Production led growth

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2 Production led growth Northern Petroleum is an oil and gas exploration and production company quoted on the AIM Market of the London Stock Exchange. The Group is focused on production and development activities which are expected to deliver cash flow and demonstrable value for shareholders in a reasonable timeframe. In conjunction with this production activity, Northern Petroleum continues to mature exploration and appraisal projects which can be farmed out and drilled in order to generate the possibility of high returns on investment. Northern Petroleum s key assets are in Canada, an onshore oil production play with significant growth potential, and in Italy, with both onshore and offshore permits and applications containing exploration prospects and oil and gas discoveries that require appraisal. Introduction 01 At a Glance 02 Chairman s Statement Strategic Report 03 Chief Executive Officer s Statement 04 Strategy and KPIs 05 Review of Operations 06 Risk Management and Principal Risks 07 Group Financial Review Governance 08 Board of Directors 08 Corporate Governance Report 10 The Health, Safety and Environment Committee 11 The Audit Committee 12 Report on Directors Remuneration 15 Directors Report 17 Financial Statements Directors Responsibilities in respect of the Annual Report and the Financial Statements 18 Independent Auditor s Report Consolidated Statement of Profit or Loss and Other 19 Comprehensive Income 20 Consolidated Statement of Financial Position 21 Company Statement of Financial Position 22 Consolidated Cash Flow Statement 23 Company Cash Flow Statement 24 Consolidated Statement of Changes in Equity 26 Company Statement of Changes in Equity 28 Notes to the Accounts Information Unaudited Statement of Net Commercial Oil & Gas 58 Reserve Quantities Proven and Probable Reserves 59 Glossary 60 Directors, Offices and Advisers Back Cover Licence Table Cover photo: Rainbow production wells on lease W6

3 At a Glance Canada production and development Following an asset acquisition in January 2016, the Group now owns the mineral rights across 58,000 acres in north west Alberta, Canada. The land position contains two projects, approximately 15 miles apart: the recently acquired Rainbow area, which involves the rejuvenation of a mature production play, and the Virgo area, a Keg River carbonate reef development project. Production is being targeted from more than 100 existing wells and 137 million barrels of light oil remaining in place. The production wells and facilities acquired at the start of 2016 provide a good opportunity for increased production through well workovers and facility repairs with the initial work programme forecast to double the average production for the Group for 2016 to 400 bopd. >> Review of Operations page 5 Italy exploration and appraisal The reefs on the redevelopment acreage were in production from the 1960s through to the early 2000s and have significantly lower recovery factors than surrounding areas with similar developments. The opportunity now exists to put the fields back on production, targeting areas of unswept oil and benefiting from the potential re equilibration of the oil within the reservoirs. Acres Oil originally in place Recovery factor to date 58, mmbbls 19% The Group owns four permits offshore Italy, one onshore and a large area of exploration permit applications in the southern Adriatic, an area of multiple hydrocarbon discoveries and existing oil production. The two permits in the southern Adriatic contain the Giove and Rovesti undeveloped oil discoveries, calculated to hold 30 million barrels of 2C contingent resource, and the potentially significant Cygnus exploration prospect, located close to the producing Aquila oil field. Onshore, the Group farmed out the Cascina Alberto permit to Shell Italia and is effectively fully carried with a 20 per cent. interest through the seismic and initial exploration well programme. The Group aims to deliver up to five potentially significant well events over the next three to five years, by maturing a broad collection of exploration and appraisal assets in Italy which can then attract finance through farm out or other joint venture arrangements. >> Review of Operations >> Licence Table page 5 back cover Other Australia exploration Large acreage position in the Otway basin primarily targeting an unconventional oil and gas play, currently available for farm out. Italy s proven hydrocarbon potential and competitive fiscal regime remains very attractive to the industry at this time. Offshore contingent oil resource Onshore partner 30 mmbbls Shell Italia French Guiana exploration Contains the Zaedyus oil discovery and additional prospects within a large deepwater exploration licence. Annual Report and Accounts

4 Chairman s Statement The continuing fall in the oil price throughout 2015 has provided both challenges in managing the cost of the business and also opportunities to pursue our production led growth strategy in Canada. We recognise the ongoing volatility in the oil price and remain aware of the cyclical nature of commodity prices that impact our business. We remain vigilant in managing costs while making operational and strategic decisions that enable future growth. During the year, the Group s key activities included the consolidation of our production base in Canada, important progress in Italy, a successful equity raise in the fourth quarter and the management of costs, given the prevailing oil price environment. The steps the Group has taken in 2015 have strengthened our position to not only survive but potentially prosper as the oil price cycle develops. As in previous cycles there has been a lag in the reduction of operating costs through the supply chain; the reduction in the revenue stream from production as oil prices fall is immediate whilst the delay in cost reduction takes time to have an impact. Consequently, in the first quarter of 2015 we took the decision to suspend production operations in Canada and firmly believe this was the prudent decision to preserve future value from our Canadian reserves. downturn and create future shareholder value. Management are also focused on attracting new capital into the business through the farm out of existing assets and the raising of debt or equity, which may be required to secure the future of the business. Given the difficulties we have faced through the year I want to add a note of personal thanks to our staff. The implementation of cost control initiatives, staff reduction and office relocation were done with the highest degree of professionalism. As mentioned above, 2016 will be equally challenging and I look forward to the support of staff and shareholders as we continue to focus on a sustainable and profitable future for the business. Jon Murphy Chairman 11 April 2016 In Italy there has been considerable progress. The farm out to Shell Italia of the Cascina Alberto permit, approvals of our Environmental Impact Assessments ( EIA ) and progress with the Ministry of Economic Development are all positive steps towards our strategic target of becoming a key player in the Adriatic. We continue to focus on how best to create shareholder value from our Italian portfolio. Throughout 2015 we maintained close control on all our costs and have taken further steps to reduce our general and administrative expense. This included relocation of the head office, staff reductions and reduced salaries for the Board and senior management. While I am confident that these actions have not, and will not, impair our ability to effectively manage our existing portfolio or secure future growth opportunities through our production led strategy, ongoing commodity price volatility and the possible requirement for further capital to sustain and grow our business will present their challenges in the coming 12 to 18 months. In conjunction with a reduced overhead the Group successfully raised a total of 1.6 million through a combination of a subscription by the Group s two key shareholders, raising 1.2 million, coupled with an open offer to all shareholders raising a further 0.4 million. This is a great achievement at a time of low commodity prices. I would like to express my thanks to our institutional shareholders and those shareholders who participated in the open offer. This vote of confidence in the Group's future is appreciated. The new capital allowed us to finalise the terms of the acquisition of reserves and production in the Rainbow area of north west Alberta and fund a modest work programme for 2016 to deliver growth in Canadian production has been a difficult year and we foresee similar challenges through The combination of reduced overhead, the injection of new capital investing in cash generating production and a focus on operating costs have enhanced the Group s position to trade through the battery tank farm 2 Annual Report and Accounts 2015

5 Chief Executive Officer s Statement A challenging year for the industry The global oil and gas industry experienced another difficult year in 2015 and Northern Petroleum was not immune to the business environment. Throughout the year the benchmark crude spot price for West Texas Intermediate ( WTI ) continued to show significant volatility and dropped from close to US$50 per barrel at the start of the year to approximately US$30 per barrel by the end. Production in Canada Having achieved production of over 500 bopd at the end of 2014, revenue streams were significantly reduced in early 2015 due to the low commodity price, while operating costs remained high. As a result the Group s production was temporarily shut in at the end of January to reduce the running costs and a project was initiated to determine the most cost effective way to restart production. At the same time, the Group was drilling a well in the Virgo area of Alberta which suffered significant operational difficulty and led to a poor completion of the well with high water production. This meant that the well was uneconomic to produce despite testing at over 90 bopd. Progress in Italy The challenges around oil price and production in Canada were offset by significant progress in Italy. Early in 2015, the Group completed the farm out of the Cascina Alberto permit to Shell Italia. For 80 per cent. of the permit, Shell Italia paid cash of US$0.85 million and has provided the Group with a carry, effectively through to the end of the drilling of an exploration well on the permit. Further to this, in June 2015 the Group received approval of the Environmental Impact Assessments for both the 3D seismic operations and the five permit applications in the southern Adriatic. Receipt of these approvals has subsequently allowed the Group to start the planning of the seismic operations in conjunction with the Ministry of Environment, as well as progress the applications with the Ministry of Economic Development in order to translate them into exploration permits. Once complete, this will provide the Group with one of the largest contiguous areas of exploration and appraisal acreage in the Adriatic. Focus on cost With the continued downturn of the industry, the management team has been even more focused on the cost base of the business. Further staff reductions were made during the year, and the Group head office moved to a significantly more cost effective location in South London. Additionally the Board and senior management all reduced their salaries and all areas of the corporate budget were significantly cut back to reflect the requirements of the organisation in the existing circumstances. From an operations perspective, a low cost production package was procured in order to bring production back on from the 100/16 19 well in Virgo, Alberta. This was restarted in June and enabled the well to be produced economically while trucking the crude to a local distribution terminal. Review work on the other Virgo wells continued in order to determine how to produce the wells economically in the low oil price environment. Survive and grow As part of the review of the Virgo wells and other options to increase Group production, multiple new business opportunities were identified and evaluated both in Alberta and elsewhere. One of these opportunities was to purchase a small amount of production with corresponding production wells and facilities in the Rainbow area, only 15 miles from the Group s existing production asset base in Virgo. This deal was announced in late 2015 and completed in January The assets acquired provide a good opportunity for production growth through low level investment and operating synergies with the Group s Virgo assets. Following the completion of the winter work programme in the second quarter of 2016, Group production is forecast to average 400 bopd for the year. At this production rate, combined with a WTI oil price of approximately US$50, all Group costs would be covered. On the assumption that these production rates can be achieved and the oil price continues to rise, this financial stability will allow time for the high value exploration and appraisal assets in Italy to be progressed. To offset the risk of lower commodity prices, the operations team are evaluating what operating cost reduction opportunities can be implemented later in the year to help preserve net cash flow. The Group will also look at different ways to attract further capital into the business to manage the downturn and provide investment for production growth. Future potential As part of the Canadian acquisition, the Group raised funds through two key supportive institutional shareholders and multiple other private shareholders. This support and belief in the Group is very much appreciated and the priority of the management team and staff is to repay this belief by adding significant value to the Group. The assets in Canada provide many opportunities for short to medium term production growth which will be required to further stabilise the Group s financial foundation while adding cash flow and value. Once financial stability is achieved, in the medium to longer term the assets in Italy provide the potential for high returns through both onshore and offshore exploration success and, in a more defined timescale, through development of Giove and other discoveries in the southern Adriatic. After every downturn in the oil and gas industry there has been a period of steady and significant growth. The management team and staff will continue to work together to ensure that the Group s shareholders have the opportunity to be part of this next phase in the industry cycle. Keith Bush CEO 11 April 2016 Annual Report and Accounts

6 Strategy While the upstream oil and gas industry environment has significantly deteriorated over the past year, the Group s strategy remains unchanged. The three key aspects have become even more important over the past year in a sector with scarce new capital available for investment. The Group remains committed to building production and generating cash flow to create a sustainable and growing business. High return appraisal and exploration projects are matured alongside production to give shareholders exposure to opportunities with significant growth potential Production led growth Capital discipline Exploration and appraisal upside The growth of the business through production provides financial stability, reduces risk and is more within management s control than through exploration alone. The net cash flow contributes to funding the Group s overhead to enable the progression of other areas of the business. As a small Group, financial resources are limited. The forecast rates of return and payback periods on all projects need to be evaluated on an equal basis, to ensure they contribute to the overall growth of the business at the appropriate level of risk. The Group s exploration and appraisal assets have the ability to produce significant returns for shareholders upon successful monetisation. The portfolio has large growth potential with exploration prospects both onshore and offshore, which include undeveloped oil discoveries. External capital, which includes through farming out licences, will be required for further material development. Key Performance Indicators The Group measures the Key Performance Indicators ( KPI ) it believes are important in assessing performance against strategic objectives. Financial and non financial metrics are tracked across the Group to help manage the long term performance and achieve the strategy of the Group. With a further reduction of staff in the Group over the year to leave a small core team, an appropriate measurement of the KPI for staff understanding and satisfaction was not possible, therefore the KPI has not been continued. The three remaining KPIs remain important and relevant to the growth of the business Health, safety and environment Finding and development costs Reserves and production Health, Safety and Environmental ( HSE ) performance targets were all achieved during the year. Ongoing operations were performed with the key targets of no incidents or accidents and no reportable environmental issues both achieved. In addition to day to day operations there were four projects that had greater potential risk to HSE. These were: the drilling of the 102/11 30 well; the installation of the 100/16 19 production package; the office move; and the Rainbow acquisition following the year end. All these projects were completed without incident. For the first time the Group has produced an Environmental and Sustainability Policy to clearly communicate our aim to minimise the impact to the environment, neighbouring communities and other stakeholders during our ongoing activities. The Group undertook the drilling of only one new exploration well, which produced 90 bopd on test, however due to a problem cementing the production liner, this has not yet been put into production and will require further analysis to determine its commerciality. Given the current sector environment, the acquisition of reserves can be done for less cost than increasing reserves through well operations. The Group proved this with the acquisition of reserves and production through the Rainbow assets in Canada after the year end. The proved and probable reserves of approximately 1.1 mmbbls were acquired for a cost of approximately US$0.2 million along with the assumption of the long term abandonment liability. During the year, the Group only drilled one well, which is yet to have reserves allocated to it. Therefore there were no reserve additions during Reserves were acquired as part of the acquisition of the Rainbow assets, but this purchase did not close until after the year end. Production was shut in during January 2015 to reconfigure the production equipment to produce more economically, given the declining oil price. This resulted in only one well being brought back into production for most of the year. Total barrels produced during the year were 9, Annual Report and Accounts 2015

7 Review of Operations Canada 2015 Activity The Group s land position in Virgo comprises 30,000 acres with an estimated 108 mmbbls Stock Tank Oil Originally in Place ( STOOIP ) as determined by the Alberta Energy Regulator, with an existing average recovery factor of only 18 per cent. Appraisal and development work during 2014 confirmed the concept that recovery factors of approximately 25 per cent. should be achievable from the Keg River play through primary recovery only, with additional upside using secondary oil recovery techniques also possible. In early 2015 the 102/11 30 well was drilled targeting unswept oil on a reef edge location. The well encountered the reservoir as expected and when tested the well flowed at 90 bopd, but with a water cut of 85 per cent. and therefore the well was suspended. Following the results of the well, a technical review was undertaken integrating all of the well and production data, to help understand development options for the Virgo area. The results of this study will be used to help determine the future work programme which may be implemented this winter. With the production in Virgo not economic at the prevailing oil price at that time, combined with the use of rental equipment, all wells were shut in during January 2015 while lower operating cost options were evaluated. Subsequently, the Group purchased and installed a new production package on the 100/16 19 well and brought this well back in to production in June at a rate of 75 bopd. The 102/15 23 well, which was tied in during 2014, was shut in by the third party operator in Q due to concerns about the integrity of the gathering pipeline into which the well was tied in. The operator of the gathering pipeline subsequently decided that it was uneconomic for them to re instate the line. Therefore the Group acquired operatorship of the pipeline and re instated production from the well in early 2016 at a rate in excess of 100 bopd Activity Early in 2016 the Group completed the acquisition of the Rainbow assets, approximately 15 miles from the Group s existing Virgo development. As well as adding 28,000 acres and 1.1 million barrels of oil equivalent of 2P reserves, the acquisition also included two processing facilities providing significant cost savings for production from the Group s trucked Virgo area wells and potential third party processing fees. At the time of the acquisition the Rainbow facilities were producing approximately 200 bopd and the Group identified an initial low cost work programme involving facility repairs and well workovers that aim to increase average Group production for 2016 to 400 bopd. Activities in early 2016 have focused on the Rainbow area and the restart of the 102/15 23 Virgo well, resulting in average production in March in excess of 400 bopd. This has been achieved by the restart of two wells in the Rainbow area and the 102/15 23 well in the Virgo area. With additional production the Group has realised the benefits from the reduction in production costs and increased net cash flow from the Canadian business, even in the prevailing oil price environment. Italy Offshore Significant progress has been made by the Group with the approval of six EIAs in the southern Adriatic; one for the proposed 3D seismic programme across the Giove oil discovery and Cygnus exploration prospect and five others for exploration permit application areas. Approval of these EIAs has allowed the Group to continue to plan the seismic programme and work with the Ministry of Economic Development to turn the applications into permits. This will provide the Group with one of the largest contiguous areas of exploration and appraisal acreage in the Adriatic. The seismic acquisition is subject to financing, most likely through a farm out of the permit, and the positive conclusion of local appeals and operational approvals. The Group has also drafted an appraisal well EIA submission for the Giove oil discovery, to be submitted during 2016, to drill a well 12 to 18 months after submission, again subject to financing and approvals being received. All offshore permits are currently held in suspension pending approvals for the next stage of the work programmes. In December 2015 the Italian Government passed a law restricting offshore oil and gas activities within the 12 nautical mile limit off the coast of Italy. Most of the Group s offshore acreage is unaffected by this law change. However one application (d59.fr NP), fully within the 12 mile limit in the Ionian Sea, and three applications (d29.gr NP, d30.gr NP and d61.fr NP), partially within the 12 mile limit, have as a result received full and partial rejections early in Onshore In early 2015, the Group agreed a farm out deal for the Cascina Alberto permit in northern Italy with Shell Italia whereby in return for an 80 per cent. interest in the licence and operatorship, Shell Italia will carry the Group for a seismic acquisition programme up to US$4 million and a single exploration well up to US$50 million. Shell Italia also paid the Group US$0.85 million on completion of the farm out. The operator has commenced the exploration work programme with the reprocessing of existing seismic to determine if further data acquisition will be required before making a decision on an exploration well. A decision on seismic acquisition is expected in Q French Guiana There was little activity on the French Guiana exploration permit during 2015 and the permit is due to expire in mid The joint venture is currently considering options regarding the future of the permit. Australia There has been limited activity on the licence in the Otway Basin in South Australia during The primary play is for unconventional resources in several shale formations, with a secondary play in a conventional sandstone reservoir. The licence continues to be suspended to allow further technical work and evaluation prior to potentially progressing with a seismic programme. The Group continues to seek a farminee for the licence. Annual Report and Accounts

8 Risk Management and Principal Risks Identifying and managing the key risks to the Group are the responsibility of the senior management and Executive Directors. The Board is then charged with monitoring and reviewing the management of these risks. Health, Safety and Environment Major Incident Description A major incident such as a blow out, significant pipeline leak or fire at a well site, may result in harm to personnel, the environment or asset damage. Mitigation The Group has designed and implemented a Health, Safety and Environmental Management System that is aligned to the principles of ISO and OHSAS and enables our staff, contractors and all subcontractors work to the principles of our HSE policy. Financial Liquidity Capital Discipline Commodity Price Description Insufficient financial resources could result in the delay or curtailment of operations. Lack of discipline in the deployment of capital to appropriate projects may result in exposure to unplanned capital outlay. Weak or volatile commodity prices will impact negatively on the Group s cash flow and increase the financial risks associated with medium to long term projects. Mitigation The Group maintains detailed forecasts of the potential future capital requirements and amends work programmes to match capital resources available. The Group considers all forms of external capital to maintain liquidity. The Group only pursues projects which are of an appropriate size and risk in relation to the Group s resources. The Group will consider the hedging of future production where appropriate and look to develop and maintain low cost production. Technical Subsurface Reserves Description Insufficient or incorrect interpretation of data can lead to the wrong conclusions regarding the subsurface environment. Inaccurate estimates may result in the over or under valuation of an asset and the incorrect allocation of capital. Mitigation Robust technical work processes, a full data inventory and technical peer review ensure opportunities are fully evaluated before investment decisions are made. A reserves review is carried out as part of an annual process. Audits are undertaken in accordance with regulatory standards and industry best practice. Political and Other Political Description Regulatory or legislative uncertainty or changes in the Group s country of operations may result in project delays or an inability to progress assets in a timely manner. Changes in fiscal policy may negatively affect the profitability or overall economics of a project. Mitigation The Group actively engages with government and regulatory bodies in all the countries that it works. British government advice is taken when travelling to new countries and when performing detailed country entry studies. 6 Annual Report and Accounts 2015

9 Group Financial Review Overview During the year, the Group focused on reconfiguring production to make it economic in the current oil price environment, minimising cash costs through a reduction in Group overhead and attracting investment for future growth through an asset farm out and an equity issue for cash. While these actions, combined with the acquisition of the Rainbow assets following the year end, have helped to provide a more stable financial platform from which the Group can grow, the continued oil price volatility and relatively small financial resources of the Group at this time mean that the focus for the next 12 months will be on sourcing further capital to increase production, most likely via debt finance or an asset farm out in Italy. The Group s Canadian assets are well suited for growth as they benefit from only requiring small amounts of capital, invested on a low risk basis, to increase production and fund the Group. Italian onshore farm out The Group farmed out the Cascina Alberto permit onshore in northern Italy to Shell Italia in March An 80 per cent. working interest was exchanged for US$0.85 million plus a capped carry on the future work programme up to and including an exploration well on the permit. The cash received net of costs attributable to the Cascina Alberto permit has been recognised under Other Income in the Profit or Loss Account. Equity issue In support of the acquisition and development of the Rainbow assets purchased by the Group in northern Alberta, which completed after the year end, 53,179,691 new ordinary shares were issued at a price of three pence per share to raise approximately 1.6 million in equity capital. To facilitate the issue of new shares at three pence, a share split was approved by shareholders to re denominate the nominal value of ordinary shares to one pence per share. The proceeds of the equity raise were used to pay the cash consideration for the assets of approximately US$0.2 million and provide development capital to increase the production from the Group s Canadian asset base. Impairment review of the Group s assets The annual review of the carrying value of the Group s assets was undertaken and it was considered prudent to impair some asset groups, reflecting the uncertainty around progressing these assets in the current industry environment. The Group s permit in Australia, which is currently in suspension, and the permits in the Sicily Channel have been fully impaired. The carrying value of the permits in the southern Adriatic has not been impaired based on the potential value of the permits following any successful exploration and appraisal well, and the continued level of interest in the permits by industry participants. If no progress on these assets is made during 2016, the Board will consider whether the carrying value is still warranted at that time. A small loss on disposal was also taken on capitalised office costs following the move of the Group s London office to lower cost premises. Costs To best manage the Group s cash resources during the continuing commodity price environment, the Group reduced its overhead and general and administration cost. These savings were in addition to the cuts made in A reduction in staff in London was made in the first half of the year followed by the relocation of the London office to much smaller and cost effective premises. Further savings have been made by reducing the use of external consultants and advisers. Cash and debt Cash at the year end was US$2.4 million (2014: US$12.1 million). The significant items of expenditure in the year were the drilling of the 102/11 30 well in Alberta and the reduction of trade creditors, both of which accounted for approximately US$8.0 million in cash outflow during the year. The strengthening of the US dollar, particularly in the first quarter of 2015, further reduced the reported cash balance as the Group was holding the majority of its cash reserves in Sterling and Canadian dollars to match the forecast costs at that time. The total debt outstanding at the year end of US$0.9 million was in relation to the Italian government seismic incentive scheme, which is being paid down over five years from inception and bears interest at 0.5 per cent. per year. At the year end, net current assets were US$2.1 million (2014: US$8.5 million) and net assets were US$28.0 million (2014: US$39.7 million). No dividend is proposed to be paid for the year ended 31 December 2015 (2014: US$ nil). Going concern While the Group has no material capital expenditure commitments, the year end cash position combined with the future revenue from existing oil and gas fields, is only likely to provide enough financial resources to undertake the redevelopment work programme in Rainbow and Virgo planned for the first half of As at 31 March 2016, the Group had cash resources of approximately US$0.7 million at its disposal with an additional US$1.4 million on deposit with the Alberta Energy Regulator in relation to future abandonment liability. The payment of the deposit was made in January 2016 and accounted for the majority of the movement in cash on the balance sheet since the year end balance of US$2.4 million. Based on current production forecasts, it is expected that the full deposit of US$1.4 million will be returned to the Group in three monthly payments starting in June Any further development or drilling in Canada and appraisal activities on the Group s assets in Italy will require external capital, which may come from the farm out of existing assets, debt or equity. If no further external capital is obtained and the price of oil at which the Group sells its Canadian production does not increase materially, the Group will need to further reduce its overhead costs after 12 months in order that revenue derived from Canada can cover all ongoing Group expenditure. Furthermore if the Group does suffer operational difficulties, it may not have the financial resources, even if the oil price increases, to resolve whatever operational problems have arisen in order to restore production and would be forced to seek further capital from external sources. Accounting policies These financial statements have been prepared by the Board using accounting policies consistent with those used in There have been no new or revised International Financial Reporting Standards adopted during the year which have had a material impact on the numbers reported. Details of the accounting policies used are included within the accounting policy notes. Nick Morgan Finance Director 11 April 2016 Annual Report and Accounts

10 Board of Directors Jon Murphy Independent Non executive Chairman Jon was appointed as Chairman in September 2013 and has over 30 years of experience in the mid cap exploration and production industry. Jon holds a BSc. in Geology from the University of London. His career includes several years with Lasmo plc where he held various positions in geology, planning and new business, and in 1999 he joined Venture Production plc as Chief Operating Officer where he remained until Venture s sale in He is currently a Non executive Director of Trinity Exploration and Production plc. Iain Lanaghan Senior Independent Non executive Director Iain was appointed as a Non executive Director in February Iain is co founder and Non executive Chairman of bus group Movell, which is one of Germany s leading private bus operators, and a Nonexecutive Director of National Nuclear Laboratory. He was previously Group Finance Director of Faroe Petroleum plc, spent four years as Group Finance Director of transport operator FirstGroup plc and was a founder of the German bus and rail group Abellio GmbH. He planned the flotation of 3i backed Atlantic Power Group and then led its merger with the Norwegian group Petroleum Geo Services. He was also Finance Director of PowerGen International. Iain is a chartered accountant, having qualified with KPMG in London. Keith Bush Chief Executive Officer Keith joined Northern Petroleum in May 2012 as Chief Operating Officer, was appointed to the Board in November the same year, and was made Chief Executive Officer in July Keith gained a degree in physics and has over 24 years industry experience. Commencing his career with Western Atlas Logging Services, Keith progressed to hold managerial positions in Amerada Hess, Burlington Resources and was most recently employed as General Manager Operations for E.ON Ruhrgas in Norway. Keith has extensive experience in the North Sea, North Africa and Norway. Nick Morgan Finance Director Nick was appointed Finance Director in November Before joining Northern Petroleum, Nick spent over 13 years in investment banking where he focused on advising the international E&P industry. He specialised in advising upon mergers and acquisitions and providing equity capital markets advice and services to a broad range of global oil and gas companies, both public and private. He was employed by Tristone Capital, the global energy investment bank, and latterly GMP Securities for six years prior to joining Northern Petroleum. Nick qualified as a chartered accountant at Price Waterhouse and is a member of the Institute of Chartered Accountants in England and Wales. Corporate Governance Report The Board is committed to high standards of stewardship and governance and aims to create a culture which demands the same commitment and performance in all its business activities. As a result accountability, integrity and honesty are fostered throughout the Group. The Group is not required to comply with the Principles of Good Corporate Governance and the Recommendations of Best Practice as set out in the principles of the revised UK Corporate Governance Code (the Code ) published in May 2010 by the Financial Reporting Council and revised in September While the Group does not comply with all aspects of the Code, in so far as is practicable and appropriate for an AIM quoted company of Northern Petroleum s size, the Group seeks to follow the guidance set out in the Code. The role of the Board The Board sets the Group s strategic objectives and ensures that they are properly pursued and that the major business risks are actively monitored and managed. The Board provides leadership and guidance while maintaining responsibility for the sustainable financial performance and long term success of the business. Board composition As at 31 December 2015 the Board comprised four Directors, two Non executive and two Executive Directors. The Non executive Chairman and Senior Non executive Director are deemed to be independent as defined by the Code. There is a balanced mix of skills and experience among the Board which enables the Board to effectively debate all strategic, operational and financial issues. Committees The Board has delegated certain responsibilities to its Committees in line with recommendations of the Code, to facilitate the business of the Board. These are the Audit Committee and the Remuneration Committee. The duties of these Committees are set out in formal terms of reference approved by the Board. The entire Board bears the responsibilities of Health, Safety and Environment issues. The Board continued to focus efforts in 2015 on strategic goals which will create shareholder value, monitoring performance against agreed objectives and planning future business opportunities. 8 Annual Report and Accounts 2015

11 Corporate Governance Report Key matters reserved for the Board The key matters reserved for the consideration and sanction by the Board are: approval of Group strategy, long term objectives and annual business plan; approval of the Group s annual financial statements, interim management statements and changes in the Group s accounting policies or practices; changes relating to the capital structure of the Group, share issues and the Group s dividend policy; approval of the annual Group budget and of individual project budgets as required by the Group Delegation of Authority guideline; review of the Group s future funding needs and the financial requirements to maintain its going concern status; changes in the nature of business operations, including entering new countries, licence applications and new business activities; material investments and divestments in the ordinary course of business; adequacy of internal control systems, hedging policy and risk management; approval of Group policies including the Code of Ethics, Anti Bribery and Corruption, Code of Conduct, Health, Safety and Environmental policies; the creation and approval of terms of reference, chairmanship, membership and delegation of authority to all committees of the Board; review and consideration of potential conflicts of interest of Directors and the independence of Directors; appointments to the Board, subject to further re election by shareholders; succession planning for the Board and senior management; the appointment and removal of the Group s external auditor upon the recommendation of the Audit Committee and subject to election or re election by shareholders; principal terms and conditions of employment of all Directors upon the recommendation of the Remuneration Committee; changes in employee share schemes and other long term incentive schemes upon the recommendation of the Remuneration Committee; decisions to prosecute or defend material litigation; and annual Board, Committee and Chairman appraisals. How the Board operates The Board has six scheduled meetings per year and meets annually to discuss the Group strategy. The agenda for each meeting is set by the Chairman in conjunction with the Executive Directors, with Board papers sent to members for consideration prior to the meeting. In addition the Board engages in frequent ad hoc telephone calls to keep all members fully briefed on the Group s operations. The Board believes that one of its strengths is in having open communication channels that enable its members to engage informally on a variety of topics. Meetings Number of meetings attended Communication with shareholders Board HSE Audit Remuneration Executive Directors Keith Bush 6 6 Nick Morgan 6 6 Non executive Directors Jon Murphy Iain Lanaghan The Group s management has recognised the need for open communication with all its stakeholders and has prioritised the requirement for a clear and consistent message concerning the Group s performance and operations. Extensive information concerning the Group s activities is provided in the annual and interim reports which are available to all shareholders. The Board is aware of its reporting responsibilities and ensures that material information is released on a timely basis. The Group website ( provides detailed information on the Group s activities. All shareholders are offered the choice of receiving shareholder documentation electronically or in paper format, as well as the choice of submitting proxy votes either electronically or by post. Enquiries from individuals on matters relating to their shareholding and the business of the Group are welcomed and shareholders are encouraged to attend the Annual General Meeting to discuss the progress of the Group. Jon Murphy Chairman 11 April 2016 Annual Report and Accounts

12 The Health, Safety and Environment Committee The role of the Health, Safety and Environment Committee The Health, Safety and Environment Committee provide the necessary resources for the corporate HSE management system and oversee its implementation across all of the Group s assets. Operations in the field are outsourced to contractors selected through a robust contractor selection process and regularly monitored to ensure they adhere to the corporate HSE policies, industry best practice and legal and other requirements in the countries in which the Group operates. The Committee directs the HSE strategy and initiatives for the Group and tracks conformance to the plan on a continual basis. Formal HSE performance reporting is made to the Board at least quarterly. Regular audits are conducted in the field to assure the Committee that the systems of both the Group and our main contractors are managing the HSE risks appropriately. These audits are supplemented by regular senior management visits to operational sites demonstrating a commitment to HSE from the top of the organisation. Robust Crisis Management Plans and location specific incident management plans are in place to ensure the safety of staff and contractors, minimise damage to the environment and assets, as well as manage the reputational risk to the organistation. These plans are tested regularly with full emergency response exercises involving all parts of the organisation. HSE Committee activities during 2015 During 2015 the HSE Committee: monitored and regularly reviewed the corporate HSE system against the requirements of ISO and OHSAS environmental and health and safety standards to ensure the system remained compliant with the principles of the respective standards; monitored and regularly reviewed the Group operations in Canada with specific HSE reporting systems, incident investigation systems and emergency management plans implemented at each site, interfaced to those of our contractors where appropriate; ensured that crisis management and incident response training was given throughout the organisation; monitored developments in legislative and regulatory requirements through specialist third parties and communicated changes to the wider organisation; oversaw HSE aspects of the head office move and establishment of new emergency response and crisis management systems to suit; issued a corporate Sustainability and Environmental Impact Policy; and commenced the integration of the Rainbow assets into the Group s HSE management systems. Keith Bush Chairman of the HSE Committee 11 April Annual Report and Accounts 2015

13 The Audit Committee The role of the Audit Committee The Audit Committee is governed by Terms of Reference which are agreed by the Board and subject to annual review. The principle objectives of the Committee are to: monitor the integrity of the published financial information of the Group; monitor the Group s internal control procedures and risk management system; make recommendations to the Board regarding the appointment, re appointment and removal of external auditors; and review whistleblowing arrangements and the Group s procedures to prevent bribery and corruption. Activities during 2015 The Committee met twice in 2015 to execute its responsibilities. The meetings focused on audit planning, risk management, and approval of the final and interim results. Accounting, tax and financial reporting The Group financial statements and accounting policies are reviewed by the Committee to comply with International Financial Reporting Standards. In addition the annual budget, liquidity risk, changes to the Corporate Governance Code and statutory audit requirements are all considered on an annual basis. As part of the process the Committee considers reports from the external auditors on the assessment of the internal control environment. Internal controls and risk The Board assigns to the Committee the responsibility of monitoring and improving the Group s internal controls governing the finances of the business. The system of internal controls is vital in managing the risks that face the Group and safeguarding shareholders interests. It is the Board s objective to be aware of the risks, to mitigate them where possible, to insure against them where appropriate and to manage the residual risk in accordance with the stated objectives of the Group. External auditors The Committee reviews the findings of the external audit and then approves the scope of work to be undertaken for the next financial reporting year. In addition, a review of the effectiveness of the external audit process is undertaken and an annual assessment of the external auditors independence is made. Whistleblowing and prevention of bribery and corruption The Committee undertakes a review of whistleblowing policy arrangements and the Group s procedures to prevent bribery and corruption to assess the effectiveness of the Group s Anti Bribery and Corruption Annual Plan. The Committee is pleased to report that no incidents were raised during 2015, or have been raised to date in Iain M Lanaghan Chairman of the Audit Committee 11 April 2016 Annual Report and Accounts

14 Report on Directors Remuneration This report sets out the details of the remuneration policy for the Group s Directors, describes its implementation and discloses the amounts paid in The report meets statutory requirements, in particular the relevant regulations on Directors remuneration reports pursuant to the Companies Act 2006 and provisions of the Code as prescribed for AIM quoted companies. Additional remuneration details have been offered voluntarily. Remuneration Committee membership and process During 2015 the Remuneration Committee comprised the Non executive Chairman, Jon Murphy and the Non executive Director Iain Lanaghan. The Committee met throughout 2015 to determine the remuneration arrangements and contracts of the Directors and senior employees. Activities during 2015 During 2015 the Committee discussed and decided upon: the approval of a reduction in basic salary for all Directors and some senior management; the approval and implementation of a new long term incentive plan; the approval of the award of nil cost options to Directors and all employees; and the approval of a further reduction in basic salary and an agreement to award nil cost options as a substitute for Directors and some senior management. Remuneration policy The Committee aims to ensure that total remuneration is set at an appropriate level for the Group and its operations. The objectives of the remuneration policy are to: enable the Group 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; ensure remuneration levels support the Group strategy while promoting capital discipline throughout the Group; and ensure alignment of Directors, senior management and shareholder interests. The core principles of the remuneration policy are to: ensure that there is an appropriate link between performance and reward; pay an appropriate level of total remuneration relative to peer group companies; determine annual bonuses which are linked to the delivery of targets including the achievement of strategic objectives and personal performance; ensure that long term incentives are linked to shareholder return; review progress made against KPI targets and agree incentive awards; determine the remainder of the remuneration packages (principally comprising salary) for each Executive Director; and review and note the remuneration trends across the Group. The philosophy of the Committee is that the targets established for each element of the remuneration should be quantified wherever practicable. There are four elements of the remuneration package for Executive Directors and senior management: basic annual salary or fees; benefits in kind; discretionary annual bonus; and a long term incentive plan (the Value Creation Plan VCP ). Basic annual salary or fees An Executive Director s basic salary and the other fixed elements of pay are determined by the Committee at the beginning of each year with any changes taking effect from 1 January. The individual salaries and benefits of Executive Directors are reviewed and adjusted taking into account individual performance, market factors and sector conditions. Details of the Executive Directors basic salary are shown on page 14. The Chief Executive Officer received a 17 per cent. pay decrease in basic salary compared to an average decrease of 2.4 per cent. among employees. 12 Annual Report and Accounts 2015

15 Report on Directors Remuneration During the year, the basic annual salaries paid to the Board were reduced on two separate occasions to help reduce the overall general and administrative cost of the Group given the current economic environment, with the combined effect of reducing the ongoing basic annual salary by approximately a third for each Board member. It was agreed by the Remuneration Committee that for the second reduction which accounted for approximately half of the total reduction and was effective from the beginning of November, nil cost options will be issued as a salary substitute on a quarterly basis. The Remuneration Committee will review this substitute mechanism on a quarterly basis and decide when the substitute will cease and if basic annual salaries will be raised. Benefitsninnkind Benefits provided to Executive Directors include critical illness cover, death in service cover, private medical insurance and a pension contribution of 3 per cent. of basic annual salary in 2014, all of which are offered to all employees. Discretionarynannualnbonus A discretionary award of nil cost options is being considered by the Remuneration Committee for all employees in relation to VCP A new long term incentive plan for the Executive Directors and other senior management was approved and implemented in Participants have been awarded performance units which have no value at grant ("Units"). The plan has a total of one million Units, the majority of which have been allocated to the Executive Directors and senior management with 15 per cent. still available to new participants. Units will normally convert into a number of ordinary shares in the form of nil cost options at three dates during a five year period, the number of which are determined as set out below. Value becomes attributable to the plan if the Measurement Price exceeds the Threshold Price at the respective Measurement Dates, where: the Threshold Price is the higher of a 20 per cent. per annum compound growth rate from: the grant price, which is 0.15 per share and represents the starting base price for the VCP, and the Measurement Price used at a previous Measurement Date the Measurement Dates are three, four and five years after the establishment of the scheme, respectively 8 May 2018, 8 May 2019 and 8 May 2020; the Measurement Price is the volume weighted share price of the Group for the 30 calendar days prior to and ending on a Measurement Date; and the Value Attributable to the scheme is 15 per cent of the difference between the Measurement Price and the Threshold Price multiplied by the number of shares in issue at the start of the plan (the "Value Attributable"). Value Attributable earned under the VCP is converted into a number of nil cost options at each Measurement Date. Any nil cost options earned at each Measurement Date will not be exercisable until the end of the five year Measurement Period, in order to increase the alignment of interests between the participants and shareholders over the longer term. Non executivendirectors nfees The Non executive Directors are paid a base fee for carrying out their duties and responsibilities as disclosed in the table on page 14. The Nonexecutive Directors reduced their fees on the same terms as the Executive Directors during The Non executive Directors have waived fees for acting as members of the Group s Audit and Remuneration Committees. Directors nservicencontracts The notice period for Keith Bush and Nick Morgan is six months, unless in the case of a change of control and the Director is removed from office at which point the notice period will be extended to 12 months. The Non executive Directors have a notice period of three months. The Directors contracts do not contain any further obligations on the Group. Loss of office payments Group policy for loss of office payments is to provide payment to cover contractual rights. No loss of office payments were made in Percentage change in remuneration of Director undertaking the role of CEO The percentage change in the remuneration of the CEO compared to the Group average percentage changes from 2014 to 2015 in respect of the employees of the Group continuing operations taken as a whole is detailed in the table below. Salary Benefit Pensions Bonus Chief Executive Officer 17.0% 52.9% Average Employees 2.4% 27.2% Annual Report and Accounts

16 Report on Directors Remuneration continued Remuneration earned by Directors who served during the year was as follows: Year ended 31 December 2015 Year ended 31 December 2014 Salary or fees Taxable benefits Pension Total Salary or fees Taxable benefits Pension Loss of office payment Total Presented in USD $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Executive Directors (salaries): K R Bush N T Morgan G L Heard (retired ) , ,582 Non Executive Directors (fees): J D Murphy I M Lanaghan (appointed ) S G Gibson (resigned ) Total Directors , ,782 The taxable benefits comprise critical illness cover, death in service and medical and dental insurance. The Non executive Directors have waived fees for acting as members of the Group s committees. Relative importance of spend on pay The table below shows the Group s actual spend on all employees relative to capital expenditure as shown on the cash flow statement $ million $ million Change Employee cost % Capital expenditure % Warrants and options held by Directors serving at 31 December 2015 were as follows: At 1 January 2014 Issued Exercised Lapsed At 1 January 2015 Issued Exercised Lapsed At 31 December s 000s 000s 000s 000s 000s 000s 000s 000s K R Bush: At 85.0p (exercisable by 31 December 2014) 75 (75) At 100.0p (exercisable by 30 June 2016) At 100.0p (exercisable by 30 June 2017) Nil cost (exercisable by 8 May 2025) (75) N T Morgan: Nil cost (exercisable by 8 May 2025) Total 275 (75) Details of when the warrants and options above were granted are disclosed in note 20 Share Capital. This report was approved by the Board on 11 April 2016 and signed on its behalf by Jon Murphy. 14 Annual Report and Accounts 2015 Jon Murphy Chairman 11 April 2016

17 Directors Report The Directors present their Annual Report and the audited financial statements. Principal activity and review of the business The activities of the Group are the exploration, appraisal, development and production of oil and gas assets. The areas of activity during 2015 were Canada, Italy, French Guiana and Australia. The Group s head office is in the UK. Results and dividends The Group financial statements are set out in pages 19 to 57 and are presented in US Dollars. The Group s net loss for the year was US$10.2 million (2014: US$58.9 million). The Directors do not recommend the payment of a dividend for the year. Going concern The Group s business activities, together with the factors likely to affect its future development and performance are set out in the Chairman s and Chief Executive s Statements and the Review of Operations. The financial position of the Group, its net cash position and liabilities are described in the Financial Review and in notes 16 and 17. Further information on the Group s exposure to financial risks and the management of those risks is provided in note 23. While the Group has no material capital expenditure commitments, the year end cash position of US$2.4 million combined with the future revenue from existing oil and gas fields, is only likely to provide enough financial resources to undertake the work programme of redevelopment in Rainbow and Virgo planned for the first half of As at 31 March 2016, the Group had cash resources of approximately US$0.7 million at its disposal with an additional US$1.4 million on deposit with the Alberta Energy Regulator in relation to future abandonment liability. The payment of the deposit was in January 2016 and accounted for the majority of the movement in cash on the balance sheet since the year end balance of US$2.4 million. Based on current production forecasts, it is expected that the full deposit of US$1.4 million will be returned to the Group in three monthly payments starting in June Any further development or drilling in Canada and appraisal activities on the Group s assets in Italy will require external capital, which may come from the farm out, joint venture or partial sale of existing assets, or debt or equity, all of which are not entirely within the control of the Board. If no further external capital is obtained and the price of oil at which the Group sells its Canadian production does not increase materially, the Group will need to further reduce its overhead costs after 12 months in order that revenue derived from Canada can cover all ongoing Group expenditure. Furthermore, if the Group does suffer operational difficulties, it may not have the financial resources, even if the oil price increases, to resolve whatever operational problems have arisen in order to restore production and would be forced to seek further capital from external sources. The Board has reviewed and considered the possible outcomes of future operations and forecast cash flows, in conjunction with accounts, budgets and financial plans, and believe that the necessary reduction in costs could be undertaken if required or future external capital could be found to allow the Group to continue which leads the Directors to believe that the Group has sufficient resources to continue in operation at least until 12 months after the date of this document and are managing the Group s assets to realise further capital to allow the development and growth of the business during that time and beyond. The financial statements are therefore prepared on a going concern basis. Directors and their interests The Directors of the Group all served throughout the year. There are no requirements for Directors to hold shares. The Directors beneficial interests in the shares of the Group as at the below dates were: Name At 31 December 2015 (ordinary 1p shares) At 31 December 2014 (ordinary 5p shares) Directors K R Bush 450, ,000 I M Lanaghan 217,000 50,000 N T Morgan 448, ,882 J D Murphy 1,425, ,200 Total 2,540, ,082 Directors have been granted warrants and share options exercisable into shares of the Group. Further details of these interests are shown in the Report on Directors Remuneration on page 14. Other than as shown above, no Director had any interest in the shares of the Group or any of its subsidiaries at 31 December 2015 or at 31 December Annual Report and Accounts

18 Directors Report continued Nick Morgan retires from office in accordance with Article 108 of the Company s Articles and, being eligible, offers himself for re election at the upcoming AGM. Nick Morgan is entitled to a notice period of six months in his service contract unless in the case of a change of control and the Director is removed from office at which point the notice period will be extended to 12 months. Iain Lanaghan retires from office in accordance with Article 108 of the Company s Articles and, being eligible, offers himself for re election at the upcoming AGM. Iain Lanaghan is entitled to a notice period of three months in his service contract. The Group maintains directors and officers insurance for the benefit of Directors and Officers of all Group companies, and has also indemnified the Directors to the fullest extent possible allowed under the Companies Act 2006 and the Group s Memorandum and Articles of Association. Directors interest in transactions No Director had, during or at the end of the year, a material interest in any other contract which was significant in relation to the Group s business, except in respect of personal service agreements, warrants and options. Employees The Group seeks to keep employees informed and involved in the operations and progress of the business by means of monthly staff meetings open to all employees and Directors. The Group operates an equal opportunities policy. The policy provides that full and fair consideration will be given to applications for employment from disabled people and people of any racial background, gender, religious belief or sexual orientation. Existing employees, who become disabled, to the extent that they are unable to perform the tasks they were employed to carry out, will have the opportunity where practical to retrain and continue in employment wherever possible. Substantial interests As at 31 March 2016, the Group has been advised of the following beneficial holdings of three per cent. or more of the issued share capital in accordance with the Transparency Obligations Directive (Disclosure and Transparency Rules) Instrument 2009: Name Shares % of issued share capital Cavendish Asset Management Limited 32,091, City Financial Investment Company Limited 22,533, Barry James Lonsdale 4,767, Disclosure of Information to Auditor The Directors who held office at the date of the approval of this Directors report confirm that, so far as they are each aware, there is no relevant audit information of which the Group s auditor is unaware and each Director has taken all steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Group s auditor is aware of that information. Auditor In accordance with Section 489 of the Companies Act 2006, a resolution for the re appointment of KPMG LLP as auditor of the Group is to be proposed at the upcoming AGM. By order of the Board on 11 April William Anderson Secretary to the Board 16 Annual Report and Accounts 2015

19 Directors Responsibilities in respect of the Annual Report and the Financial Statements The Directors are responsible for preparing the Annual Report, the Strategic Report, the Directors Report, the report on Directors Remuneration and the Group and Parent Company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the Group and Company financial statements in accordance with IFRS as adopted by the EU 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 Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; for the Group financial statements, state whether they have been prepared in accordance with IFRS as adopted by the EU; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company s transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that the financial statements comply with the Companies Act They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Annual Report and Accounts

20 Independent Auditor s Report to the Members of Independent auditor s report to the members of We have audited the financial statements of set out on pages 19 to 57. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act This report is made solely to the company s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act Our audit work has been undertaken so that we might state to the company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company s members, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors Responsibilities Statement set out on page 17, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council s website at Opinion on financial statements In our opinion: the financial statements give a true and fair view of the state of the group s and of the parent company s affairs as at 31st December 2015 and of the group s loss for the year then ended; the group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and the financial statements have been prepared in accordance with the requirements of the Companies Act Emphasis of Matter Going Concern In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of the disclosure made in note 1 to the financial statements concerning the group s and the parent company s ability to continue as a going concern. The group incurred a net loss of $14.1 million during the year ended 31 December These conditions, along with the other matters explained in note 1 to the financial statements, indicate the existence of a material uncertainty which may cast significant doubt on the group s and the parent company s ability to continue as a going concern. The financial statements do not include the adjustments that would result if the group and the parent company were unable to continue as a going concern. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Nigel Harker (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL 11 April Annual Report and Accounts 2015

21 Consolidated Statement of Profit or Loss and Other Comprehensive Income Year ended Year ended 31 December 31 December Notes $ 000 $ 000 Revenue ,731 Production costs (884) (2,696) Cost of sales 2 (884) (2,696) Gross (loss) / profit Pre licence costs (552) 35 (15) (76) Administrative expenses 3 (3,967) (7,014) (Loss) / profit on disposal of subsidiaries and other assets 4 (40) 2,344 Other operating income Impairment losses 12 & 13 (6,268) (52,597) Loss from operations 2 & 3 (10,056) (57,308) Finance costs 8 (666) (1,767) Finance income Loss before tax (10,721) (59,069) Tax credit Loss for the year (10,163) (58,948) Other comprehensive (loss): Items that may be reclassified subsequently to profit or loss: Exchange differences on translation of foreign operations (3,900) (4,407) Other comprehensive loss for the year, net of income tax (3,900) (4,407) Total comprehensive loss for the year (14,063) (63,355) Profit attributable to Equity shareholders of the Company (10,140) (42,958) Non controlling interests (23) (15,990) (10,163) (58,948) Total comprehensive income attributable to Equity shareholders of the Company (14,040) (47,365) Non controlling interests (23) (15,990) (14,063) (63,355) Earnings per share Basic (loss) / earnings per share on loss for the year 11 (10.3) cents (45.0) cents All results are from continuing operations. As the Group is loss making, there is no dilution of earnings from potential ordinary shares and diluted earnings per share has not been presented. See note 11 for further information. The notes on pages 28 to 57 form part of these financial statements. Annual Report and Accounts

22 Consolidated Statement of Financial Position at 31 December Notes $ 000 $ 000 Assets Non current assets Intangible assets 12 25,749 32,347 Property, plant and equipment 13 4,045 3,994 29,794 36,341 Current assets Inventories Trade and other receivables ,573 Cash and cash equivalents 2,417 12,143 3,088 13,716 Total assets 32,882 50,057 Liabilities Current liabilities Trade and other payables , ,233 Non current liabilities Trade and other payables Provisions 18 1,297 1,300 Deferred tax liabilities 19 2,066 2,927 3,916 5,157 Total liabilities 4,890 10,390 Net assets 27,992 39,667 Capital and reserves Share capital 20 9,034 8,225 Share premium 18,833 17,312 Merger reserve 14,190 14,190 Share incentive plan reserve Foreign currency translation reserve (8,926) (5,026) Retained earnings and other distributable reserves (5,493) 4,489 Equity attributable to owners of the parent 27,987 39,674 Non controlling interests 5 (7) Total equity 27,992 39,667 The notes on pages 28 to 57 form part of these financial statements. These financial statements were approved and authorised for issue by the Board of Directors on 11 April 2016 and were signed on its behalf by: K R Bush Director N T Morgan Director REGISTERED NO Annual Report and Accounts 2015

23 Company Statement of Financial Position at 31 December Notes $ 000 $ 000 Assets Non current assets Intangible assets 12 b 1,117 Property, plant and equipment 13 b Investments 14 21,992 45,356 22,182 46,906 Current assets Trade and other receivables 16 6,646 1,943 Cash and cash equivalents 1,349 9,823 7,995 11,766 Total assets 30,177 58,672 Liabilities Current liabilities Trade and other payables 17 2,190 3,460 2,190 3,460 Non current liabilities Trade and other payables Total liabilities 2,190 3,468 Net assets 27,987 55,204 Capital and reserves Share capital 20 9,034 8,225 Share premium 18,833 17,312 Merger reserve 14,190 14,190 Share incentive plan reserve Retained earnings and other distributable reserves (14,419) 14,993 Equity attributable to owners of the parent 27,987 55,204 The notes on pages 28 to 57 form part of these financial statements. These financial statements were approved and authorised for issue by the Board of Directors on 11 April 2016 and were signed on its behalf by: K R Bush Director N T Morgan Director REGISTERED NO Annual Report and Accounts

24 Consolidated Cash Flow Statement Year ended Year ended 31 December 31 December Notes $ 000 $ 000 Cash flows from operating activities Loss for the year (10,163) (58,948) Tax credit 10 (558) (121) Depletion and amortisation Depreciation non oil and gas property, plant and equipment 12 & ,112 Impairment losses on intangible assets 12 3,667 37,194 Impairment losses on property, plant and equipment 13 2,601 15,403 Provision for bad debts 3 Loss / (profit) on disposal of subsidiaries, investments and property, plant and equipment 4 40 (2,344) Foreign exchange loss ,591 Finance income 9 (1) (6) Finance charges Share based payments 3 & Net cash outflow before movements in working capital (2,903) (5,126) Increase in inventories (16) Decrease in trade and other receivables (Decrease) /increase in trade and other payables (4,267) 1,809 Net cash (outflow) / inflow from changes in working capital (3,535) 2,548 Cash flow from operating activities Cash outflow from operations (6,438) (2,578) Interest received 1 6 Interest paid (10) (12) Taxes refunded / (paid) 81 (91) Net cash outflow from operating activities (6,366) (2,675) Cash flows from investing activities Purchase of property, plant and equipment (4,005) (10,996) Expenditure on exploration and evaluation assets (1,139) (11,023) Sale of subsidiaries, investments and property, plant and equipment, net of cash disposed of 11 2,465 Net cash outflow from investing activities (5,133) (19,554) Cash flows from financing activities Proceeds from issue of ordinary shares 2,427 Costs and fees associated with the issue of ordinary shares (97) Proceeds from award of government grants and loans 401 Repayment of government loan (382) (421) Capital contributions from non controlling interests Net cash inflow from financing activities 1, Net decrease in cash and cash equivalents (9,516) (22,019) Cash and cash equivalents at start of year 12,143 35,841 Effect of exchange rate movements (210) (1,679) Cash and cash equivalents at end of year 2,417 12,143 There have been no significant non cash transactions during either year. 22 Annual Report and Accounts 2015

25 Company Cash Flow Statement Year ended Year ended 31 December 31 December Notes $ 000 $ 000 Cash flows from operating activities Loss for the year (29,570) (46,413) Taxation Depreciation non oil and gas property, plant and equipment 12 & ,109 Impairment losses on intangible assets Impairment losses on investments in subsidiaries 14 23,364 27,575 Provision for impairment of amounts owing from subsidiaries ,612 Loss / (profit) on disposal of subsidiaries, investments and property, plant and equipment 40 (1,958) Foreign exchange loss 1,372 2,546 Finance income (83) (126) Finance charges 1 Share based payments Net cash outflow before movements in working capital (2,673) (3,801) Increase in trade and other receivables (4,437) (1,939) Decrease in trade and other payables (3,093) (1,813) Net cash (outflow) / inflow from changes in working capital (7,530) (3,752) Cash flow from operating activities Cash outflow from operations (10,203) (7,553) Interest received 6 Interest paid (1) Taxes paid Net cash outflow from operating activities (10,203) (7,548) Cash flows from investing activities Purchase of property, plant and equipment 13 (29) (80) Sale of subsidiaries, investments and property, plant and equipment, net of cash disposed of 11 2,465 Net cash outflow from investing activities (18) 2,385 Cash flows from financing activities Proceeds from issue of ordinary shares 2,427 Costs and fees associated with the issue of ordinary shares (97) Net cash inflow from financing activities 2,330 Net decrease in cash and cash equivalents (7,891) (5,163) Cash and cash equivalents at start of year 9,823 15,996 Effect of exchange rate movements (583) (1,010) Cash and cash equivalents at end of year 1,349 9,823 There have been no significant non cash transactions during either year. Annual Report and Accounts

26 Consolidated Statement of Changes in Equity Retained Share Foreign earnings Share incentive currency and other Non Share premium Merger plan translation distributable controlling Total capital account reserve reserve reserve reserves Total interests equity $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 At 1 January ,225 17,312 14, (5,026) 4,489 39,674 (7) 39,667 Total comprehensive income for the year (3,900) (10,140) (14,040) (23) (14,063) Contributions by and distributions to owners of the Company Issue of shares during the year 809 1,618 2,427 2,427 Costs and fees associated with share issue (97) (97) (97) Equity share warrants lapsed or cancelled (158) 158 Share based payments Total contributions by and distributions to owners of the Company 809 1,521 (135) 158 2,353 2,353 Changes in ownership interests in subsidiaries Capital contributions from noncontrolling interests Total changes in ownership interests in subsidiaries At 31 December ,034 18,833 14, (8,926) (5,493) 27, , Annual Report and Accounts 2015

27 Consolidated Statement of Changes in Equity for the year ended 31 December 2014 Retained Share Foreign earnings Share incentive currency and other Non Share premium Merger plan translation distributable controlling Total capital account reserve reserve reserve reserves Total interests equity $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 At 1 January ,225 17,312 14, (619) 47,062 87,031 15, ,773 Total comprehensive income for the year (4,407) (42,958) (47,365) (15,990) (63,355) Contributions by and distributions to owners of the Company Equity share warrants lapsed or cancelled (396) 396 Share based payments Total contributions by and distributions to owners of the Company (377) Changes in ownership interests in subsidiaries Capital contributions from noncontrolling interests Acquisition of non controlling interests without a change in control* (11) (11) 11 Total changes in ownership interests in subsidiaries (11) (11) At 31 December ,225 17,312 14, (5,026) 4,489 39,674 (7) 39,667 * Increase in equity in Northpet Investments Limited. Annual Report and Accounts

28 Company Statement of Changes in Equity Retained Share earnings Share incentive and other Share premium Merger plan distributable capital account reserve reserve reserves Total $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 At 1 January ,225 17,312 14, , ,598 Total comprehensive income for the year (46,413) (46,413) Contributions by and distributions to owners of the Company Equity share warrants lapsed or cancelled (396) 396 Share based payments Total contributions by and distributions to owners of the Company (377) At 31 December ,225 17,312 14, ,993 55,204 Total comprehensive income for the year (29,570) (29,570) Contributions by and distributions to owners of the Company Issue of shares during the year 809 1,618 2,427 Costs and fees associated with share issue (97) (97) Equity share warrants lapsed or cancelled (158) 158 Share based payments Total contributions by and distributions to owners of the Company 809 1,521 (135) 158 2,353 At 31 December ,034 18,833 14, (14,419) 27, Annual Report and Accounts 2015

29 Consolidated and Company Statement of Changes in Equity The following describes the nature and background to each reserve within owners equity: Share premium Amount subscribed for share capital in excess of nominal value less any costs and fees associated with the issue of shares. Other reserves: Merger reserve The notional share premium on the shares issued in consideration for the takeover of ATI Oil Plc, evaluated at the closing market price on the day of acquisition, 24 June 2009, less the nominal value of those shares issued. Share incentive plan reserve The share incentive plan reserve captures the equity related element of the expense recognised for the issue of warrants and options, comprising of the cumulative charge to the Statement of Profit or Loss for IFRS 2 charges for share based payments less amounts released to retained earnings upon the exercise of warrants. Foreign currency translation reserve Exchange differences arising on consolidating the assets and liabilities of the Group s non US Dollar functional currency operations (including comparatives) are recognised through the Consolidated Statement of Other Comprehensive Income. Retained earnings and other distributable reserves Cumulative net gains and losses recognised in the financial statements plus other distributable reserves relating to the court sanctioned cancellation of the share premium account in July 2009 and the elimination of the previous deferred shares in issue and the cancellation of a proportion of the share premium account as at 31 December 2004 in accordance with the court order dated 31 October Non controlling interests Amounts attributable to minority shareholders of fully consolidated subsidiaries. This represents the equity of Hague and London Oil Plc in Northpet Investments Limited. The Group held 55.9% of the ordinary share capital of Northpet Investments Limited at 31 December Annual Report and Accounts

30 Notes to the Accounts 1. Accounting Policies The principal accounting policies applied in the preparation of these Company and Group consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Basis of preparation The Company and Group consolidated financial statements have both been prepared under the historical cost convention and in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union and International Financial Reporting Interpretations Committee ("IFRIC") interpretations issued by the International Accounting Standards Board ("IASB"), and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The Company previously elected to prepare its Parent Company financial statements in accordance with UK Generally Accepted Accounting Principles ("UK GAAP"). The change in accounting standards used by the Company has resulted in no change to the reported results for 2014 and therefore a restatement of the results of the Company is not necessary. The Company and Group have adopted all of the standards and interpretations issued by the International Accounting Standards Board and the International Financial Reporting Interpretations Committee that are relevant to its operations. The Company has taken advantage of Section 408(4) of the Companies Act 2006 in not presenting its own profit and loss account. The Company s loss for the year was $29,570,000 (2014: loss of $46,413,000). Going concern basis of preparation The Group s business activities, together with the factors likely to affect its future development and performance are set out in the Chairman s and Chief Executive s Statements and the Review of Operations. The financial position of the Group, its net cash position and liabilities are described in the Financial Review and in notes 16 and 17. Further information on the Group s exposure to financial risks and the management of those risks is provided in note 23. While the Group has no material capital expenditure commitments, the year end cash position of $2.4 million combined with the future revenue from existing oil and gas fields, is only likely to provide enough financial resources to undertake the work programme of redevelopment in Rainbow and Virgo planned for the first half of As at 31 March 2016, the Group had cash resources of approximately $0.7 million at its disposal with an additional $1.4 million on deposit with the Alberta Energy Regulator in relation to future abandonment liability. The payment of the deposit was in January 2016 and accounted for the majority of the movement in cash on the balance sheet since the year end balance of $2.4 million. Based on current production forecasts, it is expected that the full deposit of $1.4 million will be returned to the Group in three monthly payments starting in June Any further development or drilling in Canada and appraisal activities on the Group s assets in Italy will require external capital, which may come from the farm out, joint venture or partial sale of existing assets, or debt or equity, all of which are not entirely within the control of the Board. If no further external capital is obtained and the price of oil at which the Group sells its Canadian production does not increase materially, the Group will need to further reduce its overhead costs after 12 months in order that revenue derived from Canada can cover all ongoing Group expenditure. Furthermore, if the Group does suffer operational difficulties, it may not have the financial resources, even if the oil price increases, to resolve whatever operational problems have arisen in order to restore production and would be forced to seek further capital from external sources. The Board has reviewed and considered the possible outcomes of future operations and forecast cash flows, in conjunction with accounts, budgets and financial plans, and believe that the necessary reduction in costs could be undertaken if required or future external capital could be found to allow the Group to continue which leads the Directors to believe that the Group has sufficient resources to continue in operation at least until 12 months after the date of this document and are managing the Group s assets to realise further capital to allow the development and growth of the business during that time and beyond. The financial statements are therefore prepared on a going concern basis. These conditions indicate the existence of a material uncertainty which may cast significant doubt on the Group s and the Parent Company s ability to continue as a going concern. The financial statements do not include the adjustments that would result if the group and the parent company were unable to continue as a going concern. Functional and presentational currency The functional currency of the Parent Company is considered to be the US Dollar and the Group financial statements have been presented in US Dollars. 28 Annual Report and Accounts 2015

31 Notes to the Accounts 1. Accounting Policies Changes in accounting policies Adoption of new and revised standards A. Impact of new International Financial Reporting Standards There are no new or amended standards or interpretations adopted during the year that have a significant impact on the financial statements. B. Not yet adopted At the date of approval of these financial statements, the following Standards or Interpretations were in issue but not yet effective: IFRS 9 Financial Instruments will supersede IAS 39 Financial Instruments: Recognition and Measurement and is effective for annual periods beginning on or after 1 January IFRS 9 covers classification and measurement of financial assets and financial liabilities, impairment methodology and hedge accounting. IFRS 15 Revenue from Contracts with Customers provides a single model for accounting for revenue arising from contracts with customers and is effective for annual periods beginning on or after 1 January IFRS 15 will supersede IAS 18 Revenue. The IASB has issued IFRS 16 Leases which provides a new model for lease accounting in which all leases, other than short term and smallticket item leases, will be accounted for by the recognition on the balance sheet of a right to use asset and a lease liability, and the subsequent amortisation of the right to use asset over the lease term. IFRS 16 will be effective for annual periods beginning on or after 1 January 2019 and is expected to have a limited effect on the Group s financial statements, increasing the Group s recognised assets and liabilities and potentially affecting the presentation and timing of recognition of charges in the income statement. Information on the Group s leases currently classified as operating leases, which are not recognised on the balance sheet, is provided in Note 23. The Group does not expect to adopt IFRS 9 or IFRS 15 before 1 January 2018 and has not yet determined its date of adoption for IFRS 16. The EU has not yet adopted IFRS 9, IFRS 15 or IFRS 16. There are no other Standards and Interpretations in issue but not yet adopted that the Directors anticipate will have a material effect on the reported income or net assets of the Group. Basis of consolidation The consolidated financial statements include the financial statements of the Company, its subsidiaries and interests in joint ventures and associates made up to 31 December Subsidiaries The Company determines whether it is a parent by assessing whether it controls one or more investees, (potential subsidiaries). The Company considers all relevant facts and circumstances when assessing whether it controls an investee. The Company controls an investee, (subsidiary), when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Group financial statements incorporate the assets, liabilities and results of operations of the Company and its subsidiaries. The results of subsidiaries acquired and disposed of during a financial year are included from the effective dates of acquisition to the effective dates of disposal. Where necessary, the accounting policies of the subsidiaries are changed to ensure consistency with the policies adopted by the Group when presenting consolidated financial statements. The accounting policies of the Company are the same as the accounting policies of the Group hereafter referred to as the Group accounting policies. Non controlling interests For each business combination, the Group elects to measure any non controlling interests in the acquiree either: at fair value; or at their proportionate share of the acquiree s identifiable net assets, which are generally at fair value. Changes in the Group s interest in a subsidiary that do not result in a loss of control are accounted for as transactions with owners in their capacity as owners. Adjustments to non controlling interests are based on a proportionate amount of the net assets of the subsidiary. No adjustments are made to goodwill and no gain or loss is recognised in the profit or loss statement. Annual Report and Accounts

32 Notes to the Accounts continued 1. Accounting Policies continued Intangible assets Oil and gas assets: Exploration and Evaluation The Group has continued to apply the full cost method of accounting for Exploration and Evaluation ( E&E ) expenses, having regard to the requirements of IFRS 6 Exploration for and Evaluation of Mineral Resources. Under the modified full cost method of accounting, costs of exploring and evaluating oil and gas properties are accumulated and capitalised by reference to appropriate cash generating units. The appropriate cash generating unit grouping is based on geological basins and play types. The Group considers that Virgo, Alberta (Canada); South Australia (Australia); French Guiana (France); southern Adriatic (Italy); Italy (excluding the southern Adriatic); and the United Kingdom are cost pools. E&E expenses are initially capitalised within Intangible assets. Such E&E expenses may include costs of licence acquisition, technical services and studies, seismic acquisition, exploration drilling and testing, but do not include costs incurred prior to having obtained the legal rights to explore an area, which are expensed directly to the statement of profit or loss as they are incurred. Intangible E&E assets relating to each exploration licence or prospect are not depreciated and are carried forward until the existence (or otherwise) of commercial reserves has been determined. The Group definition of commercial reserves for such purpose is proven and probable reserves on an entitlement basis. If commercial reserves have been discovered, the related E&E assets are assessed for impairment as set out below. The carrying value, after any impairment loss, of the relevant E&E assets is then reclassified as development and production ( D&P ) assets within property, plant and equipment. The carrying value of costs within each cash generating unit grouping is reviewed annually against the progress or otherwise of a particular project within each country. E&E assets are assessed for impairment when facts and circumstances suggest that the carrying value of the E&E cash generating unit to which they relate may exceed its future recoverable amount or when the Group decides that it no longer has interest or activity in a specific region or basin. Such indicators include the point at which a determination is made as to whether or not commercial reserves exist. Where the E&E assets concerned fall within the scope of an established D&P cash generating unit, the E&E assets are tested for impairment together with the established D&P assets as a single cash generating unit. The aggregate carrying value is compared against the expected recoverable amount of the cash generating unit, generally by reference to the present value of the future net cash flows expected to be derived from production of commercial reserves. These ceiling test values are calculated on the basis of expected future product prices or, if applicable at prices specified in a sales contract, and discounted at a rate of 10% (2014: 10%) per annum, depending on risk considerations on an asset by asset basis. Intangible E&E assets that relate to such E&E activities remain capitalised as intangible E&E assets at cost. Where the E&E assets to be tested fall outside the scope of any established D&P cash generating unit and there are deemed to be no commercial reserves, or no ongoing work programme, the E&E assets concerned will generally be written off in full. Any material impairment loss is recognised in the statement of profit or loss and separately disclosed. Where the Group reaches an agreement to farm out an oil and gas permit and receives a refund of a proportion of its expenditure to date in the form of back costs, the back costs are applied to reduce the carrying value of the relevant cost pool. If the receipts of back costs exceed the cost held in the cost pool, the excess costs recovered are credited to the statement of profit or loss under other operating income. Property, plant and equipment Oil and gas assets: development and production Development and production assets are accumulated on a cash generating unit basis and represent the cost of developing the commercial reserves discovered and bringing them into production, together with the E&E expenditures incurred in finding commercial reserves transferred from intangible E&E assets as outlined above. The net book values of producing assets are depreciated on a cash generating unit basis using the unit of production method based on entitlement to produce by reference to the ratio of production in the period to the related commercial reserves of the cash generating unit, taking into account any estimated future development expenditures necessary to bring additional reserves into production. 30 Annual Report and Accounts 2015

33 Notes to the Accounts 1. Accounting Policies An impairment test is performed for D&P assets whenever events and circumstances arise that indicate that the carrying value of development or production phase assets may exceed its recoverable amount. The aggregate carrying value is compared against the expected recoverable amount of the cash generating unit, generally by reference to the present value of the future net cash flows expected to be derived from production of commercial reserves. These ceiling test values are calculated on the basis of expected future product prices or, if applicable at prices specified in a sale contract, and discounted at a rate of 10% (2014: 10%) per annum, depending on risk considerations on an asset by asset basis. The cash generating unit applied for impairment test purposes is generally the field, except that a number of field interests may be grouped as a single cash generating unit where the cash flows of each field are in some way interdependent. Decommissioning Where a material liability for the removal of production facilities and site restoration at the end of the productive life of a field exists, a provision for decommissioning is recognised. The amount recognised is the present value of estimated future expenditure determined in accordance with local conditions and requirements. A property, plant and equipment asset of an amount equivalent to the provision is also created and depreciated on a unit of production basis. Changes in estimates are recognised prospectively, with corresponding adjustments to the provision and the associated fixed assets. Non oil and gas assets Property, plant and equipment are included in the statement of financial position at cost, less accumulated depreciation and any provisions for impairment. Business combinations The acquisition of subsidiaries is accounted for using the purchase method. The consideration of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition costs incurred are expensed and included in other operating expenses. The acquiree s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 are recognised at their fair value at the acquisition date, except for non current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 non current assets held for sale and discontinued operations, which are recognised and measured at fair value less costs to sell. Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group s interest in the net fair value of the acquiree s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in the Statement of Profit or Loss. Revenue Revenue comprises net invoiced sales of hydrocarbons to customers, excluding value added and similar taxes, but before the deduction of royalties. Also disclosed within production and pre production segment revenue is income recognised, excluding value added and similar taxes, for charges in respect of fees for acting as operator of both production and pre production activities, and fees for other related services, to third parties by the Group. Income recognised, excluding value added and similar taxes, to other companies by the Group in respect of fees for any other services are disclosed within other operating income. Revenue is recognised on an entitlement basis once the significant risks and rewards of ownership have passed to the customer and receipt of future economic benefits is probable. Revenue from services provided is recognised once the services have been performed. Segment reporting In the opinion of the Directors the Group has one class of business, being the exploration for, and development and production of, oil and gas reserves, and other related activities. The Group s primary reporting format is determined to be the geographical segment according to the location of the oil and gas asset. Currently the activities of the Group are disclosed within the following geographical segments: Canada, Italy, French Guiana, United Kingdom and Others including Australia. Annual Report and Accounts

34 Notes to the Accounts continued 1. Accounting Policies continued Share based payments equity settled share based payments In accordance with IFRS 2 Share based payments, the Group reflects the economic cost of awarding shares and share options to employees, Directors, key suppliers and consultants by recording an expense in the Statement of Profit or Loss equal to the fair value of the benefit awarded. The expense is recognised in the Statement of Profit or Loss over the vesting period of the award. An accrual for employers National Insurance is made in respect of share warrants and options granted to employees that are in profit at the year end. Fair value is measured by use of a Black Scholes model which takes into account conditions attached to the vesting and exercise of the equity instruments. The expected life used in the model is adjusted, based on management s best estimate, for the effects of non transferability, exercise restrictions and behavioural considerations. If a warrant or option is cancelled before the end of its vesting period, the remaining fair value expense not yet charged to the Statement of Profit or Loss is immediately recognised in full. Upon cancellation of the warrant there will also be a transfer of the cumulative charge recognised in respect of the transferred warrants out of the share incentive reserve and into retained earnings. Pensions A defined contribution plan is a post employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an employee benefit expense in the Statement of Profit or Loss when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. Depreciation The cost of property, plant and equipment, other than costs directly related to oil and gas assets, is written off by equal annual instalments over the expected useful lives of the assets, as follows: leasehold improvements over the term of the lease computer hardware and software four to five years office equipment four years The carrying values of property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable. Inventories Inventories comprise oil and gas in tanks and field parts and supplies, all of which are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less marketing costs. Lease commitments The annual rentals under operating leases are charged to the Statement of Profit or Loss on a straight line basis over the term of the lease. Financial instruments Financial assets The Group classifies its financial assets into one of the categories discussed below, depending on the purpose for which the asset was required. The Group has not classified any of its financial assets as held to maturity. Loans and receivables These assets are non derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods and services to customers (i.e. trade receivables) but also incorporate other types of contractual monetary asset. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For trade receivables, which are reported net; such provisions are recorded in a separate allowance account with the loss being recognised within administrative expenses in the Statement of Profit or Loss. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision. 32 Annual Report and Accounts 2015

35 Notes to the Accounts 1. Accounting Policies Cash and cash equivalents Cash and cash equivalents include cash in hand and deposits held at call with banks. Cash, for the purposes of the cash flow statement, comprises cash in hand and deposits repayable on demand, based on the relevant exchange rates at the balance sheet date. Financial liabilities The Group currently classifies its financial liabilities into current and non current liabilities. The Group has not classified any of its liabilities at fair value through the Statement of Profit or Loss. Government grants and disclosure of government assistance Government grants received in respect of intangible assets or property, plant and equipment are offset against the costs of the related assets. Government loans received at below market rates of interest are fair valued at the date of inception. The fair value discount element of the loan is offset against the cost of the asset to which it relates as it is treated as a grant. The fair value of the loan is unwound as an implied interest cost over the life of the loan. The market rate of interest is determined to be 10%. Share capital Financial instruments issued by the Group are treated as equity only to the extent that they do not meet the definition of a financial liability. The Group s ordinary shares and unclassified ordinary shares are classed as equity instruments. Foreign currencies Foreign currency transactions of individual companies within the Group are translated in the individual company s functional currency at the rates ruling when the transactions occurred. Monetary assets and liabilities denominated in other currencies are retranslated at the rate of exchange ruling at the balance sheet date. All differences are taken to the Statement of Profit or Loss. The functional currency of the Parent Company is considered to be the US Dollar and the Group financial statements have been presented in US Dollars. On consolidation, assets and liabilities of subsidiaries, associate undertakings and joint ventures which are denominated in other currencies are translated into US Dollars at the rate ruling at the balance sheet date. Income and cash flow statements are translated at average rates of exchange prevailing during the year. Exchange differences resulting from the translation at closing rates of net investments in subsidiaries, associate undertakings and joint ventures, together with differences between earnings for the year translated at average and closing rates, are dealt with in the foreign currency translation reserve. Details of the current and prior year exchange rates used in these accounts are disclosed in note 23. Taxation The tax expense represents the sum of the tax currently payable and movements in deferred tax. Current tax, including UK Corporation and any overseas tax, is provided for at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted, or substantially enacted, at the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax assets and liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated on an undiscounted basis at the tax rates that are expected to apply in the period when the liability is anticipated to be settled or the asset is anticipated to be realised, based on tax rates and laws enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited in the Statement of Profit or Loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Annual Report and Accounts

36 Notes to the Accounts continued 1. Accounting Policies continued Critical accounting judgments and key sources of estimation uncertainty The preparation of the consolidated financial statements requires management to make estimates and assumptions concerning the future that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The resulting accounting estimates may, by definition, differ from the related actual results. Details of the Group s significant accounting judgments and critical accounting estimates are set out in these financial statements and include: Carrying value of property, plant and equipment (Note 13); and Carrying value of intangible exploration and evaluation assets (Note 12); Valuation of petroleum and natural gas properties: consideration of future cash flows used to assess impairment includes estimates relating to oil and gas reserves, future production rates, overall costs and oil and natural gas prices. In addition, the timing of regulatory approval, the general economic environment and the ability to finance future activities through the issuance of debt or equity also impact the impairment analysis. All these factors may impact the viability of future commercial production from developed and unproved properties, including major development projects, and therefore there may be a need to recognise an impairment. The timing of an impairment review and the judgement of when there could be a significant change affecting the carrying value of plant property and equipment or intangible exploration assets is critical accounting judgement in itself. Commercial reserves estimates; A number of critical accounting policies are dependent upon oil and gas reserve estimates. These include intangible assets and property, plant and equipment. Oil and gas reserve estimates: estimation of recoverable reserves includes assumptions regarding commodity prices, exchange rates, discount rates, production and transportation costs all of which impact future cash flows. It also requires the interpretation of complex geological and geophysical models in order to make an assessment of the size, shape, depth and quality of reservoirs and their anticipated recoveries. The economic, geological and technical factors used to estimate reserves may change from period to period. Changes in estimated reserves can impact developed and undeveloped property carrying values, asset retirement costs and the recognition of income tax assets, due to changes in expected future cash flows. Management consults third party experts and obtains external technical assurance when making these judgements. Reserve estimates are also integral to the amount of depletion and depreciation charged to income. Subsidiaries may report changes in their reserves from time to time. Only where such changes in a subsidiary s reserves are material to the Group or have a material impact on the Group financial results does the Group publish revised reserve data. This prevents numerous immaterial changes to Group reserves being announced. Decommissioning costs (Note 18); Asset retirement obligations: the amounts recorded for asset retirement obligations are based on each field s operator s best estimate of future costs and the remaining time to abandonment of the oil and gas properties, which may also depend on commodity prices and any future changes to national regulations. Management consults third party experts when making these judgements. Share based payments (Notes 3 and 20); The fair value of share based payments recognised in the Statement of Profit or Loss is measured by use of a Black Scholes model which takes into account conditions attached to the vesting and exercise of the equity instruments. The expected life used in the model is adjusted, based on management s best estimate, for the effects of non transferability, exercise restrictions and behavioural considerations. The share price volatility percentage factor used in the calculation is based on management s best estimate of future share price behaviour and is selected based on past experience and future expectations. 34 Annual Report and Accounts 2015

37 Notes to the Accounts 2. Segmental Information During 2015 the Group has maintained the management reporting information, provided to the CEO, with the same geographic reporting segments used in The United Kingdom was involved in production, development and exploration activity, until the disposal of three UK subsidiaries to UK Oil & Gas Investments PLC in October 2014 (see note 4) and is also the home of the head office; Italy is involved in exploration and appraisal operations; Canada is involved in production, development and exploration operations; French Guiana is involved in exploration operations; the Other segment comprises exploration operations in Australia, plus some pre licence expenditure in respect of exploration and production possibilities in new countries. The segment disclosures are based on the components of the business that the CEO and Board monitor in making decisions about operating matters. Such components are identified on the basis of internal reports that the Board reviews regularly. Exploration, development and production 2015 UK / Corporate $ 000 Italy $ 000 Canada $ 000 French Guiana $ 000 Other Incl. Australia $ 000 Group Revenue from external customers Oil Gas and gas condensate Cost of sales Production costs (884) (884) (884) (884) Gross profit / (loss) (552) (552) Pre licence costs (15) (15) Administrative expenses (1,983) (566) (1,298) (99) (21) (3,967) Loss on disposal of plant, property and equipment (40) (40) Other operating income Impairment losses (621) (2,122) (2,601) 46 (970) (6,268) Loss from operations (2,644) (1,917) (4,451) (53) (991) (10,056) Finance costs (504) (125) (37) (666) Finance income 1 1 Loss before tax (3,148) (2,042) (4,487) (53) (991) (10,721) Tax credit Loss for the year (3,148) (1,484) (4,487) (53) (991) (10,163) Total $ 000 Annual Report and Accounts

38 Notes to the Accounts continued 2. Segmental Information continued Exploration, development and production 2014 UK / Corporate $ 000 Italy $ 000 Canada $ 000 French Guiana $ 000 Other Incl. Australia $ 000 Group Revenue from external customers Oil 476 2,237 2,713 Project operator fees ,237 2,731 Cost of sales Production costs (262) (2,434) (2,696) (262) (2,434) (2,696) Gross profit / (loss) 232 (197) 35 Pre licence costs (76) (76) Administrative expenses (4,958) (293) (508) (136) (52) (5,947) Profit / (loss) on disposal of subsidiaries and other assets 2,383 (39) 2,344 Other operating expenses (225) (69) (773) (1,067) Impairment losses (942) (7) (15,313) (36,335) (52,597) Loss from operations (3,285) (601) (16,087) (36,471) (864) (57,308) Finance costs (1,664) (129) 2 27 (3) (1,767) Finance income 6 6 Loss before tax (4,943) (730) (16,085) (36,444) (867) (59,069) Tax credit Loss for the year (4,822) (730) (16,085) (36,444) (867) (58,948) Total $ Annual Report and Accounts 2015

39 Notes to the Accounts 2. Segmental Information Assets and liabilities at 31 December 2015 Group United Kingdom $ 000 Italy $ 000 Canada $ 000 French Guiana $ 000 Other Incl. Australia $ 000 Total $ 000 Segment assets ,908 8, ,465 Cash and cash equivalents 1, ,417 Total assets 1,843 21,977 8, ,882 Segment liabilities , ,824 Deferred tax liabilities 2,066 2,066 Total liabilities 270 3,014 1, ,890 Non controlling interests 5 5 Other segment items Capital expenditure ,055 (46) 36 5,342 Depreciation, depletion and amortisation Impairment losses 621 2,122 2,601 (46) 970 6,268 Share based payments Assets and liabilities at 31 December 2014 Group United Kingdom $ 000 Italy $ 000 Canada $ 000 French Guiana $ 000 Other Incl. Australia $ 000 Total $ 000 Segment assets 2,074 26,969 7,811 1,060 37,914 Cash and cash equivalents 9, , ,143 Total assets 12,057 27,256 9, ,150 50,057 Segment liabilities 826 1,523 5, ,463 Deferred tax liabilities 2, ,927 Total liabilities 826 4,404 5, ,390 Non controlling interests (7) (7) Other segment items Capital expenditure ,354 (188) ,833 Depreciation, depletion and amortisation 1, ,907 Impairment losses ,313 36,335 52,597 Share based payments Annual Report and Accounts

40 Notes to the Accounts continued 3. Profit / (Loss) from Continuing Operations This is stated after charging: Year ended Year ended 31 December 31 December Group $ 000 $ 000 Depreciation of IT systems (note 12b) Impairment of IT systems (note 12b) Depreciation of non oil and gas property, plant and equipment (note 13b) Impairment of non oil and gas property, plant and equipment (note 13b) 90 Operating lease rentals land and buildings Operating lease rentals other Equity settled share based payments National Insurance (10) (30) Equity settled share based payments IFRS Administrative expenses share incentives 13 (11) Auditor s Remuneration Year ended Year ended 31 December 31 December $ 000 $ 000 Audit fees payable to the Company s auditor for the audit of the Company s financial statements Fees payable to the Company s auditor and its associates for other services: the audit of the Company s subsidiaries, pursuant to legislation audit related assurance services 34 The Company has borne the Auditor s remuneration of its non trading UK subsidiary undertakings. 4. (Loss) / profit on Disposal of Subsidiaries, Investments and Other Assets Year ended Year ended 31 December 31 December Group $ 000 $ 000 Disposal of subsidiaries Sale proceeds 2,486 Net book value of liabilities disposed of 63 Cash disposed of (31) Disposal costs (135) Profit on disposal of subsidiaries 2,383 Disposal of Investments and other assets Sale proceeds Net book value of assets disposed of (51) (184) Disposal costs (5) Loss on disposal of investments and other assets (40) (39) (Loss) / profit on disposal of subsidiaries, investments and other assets (40) 2,344 The loss on disposal in 2015 relates to the sale of excess office equipment in the UK following the relocation of the Group s head office, (see note 13b, property, plant and equipment non oil & gas assets). The prior profit on disposal of subsidiaries relates to the sale of the Group s UK subsidiaries; Northern Petroleum (GB) Limited, NP Solent Limited and NP Weald Limited, to UK Oil and Gas Investments PLC, which was completed on 19 October No tax charge or credit arose on these disposals as Substantial Shareholder Exemption is available provided the proceeds are reinvested by the Group in oil and gas assets within an appropriate time scale. The prior year loss on disposal of investments relates to the sale of the Group s interest in Liberty GTL Inc., a company developing small scale gas to liquids technology. No tax credit has been recognised in respect of this disposal. 38 Annual Report and Accounts 2015

41 Notes to the Accounts 5. Other Operating Income Year ended Year ended 31 December 31 December Group $ 000 $ 000 Back costs received 850 Legal expenses and other farm out costs incurred (64) 786 On 5 March 2015 the Group announced that it had signed a farm out agreement, which included agreed terms of a joint operating agreement, with Shell Italia in respect of its Cascina Alberto permit, which is located onshore, north west Italy. Under the terms of the farm out agreement Shell Italia received an 80% equity interest in the Cascina Alberto permit and operatorship of the permit. Shell Italia will carry Northern Petroleum for the costs of the exploration campaign, which will include a carry on the acquisition of any new seismic until the seismic costs reach $4 million and a carry on any exploration well until the well costs reach $50 million. Prior to its award in July 2014, costs related to the Cascina Alberto permit had been charged to the income statement as they were incurred. In accordance with the Group s full cost accounting policy the proceeds of the farm out, less legal and other expenses, were initially offset against the Italian onshore cost pool. The excess net receipts were then credited to the Income Statement. 6. Directors Remuneration Year ended Year ended 31 December 31 December Group & Company $ 000 $ 000 Executive salaries 610 1,150 Non Executive fees Defined contribution pension costs Benefits in kind Emoluments 765 1,401 Compensation for loss of office 381 Total 765 1,782 Details for each Director s remuneration are set out in the tables below. The total remuneration of the highest paid Director was $330,000 (2014: $761,000 including a loss of office payment of $381,000). Year ended 31 December 2015 Year ended 31 December 2014 Salary or Taxable Salary or Taxable Loss of office fees benefits Pension Total fees benefits Pension payment Total Group & Company $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Executive Directors (salaries): K R Bush N T Morgan G L Heard (retired ) , ,582 Non Executive Directors (fees): J D Murphy I M Lanaghan (appointed ) S G Gibson (resigned ) Total , ,782 Additional information on Directors remuneration can be found in the Report on Directors Remuneration on page Annual Report and Accounts

42 Notes to the Accounts continued 7. Staff Costs and Numbers (including Directors) Year ended Year ended 31 December 31 December Group $ 000 $ 000 Salaries 2,201 3,709 Compensation for loss of office Social security costs Defined contribution pension costs Other benefits in kind ,045 5,417 Charge for share based payments (note 3) National insurance accrual release on share based payments (10) (30) 3,058 5,406 Based on time writing, a certain element of salaries is capitalised, predominantly at the subsidiary level, to reflect the time spent on capital projects. The amounts shown above include net salary cost to Northern Petroleum capitalised in the year of $699,000 (2014: $1,618,000). In August 2014 the Group introduced a new defined contribution group pension scheme in the UK to which it contributes 3% of a member employee s salary in accordance with its new Workplace Pensions obligation. The pension cost charge for the period represents contributions payable by the Group to UK defined contribution pension schemes and amounted to $56,000 (2014: $32,000). In addition the Group made payments to defined contribution schemes for its Canadian and Australian employees. Contributions in Canada amounted to $3,000 (2014: $2,000), while contributions in Australia amounted to $ nil (2014: $5,000). There were $3,000 (2014: $3,000) outstanding contributions at the end of the financial year. There were no prepaid contributions at either the beginning or end of the financial year. Excluding the Directors, there were 14 (2014: 20) full time members of staff at the end of the year. The average number of persons employed by the Group during the year, including Executive Directors, was made up as follows: Group Technical 5 7 Professional 3 5 Operations 3 4 Administration Finance Costs Year ended Year ended 31 December 31 December Group $ 000 $ 000 Loan interest Unwinding of discount on decommissioning provisions 31 7 Unwinding of discount on below market interest rate government loans Foreign exchange loss 512 1, ,767 In 2013 and 2014 the Group received loans from the Italian government. The loans are repayable in five annual instalments and interest is charged at 0.5% per annum. The unwinding of the fair value discount over the life of the loan is shown above as "unwinding of discount on below market interest rate government loans" and the actual interest paid is shown as "loan interest". The foreign exchange loss reflects the effect of the movement in the Canadian Dollar and Euro against the US Dollar with respect to cash balances which were and are being held in the expectation of their investment in exploration and development. 40 Annual Report and Accounts 2015

43 Notes to the Accounts 9. Finance Income and Other Finance Gains Year ended Year ended 31 December 31 December Group $ 000 $ 000 Interest receivable Tax Credit a) Analysis of tax credit Year ended Year ended 31 December 31 December Group $ 000 $ 000 Current tax: UK tax current year Tax on overseas operations current year Current tax adjustment in respect of prior years Deferred tax: UK tax Overseas tax origination and reversal of temporary differences 558 Total tax credit (note 10b) The Group has made taxable losses in its other countries of operation, but has not recognised deferred tax credits for these losses as they are not expected to be recovered in the foreseeable future for analysis of the tax charge by country of operation please see note 2, Segmental Information. For more information see note 19. b) Factors affecting tax credit The tax credit for the year is lower than the standard rate of corporation tax in the UK of 20.25% (2014: 21.50%). The difference is explained below: Year ended Year ended 31 December 31 December Group $ 000 $ 000 Group loss before taxation (10,721) (59,069) Tax on Group loss before taxation at an effective rate of 20.25% (2014: 21.50%) 2,171 12,700 Effects of: Expenses not deductible for corporate income tax purposes (33) Impact of net movements in deferred tax not recognised (1,908) (13,880) Utilisation of substantial shareholder relief 489 Effects of different corporate tax rates on UK and overseas earnings Adjustment in respect of prior years current tax 121 Total tax credit for year c) Factors that may affect future tax expense The Group has gross corporate income tax and supplementary hydrocarbon tax losses of $53.9 million (2014: $63.5 million) that are available for offset against future taxable profits. Losses that are available for offset against future taxable profits have been recognised as deferred tax assets to the extent that they offset deferred tax liabilities or will be used to offset taxable profits in the foreseeable future. Annual Report and Accounts

44 Notes to the Accounts continued 10. Tax Credit continued Corporate tax amendments: UK: A reduction in the UK corporation tax rate from 21% to 20% (effective from 1 April 2015) was substantively enacted on 2 July Further reductions in UK corporation tax to 19% effective from 1 April 2017 and 18% effective from 1 April 2020 were substantively enacted on 26 October Another reduction in UK corporation tax to 17% effective from 1 April 2020 was announced in the budget of 16 March 2016 but is yet to be substantially enacted. These will reduce the Group s future tax charge. Italy: The Italian budget law for 2016, published on 30 December 2015 included a reduction of 3.5% in the rate of corporate tax (from 27.5% to 24.0%) starting as of fiscal year On 23 March 2015 the Italian Constitutional Court issued a decision ruling that the 10.5% Robin Hood tax on companies operating in the fields of hydrocarbons exploration and development, oil refining, production and sale of petrol, oil, diesel, lubricants, liquefied natural gas and liquefied petroleum gas and the production and sale of electricity, was an illegitimate tax. Since the issue of the last Annual Report, there have been no other significant changes enacted to tax legislation in the Group s other countries of operation that are currently anticipated to have in the near term a material effect on the Group s tax position in those jurisdictions. 11. Basic (Loss) / Earnings per Share Basic earnings or losses per share amounts are calculated by dividing the profit or loss for the period attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing profit for the period attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year, plus the weighted average number of shares that would be issued on the conversion of dilutive potential ordinary shares into ordinary shares. The calculation of the dilutive potential ordinary shares related to employee and director share option plans includes only those warrants and options with exercise prices below the average share trading price for each period Group $ 000 $ 000 Net loss attributable to equity holders used in basic calculation (10,140) (42,958) Net loss attributable to equity holders used in dilutive calculation (10,140) (42,958) Number Number Basic weighted average number of shares 98,790 95,366 Dilutive potential of ordinary shares: Warrants exercisable under Company schemes Diluted weighted average number of shares 98,790 95,366 At 31 December 2015 there were 666,608 options and no warrants with exercise prices below the average share trading price for the year, (2014: nil), hence the number of potential dilutive ordinary shares is 666,608 (2014: nil). Group Earnings per share Basic earnings per share on loss for the year (cents) (10.3) cents (45.0) cents Diluted earnings per share on loss for the year (cents) (10.3) cents (45.0) cents As the Group is loss making, there is no dilution of earnings from potential ordinary shares. 42 Annual Report and Accounts 2015

45 Notes to the Accounts 12. Intangible Assets a) Exploration and Evaluation Assets Intangible assets consist of the Group's exploration projects which are pending determination of technical feasibility and commercial viability of extracting a mineral resource. Group Cost: French Other incl. Italy Canada Guiana Australia Total $ 000 $ 000 $ 000 $ 000 $ 000 At 1 January ,434 3,741 36,335 1,213 67,723 Additions (46) 36 1,139 Exchange movement (2,712) (741) (133) (3,586) At 31 December ,990 3,881 36,289 1,116 65,276 Exploration expenditure written off: At 1 January , ,493 Impairment losses 2,122 (46) 970 3,046 Exchange movement (12) (12) At 31 December ,122 36,289 1,116 39,527 Net book value: At 31 December ,868 3,881 25,749 Negative cost additions for the year in respect of the French Guiana assets arise as a result of the sale of excess inventory and adjustments to joint venture partner 2013 year end cost estimates notified by the operators. As a result of the negative additions, $46,000 of impairment booked in 2014 has been reversed. The assets in French Guiana are held through Northpet Investments Limited, 55.9% of which is owned by the Group. As the Group has a controlling interest in Northpet Investments Limited, this company is fully consolidated in the Group accounts as a subsidiary and the 44.1% non controlling interest of Hague and London Oil Plc is separately disclosed on the face of the Consolidated Statement of Profit or Loss and in Equity on the face of the Consolidated Statement of Financial Position. The Group tests intangible assets for impairment when there is an indication that assets might be impaired. An impairment loss of $2,122,000 has been recognised against the costs capitalised in respect of the Sicily Channel licences CR146 and CR149. These licences are currently in suspension awaiting EIA approval to drill a well. The carrying value of the permits in the southern Adriatic has not been impaired based on the potential value of the permits following any successful exploration and appraisal, and the continued level of interest in the permits by industry participants. If no progress on these assets is made during 2016, the Board will consider whether the carrying value is still warranted at that time. An impairment loss of $970,000 has been recognised against the Australia cost pool. The Group has always recognised that it would be necessary to bring in a partner to progress the PEL629 licence in the Otway basin, South Australia. The Government of South Australia has agreed to place the licence into suspension, to allow time for a farm out to be completed once the short term economics improve. Given the uncertainty of the timing and likelihood of a farm out being completed the Directors have decided to impair the Australia cost pool in full. At the year end the contractual commitments for capital expenditure in respect of intangible assets was $14,000 (2014: $47,000), of which the Group s share was $8,000 (2014: $26,000). Annual Report and Accounts

46 Notes to the Accounts continued 12. Intangible Assets continued The comparative tables for 2014 are detailed below: United Kingdom Italy Canada French Guiana Other incl. Australia Total Group Notes $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Cost: At 1 January ,700 40,913 3,223 36, ,762 Additions (11) 481 9,318 (188) ,521 Government grants and assistance 8 (255) (255) Disposals (7,457) (9,671) (17,128) Transfers 13 (7,684) (7,684) Exchange movement (232) (5,034) (1,116) (8) (103) (6,493) At 31 December ,434 3,741 36,335 1,213 67,723 Exploration expenditure written off: At 1 January ,370 11, ,540 Impairment losses ,335 36,450 Disposals (7,247) (9,671) (16,918) Exchange movement (231) (1,348) (1,579) At 31 December , ,493 Net book value: At 31 December ,434 3,741 1,055 31,230 Negative cost additions for the year in respect of the UK and French Guiana assets arise as a result of adjustments to joint venture partner 2013 year end cost estimates notified by the operators. During 2014 the Group received further rebates and discounted loans from the Italian government as part of a scheme to encourage the acquisition of seismic surveys. The Group successfully applied using the scheme in respect of the seismic survey acquired in 2012 over licences in the southern Adriatic. Government grants relating to intangibles and property, plant and equipment are recognised as a reduction in the costs of the related assets. Government loans advanced at below market interest rates are measured in accordance with IAS39, "Financial Instruments: Recognition & Measurement". The benefits of the below market rate of interest shall be measured as the difference between the initial carrying value of the loan determined in accordance with IAS39 and the proceeds received. The benefit is also treated as a government grant and recognised as a reduction in the cost of the asset. Disposals in 2014 of UK assets were in relation to the sale of three UK subsidiaries to UK Oil & Gas Investments PLC, in October 2014, (see note 4). Disposals in the year in Italy relate to licences that had either expired or been relinquished and that were fully impaired at the end of UK and Italian costs incurred in the year on licences that were subsequently relinquished were fully impaired before disposal. Additions for Canadian exploration and wells drilled in Q of $7,684,000 were subsequently transferred to property, plant and equipment. The Group tests intangible assets for impairment when there is an indication that assets might be impaired. An impairment loss of $36.3 million was recognised against the French Guiana cost pool. The French Guiana drilling programme was completed in 2013 and the licence is due to expire in mid With uncertainty amongst partners regarding future exploration, it was deemed appropriate to impair the full value of this asset. 44 Annual Report and Accounts 2015

47 Notes to the Accounts 12. Intangible Assets b) IT Systems Computer software Group and Company $ 000 Cost: At 1 January ,136 Additions At 31 December ,136 Amortisation: At 1 January ,019 Charge for the year 496 Impairment losses 621 At 31 December ,136 Net book value: At 31 December 2015 At 31 December ,117 Impairment losses in the year relate to accounting and procurement IT systems implemented in early Following the decision of the Directors at the end of 2015 to implement a Canadian software package and migrate the Group s accounting and procurement onto that system, the carrying value of the Group s existing IT system has been fully impaired. 13. Property, Plant and Equipment a) Oil and Gas Assets Canada Canada Developed Undeveloped Total Group $ 000 $ 000 $ 000 Cost: At 1 January , ,597 Additions 4, ,174 Transfers 87 (87) Exchange movement (3,768) (8) (3,776) At 31 December , ,995 Depletion and amortisation: At 1 January ,060 16,060 Charge for the year Impairment losses 2, ,601 Exchange movement (2,605) (2,605) At 31 December , ,155 Net book value: At 31 December ,840 3,840 Developed additions and transfers from undeveloped in the year relate mainly to the 102/11 30 well drilled in Q1 into a previously developed reef plus tangible production equipment purchased in the year to replace expensive leased production packages. Annual Report and Accounts

48 Notes to the Accounts continued 13. Property, Plant and Equipment continued 2015 Impairment The Group tests intangible assets for impairment when there is an indication that assets might be impaired. The 102/11 30 well encountered the reservoir on prognosis, but problems experienced when cementing the liner over the reservoir section lead to difficulties in interpreting the well test. The well delivered nearly 100 barrels of oil per day during the test with 85% water production, but it was not possible to determine where the water was coming from due to the cementing issue. As a result, the well was suspended pending a subsurface review to understand the water production mechanism and determine the optimum way to produce the well with minimal water production. Due to the uncertainty surrounding the economic value of the well the Directors decided to impair its carrying value by $2,530,000. The other Canadian wells, previously impaired in 2014, were reviewed for impairment at the year end. Based on reduced operating costs, projected additional savings from the use of Rainbow facilities acquired and the projected timing of the wells being brought back into production, the Directors have concluded that further impairment of these wells is not required. The $71,000 Canada undeveloped assets represent expenditure incurred on the Bow Island gas discovery acquired as part of the initial investment in Ouro Preto Resources Inc. Following the decision of the Board to focus efforts on north west Alberta this asset is outside the Group s core development area and it is deemed unlikely to be developed in the short term so has been fully impaired. At the year end the contractual commitments for capital expenditure in respect of property, plant and equipment was $ nil (2014: $327,000), of which the Group s share was $ nil (2014: $327,000). The comparative tables for 2014 are detailed below: UK UK Canada Canada Developed Undeveloped Developed Undeveloped Total Group Notes $ 000 $ 000 $ 000 $ 000 $ 000 Cost: At 1 January ,152 5, ,149 Additions , ,212 Disposals (1,080) (5,989) (7,069) Transfers 12 7,684 7,684 Exchange movement (72) (161) (117) (29) (379) At 31 December , ,597 Depletion and amortisation: At 1 January ,070 5,963 7,033 Charge for the year Impairment losses 15,313 15,313 Disposals (1,018) (5,801) (6,819) Exchange movement (64) (162) (36) (262) At 31 December ,060 16,060 Net book value: At 31 December , ,537 Additions for Canadian mineral rights, exploration expenditure and wells drilled in Q of $7,684,000 initially recorded as expenditure on intangible oil and gas assets, was subsequently transferred to property, plant and equipment following the successful testing of the wells. Canadian cost additions of $11,885,000 included the development wells in the second half of Following the drilling of the development wells, the halving of the oil price in late 2014 and after a review of the performance of all the producing wells, the Directors have considered whether each of the Canadian wells should be impaired. Having regard to the work carried out by GLJ Petroleum Consultants Limited, the Group s reserve auditors in Canada, and the Canadian Oil and Gas Evaluation Handbook (COGEH) guidelines, the Directors have recognised impairment losses of $15.3 million against Canadian developed assets. In reaching these judgments the Directors have used a discount rate of 10% and average oil prices of $50 in 2015 rising to $85 by Disposals in the year relate to licences in UK that were held by the Group's three subsidiaries sold to UK Oil & Gas Investments PLC on 19 October Annual Report and Accounts 2015

49 Notes to the Accounts 13. Property, Plant and Equipment b) Non Oil and Gas Assets Leasehold improvements Computer and office equipment Total Group $ 000 $ 000 $ 000 Cost: At 1 January ,851 2,341 Additions Disposals (490) (983) (1,473) Exchange movement (4) (4) At 31 December Depreciation: At 1 January ,394 1,884 Charge for the year Disposals (490) (932) (1,422) Exchange movement (1) (1) At 31 December Net book value: At 31 December At 31 December Disposals in the year relate to the fit out of the Group s former head office. Leasehold improvements Computer and office equipment Total Company $ 000 $ 000 $ 000 Cost: At 1 January ,825 2,315 Additions Disposals (490) (983) (1,473) At 31 December Depreciation: At 1 January ,392 1,882 Charge for the year Disposals (490) (932) (1,422) At 31 December Net book value: At 31 December At 31 December Annual Report and Accounts

50 Notes to the Accounts continued 14. Investments The Group s and Company s material subsidiary undertakings which are included within these consolidated accounts are: Country of Principal Description and Incorporation / Principal country proportion of registration activity of operation shares held Company Northern Petroleum (UK) Limited England & Wales Oil and gas exploration Italy Ordinary shares of % NP Offshore Holdings (UK) Limited England & Wales Holding company UK Ordinary shares of 1 100% NP Oil & Gas Holdings Limited England & Wales Holding company UK Ordinary shares of 1 100% Group Northpet Investments Limited* England & Wales Oil and gas exploration France (French Guiana) Ouro Preto Resources Inc ** Canada Oil and gas exploration, development and production Canada (Alberta) Ouro Preto Resources Pty Limited ** Australia Oil and gas exploration Australia (South Australia) Ordinary shares of % Ordinary shares of $1 100% Ordinary shares of $1 100% * Shares held indirectly through its ownership of NP Offshore Holdings (UK) Limited. ** Shares held indirectly through its ownership of NP Oil & Gas Holdings Limited. The Company has accounted for its investments in subsidiaries at cost, less any amounts written off. Investments in subsidiaries Company $ 000 Cost: At 1 January and 31 December ,173 Impairment: At 1 January ,817 Impairment charge 23,364 At 31 December ,181 Carrying value at 31 December ,992 Carrying value at 31 December ,356 Impairments of investments were recognised in respect of Italy, Canada, held via NP Oil & Gas Holdings Limited and French Guiana, held via NP Offshore Holdings (UK) Limited. Investment impairments have been booked to reflect impairments of subsidiary company intangible assets and plant, property and equipment and to align the net asset value of the Company with that of the Group. 48 Annual Report and Accounts 2015

51 Notes to the Accounts 15. Inventories Group $ 000 $ 000 Crude oil 13 There is no material difference between the replacement cost of inventories and the amount stated above. The amount of inventory which has been recognised as an expense during the year is $ nil (2014: $ nil). The Company had $ nil, (2014: $ nil) inventory at the year end. 16. Trade and Other Receivables Group Company $ 000 $ 000 $ 000 $ 000 Current assets Trade receivables Corporation tax receivable 85 Other receivables VAT recoverable Amounts due from subsidiary undertakings n/a n/a 6,502 1,506 Prepayments and accrued income Total trade and other receivables 658 1,573 6,646 1,943 Current trade and other receivables, and loans have a fair value that approximates to their book value at both balance sheet dates. In March 2015 the Group agreed a settlement with the Avobone Group for the historic debt for the Savio 1X well involving a cash payment and transfer of a VAT debtor of 869,000 ($944,000). The Group is pursuing the recovery of the VAT debtor, but the timing of any cash receipts is uncertain and could take a number of years, therefore they have not been recognised as receivables in the Statement of Financial Position at year end. Note 23, Financial Instruments presents an analysis of the carrying values of the Group s trade and other receivables and cash and cash equivalents by currency. 17. Trade and Other Payables Group Company $ 000 $ 000 $ 000 $ 000 Current Liabilities Trade payables 75 1, Taxation and social security 1 Italian government loans Other payables Amounts due to subsidiary undertakings n/a n/a 1,921 2,653 Accruals and deferred income 539 3, ,233 2,190 3,460 Non Current Liabilities Italian government loans Accruals and deferred income Total trade and other payables 1,527 6,163 2,190 3,468 Trade and other payables, except for Italian government loans which were initially held at fair value on receipt and whose fair value discount has been unwound during the year at a market interest rate, are measured at amortised cost and their book value approximates to fair value at 31 December 2015 and All current liability trade and other payables are considered due within three months, apart from the Italian government loans which are repayable in twelve months. Non current government loans are repayable over two to four years. Non current accruals are payable over two years. Note 23, Financial Instruments presents analysis of the carrying values of the Group s trade and other payables by currency and by timing of utilisation. Annual Report and Accounts

52 Notes to the Accounts continued 18. Provisions Group $ 000 $ 000 At 1 January 1,300 1,152 Additions 198 1,316 Disposals (593) Utilised (502) Unwinding of timing discount 31 7 Exchange movement (232) (80) At 31 December 1,297 1,300 The amount provided at 31 December 2015 represents the Group s share of decommissioning liabilities in respect of its Canadian wells. Additions in the year relate to decommissioning liabilities in respect of the Canadian 102/11 30 well drilled during 2015 in north west Alberta. As part of the Group s entry into Alberta, Canada, the Group signed an introductory agreement with Grail Energy Canada Limited, a Canadian private company owned by certain current and former employees and contractors of the Group. The agreement provided for a payment to be made to Grail Energy no earlier than 2016 based on a percentage of the value of certain Canadian based assets, taking into account the future net income and capital invested associated with those assets. The Directors believe that at this time there is no value for this potential future payment and therefore no provision has been made. The carrying values of the Group s decommissioning provisions are denominated in Canadian Dollars. The Company had $ nil, (2014: $ nil) provisions at the year end. 19. Deferred Taxation Group $ 000 $ 000 Balance at start of year (2,927) (3,333) Deferred tax liability recognised in statement of profit or loss (969) Deferred tax asset recognised in statement of profit or loss 1,527 Exchange movement Balance at end of year (2,066) (2,927) Comprising: Other temporary differences (3,593) (2,927) Tax losses 1,527 Deferred tax recognised (2,066) (2,927) Of the $3,593,000 other temporary differences, $3,555,000 (2014: $2,881,000) arises on the fair value adjustment for the assets acquired in Italy as part of the ATI acquisition and $38,000 (2014: $46,000) arises on the fair value adjustment for the assets acquired in Canada. These deferred tax adjustments arising on the fair value of assets acquired are not expected to be settled in cash and will unwind over time as new discoveries are made and, together with existing discoveries, are brought into production. Offsetting deferred tax assets for tax losses have been recognised in Italy of $1,489,000 (2014: $ nil) and Canada $38,000 (2014: $ nil). The Company had $ nil, (2014: $ nil) recognised deferred tax liabilities and or assets at the year end. Deferred tax assets have not been recognised in respect of those remaining losses and allowances that are not considered usable to offset taxable profits in the following year as they may not be used to offset taxable profits elsewhere in the Group, and they may have arisen in subsidiaries that may be loss making for some time. The gross unrecognised temporary differences comprise: Group Company $ 000 $ 000 $ 000 $ 000 Other timing differences 38,489 39,266 3,733 4,123 Tax losses 53,928 63,540 22,033 21,326 Gross unrecognised temporary differences 92, ,806 25,766 25, Annual Report and Accounts 2015

53 Notes to the Accounts 20. Share Capital Capital Reorganisation Following shareholder approval at a General Meeting on 3 December 2015, the Company raised new finance at a price of three pence per new ordinary share by means of a subscription and an open offer. To enable the Company to proceed with the subscription and the open offer at three pence per share, the Company's existing ordinary shares of five pence nominal value were sub divided and re designated into one new ordinary share of one penny and one deferred share of four pence. Each new ordinary share carries the same rights in all respects as each previously existing ordinary share, including the rights in respect of voting and entitlement to receive dividends. Each deferred share has no voting rights, no rights to receive dividends and has only very limited rights on a return of capital. The deferred shares have not been admitted to trading on AIM or listed on any other stock exchange and are not freely transferable Group and Company $ 000 $ 000 Allotted, issued, called up and fully paid: 148,545,351 (2014: 95,365,660) ordinary shares of 1p (2014: 5p) each 2,454 8,225 95,365,660 (2014: nil) deferred shares of 4p each 6,580 9,034 8,225 Date Type Shares 01 January ,365,660 8 December 2015 Placing at three pence 40,000, December 2015 Open offer at three pence 13,179, December ,545,351 The ordinary shares above all hold the same voting rights and there are no restrictions on the distribution of dividends. The Group s capital management policy is explained in note 23. Warrants and options over the Company s ordinary shares: Disclosures concerning contingent rights to the allotment of shares in respect of outstanding warrants and options held by the Board are given in the Report on Directors Remuneration. Details of warrants and options issued, extended and exercised during the year, together with warrants and options outstanding at 31 December 2015 are as follows: Exercise price At 1 January 2015 New issues Exercised Lapsed or cancelled At 31 December 2015 Issue date Final exercise date pence 000s 000s 000s 000s 000s 24 June July p 31.3 (31.3) 04 January December p 30.0 (30.0) 04 January June p September July p September July p November July p November July p May June p May June p May May 2025 nil cost (61.3) 1,046.6 Annual Report and Accounts

54 Notes to the Accounts continued 20. Share Capital continued The IFRS 2 fair values of awards granted under the Group s warrant and option schemes have been calculated using a variation of the binomial (Black Scholes) option pricing model that takes into account factors specific to share incentive plans such as the vesting periods, the expected dividend yield on the Company s shares and expected exercise of share warrants. The volatility used in the calculations is based on past share price movements and is estimated at 55% (2014: 48%). Risk free investment rates between 0.48% and 0.82% (2014: 0.52% and 2.79%) have also been assumed in the calculations. The weighted average exercise price of all the warrants and options outstanding as at 31 December 2015 was 31.8p (2014: p). The weighted average remaining contractual life of all the warrants and options outstanding as at 31 December 2015 was six years and four months. There are no outstanding conditions attached to the exercise of the warrants remaining in issue at year end. 21. Commitments Operating leases The Group s and Company s commitments for rental payments under non cancellable operating leases payable as at 31 December 2015 are as follows: Other operating leases Land and buildings Other operating leases Land and buildings Group $ 000 $ 000 $ 000 $ 000 Payable : Within one year Between one and five years After five years , Other operating leases Land and buildings Other operating leases Land and buildings Company $ 000 $ 000 $ 000 $ 000 Payable : Within one year Between one and five years After five years ,017 All leases are "operating leases" and the relevant annual rentals are charged to the statement of profit or loss on a straight line basis over the lease term. The Group and Company has one leased office in the UK. In April 2015 the Company assigned the remaining lease of its former head office to a third party and relocated to its current registered office. The Group leases an office in Canada the agreement for which expired on 29 February The lease was extended in February for a term of six months at a reduced rent. The Group s UK office lease is in subject to one month s notice and the Group s offices in Rome and Australia are rented from month to month. General renewal clauses exist on all leases. 52 Annual Report and Accounts 2015

55 Notes to the Accounts 22. Related Party Transactions Group There were no transactions with the Group s related parties in No Director or member of senior management had, during or at the end of the year, a material interest in any other contract which was significant in relation to the Group s business, except in respect of personal service agreements and warrants. Company Details of transactions and year end balances with Directors and senior management of the Company, or with companies that were at some stage during 2015 subsidiaries or joint ventures or associates, are as follows: Group subsidiaries 2015 Group subsidiaries 2014 $ 000 $ 000 Amounts due from subsidiaries 6,502 1,506 Amounts due to subsidiaries (1,921) (2,653) Year ended Year ended 31 December December 2014 $ 000 $ 000 Amounts invoiced to from subsidiaries billings for services interest charges Amounts invoiced by to subsidiaries billings for services 2,603 3,998 interest charges There were no terms or conditions attached to the outstanding balances above and none of the balances are secured. The Directors consider that related party transactions during the year were conducted on terms equivalent to those that prevail in arms lengths transactions. A summary of the Group s and Company s related parties can be found in Investments, note Financial Instruments Financial instruments Risk Management The Group and Company are exposed through their operations to the following financial risks: Credit risk Cash flow interest rate risk Foreign exchange risk Liquidity risk Price risk This note describes the Group s and Company s objectives, policies and processes for managing those risks and the methods used to measure them. There have been no substantive changes in the Group s and Company s exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note. Principal financial instruments The principal financial instruments used by the Group and Company, from which financial instrument risk can arise are as follows: Loans and receivables Trade and other receivables Cash and cash equivalents Trade and other payables Annual Report and Accounts

56 Notes to the Accounts continued 23. Financial Instruments continued General objectives, policies and processes The Board has overall responsibility for the determination of the Group s and Company s risk management objectives and policies and, while retaining responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the Group s finance function. Further details regarding these policies are set out below. Credit risk Credit risk is the risk of financial loss to the Group and Company if a customer or a counter party to a financial instrument fails to meet its contractual obligations. The Group and Company are exposed to credit risk from credit sales and from cash and cash equivalents via deposits with banks and financial institutions. It is Group and Company policy, implemented locally, to assess the credit risk of new customers and seek external credit ratings where applicable and when available. Potential customers that fail to meet the Group s and Company s benchmark creditworthiness may transact with the business on a prepayment basis. For banks and financial institutions, only independently rated parties with an acceptable credit rating are accepted. The Group and Company do not currently enter into derivatives to manage credit risk, although in certain isolated cases may take steps to mitigate such risks if it is sufficiently concentrated. Quantitative disclosures of the credit risk exposure in relation to trade and other receivables are disclosed in note 16. Cash flow interest rate risk The Group and Company are exposed to cash flow interest rate risk from their deposits of cash and cash equivalents with banks. The Group and Company are not at present exposed to cash flow interest rate risk on borrowings as it only has fixed interest debt at a rate of 0.5% per annum from the Italian government. Interest rates on financial assets and liabilities The Group s and the Company s financial assets consist of cash and cash equivalents, loans, trade and other receivables. The interest rate profile at 31 December of these assets was as follows: Group Company Financial assets on which floating rate interest is earned Financial assets on which no Interest is earned Total Financial assets on which floating rate interest is earned Financial assets on which no Interest is earned Total $ 000 $ 000 $ 000 $ 000 $ 000 $ US Dollar , ,552 Canadian Dollar , UK Sterling 1, ,431 1, ,431 Euro Australian Dollar , ,075 7, , US Dollar 1, , Canadian Dollar 5, ,912 4, ,162 UK Sterling 2, ,418 2, ,883 Euro 2, ,184 2, ,363 Australian Dollar ,497 1,502 12,131 1,585 13,716 9,810 1,956 11,766 The financial assets for each currency largely comprise cash on call accounts and placed on money markets on call and short term debtors. In addition the Company charges interest to subsidiaries of the Group on intercompany current account loans in certain circumstances. The Group earned interest on its interest bearing financial assets at rates between 0% and 0.67% (2014: 0% and 0.25%) during the year. All financial assets on which no interest is earned are considered immediately available to turn into cash on demand. If average interest rates, approximately 0.67% in 2015, had been 100% higher, i.e. 1.33%, the Group s finance income of $1,000 would have been $2,000. Had average interest rates in 2015 been 50% lower, the Group s finance income would have been $500 lower. It is considered that there have been no significant changes in cash flow interest rate risk at the reporting date compared to the previous year end and that therefore this risk has had no material impact on earnings or shareholders equity. 54 Annual Report and Accounts 2015

57 Notes to the Accounts 23. Financial Instruments Foreign exchange risk Foreign exchange risk arises because the Group has operations whose functional currency is different to the Group s reporting currency, resulting in gains and losses on retranslation into US Dollars. It is the Group s policy to ensure that individual Group entities enter into local transactions in their functional currency wherever possible and that only surplus funds over and above working capital requirements should be transferred to the treasury of the Parent Company. The Group and Company considers this policy minimises any unnecessary foreign exchange exposure. The following table discloses the exchange rates of the major currencies utilised by the Group and Company: Foreign currency units to $1 US Dollar (rounded to two decimal places) UK Sterling Euro Canadian Dollar Australian Dollar Average for At 31 December Average for At 31 December Currency exposures The monetary assets and liabilities of the Group and Company that are not denominated in US Dollars are exposed to currency fluctuations and are shown below at their US Dollar equivalent of local currency balances. US Dollar equivalent of exposed net monetary assets and liabilities UK Sterling Euro Canadian Dollar Australian Dollar Total $ 000 $ 000 $ 000 $ 000 $ 000 Group At 31 December , ,179 At 31 December ,464 2,646 5, ,057 Company At 31 December , ,313 At 31 December ,464 2,359 4, ,987 During the year the US Dollar strengthened in value against the Canadian Dollar (15.3%) and the Euro (9.6%), resulting in an overall foreign exchange loss for the year of $512,000, (Company: $1,372,000 loss), and exchange differences on translation of foreign operations of $3,900,000 (loss). Had the US Dollar risen in value against the Canadian Dollar by 10% the Group s overall foreign exchange loss would have been $611,000 lower. Had the US Dollar fallen in value against the Canadian Dollar by 5% the Group s overall foreign exchange loss would have been $2,341,000 lower. Had the US Dollar risen in value against the Euro by 10% the Group s overall foreign exchange loss would have been $102,000 higher. Had the US Dollar fallen in value against the Euro by 5% the Group s overall foreign exchange loss would have been $3,733,000 lower. Had the US Dollar risen in value against the Canadian Dollar by 10% the Company s overall foreign exchange loss would have been $409,000 lower. Had the US Dollar fallen in value against the Canadian Dollar by 5% the Company s overall foreign exchange loss would have been $1,568,000 lower. Annual Report and Accounts

58 Notes to the Accounts continued 23. Financial Instruments continued Liquidity risk Liquidity risk arises from the Group s and Company s management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the Group and Company will encounter difficulty in meeting their financial obligations as they fall due. The Group s and Company s policy is to ensure that they will always have sufficient cash to allow them to meet their liabilities when they become due. To achieve this aim, they seek to maintain readily available cash balances (or agreed facilities) to meet expected requirements. The Group and Company currently have no long term borrowings, other than the loans from the Italian government forwarded under the scheme to encourage oil and gas exploration in Italy. While the Group has no material capital expenditure commitments, the year end cash position of $2.4 million combined with the future revenue from existing oil and gas fields, is only likely to provide enough financial resources to undertake the work programme of redevelopment in Rainbow and Virgo planned for the first half of As at 31 March 2016, the Group had cash resources of approximately $0.7 million at its disposal with an additional $1.4 million on deposit with the Alberta Energy Regulator in relation to future abandonment liability. The payment of the deposit was in January 2016 and accounted for the majority of the movement in cash on the balance sheet since the year end balance of $2.4 million. Based on current production forecasts, it is expected that the full deposit of $1.4 million will be returned to the Group in three monthly payments starting in June Any further development or drilling in Canada and appraisal activities on the Group s assets in Italy will require external capital, which may come from the farm out, joint venture or partial sale of existing assets, debt or equity, all of which are not entirely within the control of the Board. If no further external capital is obtained and the price of oil at which the Group sells its Canadian production does not increase materially, the Group will need to further reduce its overhead costs after 12 months in order that revenue derived from Canada can cover all ongoing Group expenditure. Furthermore, if the Group does suffer operational difficulties, it may not have the financial resources, even if the oil price increases, to resolve whatever operational problems have arisen in order to restore production and would be forced to seek further capital from external sources. The Board has reviewed and considered the possible outcomes of future operations and forecast cash flows, in conjunction with accounts, budgets and financial plans, and believe that the necessary reduction in costs could be undertaken if required or future external capital could be found to allow the Group to continue which leads the Directors to believe that the Group has sufficient resources to continue in operation at least until 12 months after the date of this document and are managing the Group s assets to realise further capital to allow the development and growth of the business during that time and beyond. Price risk Oil revenue is subject to energy market price risk. Had average oil prices in 2015 been 10% higher, the Group s oil revenue of $331,000 would have been $33,100 higher. Had average oil prices in 2015 been 10% lower, the Group s oil revenue would have been $33,100 lower. Given current production levels it is currently not considered appropriate for the Group and Company to enter into any hedging activities or trade in any financial instruments, such as derivatives. This strategy will be subject to continued review through 2016 and beyond given the Group s current cash flow. 56 Annual Report and Accounts 2015

59 Notes to the Accounts 23. Financial Instruments Capital management policies The Group and Company consider their capital to comprise ordinary share capital, share premium, distributable reserves and accumulated retained earnings. In managing its capital, the Group s primary objective is to ensure its continued ability to provide a consistent return for its equity shareholders, principally though capital growth. In order to achieve and seek to maximise this return objective, the Group and Company may seek to maintain a gearing ratio that balances risks and returns at an acceptable level while also maintaining a sufficient funding base to enable the Group and Company to meet their working capital and strategic investment needs. In making decisions to adjust its capital structure to achieve these aims, either through new share issues, or increases or reductions in debt, the Group and Company consider not only their short term position but also their medium and longer term operational and strategic objectives. There have been no other significant changes to the Group s and Company s capital management objectives, policies and processes during the year nor has there been any change in what the Group and Company considers to be their capital. Financial liabilities The Group s and Company s financial liabilities consist of trade and other payables. The interest rate profile at 31 December of these liabilities was as follows: Group Company Financial liabilities on which interest is paid Financial liabilities on which no interest is paid Total Financial liabilities on which interest is paid Financial liabilities on which no interest is paid Total $ 000 $ 000 $ 000 $ 000 $ 000 $ Euro UK Sterling ,137 1,426 US Dollar 7 7 Canadian Dollar ,527 1,025 1,165 2, Euro 1, , UK Sterling ,153 1,153 US Dollar Canadian Dollar 3,705 3, Australian Dollar 7 7 1,322 4,841 6,163 3,468 3,468 The Group s and Company s short term creditors are considered payable on demand. 24. Post Balance Sheet Events Since the balance sheet date of 31 December 2015 and the date that these financial statements have been signed, the following developments have been announced which have a material impact on, or the understanding of, these financial statements: Canadian acquisition On 22 January 2016 the Group announced the completion of an acquisition in Canada. The acquisition comprises production facilities and wells on mineral leases across approximately 28,000 acres, the majority of which are in the Rainbow area of north west Alberta, approximately 15 miles south of the Group s existing Virgo assets. The consideration paid for the acquisition was Cdn$0.25 million (US$0.2 million) in cash. The Company has also assumed the abandonment liability for all the wells and facilities acquired. The Alberta Energy Regulator assigned an undiscounted net liability for the assets of US$1.5 million and a gross undiscounted abandonment cost of US$8.9 million. The operating cash flow attributable to the assets being acquired for the eight months ending 31 August 2015 was Cdn$0.4 million (US$0.3 million) and the turnover for the year ended 2014 was Cdn$8.6 million (US$6.2 million). Further to a reserves report commissioned by the vendor of the assets from a Calgary based independent third party engineering firm, the Rainbow assets were estimated to contain, as at 31 December 2014, proved plus probable reserves of approximately million barrels of oil equivalent. The Group has identified an initial work programme on the Rainbow assets, which was initiated shortly after the completion of the acquisition. The programme involves the reinstatement of wells and facilities and is intended to double the existing oil production over the next 12 months. Annual Report and Accounts

60 Unaudited Statement of Net Commercial Oil & Gas Reserve Quantities Proven and Probable Reserves At 31 December 2015 Volumes Group Reserves mmboe At 31 December Changes during the period: Production (0.01) At 31 December Notes 1. The Reserve estimates shown in this report are based upon the joint reserve and resource definitions of the Society of Petroleum Engineers, the World Petroleum Congress, and the American Association of Petroleum Geologists. The classification of reserves has been done in accordance with Canadian Oil and Gas Evaluation Handbook (COGEH) guidelines as referenced in (Canadian) National Instrument (NI ). 2. Canadian proven and probable reserves are the most recent estimates as determined during the first quarter of 2015 in an independent review by GLJ Petroleum Consultants Ltd. of Calgary, Alberta, Canada. 3. The table above does not include the reserves attributable to the Rainbow asset acquisition which completed in Annual Report and Accounts 2015

61 Glossary 3D Three dimensional 2P Proven plus probable reserves $ US Dollar AGM Annual General Meeting AIM The Alternative Investment Market of the London Stock Exchange plc B, b defined as 10 9 Billion bbls Barrel(s) boe (barrels of oil equivalent) A term used to summarise the amount of energy that is equivalent to the amount of energy found in a barrel of crude oil. boepd Barrel(s) of oil equivalent per day bopd Barrel(s) of oil per day Cdn$ Canadian dollar CEO Chief Executive Officer the Code UK Corporate Governance Code E&E Exploration and Evaluation EIA Environmental Impact Assessment EU European Union FCA Financial Conduct Authority GAAP Generally Accepted Accounting Practice HSE Health, Safety and the Environment IAS International Accounting Standards IASB International Accounting Standards Board IFRIC International Financial Reporting Interpretations Committee IFRS International Financial Reporting Standards Intangible assets Oil and gas assets at the exploration and evaluation stage and IT systems ISIN International Securities Identification Number ISO International Standards Organisation Environmental Management Standard Km Kilometre KPI Key Performance Indicator KPMG KPMG LLP mmbbls Million barrels mmbo Million barrels of oil mmboe Million barrels of oil equivalent Northern or the Group The Company and its subsidiaries, Northern Petroleum Plc OHSAS British Standard for Occupational Health and Safety Management Systems Parent Company, the ultimate parent company of the Group Probable Probable reserves are those unproven reserves which analysis of geological and engineering data suggests are more likely than not to be recoverable in this context and when probabilistic methods are used, there should be at least 50% probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable reserves Prospect Potential or actual drilling target that is defined by seismic data and / or log data with a sufficient level of detail for the evaluation of economic viability Proven Proven reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under current economic conditions Reserves Estimated remaining quantities of oil and natural gas and related substances anticipated to be technically and economically recoverable from known accumulations, as of a given date Shell Shell E&P France SAS Shell Italia Shell Italia E&P S.p.A STOOIP Stock Tank Oil Originally In Place VCP Value Creation Plan WTI West Texas Intermediate a grade of crude oil used as a benchmark in oil pricing Annual Report and Accounts

62 Directors, Offices and Advisers Directors J D Murphy Non executive Chairman K R Bush Chief Executive Officer N T Morgan Finance Director I M Lanaghan Senior Non executive Director Company Secretary W J Anderson Registered office Chester House, Unit 3.01 Kennington Park 1 3 Brixton Road London SW9 6DE United Kingdom Telephone: +44(0) info@northpet.com Registered number Legal form Public limited company Country of incorporation of Parent Company England Office Locations Northern Petroleum London Office Chester House, Unit 3.01 Kennington Park 1 3 Brixton Road London SW9 6DE United Kingdom Regional office, Canada Ouro Preto Resources Inc 1000, th Avenue SW Calgary, Alberta T2P 1G7 Canada Regional office, Italy Viale Trastevre Rome Italy Regional office, Australia Ouro Preto Resources Pty Ltd PO Box 394 Burleigh, Heads 4220 Australia Independent auditor KPMG LLP 15 Canada Square London E14 5GL Registrars Neville Registrars Neville House Laurel Lane, Halesowen West Midlands B63 3DA Bankers HSBC Bank Plc 8 Canada Square London E14 5GL Lloyds Banking Group 10 Gresham Street London EC2V 7AE UniCredit Banca Piazza Cavour B Roma, Italy ATB Financial Street Nanton, Alberta T0L 1R0 Nominated adviser and brokers Stockdale Securities Limited Beaufort House 15 St. Botolph Street London EC3A 7BB FirstEnergy Capital LLP 85 London Wall London EC2M 7AD Solicitors Gordons Partnership LLP 22 Great James Street London WC1N 3ES Eversheds 1 Wood Street London EC2V 7WS 60 Annual Report and Accounts 2015

63 Licence Table Canada Type Interest Operator Onshore North West Alberta 237 Leases varied 217 Northern (20 non operated) Italy Onshore Cascina Alberto Permit 20% Shell Italia Offshore Southern Adriatic F.R39.NP Permit 100% Northern F.R40.NP Permit 100% Northern d149d.r.np Application 100% Northern d60f.r.np Application 100% Northern d61f.r.np Application 100% Northern d65f.r.np Application 100% Northern d66f.r.np Application 100% Northern Sicily Channel C.R.146.NP Permit 100% Northern C.R149.NP Permit 100% Northern d29g.r.np Application 50% Northern d30g.r.np Application 100% Northern French Guiana Offshore Guyane EEL Licence 1.4%* Shell *Northern Petroleum owns a majority interest in Northpet Investments Limited, a company which has a 2.5% interest in the Guyane licence. Australia Onshore PEL629 Licence 100% Northern

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