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8/3/2019 JKX report 12m2010 (2011-05-16)
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JKX Oil & Gas plc Report & Accounts 2010
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01JKX Oil & Gas plc Annual Report & Accounts 2010
At aglanceAn overview
f our business
IndetailOur business ingreater depth
CONTENTS
02 What we do03 Highlights04 Our regions06 Our marketplace08 Our strategy and progress10 Our resources12 Our performance
CONTENTS
14 Chairmans statement
16 Chief Executives statement
19 Delivering our strategy20 Operational review
20 Ukraine26 Russia30 Hungary33 Rest of world
34 Financial review
38 Risks we face and how wemanage them
42 Corporate Social
Responsibility review
44 CSR case study Russia46 Health and safety48 Environment49 Employment49 Community
50 Directors reports
50 The Directors52 Directors report55 Corporate governance60 Remuneration
69 Financial statements
72 Group accounts110 Company accounts118 Notice of Annual General
Meeting
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02 At a glance What we do / Highlights
What we do
We draw on our extensive,long-established regional
experience and expertise to
develop oil and gas
interests in eastern and
central Europe, with aparticular focus on Ukraine
and Russia.
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03JKX Oil & Gas plc Annual Report & Accounts 2010
Highlights
RudenkovskoyedevelopmentWe completed and tested
horizontal well R-103 at
Rudenkovskoye in Ukraine,
which produced encouraging
initial results.
WorkoveraccelerationWe accelerated the workover
programme in Russia and
ested an additional well.
LPG facilityWe completed the design and
abrication stages and
commenced the installation
of the LPG facility in Ukraine.
Developmentand explorationWe continued our
development and exploration
in Hungary, Bulgaria
nd Slovakia.
Net cash ($m)
-17%
147.9
07
110.2
08
107.6
09
43.4
06
Capital expenditure ($m)
+66%
Operating profit beforeexceptional item ($m)
-21%
Revenue ($m)
-2%
Operatingprofit afterexceptionalitem:$20.4m
184.5
07
207.0
08
196.5
09
131.7
06
192.9
10
108.6
07
125.4
08
119.6
09
105.8
06
95.0
10
178.5
10
68.1
07
64.8
08
74.4
09
81.1
06
62.0
10
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04 At a glance Our regions
We have operational experience and expertise in theeastern and central regions of Europe...
H U N G A R Y
B U L G A R I A
S L O V A K I A
ProvadiaGolitza
Hernad
Nyirseg
Turkeve
Veszto
Medzilaborce
Snina
Svidnik755km2720km2
996km2
5,410km2
120km2
1,018km2*
15km2
1,787km21,241km2
1,000m
2,000m
3,000m
4,000m
5,000m
6,000m
Ignatovskoye MolchanovskoyeNorth & Main
Novo-Nikolaevskoye
Rudenkovskoye Koshekhablskoye Hernad andNyirseg
Ukraine Russia Hungary
Reserves proved and probable MMboe/depth as at 31st December 2010
* Final Turkeve area subject to drilling results
.0Oil
3.8Gas 8.4 0.0 20.4 4.5 .0
4.3 0.0 .2 0.3 0.2
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05JKX Oil & Gas plc Annual Report & Accounts 2010
G E O R G I A
U K R A I N E
R U S S I A
T H B L A C A
Elizavetovskoye
Novo-Nikolaevskoye Complex
Koshekhablskoye
265km2
71km2
32km2
1st Jan 2010 Revisions Production 31st Dec 2010
TOTALOil + Gas MMboe 88.7 0.1 (3.7) 85.1Oil MMbbl 8.1 0.0 (1.1) 7.0Gas Bcf 483.7 0.5 (15.7) 468.5Gas MMboe 80.6 0.1 (2.6) 78.1
UKRAINEOil MMbbl 7.6 0.0 (1.1) 6.5Gas Bcf 209.7 0.0 (14.4) 195.3Gas MMboe 34.9 0.0 (2.3) 32.6
RUSSIAOil MMbbl 0.3 0.0 0.0 0.3Gas Bcf 267.0 0.0 0.0 267.0
Gas MMboe 44.5 0.0 0.0 44.5HUNGARYOil MMbbl 0.2 0.0 0.0 0.2Gas Bcf 7.0 0.5 (1.3) 6.2Gas MMboe 1.2 0.1 (0.3) 1.0
Group reserves as at 31st December 2010
...with a particular focus on Ukraine and Russia
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06 At a glance Our marketplace
a marketplace that is rich in opportunity for us, acrossboth the oil and gas sectors.
OilProved world reserves(Billion barrels)
GasProved world reserves(Trillion cubic feet)
MarketplaceAs an upstream company, the oil and gas we produce is sold at ornear the edge of our facilities, at which point responsibility passes toour customers.
World: 1,340.00
Russia:60.00
Ukraine:00.40
Hungary:00.02
World:6,26
1.00
Russia1,680.00
Ukraine: 39.00
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07JKX Oil & Gas plc Annual Report & Accounts 2010
0
100
200
300
400
0
2,500
5,000
7,500
10,000
0
50
100
150
200
102
347
9,934
2,740
36
156
Ukraine Russia Hungary
0
500
1,000
1,500
2,000
0
5,000
10,000
15,000
20,000
0
100
200
300
400
715
1,560
20,610
15,524
92
399
Ukraine Russia Hungary
Each of the regional markets in which we operate isa net consumer of oil and gas, (whilst overall as acountry Russia is a net producer, the south west
Russian regional market within which we operate is anet consumer). We believe that the opportunities open tous in these markets are likely to expand, as governmentsand relevant authorities recognise that investment bynon-state companies is an attractive route towardsincreasing production regionally. We are well-positionedto exploit these opportunities.
Source: USA Energy Information Administration
Production (000 bpd) Consumption(000 bpd)
Production (Bcf per annum) Consumption(Bcf per annum)
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08 At a glance Our strategy and progress
This is the strategy via which we aim to seize thatopportunity
To build on ourwell-established
strength as an efficientand successfuldeveloper and producerof oil and gas interestsin eastern andcentral Europe.
Growth Increase production.
Explore new opportunitiesacross our existing portfolio.
Acquire new licences.
Continue to enhance andexploit our local expertise andknow-how.
Increase oil and gas reserves.
Maximise exposure to, anddeliver value from, the Ukrainianand Russian gas markets.
Drilled and tested horizontalWellR103 on Rudenkovskoyefield in Ukraine as next phase ofdevelopment programme.
Accelerated the redevelopmentof the Koshekhablskoye fieldin Russia.
Further exploration drillingin Hungary.
Enhancement of dedicatedspecialist teams in eachcountry, including geological,geophysical, materials anddrilling resource.
Enhancement of London-basedGroup technical team.
Maintenance of efficientcost base.
HSEC & Sustainability Continually strive to improve on
our strong record on:
HSE performance.
Environmental performance.
Supporting our people.
Supporting local communities.
Rigorous monitoring of All InjuryFrequency Rate.
Good progress made in reductionof emissions towards 12.5%target from 2008 to 2012.
Introduction of new system foremployee dialogue.
shareholder value Regularly assess and ensure
adherence to comprehensive andclear policies, procedures andcontrols to budget forecast andcontrol all group expenditures.
Maintain payment of a dividendin line with performance and
capital requirements. Add reserves and enhance
production profile.
Clear commitment to theCombined Code.
Dividend of 5.0p announcedfor 2010.
Expenditure controlsmaintained during a period ofheightened capital investment.
Strategic prioritiesObjective Achievements
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09JKX Oil & Gas plc Annual Report & Accounts 2010
the progress we are making and the performancemeasures we use.
e oar cons ers t e uture pro uct on pro e o t e roup s nterests to
underpin the value of its asset portfolio. Accordingly, the level of annual
production is the measure by which management monitors delivery of portfoliodevelopment. The 11% fall in average combined oil and gas production is the
result of the unscheduled delay in mobilisation of a second drilling rig to our
PPC producing fields.
Capital expenditure is used by management to monitor levels of investment, on
both a country specific and regional basis. Capital expenditure increasedsignificantly on 2009 (up 66%) as the redevelopment of the Koshekhablskoye
ield in Russia accelerated in the period.
e oar e eves a core s o t e roup to e t e ow cost eve opment oonshore gas assets in and around Ukraine. A key measure used to monitor this
is the level of production costs which remained materially consistent with 2009.
he Board has pursued a strategy to maximise exposure to and deliver value
rom the Ukrainian and Russian gas markets. This is based on the belief that as
occurre n ra ne, t e uss an omest c gas pr ce w , a ter account ng ornet-backed transportation costs, converge with gas prices in western Europe.
In 2010 the 2% increase in Ukrainian gas realisations is evidence of the
convergence that has occurred and from which the Group is benefitting. With theroup s rst uss an gas pro uct on expecte n utumn , uss an gas
realisations will be the realisations KPI going forward.
We are committed to continuously improving our health and safety performance.
During 2010 we again maintained our progress, with a significant 59% decrease
in our AIFR (All Injury Frequency Rate) figures. The AIFR represents the healthand safety incidents per 200,000 man-hours. To put our achievement in to
context, the industry benchmark for 2010 was 3.4.
he Board believes its strategic objective of returning value to shareholders is
most appropr ate y measure y t e return on average cap ta emp oye . t
believes that this measure reflects the underlying ability to return value by acombination of dividends, share buy-backs and any capital appreciation in the
Companys equities as may be determined by the capital markets. The 26%
decrease (excluding exceptional impairment) in 2010 reflects the continuedsignificant investment programmes, particularly in Russia and the decreased
net profit achieved in the period.
he Board believes that a significant component of the Groups ability to add
shareholder value lies in its success in adding to its reserves base. Total
reserves decreased by less than 5% in the period, following additions whichaccounte or a rep acement o t e . oe reserves pro uce n t e
year. Reserves of 0.1 MMboe were added following performance drivenreassessment of Hungarian reserves.
Production volumes (boepd)
10 0,324
09 11,665
08 11,012
Ukrainian gas realisations ($ per Mcf)
10 .
09 7.16
08 5.27
Capital expenditure ($m)
10 178.5
09 107.6
08 110.2
All Injury Frequency Rate
10 .
09 1.50
08 5.00
Reserves at the end of the period (MMboe)
10 85.1
09 88.7
08 89.2
Production costs ($ per boe)
10 4.74
09 4.85
08 5.97
Performance measures
Return on average capital employed (%)
10 17.1
09 23.1
08 25.2
Exceptional item: 12.1%
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10 At a glance Our resources
This is how we organise our people and resources
JKX Oil & Gas plcGroup staff 21Operational staff 738
UkraineOperational staff 583
RussiaOperational staff 151
Rest of WorldOperational staff 25
Offices:
Kiev
Poltava
Sokolova Balka
Offices:
Moscow
Maikop
Koshekhabl
Offices:
London
Tbilisi
Amsterdam
Group Operations Employee profile
Workforce
% locally employed
Workforce
% locally employed
Workforce% locally employed
98%
91%
97%
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11JKX Oil & Gas plc Annual Report & Accounts 2010
and the investment we make to ensure we deliverour objectives
Outcome
We develop strong localpresences, drawing on extensiveindustry and country-specificknowledge to deal with the localoperating environment. We haveproven expertise in efficient oiland gas production and also thepractical, on-the-groundexperience of working wherethere can be a significantbureaucratic element in howeveryday business is conducted.
Across the lifecycle of eachproject, from first exploration toabandonment, we focus on havingthe right people with the rightskills in the right place at the righttime. Although we use expatriateteams during the formative stagesof a project, over time theirnumbers will reduce significantlyand the operation will ultimatelyrely on a high percentage of localemployees. The training of localstaff underpins our strategy and is
an important aspect of how we dobusiness.
Ratio
Male | Female
Ratio
Male | Female
RatioMale | Female
2010 training
nvestment
2010 training
nvestment
2010 trainingnvestment
79% 21%
78% 22%
78% 22%
$66,500
$35,500
$27,500
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12 At a glance Our performance
and this is our performance during 2010, from afinancial perspective.
Total Second half First half Total 2010 2010 2010 2009
PRODUCTION SUMMARY
Production
Oil (Mbbl) 1,113 436 677 1,457
Gas (Bcf) 5.9 7.3 8.6 16.8
Oil equivalent (Mboe) 3,768 1,652 2,116 4,258
Daily production
Oil (bopd) 3,049 2,371 3,740 3,991
Gas (MMcfd) 44 40 48 46
Oil equivalent (boepd) 0,324 8,980 11,689 11,665
Total Second half First half Total 2010 2010 2010 2009 $m $m $m $m
OPERATING RESULTS
Revenue
Oil 78.8 32.4 46.4 76.4
Gas 112.9 55.1 57.8 118.1
Other 1.2 0.9 0.3 2.0
192.9 88.4 104.5 196.5
Cost of salesOperating costs (17.9) (5.6) (12.3) (20.6)
Depreciation, depletion and amortisation oil and gas assets (33.2) (14.7) (18.5) (32.8)
Production based taxes (5.2) (2.6) (2.6) (4.0)
(56.3) (22.9) (33.4) (57.4)
Provision for impairment of fixed assets/write off of exploration costs (13.7) (5.8) (7.9) (5.0)
Exceptional item impairment of Russian assets (74.6) (74.6)
Total cost of sales (144.6) (103.3) (41.3) (62.4)
Gross profit/(loss) 8.3 (14.9) 63.2 134.1
Operating expenses
Administrative expenses (25.3) (13.8) (11.5) (14.7)
Gain/(loss) on foreign exchange (2.6) 0.5 (3.1) (2.3)
Profit on sale of assets 2.5
Operating profit before exceptional item 95.0 46.4 48.6 119.6
Operating profit/(loss) after exceptional item 20.4 (28.2) 48.6 119.6
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13JKX Oil & Gas plc Annual Report & Accounts 2010
Total Second half First half Total 2010 2010 2010 2009
EARNINGS
Net profit/(loss) ($m) 21.2 (13.9) 35.1 85.3
Basic weighted average number of shares in issue (m) 171 171 170 157
Earnings per share before exceptional item (basic, cents) 47.56 26.84 20.72 54.23
Earnings per share after exceptional item (basic, cents) 12.38 (8.34) 20.72 54.23
Earnings before interest, tax, depreciation and amortisation ($m) 55.8 (12.4) 68.2 154.9
Total Second half First half Total 2010 2010 2010 2009
REALISATIONS
Oil (per bbl) $69.15 $74.29 $65.97 $53.90
Gas (per Mcf) $7.59 $7.79 $7.41 $7.19
Total Second half First half Total 2010 2010 2010 2009
COST OF PRODUCTION ($/boe)
Operating costs $4.74 $3.36 $5.81 $4.85
Depreciation, depletion and amortisation $8.82 $8.92 $8.74 $7.71
Production based taxes $1.39 $1.61 $1.21 $0.93
Total Second half First half Total 2010 2010 2010 2009
CASH FLOW
Cash generated from operations ($m) 146.3 79.1 67.2 160.0
Operating cash flow per share (cents) 85.6 46.0 39.6 101.7
Total Second half First half Total 2010 2010 2010 2009
BALANCE SHEET
Net cash ($m) 62.0 62.0 107.2 74.4
Net cash to equity (%) 13.2 13.2 22.1 18.4
Return on average capital employed (%) .9 (6.0) 15.8 23.1
Additions to property, plant and equipment/intangible assets ($m):
Ukraine 56.1 34.8 21.3 45.2
Russia 107.8 64.7 43.1 41.9
Other 14.6 10.7 3.9 20.5
Total 178.5 110.2 68.3 107.6
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Chairmans statement
Sir Ian Prosser
Chairman
Chairmans statement14
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015JKX Oil & Gas plc Annual Report & Accounts 2010 15as p c nnua eport ccountsJKX Oil & Gas plc Annual Report & Accounts 2010
In the short time I have been workingwith the senior team at JKX, I havebeen impressed by the managementskills and operational potential inevidence. When I was approached toconsider the role of Chairman of JKXfollowing some 12 years on theBoard at BP, I was attracted to theposition because the company
operates in a challenging area of theoil and gas sector, and one where Ifeel I can use my own experienceand expertise to good effect. Inaddition to my time at BP, I have also
established in the FTSE 250 index.I know from conversations withsenior management what a
tremendous contribution LordFraser made, chairing the JKXBoard with intelligence and greatcommitment. On behalf of theBoard I thank him unreservedly.
DividendIn a period of heavy investment, theBoard recognises that increasedtaxation in Ukraine and delay instart-up of the Russian projectinevitably impacts available cash flow.Consequently, the Board is
recommending a final dividend of 2.6pence per share, giving an unchangedtotal dividend for the year of 5.0 penceper share. The dividend will be paidon 24th June 2011 to shareholders onthe Companys Register of Memberson 6th May 2011.
OutlookThe Company is budgeting a strongincrease in production volumes for2011 with higher oil realisations andcontinued increases in gasrealisations in Ukraine. Despitethese benefits, the Company isabsorbing substantially increasedproduction related taxes in Ukrainewhich it did not bear in 2010 and thiswill impact 2011 earnings.
Turning to our prospects for 2011,first gas in Russia in the autumn willbe an important landmark for theCompany. Ukraine will continue toprovide the backbone of our cashflow and, together with Hungary, also
provide us with exploration upside. Inaddition, we look forward to enteringthe fast-growing Ukrainian LPGmarket at mid-year and adding valueto our existing gas business.
Finally, I wish to thank our people fortheir commitment and expertise overthe last 12 months, as well as ourshareholders for their continuingsupport.
served on the Boards of severalother major companies, such asGlaxoSmithKline, and believe that
this background can aid JKX in itsplans for growth.
Having been in my position for onlyone month at the date of thisrelease, it is too soon for me tocomment on achievements withwhich I have had no involvement.Clearly, we benefit from a verystrong production base in Ukraine,complemented by the developmentprospects in Russia and, albeit to alesser extent, in Hungary.
Although considerable progresswas made in 2010 on the largeredevelopment project in Russia,the Company has experienced delaysand capital cost increases; thecommencement date for productionin Russia is now expected in theautumn of 2011. More significantly,a delayed convergence of Russiandomestic gas prices to Europeannet-back levels is impacting ouroverall project economics andconsequently we are making animpairment provision of $74.6m.
Commitment to HSECMy predecessor commentedon the importance of protectingand nurturing our people, theircommunities and the environment,and this is a view which I sharewholeheartedly. As a resource-basedcompany, JKX rightly places greatvalue on health, safety,environmental matters andcommunity liaison (HSEC).
I note that the AIFR (All InjuryFrequency Rate) figures decreasedin 2010 and are well below theindustry benchmark. Furthermore,we were successful in our attemptto achieve ISO 14001 EnvironmentalAccreditation during the year.
Your BoardMy appointment has been the onlychange to the composition of theBoard. I would like to place on record
my thanks to Lord Fraser, whosesterling service of over 13 years sawJKX grow into an establishedoperator in eastern and centralEurope, and also become
Clearly, we benefit from a verystrong production base in
Ukraine, complemented by thedevelopment prospects inRussia and, albeit to a lesser
extent, in Hungary.
Annual dividends declared(pence)
Held
4.4
07
4.8
08
5.0
09
2.2
06
5.0
10
Earnings per share beforeexceptional item (basic, cents)
-12%
47.97
07
49.85
08
54.23
09
50.89
06
Exceptionalitem:
35.18 cents
47.56
10
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Chief Executives statement
Dr Paul Davies
Chief Executive
Chief Executives statement
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017JKX Oil & Gas plc Annual Report & Accounts 2010 17as p c nnua eport ccountsJKX Oil & Gas plc Annual Report & Accounts 2010
Our performance2010 was a challenging year forJKX with drilling delays in Ukraine
and construction delays on ourRussian project. Notwithstandingthese setbacks, the Company madesignificant progress on its keyprojects.
Average oil and gas production forthe year decreased by 11% to 10,324boepd (2009: 11,665 boepd) dueprimarily to the unscheduled delayin mobilisation of a second drillingrig to our development licences inPoltava, Ukraine. The effect of this
production shortfall was essentiallyoffset by the rise in both oil andgas realisations, leaving revenuesbroadly flat for the year at $192.9m(2009: $196.5m). Operating profit(before deduction of an exceptionalimpairment provision) declined 20%to $95.0m (2009: $119.6m).
The exceptional impairmentprovision of $74.6m to the carryingvalue of our Russian projectis largely the result of delayednet-back convergence of Russiandomestic gas prices to those ofEuropean gas markets and itsimpact on overall project economics.We are now forecasting Europeannet-back parity for 2017.
Milestones and progressIn last years Annual Report, I laidout two key goals by which we wouldmeasure our performance. Thesewere to:
Reach in excess of 20,000 barrels
of oil equivalent per day productionduring 2011.
Increase production atRudenkovskoye from 2% of JKXsUkrainian production in 2009 to25% in 2012.
We remain on target to achieve thefirst milestone but have moved thesecond milestone to 2013 to reflectthe current schedule for themulti-frac operations planned forthe Rudenkovskoye field.
We remain confident in our long-term prospects and are committedto our strategy, including the fournear-term objectives outlined in lastyears Annual Report:
Accelerate the appraisal anddevelopment of non-producingfields and reserves in our existing
portfolio, specifically atRudenkovskoye in Ukraine andKoshekhablskoye in Russia.
Continue to optimise productionfrom the producing fields inUkraine.
Increase activity on our existingexploration and appraisal portfolioin central Europe.
Maintain flexibility to acquireadditional interests in our focus
area, to increase production anddiversify geographically.
The fundamentals of our businessand our markets are sound althoughwe are experiencing some delay inturning upside into reality.
The installation and hook-up of thegas facility at Koshekhablskoye isnow proceeding at pace. Despiteon-schedule delivery of the keycomponents of the plant fromSharjah to Russia in January, we are
experiencing some slippage in thehook-up and commissioningschedule. Consequently, we arerevising our target for first gas tothis autumn. We continue to seeexcellent forward value in theRussian gas market and, onceproduction is underway atKoshekhablskoye, we will turn ourfocus to extending our Russianoperations to exploit opportunitieselsewhere in what we regard as aregion rich in potential.
In Ukraine, we drilled well R-103 onthe deep Rudenkovskoye tight gasfield as planned, and theencouraging initial results supportour plans for the multi-fracstimulation of the well later in theyear. Hook-up and commissioning ofour LPG plant is underway atPoltava and we are currentlyscheduling to start initial deliveriesby mid-year. LPG continues to be anincreasingly important energy
source in Ukraine and 2010 againsaw a sharp rise in the number ofvehicles powered by LPG.
Our operations in Hungary, wherewe are a non-operator, have
We continue to focus on theproven strengths that form
the backbone of JKX: anestablished presence in easternand central Europe; extensive
experience of local operatingconditions; productionand sales in buoyant local
marketplaces; and locally-based and managed operating
subsidiaries led by skilled andcommitted teams.
Net cash fromoperating activities ($m)
-7%
119.9
07
126.5
08
126.5
09
117.7
10
75.6
06
Production volumes (boepd)
-11%
12,579
07
11,012
08
11,665
09
11,146
06
10,324
10
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18
progressed well with productionincreasing in Hajdunanas supportedby the tie-in of the Gorbehaza-1
discovery. Gas has been tested in theTizsavasvari-6 and Nyekpuszta-2exploration wells and furtherappraisal is planned in 2011. Thefarm-in to the Turkeve licence hashad mixed results with only onediscovery to date.
Managing our risksRisk is intrinsic to our industry andwe expend considerable resourcesand expertise in managing it. During2010, we ensured that robust risk
management processes were inplace, with oversight at Board level.
OutlookWe have the people, the strategy andthe resources to deliver a step-change in performance during thecoming 12 months.
We are confident that we willcommence production in Russia thisautumn and I look forward to thisoperation becoming an important
contributor to net cash inflow.We are working hard to increaseproduction in Ukraine and this willplay an important role in helping usreach our key objective of producing20,000 barrels of oil equivalent perday during this year. Start-up of ourUkrainian LPG facility by mid-yearwill also contribute an importantvalue-added cash flow stream toour operations at Poltava.
Our people will once again be atthe heart of our ambitions. In thecountries where we operate we have
teams of highly skilled individuals,most of them drawn from localcommunities and many of themtrained by JKX. In the UK, we havean experienced senior team thathas been complemented in recentweeks by the appointment of SirIan Prosser as Chairman. A formerDeputy Chairman of BP, Sir Ian hasin-depth knowledge and experienceof international business,particularly in the oil and gas sector.At JKX, we are committed to grow as
a Company and our ability to attractsomebody of Sir Ians calibrespeaks volumes about our capabilityand intent.
I welcome Sir Ian to the Companyand am looking forward to workingalongside him during what I believewill be an exciting, productive andultimately rewarding year. I mustalso express my appreciation to ouroutgoing chairman, Peter Fraser,who for the last 13 years has chaired
this Company and supported methrough every challenge we havefaced.
Chief Executives statement
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019JKX Oil & Gas plc Annual Report & Accounts 2010 19as p c nnua eport ccountsJKX Oil & Gas plc Annual Report & Accounts 2010
Delivering our strategy
Commence development of theRudenkovskoye field in Ukraine.
Construct, install and commission anLPG facility in Ukraine.
Accelerate the workover programmein ussia
Test additional wells in Russia.
Construct and commission the gasfacility at Koshekhablskoye in Russia,with delivery in third quarter 2010followed by installation in the fourthquarter.
Double reserves and production inHungary.
Continue to develop the explorationportfolio, particularly in Hungary,Bulgaria and Slovakia.
Design/perform multi-frac of 1kmhorizontal wellbore of well R-103.
Delivery, hook-up, commissioningand start-up.
Complete workover of Callovianwell-09 and deepen well-22 toCallovian.
Test Oxfordian well-25 and Callovianwells 09 and 22.
Complete installation, hook-up,testing and commissioning offacility; start-up of production.
Add reserves and double production.
Continue to develop explorationportfolio in Hungary, Ukraine,Slovakia and Bulgaria.
well R-103.
esign and fabrication completed;
installation commenced.
Workover activity throughout the
period with up to three rigs
contracted.
Oxfordian well-20 tested.
abrication completed and shippingo Russia commenced. Site
preparation complete and
installation commenced.
ajdunanas production replaced by
yirseg reserves.
roduction in period up 97%.
xploration wells drilled in
ungary and Bulgaria. Seismic
cquired in Hungary, Slovakia and
Ukraine.
*As set out in the 2009 Annual Report .
Objectives for 2010* Achievements of 2010 Objectives for 2011
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Operational review
Devonian
Clastics
Visean
Basement
Tournasian
Carboniferous
Clastics
Salt
Our main Ukrainian interest is theNovo-Nikolaevskoye complex in thePoltava Oblast, eastern Ukraine.The complex is shown graphicallybelow, with a NW/SE cross sectionof the fields in the licence complex.
UKRAINE
All measurements are in Kilometres.
Novo-Nikolaevskoye complex
Operational review20
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Ukraine update
Completed:
We carried out appraisal drilling
in the Rudenkovskoye licence
and completed the R-103
horizontal well. A second rig
was mobilised, albeit later than
scheduled.
Planned:
Drilling and workover activity
will continue and we expect to
reassess the reserves in the
Ignatovskoye, Molchanovskoye
and Novo-Nikolaevskoye fields
towards the end of the year.Completion of the LPG plant
at Poltava is on target for
June 2011.
The year saw an extension of
our Ukrainian development
programme, with the focus on
appraisal drilling in theRudenkovskoye licence together
with important progress on
recompletions and stimulations.
During 2010, we carried out a rangeof activities to drive value from ourproduction licences. The key focus ofthe work programme was appraisaldrilling in the Rudenkovskoyelicence with the completion of theR-103 horizontal well in the fourthquarter. A second rig was contracted
to maintain the developmentimpetus in the second half of theperiod on the ongoing drillingprogrammes in the Ignatovskoye,Molchanovskoye and Novo-Nikolaevskoye fields. Delays inmobilisation resulted in the secondrig completing only one additionalwell during the fourth quarter.
The programme of recompletionsand stimulations continuedthroughout the period to maintainproduction levels in the Ignatovskoyeand Molchanovskoye North.
Poltava Petroleum Company (PPC),a wholly owned subsidiary of JKX,holds four production licencescovering 127sq.km in the Poltavaregion of Ukraine. Each productionlicence contains a number of fieldswhich together form the Novo-Nikolaevskoye Complex. PPC alsoholds the Zaplavskoye andElizavetovskoye exploration licencescomprising a total exploration area
of 208sq.km.
In summary, PPC:
Drilled, tested and/or completeda total of six appraisal anddevelopment wells.
Carried out an acid frac anda propped acid frac on twocarbonate wells.
Carried out 20 workoveroperations, including 12recompletions, three well repairs,
three fishing operations and twowell abandonments.
Commenced installation of theLPG recovery plant.
Continued to upgrade andde-bottleneck the productionfacility.
Installed additional generatingand compression facilities.
Ukrainian Reserves
No reserves reassessments tookplace in 2010. Drilling and workoveractivity will continue in 2011 and it isenvisaged that a reassessment ofthe Ignatovskoye, Molchanovskoyeand Novo-Nikolaevskoye fields willbe completed towards the end of theyear, although it will be 2012 before
this can be concluded in theRudenkovskoye field areas.
The Ignatovskoye production
licence is located in the centre of
the Novo-Nikolaevskoye Complex
and contains the first field to be
developed by the Company.
Evaluation of two additional
structural trends continues, one to
the west, and one to the southwest
of the main field.
The main field is an uplifted fault
block containing Devonian sand-stone and overlying CarboniferousTournasian sandstone andlimestone. On top of that is a
Elizavetovskoye
Novo-Nikolaevskoye Complex
Kiev
THE
BLACK SEA
Remaining reservesas at 31st December 2010
Proved Probable Prov+ Prob
. . .(MMbbl)
as . .6 .(Bcf)
Oil + Gas 4.1 0.7 4.8(MMboe)
Ignatovskoye
LICENCE AREA 25.3km2
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Ukraine continued
carbonate reef build up of Viseanage. There is also a series of thinsandstone channels on the flank of
the structure, also of Visean age.
Black oil is found in the Devoniansandstone and the lower parts of theTournasian and Visean reservoirs.The oil is overlain by a richcondensate-bearing gas cap and theVisean channels can therefore be oilor gas bearing. Reservoir quality inthe Devonian sandstone and Viseanreef is generally good whilst boththe Tournasian sandstone andlimestone are variable and often
dependent on local depositional andtectonic influences. Stimulation inthese reservoirs is usuallynecessary and, although this cangive high initial flow rates, the ratesoften decline to more modest levels.
No additional wells were drilled orrecompleted on the main structureof the field during the period. Thefocus of activity in 2010 was inrecompleting and stimulating thewells in the west of the structure:
Development well I-137 wasdrilled as a Visean carbonate oilproducer in the southeast of thefield but was suspended in late2008 with a fish in the hole belowthe 7-inch casing. A sidetrack wasdrilled in the period butencountered problems settingthe casing. A re-designedreplacement well is planned for2011 in preference to furthersidetracking.
Well I-105 was successfullyworked-over with the recovery ofbroken downhole pump rods.A surface pump will replace theexisting unit at a convenient timein 2011.
The workover rig successfullyrecompleted well I-133 from theTournasian sandstone to a Viseansandstone oil producer. Reservoirpressure was insufficient tomaintain flow and a beam pumphas been installed with the well
now supporting intermittent, butregular production.
Work began in well I-106 to carryout a water shut-off operation in
the Devonian sandstone andrecompletion as a Tournasiansandstone producer. Problems
recovering the tubing resulted inwork being suspended until 2011.
Well I-110 was recompleted fromthe depleted Tournasiansandstone to the Tournasiancarbonate. A similar re-completion was performed onwell I-158, but with only a smallamount of gas being produced.The well is now a candidate forabandonment.
Wells I-131 and I-150 were
abandoned in the period andtheir completion and well-headequipment recovered.
In addition to re-drilling well I-137,plans for 2011 include a well on thewestern flank of the main structureto appraise the potential in thedown-dip fault blocks. Success onthe flanks of the field would lead to afurther re-appraisal of the fieldreserves which otherwise haveremained relatively stable.
The Molchanovskoye production
licence is located approximately
8km to the south of the
Ignatovskoye Field and contains
the southernmost producing fieldwithin the complex. The licence
now comprises two distinct field
areas: Molchanovskoye North and
Molchanovskoye Main.
Molchanovskoye North is a blackoil reservoir with a gas cap in theDevonian sandstone and anoverlying Tournasian sandstonegas condensate reservoir. Thereare also newly appraised overlyingTournasian carbonate and
sandstone gas condensatereservoirs that extend over theIgnatovskoye licence boundary.
Work in 2010 addressed both theDevonian sandstone and theTournasian carbonate reservoirs andalso confirmed the presence ofproductive Visean sandstones withinthe licence area:
Development well M-167 wasdrilled as a high angle Tournasiancarbonate infill well across the
main natural fracture system inthe Molchanovskoye North field.Drilling was suspended in 2009due to a stuck drill pipe in the
22 Operational review
Remaining reservesas at 31st December 2010
roved Probable Prov+ Prob
Oil 2.9 1.4 4.3(MMbbl)
Gas 32.0 18.4 50.4(Bcf)
Oil + Gas 8.2 4.5 2.7(MMboe)
Molchanovskoye North & Main
LICENCE AREA 7.9km2
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overlying swelling shale. Thesidetrack was drilled successfullyto a measured depth of 3,000m
with a 400m section of Tournasiancarbonate. Following a controlledacid squeeze on the low porosityformation, the well settled to astabilised flow rate of 2.3 MMcfdof gas with 26 bpd of condensatethrough a 36/64" choke with aFWHP of 626 psi. Other areas ofthe extensive low porositycarbonate in the area are beingevaluated for potential applicationof this development technique.
In mid-year, well M-166, a longhorizontal well in the Devonianreservoir, showed a sharpincrease in water production anda commensurate decline in oil andgas production. The TW-100 rigwas mobilised to the location andgas lift installed to restoreproduction. The re-drilling of anew horizontal section at a higherlevel is scheduled for 2011.
Devonian horizontal wells M-151and M-152 watered out in theperiod and re-perforations higherin the well bores wereunsuccessful. The wells are nowcandidates for abandonment.
Well M-169 was spudded in 2010and was completed in March 2011as a 600m long horizontal well inthe Devonian reservoir. It isdesigned to replace both wellsM-151 and M-152 and has beenset higher in the reservoir. Initialtest production was 5.25 MMcfd
with 634 bopd oil at a FWHP of594 psi through a 2" choke. Testingis ongoing at different choke sizesto assess the most effectiveproduction rate.
Well M-28, a long servingDevonian oil producer, wasrecompleted to the T2 sandstoneand settled to a flow rate of3.5 MMcfd with 90 bcpd.
The surprise of the year was thespeculative perforation of the
unlogged V16 sandstone reservoirin well M-161. This had initial flowrates in excess of 1,000 bopd witha high gas cut, but has been
choked back to around 400 bopdfor reservoir managementpurposes.
Activity planned for 2011 will includefurther in-fill drilling in the Devonianreservoir and further mapping of theVisean sands to seek analogies tothe M-161 discovery. Reserves arenot expected to change significantly.
Molchanovskoye Main produces gascondensate in the Devoniansandstone and is being evaluated foradditional reserves in the overlyingTournasian carbonate and Viseansandstone reservoirs. Two wells
were treated in 2010:
Development well M-206 wasidentified in 2009 as a suitablecandidate for a propped acidfrac of the Tournasian carbonate.The 2010 frac operation wassuccessful but post-frac analysisindicates lack of reservoirconnectivity.
Well M-205 was recompleted inthe Visean sandstone where itflowed at an initial rate of1.1 MMcfd of gas, despitemore encouraging log results.Production enhancement bycoiled tubing conveyed jetperforating was attempted butthere was no noticeableimprovement in flow rate.
The results of both treatments weredisappointing and further work inthis area has been assigned a lowpriority; this may affect the reservesrecognised in this field area going
forward.A downthrown tilted fault blockreferred to as the Wedge Zoneseparates the MolchanovskoyeNorth and Molchanovskoye Mainfields. An exploration well M-170 iscurrently drilling ahead towards itsplanned TD of 3,100m in theDevonian sandstone to evaluate thepotential of this 1sq.km block.A second well in the block istentatively planned for later in 2011.
No reserves are currently attributedto this area of the field complex.
The Novo-Nikolaevskoye
production licence lies 3km to the
west of the Ignatovskoye Field.
Following successful drilling in
2009, remapping and additionaldrilling was carried out in 2010
with plans for more wells in 2011.
Development well N-73 wasdrilled as a Visean sandstone gasproducer and flowed at a stabilisedrate of 1.97 MMcfd of gas, 27 bcpdand 110 bwpd with a FWHP of189 psi. A well intervention wassubsequently carried out to isolatethe water producing zone.
Well N-74 was spudded in the
fourth quarter and encounteredgas in two Visean sandstonehorizons; it is currently flowingat 3.5 MMcfd with 114 bcpd.
The success of wells N-73, N-74and M-161 will contribute to anincrease in reserves in both theNovo-Nikolaevskoye and theMolchanovskoye licences when theyare reassessed later in 2011. Threefurther wells are planned for 2011with the first well (N75) scheduled
to spud in the third quarter.
Remaining reservesas at 31st December 2010
Proved Probable Prov+ Prob
Oil 0.0 0.0 0.0(MMbbl)
Gas 0.0 0.0 0.0(Bcf)
Oil + Gas 0.0 0.0 0.0(MMboe)
Novo-Nikolaevskoye
LICENCE AREA 7.8km2
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Ukraine continued
The Rudenkovskoye production
licence is the most northern of the
four production licences.
Reservoirs in the licence are the
Tournasian and Devoniansandstones at depths of between
3,000m and 5,000m with further
potential in the overlying Visean
sandstones. Productive areas have
been identified in the northern and
southern areas of the licence and,
after the modest success of the
2009 propped frac programme, an
initial three well horizontal drilling
programme was planned for
2010-2012:
Well R-103, in the southern partof the field, was drilled to ameasured depth TD of 4,641musing the Skytop N-75 rig with1,026m of the well drilledhorizontally in the Devonianreservoir. On test, the well flowedat a stabilised rate of 8.1 MMcfd ofgas and 18 bpd of condensatethrough a 85/64" choke with aflowing wellhead pressure of930 psi over the final 8 hour periodof a multi-rate test. The well has
been tied back to the main fieldprocessing facility with an 8kmflow line and placed on production.Since then production has
declined, compounded by aninability to lift the remainingdrilling and completion fluids,
despite changing the tubing to asmaller size. Rates are currentlyaround 650 Mcfd with 1-2 bcpdand intermittent water. Geologicaland engineering studies areunderway for a multi-stage fracin the long horizontal wellbore.
Well R-102, was drilled in early2007 in the southern area of thefield. It found two main gas-bearing zones in the Devoniansandstone but the presence of
water precluded any fracturestimulation testing in the lowerinterval. The well was pluggedback to a higher, and muchthinner, interval in the Devonian.The propped frac operation wasrelatively successful and the wellflow rate increased four-fold to0.5 MMcfd of gas. In 2010, theperforated zone was extended andthis resulted in an increase inproduction to 1.6 MMcfd.
The sites for the R-104 well in thenorth of the Rudenkovskoye areahas been prepared and theprogramme for this 4,300mhorizontal well to the Viseansandstone reservoir is ready, as isthe programme for well R-105, afurther well in the area of wellR-103. Both wells R-104 andR-105 have been deferred until theresults and prospects for wellR-103 have been fully evaluated.
Reserves reassessment in the
Rudenkovskoye field areas will awaitthe results of the R-103 multi-fracand the subsequent drillingprogramme.
Poltava production facilities
2010 saw continued improvementsto the Central Production Facility,including:
Commissioning of thereplacement compressor K220early in the year to provide greater
support for gas-lift and productionoptimisation an increasinglyimportant aspect of fieldmanagement.
Commencement of a review intothe efficiency of the surfacefacilities to identify potential
operating improvements.
Implementation of therecommendations of anindependent specialist team todebottleneck the plant andenhance the process facilities.Initial steps included replacementor duplication of some flowlines toreduce back pressure on the wells.Notably, the results for well I-125were significant with gasproduction increasing from
1.9 MMcfd to 2.4 MMcfd and oilproduction from 31 bopd to220 bopd. Further work will beundertaken during the annual fieldshut-down.
Improvements to the sewagetreatment facility at the productionsite are planned for 2011 and therewill be minor improvements to theroads and walkways throughout thefacility.
LPG Plant
Fabrication and construction of theLPG plant commenced during theyear. All the LPG process equipmentis now onsite and installation hascommenced. Installation andconstruction of the storage andloading equipment is also inprogress. Completion is nowexpected in June 2011.
Operational review24
Remaining reservesas at 31st December 2010
Proved Probable Prov+ Prob
Oil 1.2 1.2MMbbl)
Gas 122.3 22.3Bcf)
Oil + Gas 21.6 21.6MMboe)
Rudenkovskoye
LICENCE AREA 86.0km2
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Zaplavskoye
The Zaplavskoye exploration licence
is adjacent to the Molchanovskoyeproduction licence and nowcomprises an area of 137.6sq.km.The permit has been extended for afurther five years until 2014. Inaddition, the area has been extendedby 41.9sq.km and in-fills an areabetween the Novo-Nikolaevskoyeand Ignatovskoye licences whereexisting seismic indicates potentialdrilling targets and extends thewestern flank of the Ignatovskoyefield. The extension also includesthe Shagarivske area to the east ofthe Ignatovskoye field where a100km 2-D seismic programme wasshot in late 2010 ahead ofexploration drilling planned for 2012.The first well in the new block islikely to be in the area to thenorthwest of the Novo-Nikolaevskoye field and will targetVisean sandstone reservoirs alreadyencountered in drilling undertakenby the State in the 1980s.
Chervonoyarske East
The Chervonoyarske Eastexploration licence was acquired inDecember 2005. The licence coversa total area of 5.5sq.km and islocated about 75km from the PPCproduction licences on the northernmargin of the Dnieper-Donets basin.Evaluation of the 42sq.km 3Dseismic survey acquired in 2008supports the interpretation of
potential hydrocarbons trappedagainst the flanks of a major saltwall. However, the cost of drilling tobelow the salt and the geologicalrisks associated with the traps arehigh. Attempts to farm-out thelicence during 2010 wereunsuccessful and the licence wasrelinquished in December 2010.
Elizatovskoye
The Elizavetovskoye exploration
licence is located in the central partof the Dnieper-Donets basin andcovers an area of 70sq.km. It isapproximately 45km from PPCsexisting production licences.Three shut-in production wellson the licence are owned byUkrgasvydobuvannya, a subsidiaryof Naftogaz of Ukraine, the state oiland gas company, and are tied intoits production facility.
Negotiations with
Ukrgasvydobuvannya wereconcluded in 2010 and enabledPPC to start preparations fordrilling its own production wellsin the field.
Plans have been prepared for thedrilling of a single well and theinstallation of basic separator anddehydration equipment tied to thelocal branch gas line via a hot tap.The project is currently scheduledto commence in early 2012.
The hot tap installation isscheduled to be carried out byUkrainian specialists in the secondquarter of 2011 as an essentialpre-requisite of the rest of theprogramme.
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1
0
2
3
4
5
6
Upper
Jurassic
Middle
Jurassic
CretaceousOxfordian
Gas
Reservoir
CallovianGas
Reservoir
The Koshekhablskoye field islocated in the southern Russianautonomous Republic of Adygea.The licence covers an area of32.7sq.km The field is showngraphically below, with a NW/SEcross section.
RUSSIA
All measurements are in Kilometres.
Koshekhablskoye field
Operational review26
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JKX completed the purchase ofYuzhgazenergie LLC (YGE) inNovember 2007. YGE holds thelicence for the redevelopment of
the Koshekhablskoye gas fieldwhich is located in the southernRussian autonomous Republic ofAdygea. The licence covers an areaof 32.7sq.km.
The field was discovered in 1972 andproduced a total 89 Bcf of gas beforeoperations were suspended inJanuary 2006. In June 2006, YGEwas granted a new 20 year licenceto rehabilitate and further appraiseand develop the field.
Following the acquisition,the detailed technical andenvironmental re-evaluation byJKX concluded that the existingproduction facility would have tobe completely replaced because itcould meet neither the new gasspecification required for entry tothe Gazprom transit system northe environmental standard foremissions to the immediateenvironment.
The focus during 2010 was oncontinuing the workover of wells toensure that the Gas ProcessingFacility (GPF) would be broughton-stream at full capacity and
completing the construction of theprocessing plant to ensure thatconstruction and commissioning of
the complete facility could becompleted for first gas in theAutumn of 2011, delayed from ourprevious mid-year target.
During the period, YGE:
Completed the workover,sidetracking and successfultesting of Well-20 at a final flowrate of 22.6 MMcfd of gas and25 bcpd through a 60/64" chokewith a flowing wellhead pressureof 1,510 psi.
Re-entered Well-25 on the northflank of the field using theGeostream KES-536 rig, andrecovered the remainder of thetubing. Drilling of the 260msidetrack into the limestonereservoir kicked-off at 5,490mwith a targeted TD of 5,760m.Completion and testing isscheduled for the beginningof the second quarter.
Initiated milling and fishingoperations on Well-26 andsuspended operations afterrecovering 314m of fish with1,375m remaining. It is plannedto return with a smaller rig tocomplete fishing moreeconomically.
Completed fishing on Well-15,deep on the east flank of the field,and drilled a sidetrack to a depthof 5,755m with strong gas showsand encouraging logs.
Disappointingly, the sidetrackedwell bore did not stay open duringtesting with an obstructionpreventing deployment of thecoiled tubing to TD in the openhole section. Due to the prioritygiven to the other wells in the firstphase programme, remedialaction (which may include a newsidetrack to a more geologicallyprospective part of the field) willbe undertaken as part of thesecond phase of well
recompletions later in 2012.
Recovered tubing from theCallovian appraisal Well-09 to adepth of 5,312m using the
Russia update
Completed:We initiated and in many cases
completed a range of
workovers, tests and fishing
operations. The GPF plant was
fabricated and shipped, with
installation well underway
before the year-end.
Planned:
First commercial gas production
is scheduled for the Autumn.
We aim to have three wells in
production at start-up, with
further wells being broughton-stream in 2012.
Maikop
Koshekhablskoye
THE
BLACK SEA
Remaining reservesas at 31st December 2010
roved Probable Prov+ Prob
Oil 0.2 0.1 0.3(MMbbl)
Gas 114.0 153.0 267.0(Bcf)
Oil + Gas 19.2 25.6 44.8(MMboe)
Koshekhablskoye
LICENCE AREA 32.7km2
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Russia continued
Kremco-900 rig. Preparations arecurrently underway to sidetrackthe well through the Callovian
sandstone reservoirs to a TD of5,500m. Completion and testing ofWell-09 is now scheduled for thefourth quarter of the year.
Commenced fishing operations onCallovian exploration Well-22using a lightweight A-125 rig.The well has been suspended at4,885m awaiting mobilisation ofthe Geostream KES-536 rig todeepen the well to 5,570m in theCallovian sandstone reservoirs.
Completion and testing of Well-22is scheduled for the fourth quarterof the year.
Completed the laying ofreplacement flowlines for thewhole field, installation of theexport line and the tie-in to thelocal trunk line.
Completed the construction andhook up of additional temporaryfield camps to house constructionworkers and drilling teams.
Fabrication of key components ofthe GPF plant in Sharjah wascompleted during the last quarterof 2010 with the final shipmentleaving port at the end ofDecember, slightly ahead ofschedule. All equipment has nowbeen off-loaded and clearedthrough customs in the Russianport of Novorossiysk, some 300kmfrom the field, and transported tothe site. Foundations for theequipment are in place and theconstruction teams have beguninstallation.
Installation and construction oflocally sourced equipment andbuildings is nearing completionwith hook-up and commissioningof the plant scheduled tocommence by the end of thefirst quarter.
First commercial gas productionis scheduled for autumn 2011.
The workover programme hasencountered difficult conditions insome of the wells, and the
programme has been revised toensure that production will meetthe targets for the GPF as
commissioning begins in the secondquarter. The goal is to have threewells in production at start-up withfurther wells being broughton-stream in the second phase ofworkovers in 2012.
Field exploration and appraisalJKX inherited a YGE obligation todrill an exploration well to appraisethe production potential of theunderlying Callovian sandstonereservoir. YGE has subsequently
undertaken a significant amount ofexploration and appraisal activity onthis reservoir including:
Acquisition, processing andinterpretation of the 3D seismic.
Integration of the maps with acomplete re-evaluation of the welllogs and other geological data todetermine reservoir distributionand the potential resources in theCallovian sandstone.
Acquisition of the shut-in Callovianproduction Well-09 for earlytesting.
In recognition of YGEs commitmentto the exploration programme andthe high cost of deep drilling, theRussian State Geological Instituteresponsible for the YGE ongoingexploration and appraisalprogramme accepted the Companysproposal to deepen an existing dryOxfordian appraisal well (Well-22) tothe Callovian reservoir in order toreduce significantly the overall costof the project. The testing of theCallovian V unit in Well-09 and thedeepening and evaluation ofCallovian zones I-V in Well-22 will beconcluded later in 2011.
Russian ReservesFollowing the results of the Well-27test, the production characteristicsof the field were revised andthe material balance reserves
forecast reassessed. This resultedin a revision of the P+P reservesto 44.8 MMboe during 2009.The Oxfordian reserves will be
reassessed (as a licence obligation)later this year once the results of theWell-25 testing can be incorporated.
Callovian reserves are dependent onthe results from Well-09 andWell-22, and will be revised in 2012.
In addition, YGE has received a letterof assurance from the Russianauthorities confirming that any fieldreserves lying outside the licenceboundary could be included in arevised licence area (provided thisdid not exceed 125% of the existinglicence). This permits YGE toincrease the field reserves by up
to a further 40% when the licencehas been formally extended and isscheduled to occur after first gasproduction.
Operational review28
Right: Since year-end
2010 the pace of the
Gas Processing Facility
construction hasincreased significantly,
as pre-constructed
components have
arrived on-site.
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1
0
2
3
4
Middle
Miocene
GasReservoir
Gas
Reservoir
Upper
Miocene
Oil
Reservoir
Within our Hungarian portfolio allproduction currently comes from theHajdunanas area of the Hernad/Nyirseg licences. The Hajdunanasarea is shown graphically below,with a N/S cross section.
HUNGARY
All measurements are in Kilometres.
Hernad field
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JKX holds 50% equity in thenorthern Pannonian Basin Hernadlicences in a joint venture with theoperator, Hungarian Horizon
Energy (HHE). The Hernad Ilicence covers 2,903sq.km andthe Hernad II licence covers2,507sq.km. The Pannonian Basincomprises numerous sub-basinsdeveloped across Hungary,Slovenia and Romania. It isprospective for gas and oil, andexploration risk can be reduced bythe use of seismic data attributes(amplitude versus offset or AVO)and calibrated well log data.The post-rift sequence contains
channelised and lobe turbiditesand reservoirs in combinedstructural/stratigraphic traps.Miocene age pro-delta shalesprovide the source for the gasand condensates.
HajdunanasThe Hajdunanas Field wasdiscovered in May 2008 withsuccessful gas tests from threelevels in well Hn-1. The discoverywas confirmed by a second wellHn-2 which encountered a thickersequence of Pannonian sands. Thereservoirs include two Pannoniansand intervals and a Miocene
fractured volcanoclastic sequence.Gas quality is excellent and requiresminimal processing before export.
The Gorbehaza discovery well Gh-1in the Nyirseg licence has been tiedin the Hajdunanas facility.
Following the successful workoverof the Hn-2 well and recompletionof the Gh-1 well in the fourthquarter of 2010, current grossproduction is approximately7 MMcfd of gas and 180 bcpd.
The field operator, HHE, and JKXare planning a 20% increase inproduction in the second quarter
of the year.
The local gas market remainsstrong with 2011 realisations todate in excess of $10 /Mcf.
Hajdunanas ReservesNo changes have been made to theHajdunanas reserves in 2010. Theeffects of the minor water influx,now successfully shut-off, are beingevaluated.
Further Hernad exploration activity The Tiszavasvari-6 well was drilled
in the second quarter of 2010 andtested during January 2011. Thewell encountered a 300m grossreservoir interval with excellentgas shows in the deepersecondary target below 2,580m.Three reservoir intervals weretested with a maximum rate of1.5 MMcfd being recorded. Thewell has been suspended inanticipation of a possible reservoir
stimulation programme. A larger tilted fault block structure
with amplitude supported LowerPannonian reservoir intervals liesupdip from the first structure andis estimated to contain an initialgas in place of between 50 and150 BCF. Appraisal drilling isscheduled for the second quarterof 2011.
Additional amplitude supportedexploration targets in Upper
Pannonian shallow water sandshave been identified to thenorth-east of the Hajdunanas GasFacility. Permitting is underway for
Hungary update
Completed:Our operations progressed well
with production increasing in
Hajdunanas supported by the
tie-in of the Gorbehaza-1
discovery. Gas has been tested
in the Tizsavasvari-6 and
Nyekpuszta-2 exploration wells.
Planned:
Together with the field operator,
we are planning a 20% increase
in production at Hajdunanas
during the second quarter of the
year. Further appraisal of theTizsavasvari-6 and
Nyekpuszta-2 exploration wells
are scheduled for 2011.
Budapest
Hernad
Turkeve Veszto
Remaining reservesas at 31st December 2010
roved Probable Prov+ Prob
Oil 0.0 0.2 0.2(MMbbl)
Gas 0.9 5.3 6.2(Bcf)
Oil + Gas 0.2 1.0 1.2(MMboe)
Hernad
LICENCE AREA 5,410km2
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Hungary continued
a test of a three way dip and faultclosed structure with a TD ofapproximately 800m. Numerous
low risk but small additionalprospects would be de-riskedby a successful well.
The Tiszatarjan-1 exploration well,approximately 12km from theHajdunanas field, remainssuspended as an oil discovery,pending a forward programmeof formation stimulation.
A further 300sq.km 3D seismicdata acquisition is planned for theJaszsag area in the south of the
Hernad II licence during the firsthalf of 2011.
Nyirseg
JKX farmed-in for a 33.3% interestin 120sq.km of the adjacent Nyirseglicence operated by PetroHungariain late 2008.
JKX subsequently increased itsholding to 50%, as did HHE, bybuying out the minority partners.
The first well Gorbehaza-1 tested3.74 MMcfd of gas and 20 bcpdand has been tied into theHajdunanas gas production facilitysome 2.5km away.
First gas was achieved in August2010.
The offset Gorbehaza-5 well,drilled in early 2010, was waterbearing and has been completedas a potential water disposal well
for the Hajdunanas facility.
Veszto
In March 2009, JKX farmed-in for a25% interest in a 15.6sq.km area ofthe Veszto exploration licence heldby HHE in the eastern PannonianBasin. A 3D seismic survey coveringthe entire 219sq.km licence hasbeen completed and interpreted withtwo prospects identified.
Following abandonment of theNyekpuszta-1 well because ofunexpected high pressures(12,000psi) and temperatures
(175C), the Nyekpuszta-2 appraisalwell was successfully drilled to3,695m in late 2009. The well
encountered a gross hydrocarboncolumn of 85m and was fracturestimulated and tested in 2010.Despite flow rates being constrainedby the abrasion due to returningproppant, the rates were initiallysteady at 2.0 MMcfd and 600 bpd oil/condensate with a FWHP of4,500 psi. However, this rate wasnot sustained through the twomonth test period. After a onemonth final shut-in, reservoirpressure built back to original levels.
The slow build up indicates a lowpermeability connection of the mainreservoir volume to the fraccedinterval. It has been concluded thatthis potentially very large (200Bcf)structure will require additionalappraisal drilling and formationstimulation.
JKX and HHE continue theevaluation of the prospect specificand regional structural model in thelight of the extended test results
from the Nyekpuszta-2 well.A further well is planned for thethird quarter of 2011.
In addition to the testing andcompletion of the Nyekpuszta-2well, activity under consideration for2011 includes evaluation of a similarprospect within the Veszto Licencein which JKX has an option toparticipate.
Turkeve Acreage
JKX has entered into an agreementwith HHE to farm-in to the drilling ofup to seven wells located in theTurkeve area of north east Hungary.Under the terms of the agreement,JKX funds 66.67% of drilling andcompletion costs to earn 50% offuture mining plots formed todevelop discoveries, and also funds75% of pipeline connection costs.There has been one encouragingresult out of the five wells drilled to
date and a tie-back to existingfacilities is planned for the secondquarter. The remaining two wellswill also be drilled in the secondquarter.
Operational review32
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REST OF WORLD
Bulgaria
JKX (40% and operator) operatestwo onshore exploration permits,B Golitza and B1 Golitza, covering atotal of 3,355sq.km in easternBulgaria. The licences include thearea of the Kamchia Trough, anonshore extension of the Tertiaryage western Black Sea Basin, whichis now the subject of reneweddeepwater exploration activity.
The 2009 seismic data acquisition of250sq.km 3D was completed in theKamchia Trough, south of the townof Varna. The initial interpretationrevealed several prospects and atwo well drilling campaign began inthe third quarter of 2010.
The Staro Oryahovo South R-01exploration well was drilled to atotal depth of 1,875m. Gas showswere encountered during drillingof the target Avren Formationsubmarine fan sandstones, but
subsequent log analysisdemonstrated that the target waswater wet. The well was pluggedand abandoned.
The Shkorpilovtci South West R-01exploration well was drilled to atotal depth of 837m and wasplugged and abandoned.Significant gas shows wereobserved during drilling of boththe primary target AvrenFormation channel sand complex
and the underlying secondarytarget Dvoynitca Formationsandstones. However, wirelinedata in the Avren Formationindicated poor reservoirpermeability, and consequently awell test was not performed. Thewell appeared to have encountereda channel margin in this locationand the shallow depth to theprimary target precluded ageological sidetrack. The highlylaminated underlying secondary
reservoir was determined to bewater wet.
The lack of success of both recentGolitza wells was disappointing,but JKX and its co-venturers believe
they can integrate the informationfrom these wells with the 3D seismicto high-grade further explorationtargets within the Avren Formation.
Slovakia
In 2008, the Company farmed-in fora 25% interest in the Svidnik,Medzilaborce and Snina explorationlicences, covering a total area of2,278sq.km in the Carpathian Fold
Belt in north east Slovakia.Acquisition of 346km of 2D seismicdata in 2008/2009 provided basicregional information in the twoeastern licences, as well as infilldata in the western Svidnik licence.
In 2010, a further 150km of 2Dseismic data were acquired to firmup leads identified in the 2008/2009surveys. A structure has beenconfirmed in the vicinity of theSmilno discovery well in the Svidniklicence, and plans are being madefor drilling an exploration well,possibly in the latter part of 2011.Further regional seismic dataacquisition is planned for the thirdquarter of 2011.
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Financial review
Bruce Burrows
Finance Director
Financial review34
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Profit for the yearThe profit after tax for 2010 was$21.2m (2009: $85.3m) although,
excluding the impact of thenon-cash exceptional item of$74.6m and the resulting deferredtax credit of $14.5m, the profit aftertax is $81.3m. The impact of theexceptional item is further discussedbelow. The basic earnings per sharewas 12.38 cents per share (2009:54.23 cents per share) or, excludingthe impact of the impairmentprovision, was 47.56 cents per share.
Revenue
Total revenues of $192.9m weredown 2% (2009: $196.5m), a directresult of an 11% decrease inproduction offset by a 28% increasein oil price and 6% increase in gasprice. The average oil price achievedwas $69.15/bbl (2009: $53.90/bbl)with a gas price achieved of $7.59/Mcf (2009: $7.19/Mcf).
Operating profitThe combined cost of sales andgeneral administrative costs andloss on foreign exchange, beforeimpairment, exceptional item andprofit on sale of assets, were 13%higher at $84.2m (2009: $74.4m)comprising:
Depreciation, depletion andamortisation which increasedslightly to $33.2m (2009: $32.8m)despite the 11% drop inproduction, a function of thegreater production contribution in2010 from proportionally higher
capital expenditure fields inHungary and Rudenkovskoyein Ukraine.
Production related taxes, whichincreased 30% in the period to$5.2m (2009: $4.0m), mainlybecause of a greater contributionfrom Hungary which accounted for7% of production and 45% ofproduction related taxes.
Underlying operating costs (costof sales less DD&A, impairment,
exceptional item and productionbased taxes) declined 13% on lastyear to $17.9m (2009: $20.6m),due to savings and ongoingefficiencies being achieved in
operations. However, underlyingoperating costs combined withgeneral and administrative
expenses increased 22% duringthe period from $35.3m to $43.2m.This represents significant one offcorporate costs in Ukraine alongwith increased expenditureassociated with staffing upthe Russian subsidiaryYuzhgazenergie, and a number ofone off expenditures in our periodof transition from projectdevelopment towards an operatingcompany. The net loss on foreignexchange of $2.6m was up 13%
(2009: $2.3m).
Provisions for impairment of fixedassets and write-off of explorationcosts of $13.7m (2009: $5.0m)recognises the write off of Ukrainianexploration well Zaplavskoye 3($6.2m) and licence costs for therecently relinquishedChervonoyarske licence ($1.0m).Additionally, the Group wrote offduring the period its share of twoexploration wells in Bulgaria ($1.7m)
and one in Hungary ($1.9m).A provision was also made foran asset which was previouslyheld for Russia of $2.9m.
The exceptional item relates to animpairment provision taken on ourRussia asset, the details of this aredocumented below and within note5(e) and 5(f) of the financialstatements.
ImpairmentA review was undertaken at thebalance sheet date to determinewhether there was any indication oftriggers that may have led to anyassets requiring an impairmentreview. Following this review, animpairment trigger was noted inrelation to Yuzhgazenergie (YGE) inRussia and Poltava PetroleumCompany (PPC) in Ukraine. Havingundertaken the review, it wasconcluded that PPCs Novo-Nikolaevskoye complex was not
impaired.An impairment review wasundertaken for YGE.
2010 was a year of significantcapital expenditure
underpinned by continued solidoperating cash flow, mostimportantly from our Ukrainiansubsidiary Poltava PetroleumCompany (PPC). Whilstproduction decreased as aconsequence of delay inmobilising a second rig toUkraine, increasedinternational commodity prices,combined with effectiveoperational cost control,resulted in the second highest
operating cash flow generationin the Groups history.
Revenue oil ($m)
+3%
92.8
06
122.5
07
121.8
08
76.4
09
78.8
10
Revenue gas ($m)
-4%
59.4
07
83.1
08
118.1
09
112.9
10
37.7
06
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Financial review continued
Financial review36
The development plan andproduction profile have continued tobe refined since the 2007 acquisition
of YGE. First gas sales from theproject are now expected autumn2011, three years later than planned,and the anticipated convergence ofAdygean gas prices to net backEuropean levels is now delayed to2017. The current level of gas pricesin Russia are also lower than thoseanticipated in March 2010.
The key assumptions used in theimpairment testing were:
Production profiles based on
latest information provided byindependent reserve engineers,such information including 2Preserves (44.8 MMboe) and 3P andcontingent resources.
Economic life of field (expected tobe around 2032).
Gas prices based on the RussianGovernments intention to achievenet-back convergence with theEuropean gas markets which theGroup has assumed as occurringin 2017 (2009: 2015).
Capital and operating costs: basedon project estimates.
Post tax Rouble discount rate of13.5% (2009: 15.9%).
The changes in the key assumptionsused from previous periods haveresulted in the asset being impairedby $74.6m. No value was attributedto 3P and contingent resources.The main driver of the impairment
has been lower sales pricesanticipated in the early yearstogether with a longer period before
net back European gas price parityis achieved. The Group hasrecognised the impairment chargeas an exceptional provision withinthe accounts.
TaxationThe effective tax rate for the Groupin 2010 was (1.8%) (2009: 28.5%).The significant reduction resultsfrom three main factors: deferredtax effect of $14.5m in relation to the$74.6m Russian asset exceptional
item; the recognition of a deferredtax asset in the UK; and reducedcurrent tax on core Ukrainianoperations resulting from reducedtaxable income.
DividendThe Board proposes a final dividendof 2.6 pence per share (2009:2.7 pence per share) giving a fullyear dividend of 5.0 pence per share(2009: 5.0 pence per share). Theproposed dividend will berecognised when paid.
The Board has decided that notincreasing the full year dividend isappropriate, following the continuedextensive capital investment in theGroups YGE redevelopment projectin southern Russia, coupled with thecash impact of rental payments inUkraine following the 1st January2011 introduction of Ukraines newtax code.
Less than Between Between OverMaturity of financial liabilities1 year 1 and 2 years 2 and 5 years 5 years$000 $000 $000 $000
At 31st December 2010
Trade and other payables 51,369
Deferred consideration, due within one year 2,000
53,369
At 31st December 2009
Trade and other payables 36,018
Deferred consideration, due after one year 5,000
41,018
Realisations Oil ($ per bbl)
+28%
60.37
07
84.34
08
53.90
09
54.31
06
69.15
10
Realisations Gas ($ per Mcf)
+6%
3.95
07
5.47
08
7.19
09
2.83
06
7.59
10
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Cash flow/Net cashNet cash from operating activities(after tax payments of $28.5m) was$117.7m, which is 7% lower than the
previous year (2009: $126.5m). Thisreflects the lower PPC production inthe period partially offset by highercommodity prices. There was an81% increase in total net cash usedin investing activities to $175.1m(2009: $96.7m). This was due to theincreased capital expenditures to$172.8m (2009: $108.7m) mainly onthe continued development of PPCslicences in Ukraine, the YGEredevelopment of theKoshekhablskoye field in south west
Russia, and the Groups growingHungarian asset portfolio.
The Group raised funds in February2010 via a share placing which,
Capital expenditure
Total capital expenditure increasedin 2010 by 66%. The mix reflectsthe increased investment in theGroups Russian project whichaccounted for 60% of totalinvestment (2009: 39%).
instruments is to finance theGroups operations.
Foreign exchange risk sensitivitiesIf as at 31st December the UkrainianHryvna had strengthened/(weakened) by 10% against the USDollar with all other variables heldconstant, post-tax profit for the yearwould have been $0.4m (2009:$0.1m) higher/lower, mainly as aresult of Hryvna denominated gastrade receivables, cash balancesand trade payables, and the foreignexchange in equity would have been
$0.1m higher/lower (2009: remainedthe same).
If as at 31st December the RussianRouble had strengthened/(weakened) by 10% against the USDollar with all other variables heldconstant, equity would haveincreased/decreased by $0.5m(2009: $0.1m) mainly as a result ofcash balances and trade payables.
If as at 31st December the Euro hadstrengthened/(weakened) by 10%against the US Dollar with all othervariables held constant, post-taxprofit for the year would have been$0.3m (2009: $0.1m) higher/lower,and the foreign exchange in equitywould have increased/decreasedby $0.7m (2009: $0.1m) mainly asa result of trade receivable andcash balances.
If as at 31st December Sterling hadstrengthened/(weakened) by 10%against the US Dollar with all other
variables held constant, post-taxprofit for the year would have been$2.5m (2009:$4.7m) higher/lower,mainly as a result of Sterlingdenominated trade receivables, cashbalances and trade payables, andthe foreign exchange in equity wouldhave been $2.0m (2009:$0.3m)higher/lower.
Fair value interest rate risk sensitivitiesAt 31st December 2010, if interest
rates had increased by 10% with allother variables held constant,post-tax profit would have remainedthe same (2009: remained the same).
together with share optionsexercised, resulted in a $58.4m cashinflow from financing. The dividendspaid in the year were $13.2m
(2009: $12.3m).The Group is confident in beingsufficiently funded to meet thecapital commitments of its currentdevelopment programmes. Thisconfidence comes from the Groupscurrent cash position and positiveoperating cash flows.
Financial instrumentsThe Groups financial instrumentscomprise cash and liquid resources,various items such as trade andother receivables, and trade andother payables that arise directlyfrom its operations. The mainpurpose of these financial
Production costs ($ per boe)
-2%
4.01
07
5.97
08
4.85
09
3.83
06
4.74
10
Net profit before
exceptional item ($m)
-5%
74.4
07
78.2
08
85.3
09
77.8
06
81.3
10
Exceptionalitem:$60.1m(net of taxeffect)
Ukraine$56.1m31%
Russia$107.8m60%
Hungary$9.9m6%
Rest of world$4.7m3%
Total: $178.5m
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Procurementand contractmanagement
Financial review
Whats therisk?
Definition Probability
Reservoirperformance
he hydrocarbon reservoirs that generate production and cash flow to underpinhe Groups growth may not perform as expected, exposing the Group to lower
profits and challenges in funding planned development. Accordingly, forecastreservoir performance is critical in deciding on development options for specificassets, as well as allocation of resources generally across the Group.
Capitalexpenditure
he Group operates in a capital intensive business requiring long lead timeinvestment decisions. Deviations in forecasts of timing and quantum of explorationand development expenditures can expose the Group to funding challenges and to
projects which may have diminished or negative economic return. Such deviationscan result from a number of causes, including general economic and industryspecific cost inflation, variations in foreign exchange rates, deficient projectplanning and monitoring of project spend.
he Group is exposed to international oil and gas price movements.he Group is a price taker and does not enter into hedge agreements unless
required for borrowing purposes.
nability to negotiate and manage purchases and contracts can increase costs tohe Group and/or cause delays to project completions and operations, negatively
impacting production, cash flow and value generation.
Commodityprices
Risks we face and how we manage them
The Groups business of oil andgas exploration and productionand its chosen area of operation,
central and eastern Europe,dictates that it is exposed to abroad range of risks.
The Groups approach to thisspectrum of risk is to monitor andmitigate identified risks and then
actively manage them to the extentpossible to minimise potentialadverse effects on the Groupsfinancial performance.
Risk management is carried outby designated individuals underpolicies and procedures
approved, reviewed and managedby the Board of Directors.An annual review of the Groupssystem of internal control is
MED
MED
MED
LOW
LOWCapitalmanagement
An optimal capital structure should be maintained for the Group to continuemaximising returns for shareholders and benefits to other stakeholders. Failureo manage the capital structure could reduce stakeholder returns and, in extreme
circumstances, impact the Groups ability to operate as a going concern.
38
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How we manage itPotentialimpact
As it has evolved, the Group has continued to recruit specialist and industry recognisedpersonnel and consultants to model, monitor and manage reservoir performance. Increased levels of
local operating experience both within and external to the Group assist in further mitigating this risk.The Group manages its key activities in Ukraine and Russia via strong local operating companies thathave been developed and staffed with skilled personnel. The interaction between local and London basedspecialists and third party consultants is key to operational risk management. The continued intra-regional diversification of interests (highlighted by Russian and Hungarian development participations)has aided in spreading this risk away from the previous very high concentration in Ukraine. With theincreased diversification in assets, the Group has also expanded its UK technical team to ensureknowledge transfer to and between operating companies and the consistent application of the Groupsstrategic technical methodology.
The Group operates its key interests in Ukraine and Russia via strong local operating companies, whointeract with London based Group specialists, as well as UK and locally based contracted specialists tomaximise project management capability. For individual capital projects which are material to the Group,
Project Management teams are created to oversee planning and implementation. Recent examples ofsuch teams include those established at the Rudenkovskoye development in Ukraine, and at theKoshekhablskoye workover programme and gas processing facility construction in Russia. These projectmanagement teams report to stakeholder groups comprising senior management and other appropriateproject related staff and contractors.
Most of the Groups gas sold in Ukraine and its share of Hungarian gas sales is through market relatedcontracts to significant and creditworthy customers. This is intended to minimise exposure to abruptprice movements, ensuring sales are as closely matched as possible, in terms of timing and volume, toproduction. The balance of oil and gas production in Ukraine is sold by way of auctions, conducted with arequency aimed to achieve as close as practicable the aforementioned matching principle. The Groups
Russian gas production, scheduled to commence in autumn 2011, is intended to be sold on a similar
basis to the bulk of Ukranian production, being to large credit worthy customers on contracts at marketrelated prices.
The Group operates policies, procedures and controls intended to regularise procurement within strictlevels of delegated authority. All significant purchases are tendered. Each operating entity manages aschedule of approved suppliers. All contracts are constructed specifically or in accordance withtemplates, targeted at the jurisdictions of supply and delivery, taking account of reviews of both internallawyers and, where dictated by procedure, by third party legal advisors.
HIGH
HIGH
MED
MED
LOW
Capital management is monitored by the Finance Director in accordance with policies and proceduresapproved by the Board. It is also assessed and monitored by the Groups financial advisor and by theBoard. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends
paid to shareholders, return capital to shareholders, issue new shares, sell assets, or obtain borrowingsrom third parties. Two recent material examples of managing the Groups capital structure have been the
February 2010 share placing ($58.4m net) and the concluding of a $15.0m draw-down facility for PPC inUkraine with Credit Agricole CIB Ukraine.
conducted by the AuditCommittee, along with a reviewat each meeting of the Audit
Committee of the Group risklandscape and management.
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Risks we face and how we manage them continued
Financial review40
Cash flowand interestrate exposure
Credit
Liquidity
Health, safety,environment& communityrelations
Productionlicences
Countryexposure
he Company operates in a variety of emerging markets where the accounting,ax and legal environment and the application of laws and regulations are
constantly evolving. New laws can come into effect at times which can conflictwith others and, therefore, are subject to varying interpretations and changeswhich may be applied retrospectively. This can result in the Group be