JKX Oil & Gas plc Annual Report 2015

A fresh perspective

UA-404

Fin

an

cia

l s

tate

me

nts

104-

169

Go

ve

rn

an

ce

68-1

03

57

56

JKX

Oil

& G

as p

lc A

nnua

l Rep

ort 2

015

JKX

Oil

& G

as p

lc A

nnua

l Rep

ort 2

015

Str

ate

gic

re

po

rt

2-67

Ta

rg

ets

20

15

Ac

hie

ve

me

nts

20

15

Ta

rg

ets

20

16

Furt

her

impr

ove

Em

erge

ncy

Res

pons

e (‘E

R’)

arra

ngem

ents

an

d pl

ans

with

sim

ulat

ed

exer

cise

s, d

rill

s an

d tr

aini

ng in

ea

ch o

f our

ope

ratio

nal a

reas

Ac

hie

ve

d

Dur

ing

2015

JK

X im

prov

ed E

R in

Ukr

aine

and

Rus

sia

and

cont

inue

d w

ith r

egul

ar E

R d

rill

s an

d ob

serv

atio

ns o

f the

pro

cess

. Pla

ns h

ave

been

est

ablis

hed

whi

ch in

clud

e re

scue

of p

erso

nnel

and

act

ions

to

min

imis

e da

mag

e an

d bu

sine

ss d

isru

ptio

n.

Furt

her

impr

ove

ER

ar

rang

emen

ts a

nd p

lans

with

si

mul

ated

exe

rcis

es, d

rill

s an

d tr

aini

ng in

eac

h of

our

op

erat

iona

l are

as d

urin

g 20

16

Upd

ate

the

Car

bon

Man

agem

ent

Pla

n an

d re

port

s E

nsur

e th

e ne

xt a

sses

smen

t of o

ur C

arbo

n M

anag

emen

t Su

bmis

sion

by

the

Car

bon

Dis

clos

ure

Pro

ject

is s

ubm

itte

d in

Q3

2016

.

The

perf

orm

ance

rep

ort i

s in

clud

ed in

this

Ann

ual R

epor

t w

ith im

prov

emen

ts p

lann

ed

for

2016

Com

ply

with

the

Gre

enho

use

G

as (‘

GH

G’)

Emis

sion

s (D

irec

tors

’ R

epor

ts) R

egul

atio

ns 2

015

Ac

hie

ve

d

An

inde

pend

ent c

ompa

ny, T

ru-C

ost,

was

eng

aged

to a

naly

se a

nd

repo

rt o

ur G

HG

’s.

All

emis

sion

s so

urce

s ow

ned,

ope

rate

d or

con

trol

led

by th

e G

roup

ar

e in

clud

ed in

our

rep

ort.

The

base

line

mea

sure

men

t is

incl

uded

in th

is A

nnua

l Rep

ort

with

impr

ovem

ents

pla

nned

fo

r 20

16

Car

ry o

ut a

Man

agem

ent

Trai

ning

Nee

ds A

naly

sis

Iden

tify

curr

ent c

ompe

tenc

ies

with

in th

e JK

X S

enio

r

Man

agem

ent T

eam

incl

udin

g D

irec

tors

and

pro

pose

a p

rogr

am o

f C

ontin

uing

Pro

fess

iona

l Dev

elop

men

t inc

ludi

ng C

orpo

rate

G

over

nanc

e an

d E

nvir

onm

enta

l mat

ters

. With

the

chan

ge in

the

JKX

Boa

rd o

n 28

Jan

uary

201

6, th

e m

anag

emen

t tra

inin

g pl

an is

be

ing

revi

sed

for

2016

.

Rev

ise

curr

ent a

rran

gem

ents

w

ith im

prov

emen

ts p

lann

ed

for

2016

Cor

pora

te a

nd s

ocia

l res

pons

ibil

ity

(‘CSR

’) r

evie

w

CS

R t

ar

ge

ts a

nd

ac

hie

ve

me

nts

JK

X’s

str

ate

gy

for

2015

ha

s b

ee

n t

o c

on

tin

ue

to

im

pro

ve its

exi

sti

ng

sys

tem

s f

or

ma

na

gin

g its

HS

EC

Q a

ims a

nd

ob

jec

tive

s.

Ta

rg

ets

20

15

Ac

hie

ve

me

nts

20

15

Ta

rg

ets

20

16

Kee

p ou

r A

IFR

to 0

.40

or b

elow

Con

tinue

to b

eat t

he

perf

orm

ance

ben

chm

ark

set b

y th

e In

tern

atio

nal A

ssoc

iatio

n of

O

il an

d G

as P

rodu

cers

(‘IO

GP

’)

JKX

achi

eved

an

AIF

R o

f 0.1

5 (2

014:

0.9

9) p

er 2

00,0

00 h

ours

w

orke

d.

JKX

achi

eved

0.7

5 in

juri

es p

er m

illio

n ho

urs

wor

ked

in 2

015

(2

014:

4.9

5), t

he 2

015

IOG

P p

erfo

rman

ce b

ench

mar

k w

as 1

.6 p

er

mill

ion

hour

s fo

r 20

15.

Kee

p ou

r A

IFR

to 0

.35

or b

elow

an

d ex

ceed

the

IOG

P

perf

orm

ance

ben

chm

ark

LTI o

f 0.2

5 or

low

er p

er 2

00,0

00

hour

s w

orke

dA

ch

iev

ed

Zer

o LT

I per

200

,000

hou

rs w

orke

dLT

I of 0

.35

or b

elow

EIF

R o

f 0.7

0 pe

r 20

0,00

0 ho

urs

wor

ked

Ex

ce

ed

ed

ta

rg

et

EIF

R o

f 0.3

0 ac

hiev

edE

IFR

at 0

.60

or b

elow

Mai

ntai

n IS

O 9

001

accr

edit

atio

nA

ch

iev

ed

Mai

ntai

n IS

O 9

001

accr

edit

atio

n

Mai

ntai

n IS

O 1

4001

acc

redi

tatio

n fo

r JK

X O

il &

Gas

plc

Ac

hie

ve

dM

aint

ain

ISO

140

01 a

ccre

dita

tion

Mai

ntai

n O

HS

AS

1800

1 ac

cred

itat

ion

for

JKX

Oil

&

Gas

plc

Ac

hie

ve

dM

aint

ain

OH

SA

S 18

001

accr

edit

atio

n

Com

plet

e O

HS

AS

1800

1 ac

cred

itat

ion

for

PP

CA

ch

iev

ed

M

aint

ain

OH

SA

S 18

001

accr

edit

atio

n fo

r P

PC

ISO

900

1 ac

cred

itat

ion

for

PP

CA

ch

iev

ed

Eva

luat

e as

sess

ors

reco

mm

enda

tions

and

app

ly to

th

e P

PC

Man

agem

ent S

yste

m

Con

tinue

to im

prov

e ou

r St

akeh

olde

r en

gage

men

t and

C

omm

unit

y Li

aiso

n P

lan

Pro

gres

s m

ade,

impr

ovin

g le

vels

of c

omm

unic

atio

n w

ith lo

cal

stak

ehol

ders

, the

ir in

tere

sts

form

ing

part

of t

he d

ecis

ion-

mak

ing

proc

ess

for

all o

ur s

igni

fican

t ope

ratio

ns.

Con

tinue

to u

pdat

e an

d im

prov

e ou

r St

akeh

olde

r en

gage

men

t and

C

omm

unit

y Li

aiso

n P

lan

in a

ll lo

catio

ns

Con

tinue

to im

prov

e lo

cal

enga

gem

ent i

n ou

r G

roup

Ris

k M

anag

emen

t Sys

tem

s an

d re

port

ing

into

our

Gro

up R

isk

Reg

iste

r

Ac

hie

ve

d

Ris

k m

anag

emen

t str

ateg

y w

as u

pdat

ed a

nd lo

cal R

isk

Com

mit

tees

con

tinue

d to

ope

rate

in U

krai

ne a

nd R

ussi

a su

ppor

ted

by s

taff

trai

ning

in r

isk

iden

tific

atio

n an

d m

itiga

tion.

Impr

ove

our

Ris

k M

anag

emen

t an

d A

sses

smen

t act

iviti

es

acro

ss th

e G

roup

Con

tinue

to im

prov

e in

cide

nt

repo

rtin

g, u

sing

saf

ety

mom

ents

, w

orks

hops

, site

cam

paig

ns,

trai

ning

ses

sion

s, to

olbo

x ta

lks

and

brie

fings

Ac

hie

ve

d

56 in

cide

nts

wer

e re

port

ed in

201

5 (2

014:

47)

whi

ch in

clud

ed

near

-mis

s re

port

s, u

nsaf

e ac

ts a

nd h

azar

ds.

Con

tinue

to im

prov

e in

cide

nt

repo

rtin

g, u

sing

saf

ety

mom

ents

, w

orks

hops

, site

cam

paig

ns,

trai

ning

ses

sion

s, to

ol-b

ox ta

lks

and

brie

fings

UA-404

Fin

an

cia

l s

tate

me

nts

104-

169

Go

ve

rn

an

ce

68-1

03

59

58

JKX

Oil

& G

as p

lc A

nnua

l Rep

ort 2

015

JKX

Oil

& G

as p

lc A

nnua

l Rep

ort 2

015

Str

ate

gic

re

po

rt

2-67

HSE

CQ

sta

tist

ical

ana

lysi

s fo

r 20

15

su

pp

ort

ed

by

exp

atr

iate

su

pe

rvis

ors

to

pro

vid

e a

dd

itio

na

l

exp

ert

ise

an

d o

vers

igh

t. T

his

en

ab

les u

s t

o d

efi

ne

an

d

ma

na

ge

ris

k m

ore

cle

arl

y u

sin

g W

es

tern

me

tho

do

log

ies

.

JK

X d

rill

ing

an

d w

ork

ove

r e

mp

loye

es a

nd

co

ntr

ac

tors

ha

ve

the

ne

ce

ss

ary

tra

inin

g a

nd

ce

rtif

ica

tio

n in

we

ll s

afe

ty a

nd

we

ll

co

ntr

ol,

an

d a

ll p

ers

on

ne

l h

ave

th

e a

uth

ori

ty t

o s

top

an

y jo

b

tha

t th

ey

de

em

un

sa

fe.

Su

pe

rvis

ors

are

se

lec

ted

fo

r th

eir

exp

ert

ise

as w

ell

as f

or

the

ir f

am

ilia

rity

wit

h t

he

re

gio

ns w

he

re J

KX

op

era

tes

. T

he

y

un

de

rsta

nd

an

d a

re s

en

sit

ive

to

lo

ca

l w

ork

ing

pra

cti

ce

s a

nd

cu

ltu

re, a

nd

wo

rk t

o e

nh

an

ce

th

e e

du

ca

tio

n a

nd

tra

inin

g o

f

loc

al

sta

ff a

nd

co

ntr

ac

tors

ali

ke

.

JK

X m

ak

es t

he

be

st

use

of

its r

eso

urc

es b

y sh

ari

ng

exp

ert

ise

be

twe

en

op

era

tin

g c

om

pa

nie

s u

sin

g a

str

on

g c

oll

ab

ora

tive

en

viro

nm

en

t w

he

re e

very

bo

dy

co

ntr

ibu

tes t

o a

na

lyse

th

e r

isk

s

an

d d

eve

lop

mit

iga

tin

g s

tra

teg

ies in

ord

er

to m

inim

ise

it.

A L

ea

d D

rill

ing

an

d W

ork

ove

r E

ng

ine

er

is b

ase

d a

t th

e L

on

do

n

off

ice

wh

o r

ep

ort

s d

ire

ctl

y to

th

e B

oa

rd a

nd

is r

esp

on

sib

le

for

the

pla

nn

ing

, re

vie

win

g a

nd

au

tho

risin

g o

f G

rou

p d

rill

ing

an

d w

ork

ove

r o

pe

rati

on

s;

this

sig

nif

ica

ntl

y s

tre

ng

the

ns t

he

ca

pa

bil

ity

to id

en

tify

an

d m

an

ag

e d

rill

ing

ris

k. A

da

ily

dri

llin

g

up

da

te is p

rovi

de

d t

o t

he

Bo

ard

fo

r a

ll J

KX

op

era

tio

ns w

hic

h

de

scri

be

s d

rill

ing

pro

gre

ss, is

su

es a

nd

exp

ec

tati

on

s f

or

the

foll

ow

ing

24 h

ou

rs.

He

alt

h a

nd

sa

fety

ris

k m

an

ag

em

en

t

JK

X is p

rou

d t

o h

ave

ma

inta

ine

d a

ccre

dit

ati

on

s f

or

co

mp

l ia

nce

wit

h:

•

OH

SA

S 1

80

01 H

ea

lth

& S

afe

ty

•

ISO

14

001 E

nvi

ron

me

nta

l a

nd

•

ISO

90

01 Q

ua

lity

Ma

na

ge

me

nt.

Th

ese

are

in

tern

ati

on

all

y-re

co

gn

ise

d s

pe

cif

ica

tio

ns f

or

occu

pa

tio

na

l h

ea

lth

an

d s

afe

ty e

nvi

ron

me

nta

l a

nd

qu

ali

ty

ma

na

ge

me

nt

sys

tem

s m

on

ito

red

by

exp

eri

en

ce

d a

ud

ito

rs

bi-

an

nu

all

y to

en

su

re c

om

pli

an

ce

to

th

e s

tan

da

rds T

he

lis

t

be

low

is a

sa

mp

le o

f 3

rd p

art

y in

sp

ec

tio

n a

cti

viti

es in

2015

.

A f

ull

re

po

rt o

f a

ll in

sp

ec

tio

ns is a

vail

ab

le o

n r

eq

ue

st.

3r

d P

ar

ty I

ns

pe

cti

on

s d

ur

ing

20

15

PP

C, U

krai

ne

•

Ma

in B

oa

rd o

f th

e S

tate

Em

erg

en

cy

Sit

ua

tio

n S

erv

ice

of

Uk

rain

e in

Po

lta

va r

eg

ion

•

Exp

ert

org

an

iza

tio

n N

VF

Pro

mse

rvis

dia

gn

os

tik

a

•

Exp

ert

org

an

iza

tio

n P

P E

ne

rgo

ma

sh

•

Sta

te L

ab

ou

r B

oa

rd, P

olt

ava

re

gio

n

•

Off

ice

of

the

Fe

de

ral

Se

rvic

e f

or

Eco

log

ica

l, T

ech

no

log

ica

l

an

d A

tom

ic S

up

erv

isio

n (R

os

tek

hn

ad

zor)

•

As

so

cia

tio

n o

f in

de

pe

nd

en

t e

xpe

rts o

f U

kra

ine

Uk

rexp

ert

•

Fe

de

ral

Se

rvic

e f

or

the

Su

pe

rvis

ion

of

Na

tura

l R

eso

urc

es

YGE

, Rus

sia

•

No

rth

Ca

uc

asu

s O

ffic

e o

f th

e F

ed

era

l S

erv

ice

fo

r

Eco

log

ica

l, T

ech

no

log

ica

l a

nd

Ato

mic

Su

pe

rvis

ion

(Ro

ste

kh

na

dzo

r)

•

Sta

te L

ab

ou

r In

sp

ec

tora

te in

Ad

yge

a R

ep

ub

lic

•

Fe

de

ral

Se

rvic

e f

or

the

Su

pe

rvis

ion

of

Na

tura

l R

eso

urc

es in

Kra

sn

od

ar

Re

gio

n

•

Fe

de

ral

Ag

en

cy

on

Te

ch

nic

al

Re

gu

lati

ng

an

d M

etr

olo

gy,

So

uth

ern

In

terr

eg

ion

al

Terr

ito

ria

l O

ffic

e

•

He

ad

Off

ice

of

the

Min

istr

y o

f th

e R

us

sia

n F

ed

era

tio

n

for

Civ

il D

efe

nce

, E

me

rge

nc

y S

itu

ati

on

an

d M

itig

ati

on

of

Na

tura

l D

isa

ste

r C

on

se

qu

en

ce

s in

Ad

yge

a R

ep

ub

lic

Fata

l acc

iden

t cas

e

Lost

tim

e in

juri

es

Med

ical

trea

tmen

t / R

estr

icte

d w

ork

case

s

Nea

r m

iss

/ Los

s ha

zard

s / P

rope

rty

dam

age

/ Uns

afe

act o

r co

nditi

ons

1 0 0 56

Ou

r s

afe

ty s

tati

sti

cs

fo

r 2

01

52

All

Inju

ry F

requ

ency

Rat

e (‘A

IFR

’) 20

15

Cor

pora

te a

nd s

ocia

l res

pons

ibil

ity

(‘CSR

’) r

evie

w

Ou

r a

pp

ro

ac

h

JK

X’s

He

alt

h, S

afe

ty, E

nvi

ron

me

nt,

Co

mm

un

ity

an

d Q

ua

lity

(‘H

SE

CQ

’) p

hil

oso

ph

ies a

re e

mb

od

ied

in

its

Po

lic

y S

tate

me

nts

,

wh

ich

are

en

do

rse

d b

y th

e B

oa

rd a

nd

ma

de

kn

ow

n t

o a

ll

em

plo

yee

s a

nd

bu

sin

es

s p

art

ne

rs. T

he

sta

tem

en

ts r

ep

rese

nt

the

Co

mp

an

y’s c

om

mit

me

nt

to a

sa

fe a

nd

he

alt

hy,

in

cid

en

t

fre

e, w

ork

ing

en

viro

nm

en

t a

nd

its

re

sp

on

sib

ilit

y to

pre

ven

t

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UA-404

JKX Oil & Gas plcA N N U A L R E P O R T 2 0 1 6

P R OD U C T ION

Technological revolutionThe past 10 years sees tight oil plays production increase by 15 times. P5

P O L I T IC S

29% gas tax rate blocks progress12% would open the gas market to global energy investors and operators. P5

L E G A L

Tribunal awardAn opportunity to resolve historical legal issues. P2

TA R G E T S

135 wells and total investment of $660 millionJKX will bring the capital and technology to start our own gas revolution, but Ukraine also needs to do its part. P9

M I N D S E T

“What’s possible?” unleashes latent talentTom updates the philosophy of the new JKX and sets the mindset. P8

OverviewHighlights inside coverOur business 1Chairman’s statement 2

New FDP targets 600 billion cubic feet• Updated field development

plans focus on the Rudenkivske field in Poltava

• Technically recoverable reserves of 600 billion cubic feet (17 billion cubic metres)

• Plateau production of 18,300 boepd P9

S T R AT E G Y

All seeing the same picture Extreme transparency, the way forward. P14

www.jkx.co.ukA new ambitious plan, a great team, and exciting prospects

Strategy Strategic context 4Our business model 7Chief Executive’s statement 8Our objective 11Strategic priorities 12

PerformanceRegional operations update 16Performance in 2016 18Financial review 19Safe and responsible operations 22Principal risks and how we manage them 29

For full governance and financial statements refer to the document above (enclosed with this report) and also available online: www.jkx.co.uk

UA-404

JKX Oil & Gas plc Annual Report 20163

enquiry and believe that PPC is in full legal compliance with all relevant Ukrainian law and regulation. These searches have been a significant distraction for the Board and JKX staff, and damaging to Ukraine’s investment climate. We have engaged with both the US and UK embassies in Kiev in order to register our complaints in this matter.

We have commenced the settlement process with the Government in Ukraine to settle the arbitration award and the local tax issues so that the Company can return its focus to key operational matters.

UKRAINE

Production licenses securedIn January 2016, the State Geology and Mineral Resources Survey of Ukraine suspended four of PPC’s subsoil use permits. The authority gave a list of actions that were required in order to cancel the suspension (including a change to the minimum production requirements under the licenses) and would normally have given the operator sufficient time to remedy the failings. Instead PPC was given only one month to do so.

Following successful legal action, PPC has now renewed all four of these licenses until 2024 and also received a ruling from the Kharkiv Administration Court of Appeal which deemed the original suspensions to have been illegal.

Rebuilding of Field Development Plans (‘FDPs’) Our reconstructed Field Development Plans have revealed that applying modern technology and techniques in well construction and field development design, our Rudenkivske gas field has much greater potential than was previously considered

economic. Further details of the FDPs are provided in The Chief Executive’s statement on pages 8 to 10.

FINANCIAL

Bond repayment and restructuringThrough 2016, we reduced the principal amount of outstanding bonds from $36 million to $16 million. This was achieved through a $10 million scheduled repayment in February and various market purchases of bonds of a total principal amount $10 million at various discounts to face value.

On January 3 2017 the Bondholders approved a restructuring of the remaining $16 million of Bonds, the detail of which is provided in the Financial Review on pages 19 to 21. The repayment of the Bonds is now well within the operating cash flow capabilities of the Company enabling the business to move forward with its development plans.

Reducing operating costs and overheads Measures were taken immediately following the appointment of the new Board in January 2016 to significantly reduce the cost burden of the Company’s London headquarters, reducing headcount and moving all remaining staff onto one floor of the building, where we previously occupied four floors. We have been able to extract ourselves from the long-term lease on one of the unoccupied floors and continue negotiations with the landlord to extract the Company from the long-term lease agreements on the other two floors.

During 2016, headcount reductions have been made in Ukraine and Russia of 18% and 14%, respectively. The benefits of our cost reduction actions during 2016 will be seen in 2017 and we continue to identify further cost-saving opportunities.

GROUP

Your Board Following the replacement of the entire Board on 28 January 2016, the composition of the Board did not comply with the UK Corporate Governance Code in respect of the number of independent Non Executive Directors. To address this, in April, two new independent Non Executive Directors were appointed.

Alan Bigman and Bernie Sucher both bring extensive knowledge of working at the highest levels in the region combined with directly relevant experience which will be of great benefit to the Company. As independent directors, Alan and Bernie have strengthened the corporate governance credentials of the Company which ensures that the interests of all shareholders are protected.

At the Company’s AGM on 28 June 2016, the resolutions to accept the appointment of Alan and Bernie were rejected by a small number of shareholders but with enough votes to prevent the resolutions being passed. Given the very low turnout of voting shareholders, the fact that the vast majority of voting shareholders were in favour of the appointments and the need for value-adding independent directors, the Board re-appointed both Alan and Bernie at a subsequent Board Meeting. The shareholders will be asked to approve these appointments at the next Annual General Meeting. The result of last year’s AGM underlines that if shareholders want to ensure a high-quality board and good governance, they must exercise their right to vote at General Meetings.

MINDSET

People The Board continues to be impressed and often humbled by the level of dedication, talent, and perseverance shown by staff throughout the Group,

especially during a year in which we were trying to drive such significant change. We believe that our teams are capable of accomplishing market leadership in our field, and much more.

POTENTIAL

The road ahead We are working with the Ukrainian Government to amicably settle all claims and secure support in creating an environment in which JKX can execute its Field Development Plans, invest in gas production and assist Ukraine to achieve energy independence.

2016 began with some major changes at the board level, and uncertainty with regards to our future. Yet we endured that uncertainty, increased production, improved relationships with our stakeholders and have more focused teams with a clearer understanding of our organisational and technical challenges. We achieved some significant gains during 2016 but have also suffered some setbacks. With a renewed purpose, strategic focus and the right people in the right places, we enter 2017 with optimism.

Finally, I wish to thank all our shareholders and staff for their support of the Company and the new Board through this year of challenging transformation. We have achieved a significant amount in our first 12 months, but relish the challenges and opportunities that 2017 presents.

Paul OstlingChairman

UA-404

JKX Oil & Gas plc Annual Report 201616

GROUP PRODUCTION

In 2016 Group average production was 10,083 boepd (2015: 8,996 boepd), comprising 54.7 MMcfd of gas (2015: 48.7 MMcfd) and 967 bpd of oil and condensate (2015: 871 bpd), an overall increase in production of 12%.

UKRAINE

Novomykolaivske licencesProductionAverage production from the Novomykolaivske group of fields in 2016 was 2,553 boepd (2015: 2,611 boepd) comprising 10.0 MMcfd of gas (2015: 10.9 MMcfd) and 879 bpd of oil and condensate (2015: 794 bpd). Despite the cancellation of all development expenditure since early 2015, oil production increased by 11% in 2016 while gas production decreased by 8%, although the decline in gas production has to be viewed in the context of a declining field and lack of an effective development plan in the first half of the year. We have implemented an enhancement program targeting the technical potential of existing well stock which has resulted in the increase in oil production and enabled a smaller reduction in gas production than would otherwise have been the case. The decline in gas is mainly attributed to a year on year natural decline of 1.5 MMcfd observed in the Ignativske field.

Development and drillingNo drilling took place in 2016 as the new board focused on rebuilding Field Development Plans (‘FDPs’) using global best practices, including drilling, fracturing and completion techniques from North America. Several technical advisors with a broad range of global and regional expertise were engaged.

The FDP for Ukraine identifies a technical solution to potentially unlock approximately 600 billion cubic feet of recoverable gas reserves previously considered uneconomic at the Rudenkivske gas field in addition to significant enhanced oil recovery opportunities in existing fields.

Work commenced on the initial stages of the FDP, including the acquisition and preparation of existing wellbores for stimulation, and the re-start of water injection into Ignativske. Production optimisation operations continued with the TW-100 and the recently leased Cooper LTO-550 and ZJ-20 workover rigs and rigless interventions.

• As part of the re-start of the Ignativske pilot waterflood project in the first half of last year, re-pressurisation of IG138 occurred in July. This led to the opening of the well in August and production of 5.5 Mstb of oil in the following two months. An electrical submersible pump was sourced for IG110 which will enable injection to be increased to 10,000 bbls/d as part of the FDP.

• A cement plug over the T2 and Devonian Sands was drilled out in IG-132, which resulted in a significant increase in production. Initial rates were over 1,100 bbls/d and total incremental production was 96 Mstb of oil and 129 MMcf of gas.

• In the Movchanivske North Field M171 was worked over to deepen the gas lift, followed by M153 where additional perforations were also added. Both of these projects were as a result of the newly generated enhancement list and both added to oil production quickly and with minimal investment.

• Rigless interventions included velocity string installations in M155, M157, M159, M162, M167, and IG106. In addition, a plunger lift system was installed in M160. All of these installations increased gas and condensate production quickly and with minimal investment.

• Successful re-entry of two old leased wells, NN16 and NN47, was completed in the Rudenkivske field. NN16 recovered a total of 100 MMcf of gas and 1.9 Mstb of condensate from the Devonian horizon in the southern part of the field. At the year end, NN47 had recovered a total of 37 MMcf of gas and 1.7 Mstb of condensate from the Visean horizon in the Northern part of the field. The success of both of these projects was due to the use of modern perforating technologies.

• Work started on 19R to prepare the well for fracturing in 2017 as outlined in the FDP.

• Wireline operations have focussed on the clearance of wax and salt build up in the production tubing of a number of wells. A sustained programme of wax clearance has stabilised oil production.

Production facilities Operations at the main processing facility, the LPG plant and the oil loading facility continued smoothly throughout the year. A new water treatment vessel was installed at the main processing facility. Minor piping modifications continue to enhance production. A routine annual plant shutdown of 2 days for maintenance was successfully completed in September.

Improvements at the oil loading terminal included an upgrade of the fire protection system and the installation of an additional loading point to enable loading of road tankers in addition to rail cars.

Elyzavetivske production licenceProductionAverage production from the Elyzavetivske field in 2016 was 1,448 boepd (2015: 1,715 boepd) comprising 8.6 MMcfd of gas (2015: 10.1 MMcfd) and 23 bpd of condensate (2015: 29 bpd), an overall 16% decrease in production.

Development and drillingThere was no drilling activity on the Elyzavetivske field during the year although new field development plans on the Elyzavetivske field and West Mashivska licence were completed.

Production facilities The Elyzavetivske production facility continues to operate efficiently and there have been no further changes.

RUSSIA

Koshekhablskoye licenceProductionAverage production from the Koshekhablskoye field in 2016 was 6,082 boepd (2105: 4,670 boepd) comprising 36.1 MMcfd of gas (2015: 27.7 MMcfd) and 65 bpd (2015: 48 bpd) of condensate, a 30% increase on the average for 2015. This increase is due mainly to full year of production from well-27 which came back on line in late 2015.

Licence obligationsThe Group’s Russian operating subsidiary Yuzhgazenergie (‘YGE’) maintains a regular dialogue with Rosnedra, the licencing authority, to ensure that the authorities are kept abreast with progress on the field development and the associated exploration and reserves determination commitments.

Rosnedra, is fully aware that there are certain licence commitments under YGE’s Koshekhablskoye licence which have not been met and have issued YGE with notices to this effect. YGE is addressing these issues and expects to resolve them in 2017.

Development and drillingAfter completion of the well-27 workover at the end of 2015, there were no additional workover activities in 2016. Routine acid treatment has been carried out using coiled tubing on the main producing wells.

Production from well-20 has declined from 17.5 MMcfd to 14.1 MMcfd through the year without any additional acid stimulation. During a routine wireline operation in the middle of the year a fish was lost in the hole which has prevented further acid stimulation taking place, but despite this production has remained relatively stable.

The north flank well-25 has been producing gas at rates between 5.5-12.4 MMcfd with three acid treatments in the year. Well-27 has been producing gas at rates between 8.3–12.2 MMcfd on a monthly average basis, having required eight acid treatments through the year. The deep east-flank well-15 continues to produce approximately 0.6 MMcfd on a monthly average basis.

Production facilities There were no changes to the facilities in 2016. An unscheduled shutdown of the plant in May was prolonged in order to complete the annual maintenance which had originally been planned for later in the year.

Reserves audit A reserves audit was carried out by Degoyler and MacNaughton in 2016 which increased total

STRATEGIC REPORT

Regional operations update

2P reserves for the field to 80.3 MMboe (2015: 66.1 MMboe). Proved reserves have been slightly reduced, due to higher resolution geological modeling showing slightly less drainage area. Probable reserve categories have increased due to the addition of reserves attributable to a new Callovian well, which is planned for 2018, and net pay maps revealing volumes previously not accounted for by material balance.

HUNGARYJKX now operates the following six new Mining Plots (production licences) in Hungary covering 200 sq km and which are 100% owned by Riverside Energy Kft, the Company’s wholly-owned Hungarian subsidiary:

Hajdunanas IV 28 sq kmHajdunanas V 7 sq kmTiszavasvari IV 41 sq kmEmod V 100 sq kmPely I 18 sq kmJaszkiser II 6 sq km

The licence terms enable JKX to carry out appraisal and development activity over a 30 year period.

Hajdunanas fieldProduction from the Hajdunanas and Gorbehaza Fields in north east Hungary, which form the Hajdunanas IV Mining Plot, was suspended by the previous operator in 2013.

In December, a sidetrack of the Hn-2 well was started to access the remaining Pannonian reservoir gas and to test the oil potential of the underlying Miocene volcanoclastic sequence, which was previously productive in the Hn-1 well. This was the first drilling operation completed since JKX assumed operatorship in November 2014.

The Hn-2ST well tested 1.5 MMcfd from the Pannonian Pegasus sands and 2.8 MMcfd from a lower Pannonian sand interval. The latter is a newly discovered productive horizon in the field.

Gas sales commenced on 2 February 2017 at an initial rate of 1.8 MMcfd, after a production and sales break of more than three years. Production forecasting and development planning is underway and future work may include a workover of the existing Hn-1 well to add production from the Lower Pannonian reservoir interval.

JKX continues to seek a farm-in partner to participate in the further development of the Hajdunanas field and the Group’s other Hungarian licence interests.

Turkeve IV Mining PlotDuring the year, JKX sold its 50% beneficial interest in the Ny-7 discovery (within the Turkeve IV Mining Plot) to the operator.

SLOVAKIAExplorationJKX holds a 25% equity interest in the Svidnik, Medzilaborce, Snina and Pakostov exploration licences in the Carpathian fold belt in north east Slovakia. A programme of magneto-telluric geophysical surveys combined with seismic re-interpretation has led to the identification of a number of shallow prospects across the licences.

The 128 sq km Pakostov licence was applied for and approved in 2015 as protection acreage around material prospects identified in the Medzilaborce licence. The Operator (DiscoveryGeo) had planned to drill two of these prospects in 2016 but a combination of revised permitting procedures and local activist opposition has delayed well location permitting and construction. The Operator now hopes to spud the first well of a larger three well programme in 2017.

A winters day at the Poltava production plant

UA-404

1 JKX Oil & Gas plc Half-Yearly Report 2017

JKX OIL & GAS PLC (‘JKX’ OR THE ‘COMPANY’)

Half-Yearly Results For the six months ended 30 June 2017

Highlights Executed Phase 1 of the appraisal program at Rudenkivske field and completed several enhancement projects in Ukraine

Completed workover of well 25 in Russia

Restarted production in Hungary after a break of more than 3 years

Average production decreased by 17.3% at 8,598 boepd (2016: 10,393 boepd)

Restructured and extended the short-term bond liabilities

Commenced negotiations to resolve legal disputes with the Ukrainian Government

Significant changes at the Board level following the Annual General Meeting

Key Financials Revenue: $38.0m (2016: $35.4m)

Other cost of sales: $12.6m (2016: $9.7m)

Loss from operations before tax and exceptional costs $2.2m (2016: $2.8m loss)

Exceptional costs $3.1m (2016: $3.1m)

Loss for the period: $7.7m (2016: $10.1m loss)

Loss per share: 4.46 cents (2016: loss 5.86 cents)

Operating cash flow: $4.0m (2016: $7.8m)

Capital expenditure: $10.4m (2016: $2.2m)

Total cash balance: $4.2m (31 December 2016: $14.3m)

Outlook Analysis of results of Phase 1 of Rudenkivske appraisal program and preparation for Phase 2 in Ukraine

Progress of field development using best working and technical practices from North America adapted to Ukraine

Successful completion of well 5 workover to increase gas production in Russia

Workover of well Hn-1 in Hungary and search for farm-in partner

Amicable settlement of the legal disputes with the Ukrainian Government

Review of different options to raise external financing to enable execution of our strategy

Acting CEO, Victor Gladun commented:

“During the first half of the year, we have started implementing the Field Development Plans, completed Phase 1 of the appraisal

program in the Rudenkivske field in Ukraine, completed well 25 workover in Russia and restructured the significant short-term bond

liabilities.

On the Board level, continued disputes between major shareholders and the Board resulted in a change of the Executive Directors for

the second time in 18 months. The Board is actively looking for new Executive and Non Executive Directors. I have taken on the role of

Acting CEO to secure a smooth transition. Tom Reed acted as Advisor to the Board and Advisor to the Acting CEO and Russell Hoare served as Acting CFO from the date of the Annual General Meeting (“AGM”) on 30 June 2017 until 31 July 2017 to help with the

transition. Irrespective of changes in the management team, the Company will continue to seek to mitigate its litigation risks and

potential liabilities with the Ukrainian Government, execute on Field Development Plans, and establish opportunities for long-term growth”.

For further information please contact EM Communications:

Stuart Leasor leasor@em-comms.com

T: +44 20 3709 5711

M: +44 7703 537721

Jeroen van de Crommenacker

crommenacker@em-comms.com

T: +44 20 3709 5713 M: +44 7887 946719

UA-404

10 JKX Oil & Gas plc Half-Yearly Report 2017

Financial performance

Earnings First half

2017

Second half

2016

First half

2016

Net loss ($m) (7.7) (27.0) (10.1)

Net loss before exceptional items ($m) (5.0) (0.5) (7.0)

Basic weighted average number of shares in issue (m) 172 172 172

Loss per share before exceptional items (basic, cents) (2.89) (0.25) (4.09)

Loss per share after exceptional items (basic, cents) (4.46) (15.70) (5.86)

Pre-exceptional earnings before interest, corporation tax,

depreciation and amortisation1 ($m)

8.3 7.4 8.4

Realisations First half

2017

Second half

2016

First half

2016

Oil (per bbl) $57.45 $49.65 $39.92

Gas (per Mcf) $3.67 $2.94 $2.96

LPG (per tonne) $497.53 $496 $254

Cost of production ($/boe) First half

2017

Second half

2016

First half

2016

Production costs (excluding exceptional item) $7.84 $5.33 $5.43

Depreciation, depletion and amortisation $6.46 $5.90 $5.67

Production based taxes $5.76 $5.21 $4.57

Cash flow First half

2017

Second half

2016

First half

2016

Cash generated from operations ($m) 4.0 9.2 7.8

Operating cash flow per share (cents) 2.3 5.4 4.5

Statement of Financial Position First half

2017

Second half

2016

First half

2016

Total cash2 ($m) 4.2 14.3 18.6

Borrowings ($m) 16.3 16.8 23.8

Net debt3 ($m) (12.1) (2.5) (5.2)

Net debt to equity (%) (7.9) (1.6) (2.9)

Return on average capital employed4 (%) (9.3) (11.0) (11.4)

Additions to property, plant and equipment/intangible assets ($m)

- Ukraine 8.3 2.6 1.5

- Russia 1.7 (0.3) 0.6

- Other 0.4 1.2 0.1

Total 10.4 3.5 2.2

1. Pre-exceptional earnings before interest, tax, depreciation and amortisation (‘EBITDA’) is a non-IFRS measure and calculated using loss from operations of $5.3m (2016: $5.8m) and adding back depreciation, depletion and amortisation and exceptional items of $13.6m (2016: $14.2m). EBITDA is an indicator of the Group’s ability to generate operating cash flow that can fund its working capital needs, service debt obligations and fund capital expenditures.

2. Total cash is Cash and cash equivalents plus Restricted Cash. 3. Net cash/(debt) is Total cash less Borrowings (excluding derivatives). 4. Return on average capital employed is the annualised loss for the period divided by average capital employed.

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12 JKX Oil & Gas plc Half-Yearly Report 2017

Financial review

Realisations 2017 2016 Change % Change

Ukraine

Gas ($/Mcf) 6.57 5.77 0.80 13.9

Oil ($/bbl) 57.45 39.92 17.53 43.9

LPG ($/tonne) 497.53 254.70 242.83 95.3

Russia

Gas ($/Mcf) 1.66 1.50 0.16 10.7

Hungary

Gas ($/Mcf) 6.06 - 6.06 100

Group

Gas ($/Mcf) 3.67 2.94 0.73 24.8

Oil ($/bbl) 57.45 39.92 17.53 43.9

LPG ($/tonne) 497.53 254.70 242.83 95.3

Average exchange rates 2017 2016 Change % Change

Russia (RUB/$) 57.84 70.23 12.39 17.6

Ukraine (UAH/$) 26.78 25.65 (1.13) (4.4)

Ukrainian revenues 2017

$m

2016

$m

Change

$m

% Change

Gas 20.0 18.4 1.6 8.7

Oil 6.7 5.9 0.8 13.6

Liquefied Petroleum Gas

(‘LPG’) 2.2 1.3 0.9 69.2

Total 28.9 25.6 3.3 12.9

Ukraine revenues As the revenue bridge chart demonstrates, one factor affecting revenues from our Ukrainian business was the decreased production due to the suspension of enhancement activity in Ukraine in 2017 due to planning and preparation for the stimulation programme on

the Rudenkivske field. Gas sales volumes in Ukraine were 7.6% lower at 3,453 boepd (2016: 3,737 boepd) as a result of reduced gas

production to 3,766 boepd (2016: 4,114 boepd).

Whilst the realised gas price increased by 16% from an average of 5,208 UAH per Mcm in 2016 to 6,052 UAH per Mcm in 2017, US

Dollar gas realisations in Ukraine improved only by 13.9% from $5.77/Mcf to $6.57/Mcf due to the 4.4% devaluation of the Hryvnia.

Since the introduction of a new law affecting the Ukrainian gas market in 2015, gas prices are more closely following global market trends. The increase in gas realisations is explained by higher prices of imported gas from Europe compared to 2016.

Oil realisations also improved from $39.92/bbl in 2016 to $57.45/bbl in 2017 which is in line with Brent movement from an average of

$41.21/bbl during the 1H 2016 to $52.28/bbl during the 1H 2017. Ukrainian realisations are now higher than Brent, with an average

premium of $5/bbl in 2017, due to the removal of illegal cheap products from the Ukrainian market and robust local demand for oil exceeding local supply.

LPG sales were affected by both volume declines, associated with a reduced volume of gas produced, and an improvement in the market

price achievable in Ukraine. The average price increased to $497.53/tonne (2016: $254.70/tonne) due to tight controls over customs clearance imposed by certain market players which resulted in a limited access of cheaper LPG products. However, the strong

operational performance of the LPG plant enabled it to contribute $2.2m (2016: $1.3m) to Group revenue.

Russia revenues Russian gas sales made up 54% of the Group’s volumes sold (2016: 56%). Gas production in Russia was lower by 25% to 4,654 boepd

(2016: 6,222 boepd) largely due to the workover of well 25 in Russia and as the revenue bridge chart shows, this was the largest

negative factor affecting Group revenues in the period.

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Annual Report and Financial Statements for the year ended 31 December 2015

Regal Petroleum plc

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OPERATIONS REVIEW

STRATEGIC REPORT

Health, Safety, Environment and Security

(“HSES”)

The Group is committed to maintaining the highest HSES

standards and the effective management of these areas is an

intrinsic element of the overall business ethos. Through strict

enforcement of the Group’s HSES Management System,

together with regular management meetings, training and the

appointment of dedicated safety professionals, the Group

strives to ensure that the impact of its business activities

on its staff, contractors and the environment is as low as

is reasonably practicable. The Group reports safety and

environmental performance in accordance with industry

practice and guidelines.

Ukraine Operations

Asset Overview

Regal Petroleum Corporation Limited (a wholly owned

subsidiary in the Group) holds a 100% working interest and is

the operator of the MEX-GOL and SV fields. The licences are

the Group’s sole project and extend over a combined area of

269 km2, approximately 200 km east of Kiev. The two licences

are adjacent and the interests are operated and managed as

one field. The licences were granted in July 2004 and have a

duration of 20 years.

The fields are located, geologically, towards the middle of the

Dnieper-Donets sedimentary basin which extends across the

majority of north-east Ukraine. The vast majority of Ukrainian

gas and condensate production comes from this basin. The

reservoir comprises a series of gently dipping Carboniferous

sandstones of Visean age (“B-Sands”) inter-bedded with

shales that form stratigraphic traps at around 4,700 metres

below the surface, with a gross thickness between 800 metres

and 1,000 metres. Analysis suggests that these deposits

range from fluvial to deltaic in origin. Below these reservoirs is

a thick sequence of shale above deeper, similar, sandstones

which are encountered at a depth of around 5,800 metres.

These sands are of Tournasian age (“T-Sands”). Deeper

sandstones of Devonian age (“D-Sands”) have also been

penetrated in the fields.

Production

The Group’s average production from the MEX-GOL and SV

fields over the year ended 31 December 2015 was 144,783

m3/d of gas, 44 m3/d of condensate and 21 m3/d of LPG,

which equates to a combined total oil equivalent of 1,274

boepd (2014: 152,744 m3/d of gas, 52 m3/d of condensate

and 21 m3/d of LPG (1,370 boepd in aggregate).

Production was boosted by the commencement of production

from the SV-6 well at the end of November 2015, with average

gas, condensate and LPG production for December 2015 at

191,098 m3/d of gas, 46 m3/d of condensate and 21 m3/d of

LPG (1,574 boepd in aggregate).

The Group’s average production for the period from 1 January

2016 to 30 May 2016 was 169,649 m3/d of gas, 42 m3/d

of condensate and 20 m3/d of LPG, which equates to a

combined total oil equivalent of 1,406 boepd.

Since the Group commenced the treatment of “wet” gas

from the adjacent Lutsenky field at the beginning of July 2015,

the Group has purchased 4,723,010 m3 of “wet” gas and

following treatment of this gas, produced 2,945,021 m3 of

gas, 778 m3 of condensate and 5,957 m3 of LPG (49,473 boe

in aggregate).

Operations

The geopolitical upheaval, the volatility in the gas price,

the devaluation of the Ukrainian Hryvnia, and the fiscal and

economic uncertainty in Ukraine during 2015, meant that the

Group considered it necessary to reduce its planned capital

investment programme.

The revised programme during the year was limited to

installation of the Lutsenky “wet” gas treatment infrastructure,

undertaking workover operations on the SV-6 well,

improvements to the Group’s gas processing facilities and

pipeline network, and performing remedial work on existing

wells.

The Lutsenky “wet” gas treatment project arose from an

agreement with Pryrodni Resursy, the operator of the adjacent

Lutsenky field, under which the Group has agreed to purchase

“wet” gas and treat it through the Group’s gas processing

facilities to strip out and sell the liquids. This has not only

created an additional revenue stream for the Group, but also

improved environmental emissions from the Lutsenky field.

The workover of the SV-6 well was undertaken after the Group

entered into an agreement with NJSC Nadra, the State-

owned gas producer, for the lease of the SV-6 well, which is

a suspended well owned by NJSC Nadra, located within the

Group’s SV licence area. Successful workover operations were

performed during the year, and the well was brought onto

production at the end of November 2015.

REGAL PETROLEUM PLC Annual Report and Financial Statements 2015

04

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Annual Report and Financial Statements for the year ended 31 December 2016

Regal Petroleum plc

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Operations

The geopolitical situation, the volatility in the gas price,

the weakness of the Ukrainian Hryvnia, and the fiscal and

economic uncertainty in Ukraine over recent years, meant

that the Group considered it necessary to reduce its capital

investment programme at the MEX-GOL and SV fields

during 2016. The programme during the year was limited

to the commencement of the drilling of the MEX-109 well,

improvements to the Group’s gas processing facilities

and pipeline network, and performing remedial work

on existing wells.

However, during the year, the Group engaged P.D.F. Limited

to undertake a comprehensive review and re-evaluation study

of the geology, geophysics, petroleum engineering and well

performance at the MEX-GOL and SV fields. The results of

the study are now being utilised in the planning of the further

development of the fields, both in relation to an improved

understanding of the geological aspects of the fields and

reservoir engineering, drilling and completion techniques.

Reprocessing of existing seismic data, using the latest

processing technology, is being undertaken to try to improve

the definition in such data, and thereafter further interpretation

work is planned.

The MEX-109 well was spudded at the end of July 2016,

targeting the Visean reservoirs (“B-Sands”) in the MEX-GOL

field. The well has been drilled to a depth of 4,873 metres,

which is shallower than its original target depth of 5,250

metres following some technical issues during the drilling

operations. As a result, it was decided to curtail the well

at this depth as access to the main reservoir target had

been achieved. The well may be deepened later to access

deeper horizons. Completion operations are scheduled

to be concluded in May 2017, after which well testing will

commence, and subject to successful testing, it hoped that

the well will be hooked-up for production by the end of the

second quarter of 2017.

Reserves

MEX-GOL and SV fields

The Group’s estimates of the remaining Reserves and

Resources at the MEX-GOL and SV licence areas are

derived from an assessment undertaken by independent

petroleum consultants, ERC Equipoise Limited (“ERCE”),

as at 31 December 2013 (the “ERCE Report”), which was

announced on 25 March 2014. During the period from

1 January 2014 to 31 December 2016, the Group has

produced 1.45 MMboe from these fields.

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