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expenses, the Group must make assumptions about a range of geological, technical and economic factors, including
quantities, grades, production techniques, recovery rates, production costs, transport costs, commodity demand,
commodity prices, exchange rates and the contractual terms of the concessions (such as terminations, renewals or
changes in provisions). If these assumptions are significantly incorrect, it could result in depletion expenses that are
higher or lower than anticipated, and affect the Group’s results of operations. See “
—Material factors affecting results of
operations.
”
Impairment of property, plant and equipment
The Group assesses its property, plant and equipment for possible impairment when facts and circumstances indicate to
the Directors that the carrying value of the assets may exceed its recoverable amount. Such indicators include, but are not
limited to, whether the carrying value of the property, plant and equipment assets exceeds the discounted estimated
future cash flows generated by the assets. Determination of these future cash flows involves the Directors’ estimates on
highly uncertain matters such as future commodity prices, the effects of inflation and technology improvements on
operating costs, production profiles and the outlook for supply-and-demand conditions for oil, natural gas and
condensate.
In the event the Directors’ estimate of the discounted estimated cash flows generated by the assets are less than the
carrying value of the assets, an impairment charge to the Group’s consolidated income statement is made for the
difference. Charges for impairment may be recognised in the Group’s results from time to time as a result of, among
other factors, adverse changes in the recoverable reserves from oil and gas fields, adverse changes to commodity prices
or increases in costs. If there are low gas prices or oil prices over an extended period, the Group may need to recognise
significant impairment charges.
Fair value gain or loss on convertible loans
Under IFRS, the value of the conversion options within the Group’s Convertible Loans are treated as embedded
derivatives which have been determined not to be closely related to the loan arrangements. As a result the Group has
opted to recognise the convertible loans as financial liabilities at fair value through the income statement. Any change
in the fair value of the Convertible Loans during a period which results from a change in the forecasted cash flows is
recognized in the Group’s consolidated income statement as fair value gain or loss on convertible loans. The Group uses
a discounted cash flow technique to determine the fair value of the Convertible Loans. The significant inputs considered
in the valuation are likelihood and timing of a qualifying IPO (as defined in the Convertible Loans) offering and the
discount rate. The discount rate currently in use by the Group is in the range of 15-17%. A significant change in the
Issuer’s estimate of the timing of a qualifying IPO or in the discount rate applied by the Group could have a material
impact on the fair value gain or loss incurred by the Group in any given period. If the Issuer extends its estimate of the
timing of a qualifying IPO, then the Group will recognize a fair value loss on the Convertible Loans.
Quantitative and qualitative disclosures about market risks
Market risk is the risk that changes in market values will affect the Group’s income or the value of its assets or liabilities.
The Group’s primary market risk exposures are fluctuations in oil, natural gas and condensate prices, credit risk,
exchange rate risk, interest rate risk, liquidity risk and inflation risk.
Commodity price risk
The sells its production of crude oil and natural under short term arrangements priced in US dollars at prevailing market
prices. Price fluctuations in global and regional prices for crude oil and, to a lesser extent, on natural gas and condensate,
may have considerable impact on the Group’s revenues and operating cash flows. See “
—Material factors affecting
results of operations.
” The commodity price risk related to fluctuations in the Brent Crude benchmark price is the
Group’s most significant market risk exposures. World prices for crude oil, natural gas and condensate are characterised
by significant fluctuations that are determined by the global balance of supply and demand and worldwide political
developments, including actions taken by the Organisation of Petroleum Exporting Countries. These fluctuations may
have a significant effect on the Group’s revenues and operating cash flows going forward.
The Group does not currently hedge against fluctuations in prices for crude oil.
Credit risk
The Group is exposed to credit risk of default by its counterparties principally with respect to its trade and other
receivables. The Group’s trade receivables balance as at 31 March 2014 consist predominately of receivables related to
oil sales in Egypt to EGPC, the Group’s largest counterparty. As at 31 March 2014, the total amount of receivables due
