69
which was subsequently reduced to $14.5 million as at 31 March 2014. On 30 April 2014, the Group completed the
disposal of its assets in Ukraine. The Group is engaged in active negotiations in respect of the sale of its assets in Russia
and expects to complete the sale during the third quarter of 2014. The Group is also engaged in active negotiations to
farm out a portion of its working interest share in the Block 9 licence and expects to conclude an arrangement by the end
of 2014. If such a farm out arrangement is entered into, the proportion of the Block 9 contingent resources in the CPR
that are attributable to the Group will be reduced accordingly. Under the terms of the Block 9 licence, the other parties to
the licence will have a right of first refusal to acquire the working interest that is subject to any proposed farm out. See
“
Risk Factors—Risks relating to the Group—The economic valuations contained in the CPR may not provide an
accurate estimate of the value of the Group or its assets
.”
The financial information presented in this Offering Memorandum for the years ended 31 December 2011, 2012 and
2013 and the three months ended 31 March 2013 and 31 March 2014 includes the results of operations of the Group for a
period in which the Group incurred expenses and incurred capital expenditures in its Pakistani and Latvian assets as well
as in Mansuriya in Iraq. In respect of its assets in Russia and Ukraine, in order to assist comparability the Group has
classified these as discontinued operations in its financial statements from 1 January 2011. In respect of its assets in
Pakistan and Latvia, however, to the extent some or all of these assets are exited, disposed of or otherwise relinquished
subsequent to 31 March 2014, the results of operations and financial position of the Group presented in this Offering
Memorandum for the years ended 31 December 2011, 2012 and 2013 and the three months ended 31 March 2013 and 31
March 2014 may not be directly comparable with later periods. In addition, upon relinquishment of its licences in
Pakistan, the Group will be required to make a cash payment of $3.0 million under the terms of the license. Although
this amount has already been recognized in the Group’s consolidated income statement in 2013, as exploration
expenditure written off, no cash payment has yet been made. In preparing its consolidated financial statements, the
Group may opt to recognise a provision for any such forfeiture costs, even prior to agreeing any specific disposal. Upon
a disposal, the Group may also incur impairment losses, which may be significant, if the value of its assets in any of
these jurisdictions on the date of disposal is less than the value recorded in the Group’s consolidated balance sheet for
that asset. Any such disposals may also result in substantial additional payments, including non-fulfillment of work
commitments under certain licences. See
“Risk factors—Risks relating to the Group—The Group could face significant
forfeiture of cash, impairment charges and other costs as a result of its decision to exit from certain jurisdictions.”
Results of operations
Composition of key line items in the Group’s consolidated income statement
The following describes certain line items in the Group’s consolidated income statement.
Revenue
The Group’s consolidated revenue comprises the Group’s net entitlement to the sale of oil, natural gas and condensate
under the terms of its fiscal arrangements with government counterparties, as well as cost recovery amounts received
from government counterparties for approved costs in the period, and net of service fees paid under the terms of the
Group’s service contracts. Revenues from the Group’s production of oil and gas are recognised on the basis of the
Group’s net entitlement interest in those properties (the entitlement method). The revenue recognition according to the
entitlement method is based on actual net entitlement production in the period, and revenue is recognised when the title
passes from the Group to its customer, regardless of when cash is received by the Group for the sale. As a result, the
Group’s revenues for sales to EGPC from its production in Egypt have been booked in the periods when sales occurred,
despite the significant delay in receipt of cash from EGPC for those sales. See
“Risk factors—Risks relating to the
Group—The Group is dependent on its operations in Egypt for a significant portion of its revenues, and receivables due
from the Group’s operations in Egypt under the Group’s licence agreements are paid irregularly and after significant
delay”
and
“—Material factors affecting results of operations—Receipt of cash payments from EGPC.”
Cost of sales
Cost of goods sold comprises operating costs, depletion of exploration, appraisal and development costs capitalised on
the Group’s oil and gas assets, and royalty charges paid to the Group’s governmental counterparties under the terms of
certain of its fiscal arrangements. Depletion expenses, which comprise the majority of the Group’s cost of sales, are non-
cash charges for costs relating to past capital expenditures for the acquisition, exploration, appraisal and development of
new oil and gas assets. These expenses include depletion of capitalised costs relating to exploration, appraisal and
development expenditures, the depreciation of certain long-lived operating equipment, and the amortisation of tangible
non-drilling costs incurred with developing the reserves. The amount of the Group’s depletion, expenses charged to its
consolidated income statement is determined by the unit of production method. See “
—Critical accounting policies
subject to significant judgments, estimates and assumptions.
” Operating costs consist of costs relating to the production
of oil and gas, including operation and maintenance of installations, well intervention and workover activities, insurance,
and other ancillary miscellaneous costs.
