30
substantial downward revisions based on the results of subsequent drilling, testing and production, or as a result of
changes in oil and gas prices or operating costs or other economic factors which are beyond the Group’s ability to predict
or control. Any such downward revisions may indicate lower future production, adversely affecting the Group’s financial
condition and the present value of its reserves and resources. Downward revisions in reserve levels may also result in
impairment losses, impacting the Group’s reported operating profit. In 2013, for example, the Group recognised a net
impairment loss of $236.9 million, of which $89.0 million related to the Group’s operations in Russia and $147.9 million
related to the Group’s operations in Ukraine, as a result of a downward adjustment in the Group’s assessment of its
commercially recoverable reserves from these assets, and reflecting an estimated revision of their value down to an
estimated disposal value totalling $15.0 million, which was subsequently reduced to $14.5 million as at 31 March 2014.
Fluctuations in the estimates of the Group’s reserves may also affect its ability to raise capital for future exploration,
appraisal and development.
In particular, potential investors should note the following:
The reserves and resources estimates as at 31 May 2014 were calculated using forecast prices for hydrocarbons
in effect as at that date. As a result, changes in the future price of hydrocarbons, if below the projected prices
used to estimate the Group’s reserves and resources, may materially adversely affect the estimates of the
Group’s reserves and resources, as well as estimates of the net present value of future cash flows.
Evaluations of reserves and resources necessarily involve multiple uncertainties, and the accuracy of any
reserves or resources evaluation depends on the quality of available information and on petroleum engineering
and geological interpretation. Exploration and appraisal drilling, geophysical and geological interpretation and
modelling, interpretation and testing, and production after the date of the estimates may require substantial
downward revisions in the Group’s reserves or resources data, for example as a result of geological features in
hydrocarbon reservoirs which prove to be less favourable in terms of location, shape, size or in other respects
than those which are estimated and assumed in the Group’s model. Estimates of reserves and resources may also
change because of acquisitions and disposals, new discoveries and extensions of existing fields as well as the
application of improved recovery techniques. Poor data quality from certain fields, particularly when such data
are old and in need of updating, will increase the uncertainty of reserve and resource estimates for a given field.
Different reservoir engineers may make different estimates of reserves, resources and cash flows based on the
same available data. Actual production, revenues and expenditures with respect to reserves and resources may
vary from estimates, and the differences may be material.
The Group’s reserves and resources evaluations are based in part on the assumed success of exploration,
appraisal and development activities it intends to undertake in future years as part of the Group’s capital
expenditure plans. The reserves and resources and estimated cash flows to be derived therefrom contained in the
Group’s estimates will be reduced to the extent that the Group’s planned exploration, appraisal and development
activities do not achieve the level of success assumed in the evaluations.
Certain categories of reserves (probable and possible reserves) are inherently less certain than other categories
(proved reserves). See “
Presentation of Financial and Other Information—Reserves and Resources Reporting—
Basis of Preparation
”. Results of drilling, testing and production subsequent to the date of an estimate may
result in revisions to the original estimates and, as a consequence, could have the effect of altering the Group’s
recoverable reserves, potentially leading to material unfavourable classification changes from proved to
probable or possible or from probable to possible, or from possible to a contingent resource. The estimates
underlying the categorisation of the Group’s reserves include a number of assumptions related to factors such as
initial production rates, production decline rates, the likelihood and amount of the ultimate recovery of reserves,
timing and amount of capital expenditure, marketability of production, future prices of oil and gas and operating
costs, among others. These assumptions were based on price forecasts in use at 31 May 2014, the date the
relevant evaluations were prepared, and many of these assumptions are subject to change according to factors
which are beyond the control of the Group. Actual production, capital expenditure and cash flows derived
therefrom will vary from these estimates and evaluations and such variations could be material.
In estimating and/or auditing the Group’s reserves and resources, GCA has applied forecast discounts to the
relevant benchmark oil price, Brent Crude in most cases, to account for local market conditions, the terms of the
Group’s various sales and marketing agreements in various jurisdictions, and other factors. If actual production
achieved and sold in these jurisdictions is sold at a greater discount to the benchmark oil price than was used in
these forecasts, the Group’s reserves and resources could be subject to downward revision, which could be
material.
