Annual Financial Report

CADOGAN PETROLEUM PLCANNUAL FINANCIAL REPORT2014 Key developments during 2014: Management continued the optimisation of administrative and operational costsin 2014. Significant cost cutting initiatives have been implemented resultingin a decrease of administrative expenses from $8.9 million in 2013 to $7.0million in 2014. Management have taken the decision to continue with thestructure optimisation throughout 2015. In 2014, the Group started trading energy products in Ukraine, such as naturalgas and diesel. Trading operations include the importing of gas from Europeancountries, local purchasing and sales operations with physical delivery ofnatural gas and diesel. A new exploration well at Debeslavetskoe area was drilled. The Group has recorded significant impairment charges in 2014, including $40.2million relating to the Group's share of $57.4 million impairment of the assetsof the Pokrovskoe joint venture and $5.1 million of Oil and Gas Assets relating tothe Pirkovskoe and Debeslavetskoe fields. Net cash and cash equivalents at year-end total $48.9 million (2013: $56.5million) excluding $0.5 million (2013: $0.2 million) of Cadogan's share of cashand cash equivalents in joint ventures. Cash and cash equivalents at 30 April2015 is $49.7 million, including $20 million of restricted cash. Group OverviewThe Group's assets are located in two of the three proven hydrocarbon basins inUkraine, the Dnieper-Donets basin and the Carpathian basin. Zagoryanska fieldThe Zagoryanska licence covers an area of 49.6 square kilometres and is locatedin the Dnieper-Donets basin. As at year-end, five wells have been drilled inthis field with gas being discovered in the Upper and Lower Visean andTurnaisian reservoirs, at depths varying from 4,500 to 5,500 metres. The licence expired on 24 April 2014 and, thus, the abandonment plans for thewells have been prepared. At the same time Cadogan, via its subsidiary,requested the 20 years production licence and the extension of thestratigraphic exploration intervals to the Upper Carboniferous and Permian. ENIhas no interest to enter into the production phase with Cadogan. All assets onthe Group's Balance Sheet related to this licence were impaired in full in2013. Pokrovskoe fieldThe Pokrovskoe licence area covers 49.5 square kilometres and is located in theDnieper-Donets basin. It has prospective resources in the Permian, Upper andLower Carboniferous. Facilities in the Pokrovskoe area are approximately 10kilometres away from the UkrTransGas system. The work programme obligation forthe licence has been fulfilled. Following the 3D seismic stratigraphic interpretation of the block, newprospects have been identified in the Upper Carboniferous and Permianformations. Given this, a licence extension for those stratigraphic intervalshas been requested and obtained in 2014. The Group has assessed the Pokrovskoelicence for impairment and recognised $40.2 million of impairment as at 31December 2014. Pirkovskoe fieldPirkovskoe is adjacent to the Group's Zagoryanska licence. The exploration andappraisal licence covers 71.6 square kilometres and had 2.26 million barrels ofoil equivalent (mmboe) of "2P"reserves. The proved reserves in Pirk 1, testedby a third party company, produced an inconclusive result due to damagedformation and therefore, those reserves have been reclassified from reserves tocontingent resources together with corresponding assets. Prospective netinterest recoverable resources of 63.85 mmboe have been identified in thePermian horizons, based on in-house assessment, following the 3D interpretationof the area. In 2014 Cadogan received the stratigraphic exploration extensionto the Upper Carboniferous and Permian horizons. Cadogan owns the Krasnozayarska gas treatment plant on the Pirkovska licencearea which is connected to the UkrTransGas system. The plant is presentlyproviding services to the third party operator and is included in thereportable service segment. Borynya and Bitlyanska fieldsThe Borynya and Bitlyanska exploration and development licence covers an areaof 390 square kilometres, tectonically belonging to the Krosno zone of thefolded Carpathians and includes the Bitlya, Borynya and Vovchenska areas. TheBorynya and Bitlyanska fields hold 276.8 mmboe of recoverable resourcesincluding condensate (in house evaluation). No reserves and resources have beenassociated to the depleted Vovchenska field. Borynya 3 well was re-entered and tested Krosno 1 interval with promisingresults in 2013. The well is monitored, routinely bled-off, fluid samplesextracted, measured and kept on hold for an eventual fracturing job andpossible re-entry to the deeper intervals. Minor fieldsCadogan owns exploration, development and production licences either directlyor through subsidiaries and joint ventures in several minor fields, of whichtwo are currently in commercial production (Debeslavetska and Cheremkhivska),one (Monastyretska)is in pilot commercial development and the other(Slobodo-Rungurska) is idle. In addition to the above licences the Group has a 15 per cent interest inWestgasinvest LLC ("WGI"), which holds the Reklynetska, Zhuzhelianska,Cheremkhivsko-Strupkivska, Debeslavetska Exploration, Debeslavetska Production,Baulinska, Filimonivska, Kurinna, Sandugeyivska and Yakovlivska licences forunconventional activities. Strategic Report The Strategic Report has been prepared in accordance with Section 414A of theCompanies Act 2006 (the "Act"). Its purpose is to inform members of the Companyand help them assess how the Directors have performed their legal duty underSection 172 of the Act to promote the success of the Company. Our consistent business model We aim to increase value through: Our unique expertise and knowledge of both the Ukrainian market and bestWestern practices; Having a very disciplined investment process with capital used as underwritingcapital to farm-out; Focusing our stand-alone drilling or workover activities to lower riskinitiatives with limited capital commitment until we obtain success ingenerating new or increased production; and Obtaining a proper return on cash to achieve material impact on the Company'sprofitability or cash flow focusing on yield-generating fixed incomeinvestments, within the Company's or its management's areas of expertise. Principal activity and status of the Company The Company is registered as a public limited company (registration number05718406) in England and Wales. Its principal activity is oil and gasexploration, development and production. The Company's shares have a standard listing on the Official List of the UKListing Authority and are traded on the main market of the London StockExchange. Chairman's Statement In 2014 the Company pursued its strategy of furthering the evaluation,de-risking and promotion of its assets in the east and the west of the country.The unstable local situation was not supportive of pursuing businessdevelopment initiatives. Instead, decisive actions to optimise our activitiesand reduce our cost base were implemented to strengthen the Company's positionto maintain its financial resilience pending results from operations. Theactivities as a Service Contractor and Gas Trading were further developed witha very positive impact on improving the Company's financial standing. Revenue this year has increased from $3.8 million in 2013 to $32.6 million in2014 primarily thanks to the trading operations, which represent $29.4 millionof total revenues; revenues from production and service business have slightlydeclined to $2.4 million (2013: $2.5 million) and $0.8 million (2013: $1.2million) respectively. The cash position at 31 December 2014 remained strong at $48.9 million,including restricted cash of $20 million. Despite the new revenue generation activities and cost optimisation during theyear, the Group has recorded a significant loss in 2014 due to the impairmentof its oil and gas assets and investments in joint ventures. Loss before taxwas $59.1 million (2013: $14.4 million) reflecting $54.7 million (2013: $6.6 million)share of losses of joint ventures and $5.1 million (2013: $nil) impairment of oiland gas assets. Share of losses in joint ventures mainly include the impairmentof oil and gas assets in joint ventures and losses arising on translation ofBalance Sheet items from UAH to USD, being the presentation currency of the Group. Operations As anticipated, the principal focus for 2014 was to reduce the risk of presentand anticipated operations while maximising the existing production potential.Our exploration department identified new drillable prospects in Pokrovskoe andPirkovskoe, following the continuous refinement process of the 3D seismicinterpretation. The shallow well Debeslavetska 15 was drilled with nocommercial result. Due to surface logistic constraints the location had to bemoved few hundred metres apart and did not hit the planned target as a result.The area's exploration potential is confirmed. The work-over activity inPirkovskoe 1 well run by a local contractor continues. It confirms thehydrocarbon potential but so far has not achieved commercial results. Localcontractors confirmed their interest in the other suspended deep wells in theeastern licences. The total production has marginally increased in the year.Gas production in Debeslavetska and Cheremkhivska was kept constant while inMonastyretska the Blazh 1 well production increased to 45 bopd. The re-evaluation of the Group's assets continues and our outlook remainspositive. The Board The Company is committed to acting professionally, fairly and with integrity inall of its dealings and relationships wherever it operates, and to implementingand enforcing effective systems to counter bribery and corruption in all itsforms. All policies included into the "Working with Integrity" documents havebeen disseminated to the staff and are available to view on the Company'swebsite. Our adherence to the principles contained in these policy documentsremains unshakeable and have been the focus in our way of conduct. Recent Political Developments Strategy and ProspectsThe political situation in Ukraine continues to be unstable, as the fastdeterioration that followed the events at the end of 2013 made the year 2014the most challenging and unpredictable in the country's recent history. Despiteour optimism on the continuation of the progress experienced in the lastmonths, we remain cautious on the challenges ahead and how much they willcontinue to create a remaining level of unpredictability in the political andeconomical environment. This challenge has obviously been aggravated by therecent oil price collapse which, even though favourable for the country'sbalance is unfavourable for the Exploration and Production ("E&P") industry.The strategy reassessment by the International Oil Companies ("IOC")present in Ukraine will also keep affecting our Ukrainian operations. The localmarket instability gave to us the opportunity to quickly implementadequate measures to increase its competitive value and readdressed its focusto the local operators and possible partners and aggressively develop the gasand oil trading activity, which represents a valuable contribution to thefinancial integrity of the Company. The Board continues to develop further relationships and opportunitiesoverseas, our established presence in Ukraine, our skilled staff both in Kievand also in the east and west of the country, and our adherence to the higheststandards of corporate governance gives us the opportunity to act as a beaconfor the western industry and industry standards. We believe that the Company isuniquely placed to create value from any emerging opportunity. We continuously work to make 2015 an exciting and successful year for both theCompany and the people of Ukraine. Annual General Meeting I look forward to meeting shareholders at the Company's Annual General Meetingto be held on 25 June 2015 at Chandos House, 2 Queen Anne Street, London W1G9LQ. Zev FurstNon-executive Chairman30 April 2015 Chief Executive's Review In spite of an extremely challenging political and economic situation in theUkraine, with significant instability brought by fighting between Governmentforces and rebels most of the year in the Eastern part of the country, as wellas continued disappointments in the exploration and appraisal activities,Cadogan reached a major milestone in 2014 which culminates years of focus onprotecting shareholder value in the face of adverse events: For the last monthsof 2014 as well as the beginning of 2015 the Company has operated at above cashflow breakeven, primarily as a result of its successful launch of a tradingactivity. Given the non-core nature of the trading business and its criticalreliance on key executives in the management, it should not be seen as astrategic development yet but instead as a significant tactical achievement tosupport the Company's turnaround at a difficult time, by turning geopoliticaladversity into an opportunity to monetise market dislocations. Continued discipline in cost management has also played a key part in bringingCadogan to a situation where it has the financial flexibility to manage itsoptions from a position of strength, with general and administrative ("G&A")expenses at an annual run rate below $4.5 million for 2015 after another roundof material costs reduction at the beginning of the year. Core Operations The Company's announced strategy to protect cash flows by rightsizing itsoperation and limiting upstream activity to the strict minimum necessary inorder to facilitate farm-outs has been pursued throughout the year, without yetdelivering significant progress. The unstable environment has made it difficultto progress on potential partnerships as the majority of operators, foreign ordomestic, have remained on the side-lines for most of the year. The drop inenergy prices at the end of 2014 has further depressed the attractiveness ofour assets in the short term. However we believe that Ukraine is about to turnthe corner in 2015 and we are confident that the partnership opportunities willkeep on expanding. Our limited well operations have yielded mixed results. The disappointingdrilling result of Debeslavetska 15, the first well of our program targetingshallow horizons, does not invalidate the program in our opinion. Otheractivities include a successful increase in the oil production of the Blaz-1well as a result of our activities on the well, the stabilisation of the gasproduction in the Debeslavetska and Cheremkhivska licences, as well ascontinued work-over activities in Pirkoskoe via a farm-out to a local operator,although with no result so far. The most promising achievement in the geological and geophysical ("G&G") areahas been the identification of new sizeable drillable prospects in Pokrovskoeand Pirkovskoe from the extensive re-interpretation of the 3D seismic data.These targets present attractive economics that we believe enhance the value ofour overall asset portfolio. Non-Core Operations As anticipated in last year's CEO statement, non-core operations are nowplaying a key role in strengthening the Company's financial position. MakingCadogan able to withstand even a temporary failure of exploration and appraisalactivities has been a key focus since I took over as CEO in 2011, this abilitybeing a critical advantage for an intrinsically high-risk Junior E&P company.In fact, despite more than $70 million of unproductive capital expenditures andmore than $50 million of cumulative G&A expenses over the period, the Companyhas a material increase in its cash position since I took over. Initialachievements in asset recovery and monetisation of stale assets on the balancesheet are progressively giving way to revenue generation from new businesses.So far these businesses have grown under the constraint that no materialinvestment would be made to support them given their non-core nature. As theCompany redesigns its E&P strategy, a decision will have to be made whether tomake the investments necessary to support the growth of these activities orwhether they should be discontinued or sold. The service activity has made a positive contribution, albeit smaller than in2013 and below expectations for 2014, mainly as a result of the postponement ofwork programs caused by the political instability. Foreign IOCs, which remainour core customer base, have been particularly defensive with operations beingbrought to a standstill. We remain optimistic on the next year's activity asthe country normalises. Investments in fixed income have generated a little short of $1 million despitebeing conservatively kept to within 10% of the Company's cash position. Thiscomes in addition to the benefit of our strategy of shifting the majority ofour cash to US$ which allowed Cadogan to benefit from the current US$ riseagainst most currencies. The trading activity, mostly in gas and to a limited extend in diesel, has beenable to capture opportunities arising from dislocated gas and currency marketsas well as the unpredictable political and regulatory environment and thecomplex access to transport and storage infrastructure. It now represents thelarge majority of our turnover and gross profit, and has been developed withina disciplined risk management environment under my direct oversight. Thechallenge of a volatile and depreciating Hryvna, approximately 48% down againstthe US$ during 2014 and 65% down as at 1 April 2015 with limited convertibilitythroughout most of 2014, as well as an unpredictable series of short-term gassupply deals between Russia and Ukraine have played to our sophistication andconservative management of risk. Outlook Cadogan remains better positioned than ever to exploit Ukraine's rebound as,helped by its upcoming IMF-led debt restructuring and the stabilisation of theEast Ukraine region, the country restarts its progress towards increasedtransparency and lower energy dependency of imported gas. In support of ourability to exploit local opportunities the Company has continued the executionof its strategy of "Ukrainisation" of its staff by attracting, promoting anddeveloping outstanding local human resources. I am proud to announce theappointment of Marta Halabala as a Company Secretary this year, in thecontinuation of the appointment of Volodymyr Pogrebniak as Finance Directorin 2011. The Company will also continue to assess opportunities outside of Ukraine inorder to balance its portfolio, keeping a very strict risk/return hurdle. I am proud of how Cadogan's employees have risen to the challenge of the lastyears, and am excited in our ability to leverage the financial flexibility wecreated for ourselves to exploit the opportunities that we have ahead of us. Bertrand des PallieresChief Executive Officer30 April 2015 Operations Review In 2014 the Group held working interests in nine conventional (2013: nine) gas,condensate and oil exploration and production licences in the east and west ofUkraine. All these assets are operated by the Group and are located in eitherthe Carpathian basin or the Dnieper-Donets basin, in close proximity to theUkrainian gas distribution infrastructures. Summary of the Group's licences (as at 31 December 2014) Working interest (%) Licence Expiry Licence type(1) Major licences 40.0 Zagoryanska April 2014(4) E&D 70.0 Pokrovskoe August 2016(5) E&D 100.0 Pirkovskoe October 2015(5) E&D 99.8 Bitlyanska December 2014(3) E&D Minor licences 99.2 Debeslavetska(2) November 2026 Production 99.2 Debeslavetska(2) September 2016 E&D 53.4 Cheremkhivska(2) May 2018 Production 100.0 Slobodo-Rungurska April 2016 E&D 99.2 Monastyretska November 2014(3) E&D E&D = Exploration and Development. Debeslavetska and Cheremkhivska licences are held by WGI, in which the Grouphas a 15% interest. The Group has 99.2% and 53.4% of economic benefit inconventional activities in Debeslavetska and Cheremkhivska licencesrespectively through Joint Activity Agreements ("JAA"). Licence extension process is ongoing and is expected to be completed in Q22015. Obtaining 20 years production licence is in process. Extension to the upper Permian interval was obtained in 2014. In addition to the above licences the Group has a 15 per cent interest inWestgasinvest LLC ("WGI"), which holds the Reklynetska, Zhuzhelianska,Cheremkhivsko-Strupkivska, Debeslavetska Exploration, Debeslavetska Production,Baulinska, Filimonivska, Kurinna, Sandugeyivska and Yakovlivska licences forunconventional activities. Recent developments of political and economic turmoil in Ukraine have had a lowimpact on the Group licences as the Group has assets in three regions: Western Ukraine (Lviv and Ivano-Frankivsk regions), which is not an area of conflict;; Kiev - the capital, where there was a low level of instability throughout 2014 year; and Central Ukraine, represented by the Poltava region, which is not under theanti-terrorist operation. Zagoryanska licence The Zagoryanska licence covered 49.6 square kilometres and expired on 24 April2014. The Group held a 40 per cent working interest in the Zagoryanska licencearea. The wells abandonment plans have been prepared in agreement with thejoint venture partner, ENI. At the same time Cadogan, via its subsidiary LLCZagvydobuvannya, requested the 20 years production licences and the extensionof the stratigraphic exploration intervals to the Upper Carboniferous andPermian for the same area. ENI has no interest to enter into the productionphase with Cadogan. To value and price all the possible remaining resources in the block, astratigraphic re-interpretation of the 3D seismic data is currently ongoing. Pokrovskoe licence The Group holds a 70 per cent working interest in the Pokrovskoe licence. ThePokrovskoe licence area covers 49.5 square kilometres. It has prospectiveresources in the Permian, Upper and Lower Carboniferous. On the basis of the previous results and the clear indication of the presenceof a positive hydrocarbons generation and migration system, it was decided tocontinue the seismic and geological investigation of the area. The thorough 3Dseismic re-interpretation has been successfully concluded for the relativeshallow horizons. One drillable prospect in the Permian formation (at about2,200m-2400m depth) and one in the Upper Carboniferous (at about 2,200m depth)have been identified with two other leads in the Upper Carboniferous underevaluation. The extension to the new stratigraphic exploration intervals in theUpper Carboniferous and Permian have been requested and granted to Cadoganalong with the change of the previous work programme. Pirkovska licence The Group holds a 100 per cent working interest in the Pirkovska licence whichhad 2.26 mmboe of Proved and Probable Reserves of gas and condensate (2013:2.26 mmboe). The proved reserves in Pirk 1, tested by a third party company,produced an inconclusive result due to damaged formation; therefore thosereserves have been reclassified from reserves to contingent resources. This exploration and appraisal licence covers 71.6 square kilometres andexpires in October 2015; the necessary steps to renew the licence have alreadystarted. On the basis of the previous results and the clear indication of the presenceof a positive hydrocarbons' generation and migration system, it was decided tocontinue the seismic and geological investigation of the area. The thorough 3Dseismic re-interpretation has been successfully concluded for the relativelyshallow horizons. The total prospective net interest recoverable resourcesafter the 3D stratigraphic interpretation and attribute analysis performedin-house on the Permian reservoir are estimated in 383.11 Bcf (63.85 mmboe).The extension to the new stratigraphic exploration intervals in the UpperCarboniferous and Permian have been requested and granted to Cadogan in 2014along with the change of the previous work programme. The Group owns the Krasnozayarska gas treatment plant, located in the Pirkovskalicence area, which is connected to the UkrTransGas system and is continuingthe service contract with a nearby local operator. Bitlyanska licence area The Bitlyanska exploration and development licence covers an area of 390 squarekilometres with the Group's interest at 99.8 per cent. There are threehydrocarbon discoveries in this licence area, namely Bitlyanska, Borynya andVovchenska. The Borynya and Bitlyanska fields hold 276.89 mmboe (2013: 336.5mmboe) of contingent recoverable resources including condensates. After initialin-house evaluation, no reserves or resources have been allocated to thedepleted Vovchenska field. Borynya 3 well, after having been re-entered and tested in 2013, was kept onhold, monitored and routinely bled-off for an eventual fracturing job and wayforward evaluation, which also considered the deeper horizons. The planned vintage seismic lines in the Vovchenska area were purchased andinterpreted; a new additional seismic programme has been prepared to definepossible prospective exploration areas to investigate; the survey waspostponed. The work programme and obligations for this licence have beenchanged and we are awaiting the licence renewal. Minor fields The Group has a number of minor licence areas located in Western Ukraine. Theseinclude the following: Debeslavetska Production licence area A production licence containing 2P reserves 0.766 mmboe of Proved Reserves(2013: 0.79 mmboe). The field is currently producing 64.8 boepd (2013: 65.73boepd). The new compressor unit and the dehydration facilities for productionoptimisation were successfully performed and contributed to the energy andemissions saving as per the programme. Debeslavetska Exploration licence area In the exploration licence, surrounding the Debeslavetska Production area, anAmplitude Versus Offset ("AVO") and Inversion analysis was successfully carriedout with existing seismic data. In order to confirm and evaluate those findingsabout 100 km of 2D seismic lines were recorded. The seismic acquisition startedon December 2013 and ended in April 2014. Following the processing andinterpretation of the old and new data, three prospects have been identified.The location of the best promising prospect was selected on the basis of i)nearby facilities, ii) multiple targets and iii) non-depleted areas, also byusing the InSar data. The expected well drilling spud-in was in July 2014. Itwas delayed to December 2014 due to longer than forecasted procedures for landallotment and complications with the well location, meaning that it had to beoffset from the selected coordinates. The exploration drilling result has beennegative; the Cretaceous formations did not provide the expected sealing(missing shale on top of Cretaceous limestone) for the main producing levelsthat were in truncation and over-lapping the Cretaceous formation. Cheremkhivska Production licence area A production licence containing 0.19 mmboe of 2P reserves (2013: 0.203 mmboe).This licence is currently producing 17.4 boepd (2013: 20.73 boepd). Potentialgas production from shallow intervals seems to be promising for this licence.Preliminary amplitude versus offset ("AVO") studies on the only available linewere positive but the planned 30 km of seismic lines to be acquired in 2014were postponed. Slobodo-Rungurska licence area An exploration and development licence with no booked reserves (2013: nil). Thecurrent evaluation of the block has allowed us to identify prospective grossoil resources in shallow reservoir levels (Old Sloboda reservoirs) of 5.75mmboe and 27.9 mmboe in the relatively deeper reservoir levels (1600m).Additional petrophysical and reservoir studies are currently underway. Monastyretska licence area A new exploration and development licence for this block has been requested tothe competent authority and we are awaiting the renewal. No booked reserves/resources have been considered in 2014 (2013: nil). To enhance the Blazhiv 1well production, a chemical treatment was implemented bringing about positiveresults with production increasing from 25 boepd to 45 boepd. Currently theproduction is on hold as we await the formal licence renewal approval. Financial review Overview In 2014 in addition to performing the E&P work programme the Group focused onmanaging the cost base by implementing a number of cost optimisationinitiatives as well as starting an energy trading business. Trading operations include the importing of gas from Slovakia and localpurchasing and sales operations with physical delivery of natural gas anddiesel. Also, the Group continued to operate its service business whichincludes drilling, construction and other services provided to E&P companies. Revenue has increased from $3.8 million in 2013 to $32.6 million in 2014 due togas and diesel trading operations, which represent $29.4 million of totalrevenues; revenues from production have slightly declined to $2.4 million(2013: $2.5 million). Revenue from the service business, which includes drilling and constructionservices, decreased to $0.8 million (2013: $1.2 million) mainly due to thepostponement of service contracts by clients as a result of the situation inUkraine. The cash position of $48.9 million at 31 December 2014, including restrictedcash of $20 million, has decreased from $56.5 million at 31 December 2013. Income statement Loss before tax was $59.1 million (2013: $14.4 million), of which $54.7 million(2013: $6.6 million) is a share of losses of joint ventures and $5.1 million(2013: $nil) is an impairment of oil and gas assets. Share of losses in JointVentures mainly include the impairment of oil and gas assets in joint venturesand losses arising on translation of Balance Sheet items from UAH to USD, beingthe presentation currency of the Group. Revenues of $32.6 million (2013: $3.8 million) are comprised of $29.4 millionin gas and diesel sales of trading reportable segment, $2.4 million gas salesof E&P reportable segment and $0.8 million sales of service reportable segment.Cost of sales represents $26.8 million of purchases of gas for tradingoperating segment, $2.9 million of production royalties and taxes, depreciationand depletion of producing wells and direct staff costs for exploration anddevelopment and service segment. Gross profit has increased to $2.8 million(2013: $0.8 million). Other administrative expenses of $7.0 million (2013: $8.9 million) compriseother staff costs, professional fees, Directors' remuneration and depreciationcharges on non-producing property, plant and equipment. Impairment of oil and gas assets of $5.1million (2013: $nil) representsimpairment charge for Debeslavetske and Cheremkhivske assets as a result of animpairment assessment of its recoverability as at 31 December 2014 and certainobsolete property, plant and equipment ("PP&E") assets at Pirkovska licence. Reversal of impairment of other assets of $0.9 million (2013: $0.2 million)comprised of $0.3 million provision for inventory (2013: release $0.1 million)and $1.1 million release in relation to an impairment of Ukrainian VAT (2013:$0.1 million). Share of losses in joint ventures of $54.7 million (2013: $6.6 million)comprised of loss of: i) $40.2 million in relation to Pokrovska licence, ofwhich $44.2 million is non-cash impairment offset by $4.0 deferred tax liability,$12.7 million (2013: $nil) of translation loss which arose mainly ontranslation of non-current assets of Gazvydobuvannya LLC (Pokrovskoe licence)from UAH to USD, being the presentation currency of the Group $0.2million profitfrom operations (mainly as the result of VAT recovery which were previouslyimpaired), ii) $1.3 million in relation to Zagoryanska licence; and iii) lossof $0.7 million from operations of Westgasinvest LLC. Net foreign exchange gain of $3.0 million (2013: loss of $0.3 million) mainlyrelates to the revaluation of the USD-denominated monetary assets of theGroup's UK entities which have GBP as a functional currency. Cash flow statement The Consolidated Cash Flow Statement on page 65 shows operating cash outflowbefore movements in working capital of $3.9 million (2013: $8.7 million). Cashoutflows from movements in working capital in 2014 of $16.1 million mostlyrepresent an increase in trading receivables and prepayments of $13.6 million(note 21), increase in trading inventories of $8.4 million (note 20), offset byincrease in prepayments received and trading payables of $2.8 million (note 25)in relation to trading reportable segment and $3.1 million of change in workingcapital for other reportable segments. In addition, the Group has incurredcapital expenditure of $0.5 million (2013: $3.0 million) on intangibleExploration and Evaluation ("E&E") assets and $1.6 million (2013: $0.8 million)on PP&E. In 2014 the Group invested $3.0 million (2013: $4.7 million) intojoint ventures, mainly to repay the operating service charges to Cadogan forprior years. In 2014 the Group financed its trading operations with short-term borrowings(note 24) and as at 31 December 2014 the outstanding amount was $17.3 million(2013: $nil), which decreased to $7.8 million as at 30 April 2015. Borrowingsare represented by credit line drawn in UAH at Ukrainian bank, 100% subsidiaryof UK bank. Credit line is secured by $20 million of cash balance placed at UKbank. Balance sheet The cash position of $48.9 million at 31 December 2014, including restrictedcash of $20 million, has decreased from $56.5 million at 31 December 2013. Intangible E&E assets of $18.3 million (2013: $6.0 million) represent thecarrying value of the Group's investment in E&E assets as at 31 December 2014.The PP&E balance of $3.8 million at 31 December 2014 (2013: $43.9 million)reflects the cost of developing fields with commercial reserves and bringingthem into production. Due to unsuccessful testing of Pirk-1 well, $14.6 millionof PP&E assets have been reclassified to E&E so as to use them in furtherexploration and evaluation works. Management reassessed classification ofcapital expenditures following the impairment test and the production anddevelopment assets. As a result, $14.6 million were reclassified to E&E as theGroup expects to continue exploration at Pirkovskoe field and targets othergeological horizons. Cadogan plans to use the existing assets at Pirkovskoefield in their exploration activities. As a result of the impairment assessmentof PP&E assets as at 31 December 2014, the Group has recognised $5.1 millionimpairment including $2.9 million at Pirkovskoe field and $2.2 million ofDebeslavetska and Cheremkhivska. Investments in joint ventures of $14.3 million (2013: $65.9 million) mainlyrepresent the carrying value of the Group's investments into Pokrovska licencesand Westgasinvest LLC (costs related to Zagoryanska licence have been fullyimpaired as well as impairment on Pokrovska licence assets (note 19). Trade and other receivables of $17.9 million (2013: $6.9 million) include$13.6 million trading prepayments and receivables, $1.9 million receivable from jointventures in respect of management charges (2013: $4.1 million) and VATrecoverable of $1.8 million (2013: $0.3 million) in respect to VAT arising ongas trading purchases. In October 2014 the Group started to use the short-term facility in Ukraine forits trading operations. The $17.3 million outstanding as of 31 December 2014($7.8 million as at 30 April 2015) represents UAH 278.9 million borrowed in UAHto purchase natural gas and diesel (UAH 174.7 million as at 30 April 2015). The $5.1 million of trade and other payables as of 31 December 2014 (2013: $3.4million) represent $2.5 million (2013: $nil) worth of advances received fromclients for future supplies of natural gas and $2.3 million (2013: $3.4 million)of other creditors and accruals. Key performance indicators The Group monitors its performance in implementing its strategy with referenceto clear targets set out through four key financial and one key non-financialperformance indicators ("KPIs"): to increase oil, gas and condensate production measured on number of barrels ofoil equivalent produced per day ("boepd"); to increase the Group's oil and gas reserves by de-risking possible resourcesand contingent reserves into 2P reserves. This is measured in million barrelsof oil equivalent ("mmboe"); to decrease administrative expenses; to increase the Group's basic earnings per share; and to maintain no lost time incidents. The Group's performance in 2014 against these targets is set out in the tablebelow, together with the prior year performance data. No changes have been madeto the source of data or calculation used in the year. Unit 2014(3) 2013 Financial KPIs Average production (working interest basis) (1) boepd 99 88 2P reserves (2) mmboe 0.6 2.6 Administrative expenses $ million 7.0 8.9 Basic loss per share (4) cents (25.6) (6.4) Non-financial KPIs Lost time incidents (5) incidents 0 0 Average production is calculated as the average daily production during theyear. Quantities of 2P reserves as at 31 December 2013 and 2014 are based on Gaffney,Cline & Associates' ("GCA") independent reserves report on 2P reserves as at31 December 2009, dated 16 March 2010, as adjusted for the actual productionduring 2013 and actual production and reclassification to contingent resources. One of the KPIs in previous years was realised price per 1,000 cubic metres.The Group decided to remove it from the list as the price is outside ofmanagement's control. Realised price is often market-driven but capped byUkrainian authorities at a certain maximum level subject to periodic revisions.Management intention is always to negotiate the selling price which will be asclose as possible to the upper limit approved by government. Basic loss per Ordinary share is calculated by dividing the net loss for theyear attributable to equity holders of the parent company by the weightedaverage number of Ordinary shares during the year. Lost time incidents relate to injuries where an employee/contractor is injuredand has time off work. The Group will continue exploration efforts in 2015, particularly at the Pirkovskayaand Pokrovskaya fields. If successful, management plan to reassess reservesbased using independent petroleum engineer. In 2014 the Group has made impairment assessment at all material gas and oilfields. As a result Cadogan recognised a number of impairment losses directlyand through their share in losses of joint ventures. Management believes thatimpairment losses are non-recurring and the Group will maintain healthyfinancial performance in 2015. Related party transactions Related party transactions are set out in note 30 to the Consolidated FinancialStatements. Treasury The Group continually monitors its exposure to currency risk. It maintains aportfolio of cash and cash equivalent balances mainly in US dollars ("USD")held primarily in the UK. Production revenues from the sale of hydrocarbons arereceived in the local currency in Ukraine however the hydrocarbon prices arelinked to the USD denominated gas and oil prices. To date, funds from suchrevenues have been held in Ukraine for further use in operations rather thanbeing remitted to the UK. Risks and uncertainties There are a number of potential risks and uncertainties, which could have amaterial impact on the Group's long-term performance and could cause the actualresults to differ materially from expected and historical results. Executivemanagement review the potential risks and then classify them as having a highimpact, above $5 million, medium impact, above $1 million but below $5 million,and low impact, below $1 million. They also assess the likelihood of theserisks occurring. Risk mitigation factors are reviewed and documented based onthe level and likelihood of occurrence. The Audit Committee reviews the riskregister and monitors the implementation of improved risk mitigation proceduresvia Executive management. The Group has analysed the following categories as key risks: Risk Mitigation Operational risks Health, Safety and Environment("HSE") The oil and gas industry by its The Group maintains a HSE system in placenature conducts activities which can and demands that management, staff andbe seriously impacted by health, contractors adhere to it. The systemsafety and environmental incidents. ensures that the Group meets UkraineSerious incidents can have not only legislative standards in full and achievesa financial impact but can also international standards to the maximumdamage the Group's reputation and extent possible.the opportunity to undertake furtherprojects. Drilling operations The technical difficulty of drilling The incorporation of detailed sub-surfacewells in the Group's locations and analysis into a robustly engineered wellequipment limitations can result in design and work programme, withthe unsuccessful completion of the appropriate procurement procedures andwell. competent on site management, aims to minimise risk. Production and maintenance Some of the Group's facilities have All plants are operated at standards abovebeen inherited and, although fully the Ukraine minimum legal requirements.checked, were not installed under Operative staff are experienced andour supervision and there is a risk receive supplemental training to ensureof plant failure. that facilities are operated and maintained at a high standard. Service providers are rigorously reviewedThere is a risk that production or at the tender stage and are monitoredtransportation facilities can fail during the contract period.due to poor performance of theGroup's suppliers and control ofsome facilities being with othergovernmental or commercialorganisations. Work over and abandonment Certain wells owned by the Group Work programmes are designed to assess thewere drilled by the State and other status of the wells and any work that isprivate companies and will be worked not safe or is not technically feasibleover. There is a risk that Cadogan's will be abandoned. Qualified professionalsactivities fail because of problems will be used to design a step-by-stepinherited with these sites. approach to re-entering old wells. Any well stock that is not All sites that are abandoned will beconsidered satisfactory for purpose restored and re-cultivated to meet oror poses an environmental hazard exceed standards required by the relevantwill need to be abandoned. environmental control authorities and in compliance with recognised international standards. Sub-surface risks The success of the business relies All externally provided and historic dataon accurate and detailed analysis of is rigorously examined and discarded whenthe sub-surface. This can be appropriate. New data acquisition isimpacted by poor quality data, considered and appropriate programmeseither historic or recently implemented, but historic data can begathered, and limited coverage. reviewed and reprocessed to improve theCertain information provided by overall knowledge base.external sources may not beaccurate. Some local contractors may not Detailed supervision of local contractorsacquire data accurately, and there by Cadogan management is followed. Plansis frequently limited choice of are discussed well in advance with bothlocally available equipment or local and international contractors in ancontractors of a desirable standard. effort to ensure that appropriate equipment is available. Data can be misinterpreted leading All analytical outcomes are challengedto the construction of inaccurate internally and peer reviewed.models and subsequent plans. Interpretations are carried out on modern geological software. A staff training programme has been put in place. Area available for drilling If not covered by 3D seismic or fittingoperations is limited by logistics, over 2D seismic lines, the eventual well'sinfrastructures and moratorium. This dislocation will not be accepted.increases the risk for settingoptimum well coordinates. Financial risks The Group may not be successful in The Group performs a review of its oil andachieving commercial production from gas assets for impairment on annual basis.an asset and consequently the The Group considers on an annual basiscarrying values of the Group's oil whether to commission a Competent Person'sand gas assets may not be recovered Report ("CPR") from an independentthrough future revenues. reservoir engineer. The CPR provides an estimate of the Group's reserves and resources by field/licence area. As no new production has been achieved during 2014, management has decided not to commission a new CPR during 2014. As part of the annual budget approval process, the Board considers and evaluates projects for the forthcoming year and considers the appropriate level of risk. The Board has approved a work programme for 2015. Further attempts to bring in partners and mitigate the Group's risk exposure are underway. There is a risk that insufficient The Group manages the risk by maintainingfunds are available to meet adequate cash reserves and by closelydevelopment obligations to monitoring forecasted and actual cashcommercialise the Group's major flow, as well as short and longer funding licences. requirements. Management reviews these forecasts regularly and updates are made where applicable and submitted to the Board for consideration. The farm-out campaign to maintain current cash balances and mitigate risk will continue through 2015. The Group could be impacted by These risks are mitigated by employingfailing to meet regulatory reporting suitably qualified professionals who,requirements in the UK, and working with advisers when needed, arestatutory tax and filing monitoring regulatory reportingrequirements in both Ukraine and the requirements and ensuring that timelyUK. submissions are made. The Group operates primarily in Clear authority levels and robust approvalUkraine, an emerging market, where processes are in place, with stringentcertain inappropriate business controls over cash management and thepractices may from time to time tendering and procurement processes.occur. This includes bribery, theft Adequate office and site protection is inof Group property and fraud, all of place to protect assets. Anti-briberywhich can lead to financial loss. policies are also in place. The Group is at risk from changes in Revenues in Ukraine are received in UAHthe economic environment both in and expenditure is made in UAH, howeverUkraine and globally, which can the prices for hydrocarbons are implicitlycause foreign exchange movements, linked to USD prices.changes in the rate of inflation andinterest rates and lead to creditrisk in relation to the Group's keycounterparties. The Group continues to hold most of its cash reserves in the UK mostly in USD. Cash reserves are placed with leading financial institutions which are approved by the Audit Committee. The Group is predominantly a USD denominated business. Foreign exchange risk is considered a normal and acceptable business exposure and the Group does not hedge against this risk for its E&P operations. For trading operations, the Group matches the revenues and the source of financing. Refer to note 28 to the Consolidated Financial Statements for detail on financial risks. The Group is at risk that the We monitor the credit quality of ourcounterparty will default on its counterparties and seek to reduce the riskcontractual obligations resulting in of customer non-performance by limitinga financial loss to the Group. the title transfer to product until the payment is received, prepaying only to known credible suppliers The Group is at risk that The Group mostly enters into back-to-backfluctuations in gas prices will have transactions where the price is known ata negative result for the trading the time of committing to purchase andoperations resulting in a financial sell the product. Sometimes the Grouploss to the Group. takes exposure to open inventory positions when justified by the market conditions in Ukraine. Corporate risks Should the Group fail to comply with The Group designs a work programme andlicence obligations, there is a risk budget to ensure that all licencethat its entitlement to the licence obligations are met. The Group engageswill be lost. proactively with government to re-negotiate terms and ensure that they are not onerous. Ukraine is an emerging market and as The Group minimises this risk bysuch the Group is exposed to greater maintaining the funds in internationalregulatory, economic and political banks outside Ukraine and by continuouslyrisks, more than other maintaining a working dialogue with thejurisdictions. Emerging economies regulatory authorities.are generally subject to a volatilepolitical environment which couldadversely impact Cadogan's abilityto operate in the market. The Group's success depends upon The Group periodically reviews theskilled management as well as compensation and contract terms of itstechnical and administrative staff. staff.The loss of service of criticalmembers from the Group's team couldhave an adverse effect on thebusiness. Statement of Reserves and Resources The Group did not commission an independent Reserves and Resources Evaluationof the Group's oil and gas assets in Ukraine as at 31 December 2014 due toinsufficient new information arising from operational activity before the yearend. The summary of the Reserves and Resources below is based on theIndependent Reserves and Resources Evaluation performed by Gaffney Cline andAssociates as at 31 December 2009. These have been adjusted forsubsequent actual production and expert review and studies have been performedwith an external firm both in Kyiv and in-house. Summary of ReservesAs of 31 December 2014 Working interest basis Gas Condensate Oil bcf mmbbl mmbbl Proved and Probable Reserves at 1 January 2014 11.1 0.6 - Production (0.2) - - Reclassification (10.3) (0.6) - Proved and Probable Reserves at 31 December 2014 0.6 - - Possible Reserves at 1 January 2014 and 31 December 2014 19.5 1.5 - Summary of Contingent ResourcesAs of 31 December 2014 Working interest basis Gas Condensate Oil Total Bcf mmbbl mmbbl mmboe Contingent Resources at 1 January 2014 2,357.3 97.9 - 522.2 Change in working interest - - - - Reclassification 10.3 0.6 - 2.2 Contingent Resources at 31 December 2014 2,367.6 98.5 - 524.4 Reserves are assigned only to the Debeslavetska and Cheremkhivska fields;adjusted to consider the dry gas production only. The proved reserves in Pirk1, tested by a third party company, produced an inconclusive result due todamaged formation; therefore those reserves have been reclassified fromReserves to Contingent Resources. Contingent Resources are assigned to the Zagoryanska, Pirkovskoe, Borynya andBitlya fields, where development is contingent on further appraisal. Prospective Resources of 165.9 bcf (2013: 165.9 bcf) of gas and 5.9 mmbl (2013:5.9 mmbl) of condensate are attributed to the Pokrovskoe field (reflectingCadogan's working interest), where there has not yet been a production test. Corporate Responsibility The Board recognises the requirement under Section 414C of the Companies Act2006 (the "Act") to detail information about employees, human rights andcommunity issues, including information about any policies it has in relationto these matters and the effectiveness of these policies. The Group considers the sustainability of its business as a key and competitiveelement of its strategy. Meeting the expectations of our stakeholders is theway in which we secure our licence to operate, and to be recognised in thevalues we declare is the best added value we can bring in order to profitablyprolong our business. The Board recognises that it has an obligation to protectthe health and safety of its employees and communities as well as theenvironment it impacts; these are the key drivers for the sustainabledevelopment of the Company's activity. Our Code of Ethics and the adoption ofinternationally recognised best practices and standards are our, and ouremployees', references for conducting our operations. Our activities are carried out in accordance with a policy manual, endorsed bythe Board, which has been disseminated to all staff. The manual includespolicies on business conduct and ethics, anti-bribery, the acceptance of giftsand hospitality and whistleblowing. The Group's Health, Safety and Environment Manager reports directly to theChief Operations Officer. His role is to ensure that the Group has developedsuitable procedures, and that operational management have incorporated theminto daily operations and that he has the necessary level of autonomy andauthority to discharge his duties effectively and efficiently. The Board believes that health and safety procedures and training across theGroup should be to the standard expected in any company operating in the oiland gas sector. Accordingly, it has set up a Committee to review and agreehealth and safety initiatives and report back on progress. The monthlymanagement report to the Board contains a full report on health and safety,environmental and key safety and environmental issues which are discussed bythe Executive Management. The Health, Safety and Environment Committee Reportis on page 37. Health, safety and environment The Group has developed an integrated Health, Safety and Environmental ("HSE")management system. The system aims, by a continuous improvement programme, toensure that a safety and environmental protection culture is embedded in theorganisation. The HSE management system ensures that both Ukrainian andinternational standards can be met, with the Ukrainian HSE legislationrequirements taken as an absolute minimum although the internationalrequirements are in the main met or exceeded. All the Group's local operatingcompanies in east and west Ukraine have all the necessary documentation andsystems in place to ensure compliance with Ukrainian legislation. A proactive approach to the prevention of incidents has been in placethroughout 2014, which relies on an observation cards system and reliablenear-miss reporting. Staff training on HSE matters is recognised as the keyfactor to generate continuous improvement. In-house training is provided tohelp staff meet international standards and follow best practice. At present,special attention is being given to training on risk assessments, emergencyresponse, incident prevention, reporting and investigation, as well as hazardand operational ("HAZOP") studies to ensure that international standards aremaintained even if they exceed those required by Ukrainian legislation. The Board monitors lost time incidents as a key performance indicator of thebusiness, to reasonably verify that the procedures in place are robust. TheBoard has benchmarked safety performance against the HSE performance indexmeasured and published annually by the International Association of Oil & GasProducers. In 2014, the Group recorded a total of 400,000 man hours worked.There were no Lost Time Incidents ("LTIs") recorded in 2014 and close to twomillion man hours have been worked without an LTI since the previous incidentwas recorded in July 2011. Vehicle safety and driving conduct remain among the Company's priorities incontrolling hazards and preventing injuries. As of the end of 2014, the Companyhas recorded over nine million kilometres driven without an LTI. The year 2013 was the baseline year for the Company in terms of greenhouse gasemissions reporting, as well as Company-wide collection of statistical datarelated to consumption of electricity and industrial water and fuel consumptionby cars, plants and other work sites. Comparing the baseline figures with thedata for 2014 will allow the assessment of the Company's environmentalperformance and identify the areas for improvement. Employees Certain of the Group's operations are undertaken by sub-contracting specialistshaving the technical knowledge required for complex wells' drilling operations.Local interest is part of the Company's sustainable development policy andwherever possible local staff are recruited and procedures are in place toensure that all recruitments are undertaken on a transparent and fair basiswith no discrimination against applicants. Each operating company has its ownHuman Resources staff to ensure that the Group's employment policies areproperly implemented and followed. As required by Ukrainian legislation,Collective Agreements are in place with the Group's Ukrainian subsidiarycompanies which provide an agreed level of staff benefits and other safeguardsfor employees. The Group's Human Resources policy covers key areas such asequal opportunities, wages, overtime and non-discrimination. All staff areaware of the Group's grievance procedures. Sufficient levels of health insurance are provided by the Group to employees toensure they have access to good medical facilities. Each employee's trainingneeds are assessed on an individual basis to ensure that their skills areadequate to support the Group's operations, and to help them to develop. Gender diversity The Board of Directors of the Company comprised of six male Directorsthroughout the year to 31 December 2014. The appointment ofany new Director is made on the basis of merit. See pages 21 to 23 for moreinformation on the composition of the Board. There were no females holdingSenior Manager(1) positions as at 31 December 2014. As at 31 December 2014, the Company comprised a total of 96 employees, asfollows: Male Female Non-executive directors 4 - Executive directors 2 - Other employees 66 24 All employees 72 24 Human rights Cadogan's commitment to the fundamental principles of human rights is embeddedin our HSE polices and throughout our business processes. We promote the coreprinciples of human rights pronounced in the UN Universal Declaration of HumanRights. Our support for these principles is embedded throughout our Code ofConduct, our employment practices and our relationships with suppliers whereverwe do business. Community The Group's activities are carried out in rural areas of Ukraine and the Boardis aware of its responsibilities to the local communities in which the Groupoperates and from which some of the employees are recruited. At currentoperational sites, management works with the local councils to ensure that theimpact of operations is as low as practicable by putting in place measures tomitigate their effect. Key projects undertaken include improvement of the roadinfrastructure in the area, which provides easier access to the operationalsites while at the same time minimising inconvenience for the local populationand allowing improved road communications in the local communities. Specificcharitable activities are undertaken for the direct benefit of local kindergartens,schools, sporting facilities and medical services, as well asother community-focused facilities. All activities are followed and supervisedby managers who are given specific responsibility for such tasks. The Group's local companies see themselves as part of the community and areinvolved not only with financial assistance, but also with practical help andsupport. The recruitment of local staff generates additional income for areasthat otherwise are predominantly dependent on the agricultural sector. Approval The Strategic Report was approved by the Board of Directors on 30 April 2015and signed on its behalf by: Marta HalabalaCompany Secretary30 April 2015 (1) Senior Managers are directors of subsidiary companies or who otherwise haveresponsibility for planning, directing or controlling the activities of thecompany or a strategically significant part of it. Zev FurstIndependent Non-executive Chairman Bertrand des PallieresChief Executive Officer Adelmo SchenatoChief Operating Officer Gilbert LehmannSenior Independent non-executive Director Michel MeeùsNon-Independent non-executive Director Enrico TestaIndependent non-executive Director Dividends The Directors do not recommend payment of a dividend for the year to 31December 2014 (2013: nil). Structure of share capital The authorised share capital of the Company is currently £30,000,000 dividedinto 1,000,000,000 Ordinary shares of 3 pence each. The number of shares inissue as at 31 December 2014 was 231,091,734 Ordinary shares of 3 pence eachwith a nominal value of £6,932,752. The Companies (Acquisition of Own Shares)(Treasury Shares) Regulations 2003 allow companies to hold shares in treasuryrather than cancel them. Following the consolidation of the issued capital ofthe Company on 10 June 2008, there were 66 residual Ordinary shares which weretransferred to treasury. No dividends may be paid on shares whilst held intreasury and no voting rights attach to shares held in treasury. Total votingrights amount to 231,091,668. Going concern After making enquiries, the Directors have a reasonable expectation that theCompany and the Group have adequate resources to continue in operationalexistence for the foreseeable future. Accordingly, they continue to adopt thegoing concern basis in preparing the Consolidated and Company FinancialStatements. For further detail refer to the detailed discussion of theassumptions outlined in note 3(b) to the Consolidated Financial Statements. Non-Statutory Accounts The financial information set out below does not constitute the Company'sstatutory accounts for the years ended 31 December 2014 and 31 December 2013,but is derived from those accounts. Statutory accounts for 2013 have beendelivered to the Registrar of Companies, and those for 2014 will be deliveredin due course. The Auditors have reported on those accounts; their report was(i) unqualified, (ii) did not include a reference to any matters to which theAuditor drew attention by way of emphasis without qualifying their report and(iii) did not contain a statement under Section 498 (2) or (3) of the CompaniesAct 2006. The text of the Auditor's report can be found in the Company's fullAnnual Report and Financial Statements at www.cadoganpetroleum.com. Statement of Directors' Responsibilities in respect of the Annual Reportand the Financial Statements The Directors are responsible for preparing the Annual Report and thefinancial statements in accordance with applicable law and regulations.Company law requires the Directors to prepare financial statements for eachfinancial year. The Directors are required by law to prepare the Groupfinancial statements in accordance with International Financial ReportingStandards ("IFRSs") as adopted by the European Union and Article 4 of theInternational Accounting Standards ("IAS") regulation and have also elected toprepare the Parent Company financial statements under IFRSs as adopted by theEuropean Union. Under Company law, the Directors must not approve the FinancialStatements unless they are satisfied that they give a true and fair view of thestate of affairs of the Company and Group and of the profit or loss for thatperiod. In preparing the Company and Group's financial statements, IASRegulation requires that Directors: properly select and apply accounting policies; present information, including accounting policies, in a manner that providesrelevant, reliable, comparable and understandable information; provide additional disclosures when compliance with the specific requirementsin IFRSs are insufficient to enable users to understand the impact ofparticular transactions, other events and conditions on the Company's andGroup's financial position and financial performance; and make an assessment of the Company's and Group's ability to continue as a goingconcern. The Directors are responsible for keeping adequate accounting records that aresufficient to show and explain the Company and Group's transactions anddisclose with reasonable accuracy at any time the financial position of theCompany and Group and enable them to ensure that the financial statementscomply with the Companies Act 2006. They are also responsible for safeguardingthe assets of the Company and hence for taking reasonable steps for theprevention and detection of fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible forpreparing a Strategic Report, Directors' Report, Annual Report on Remuneration,Directors' Remuneration Policy and Corporate Governance Statement that complywith that law and those regulations. The Directors are responsible for the maintenance and integrity of thecorporate and financial information included on the Company's website,www.cadoganpetroleum.com. Legislation in the United Kingdom governing thepreparation and dissemination of the financial statements may differ fromlegislation in other jurisdictions. Responsibility Statement of the Directors in respect of the Annual ReportWe confirm to the best of our knowledge: (1) the financial statements, prepared in accordance with InternationalFinancial Reporting Standards as adopted by the European Union, give a true andfair view of the assets, liabilities, financial position and profit or loss ofthe Company and the undertakings included in the consolidation as a whole; and (2) the Strategic Report, includes a fair review of the development andperformance of the business and the position of the Company and theundertakings included in the consolidation taken as a whole, together with adescription of the principal risks and uncertainties that they face; and (3) the annual report and the financial statements, taken as a whole, are fair,balanced and understandable and provide the information necessary for theshareholders to assess the Group's performance, business model and strategy. On behalf of the BoardZev FurstChairman30 April 2015 Consolidated Income StatementFor the year ended 31 December 2014 2014 201330 April 2015 Notes $'000 $'000 CONTINUING OPERATIONS Revenue 6 32,623 3,772 Cost of sales (29,813) (3,019) Gross profit 2,810 753 Administrative expenses: Other administrative expenses (7,002) (8,919) Impairment of oil and gas assets 8 (5,134) - Reversal of impairment of other assets 8 877 234 (11,259) (8,685) Share of losses in joint ventures 19 (54,664) (6,630) Net foreign exchange gains/(losses) 3,036 (271) Other operating income, net 7 547 5 Operating loss (59,530) (14,828) Investment income 12 852 434 Finance costs 13 (468) (6) Loss before tax (59,146) (14,400) Tax charge 14 (166) (289) Loss for the year 9 (59,312) (14,689) Attributable to: Owners of the Company (59,271) (14,660) Non-controlling interest (41) (29) (59,312) (14,689) Loss per Ordinary share cents cents Basic 15 (25.6) (6.3) Consolidated Statement of Comprehensive IncomeFor the year ended 31 December 2014 2014 2013 $'000 $'000 Loss for the year (59,312) (14,689) Other comprehensive loss Items that may be reclassified subsequently to profit orloss: Unrealised currency translation differences (28,153) (3,551) Other comprehensive loss (28,153) (3,551) Total comprehensive loss for the year (87,465) (18,240) Attributable to: Owners of the Company (87,424) (18,211) Non-controlling interest (41) (29) (87,465) (18,240) Consolidated Balance SheetAs at 31 December 2014 2014 2013 Notes $'000 $'000ASSETS Non-current assets Intangible exploration and evaluation assets 16 18,289 5,958 Property, plant and equipment 17 3,846 43,886 Investments in joint ventures 19 14,325 65,965 36,460 115,809 Current assets Inventories 20 9,940 2,951 Trade and other receivables 21 17,891 6,879 Cash and cash equivalents 22 48,927 56,484 76,758 66,314 Total assets 113,218 182,123 LIABILITIES Non-current liabilities Deferred tax liabilities 23 (288) (675) Provisions 26 (55) (195) (343) (870)Current liabilities Short-term borrowings 24 (17,327) - Trade and other payables 25 (5,068) (3,442) Provisions 26 (647) (513) (23,042) (3,955) Total liabilities (23,385) (4,825) NET ASSETS 89,833 177,298 EQUITY Share capital 27 13,337 13,337 Retained earnings 223,600 282,871 Cumulative translation reserves (148,991) (120,838) Other reserves 1,589 1,589 Equity attributable to owners of the Company 89,535 176,959 Non-controlling interest 298 339 TOTAL EQUITY 89,833 177,298 The consolidated financial statements of Cadogan Petroleum plc, registered inEngland and Wales no. 5718406, were approved by the Board of Directors andauthorised for issue on 30 April 2015. They were signed on its behalf by: Bertrand Des PallieresChief Executive Officer30 April 2015 The notes on pages 67 to 106 form an integral part of these financialstatements. Consolidated Cash Flow StatementFor the year ended 31 December 2014 2014 2013 $'000 $'000 Operating loss (59,530) (14,828) Adjustments for: Depreciation of property, plant and equipment 938 1,201 Impairment of oil and gas assets 5,134 - Share of losses in joint ventures 54,664 6,630 Charge/(release) of impairment of inventories (note 8) 253 (97) Reversal of impairment of VAT recoverable (note 8) (727) (137) Loss on disposal of property, plant and equipment 211 103 Effect of foreign exchange rate changes (4,892) (1,571) Operating cash flows before movements in working capital (3,949) (8,699) (Increase)/decrease in inventories (7,242) 628 (Increase)/decrease in receivables (10,285) 32,879 Increase/(decrease) in payables and provisions 1,424 (645) Cash (used in)/from operations (20,052) 24,163 Interest paid (218) - Income taxes paid (373) (169) Net cash (outflow)/inflow from operating activities (20,643) 23,994 Investing activities Investments in joint ventures (3,024) (4,687) Purchases of property, plant and equipment (1,611) (783) Purchases of intangible exploration and evaluation assets (468) (3,069) Proceeds from sale of property, plant and equipment 84 127 Interest received 852 434 Net cash used in investing activities (4,167) (7,978) Financing activities Proceeds from short-term borrowings 17,327 - Net cash from financing activities 17,327 - Net (decrease)/increase in cash and cash equivalents (7,483) 16,016 Effect of foreign exchange rate changes (74) (9) Cash and cash equivalents at beginning of year 56,484 40,477 Cash and cash equivalents at end of year 48,927 56,484 Consolidated Statement of Changes in EquityFor the year ended 31 December 2014 Cumulative Other reserves Share Retained translation Share-based Non-controlling capital earnings reserves payment Reorganisation interest Total $'000 $'000 $'000 $'000 $'000 $'000 $'000As at 1January 2013 13,337 297,438 (117,287) 93 1,589 368 195,538 Net loss forthe year - (14,660) - - - (29) (14,689) Othercomprehensiveloss - - (3,551) - - - (3,551) Totalcomprehensiveloss for theyear - (14,660) (3,551) - - (29) (18,240) Share-basedpayments - 93 - (93) - - - As at 1January 2014 13,337 282,871 (120,838) - 1,589 339 177,298 Net loss forthe year - (59,271) - - - (41) (59,312) Othercomprehensiveloss - - (28,153) - - - (28,153) Totalcomprehensiveloss for theyear - (59,271) (28,153) - - (41) (87,465) As at 31December 2014 13,337 223,600 (148,991) - 1,589 298 89,833 Notes to the Consolidated Financial StatementsFor the year ended 31 December 2014 1. General information Cadogan Petroleum plc (the "Company", together with its subsidiaries the"Group"), is registered in England and Wales under the Companies Act 2006. Theaddress of the registered office is 1st Floor, 40 Dukes Place, London, EC3A7NH. The nature of the Group's operations and its principal activities are setout in the Operations Review on pages 8 to 10 and the Financial Review on pages11 to 13. 2. Adoption of new and revised Standards Adoption of new and revised International Financial Reporting Standards The following standards have been adopted by the Group for the first time forthe financial year beginning on or after 1 January 2014 and have no impact onthe Group: Amendments to IFRS 10, IFRS 11 and IFRS 12 - "Consolidated FinancialStatements, Joint Arrangements and Disclosure of Interests in Other Entities:Transition Guidance" Amendment to IAS 27 "Separate Financial Statements" (revised 2011) - Investmententities Amendments to IAS 32 "Financial instruments: Presentation" - Applicationguidance on the offsetting of financial assets and financial liabilities Amendments to IAS 36 "Recoverable amounts disclosures for non-financial assets" Amendments to IAS 39 "Novation of derivatives and continuation of hedgeaccounting" IFRIC 21 "Levies" Consequential amendments to IFRS 12 and IAS 27 have been made to introduce newdisclosure requirements for investment entities. In general, the amendments require retrospective application, with specifictransitional provisions. As the reporting entity is not an investment entity (assessed based on thecriteria set out in IFRS 10 as at 1 January 2014), the application of theamendments has had no impact on the disclosures or other amounts recognised inthe Group's consolidated financial statements. The adoption of other new or revised standards did not have any effect on theconsolidated financial position or performance of the Group and any disclosuresin the Group's consolidated financial statements. Standards and Interpretations in issue but not effective At the date of authorisation of these consolidated financial statements, thefollowing Standards and Interpretations, as well as amendments to the Standardswere in issue but not yet effective: Standards and Interpretations Effective for annual period beginning on or after IFRS 9 "Financial Instruments" Not yet adopted in the EU IFRS 15 "Revenue from contracts with customers" Not yet adopted in the EU IFRS 14 "Regulatory Deferral Accounts" Not yet adopted in the EU Amendment to IFRS 10, IFRS 12 and IAS 28: Investment Not yet adopted in the EUEntities: Applying the consolidation exception Standards and Interpretations Effective for annual period beginning on or after Amendments to IAS 19 "Employee Benefits" - Defined Not yet adopted in the EUBenefit Plans: Employee Contribution Amendments to IAS 1: Disclosure Initiative Not yet adopted in the EU Amendments to IAS 27: Equity Method in Separate Not yet adopted in the EUFinancial Statements Amendments to IAS 16 and IAS 41: Bearer plants Not yet adopted in the EU Amendments to IAS 16 and IAS 38: Classification of Not yet adopted in the EUAcceptable Methods of Depreciation and Amortisation Amendments to IFRS 10 and IAS 28: Sale or Contribution Not yet adopted in the EUof Assets between an Investor and its Associate or JointVenture Amendments to IFRS 11: Accounting for acquisitions of Not yet adopted in the EUInterests in Joint Ventures Amendments to IFRSs - "Annual Improvements to IFRSs Not yet adopted in the EU2010-2012 Cycle" Amendments to IFRSs - "Annual Improvements to IFRSs Not yet adopted in the EU2011-2013 Cycle" Amendments to IFRS 7 "Financial instruments: 1 January 2015Disclosures" - Disclosures about the initial applicationof IFRS 3. Significant accounting policies (a) Basis of accounting The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards ("IFRS") as issued by the InternationalAccounting Standards Board ("IASB") and as adopted by the European Union("EU"), and therefore the Group financial statements comply with Article 4 ofthe EU IAS Regulation. The financial statements have been prepared on the historical cost conventionbasis, except for share-based payments, accounting for the WGI transaction andother financial assets and liabilities, which have been measured at fair valuesand using accounting policies consistent with IFRS. The principal accounting policies adopted are set out below: (b) Going concern The Group's business activities, together with the factors likely to affectfuture development, performance and position are set out in the StrategicReport on pages 3 to 20. The financial position of the Group, its cash flow andliquidity position are described in the Financial Review on pages 11 to 13. The Group's cash balance at 31 December 2014 was $48.9 million (2013: $56.5million) excluding $0.5 million (2013: $0.2 million) of Cadogan's share of cashand cash equivalents in joint ventures. It includes $20 million of restrictedcash held in UK bank which represent security of borrowings (note 24). TheDirectors believe that the funds available at the date of the issue of thesefinancial statements are sufficient for the Group to manage its business riskssuccessfully. The Group's forecasts and projections, taking into account reasonably possiblechanges in operational performance, start dates and flow rates for commercialproduction and the price of hydrocarbons sold to Ukrainian customers, show thatthere are reasonable expectations that the Group will be able to operate onfunds currently held and those generated internally, for the foreseeablefuture. As the Group engages in oil and gas exploration and development activities, themost significant financial risk faced by the Group is delays encountered inachieving commercial production from the Group's major fields. The Group alsocontinues to pursue its farm-out campaign, which, if successful, will enable itto farm-out a portion of its interests in its oil and gas licences to spreadthe risks associated with further exploration and development. After making enquiries and considering the uncertainties described above, theDirectors have a reasonable expectation that the Company and the Group haveadequate resources to continue in operational existence for the foreseeablefuture and consider the going concern basis of accounting to be appropriateand, thus, they continue to adopt the going concern basis of accounting inpreparing the annual financial statements. In making its statement theDirectors have considered the recent political and economic uncertainty inUkraine, as described further in the note 4 (f). (c) Basis of consolidation The consolidated financial statements incorporate the financial statements ofthe Company and entities controlled by the Company (its subsidiaries) made upto 31 December each year. IFRS 10 defines control to be investor control overan investee when it is exposed, or has rights, to variable returns from itsinvolvement with the investee and has the ability to control those returnsthrough its power over the investee. The results of subsidiaries acquired or disposed during the year are includedin the consolidated income statement from the effective date of acquisition orup to the effective date of disposal, as appropriate. Where necessary,adjustments are made to the financial statements of subsidiaries to bringaccounting policies used into line with those used by the Group. Allintra-group transactions, balances, income and expenses are eliminated onconsolidation. Non-controlling interests in subsidiaries are identified separately from theGroup's equity therein. Those interests of non-controlling shareholders thatare present ownership interests entitling their holders to a proportionateshare of net assets upon liquidation may be initially measured at fair value orat the non-controlling interests' proportionate share of the fair value of theacquiree's identifiable net assets. The choice of measurement is made on anacquisition-by-acquisition basis. Other non-controlling interests are initiallymeasured at fair value. Subsequent to acquisition, the carrying amount of non-controlling interests isthe amount of those interests at initial recognition plus the non-controllinginterests' share of subsequent changes in equity. Total comprehensive income isattributed to non-controlling interests even if this results in thenon-controlling interests having a deficit balance. Changes in the Group's interests in subsidiaries that do not result in a lossof control are accounted for as equity transactions. The carrying amount of theGroup's interests and the non-controlling interests are adjusted to reflect thechanges in their relative interests in the subsidiaries. Any difference betweenthe amount by which the non-controlling interests are adjusted and the fairvalue of the consideration paid or received is recognised directly in equityand attributed to the owners of the Company. When the Group loses control of a subsidiary, the profit or loss on disposal iscalculated as the difference between (i) the aggregate of the fair value of theconsideration received and the fair value of any retained interest and (ii) theprevious carrying amount of the assets (including goodwill), less liabilitiesof the subsidiary and any non-controlling interests. Amounts previouslyrecognised in other comprehensive income in relation to the subsidiary areaccounted for (i.e. reclassified to profit or loss or transferred directly toretained earnings) in the same manner as would be required if the relevantassets or liabilities are disposed of. The fair value of any investmentretained in the former subsidiary at the date when control is lost is regardedas the fair value on initial recognition for subsequent accounting under IAS 39Financial Instruments: Recognition and Measurement or, when applicable, thecosts on initial recognition of an investment in an associate or jointlycontrolled entity. (d) Business combinations The acquisition of subsidiaries is accounted for using the acquisition method.The cost of the acquisition is measured at the aggregate of the fair values, atthe date of exchange, of assets given, liabilities incurred or assumed, andequity instruments issued in exchange for control of the acquiree.Acquisition-related costs are recognised in profit or loss as incurred. Theacquiree's identifiable assets, liabilities and contingent liabilities thatmeet the conditions for recognition under IFRS 3 Business Combinations arerecognised at their fair value at the acquisition date, except for non-currentassets (or disposal groups) that are classified as held for resale inaccordance with IFRS 5 Non-Current Assets held for sale and DiscontinuedOperations. These are recognised and measured at fair value less costs to sell. (e) Investments in joint ventures A joint venture is a joint arrangement whereby the parties that have jointcontrol of the arrangement have rights to the net assets of the arrangement. Ajoint venture firm recognises its interest in a joint venture as an investmentand shall account for that investment using the equity method in accordancewith IAS 28 Investments in Associates and Joint Ventures. Under the equity method, the investment is carried on the balance sheet at costplus changes in the Group's share of net assets of the entity, lessdistributions received and less any impairment in value of the investment. TheGroup Consolidated Income Statement reflects the Group's share of the resultsafter tax of the equity-accounted entity, adjusted to account for depreciation,amortisation and any impairment of the equity accounted entity's assets. TheGroup Statement of Comprehensive Income includes the Group's share of theequity-accounted entity's other comprehensive income. Financial statements of equity-accounted entities are prepared for the samereporting year as the Group. The Group assesses investments in equity-accountedentities for impairment whenever events or changes in circumstances indicatethat the carrying value may not be recoverable. If any such indication ofimpairment exists, the carrying amount of the investment is compared with itsrecoverable amount, being the higher of its fair value less costs of disposaland value in use. If the carrying amount exceeds the recoverable amount, theinvestment is written down to its recoverable amount. The Group ceases to use the equity method of accounting from the date on whichit no longer has joint control over the joint venture or significant influenceover the associate, or when the interest becomes classified as an asset heldfor sale. (f) Revenue recognition Revenue is measured at the fair value of the consideration received orreceivable and represents amounts receivable for hydrocarbon products andservices provided in the normal course of business, net of discounts, valueadded tax ('VAT') and other sales-related taxes. Sales of hydrocarbons arerecognised when the title has passed. Revenue from services is recognised inthe accounting period in which services are rendered. The main types ofservices provided by the Group are drilling and construction services. Interest income is accrued on a time basis, by reference to the principaloutstanding and at the effective interest rate applicable, which is the ratethat exactly discounts estimated future cash receipts through the expected lifeof the financial asset to that asset's net carrying amount on initialrecognition. To the extent that revenue arises from test production during an evaluationprogramme, an amount is charged from evaluation costs to cost of sales, so asto reflect a zero net margin. (g) Foreign currencies The individual financial statements of each Group company are presented in thecurrency of the primary economic environment in which it operates (itsfunctional currency). The functional currency of the Company is poundssterling. For the purpose of the consolidated financial statements, the resultsand financial position of each Group company are expressed in US dollars, whichis the presentation currency for the consolidated financial statements. In preparing the financial statements of the individual companies, transactionsin currencies other than the functional currency of each Group company('foreign currencies') are recorded in the functional currency at the rates ofexchange prevailing on the dates of the transactions. At each balance sheetdate, monetary assets and liabilities that are denominated in foreigncurrencies are retranslated into the functional currency at the ratesprevailing on the balance sheet date. Non-monetary assets and liabilitiescarried at fair value that are denominated in foreign currencies are translatedat the rates prevailing at the date when the fair value was determined.Non-monetary items that are measured in terms of historical cost in a foreigncurrency are not retranslated. Exchange differences are recognised in the profit or loss in the period inwhich they arise except for exchange differences on monetary items receivablefrom or payable to a foreign operation for which settlement is neither plannednor likely to occur. This forms part of the net investment in a foreignoperation which is recognised in the foreign currency translation reserve andin profit or loss on disposal of the net investment. For the purpose of presenting consolidated financial statements, the resultsand financial position of each entity of the Group are translated into USdollars as follows: (i) assets and liabilities of the Group's foreign operations are translated atthe closing rate on the balance sheet date; (ii) income and expenses are translated at the average exchange rates for theperiod, unless exchange rates fluctuate significantly during that period, inwhich case the exchange rates at the date of the transactions are used; and (iii) all resulting exchange differences arising, if any, are recognised inother comprehensive income and accumulated equity (attributed tonon-controlling interests as appropriate), transferred to the Group'stranslation reserve. Such translation differences are recognised as income oras expenses in the period in which the operation is disposed of. Goodwill and fair value adjustments arising on the acquisition of a foreignentity are treated as assets and liabilities of the foreign entity andtranslated at the closing rate. The relevant exchange rates used were as follows: Year ended 31 December Year ended 31 December 2014 2013 GBP/USD USD/UAH GBP/USD USD/UAH Closing 1.5534 16.0960 1.6491 8.3920rate Average 1.6481 12.1705 1.5648 8.2545rate (h) Taxation The tax expense represents the sum of the tax currently payable and deferredtax. The tax currently payable is based on taxable profit for the year. Taxableprofit differs from net profit as reported in the consolidated income statementbecause it excludes items of income or expense that are taxable or deductiblein other years and it further excludes items that are never taxable ordeductible. The Group's liability for current tax is calculated using tax ratesthat have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of assets and liabilities in the financialstatements and the corresponding tax bases used in the computation of taxableprofit. This is accounted for using the balance sheet liability method.Deferred tax liabilities are generally recognised for all taxable temporarydifferences and deferred tax assets are recognised to the extent that it isprobable that taxable profits will be available against which deductibletemporary differences can be utilised. Such assets and liabilities are notrecognised if the temporary difference arises from the initial recognition ofgoodwill or from the initial recognition (other than in a business combination)of other assets and liabilities in a transaction that affects neither thetaxable profit nor the accounting profit. Deferred tax liabilities arerecognised for taxable temporary differences arising on investments insubsidiaries and associates, and interests in joint ventures, except where theGroup is able to control the reversal of the temporary difference and it isprobable that the temporary difference will not reverse in the foreseeablefuture. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the asset to berecovered. Deferred tax is calculated at the tax rates that are expected toapply in the period when the liability is settled or the asset is realised.Deferred tax is charged or credited in the income statement, except when itrelates to items charged or credited in other comprehensive income, in whichcase the deferred tax is also dealt with in other comprehensive income. Deferred tax assets and liabilities are offset when there is a legallyenforceable right to set off current tax assets against current tax liabilitiesand when they relate to income taxes levied by the same taxation authority andthe Group intends to settle its current tax assets and liabilities on a netbasis. (i) Property, plant and equipment Property, plant and equipment ('PP&E') are carried at cost less accumulateddepreciation and any recognised impairment loss. Depreciation and amortisationis charged so as to write-off the cost or valuation of assets, other than land,over their estimated useful lives, using the straight-line method, on thefollowing bases: Buildings 4% Fixtures and equipment 10% to 30% The gain or loss arising on the disposal or retirement of an asset isdetermined as the difference between the sales proceeds and the carrying amountof the asset and is recognised in income. (j) Impairment of property, plant and equipment At each balance sheet date, the Group reviews the carrying amounts of its PP&Eto determine whether there is any indication that those assets have suffered animpairment loss. If any such indication exists, the recoverable amount of theasset is estimated in order to determine the extent of the impairment loss (ifany). Where the asset does not generate cash flows that are independent fromother assets, the Group estimates the recoverable amount of the cash-generatingunit to which the asset belongs. The recoverable amount is the higher of fairvalue less costs to sell and value in use. In assessing value in use, theestimated future cash flows are discounted to their present value using apre-tax discount rate that reflects current market assessments of the timevalue of money and the risks specific to the asset for which the estimates offuture cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated tobe less than its carrying amount, the carrying amount of the asset(cash-generating unit) is reduced to its recoverable amount. An impairment lossis recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of theasset (cash-generating unit) is increased to the revised estimate of itsrecoverable amount, but so that the increased carrying amount does not exceedthe carrying amount that would have been determined had no impairment loss beenrecognised for the asset (cash-generating unit) in prior years. A reversal ofan impairment loss is recognised as income immediately. (k) Intangible exploration and evaluation assets The Group applies the modified full cost method of accounting for intangibleexploration and evaluation ('E&E') expenditure which complies with requirementset out in IFRS 6 Exploration for and Evaluation of Mineral Resources. Underthe modified full cost method of accounting, expenditure made on exploring forand evaluating oil and gas properties is accumulated and initially capitalisedas an intangible asset, by reference to appropriate cost centres being the appropriate oil or gas property. E&E assets are then assessed for impairmenton a geographical cost pool basis. E&E assets comprise costs of (i) E&E activities which are in progress at thebalance sheet date, but wherethe existence of commercial reserves has yet to bedetermined (ii) E&E expenditure which, whilst representing part of the E&Eactivities associated with adding to the commercial reserves of an establishedcost pool, did not result in the discovery of commercial reserves. Costs incurred prior to having obtained the legal rights to explore an area areexpensed directly to the income statement as incurred. Exploration and Evaluation costs E&E expenditure is initially capitalised as an E&E asset. Payments to acquirethe legal right to explore, costs of technical services and studies, seismicacquisition, exploratory drilling and testing are also capitalised asintangible E&E assets. Tangible assets used in E&E activities (such as the Group's vehicles, drillingrigs, seismic equipment and other property, plant and equipment) are normallyclassified as PP&E. However, to the extent that such assets are consumed indeveloping an intangible E&E asset, the amount reflecting that consumption isrecorded as part of the cost of the intangible asset. Such intangible costsinclude directly attributable overheads, including the depreciation of PP&Eitems utilised in E&E activities, together with the cost of other materialsconsumed during the exploration and evaluation phases. E&E assets are not amortised prior to the conclusion of appraisal activities. Treatment of E&E assets at conclusion of appraisal activities Intangible E&E assets related to each exploration property are carried forward,until the existence (or otherwise) of commercial reserves has been determined.If commercial reserves have been discovered, the related E&E assets areassessed for impairment on individual assets basis as set out below and anyimpairment loss is recognised in the income statement. Upon approval of adevelopment programme, the carrying value, after any impairment loss, of therelevant E&E assets is reclassified to the development and production assetswithin PP&E. Intangible E&E assets that relate to E&E activities that are determined not tohave resulted in the discovery of commercial reserves remain capitalised asintangible E&E assets at cost less accumulated amortisation, subject to meetinga pool-wide impairment test in accordance with the accounting policy forimpairment of E&E assets set out below. Impairment of E&E assets E&E assets are assessed for impairment when facts and circumstances suggestthat the carrying amount may exceed its recoverable amount. Such indicatorsinclude, but are not limited to, those situations outlined in paragraph 20 ofIFRS 6 Exploration for and Evaluation of Mineral Resources and include thepoint at which a determination is made as to whether or not commercial reservesexist. Where there are indications of impairment, the E&E assets concerned are testedfor impairment. The aggregate carrying value of the relevant assets is comparedagainst the expected recoverable amount of the asset, generally by reference tothe present value of the future net cash flows expected to be derived fromproduction of commercial reserves from that pool. Where the assets fall intoan area that does not have an established pool or if there are no producingassets to cover the unsuccessful exploration and evaluation costs, those assetswould fail the impairment test and be written off to the income statement infull. Impairment losses are recognised in the income statement as additionaldepreciation and amortisation and are separately disclosed. Reclassification from development and production assets back to exploration andevaluation Where development efforts are unsuccessful in the target geological formationof the license area but the Company see a potential for oil and gas discoveries inother geological formations of the same license area, reclassification ofrecoverable amount of assets from development and production assets back toexploration and evaluation is appropriate following the impermanent assessment. (l) Development and production assets Development and production assets are accumulated on a field-by-field basis andrepresent the cost of developing the commercial Reserves discovered andbringing them into production, together with E&E expenditures incurred infinding commercial Reserves transferred from intangible E&E assets. The cost of development and production assets comprises the cost ofacquisitions and purchases of such assets, directly attributable overheads,finance costs capitalised, and the cost of recognising provisions for futurerestoration and decommissioning. Depreciation of producing assets Depreciation is calculated on the net book values of producing assets on afield-by-field basis using the unit of production method. The unit ofproduction method refers to the ratio of production in the reporting year as aproportion of the proved and probable Reserves of the relevant field, takinginto account future development expenditures necessary to bring those Reservesinto production. Producing assets are generally grouped with other assets that are dedicated toserving the same Reserves for depreciation purposes, but are depreciatedseparately from producing assets that serve other Reserves. (m) Inventories Raw materials and oil and gas stock are stated at the lower of cost and netrealisable value. Costs comprise direct materials and, where applicable, directlabour costs and those overheads that have been incurred in bringing theinventories to their present location and condition. Cost is allocated usingthe weighted average method. Net realisable value represents the estimatedselling price less all estimated costs of completion and costs to be incurredin marketing, selling and distribution. (n) Financial instruments Recognition of financial assets and financial liabilities Financial assets and financial liabilities are recognised on the Group'sbalance sheet when the Group becomes a party to the contractual provisions ofthe instrument. Derecognition of financial assets and financial liabilities The Group derecognises a financial asset only when the contractual rights tocash flows from the asset expire; or it transfers the financial asset andsubstantially all the risks and rewards of ownership of the asset to anotherentity. If the Group neither transfers nor retains substantially all the risksand rewards of ownership and continues to control the transferred asset, theGroup recognises its retained interest in the asset and an associated liabilityfor the amount it may have to pay. If the Group retains substantially all therisks and rewards of ownership of a transferred financial asset, the Groupcontinues to recognise the financial asset and also recognises a collateralisedborrowing for the proceeds received. The Group derecognises financial liabilities when the Group's obligations aredischarged, cancelled or expired. Financial assets The Group classifies its financial assets in the following categories: loansand receivables; available-for-sale financial assets; held to maturityinvestments; and financial assets at fair value through profit or loss("FVTPL"). The classification depends on the purpose for which the financialassets were acquired. Management determines the classification of its financialassets at initial recognition and re-evaluates this designation at everyreporting date. Loans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market. They areincluded in current assets, except for those with maturities greater thantwelve months after the balance sheet date which will then be classified asnon-current assets. Loans and receivables are classified as "other receivables"and "cash and cash equivalents" in the balance sheet. Trade and other receivables Trade and other receivables are measured at initial recognition at fair value,and are subsequently measured at amortised cost using the effective interestrate method. Cash and cash equivalents Cash and cash equivalents comprise cash on hand, on-demand deposits, and othershort-term highly liquid investments that are readily convertible to a knownamount of cash with three months or less remaining to maturity and are subjectto an insignificant risk of changes in value. Restricted cash balances represent components of cash and cash equivalents thatare not available for use by the Group. Financial assets at FVTPL Financial assets at FVTPL are stated at fair value, with any gains or lossesarising on remeasurement recognised in profit or loss which is includedin the 'Other gains and losses' line item in the consolidated income statement. Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators ofimpairment at each balance sheet date. Appropriate allowances for estimatedirrecoverable amounts are recognised in profit or loss when there is objectiveevidence that the asset is impaired. The allowance recognised is measured asthe difference between the asset's carrying amount of the financial asset andthe present value of estimated future cash flows discounted at the effectiveinterest rate computed at initial recognition. Evidence of impairment could include: significant financial difficulty of the issuer or counterparty; default or delinquency in interest or principal payments; or it becoming probable that the borrower will enter bankruptcy or financialre-organisation. For certain categories of financial assets, such as trade receivables, assetsthat are assessed not to be impaired individually are, in addition, assessedfor impairment on a collective basis. The carrying amount of the financial assets is reduced by the impairment lossdirectly for all financial assets with the exception of trade receivables,where the carrying amount is reduced through the use of an allowance account.Subsequent recoveries of amounts previously written off are credited againstthe allowance account. Changes in the carrying amount of the allowance accountare recognised in profit or loss. If, in a subsequent period, the amount of the impairment loss decreases and thedecrease can be related objectively to an event occurring after the impairmentwas recognised, the previously recognised impairment loss is reversed throughprofit or loss to the extent that the carrying amount of the investment at thedate the impairment is reversed does not exceed what the amortised cost wouldhave been had the impairment not been recognised. Financial liabilities Financial liabilities are classified as either financialliabilities 'at FVTPL' or 'other financial liabilities' Financial liabilities at FVTPL Financial liabilities at FVTPL are stated at fair value, with any resultantgain or loss recognised in profit or loss and is included in the 'Other gainsand losses' line item in the income statement. Fair value is determined in themanner described in note 28. Trade payables and short-term borrowings Trade payables and short-term borrowings are initially measured at fair value,and are subsequently measured at amortised cost, using the effective interestrate method. (o) Provisions Provisions are recognised when the Group has a present obligation (legal orconstructive) as a result of a past event, it is probable that the Group willbe required to settle that obligation and a reliable estimate can be made ofthe amount of the obligation. The amount recognised as a provision is the bestestimate of the consideration required to settle the present obligation at thebalance sheet date, taking into account the risks and uncertainties surroundingthe obligation. When a provision is measured using the cash flows estimated tosettle the present obligation, its carrying amount is the present value ofthose cash flows. (p) Decommissioning A provision for decommissioning is recognised in full when the relatedfacilities are installed. The decommissioning provision is calculated as thenet present value of the Group's share of the expenditure expected to beincurred at the end of the producing life of each field in the removal anddecommissioning of the production, storage and transportation facilitiescurrently in place. The cost of recognising the decommissioning provision isincluded as part of the cost of the relevant asset and is thus charged to theincome statement on a unit of production basis in accordance with the Group'spolicy for depletion and depreciation of tangible non-current assets. Periodcharges for changes in the net present value of the decommissioning provisionarising from discounting are included within finance costs. (q) Share-based payments The Group issued equity-settled share-based payments to certain parties inreturn for services or goods. The goods or services received and thecorresponding increase in equity are measured directly at the fair value of thegoods or services received at the grant date. The fair value of the services orgoods received is recognised as an expense except in so far as they relate tothe cost of issuing or acquiring its own equity instruments. The costs of anequity transaction are accounted for as a deduction from equity to the extentthey are incremental costs directly attributable to the equity transaction thatwould otherwise have been avoided. The Group also issued equity-settled share-based payments to certain Directorsand employees. Equity settled share-based payments are measured at fair value(excluding the effect of non market-based vesting conditions) at the date ofgrant. The fair value determined at the grant date for each tranche of theequity-settled share-based payments is expensed on a straight-line basis overthe vesting period, based on the Group's estimate of shares that willeventually vest and adjusted for the effect of non market-based vestingconditions. At each balance sheet date, the Group revises its estimate of thenumber of equity instruments expected to vest as a result of the effect of nonmarket-based vesting conditions. The impact of the revision of the original estimates, if any, is recognised inprofit or loss such that the cumulative expense reflects the revised estimate,with a corresponding adjustment to the equity-settled employee benefitsreserve. For those equity-settled share-based payments with market-based performanceconditions, fair value is measured by use of the Stochastic model. For thosewhich are not subject to any market based performance conditions, fair value ismeasured by use of the Black-Scholes model. The expected life used in themodels has been adjusted, based on management's best estimate, for the effectsof non-transferability, exercise restrictions, and behavioural considerations. 4. Critical accounting judgements and key sources of estimation uncertainty In the application of the Group's accounting policies, which are described innote 3, the Directors are required to make judgements, estimates andassumptions about the carrying amounts of the assets and liabilities that arenot readily apparent from other sources. The estimates and associatedassumptions are based on historical experience and other factors that areconsidered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the period in which theestimate is revised if the revision affects only that period or in the periodof the revision and future periods if the revision affects both the current andfuture periods. The following are the critical judgements and estimates that the Directors havemade in the process of applying the Group's accounting policies and that havethe most significant effect on the amounts recognised in the financialstatements: (a) Impairment of E&E The outcome of ongoing exploration, and therefore the recoverability of thecarrying value of intangible exploration and evaluation assets, is inherentlyuncertain. Management makes the judgements necessary to implement the Group'spolicy with respect to exploration and evaluation assets and considers theseassets for impairment at least annually with reference to indicators in IFRS 6. (b) Impairment of PP&E IAS 36 Impairment of Assets require that a review for impairment to be carriedout if events or changes in circumstances indicate that the carrying amount ofan asset may not be recoverable. Management assessed whether any impairment triggers were present at 31 December2014 and concluded that the following impairment indicators existed for thePirkovska licence area: High uncertainty about the impact of political and economic turmoil in Ukraineon Group operations; Significant market capitalization discount to the carrying amount of the netassets of the entity; and Lack of production at Pirkovska licence area since 2009. Carrying the analysis on the Pirkovska licence area management identifiedassets which have been reclassified to exploration and evaluation and obsoleteassets which as of 31 December 2014 were used in production and development.Further details are provided in note 17. (с) Impairment of investments in joint ventures The Group's investments in joint ventures are accounted for using the equitymethod. The carrying value of the Group's investments is reviewed at eachbalance sheet date. This review requires estimation of the future cash flowsexpected to be received by the Group mainly from the joint ventures'exploration and evaluation assets. As of 31 December 2014 exploration andevaluation assets of the joint venture entity LLC Industrial CompanyGazvydobuvannya have been assessed for impairment through calculation of therecoverable amount as a fair value less cost to sell. As a result, impairmenthas been recognised in the accounts of the joint venture and the Group's sharewas included in the consolidated financial statements as share of losses injoint ventures. Further details are provided in note 19. (d) Reserves Commercial reserves are proven and probable ('2P') oil and gas reserves, whichare defined as the estimated quantities of crude oil, natural gas and naturalgas liquids which geological, geophysical and engineering data demonstrate witha specified degree of certainty to be recoverable in future years from knownreservoirs and which are considered commercially producible. There should be a50 per cent statistical probability that the actual quantity of recoverableReserves will be more than the amount estimated as proven and probable Reservesand a 50 per cent statistical probability that it will be less. Commercial Reserves used in the calculation of depreciation and for impairmenttest purposes are determined using estimates of oil and gas in place, recoveryfactors and future oil and gas prices. Management base their estimate of oiland gas Reserves and Resources upon the Report provided by independentadvisers. (e) Recoverability of VAT The Group has significant receivables from the State Budget of Ukraine relatingto reimbursement of VAT arising on purchases of goods and services fromexternal service and product providers. Due to the budgetary problems ofUkraine, the recovery of VAT has been an issue for most companies operating inUkraine. In the past the Group has taken a conservative view in relation to VATand has impaired outstanding balances as appropriate due to the uncertainty of therecovery of these balances in cash from the State Budget of Ukraine anduncertainty of future production, VAT on which would be offset against the VATrecoverable amounts the Group has. VAT receivable that has been generated through gas purchases in 2014 isconsidered by the Group as recoverable through future sales of gas. For allother VAT the Group will continue to use an approach consistent with prioryears by impairing Ukrainian VAT as appropriate and then recognising therecovery in the period it has been made. A cumulative provision of $4.4 million(2013: $9.5 million) against Ukrainian VAT receivable has thus been recognisedas at 31 December 2014, excluding VAT recoverable balances in the JV which arereported under equity method in these financial statements. (f) Assessment of political and economic turmoil in Ukraine impact on Groupoperations Since November 2013, Ukraine has been in a political and economic turmoil. TheUkrainian Hryvnia devalued against major world currencies and significantexternal financing is required to maintain stability of the economy. InFebruary 2014, Ukraine's sovereign rating has been downgraded to CCC with anegative outlook. This situation continued through 2014 and also in 2015.However the Government already received in 2015 significant funding from theinternational creditors, with International Monetary Fund ("IMF") being thelargest. In March 2015 IMF approved $17.5billion loan to Ukrainian government,which is part of $40 billion package, including contributions from the U.S. andEuropean Union and a prospective $15 billion in savings to be negotiated withUkraine's bondholders. In May 2014 Ukraine had its presidential elections and a new government hasbeen formed. In March 2014, Crimea, an autonomous republic of Ukraine, waseffectively annexed by the Russian Federation. Escalation of conflict continuedthrough 2014 up until now at the east of the country. Further politicaldevelopments are currently unpredictable and may adversely affect the Ukrainianeconomy. Management is monitoring how the political and economic situation is affectingthe Group operations, and has considered whether adjustments are required tothe carrying values of assets and the appropriateness of the going concernassumption. As a result management have concluded that there were nosignificant adverse consequences in relation to the Group's operations, cashflows and assets that impact the 2014 financial statements, apart fromcontinuous uncertainty related to key assumptions used by management inassessment of the recoverable amount of production assets as described above.Management noted that none of the Group’s assets are located in areas of currentconflict. Any further escalations of the political crisis may impact the Group's normalbusiness activities, and increase the risks relating to its businessoperations, financial status and maintenance of its Ukrainian productionlicences. 5. Segment information Segment information is presented on the basis of management's perspective andrelates to the parts of the Group that are defined as operating segments.Operating segments are identified on the basis of internal reports provided tothe Group's chief operating decision maker ("CODM"). The Group has identifiedits top management team as its CODM and the internal reports used by the topmanagement team to oversee operations and make decisions on allocatingresources serve as the basis of information presented. These internal reportsare prepared on the same basis as these consolidated financial statements. Segment information is analysed on the basis of the type of activity, productssold or services provided. The majority of the Group's operations are located within Ukraine. Segment information is analysed on the basis of the types of goods supplied bythe Group's operating divisions. The Group's reportable segments under IFRS 8are therefore as follows: Exploration and Production E&P activities on the production licences for natural gas, oil and condensate Service Drilling services to exploration and production companies Construction services to exploration and production companies Trading Import of natural gas and diesel from European countries Local purchase and sales of natural gas operations with physical delivery ofnatural gas The accounting policies of the reportable segments are the same as the Group'saccounting policies described in Note 3. Sales between segments are carried outat market prices. The segment result represents operating profit under IFRSbefore unallocated corporate expenses. Unallocated corporate expenses includemanagement remuneration, representative expenses, and expenses incurred inrespect of the maintenance of office premises. This is the measure reported tothe CODM for the purposes of resource allocation and assessment of segmentperformance. The Group does not present information on segment assets and liabilities as theCODM does not review such information for decision-making purposes. As of 31 December 2014 and for the year then ended the Group's segmentalinformation was as follows: Exploration and Service Trading Consolidated Production $'000 $'000 $'000 $'000 Sales of hydrocarbons 1,291 - 30,253 31,544 Other revenue - 846 233 1,079 Sales between segments 1,077 - (1,077) - Total revenue 2,368 846 29,409 32,623 Cost of sales (2,579) (386) (26,848) (29,813) Other administrative expenses (1,347) - (379) (1,726) Interest on short-term borrowings (Note 13) - - (420) (420) Segment results (1,558) 460 1,762 664 Unallocated other (5,276)administrative expenses Other income, net 2,228 Impairment(1) (5,134) Share of losses in joint (54,664)ventures (1) Net foreign exchange gains 3,036 Loss before tax (59,146) (1)Impairment loss recognised in 2014 of $5.1 million related to explorationand production segment. As of 31 December 2013 and for the year then ended the Group's segmentalinformation was as follows: Exploration and Service Trading Consolidated Production $'000 $'000 $'000 $'000 External sales 2,619 - - 2,619 Other revenue - 1,153 - 1,153 Total revenue 2,619 1,153 - 3,772 Cost of sales (2,324) (695) - (3,019) Other administrative expenses (1,404) - - (1,404) Segment results (1,109) 458 - (651) Unallocated other (7,515)administrative expenses Other income, net 667 Share of losses in joint (6,630)ventures Net foreign exchange losses (271) Loss before tax (14,400) 6. Revenue 2014 2013 $'000 $'000 Sale of hydrocarbons 31,544 2,619 Other revenues 1,079 1,153 32,623 3,772 Other revenues include revenues from services provided to third parties of$0.8 million (2013: $1.2 million). Information about major customers Included in revenues for the year ended 31 December 2014 are revenues of $25.3million (2013: $2.0 million) which arose from sales to the Group's two largestcustomers. None other single customers contributed 10% or more to the Grouprevenue for both 2014 and 2013 years. 7. Other operating income/(expenses), net 2014 2013 $'000 $'000 Transactions with JV partner 510 (60) Other income 37 65 547 5 8. Impairment 2014 2013 $'000 $'000 Impairment of oil and gas assets (note 17) (5,134) - Inventories (253) 97 VAT recoverable (note 4(e)) 1,130 137 Reversal of impairment of other assets 877 234 The carrying value of inventory as at 31 December 2014 and 2013 has beenimpaired to reduce it to net realisable value (see note 20). During 2014,the Group gross sales of inventory to third parties comprised $0.1 million(2013:$0.4 million). During the year VAT impairment in the amount of $1.1 million (2013: $0.1million) has been released as a result of receiving VAT bonds by severalsubsidiaries and VAT recovery of historical balances through offset of VATliabilities arising on sales. 9. Loss for the year The loss for the year has been arrived at after (charging)/crediting: 2014 2013 $'000 $'000 Depreciation of property, plant and equipment (938) (1,201) Loss on disposal of property, plant and equipment (211) (227) Reversal of impairment of other assets (note 8) 877 234 Impairment of oil and gas assets (note 17) (5,134) - Staff costs (4,039) (4,790) Net foreign exchange gain/(losses) 3,036 (271) In addition to the depreciation of PP&E of $0.9 million (2013: $1.2 million) inthe year ended 31 December 2014, depreciation of $0.04 million (2013: $0.2million) was capitalised to E&E assets being depreciation of tangible assetsused in E&E activities. 10. Auditor's remuneration The analysis of auditor's remuneration is as follows: 2014 2013 $'000 $'000Audit fees Fees payable to the Company's auditor and their associates for the 194 201audit of the Company's annual accounts Fees payable to the Company's auditor and their associates for otherservices to the Group: The audit of the Company's subsidiaries 30 13 Total audit fees 224 214 Non-audit fees Audit-related assurance services 38 20 Taxation compliance services 25 45 Other taxation advisory services - 40 Non-audit fees 63 105 11. Staff costs The average monthly number of employees (including Executive Directors) was: 2014 2013 Number Number Executive Directors 2 2 Other employees 98 116 100 118 Total number of employees at 31 December 100 118 $'000 $'000Their aggregate remuneration comprised: Wages and salaries 4,012 5,102 Social security costs 455 725 4,467 5,827 Within wages and salaries $0.8 million (2013: $0.7 million) relates to amountsaccrued and paid to executive Directors for services rendered. Included within wages and salaries is $0.4 million (2013: $0.3 million)capitalised to intangible E&E assets and $nil million (2013: $0.1 million)capitalised to development and production assets. 12. Investment income 2014 2013 $'000 $'000Interest on bank deposits 27 283 Interest on loans issued 825 151 852 434 13. Finance costs 2014 2013 $'000 $'000 Interest on short-term borrowings (420) - Unwinding of discount on decommissioning provision (note 24) (48) (6) (468) (6) Starting October 2014 the Group used short-term borrowings in UAH (note 24) forthe financing of gas trading which resulted in $0.4 million of interest for2014. 14. Tax 2014 2013 $'000 $'000 Current tax 11 169 Prior year tax 362 - Deferred tax (benefit)/charge (note 23) (207) 120 166 289 The Group's operations are conducted primarily outside the UK. The mostappropriate tax rate for the Group is therefore considered to be 18 per cent(2013: 19 per cent), the rate of profit tax in Ukraine which is the primarysource of revenue for the Group. Taxation for other jurisdictions is calculatedat the rates prevailing in the respective jurisdictions. The taxation charge for the year canbe reconciled to the loss per the 2014 2014 2013 2013income statement as follows: $'000 % $'000 % Loss before tax (59,146) 100 (14,400) 100 Tax credit at Ukraine corporation (10,646) 18 (2,736) 19tax rate of 18% (2013: 19%) Tax credit related to theJoint venture losses 9,292 (15.7) 3,004 (21.0) Foreign exchange on operating 1,543 (2.6) 3.8 (552)activities Tax (gains)/losses generated in the (839) 1.4 857 (6.0)year not yet recognised Effect of different tax rates 454 (0.8) (284) 2.0 (196) 0.3 289 (2.2) Adjustments recognised in thecurrent year in relation 362 - - -to the current tax of prior years Income tax expense recognised in 166 - 289 -profit or loss 15. Loss per Ordinary share Basic loss per Ordinary share is calculated by dividing thenet loss for the year attributable to owners of the Company bythe weighted average number of Ordinary shares outstandingduring the year. The calculation of the basic loss per shareis based on the following data: 2014 2013Loss attributable to owners of the Company $'000 $'000 Loss for the purposes of basic loss per share being net loss (59,271) (14,660)attributable to owners of the Company 2014 2013 Number NumberNumber of shares '000 '000 Weighted average number of Ordinary shares for the purposes of 231,092 231,092basic loss per share 2014 2013 cent centLoss per Ordinary shareBasic (25.6) (6.3) The Group has no potentially dilutive instruments in issue. Therefore no dilutedloss per share is presented above. 16. Intangible exploration and evaluation assets Cost $'000 At 1 January 2013 33,049 Additions 3,276 Change in estimate of decommissioning assets (note 26) 16 Transfer from property, plant and equipment (note 17) 34 Disposals (118) Exchange differences (1,362) At 1 January 2014 34,895 Additions 468 Change in estimate of decommissioning assets (note 26) 95 Transfer from property, plant and equipment (note 17) 18,467 Disposals (1) Exchange differences (16,743) At 31 December 2014 37,181 Impairment At 1 January 2013 30,032 Exchange differences (1,095) At 1 January 2014 28,937 Transfer from property, plant and equipment (note 17) 3,826 Exchange differences (13,871) At 31 December 2014 18,892 Carrying amount At 31 December 2014 18,289 At 31 December 2013 5,958 During the year additions to the exploration and evaluation assets include$0.1 million (2013: $0.2 million) of capitalised depreciation of development andproduction assets used in exploration and evaluation activities. As of 31 December 2014 the Group has reclassified carrying value of assets of$14.6 million related to the Pirkovska licence from development and productionto exploration and evaluation (note 17).The 2P reserves of the Pirkovskalicence have been reclassified to contingent resources. 17. Property, plant and equipment Development and production assets Other TotalCost $'000 $'000 $'000 At 1 January 2013 53,324 9,603 62,927 Additions 585 217 802 Transfer to intangible exploration and (34) - (34)evaluation assets Transfer between property, plant and equipment (80) 80 - Change in estimate of decommissioning assets 42 - 42(note 26) Disposals (416) (138) (554) Exchange differences (2,479) (112) (2,591) At 1 January 2014 50,942 9,650 60,592 Additions 1,235 376 1,611 Transfer to intangible exploration and (18,467) - (18,467)evaluation assets Transfer between property, plant and equipment (54) 54 - Change in estimate of decommissioning assets 201 - 201(note 26)Disposals (587) (89) (676)Exchange differences (24,492) (4,801) (29,293) At 31 December 2014 8,778 5,190 13,968 Accumulated depreciation and impairment At 1 January 2013 13,511 3,038 16,549 Charge for the year 1,062 326 1,388 Disposals (360) (82) (442) Exchange differences (724) (65) (789) At 1 January 2014 13,489 3,217 16,706 Impairment 5,134 - 5,134 Charge for the year 614 359 973 Transfer to intangible exploration and (3,826) - (3,826)evaluation assets Disposals (188) (76) (264) Exchange differences (6,787) (1,814) (8,601) At 31 December 2014 8,436 1,686 10,122 Carrying amount At 31 December 2014 342 3,504 3,846 At 31 December 2013 39,122 4,764 43,886 As a result of the latest geological works and the 3D seismic assessmentsperformed during 2014 on the Pirkovska licence the Group did not identifyviable 2P reserves in the geological levels indicated by the GCA report.However, the results of the 3D seismic assessment indicated that gas reservesare located on other geological levels and require additional exploration andevaluation work to be performed. Due to the above findings managementperformed the impairment assessment of the development and production assets ofthe Pirkovska licence. Management identified that the cost of the licence and the carrying value ofthe existing wells of $14.6 million are to be used in further exploration andevaluation works. Management identified that as of 31 December 2014 the assetspreviously used in production and development of the Pirkovska licence withcarrying value of $2.9 million were obsolete and therefore were written off.As a result of the production and development assets value assessment the Grouphas reclassified the carrying value of assets in amount of $14.6 million toexploration and evaluation (note 16) and written off certain obsolete assetsof $2.9 million for the year ended 31 December 2014 (note 9). As of 31 December 2014 management of the Group carried out the assessment of theDebeslavetska and Cheremkhivska licences value in use and recognised anadditional impairment of these oil and gas assets of $2.2 million (note 9)Recoverable amount was assessed at $0.4 million as at 31 December 2014. Keyassumptions used in impairment assessment were as follows: Future gas price was assumed to be flat $300 real per m3; The pre-tax discount rate used was 15% real; and The growth rate used for the future costs projections was estimated based oninflation level in Ukraine for 2014 of 30% with a steady decline over the next10 years. Foreign exchange effects were assumed to be flat. During the year ended 31 December 2014 the depreciation charge of $0.1 million(2013: $0.2 million) of development and production assets used in explorationand evaluation activities has been capitalised and accounted as additions tothe exploration and evaluation assets (note 16). 18. Subsidiaries The Company had investments in the following subsidiary undertakings as at 31December 2014, which principally affected the profits and net assets of theGroup: Country of Proportion incorporation of votingName and operation interest % Activity Directly held Cadogan Petroleum Holdings UK 100 Holding companyLtd Ramet Holdings Ltd Cyprus 100 Holding company Indirectly held Rentoul Ltd Isle of Man 100 Holding company Cadogan Petroleum Holdings Netherlands 100 Holding companyBV Cadogan Bitlyanske BV Netherlands 100 Holding company Cadogan Delta BV Netherlands 100 Holding company Cadogan Astro Energy BV Netherlands 100 Holding company Cadogan Pirkovskoe BV Netherlands 100 Holding company Cadogan Zagoryanske Netherlands 100 Holding companyProduction BV Momentum Enterprise (Europe) Cyprus 100 Holding companyLtd Cadogan Ukraine Holdings Cyprus 100 Holding companyLimited Cadogan Momentum Holdings Canada 100 Holding companyInc Radley Investments Ltd UK 100 Holding company Cadogan Petroleum Trading Switzerland 100 Trading companySAGL LLC AstroInvest-Ukraine Ukraine 100 Exploration LLC Zagvydobuvannya Ukraine 100 Exploration LLC Astro Gas Ukraine 100 Exploration DP USENCO Ukraine Ukraine 100 Exploration LLC USENCO Nadra Ukraine 95 Exploration JV Delta Ukraine 100 Exploration LLC WestGasInvest Ukraine 100 Exploration LLC Astro-Service Ukraine 100 Service Company OJSC AgroNaftoGasTechService Ukraine 79.9 Construction services LLC Cadogan Ukraine Ukraine 100 Corporate services During the year ended 31 December 2014, the Group structure continued to berationalised both so as to reduce the number of legal entities inside Ukraineand also to replace the structure of multiple jurisdictions with one based on aseries of sub-holding companies incorporated in the Netherlands for eachlicence area. 19. Joint ventures Details of each Group's joint ventures at the end of the 2014 and 2013reporting periods are as follows: Country of incorporation OwnershipCompany name Licenses held and operation share % Activity LLC Zagoryanska exploration Ukraine 40 ExplorationAstroinvest-Energy licence LLC Industrial Pokrovska exploration Ukraine 70 ExplorationCompany licenceGazvydobuvannya LLC Westgasinvest Reklynetska, Ukraine 15 Exploration Zhuzhelianska, Cheremkhivsko-Strupkivska, Baulinska, Filimonivska, Kurinna, Sandugeyivska, Yakovlivska, and Debeslavetska Exploration, Debeslavetska Production licence All of the above joint ventures are accounted for using the equity method inthese consolidated financial statements. According to the shareholders'agreements, which regulate the activities of the jointly controlled entities,all key decisions require unanimous approval from the shareholders, thereforethese entities are jointly controlled. Summarised financial information in respect of each of the Group's materialjoint ventures is set out below. The summarised financial information belowrepresents amounts shown in the joint venture's financial statements preparedin accordance with IFRSs. LLC Astroinvest-Energy 2014 2013 $'000 $'000 Non-current assets 886 34 Current assets 1,234 3,001 Non-current liabilities (598) (1,194) Current liabilities (4,742) (4,288) Revenue - - Loss for the period (3,058) (6,997) Other comprehensive (loss)/income (73) 111 Total comprehensive loss (3,131) (6,886) Net deficit of the joint venture (3,220) (2,447) LLC Industrial Company Gazvydobuvannya 2014 2013 $'000 $'000 Non-current assets 26,047 101,041 Current assets 2,106 1,041 Non-current liabilities (6,086) (8,484) Current liabilities (2,821) (2,617) Revenue - - Loss for the period (56,559) (4,899) Other comprehensive income/(loss) (18,727) 71 Total comprehensive loss (75,286) (4,828) Net assets of the joint venture 19,246 90,981 As of 31 December 2014 joint venture LLC Industrial Company Gazvydobuvannyaconducted an impairment assessment of its exploration and evaluation assets.The impairment charge of $57.4 million recognised as the result of explorationand evaluation assets value recoverability assessment was included in the lossfor the period. LLC Westgasinvest 2014 2013 $'000 $'000 Non-current assets 73 164 Current assets 123 662 Non-current liabilities - - Current liabilities (2,893) (2,672) Revenue - - Loss for the period (3,717) (3,364) Other comprehensive income (1,024) 55 Total comprehensive loss (4,741) (3,309) Net assets of the joint venture (2,697) (1,846) The carrying amounts of the Group's interest in joint ventures recognized inthe financial statements of the Group using the equity method are set out inthe tables below: LLC LLC Industrial LLC Total Astroinvest-Energy company Westgasinvest Gazvydo-buvannya $'000 $'000 $'000 $'000 (Deficit)/netassets recognised (1,240) 62,283 4,922 65,965as at 31 December2013 Investments 224 2,800 - 3,024during the year Loss for the year (1,253) (52,700) (711) (54,664) Carrying amountof Group'sinterest (2,269) 12,383 4,211 14,325 as at 31 December2014 The Group's share of loss for the year includes the amount of impairment of $40.2million recognised as the result of exploration and evaluation assets valuerecoverability assessment; $12.7 million (2013: nil) of translation loss whicharose mainly on translation of non-current assets from UAH to USD being thepresentation currency of the Group and $0.2million profit from operations(mainly as the result of VAT recovery which were impaired in the prior period). Key assumptions used in the impairment assessment were as follows: Future gas price was assumed to be flat $300, real per m3; The pre-tax discount rate used was 15%, real; and The growth rate used for the future costs projections was estimated based oninflation level in Ukraine for 2014 of 30% with a steady decline over the next10 years. Foreign exchange effects were assumed to be flat. The Group is committed together with ENI to fund LLC Astroinvest-Energysubsequently to the year end with the necessary amount of $2.3 million in orderto close current liabilities of the joint venture. Most of the funds will beused to repay the costs charged by the partners. 20. Inventories 2014 2013 $'000 $'000 Natural gas 8,124 - Diesel 258 - Other inventories 1,751 3,846 Impairment provision for obsolete inventory (193) (895) Carrying amount 9,940 2,951 The impairment provision as at 31 December 2014 and 2013 is made so as toreduce the carrying value of the obsolete inventories to net realisable value.During 2014 impairment charge $0.3 million (2013: $0.1 million release) hasbeen recognised in respect of other inventories. 21. Trade and other receivables 2014 2013 $'000 $'000 Trading prepayments 8,584 - Trading receivables 5,060 - Receivable from joint venture 1,938 4,077 VAT recoverable 1,674 251 Prepayments 166 401 Loans issued - 1,559 Other receivables 469 591 17,891 6,879 Trading prepayments represent actual payments made by the Group to suppliersfor the January 2015 gas supply. Trading receivables represent current receivables from customers that have beenpaid in January 2015. As of 31 December 2014 there were no past duereceivables and no related impairment provision. The Group considers that thecarrying amount of receivablesapproximates their fair value. VAT Receivable is presented net of the cumulative provision of $4.4 million(2013: $9.5 million) against Ukrainian VAT receivable has been recognised asat 31 December 2014. Ageing of VAT receivable varies from 2 months to 2 years. Receivable from joint ventures comprise $1.2 million from Astroinvest-EnergyLLC (2013: $1.6 million) and $0.7 million from Gazvydobuvannya LLC (2013: $2.5million). Loans issued of $1.6 million as at 31 December 2013 represent loan issued inJune 2013 to Oil and Gas Management Services Group Limited ("OAGSG") as part of$3 million Loan Facility on a fully secured basis against receivables due toOAGSG with the term of loan of 24 months and annual interest of 15%. It wasfully repaid on 9 July 2014. In July 2014 the agreement was cancelled and theloan was settled by the counterparty in full amount. 22. Cash and cash equivalents Cash and cash equivalents as at 31 December 2014 of $48.9 million (2013: $56.5million) comprise cash held by the Group. The Directors consider that thecarrying amount of these assets approximates to their fair value. As of 31 December 2014 part of the cash and cash equivalents in amount of $20million related to security of borrowings and held at UK bank is considered tobe restricted cash balance (note 24). 23. Deferred tax The following are the major deferred tax liabilities and assets recognised bythe Group and movements thereon during the current and prior reporting period: Temporary differences $'000 Liability as at 1 January 2013 586 Deferred tax expense 120 Exchange differences (31) Liability as at 1 January 2014 675 Deferred tax benefit (207) Exchange differences (180) Liability as at 31 December 2014 288 At 31 December 2014, the Group had the following unused tax losses availablefor offset against future taxable profits: 2014 2013 $'000 $'000 UK 10,274 13,623 Netherlands - 938 Ukraine 69,010 46,719 79,284 61,280 Deferred tax assets have not been recognised in respect of these tax lossesowing to the uncertainty that profits will be available in future periodsagainst which they can be utilised. The Group's unused tax losses of $10.3 million (2013: $13.6 million) relatingto losses incurred in the UK are available to shelter future non-tradingprofits arising within the Company. These losses are not subject to a timerestriction on expiry. Unused tax losses incurred by Ukraine subsidiaries amount to $69.0 million(2013: $46.7 million). Under general provisions, these losses may be carriedforward indefinitely to be offset against any type of taxable income arisingfrom the same company of origination. Tax losses may not be surrendered fromone Ukraine subsidiary to another. However, in the past, Ukrainian legislationhas been imposed which restricted the carry forward of tax losses. During 2011a new tax legislation in Ukraine was implemented which resulted in therestriction to recognition of accumulated losses at 1 April 2011. Starting 1January 2012 only 25% of accumulated losses as at this date are allowed to beutilised each year for the period from 2012 till 2015 in the calculation oftaxable income of the company. Tax losses accumulated after 1 January 2012 haveno restrictions. 24. Short-term borrowings In October 2014 the Group started to use short-term borrowings as a financingfacility for its trading activities. Borrowings are represented by credit linedrawn in UAH at Ukrainian bank, 100% subsidiary of UK bank. Credit line issecured by $20 million of cash balance placed at UK bank. Outstanding amount as at 31 December 2014 was $17.3 million with averageeffective interest rate 16% p.a. Interest is paid monthly and as at 31 December2014 accrued interest amounted to $0.2million. 25. Trade and other payables 2014 2013 $'000 $'000 Prepayments received 2,470 - Trade creditors 723 1,125 Accruals 631 1,148 Taxes and social security 425 21 Trading payables 312 - Payables to joint ventures 159 801 Other payables 348 347 5,068 3,442 Prepayments received represent payments from the customers for the natural gasto be supplied in January 2015. Trading payables represent liability to suppliers for the natural gas supply inDecember 2014. Trade creditors and accruals principally comprise amounts outstanding forcapital work programme purchases and ongoing costs. The average credit periodtaken for trade purchases is 91 days (2013: 70 days). The Group has financialrisk management policies to ensure that all payables are paid within the credittimeframe. The Directors consider that the carrying amount of trade and other payablesapproximates to their fair value. No interest is generally charged onoutstanding balances. 26. Provisions $'000At 1 January 2013 671 Change in estimate (note 16 and 17) 58 Unwinding of discount on decommissioning provision (note 13) 6 Exchange differences (27) At 1 January 2014 708 Change in estimate (note 16 and 17) 296 Unwinding of discount on decommissioning provision (note 13) 48 Exchange differences (350) At 31 December 2014 702 At 1 January 2013 671 Non-current 195 Current 513 At 1 January 2014 708 Non-current 55 Current 647 At 31 December 2014 702 In accordance with the Group's environmental policy and applicable legalrequirements, the Group intends to restore the sites it is working on aftercompleting exploration or development activities. A short-term provision of $0.6 million (2013: $0.5 million) has been made fordecommissioning costs, which are expected to be incurred within the next yearas a result of the demobilisation of drilling equipment and respective siterestoration. The long-term provision recognised in respect of decommissioning reflectsmanagement's estimate of the net present value of the Group's share of theexpenditure expected to be incurred in this respect. This amount has beenrecognised as a provision at its net present value, using a discount rate thatreflects the market assessment of time value of money at that date, and theunwinding of the discount on the provision has been charged to the incomestatement. These expenditures are expected to be incurred at the end of theproducing life of each field in the removal and decommissioning of thefacilities currently in place (currently estimated to be between 1 and 17years). 27. Share capital Authorised and issued equity share capital 2014 2013 '000 $'000 '000 $'000Authorised Ordinary shares of £0.03 each 1,000,000 57,713 1,000,000 57,713 Issued Ordinary shares of £0.03 each 231,092 13,337 231,092 13,337 Authorised but unissued share capital of £30 million has been translated intoUS dollars at the historic exchange rate of the issued share capital. The Company has one class of Ordinary shares which carry no right to fixedincome. Issued equity share capital Ordinary shares of £0.03 At 31 December 2013 and 2014 231,091,734 28. Financial instruments Capital risk management The Group manages its capital to ensure that entities in the Group will be ableto continue as a going concern, while maximising the return to shareholders. The capital resources of the Group consists of cash and cash equivalentsarising from equity attributable to owners of the Company, comprising issuedcapital, reserves and retained earnings as disclosed in the ConsolidatedStatement of Changes in Equity. Externally imposed capital requirement The Group is not subject to externally imposed capital requirements. Categories of financial instruments 2014 2013 $'000 $'000 Financial assets - loans and receivables (includes cash and cashequivalents) Cash and cash equivalents 48,927 56,484 Trading receivable 5,060 - Receivable from joint venture 1,938 4,077 Loans issued - 1,559 Other receivables 469 590 56,394 62,710 Financial liabilities - measured at amortised cost Short-term borrowings 17,327 - Trade creditors 723 1,125 Accruals 631 1,148 Other payables 348 347 Trading payables 312 - Payables to joint ventures 159 801 Taxes and social security 425 21 19,925 3,442 Financial risk management objectives Management provides services to the business, co-ordinates access to domesticand international financial markets and monitors and manages the financialrisks relating to the operations of the Group in Ukraine through internal risksreports which analyse exposures by degree and magnitude of risks. These risksinclude commodity price risks, foreign currency risk, credit risk, liquidityrisk and cash flow interest rate risk. The Group does not enter into or tradefinancial instruments, including derivative financial instruments, forspeculative purposes. The Audit Committee of the Board reviews and monitors risks faced by the Groupthrough meetings held throughout the year. Financial instruments Interest rate risk Interest rate risk arises from the possibility that changes in interest rateswill affect the value of the financial instruments. The Group is not exposed to interest rate risk because entities of the Groupborrow funds at fixed interest rates. Commodity price risk The commodity price risk related to Ukrainian gas and condensate prices and, toa lesser extent, prices for crude oil are the Group's most significant marketrisk exposures. World prices for gas and crude oil are characterised bysignificant fluctuations that are determined by the global balance of supplyand demand and worldwide political developments, including actions taken by theOrganisation of Petroleum Exporting Countries. These fluctuations may have a significant effect on the Group's revenues andoperating profits going forward. The principal factor in the current Ukrainiangas price is bilateral negotiations with Gazprom to establish the price of gasimports from Russia. The price for Ukrainian gas is based on the current priceof these gas imports from Russia, which are nonetheless influenced by worldprices. Management continues to expect that the Group's principal market forgas will be the Ukrainian domestic market. The Group does not hedge market risk resulting from fluctuations in gas,condensate and oil prices, and holds no financial instruments which aresensitive to commodity price risk. Foreign exchange risk and foreign currency risk management The Group undertakes certain transactions denominated in foreign currencies.Hence, exposures to exchange rate fluctuations arise. The Group to date haselected not to hedge its exposure to the risk of changes in foreign currencyexchange rates. The carrying amounts of the Group's foreign currency denominated monetaryassets and monetary liabilities at the reporting date are as follows: Liabilities Assets 2014 2013 2014 2013 $'000 $'000 $'000 $'000 GBP ('£') 105 106 - - Foreign currency sensitivity analysis The Group is exposed primarily to movements in currencies against the US dollaras this is the presentation currency of the Group. In order to fundoperations, US dollar funds are converted to UAH just before being contributedto the Ukrainian subsidiaries. Sensitivity analyses have been performed toindicate how the profit or loss would have been affected by changes in theexchange rate between the GBP and US dollar. The analysis is based on aweakening of the US dollar by 10 per cent against GBP, a functional currency inthe entities of the Group which have significant monetary assets andliabilities at the end of each respective period. A movement of 10 per centreflects a reasonably possible sensitivity when compared to historicalmovements over a three to five year timeframe. The sensitivity analysisincludes only outstanding foreign currency denominated monetary items andadjusts their translation at the period end for a 10 per cent change in foreigncurrency rates. A number below indicates a decrease in profit where US dollar strengthens 10per cent against the other currencies. For a 10 per cent weakening of the USdollar against the other currencies, there would be an equal and oppositeimpact on the profit or loss, and the balances would be negative. The Group is not exposed to significant foreign currency risk in othercurrencies. The following table details the Group's sensitivity to a 10 per cent decreasein the US dollar against the GBP. 2014 2013 $'000 $'000 Income statement (4,473) (4,587) Inflation risk management Inflation in Ukraine and in the international market for oil and gas may affectthe Group's cost for equipment and supplies. The Directors will proceed withthe Group's practices of keeping deposits in US dollar accounts until funds areneeded and selling its production in the spot market to enable the Group tomanage the risk of inflation. Credit risk management Credit risk refers to the risk that counterparty will default on itscontractual obligations resulting in financial loss to the Group. The Group'scredit management process includes the assessment, monitoring and reporting ofcounterparty exposure on a regular basis. Credit risk with respect toreceivables and advances is mitigated by active and continuous monitoring thecredit quality of its counterparties through internal reviews and assessment.Trading receivables as at 31 December 2014 have been paid in January 2015. The Group makes allowances for impairment of receivables where there is anidentified event which, based on previous experience, is evidence of areduction in the recoverability of cash flows. The credit risk on liquid funds (cash) is considered to be limited because thecounterparties are financial institutions with high and good credit ratings,assigned by international credit-rating agencies in the UK and Ukrainerespectively. The carrying amount of financial assets recorded in the financial statementsrepresents the Group's maximum exposure to credit risk. Liquidity risk management Ultimate responsibility for liquidity risk management rests with the Board ofDirectors, which has built an appropriate liquidity risk management frameworkfor the management of the Group's short, medium and long-term funding andliquidity management requirements. The Group manages liquidity risk bymaintaining adequate cash reserves and by continuously monitoring forecast andactual cash flows. The following tables sets out details of the expected contractual maturity offinancial liabilities. Within 3 months 3 months to 1 year More than 1 year Total $'000 $'000 $'000 $'000At 31 December 2014 Short-term borrowings 17,327 - - 17,327 Trade and other payables 1,683 915 - 2,598 At 31 December 2013 Trade and other payables 1,192 2,250 - 3,442 29. Commitments and contingencies Joint activity agreements The Group has working interests in nine licences to conduct its exploration anddevelopment activities in Ukraine. Each licence is held with the obligation tofulfil a minimum set of exploration activities within its term and issummarised on an annual basis, including the agreed minimum amount forecastedexpenditure to fulfil those obligations. The activities and proposedexpenditure levels are agreed with the government licensing authority. The required future financing of exploration and development work on fieldsunder the licence obligations are as follow: 2014 2013 $'000 $'000 Within one year 580 1,258 Between two and five years 520 1,863 1,100 3,121 The Group has revised its minimum working programmes and resubmitted therequired documentation to the government authorities; updated commitments havedecreased for all licences from $3.1 million to $1.1 million. Licenceobligations of the joint ventures as at 31 December 2014 amounted to $0.5million (2013: $0.4 million) of obligations within one year and $0.4 million(2013: $0.1 million) of obligations between two and five years. In addition to licence commitments, the Group is committed together with ENI tofund LLC Astroinvest-Energy subsequently to year end with the necessary amountof $2.3 million in order to close current liabilities of the joint venture. Tax contingent liabilities The Group assesses its liabilities and contingencies for all tax years open foraudit by UK tax authority based upon the latest information available. Forthose matters where it is probable that an adjustment will be made, the Grouprecords its best estimate of these tax liabilities, including related interestcharges. Inherent uncertainties exist in estimates of tax contingencies due tocomplexities of interpretation and changes in tax laws. Whilst the Group believes it has adequately provided for the outcome of thesematters, certain periods are under audit by the UK tax authority, and thereforefuture results may include favourable or unfavourable adjustments to theseestimated tax liabilities in the period the assessments are made, or resolved.The final outcome of tax examinations may result in a materially differentoutcome than assumed in the tax liabilities. 30. Related party transactions All transactions between the Company and its subsidiaries, which are relatedparties, have been eliminated on consolidation and are not disclosed in thisnote. The application of IFRS 11 has resulted in the existing joint venturesLLC Astroinvest-Energy, LLC Gazvydobuvannya and LLC Westgasinvest beingaccounted for under the equity method and disclosed as related parties. During the period, Group companies entered into the following transactions withjoint ventures who are considered as related parties of the Group: 2014 2013 $'000 $'000 Revenues from services provided and sales of goods 597 1,892 Purchases of goods 87 22 Amounts owed by related parties 1,938 4,077 Amounts owed to related parties 159 801 Remuneration of key management personnel The remuneration of the Directors, who are the key management personnel of theGroup, is set out below in aggregate for each of the categories specified inIAS 24 Related Party Disclosures. Further information about the remuneration ofindividual Directors is provided in the audited part of the Annual Report onRemuneration 2014 on pages 39 and 53. Purchase of services Amounts owing 2014 2013 2014 2013 $'000 $'000 $'000 $'000 Short-term employee benefits 1,148 911 137 69 The total remuneration of the highest paid Director was $0.4 million in theyear (2013: $0.4 million). The amounts outstanding are unsecured and will be settled in cash. Noguarantees have been given or received and no provisions have been made fordoubtful debts in respect of the amounts owed by related parties. 31. Events after the balance sheet date Political and economic turmoil in Ukraine We are monitoring the current political situation in Ukraine carefully andthere have been no disruptions to the Company's operations in either of ouroperating locations. As a result of the recent political and economic turmoil in Ukraine, there hasbeen a further significant devaluation of the Ukrainian Hryvnia against the USDollar which is likely to affect the carrying value of the Group's assets inthe future. Since 1 January 2015, the Ukrainian Hryvnia has devalued againstthe US Dollar by approximately 45%. We have reassessed the key judgements and critical accounting estimates as atthe date of this report and, based on the current status of operations, noadjustments have been made. Company Balance SheetAs at 31 December 2014 2014 2013 Notes $'000 $'000ASSETS Non-current assets Investments 34 - - Receivables from subsidiaries 35 73,750 77,506 73,750 77,506 Current assets Trade and other receivables 35 3,333 1,763 Cash and cash equivalents 35 46,634 50,280 49,967 52,043 Total assets 123,717 129,549 LIABILITIES Current liabilities Trade and other payables 36 (370) (1,211) (370) (1,211) Total liabilities (370) (1,211) Net assets 123,347 128,338 EQUITY Share capital 37 13,337 13,337 Retained earnings 212,902 210,297 Cumulative translation reserves 38 (102,892) (95,296) Share-based payment reserve - - Total equity 123,347 128,338 The financial statements of Cadogan Petroleum plc, registered in England andWales no. 5718406, were approved by the Board of Directors and authorised forissue on 30 April 2015. They were signed on its behalf by:Bertrand Des PallieresChief Executive Officer30 April 2015 The notes on pages 67 to 106 form part of these financial statements. Company Cash Flow StatementFor the year ended 31 December 2014 2014 2013 Note $'000 $'000 Net cash inflow/(outflow) from operating activities 39 194 (4,034) Investing activities Interest received 827 258 Repayment of loans to subsidiary companies - 19,783 Net cash from investing activities 827 20,041 Net increase in cash and cash equivalents 1,021 16,007 Effect of foreign exchange rate changes (4,667) 2,181 Cash and cash equivalents at beginning of year 50,280 32,092 Cash and cash equivalents at end of year 46,634 50,280 Company Statement of Changes in EquityFor the year ended 31 December 2014 Cumulative Share Retained translation Share-based capital earnings reserves payment reserve Total $'000 $'000 $'000 $'000 $'000 As at 1 January 2013 13,337 212,497 (97,734) 93 128,193 Share-based - 93 - (93) -payment Net loss for the - (2,293) - - (2,293)year Exchange - - 2,438 - 2,438translationdifferences As at 1 January 2014 13,337 210,297 (95,296) - 128,338 Net income for the - 2,605 - - 2,605year Exchange - (7,596) - - (7,596)translationdifferences As at 31 December2014 13,337 212,902 (102,892) - 123,347 32. Significant accounting policies The separate financial statements of the Company are presented as required bythe Companies Act 2006 (the "Act"). As permitted by the Act, the separatefinancial statements have been prepared in accordance with InternationalFinancial Reporting Standards. The financial statements have been prepared on the historical cost basis. Theprincipal accounting policies adopted are the same as those set out in note 3to the Consolidated Financial Statements except as noted below. As permitted by section 408 of the Act, the Company has elected not to presentits profit and loss account for the year. Cadogan Petroleum plc reports aprofit for the financial year ended 31 December 2014 of $2.6 million (2013:loss $2.3 million). Investments Investments in subsidiaries are stated at cost less, where appropriate,provisions for impairment. Critical accounting judgements and key sources of estimation uncertainty The Company's financial statements, and in particular its investments in andreceivables from subsidiaries, are affected by certain of the criticalaccounting judgements and key sources of estimation uncertainty described innote 4 to the Consolidated Financial Statements. 33. Auditor's remuneration The auditor's remuneration for audit and other services is disclosed in note 10to the Consolidated Financial Statements. 34. Investments The Company's subsidiaries are disclosed in note 18 to the ConsolidatedFinancial Statements. The investments in subsidiaries are all stated at costless any provision for impairment. 35. Financial assets The Company's principal financial assets are bank balances and cash and cashequivalents, prepayments and receivables from related parties none of which arepast due. The Directors consider that the carrying amount of receivables fromrelated parties approximates to their fair value. Receivables from subsidiaries At the balance sheet date gross amounts receivable from the fellow Groupcompanies were $329.0 million (2013: $348.5 million). No impairment wasrecognised in 2014 or 2013. The carrying value of the receivables from thefellow Group companies as at 31 December 2014 was $73.8 million (2013: $77.5million). There are no past due receivables. Trade and other receivables 2014 2013 $'000 $'000 Prepayments 3,272 51 VAT recoverable 37 138 Loans issued - 1,559 Other receivables 24 15 3,333 1,763 In December 2014 the Company has made a prepayment for the natural gas onbehalf of its Ukrainian subsidiary due to difficulties of currency purchase inUkraine. In 2015 this prepayment has been settled in full to the Company. Cash and cash equivalents Cash and cash equivalents comprise cash held by the Company and short-term bankdeposits with an original maturity of three months or less. The carrying valueof these assets approximates to their fair value. As of 31 December 2014, cash and cash equivalents in amount of $20 million,related to security of the loan provided to the Ukrainian subsidiary and heldat UK bank, was restricted (note 24). 36. Financial liabilities Trade and other payables 2014 2013 $'000 $'000 Trade creditors 179 317 Other creditors and payables - 238 Accruals 191 656 370 1,211 Trade payables principally comprise amounts outstanding for trade purchases andongoing costs. The average credit period taken for trade purchases is 82 days(2013: 45 days). The Directors consider that the carrying amount of trade and other payablesapproximates to their fair value. No interest is charged on balancesoutstanding. 37. Share capital The Company's share capital is disclosed in note 27 to the ConsolidatedFinancial Statements. 38. Cumulative translation reserve The functional currency of the Company is pounds sterling. The financialstatements of the Company are expressed in US dollars, which is itspresentation currency. Cumulative translation reserve represents the effect oftranslating the results and financial position of the Company into US dollars. 39. Notes to the cash flow statement 2014 2013 $'000 $'000 Operating loss from continuing operations 2,605 (2,293) Operating cash flows before movements in working capital 2,605 (2,293) Increase in receivables (1,570) (1,662) Decrease in payables (841) (79) Cash used in operations 194 (4,034) Income taxes paid - - Net cash outflow from continuing operations 194 (4,034) 40. Financial instruments The Company manages its capital to ensure that it is able to continue as agoing concern while maximising the return to shareholders. Refer to note 28 forthe Group's overall strategy and financial risk management objectives. The capital resources of the Group consist of cash and cash equivalents arisingfrom equity, comprising issued capital, reserves and retained earnings. Categories of financial instruments 2014 2013 $'000 $'000 Financial assets - loans and receivables (includes cash andcash equivalents) Cash and cash equivalents 46,634 50,280 Amounts due from subsidiaries 73,750 77,506 120,384 127,786 Financial liabilities - measured at amortised cost Trade creditors (179) (317) (179) (317) Interest rate risk All financial liabilities held by the Company are non-interest bearing. As theCompany has no committed borrowings, the Company is not exposed to anysignificant risks associated with fluctuations in interest rates. Credit risk Credit risk refers to the risk that a counterparty will default on itscontractual obligations resulting in financial loss to the Company. For cashand cash equivalents, the Company only transacts with entities that are ratedequivalent to investment grade and above. Other financial assets consist ofamounts receivable from related parties. The Company's credit risk on liquid funds is limited because the counterpartiesare banks with high credit-ratings assigned by international credit-ratingagencies. The carrying amount of financial assets recorded in the Company financialstatements, which is net of any impairment losses, represents the Company'smaximum exposure to credit risk. Liquidity risk management Ultimate responsibility for liquidity risk management rests with the Board ofDirectors, which has built an appropriate liquidity risk management frameworkfor the management of the Company's short, medium and long-term funding andliquidity management requirements. The Company maintains adequate reserves, bycontinuously monitoring forecast and actual cash flows. The Company's financial liabilities are not significant and therefore nomaturity analysis has been presented. Foreign exchange risk and foreign currency risk management The Company undertakes certain transactions denominated in foreign currencies.Hence, exposures to exchange rate fluctuations arise. The Company holds alarge portion of its foreign currency denominated monetary assets and monetaryliabilities in US dollars. More information on the foreign exchange risk andforeign currency risk management is disclosed in note 28 to the ConsolidatedFinancial Statements. 41. Related parties Amounts due from subsidiaries The Company has entered into a number of unsecured related party transactionswith its subsidiary undertakings. The most significant transactions carried outbetween the Company and its subsidiary undertakings are mainly for short andlong-term financing. Amounts owed from these entities are detailed below: 2014 2013 $'000 $'000 Cadogan Petroleum Holdings Limited 73,750 77,506 73,750 77,506 Refer to note 35 for details on the Company's receivables due fromsubsidiaries. The remuneration of the Directors, who are the key management personnel of theGroup, is set out below in aggregate for each of the categories specified inIAS 24 Related Party Disclosures. Further information about the remuneration ofindividual Directors is provided in the audited part of the Annual Report onRemuneration 2014 on pages 39 to 53. Remuneration Amounts owing 2014 2013 2014 2013 $'000 $'000 $'000 $'000 Short-term employee benefits 334 326 54 - The total remuneration of the highest paid Director was $0.4 million in theyear (2013: $0.4 million). 42. Events after the balance sheet date Events after the balance sheet date are disclosed in note 31 to theConsolidated Financial Statements. Glossary IPO Initial public offering IFRSs International Financial Reporting Standards JAA Joint activity agreement UAH Ukrainian hryvnia GBP Great Britain pounds $ United States dollars bbl Barrel boe Barrel of oil equivalent mmboe Million barrels of oil equivalent mboe Thousand barrels of oil equivalent mboepd Thousand barrels of oil equivalent per day boepd Barrels of oil equivalent per day bcf Billion cubic feet mmcm Million cubic metres mcm Thousand cubic metres Reserves Those quantities of petroleum anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions. Reserves include proved, probable and possible reserve categories. Proved Those additional Reserves which analysis of geoscience andReserves engineering data can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from reservoirs and under defined economic conditions, operating methods and government regulations. Probable Those additional Reserves which analysis of geoscience andReserves engineering data indicate are less likely to be recovered than proved Resources but more certain to be recovered than possible Reserves. Possible Those additional Reserves which analysis of geoscience andReserves engineering data indicate are less likely to be recoverable than probable Reserves. Contingent Those quantities of petroleum estimated, as of a given date, toResources be potentially recoverable from known accumulations by application of development projects, but which are not currently considered to be commercially recoverable due to one or more contingencies. Prospective Those quantities of petroleum which are estimated as of a givenResources date to be potentially recoverable from undiscovered accumulations. 1P Proved Reserves 2P Proved plus probable Reserves 3P Proved plus probable plus possible Reserves Carboniferous A geological period 295 million to 354 million years before present Devonian A geological period between 417 million and 354 million years before present Visean Geological period within the early to middle Carboniferous Spud To commence drilling, once the cement cellar and conductor pipe at the well-head have been constructed TD Target depth Workover The process of performing major maintenance or remedial treatment of an existing oil or gas well LWD Logging while drilling Shareholder Information Financial calendar 2015/2016 Annual General Meeting 25 June 2015Half Yearly results announced August 2015Annual results announced April 2016 Investor relations Enquiries to: [email protected] Registered office 1st Floor, 40 Dukes Place, London EC3A 7NH Registered in England and Wales no. 5718406 27A Taras Shevchenko Boulevard01032 KyivUkraine Email: [email protected]: +38 044 591 03 90Fax: +38 044 591 03 91 www.cadoganpetroleum.com All references to page numbers in the announcement are to the page numbers inthe full Annual Report and Financial Statements which can be found on theCompany's website www.cadoganpetroleum.com.