33
initial exploration efforts result in one or more dry wells in a given asset, the Group may opt to forgo drilling appraisal
wells and relinquish its licensing rights with regard to that asset, resulting in the loss of previously spent exploration
capital expenditure, the forfeiture of cost recovery prospects for that field, the loss of potential future revenue and value,
and, potentially, impairment losses on the Group’s consolidated balance sheet. For example, the Group wrote off $47.8
million in exploration expenditure in 2013, primarily attributable to the Group’s operations in Latvia, where the Group
decided to relinquish its licence after initial exploration efforts were unsuccessful. Dry wells may also result in the
Group requiring substantially more funds than planned if it chooses to continue exploration work and drill additional
wells in a given asset.
As a result of these or other factors, the Group’s future exploration and appraisal activities may fail to result in the
discovery and development of additional oil and gas, or the conversion of prospective or contingent resources into
reserves in sufficient quantities to keep pace with the Group’s level of production, or at all. Furthermore, the Group may
not be successful in selecting and acquiring additional suitable oil and gas properties at attractive prices, or at all. Failure
by the Group to replace depleted reserves, for these or other reasons, may materially adversely affect the Group’s
business, prospects, and financial condition.
The Group’s exploration and appraisal activities, even if initial appraisal wells lead to the flow of oil or gas in sufficient
quantities to justify further development of a field, may fail to result in economically viable production on a scale
sufficient to meet the Group’s long-term production and reserves targets. See
“—The Group may be unsuccessful in
realising its reserve and production growth targets.
” Factors such as adverse weather conditions, natural disasters,
equipment or services shortages, procurement delays or difficulties arising from the political, environmental and other
conditions in the areas where the reserves are located or through which the Group’s products are transported may
increase costs and make it uneconomical to develop potential reserves.
The Group’s development plans may be unsuccessful if it is unable to convert its exploration licences into production
licences.
Certain of the Group’s agreements grant a licence for the exploration and appraisal of hydrocarbons within defined areas
and provide for certain commitments (for example, exploration and appraisal drilling commitments) to be completed
within specified timeframes. If the Group is unable to meet the specified deadlines for commitments set out in its
exploration licences, it may be required to relinquish those licences or may otherwise fail to secure a waiver, amendment
or extension of such requirements, which could result in premature termination, expiration, suspension or cancellation of
any of the Group’s material exploration licences. Sometimes, the Group must provide letters of credit when it enters into
minimum work commitments, which it may have to write off if an asset is relinquished. Even if the terms of the Group’s
exploration licences are met, the ability of the Group to initiate production in respect of the hydrocarbon reserves for
which it has exploration licences depends on its ability to convert its exploration licences into production licences. The
Group may be unable to negotiate commercially reasonable terms for development and production, and its development
plans may be subject to delays or difficulties arising from the political, environmental and other conditions in the areas
where potential reserves and resources are located. Factors such as equipment or staff shortages, infrastructure problems,
adverse weather conditions and, natural disasters may also make it uneconomical to develop potential reserves and
resources. In addition, the conversion of exploration licences into development and production licences will require
approval from central, regional or local governments, which may be delayed or altogether unavailable for reasons
beyond the Group’s ability to predict or control. The Group may also be required to raise additional debt or issue
additional equity in order to successfully implement its exploration, appraisal and development programme. See
“—The
Group’s exploration, appraisal and development programmes are capital intensive and the Group will be unable to
implement these programmes and fulfil its licensing commitments without significant capital expenditure for which
funding may not be available
.”
Any inability of the Group to convert its exploration licences in line with the Group’s exploration, appraisal and
development programmes could delay or prevent production, which would limit the growth of future reserves and
revenues and could have a material adverse effect on the Group’s expected return on investment.
The Group may be unsuccessful in realising its reserve and production growth targets.
The Group has targeted significant growth in both 2P net entitlement reserves and daily working interest production
levels by 2015, and is seeking to achieve these targets by a mix of both organic growth via its exploration, appraisal and
development programmes, and the acquisition of new assets or licences. In the past, the Group has failed to meet its
published targets for reserve and production growth. For example, the Group previously maintained a 2P working
interest reserves target of 300 mmboe and a production target of 50,000 boepd by 2010, but realised only 48.8 mmboe
and 14,070 boepd, respectively. As part of its current strategy, the Group has an exploration and appraisal drilling
programme with 17 wells planned for the period from 2014 through 2016, targeting average daily working interest
production of 75,000 boepd and 2P working interest reserves of 400 mmboe (Group estimates). Unless the Group is able
