder interests, and encouraging delivery of the Company s strategic objectives. Remuneration Committee s work in Each year the Committee has a full agenda ensuring the directors remuneration policy is in line with evolving corporate governance requirements, and is appropriate to drive the right behaviours and to reward sustainable company value. Details of the Committee s work during is set out on page 105. The Committee values engagement with key investors. In recent years, we have written to investors regarding our remuneration policy, and investor views were sought again during 2013 prior to formulating proposals for changes to the remuneration policy; the new remuneration policy was approved at the AGM in June and is summarised in this report. Remuneration in Executive Directors salaries were increased by an average of 3.5% in January which compared with an average of 4.5% increase awarded to other UK-based staff. Based on the strategic, financial and health and safety performance criteria established by the Committee for, the Executive Directors could have received bonuses totalling 43.4% of their base pay in cash. As a result of the financial circumstances facing the Company at this time, the Committee has determined that bonuses achieved by Executive Directors, in respect of the financial year, will be deferred into JKX shares. The applicable number of deferred shares will be awarded later in 2015 and will be subject to a 12 month

101 Strategic report 2-79 Governance Financial statements holding period and clawback in accordance with the Directors Remuneration Policy (see page 102). The number of deferred shares to be awarded to each Executive Director will be determined by the share price on the date of award, but will not exceed that implied by the share price on the date the Committee determined that the bonuses would be deferred (11 March 2015). The Committee s decision on the quantum of deferred shares to be awarded will be reported in the 2015 Annual Report. TSR and EPS performance targets for the 2012 Performance Share Plan ( PSP ) and Discretionary Share Option Scheme ( DSOS ) awards, respectively, were not met, and consequently no long-term incentives vest for performance to 31 December. Details of the remuneration decisions for the reporting year are covered in the Annual Report on Remuneration. Remuneration in 2015 The Committee annually examines the evolution of remuneration practices and policy. Changes proposed by The Committee at the AGM in June were approved and will remain in place for the next three years. No salary increases were awarded for 2015 across the organisation, including to Executive Directors and Non-Executive Directors. Annual bonuses in 2015 will be based on a similar performance framework as in using a range of strategic, financial and health and safety targets. Half of the weighting will be apportioned to financial targets. Under the Performance Share Plan approved at the AGM, awards would normally be granted of nil cost options which equate to 150% of the base salary for each of the Executive Directors. For 2015, the Committee has decided to restrict the grant to 100% of base pay with performance conditions that reflect the approved Remuneration Policy. Remuneration disclosure This report complies with the requirements of the Large and Medium sized Companies and Groups Regulations 2008 as amended in 2013, the provisions of the UK Corporate Governance Code (September 2012) and the Listing Rules. As with last year, this Report is split into two parts: the Policy Report and the Directors annual remuneration report: Our Directors Remuneration Policy (pages 100 to 104) is unchanged from that approved by shareholders at the June AGM, and we have therefore provided a summary in order to provide context. The full Policy Report, as approved by shareholders, can be found in our 2013 Annual Report available on our website. The Directors annual remuneration report (pages 105 to 115) sets out details of how our remuneration policy has been applied for the year ended 31 December. This section is subject to an advisory shareholder vote. These sections work together to give you full and transparent disclosure of the Company s intention and operation of Directors remuneration. At the AGM on 3 June 2015, the Directors annual remuneration report will be put to an advisory shareholder vote. Yours faithfully Dipesh J Shah OBE; FRSA Chairman of the Remuneration Committee 19 March 2015

102 JKX Oil & Gas plc Annual Report 100 Future policy Directors Remuneration Policy Summary of Directors Remuneration Policy The Remuneration Policy for Executive Directors and Non-Executive Directors was approved by shareholders at the June AGM and took effect from 1 January Below we provide a summary including the Remuneration policy table, and terms and conditions for members of the Board. The full policy report, as approved by shareholders, can be found in last year s remuneration report, a copy of which can be found on the Company s website at Reward policies The Company aims to ensure that total remuneration is set at an appropriate level relative to peer group comparator companies, those being UK-based oil and gas companies which are primarily quoted on the London Stock Exchange or AIM. The main components of remuneration for Executive Directors and senior management are basic annual salary; pension and benefits (including non-contributory health insurance, life assurance and income protection); an annual bonus scheme linked to short-term financial and strategic objectives; and long-term incentives linked to the delivery of long-term shareholder value. The main objectives of JKX s remuneration policy are to: enable the Company to recruit, retain and motivate individuals with the skills, capabilities and experience to achieve its stated objectives; strengthen teamwork by enabling all employees to share in the success of the business; and ensure alignment of Executive, senior management and shareholder interests. Reward principles The principles of JKX s remuneration policy are to: pay an appropriate level of total remuneration in relation to company and individual performance and with reference to peer group companies; ensure that there is an appropriate link between performance and reward; award annual bonuses which reflect the achievement of short term financial and strategic objectives as well as personal performance; and ensure that long-term incentives are linked to Total Shareholder Return ( TSR ) and to the delivery of Strategic Plan targets including the achievement of strategic objectives. Each element of remuneration has a specific role in achieving the objectives of the remuneration policy and aligning the interests of Executive Directors with the interests of shareholders. The combined potential remuneration from the annual bonus and long-term incentives ensures that the balance of the Executive remuneration package is weighted towards at risk performance pay with a higher weighting on long-term remuneration. More than 97% of JKX staff are based outside of the UK, primarily in the Ukraine and Russia. The Committee takes into account remuneration conditions elsewhere in the Company, and particularly for those employees based in the UK, in formulating the Executive Director remuneration policy. A summary of the Directors remuneration policy is provided in the table opposite.

103 Strategic report 2-79 Governance Financial statements Executive Director Remuneration Policy table Base salary Purpose and link to strategy Operation Opportunity Performance metrics To attract and retain talent by ensuring base salaries reflect individual performance and market factors. Base salaries are reviewed annually on 1 January, with reference to the individual s role, experience and performance; salary levels at relevant UK sector comparators 1 ; and the range of salary increases applying across the Group. Any base salary increases are applied in line with the outcome of the annual review. It is not anticipated that salary increases for Executive Directors will exceed those of the UK-based workforce over the period over which this policy will apply. Where increases are awarded in excess of the UK employee population, the Committee will provide clear rationale in the relevant year s Annual Report on Remuneration. Business and individual performance are considerations in setting base salary. Pension Purpose and link to strategy Operation Opportunity Performance metrics To provide competitive retirement benefits. The Company makes a contribution to the pension scheme of the individual s choice. At their option, Executive Directors may either have equivalent contributions made to their personal pension schemes or cash in lieu of pension or a combination of both. Executive Directors are eligible to receive an annual contribution equivalent to 15% of base salary. Not performance related. Benefits Purpose and link to strategy Operation Opportunity Performance metrics To provide competitive benefits. Executive Directors receive benefits which consist primarily of life assurance, income protection and private medical cover, although can include any such benefits that the Committee deems appropriate. Benefits values vary by role and are reviewed periodically relative to market circumstances. The cost of the benefits provided changes in accordance with market conditions and will, therefore, determine the maximum amount that would be paid in the form of benefits during the Policy Period. The Committee retains the discretion to approve a higher cost in exceptional circumstances (e.g. relocation) or in circumstances where factors outside the company s control have changed materially (e.g. increases in insurance premiums). Not performance related. 1 Comparator companies used to assess market pay competitiveness have historically included UK-based oil and gas companies listed on the London Stock Exchange or AIM. The Committee reviews comparator companies periodically to ensure they remain appropriate and retains the discretion to adjust the reference group or companies as appropriate.

104 JKX Oil & Gas plc Annual Report 102 Future policy Directors Remuneration Policy Annual bonus Purpose and link to strategy Operation Opportunity Performance metrics To incentivise the achievement of short-term financial and strategic objectives. Performance measures, targets and weightings are set at the start of the year according to strategic priorities. At the end of the year, the Remuneration Committee determines the extent to which the targets have been achieved, with any bonus payments delivered in cash. For Executive Directors, the Committee has the discretion to mandate the deferral of a proportion (up to 100%) of the annual bonus in JKX shares, to be held for a minimum of 1 year. Deferred shares will be subject to clawback provisions in the event of gross misconduct, material misstatement, or in any other circumstance that the Committee considers appropriate. For Executive Directors, the maximum annual bonus opportunity is 100% of base salary, with target bonus set at 40% of maximum. For Threshold level performance, the annual bonus will be between 0% to 20% of base salary. Performance is assessed annually based on challenging budget and stretch targets for financial and business performance. The measures selected may vary each year depending on business context and strategy, and measures will be weighted appropriately according to business priorities. Under normal circumstances, financial measures will make up at least half of the total bonus opportunity. The Committee has discretion to adjust the formulaic bonus outcomes both upwards and downwards within the plan limits (including down to zero) to ensure alignment of pay with the underlying performance of the business, e.g., in the event of a target being significantly missed or unforeseen circumstances outside of management control. Further details of the measures, weightings and targets applicable are provided on page 107. Performance Share Plan ( PSP ) Purpose and link to strategy Operation Opportunity Performance metrics To incentivise strong long-term financial performance and superior longer term returns to shareholders relative to peers. The Remuneration Committee has the ability to grant awards of nil-cost options annually to Executive Directors, conditional on Group performance over a period of at least three years. The sale of vested PSP awards is subject to meeting shareholding requirements (see notes to the Policy Table). Award levels and performance conditions will be reviewed from time to time to ensure they remain appropriate and no less stretching than the first cycle. Clawback applies on unvested PSP shares in the event of gross misconduct, material misstatement, or in any other circumstance that the Committee considers appropriate. The PSP provides for an award up to a normal aggregate limit of 150% of salary for Executive Directors, with an overall limit of 200% of salary in exceptional circumstances. The Committee has the discretion to authorise a payment, in cash or shares, equal to the value of dividends which would have accrued on vested shares during the vesting period. Vesting of PSP awards is subject to continued employment and the Company s performance over a 3-year performance period. If no entitlement has been earned at the end of the relevant performance period, awards will lapse. From 2015, PSP awards will be based on a number of financial and strategic measures, which may include, but not be limited to: TSR Earnings per Share ( EPS ) Other financial measures (e.g. ROCE, Profit before tax, cash resources) Strategic and operational measures (e.g. production, reserves) In addition, awards are subject to an underpin such that for any awards to vest, the Remuneration Committee must satisfy themselves that health and safety performance has been satisfactory over the performance period. Each measure can be applied a weighting of between 0% and 50%. The Committee has the discretion to adjust the performance measures and weightings in advance of making an award to ensure that they continue to be linked to the delivery of Company strategy.

105 Strategic report 2-79 Governance Financial statements Performance metrics continued Under each measure, threshold performance will result in up to 25% of maximum vesting for that element. The vesting level will increase on a sliding scale to 100% vesting for stretch levels of performance. Vesting of PSP awards will be deferred in whole or in part for a period of up to two years following the end of a three year vesting period. The Company s policy from 2015 will be for awards to vest 50% after 3 years with 25% required to be held until the end of 4 years, and 25% until the end of 5 years. As under the annual bonus, the Committee has discretion to adjust the formulaic PSP outcomes within the plan limits to ensure alignment of pay with performance, i.e. to ensure the outcome is a true reflection of the performance of the company. Details of the targets to be used in PSP grants for are included in the Annual Report on Remuneration on page 109. Discretionary Share Option Scheme ( DSOS ) The future policy proposed from 2015 does not envisage the grant of any DSOS awards. Purpose and link to strategy Operation Opportunity Performance metrics To incentivise superior long-term financial and share price performance. The Remuneration Committee has the ability to grant awards of market-value options annually to Executive Directors and senior managers, conditional on Group performance over a period of at least three years. Subject to the approval of the new PSP, the Committee will not grant awards under the DSOS beyond. Details of outstanding DSOS awards, and awards for, are included in the Annual Report on Remuneration on page 115. The DSOS allows for awards up to an aggregate limit of 200% of salary in exceptional circumstances. Where granted, DSOS awards will be subject to performance conditions. Details of the targets applying to DSOS awards will be included in the Annual Report on Remuneration, where applicable. Non-Executive Director fees Function Operation Opportunity Performance metrics To attract and retain Non-Executive Directors of the highest calibre with broad commercial and other experience relevant to the Company. Fee levels are reviewed annually, with any adjustments effective 1 January in the year following review. The fees paid to the Chairman and Non-Executive Directors are determined by the Board. Additional fees are payable for acting as Senior Independent Director and as Chairman of the Audit and Remuneration Committees, and for individual membership of such Committees. Fee levels are benchmarked against comparable companies in the sector as well as FTSE-listed companies of similar size and complexity. Time commitment and responsibility are taken into account when reviewing fee levels. Non-Executive Director fee increases are applied in line with the outcome of the annual fee review. Fees for the year commencing 1 January 2015 are set out in the Annual Report on Remuneration. Fee levels will be next reviewed during 2015, with any increase effective 1 January It is expected that increases to Non-Executive Director fee levels will be in line with salaried UK-based employees over the life of the policy. In the event that there is a material misalignment with the market or a change in the complexity, responsibility or time commitment required to fulfil a non-executive role, the Board has discretion to make an appropriate adjustment to the fee level. None

106 JKX Oil & Gas plc Annual Report 104 Future policy Directors Remuneration Policy Executive Director service contracts, including arrangements for early termination, are carefully considered by the Committee. The Committee considers appointments of indefinite term and with a notice period of one year to be appropriate. Executive Director service contracts Date Notice of contract Period 1 Dr Paul Davies 1 January months Cynthia Dubin 14 November months Peter Dixon 1 July months Martin Miller 1 July months 1 The notice period is 12 months by the Company or the individual Payments from existing awards Executive Directors are eligible to receive payment from any award made prior to the approval and implementation of the remuneration policy detailed in last year s Remuneration Report, i.e. before 1 January Details of these awards are disclosed in the Annual Report on Remuneration, and include existing awards made under the DSOS. Clawback For the avoidance of doubt, the Committee has discretion to operate clawback as a mechanism to reduce unvested or deferred incentives in the event of a material misstatement in the annual financial statements, gross misconduct, or any other circumstances that the Committee deems appropriate.

107 Strategic report 2-79 Governance Directors Remuneration Report Annual Report on Remuneration Financial statements The following section provides details of how JKX s remuneration policy was implemented during the financial year ending 31 December. In accordance with the Committee s terms of reference and the Group s remuneration policy, the Committee determines Executive Directors actual remuneration for the year. Members and process The Remuneration Committee currently comprises three independent Non-Executive Directors and is chaired by Dipesh Shah (Senior Independent Director). The Committee meets at least twice a year, to assist the Board in determining the remuneration arrangements and contracts of the Directors and senior employees. The Committee met three times during (2013: three). The Remuneration Committee has reviewed the Code, specifically Section D that addresses the level, make up and procedural aspects of remuneration. The Remuneration Committee considers that it complies with all the provisions and practices identified. Attendance at meetings When required, the Chief Executive attends Committee meetings; however no Director plays a part in any discussion regarding his own remuneration. None of the Committee has any personal financial interest except as a shareholder (as detailed on page 114), which, given the level of holdings, the Board accepts does not impair independence, and no conflicts of interests arise from crossdirectorships or day-to-day involvement in running the Group. Advisers The Committee retains Kepler Associates ( Kepler ) as its independent executive remuneration advisers. The Committee undertakes due diligence periodically to ensure that Kepler remains independent and that the advice provided is impartial and objective. Their total fees for the provision of remuneration services in were 24,295 on the basis of time and materials. Kepler provides no other services to the Group. Kepler is a signatory to the Remuneration Consultants Group Code of Conduct, details of which can be found at Remuneration Committee Dipesh Shah OBE (as Chairman) Nigel Moore Richard Murray Role of the Committee Establishes the overall principles of remuneration for Directors of all Group companies Determines the remuneration of Executive Directors and Senior Management, communicates this to the stakeholders in the annual report Recommends the participation in, and operation of, the Company s long-term incentive plans. The full terms of reference are available from the Company Secretary Activities during In addition to regular topics, the Committee engaged in specific matters including: Review and approval of payments to be made under the 2013 Annual Bonus Scheme Approval of executive salary levels for Confirmation of lapse of share option awards made in 2011 due to failure to achieve vesting criteria in Review and approval of performance targets for the Annual Bonus Scheme Review and approval of the allocation of, and performance conditions applicable to, performance shares and share option awards made in Review the application and appropriateness of current remuneration policies

108 JKX Oil & Gas plc Annual Report 106 Directors Remuneration Report Annual Report on Remuneration Single figure of total remuneration for Executive Directors (audited) The table below sets out a single figure for the total remuneration received by each Director for the year ended 31 December and the prior year: Dr Paul Davies Cynthia Dubin Martin Miller Peter Dixon Notes Salary Benefits Annual bonus* DSOS 5 PSP 6 Pension contribution Total remuneration * The Committee has determined that the Executive Directors shall have no entitlement to receive a bonus in respect of the financial year and that the bonus shall be deferred into JKX shares. The Committee has agreed with each Executive Director that the Company will award the applicable number of deferred shares later in Full details of the deferred shares will be reported in the 2015 Annual Report. 1) Salary: amount earned for the year 2) Benefits: the taxable value of benefits received in the year, including life assurance, income protection and private medical cover 3) Annual Bonus: this is the total bonus based on performance during the year which for is to be deferred into shares, subject to clawback 4) DSOS: no awards vested on performance to 31 December (2013: none) 5) PSP: no awards vested on performance to 31 December (2013: none) 6) Pension: annual contribution by the Group to directors pension plans or cash in lieu Single figure of total remuneration for Non-Executive Directors (audited) Prior to, the Non-Executive fees were last increased at the end of 2011 for application in The table below sets out a single figure for the total remuneration received by each Director for the year ended 31 December and the prior year: Nigel Moore Dipesh Shah Lord Oxford Alastair Ferguson Richard Murray Fees Total remuneration Incentive outcomes for the year ended 31 December (audited) Annual Bonus Scheme The Annual Bonus Scheme for applied to Executive Directors and certain senior management including senior staff in Poltava Petroleum Company ( PPC ) and Yuzhgazenergie ( YGE ). Bonuses are based on both Group and individual performances against objectives determined by the Committee at the beginning of the year and are designed to reward short-term performance. The scheme is discretionary and annual awards are not pensionable. The performance conditions for each financial year are derived from the Company s Annual Budget and Strategic Plan and have been approved by the Board. In order to encourage teamwork across the Group the weighting applied to each performance condition was identical for each Executive Director and for senior management. In, the Maximum bonus opportunity for Executive Directors was 100% of base salary and target bonus was 40% of base salary. For senior managers target bonuses ranged between 12% and 20%, and maximum bonus opportunity ranged between 30% and 60%. The Annual Bonus Scheme performance conditions and Achievements for were as shown as in the table opposite. To earn the maximum level of bonus requires the maximum to be met or exceeded for each performance measure and all of the strategic objectives to be met. The Remuneration Committee considers these performance measures as the key drivers and indicators of both short and long-term performance and value creation.

109 Strategic report 2-79 Governance Financial statements Element Weighting to overall bonus Performance measures Performance targets Achievement % of bonus achieved Strategic Plan targets 40% Increases in production Based on quantifiable figures to limit subjectivity as far as possible New reserves and resources from existing and new licences Above minimum threshold but below target Exceeded target but below stretch target 10.1% Financial targets 50% Adjusted Pre-Tax Profit Targets established against each measure Adjusted return on Average Capital Employed with a sliding scale between threshold and maximum Below minimum threshold Exceeded stretch target 30.0% Minimum rolling cash resources Exceeded stretch target Health and safety targets 10% Lost Time Injury Frequency Rate ( LTIF ) All Injury Frequency Rate ( AIFR ) LTIF=0.25 Below target 3.3% AIFR=0.40 Below target Environmental Incident Frequency Rate ( EIFR ) EIFR=0.80 Exceeded target Total 100% 43.4% Given the close link between these targets and JKX s longer-term strategy, the Committee has deemed that the targets remain commercially sensitive and will not be published at this time. The Committee will disclose these bonus targets when they cease to be commercially sensitive which is expected to be in On the basis of the results above, bonuses achieved are 43.4% of basic salary for Executive Directors, and of between 13.0% and 26.0% of basic salary for senior management. As a result of the financial circumstances facing the Company at this time, all bonuses have been deferred. The Committee has determined that bonuses achieved by Executive Directors, in respect of the financial year, will be deferred into JKX shares. The applicable number of deferred shares will be awarded later in 2015 and will be subject to a 12 month holding period and clawback in accordance with the Directors Remuneration Policy. The number of deferred shares to be awarded to each Executive Director will be determined by the share price on the date of award, but will not exceed that implied by the share price on the date the Committee determined that the bonuses would be deferred (11 March 2015). The Committee s decision on the quantum of deferred shares to be awarded will be reported in the 2015 Annual Report. Scheme interests awarded in (audited) The Company operated two long-term incentive plans during : the 2010 Discretionary Share Option Scheme ( DSOS ) and the 2010 Performance Share Plan ( PSP ) both of which were approved by shareholders at the 2010 and Annual General Meetings, respectively. The approved future policy does not envisage the grant of any DSOS awards from 2015 onwards. The PSP provides nil-cost options for Executive Directors and the DSOS provides market value options for Executive Directors and senior management. In the aggregate, the market value of shares that may be granted in any financial year under the DSOS and the PSP together cannot exceed 300% of basic salary for any Executive. In any ten year period, the number of Shares which may be placed under Option, or issued:

110 JKX Oil & Gas plc Annual Report 108 Directors Remuneration Report Annual Report on Remuneration may not exceed five per cent of the Company s ordinary share capital if issued under the discretionary employees share scheme; and may not exceed ten per cent of the Company s ordinary share capital if issued under the other employees share schemes. As at 31 December, the maximum available shares under the Company s 5% and 10% limits was 1.0 million (2013: 0.3 million) and 9.6 million (2013: 8.9 million) shares respectively, out of an issued share capital of million shares Discretionary Share Option Scheme ( DSOS ) The normal maximum grant of Options in any financial year under the DSOS is 100% of basic salary. In exceptional circumstances the Committee has the discretion to grant options with a face value of up to 200% of basic salary. To date, awards have not exceeded 100% of salary. For awards under the DSOS, Paul Davies and Cynthia Dubin received a grant of options of 100% of salary, and Peter Dixon and Martin Miller received grants of 80% of salary. Options vest at the end of a 3-year performance period, subject to achievement of 3-year Earnings per Share ( EPS ) growth targets. For the purposes of the DSOS, EPS will be adjusted for any changes in tax (production and corporate) rates. Executives will therefore not be rewarded (or penalised) for subsequent reductions (or increases) in these tax rates, which the Remuneration Committee considers are outside of their control. The performance targets are reviewed on an annual basis at the start of each 3-year performance cycle to ensure their continued appropriateness. The Remuneration Committee determined that for grants 25% of the options would vest for EPS growth of 5% p.a. and all of the options would vest for EPS growth of 10% p.a. (and on a straight-line basis in between these points), in line with the performance conditions for 2013 grants. The Committee has total discretion as to the application of the Rules of the 2010 DSOS, and in the event of a change of control, the Committee retains discretion to determine the treatment of unvested unapproved options. Vesting schedule for the DSOS Vesting schedule for the PSP 100% 100% % of options vesting 25% % of shares vesting 25% 0% Threshold Maximum 0% Index Index + 10% p.a. 3 year EPS growth p.a. JKX s 3 year TSR vs. Index 50% based on relevant FTSE market capitalisation Index and 50% based on FTSE All-Share Oil & Gas Producers Index awards under the DSOS Market Shares over price at date End of which awards of award/ performance Executive Director Date of grant granted exercise price Face value period Dr Paul Davies 28-Mar , , Dec-16 Cynthia Dubin 28-Mar , , Dec-16 Martin Miller 28-Mar , , Dec-16 Peter Dixon 28-Mar , , Dec-16

111 Strategic report 2-79 Governance Financial statements awards under the PSP Shares over Market End of which awards price at date performance Executive Director Date of grant granted of award Face value period Dr Paul Davies 28-Mar , , Dec-16 Cynthia Dubin 28-Mar , , Dec-16 Martin Miller 28-Mar , , Dec-16 Peter Dixon 28-Mar , , Dec Performance Share Plan ( PSP ) The normal maximum award of nil-cost options in any financial year under the PSP is 100% of a participant s basic salary for awards up to and including. From 2015 onwards, grants under the DSOS will cease, in accordance with our policy, and a normal limit of 150% of salary will apply under the PSP. In exceptional circumstances the Committee has the discretion to make awards of up to 200% of a participant s basic salary. To date, awards have never exceeded 100% of salary. Maximum award opportunities in were 100% of salary for Paul Davies and Cynthia Dubin, and 80% of salary for Peter Dixon and Martin Miller. PSP awards vest based on 3-year TSR performance relative to a relevant FTSE market capitalisation index (the FTSE SmallCap for awards) and FTSE All-Share Oil & Gas Producers index with half of the award being assessed against each index. Each part of the award will be based on performance relative to the relevant index, with 25% vesting for performance in line with the index. Vesting would increase on a straight-line basis between 25% and 100% for index out-performance of up to 10% p.a. Historically, this has been broadly equivalent to upper quartile performance. In addition, the Committee must be satisfied that the recorded TSR is a genuine reflection of the underlying performance of the Company over the performance period. There is no retesting of performance targets. TSR performance is measured using percentage out-performance rather than a ranking approach since it is less sensitive to the TSR of individual comparators, and uses a 12-month averaging period due to the volatility of the Company s share price and the long-term nature of the Company s investments. Whilst noting market practice is typically to use a shorter averaging period, the Table Committee feel that 12-month averaging would give a fairer result for both management and shareholders. Change of control In the event of a change of control, any outstanding PSP or DSOS awards will be pro-rated for time and performance. The Committee may in its absolute discretion waive time pro-rating of the award and retains discretion to determine the treatment of unvested awards. In the event of a change of control, JKX awards may alternatively be exchanged for new equivalent awards in the acquirer, where appropriate PSP and DSOS vesting Options granted in 2012 under the DSOS, in accordance with the terms noted above, are subject to a 3-year performance target of EPS growth of 22.5% p.a. for maximum vesting with threshold vesting at 7.5% (on a straight-line basis between these points). 3-year EPS growth to 31 December did not reach the threshold vesting target therefore all DSOS awards granted in 2012 will lapse in PSP awards granted in 2012 vest based on a 3-year TSR performance as described above, with TSR assessed relative to the FTSE250 index and FTSE All-Share Oil & Gas Producers index. The TSR for the 3-year period to 31 December was below the performance of both indexes and therefore all PSP awards granted in 2012 will lapse in 2015.

112 JKX Oil & Gas plc Annual Report 110 Directors Remuneration Report Annual Report on Remuneration Executive Director remuneration for 2015 Base salary An Executive Director s basic salary and the other fixed elements of pay are determined by the Committee at the beginning of the year. The individual salaries and benefits of Executive Directors were reviewed taking into account individual performance and market factors, with reference to independent and objective research that provides up-to-date information on a comparator group of UK companies operating in the independent oil and gas sector. In recognition of the financial circumstances facing the Company, the Committee did not increase basic salaries with effect from 1 January 2015: Similarly, no salary increase was awarded to the UK employees (2013: 4.5%). Pension and benefits The Company will make a contribution equivalent to 15% of basic salary to the pension scheme of the individual s choice. At their option, Executive Directors may either have contributions of the same amounts made to their personal pension schemes or cash in lieu of pension at the stated rate, or a combination of pension contributions and cash in lieu at the stated rate, subject to normal statutory deductions. Benefits provided to Executive Directors includes life assurance, which is also provided for senior managers, for a sum assured of four times base salary; income protection (¾ base salary deferred for 13 weeks); and private medical cover (AXA PPP) is offered to all Company employees and provides medical cover for them and their dependents, on a non-contributory basis). Annual Bonus Scheme The performance related annual bonus for the 2015 financial year will operate on the same basis as in, and in line with the stated future remuneration policy. Bonuses will continue to be based on Strategic Plan targets, financial targets, and health and safety targets with similar weightings as in The performance targets set by the Committee require Executive Directors to deliver significant stretch performance. Given the close link between these targets and JKX s longer-term strategy, targets remain commercially sensitive and will not be published until such time that the Committee Executive Director base salary Salary 2015 Salary % increase Dr Paul Davies 423, ,000 nil Cynthia Dubin 298, ,000 nil Martin Miller 226, ,000 nil Peter Dixon 226, ,000 nil is confident there will be no adverse impact on the Company of such disclosure. At this time the Committee believes that disclosure of the targets in three years time is appropriate. Long-Term Incentive Plans For 2015, the Committee intends to grant PSP awards to Executive Directors in line with the framework stated in the policy noted on page 102. Under the Performance Share Plan approved at the AGM, awards would normally be granted of nil cost options which equate to 150% of the base salary for each of the Executive Directors. For 2015, the Committee has decided to restrict the grant to 100% of base pay with performance conditions that reflect the approved Remuneration Policy. Non-Executive Director remuneration All Non-Executive Directors have specific terms of engagement and their remuneration is determined by the Board within the limits set by the Articles of Association. Non-Executive Directors service contracts are for an indefinite term, not a finite term as recommended by Section B.2.3 of the Code, subject to re-election on an as required basis. The Board continues to believe these terms are appropriate given the Company size, the Non- Executive skill set, including experience of natural resources and the geographical regions in which the Company operates, and the continuing evaluation of performance and independence. In the event of early termination, the Non-Executive Directors Non-Executive Director service contracts Date of contract Notice Period Nigel Moore 13 July months Lord Oxford 1 January months Dipesh Shah 1 June months Alastair Ferguson 1 November months Richard Murray 1 January months

113 Strategic report 2-79 Governance Financial statements contracts provide for compensation of three months base fee. The Non-Executive Directors are paid a base fee for carrying out their duties and responsibilities as Directors, and fees for membership and, where applicable, chairmanship of each of the remuneration, nomination and audit committees. The fees were last increased by 5% at the end of 2013 and based on a per annum rate (in Sterling) which was compared to published material concerning Non-Executive Director fees in similar size companies and comparable companies in the sector. These fees were reviewed at the year end and no increase has been awarded from their level. Non-Executive Directors fees for and 2015 are as in the table opposite. Non-Executive Directors cannot participate in any of the Company s share schemes nor are they eligible to join the Company s pension benefit arrangements. Exit payments made in the year (audited) No exit payments were made during the year. Payments to past directors (audited) No payments were made to past directors in the year. Percentage change in CEO remuneration The table below shows the percentage change in CEO remuneration from the prior year compared to the average percentage change in remuneration for UK employees. The CEO s remuneration includes base salary, taxable benefit and annual bonus. The analysis Non-Executive Director fees 2015 % increase Chairman of the Company 157, ,500 1 nil Board membership fee 47,250 47,250 nil Senior Independent Director 10,500 10,500 nil Committee chairman Audit 10,500 10,500 nil Remuneration 10,500 10,500 nil Committee membership Audit 5,250 5,250 nil Remuneration 5,250 5,250 nil 1 The Chairman s fee includes amounts for Chairman of the Nomination Committee and membership of the Remuneration Committee excludes part-time employees and is based on a consistent set of all UK employees, i.e. the same individuals appear in the 2013 and populations. A comparison with UK employees is used as most of the Group s senior management are based in the UK; all other Group staff are employed in Ukraine and Russia which have different economies from the UK driving their remuneration levels and practices. Relative importance of spend on pay The table below show shareholder distributions (i.e. dividends and share buybacks) and total employee pay expenditure for the financial years ended 31 December 2013 and 31 December, along with the percentage change in both Year-on-year $ 000 $ 000 change All-employee remuneration 19,193 23,914 (19.7 %) Distributions to shareholders Percentage change in CEO remuneration CEO All UK employees 2013 % change % change Base salary % 4.5% Taxable benefits % 28% 1 Annual bonus (27%) 2 (36%) 2 Total (8 %) 2 (3%) 1 Reflects increase in premiums. No additional benefits were provided. 2 The calculations are based on the full value of the bonus earned. As previously noted, the Committee will determine later in 2015 the extent to which these bonuses may become payable and, in respect of Executive Directors, the extent to which deferred shares will be awarded, depending on the financial circumstances of the Company at the time.

114 JKX Oil & Gas plc Annual Report 112 Directors Remuneration Report Annual Report on Remuneration 6-year JKX vs FTSE All Share Index and FTSE All-Share Oil & Gas producers 10-year JKX vs FTSE All Share Index and FTSE All-Share Oil & Gas producers Dec Dec Dec Dec Dec Dec Dec 31 Dec Dec Dec Dec Dec Dec JKX FTSE All-Share Index FTSE All-Share Oil and Gas Producers Index JKX FTSE All-Share Index FTSE All-Share Oil and Gas Producers Index Review of past performance The following graphs show the Company s TSR performance compared to the performance of the FTSE All-Share and FTSE All-Share Oil & Gas Producers Index indices over a 6-year and 10-year period. These indices have been chosen as suitable broad comparators against which the Company s shareholders may judge their relative returns given that the Company is a member of the FTSE All-Share and continue to be part of the FTSE All-Share Oil & Gas Producers Index. The table below details the Chief Executive s single figure remuneration over a 6-year period. An investment of 100 in the Company on 31 December 2008 was worth 6.79 at 31 December (same investment on 31 December 2008 was worth at 31 December 2013). The calculation of the return assumes dividends are reinvested to purchase additional equity. Chief Executive s single figure remuneration over a 6-year period CEO single figure of remuneration ( 000) STI award rates against maximum opportunity 64.2% 40.0% 43.3% % 61.5% 43.4% 2 LTI award rates against maximum opportunity 0% 0% 0% 0% 0% 0% 1 At the request of the Remuneration Committee, half of the 2011 Annual Bonus earned was deferred into Performance Share Options at nil-cost and were subject to claw back and performance conditions being met. One third of the deferred options granted became exercisable on 31 March 2012 and the balance of the options lapsed. 2 The calculations are based on the full value of the bonus earned. As previously noted, the Committee will determine later in 2015 the extent to which the deferred shares will be awarded, depending on the financial circumstances of the Company at the time.

115 Strategic report 2-79 Governance Financial statements Shareholder voting at the Annual General Meeting At last year s Annual General Meeting held on 4 June, the votes on each resolution had to be counted and presented including and excluding the restriction notices served upon shareholders Eclairs Group Ltd ( Eclairs ) and Glengary Overseas Limited ( Glengary ) and their nominees, who together own per cent of the issued share capital of the Company, pending the court s judgment on the validity of the restriction notices (see page 88). The Directors Remuneration Policy which comes into effect on 1 January 2015 received the following votes from shareholders and has been presented including and excluding the impact of the restriction notices (as shown in the first table below). The Annual Report on Remuneration received the following votes from shareholders and has been presented including and excluding the impact of the restriction notices (as shown in the second table below). Where shareholders voted against the Annual Report on Remuneration, the Committee notes that this was in part due to the recommended vote against the governance report issued by Institutional Shareholder Services Inc ( ISS ) in May. ISS expressed the concern that the Committee had granted DSOS awards in 2013 at the normal maximum level, whereas it had reduced awards in the 2012 when performance targets were revised. The Committee considered carefully the targets to ensure an achievable level of stretch and believes these were reasonable. Nevertheless, the Committee has responded to feedback from shareholders regarding this matter and, in light of the prevailing share price, has restricted the grant of PSP awards to Executive Directors to 100% of base pay in 2015, which equates to two-thirds of the normal maximum opportunity. The Committee values, and would encourage, direct feedback from shareholders. Shareholder voting on Directors Remuneration Policy Total number of votes Total number of votes excluding votes subject % of including votes subject % of to restriction notices votes cast to restriction notices votes cast For 84,771, % 84,771, % Against 377, % 20,033, % Total votes cast (for and against, excluding withheld votes) 85,148, % 104,805, % Votes witheld 1 85, % 85, % Total votes (for, against and withheld) 85,233, ,890,395 1 A withheld vote is not a vote in law and is not counted in the calculation of votes cast for and against a resolution Shareholder voting on the Directors Remuneration Report Total number of votes Total number of votes excluding votes subject % of including votes subject % of to restriction notices votes cast to restriction notices votes cast For 43,547, % 43,547, % Against 37,929, % 57,585, % Total votes cast (for and against, excluding withheld votes) 81,476, % 101,133, % Votes witheld 1 3,757, % 3,757, % Total votes (for, against and withheld) 85,233, ,890,395 1 A withheld vote is not a vote in law and is not counted in the calculation of votes cast for and against a resolution

116 JKX Oil & Gas plc Annual Report 114 Directors Remuneration Report Annual Report on Remuneration Executive Directors shareholding requirements (audited) In 2010, the Committee introduced executive share ownership guidelines of 100% of basic salary for Executive Directors which can be built up over a reasonable period of time from appointment. No specific value per share was designated for the calculation. Unvested share awards, including shares held in connection with compulsory bonus deferrals, are not taken into account in applying this test. The table below shows the position at 31 December, based on that day s closing middle market price of an ordinary share of the Company of 12 pence: Shares Options Executive Directors Vested but Unvested and subject to subject to Vested Shareholding Current Owned holding period / performance but not requirement shareholding Requirement outright deferral conditions exercised % salary/fee % salary/fee met? Dr Paul Davies 3,663,105 3,080,400 90, % 104% Yes Cynthia Dubin 40,000 2,169, % 2% No Martin Miller 202,303 1,315,000 33, % 11% No Peter Dixon 175,482 1,315,000 16, % 9% No Non-Executive Directors Nigel Moore 29,000 Dipesh Shah 10,490 Lord Oxford 94,000 Alastair Ferguson Richard Murray Since 31 December, there have been no changes in the Directors interests in shares owned outright. This report was approved by the Board of Directors on 19 March 2015 and signed on its behalf by Dipesh J Shah OBE; FRSA Chairman of the Remuneration Committee

117 Strategic report 2-79 Governance Financial statements Directors share options Options Options Options Number of granted exercised lapsed Number of Date from options at during during during options at Exercise Market which Expiry 1 Jan period period period 31 Dec price price exercisable date Dr Paul Davies (b) 17-Mar-05 90,000 90, Mar Mar-15 (c) 31-Mar , , Mar Mar-21 (c) 31-Mar , , Mar Mar-21 (d)* 28-Mar , , Mar Mar-22 (d)** 06-Jun , , Jun Jun-22 (e) 09-Apr , , Apr Apr-23 (e) 09-Apr , , Jun Jun-23 (f) 28-Mar , , Mar Mar-24 (f) 28-Mar , , Mar Mar-24 2,000,400 1,415, ,800 3,170,400 Peter Dixon (b) 17-Mar-05 16,750 16, Mar Mar-15 (c) 31-Mar-11 52,300 52, Mar Mar-21 (c) 31-Mar-11 52,300 52, Mar Mar-21 (d)* 28-Mar , , Mar Mar-22 (d)** 06-Jun , , Jun Jun-22 (e) 09-Apr , , Apr Apr-23 (e) 09-Apr , , Jun Jun-23 (f) 28-Mar , , Mar Mar-24 (f) 28-Mar , , Mar Mar , , ,600 1,331,750 Martin Miller (a) 18-Mar-04 82,500 82, Mar Mar-14 (b) 17-Mar-05 33,500 33, Mar Mar-15 (c) 31-Mar-11 52,300 52, Mar Mar-21 (c) 31-Mar-11 52,300 52, Mar Mar-21 (d)* 28-Mar , , Mar Mar-22 (d)** 06-Jun , , Jun Jun-22 (e) 09-Apr , , Apr Apr-23 (e) 09-Apr , , Jun Jun-23 (f) 28-Mar , , Mar Mar-24 (f) 28-Mar , , Mar Mar , , ,100 1,348,500 Cynthia Dubin (d)* 28-Mar , , Mar Mar-22 (d)** 06-Jun , , Jun Jun-22 (e) 09-Apr , , Apr Apr-23 (e) 09-Apr , , Apr Apr-23 (f) 28-Mar , , Mar Mar-24 (f) 28-Mar , , Mar Mar-24 1,171, ,400 2,169,200 * Based on performance to 31 December these awards are expected to laspe in full in March 2015 ** Based on performance to 31 December these awards are expected to laspe in full in June 2015 (a) 2001 Share Options Scheme in respect 2004 (b) 2001 Share Options Scheme in respect 2005 (c) 2010 DSOS/PSP in respect Awards based on the same performance measures and targets as 2011 awards. (c) 2010 DSOS/PSP in respect 2011 (d) 2010 DSOS/PSP in respect Awards are based on the same performance measures and targets as 2013 awards. (e) 2010 DSOS/PSP in respect 2013 (f) 2010 DSOS/PSP in respect Table

118 JKX Oil & Gas plc Annual Report 116 Directors report other disclosures This information is required to be presented by law. The UKLA s Disclosure & Transparency Rules ( DTRs ) and Listing Rules ( LRs ) also require us to make certain disclosures. The Corporate Governance Report, the Audit Committee Report and the Strategic report form part of this information. Disclosures elsewhere in the Annual Report and Accounts are crossreferenced where appropriate. Taken together, they fulfil the combined requirements of company law, the DTRs and LRs. Legal form JKX Oil & Gas plc is a company incorporated in England & Wales, with company number The principal activities of the Group are oil and gas exploration, appraisal, development and production. It conducts very limited business activities on its own account, and trades principally through its subsidiary undertakings in various jurisdictions. Annual General Meeting The Annual General Meeting of the Company will be held at 11am on Wednesday 3 June 2015 at the premises of The Kings Fund, Cavendish Square, London, W1G 0AN. At the AGM, individual shareholders are given the opportunity to put questions to the Chairman, the chairmen of the Audit, Nominations and Remuneration Committees and to other members of the Board. The voting results are announced via the London Stock Exchange as soon as practicable after the meeting. The announcement is also made on the Company s corporate website. Notice of the 2015 AGM and matters of Ordinary Business and those proposed as Special Business, together with explanatory notes, will be sent to shareholders at least 20 working days before the meeting. Political and charitable contributions In line with Group policy, the Group did not make any political contributions during the year (2013: nil). The Group made charitable contributions of $353,426 (2012: $347,675) for local educational, health and village infrastructure initiatives in Ukraine and Russia, details of which can be found on page 77. Disabled employees The Group gives full consideration to applications for employment from disabled persons where the requirements of the job can be adequately fulfilled by such persons. Should an existing employee become disabled, it is in the Group s policy wherever practicable to provide continuing employment under normal terms and conditions and to provide training and career development and promotion. Greenhouse gas emissions The disclosures concerning greenhouse gas emissions required by law are included in the Corporate Social Responsibility review on page 72. Policy on derivatives and financial instruments The Group s objectives and policies on financial risk management, and information on the Group s exposures to foreign exchange, commodity price and liquidity risks can be found on pages 52 to 61 and in note 15 to the financial statements. Shares in JKX Oil & Gas plc Details of movements in share capital during the year are set out in note 17 to the financial statements. The Company has one class of Ordinary Share which carries no right to fixed income. Each share carries the right to one vote at General Meetings of the Company. There are no significant restrictions on the transfer of securities. Treasury shares In the Company did not purchase in the market any of its own ordinary 10p shares, to be held as treasury shares. At 31 December, 402,771 (2013: 402,771) shares continued to be held as treasury shares representing 0.23% (2013: 0.23%) of the shares then in issue. Restrictions on voting No member shall, unless the Directors otherwise determine, be entitled in respect of any share held by him/her to vote either personally or by proxy at a shareholders meeting or to exercise any other right conferred by membership in relation to shareholders meetings if any call or other sum presently payable by him/her to the Company in respect of that share remains unpaid. In addition, no member shall be entitled to vote if he/she has been served with a notice after failing to provide the Company with information concerning interests in those shares required to be provided under the Companies Act.

119 Strategic report 2-79 Governance Financial statements Appointment and replacement of Directors The number of Directors shall not be less than two nor more than ten. Directors may be appointed to the Board by shareholders by ordinary resolution or by the Board. A Director appointed by the Board holds office only until the next following AGM and is then eligible for election by shareholders but is not taken into account in determining the Directors or the number of Directors who are to retire by rotation at that meeting. Amendment of Articles of Association Any amendments to the Articles may be made in accordance with the provisions of the Companies Act by way of special resolution. Authority to allot shares At the AGM on 4 June, authority was given to the Directors to allot new ordinary shares up to a nominal value of: (a) 5,724,104, representing approximately one third (33.33%) of the Company s existing issued share capital (excluding shares held in treasury); and (b) 11,448,209, representing approximately two thirds (66.67%) of the Company s existing issued share capital, less the nominal amount of any shares issued under part (a), in connection with a pre-emptive offer by way of a rights issue to shareholders. In addition the Directors were authorised to issue shares in connection with a rights issue or other pre-emptive offer and otherwise to issue shares for cash up to a maximum nominal amount of 860,629, representing approximately 5% of the issued share capital of the Company. Both of these authorities expire at the conclusion of the 2015 AGM. Authority to purchase shares In certain circumstances, it may be advantageous for the Company to purchase its own ordinary shares and the Company seeks authority on an annual basis to renew the Directors limited authority to purchase the Company s ordinary shares in the market. At the AGM on 4 June, authority was given to the Directors to make on-market purchases of up to 17,172,313 ordinary shares at set minimum and maximum prices. The Company did not repurchase any of its ordinary shares during and the existing authority expires at the conclusion of the 2015 AGM. Directors and their interests A full list of the individuals who were Directors of the Company during the financial year ended 31 December can be found on page 82. The Directors and their interests at the beginning and end of the year in the shares of the Company, all beneficially held, were as shown in the table on the following page. Details of Directors remuneration and share options are shown in the Remuneration Report on pages 98 to 115. There were no contracts existing during or at the end of the year in which a Director was, or is, materially interested. The share capital structure is listed in note 17 in the notes to the financial statements and the significant holdings are listed below. Directors indemnities As permitted by the Articles of Association, the Directors have the benefit of an indemnity which is a qualifying third party indemnity provision as defined by Section 234 of the Companies Act The indemnity was in force throughout the last financial year and is currently in force. The Company also purchased and maintained throughout the financial year Directors and Officers liability insurance in respect of itself and its Directors. Change of control (significant contracts) The Company is not party to any significant agreements that take effect, alter or terminate upon a change of control following a takeover except for the $40m convertible bond dated 19 February 2013, which could become repayable following a relevant change of control. There are no agreements between the Company and any Director or its employees that would provide compensation for loss of office or employment resulting from a change of control following a takeover bid, except that provisions of the Company s share schemes may cause options and awards granted under such schemes to vest in those circumstances. All of the Company s share schemes contain provisions relating to a change of control. Outstanding options and awards would normally vest and become exercisable for a limited period of time upon a change of control following a takeover, reconstruction or winding up of the Company (not being an internal reorganisation), subject at that time to rules concerning the

120 JKX Oil & Gas plc Annual Report 118 Directors report other disclosures satisfaction of any performance conditions. There are a number of other agreements that take effect, alter or terminate upon a change of control of the Company such as commercial contracts, finance agreements and property lease arrangements. None of these is considered to be significant in terms of their likely impact on the business of the Group as a whole. Events after the reporting date Events after the reporting date are discussed in note 37 to the financial statements. Substantial shareholders At 31 December and at 6 March 2015, the Company had received notification from the following institutions of interests in excess of 3% of the total number of voting rights of the Company: Other disclosures Certain information that is required to be included in the Directors Report can be found elsewhere in this document as referred to below, each of which is, to the extent not in this report, incorporated by reference. Dividends No dividends has been paid or proposed for the year ended 31 December and the Board will not be recommending the payment of a dividend at the forthcoming AGM. Going concern The going concern statement can be found on page 91. Substantial shareholders 31 December 6 March December % of total 6 March 2015 % of total Number of shares voting rights Number of shares voting rights Eclairs Group Limited 47,287, % 47,287, % Proxima Capital Group 21,531, % Glengary Overseas Ltd 19,656, % 19,656, % Aberforth Partners 11,961, % 11,961, % Interneft Ltd 11,368, % 11,368, % Neptune Invest & Finance Corp 7,160, % Norges Bank Investment Management 6,842, % 6,804, % Blackrock Inc 5,466, % 5,466, % Director shareholdings 1 January 31 December 6 March 2015 Ordinary Share Ordinary Share Ordinary Share Number Number Number Nigel Moore 29,000 29,000 29,000 Dr Paul Davies 1 3,632,272 3,663,105 3,663,105 Cynthia Dubin 40,000 40,000 40,000 Peter Dixon 163, , ,482 Martin Miller 190, , ,303 Dipesh Shah 2 10,490 10,490 10,490 Lord Oxford 94,000 94,000 94,000 Alastair Ferguson Richard Murray (appointed 1 January 2013) 1 Dr Paul Davies interest is partly indirect with 1,975,000 ordinary shares held in trust, the beneficiary of which is the family of Dr Paul Davies. Of the remaining ordinary shares 1,000 are held by Mr D Davies, the son of Dr Paul Davies with the balance held directly by Dr Paul Davies. 2 Dipesh Shah s interest is held by members of his immediate family.

121 Strategic report 2-79 Governance Financial statements Directors responsibilities statement The Directors are responsible for preparing the Annual Report, the Directors Remuneration Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group financial statements in accordance with International Financial Reporting Standards ( IFRSs ) as adopted by the European Union, and the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether IFRSs as adopted by the European Union and applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Group and parent company financial statements respectively; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the Company s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Future developments within the Group The Strategic report starting on page 2 contains details of likely future developments within the Group. Profit Details of the Company s profit for the year ended 31 December can be found on page 180. Capitalised interest See Group financial statements note 22. Long term incentive schemes See pages 100 to 115 of the Directors Remuneration Report. Directors responsibilities Each of the Directors, whose names and functions are listed on pages 82 and 83, confirm that, to the best of their knowledge: the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; the Directors report contained in the Annual Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces; the annual report and financial statements, taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the company s performance, business model and strategy; so far as the Director is aware, there is no relevant audit information of which the Company s auditors are unaware; and he or she has taken all the steps that he or she ought to have taken as a Director in order to make himself or herself aware of any relevant audit information and to establish that the Company s auditors are aware of that information. By order of the Board Capita Company Secretarial Services Limited Company Secretary 19 March 2015

122 JKX Oil & Gas plc Annual Report 120

123 Strategic report Governance Financial statements Financial statements Independent Auditors Report Group 122 Group financial statements 128 Independent Auditors Report Company 171 Company financial statements 173