Annual Financial Report

CADOGAN PETROLEUM PLC ANNUAL FINANCIAL REPORT 2013 Key developments during 2013: - In Pokrovskoe Field, new prospects have been identified in thePermian formation and Upper Carboniferous - Borynya 3 well re-entered and tested with promising results - Significant, further reductions to the Company's cost base tomaintain financial strength pending results from operations - Monastyretska production back up to previous levels and expectedto rise further - $29.5 million received in full and final settlement of the GPSlitigation. - Net cash and cash equivalents at year-end of $56.5 million(2012: $40.5 million) excluding $0.2 million (2012: $0.7 million) of Cadogan's shareof cash and cash equivalents in joint ventures. Cash and cash equivalents at28 April of $47.8 million excluding $1.4 million of Cadogan's share of cash andcash equivalents in joint ventures and excluding $5.3 million ofyield-generating fixed income investments. Group Overview The Group's assets are located in two of the three proven hydrocarbon basinsin Ukraine, the Dniper-Donets basin and the Carpathian basin. Zagoryanska field The Zagoryanska licence covers an area of 49.6 square kilometres.Five wells have been drilled to date in the field. Wells in the fieldencountered gas in the Upper and Lower Visean and Tournaisian reservoirs, andin one well hydrocarbons have been encountered in the Devonian reservoir.Reservoir depths vary from 4,500 to 5,500 metres. On 6 July 2011 Eni S.p.A ("Eni"), the major Italian integratedenergy company acquired a 60% interest in the licence. Following the mechanical failure in the Zag 3 production tubing awork-over to open new intervals was completed but commercial production wasnot achieved due to formation low permeability. A work-over activity on Zag 2well started in November and is still continuing. As at 31 December 2012 and 2013 the Group assessed therecoverability of the carrying value of the development and production assetsrelated to the Zagoryanska licence. This has resulted in the impairment of thementioned assets to nil. Pokrovskoe field The Pokrovskoe licence area covers 49.5 square kilometres and islocated in the Dnieper-Donets basin. The Pokrovskoe field is approximately10 kilometres from the UkrTransGas system. On 6 July 2011 Eni acquired a 30%interest in the licence. The work obligations on the licence have beenfulfilled. Following the 3D seismic interpretation, new prospects have beenidentified in the Permian formation and Upper Carboniferous. Pirkovskoe field Pirkovskoe is adjacent to the Group's Zagoryanska licence. Theexploration and appraisal licence covers 71.6 square kilometres and holds2.5 million barrels of oil equivalent (`mmboe') of Proved and Probable (`2P')Reserves and 138.2 mmboe of 2C Contingent Resources. Cadogan owns theKrasnozayarska gas treatment plant, on the Pirkovskoe licence area, which isconnected to the UkrTransGas system. A work-over activity on Pirk 1 well started in October 2013 and isstill continuing. 3D seismic reinterpretation is ongoing. Borynya and Bitlya fields The 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. TheBitlya and Borynya areas are approximately 9 kilometres apart and both fieldsare close to the UkrTransGas pipeline at Turka, approximately 15 kilometresaway. The Borynya and Bitlyanska fields hold 219.2 mmboe(100 per cent - 2012: 219.2 mmboe) and 117.3 mmboe (100 per cent - 2012: 117.3 mmboe)of Contingent Resources respectively, while no Reserves and Resources have been attributedto the depleted Vovchenska field. Borynya 3 well was re-entered and tested in the Krasno 1 intervalwith promising results. The decision was made to put the fracturing job on holddue to lack of data from the previous drilling activity. Minor fields Cadogan owns exploration, development and production licenceseither directly or through subsidiaries or joint ventures in several minorfields, of which two are currently in commercial production (Debeslavetska andCheremkhivska) and one (Monastyretska) is in pilot commercial development. Strategic Report The Strategic Report has been prepared in accordance with Section414A of the Companies Act 2006 (the "Act"). Its purpose is to inform membersof the Company and help them assess how the Directors have performed theirlegal duty under Section 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 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 high return on cash to achieve material impact on thecompany's profitability 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 (registrationnumber 05718406) 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 Listof the UK Listing Authority and are traded on the main market of the LondonStock Exchange. Chairman's Statement 2013 saw the continuation of operations as planned on the Company'sassets in the East and the West of the Country while significant, furtherreductions have been made to the Company's cost base to maintain its financialstrength pending results from operations. Revenue, largely reflectingproduction from the Group's Cheremkhivska and Debeslavetska fields andservices provided to third parties was stable at the level $3.8 million. Theloss before tax was $14.4 million (2012: $92.4 million). At 31 December 2013 the Group had cash and cash equivalents of $56.5 million. Operations As anticipated, the principal focus for 2013 was to reduce the riskof present and anticipated operations while maximising the potential existingproduction potential. With workover activity on Zag 2 having commenced inNovember 2013, new prospects having been identified in Pokrovskoe following 3Dseismic interpretation and continuing workover activity on Pirk 1 sinceOctober 2013 with so far promising indications, the de-risking targets set forour technical operations and sub-surface explorations teams have largely beenmet. Borynya 3 has thus far proved disappointing with lack of data fromprevious drilling activities having hampered our current efforts. However, weremain confident in its potential value and our assessment work continues.Production has increased moderately in Debeslavetska while potential gasproduction from Cheremkhivska appears promising at this stage. InMonastyretska production is now back up to 25 bopd and expected to risefurther. The re-evaluation of the Groups' assets continues and we remainpositive in our outlook. The Board There were no changes to the Board during the year, reflecting ayear of internal stability as we continue to reshape the Group. The presenceof a high-quality, experienced Board able and available to steer the Groupthrough challenging and occasionally volatile periods should not be takenlightly and I wish to thank all the Board members for their continuing effortson behalf of the Company. The Company is committed to acting professionally, fairly and withintegrity in all of its dealings and relationships wherever it operates, andto implementing and enforcing effective systems to counter bribery andcorruption in all its forms. The Board recently undertook an update to all ourpolicies, statements and programmes entitled, "Working with Integrity". Allpolicies have been disseminated to staff and are available to view on theCompany's website. Our adherence to the principles contained in these policydocuments remains unshakeable and I would urge shareholders to review these. Recent Political Developments At the outset of this Report, I wish to state the great personalpride I have taken in the performance and dedication of our employees andsenior management based in Kiev and across the regions, during this verydifficult period for Ukraine and its people. It is people, not bricks andmortar, which make a company. The continuing bravery, honesty and commitmentof our employees in such turbulent times do them and, by extension, theCompany, great credit. The Company is an apolitical organisation that will always supportthe democratic process in the countries in which it operates. As stated in our"Working with Integrity" policy documents, we stand for the principles ofgreater transparency and the highest standards of corporate governance. Theseoverriding principles form the framework for our relations and relationshipswith all governmental and non-governmental institutions both within Ukraineand elsewhere. Ukraine is and always has been, a bridge between East and West,with a rich and diverse cultural history. It is now nine years since ouractivities in Ukraine first began and the country continues to fascinate allof us at the Company, driving us to continue to make a success of ouroperations and forge closer relationships in Ukraine. Strategy and Prospects Following any period of uncertainty comes the certainty ofopportunity, and recent events in Ukraine have provided many opportunities forthe Company. While the Board continues to develop further relationships andopportunities overseas, our established presence in Ukraine, our skilled staffboth in Kiev and also in the east and west of the country and our adherence tothe highest standards of corporate governance, give us the opportunity to actas a beacon for western industrials and industry standards. We believe thatthe Company is uniquely placed to afford such companies an opportunity tocommence or expand their presence in Ukraine in a secure environment workingalongside people who know and understand the country, its people and itsculture. We look forward to an exciting and successful 2014 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 at 10.30am on Thursday 26 June 2014 at Chandos House, 2 Queen AnneStreet, London W1G 9LQ. Zev FurstNon-executive Chairman28 April 2014 Chief Executive Officer's Report 2013 has been another challenging year for Cadogan. Results fromoil and gas operations and activities have so far not, in general, metexpectations. However, while this and the political events of the last fewmonths have added an unhelpful layer of complexity to the execution of ourstrategy, these circumstances should not overshadow other, tremendousachievements. In particular our continued balance sheet recoveries haveincreased Cadogan's financial strength despite the negative cash flow of ourcore business. This positions us to take full advantage of the unprecedentedopportunities in the following quarters that we believe will follow thecurrent political upheavals, as Ukraine gets an increased focus and supportfrom the international community. Core Operations This year's purposely limited workover activity in the Zagoryanska,Bitlyanska and Monastyretska licenses has not yet delivered the expectedresults despite some success in Blazh-1. This has led management to implementfurther cuts to our cost base at the end of 2013 and beginning of 2014 thatshould materially reduce the G&A figures in 2014. Our continuous efforts inseismic acquisition and interpretation across all our licenses have allowedCadogan to achieve a more systematic understanding of the potential of itsresources, as well as identifying promising new horizons. The Company'sstrategy of focusing its stand-alone drilling or workover activities to lowerrisk initiatives with limited capital commitment will be intensified, until itobtains success in generating new or increased production. The main, low-costproject currently underway is the targeting of shallow horizons across severalof our Western licenses and drilling of the first well in Deb is expected thissummer. For this upcoming well, as well as future shallow wells, Cadogan'sability to use its own rig will keep capital expenditures moderate. Theactivities requiring larger risk or capital commitment in comparison with thecompany's current financial resources will for now remain conditional onfarm-out agreements. The shale gas project with WGI has been progressing and theplanning on the first exploratory well is now at an advanced stage, althoughwe may anticipate some delay to drilling operations as a consequence of theunstable political situation. Non-Core Business While the company progresses carefully and assesses its options inits core business, we have put an increased emphasis on non-core activities asa means to stabilise the company's cash flows. The management has worked hardto strike a balance between shrinking our costs and maintaining our presencein and commitment to, Ukraine while finding alternative ways to compensate forlow oil and gas sales from production. After only two years since its launchand without the need for any meaningful investment, our service subsidiary,Astro Service, has produced more than a third of our revenues in 2013 andshould continue its progression in 2014. The company also commenced at the endof 2013 a physical gas trading activity that has produced limited revenues sofar but opened up new horizons that we hope will enable us to exploitsignificant market distortions in the future. Finally, Cadogan is increasinglyproactive in prudent management of its cash balance, given its size incomparison with its current revenues and P&L and the skill-set of severalsenior executives within the Group. Conservative use of this cash willmaximize its utility and availability for a significant period as the companycontinues to explore its strategic options in oil and gas. Obtaining a properreturn on this cash should therefore be an important objective with materialimpact on the company's profitability or cash flow. Management believes thatthe main focus of this activity should be on yield-generating fixed incomeinvestments, within the company's or its management's areas of expertise. It is the management's goal to achieve a recurrent positive cashflow in 2014 regardless of success in the core E&P activity thanks to thecontribution of non-core service, trading and investment activities inaddition to cost reduction initiatives. Management expects to monetize furtherbalance sheet recoveries in 2014 to complement the cash generation from coreand non-core activities, principally relating to existing, complex tax claimsreceivables. Outlook Ukraine has never been more relevant on the world geopolitical mapand Cadogan management continues to believe that it is ideally placed, thanksto its ongoing efforts to maximize its resources while minimizing costs, toturn this opportunity into value for shareholders. Bertrand des PallieresChief Executive Officer28 April 2014 Operations Review In 2013 the Group held working interests in nine conventional(2012: nine) gas, condensate and oil exploration and production licences inthe East and West of Ukraine. All these assets are operated by the Group andare located in either the Carpathian basin or the Dnieper-Donets basin, inclose proximity to the Ukrainian gas distribution infrastructures. The Group'sprimary focus during 2013 was on the four biggest licences in which the mainreserve and resource potential is located: Zagoryanska, Pokrovskoe, andPirkovskoe in the Dnieper-Donets basin of East Ukraine and Bitlyanska, in theCarpathian Basin of West Ukraine. Summary of the Group's licences (as at 31 December 2013) Workinginterest(%) Licence Expiry Licence type(1) Major licences 40.0 Zagoryanska April 2014(3) E&D 70.0 Pokrovskoe August 2016 E&D 100.0 Pirkovskoe October 2015 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-Rungerska April 2016 E&D 99.2 Monastyretska November 2014(3) E&D (1) E&D = Exploration and Development. (2) Debeslavetska and Cheremkhivska licences are held by WGI, inwhich the Group has a 15% interest. The Group has 99.2% and 53.4% of economicbenefit in conventional activities in Debeslavetska and Cheremkhivska licencesrespectively through Joint Activity Agreements ("JAA"). (3) License extension process is ongoing In addition to above licences the Group has a 15% interest inWestgasinvest LLC ("WGI"), which holds the Reklynetska, Zhuzhelianska,Cheremkhivsko-Strupkivska, Debeslavetska Exploration, DebeslavetskaProduction, Baulinska, Filimonivska, Kurinna, Sandugeyivska and Yakovlivskalicences for unconventional activities. Zagoryanska licence The Group has a 40 per cent working interest in the Zagoryanskalicence area. The Zagoryanska licence previously reported 96.4 mmboe ofcontingent resources but, in light of the 2012 drilling campaign and a recentexpert review carried out in Kiev by Brand Vick, the total contingentresources (gas and condensate) (2C) have been reduced to 7.7 mmboe. The exploration and development licence covers 49.6 squarekilometres and in 2009 the licence was extended until April 2014. The workobligations have been fulfilled. Following the joint venture ("JV") formed with Eni in July 2011,under which Eni acquired a 60 per cent interest in the Zagoryanska licence, awork-over and drilling plan was implemented to verify and exploit thepotentially productive intervals. The work over in the wells Zag 1, 2, and 8 did not bring to commercial production. The well Zag 3 was worked over after a mechanical failure, the V19and V18 intervals were perforated, lifted and tested but no commercialproduction was achieved. The Zag 11 well drilling assessed and tested the V24, V23, V19, andV18 intervals. Hydrocarbons were proven but with no commercial flow. As at 31 December 2012 the Group assessed the recoverability of thecarrying value of the development and production assets related to theZagoryanska licence. This has resulted in the impairment of the mentionedassets to nil (for details refer to Note 4(b) of the ConsolidatedFinancial Statements). An extensive revision and reinterpretation of the 3D seismic andGeological and Geophysical ("G&G") studies to value and price all the possiblereserves potential is still ongoing. Zag 3 for V18 and V19 perforation and nitrogen lifting did notbring to commercial production results. Zag 2 for V17 perforation and nitrogen lifting did not bring tocommercial production results. A coiled tubing intervention is planned. Zag 1 and Zag 11 wells are under evaluation for possible work-overintervention. Pokrovskoe licence The Group holds a 70 per cent working interest in the Pokrovskoelicence. Prospective resources reported by GCA at the end of December 2009were 51.1 mmboe. The exploration licence covers 49.5 square kilometres and theinitial licence was extended until August 2016. After the JV with Eni, that acquired 30 per cent of the Group'sPokrovskoe licence, the drilling of the Pokrovskoe 2a well indicated thepresence of hydrocarbons in the deeper Tournasian levels, beneath both thePokrovskoe 1 and Pokrovskoe 2 wells, but due to mechanical problems the wellwas suspended with a future option of re-entry. On 9 March 2012 the Group was advised by Eni that, following theiranalysis of the results for the Pokrovskoe 1 and Pokrovskoe 2a wells, they didnot intend to exercise the option to acquire the additional 30 per cent.Notwithstanding Eni's decision not to exercise the option, Eni continues tohold a 30 per cent share in the Pokrovskoe licence. On the basis of the previous results and the clear indication ofthe presence of a positive hydrocarbons generation and migration system, itwas decided to continue the investigation of the area. The thorough 3D seismicre-interpretation has been successfully concluded for the relative shallowhorizons. One drillable new prospect in the Permian formation(about 2.200m deep) and other two leads in the moderately deeper horizons have beenidentified. Pirkovskoe licence The Group has a 100 per cent working interest in the Pirkovskoelicence which holds 2.5 mmboe of 2P Proven and Probable Reserves(2012: 2.5 mmboe) and 138.2 mmboe of 2C Contingent Resources. This exploration andappraisal licence covers 71.6 square kilometres and expires October 2015. The remaining work programme includes: (a) the testing ofPirkovskoe 1, which is ongoing; (b) deepening to 5,450 metres and testing ofthe suspended Pirkovskoe 2 well; (c) the drilling of a new well;and (d) calculation of the potential hydrocarbon reserves. The Pirkovskoe 2 well is currently suspended. The revision andreinterpretation of the 3D seismic and G&G studies is still ongoing to valueand price all the possible reserves potential. The Group owns the Krasnozayarska gas treatment plant located inthe Pirkovskoe licence area, which is connected to the UkrTransGas system andis continuing the service contract with a nearby local operator. The work-over in Pirk 1 started in October 2013 with the objectiveto perforate V17 interval, lifting and testing. Results were encouraging butno sustainable production with gas and liquid hydrocarbon was achieved.Operations are still ongoing. Bitlyanska licence area The Bitlyanska exploration and development licence covers an areaof 390 square kilometres with the Group's interest at 99.8 per cent. There arethree hydrocarbon discoveries in this licence area, namely Bitlyanska, Borynyaand Vovchenska. The Borynya and Bitlyanska fields hold 219.2 mmboe (gross)(2012: 219.2 mmboe) and 117.3 mmboe (gross) (2012: 117.3 mmboe) of ContingentResources respectively, while no Reserves and Resources have been attributedto the depleted Vovchenska field. In the 1970s drilling of the Borynya 1 resulted in a blow out andBorynya 2 reportedly tested gas at very high rates. In 2009 Cadogan drilledthe Borynya 3 well down to 5,325m, proximal to these two Soviet era wells,suspended due to very highly pressured gas bearing zones. Several intervalsshowed very interesting evidence of gas during drilling, confirmed by logging.Due to the difficult operations' conditions, three very limited open holedrill stem tests were run. In particular, from one of the secondary reservoirtargets at around 3,600m gas was tested at a maximum flow rate of 128,000cubic metres per day. In 1994 the Bitlya 1 well tested non-commercial gas from severalzones down to 3,200 metres. Although, at that time, the presence of an activehydrocarbon system was established, the recent 2D seismic data interpretationdemonstrates that the well was poorly located in relation to any structuralclosure. In 2010 a 2D survey was completed in the southern part of thelicence area to complement the Soviet era 2D seismic data that had beenreprocessed by Cadogan. This integrated data set has been interpreted with thebenefit of recent surface geological mapping and balanced section generation,and a series of prospects for future exploration drilling have beenidentified. Based on the new prospect structures model, and internalre-evaluation, 430 mmboe of contingent resources have been estimated (p50) inhouse. Borynya 3 well has been re-entered and tested in two Krosno 1intervals (2685-2745m and 2890m- 2935m) with interesting flows of gas,condensate and oil. The planned fracturing job remains on hold because theengineering study was inconclusive due to essential information not beingavailable from the previous drilling data collection; a way forward is underevaluation and the deeper horizons will be considered. The planned vintage seismic lines in the Vovchenska area werepurchased and interpreted; a new additional seismic program has been preparedto define possible prospective areas. The remaining work obligations for this licence are under re-negotiation. Minor fields The Group has a number of minor licence areas located in WesternUkraine. These include the following: - Debeslavetska Production licence area A production licence containing 0.860 mmboe of Proved Reserves(2012: 0.845 mmboe). The field is currently producing 95.0 boepd(2012: 84.0 boepd). Newcompressor unit and dehydration facilities for productionoptimisation have been installed as per the programme and are contributing toenergy and emissions saving in 2013. - Debeslavetska Exploration licence area An exploration licence surrounding the Debeslavetska Productionlicence area which is considered quite promising in shallow gas productionpotential following the positive preliminary results of Amplitude versusOffset ("AVO") and Inversion Analysis. The purchase of vintage seismic datawas completed in 2013. The acquisition of 100 linear kilometres of 2D seismiclines is in progress, expected to be completed by April 2014. One shallow wellis approved for drilling from July 2014, a second one is contingent. Ageomechanical model from satellite data, using the "InSar" technologies, willbe applied to understand and predict the gas depletion in the area for betterwells location identification. - Cheremkhivska Production licence area A production licence containing 0.038 mmboe of proved reserves(2012: 0.029 mmboe). This licence is currently producing 23.9 boepd(2012: 32.8 boepd). Potential gas production from shallow intervals seems to bepromising from this licence. Preliminary studies have not yet been conclusive.Vintage seismic data were purchased. Acquisition of 30 linear kilometres of 2Dseismic lines to assess and estimate the reserves will be considered in 2014. - Slobodo-Rungerska licence area An exploration and development licence, with no booked Reserves andResources (2012: nil). Seismic data for this area was reprocessed in 2010 andthe results indicate a deeper structure underlying the depleted and abandonedSlobodo-Rungerska Field. The ongoing re-evaluation of the block has identified6.7 mmboe of oil prospective resources (best estimate), further petrophysicaland reservoir studies are currently underway. - Monastyretska licence area An exploration and development licence, with no booked Reserves orResources (2011: nil). The Blazhiv 1 well was re-entered during the year. After the formation cleaning performances deteriorated from 20-25to 10-15 bopd. It was decided to clean the formation with a light acidchemical that is showing good results. The well is now spontaneously producingat a rate of 25 bopd and a sucker rod pump is going to be installed. Expectedproduction is 40 bopd. The other two presently shut-in wells could be suitable forintervention and are under evaluation. Financial Review Overview In 2013 the Group focused on the operations in west Ukraine onBorynya 3 well, re-interpretation of the existing seismic, and preparation forthe seismic acquisition in the selected western assets. Revenue was stable at the level of $3.8 million; however the salesmix has changed from that in 2013. Sales of hydrocarbons have decreased from$3.0 million to $2.5 million due to decreasing production volumes atDebeslavetska and Cheremkhivska fields. Revenue from service business hasincreased from $0.8 million to $1.3 million. The cash position of$56.5 million at 31 December 2013 has increased from $40.5 million at31 December 2012 mainly due to receivable from Global Process Systems ("GPS")paid in April 2013. Income statement Loss before tax was $14.4 million (2012: $92.4 million). Revenuesof $3.8 million (2012: $3.8 million) comprised sales of gas from theDebeslavetska and Cheremkhivska fields, and revenue from the service business.Cost of sales, which represents production royalties and taxes, depreciationand depletion of producing wells and direct staff costs increased to$3.0 million in 2013 from $2.6 million in 2012 to give a gross profit of$0.8 million (2012: $1.1 million). - Other administrative expenses of $8.9 million(2012: $7.5 million) comprise other staff costs, professional fees, Directors'remuneration and depreciation charges on non-producing property, plant andequipment. In addition to recurring administrative expenses, $0.5 million(2012: $0.5 million) of professional costs were incurred in relation tolitigation and $0.5million (2012: nil) of shortfall between the receivablefrom GPS and the amount of settlement. - Share of losses in joint ventures of $6.7 million (2012: $58.3 million),represents the loss from the operations of joint ventures, whichhave been consolidated using the equity method. This comprised of loss of i) $2.8million from operations on Zagoryanska license of which $0.4million is theforeign exchange loss on the loans to Cadogan Group, ii) loss of $3.4 millionfrom operations on Pokrovska license of which $2.3 million is the foreignexchange loss on the loans to Cadogan Group, and iii) loss of $0.5 millionfrom operations of Westgasinvest LLC. - Other operating expenses of $0.3 million (2012: $2.9 million)includes $0.3 million of net foreign exchange losses (2012: $3.6 million)related to the revaluation of USD denominated monetary assets of the Group'sUK entities which have GBP as the functional currency. Cash flow statement The Consolidated Cash Flow Statement below shows cash fromoperations of $24.0 million (2012: cash used in operations of $0.5 million)whichrelated mainly to receivable from GPS of $30.0 million, $29.5 million of whichhas been recovered under the settlement in April 2013. In addition, the Grouphas occurred capital expenditure of $3.0 million (2012: $0.1 million) onintangible Exploration and Evaluation ("E&E") assets and $0.8 million(2012: $1.1 million) on Property, Plant & Equipment ("PP&E"). In 2013 the Groupinvested into joint ventures $4.7 million (2012: $22.5 million), mainly to coverthe historical capex incurred in 2012 and to repay the operating service chargesto Cadogan as the operating services provider. Balance sheet As at 31 December 2013, the Group had net cash and cash equivalentsof $56.5 million (2012: $40.5 million). Intangible E&E assets of $6.0 million(2012: $3.0 million) represent the carrying value of the Group's investment inexploration and appraisal assets as at 31 December 2013. The PP&E balance of$43.9 million at 31 December 2013 (2012: $46.4 million), reflects the cost ofdeveloping fields with commercial reserves and bringing them into production.Investments in joint ventures of $65.9 million (2012: $67.9 million) mainlyrepresents the carrying value of the Group's investment into Pokrovskalicenses and Westgasinvest LLC (costs related to Zagoryanska license have beenfully impaired), which are accounted for in accordance with IFRS 11 using theequity method (for details please see Note 19). Trade and other receivables of$6.9 million (2012: $39.6 million) includes $4.1 million (2012: $6.9 million)receivable from joint ventures in respect of management charges, loan issuedto Oil and Gas Management Services Group Limited ("OAGSG") of $1.6 million,VAT recoverable of $0.3 million (2012: $0.1 million) in respect to VAT aroseat UK companies, and $0.4 million (2012: $0.8 million) in prepayments. Key performance indicators The Group monitors its performance in implementing its strategywith reference to clear targets set out for four key financial and one keynon-financial performance indicators (`KPIs'): - to increase oil, gas and condensate production measured on numberof barrels of oil equivalent produced per day (`boepd'); - to increase the Group's oil and gas reserves by de-riskingpossible resources and contingent reserves into 2P Reserves. This is measuredin million barrels of oil equivalent (`mmboe'); - to increase the realised price per 1,000 cubic metres; - to increase the Group's basic and diluted earnings per share; and - to maintain no lost time incidents. The Group's performance in 2013 against these targets is set out inthe table below, together with the prior year performance data. No changeshave been made to the source of data or calculation used in the year. Unit 2013 2012Financial KPIsAverage production (working interest basis)(1) boepd 88 1812P reserves(2) mmboe 2.6 2.6Realised price per 1,000 cubic metres(3) $ 483.8 486.0Basic and diluted loss per share(4) cents (6.4) (40.1) Non-financial KPIsLost time incidents(5) incidents 0 0 (1) Average production is calculated as the average dailyproduction during the year. (2) Quantities of 2P reserves as at 31 December 2012 and 2013 arebased on Gaffney, Cline & Associates' independent reserves report on 2PReserves as at 31 December 2009, dated 16 March 2010, as adjusted for theactual production during 2012 and 2013 respectively. (3) This represents the average price received for gas sold duringthe year (including VAT). (4) Basic and diluted profit per Ordinary share is calculated bydividing the net profit for the year attributable to equity holders of theparent company by the weighted average number of Ordinary shares during theyear. (5) Lost time incidents relate to injuries where anemployee/contractor is injured and has time off work. Related party transactions Related party transactions are set out in note 29 to theConsolidated Financial Statements. Treasury The Group continually monitors its exposure to currency risk. Itmaintains a portfolio of cash and cash equivalent balances mainly in US dollars('USD') held primarily in the UK. Production revenues from the sale ofhydrocarbons are received in the local currency in Ukraine ('UAH'), howeverthe hydrocarbon prices are linked to the USD denominated gas and oil prices.To date funds from such revenues have been held in Ukraine for further use inoperations rather than being remitted to the UK. Funds are transferred to theCompany's subsidiaries in USD to fund operations at which time the funds areconverted to UAH. Risks and uncertaintiesThere are a number of potential risks and uncertainties, whichcould have a material impact on the Group's long-term performance and couldcause the actual results to differ materially from expected and historicalresults. Executive management review the potential risks and then classifythem as having a high impact, above $5 million, medium impact above $1 millionbut below $5 million, and low impact below $1 million. They also assess thelikelihood of these risks occurring. Risk mitigation factors are reviewed anddocumented based on the level and likelihood of occurrence. The AuditCommittee reviews the risk register and monitors the implementation ofimproved risk mitigation procedures via 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 HSE system innature conducts activities which can in place demands thatbe seriously impacted by health, management, staff andsafety & environmental incidents. contractors adhere to it. TheSerious incidents can have not only a system ensures that the Groupfinancial impact but can also damage meets Ukraine legislativethe Group's reputation and the standards in full and achievesopportunity to undertake further international standards to theprojects. maximum extent possible. Drilling operations The technical difficulty of drilling The incorporation of detailedwells in the Group's locations and sub-surface analysis into aequipment limitations can result in robust engineered well design andthe unsuccessful completion of the work programme, with appropriatewell. procurement procedures and on site management competence aims to minimise risk.Production and maintenance Some of the Group's facilities have All plants are operated atbeen inherited, and although fully standards above the Ukrainechecked were not installed under our minimum legal requirements.supervision and there is a risk of Operative staff is chosen for itsplant failure. experience and receives supplemental training to ensure that facilities are operated and maintained at a high standard. There is a risk that production or Service providers are rigorouslytransportation facilities can fail reviewed at the tender stage anddue to poor performance of the are monitored during the contractGroup's suppliers and control of period.some facilities being with othergovernmental or commercialorganisations. Work over and abandonment Certain of the Group's wells were Work programmes are designed todrilled by the State and other assess the status of the wellsprivate companies and will be worked and any work that is not safe orover. There is a risk that Cadogan's is not technically feasible willactivities fail because of problems be abandoned. Qualifiedinherited with these sites. professionals will be used to design a step-by-step approach to re-entering old wells. Any well stock that is not considered All sites that are abandoned willsatisfactory for purpose or poses an be restored and re-cultivated toenvironmental hazard will need to be meet or exceed standards requiredabandoned. by the relevant environmental control authorities and in compliance with recognised international standards.Sub-surface risks The success of the business relies on All externally provided andaccurate and detailed analysis of the historic data is rigorouslysub-surface. This can be impacted by examined and discarded whenpoor quality data, either historic or appropriate. New data acquisitionrecently gathered, and limited is considered and appropriatecoverage. Certain information programmes implemented, butprovided by external sources may not historic data can be reviewed andbe accurate. reprocessed to improve the overall knowledge base. Some local contractors may not Detailed supervision of localacquire data accurately, and there is contractors by Cadogan managementfrequently limited choice of locally is followed. Plans are discussedavailable equipment or contractors of well in advance with both locala desirable standard. and international contractors in an effort to ensure that appropriate equipment is available. Data can be misinterpreted leading to All analytical outcomes arethe construction of inaccurate models challenged internally and peerand subsequent plans. reviewed. Interpretations are carried out on modern geological software. A staff training programme has been put in place. Financial risks The Group may not be successful in The Group performs a review ofachieving commercial production from its O&G assets for impairment onan asset and consequently the annual basis. The Group considerscarrying values of the Group's oil on an annual basis whether toand gas assets may not be recovered commission a Competent Person'sthrough future revenues. Report (`CPR') from an independent 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 2013, Management has decided not to commission a new CPR during 2013. 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 2014. 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 byfunds are available to meet maintaining adequate cashdevelopment obligations to reserves and by closelycommercialise the Group's major monitoring forecast and actuallicences. cash flow, as well as short and longer funding requirements. Management reviews these forecasts regularly and updates are made where applicable and submitted to the Board for consideration. The farm-out campaign to conserve cash and mitigate risk will continue through 2014. The Group could be impacted by These risks are mitigated byfailing to meet regulatory reporting employing suitably qualifiedrequirements in the UK, and statutory professionals who, working withtax and filing requirements in both advisers when needed, areUkraine and the UK. monitoring regulatory reporting requirements, and who ensure that timely submissions are made. The Group operates primarily in Clear authority levels and robustUkraine, an emerging market, where approval processes are in place,certain inappropriate business with stringent controls over cashpractices may from time to time management and the tendering andoccur. This includes bribery, theft procurement process. Adequateof Group property and fraud, all of office and site protection is inwhich can lead to financial loss. place to protect assets. Anti-bribery policies are in place. Risk MitigationFinancial risksThe Group is at risk from changes in Revenues are received in UAH andthe economic environment both in expenditure is made in UAH, butUkraine and globally, which can cause funds are transferred in USforeign exchange movements, changes dollars to Ukraine. The Groupin the rate of inflation and interest continues to hold most of itsrates and lead to credit risk in cash reserves in the UK mostly inrelation to the Group's key US dollars. Cash reserves arecounterparties. placed with leading financial institutions which are approved by the Audit Committee. The Group is predominantly a US dollar denominated business. Foreign exchange risk is considered a normal and acceptable business exposure and the Group does not hedge against this risk. Refer to note 29 to the Consolidated Financial Statements for detail on financial risks. Corporate risks Should the Group fail to comply with The Group designs a worklicence obligations there is a risk programme and budget to ensurethat its entitlement to the licence that all licence obligations arewill be lost. met. The Group engages 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 inregulatory, economic and political international banks outsiderisks than other jurisdictions. Ukraine and by continuouslyEmerging economies are generally maintaining a working dialoguesubject to a volatile political with the regulatory authorities.environment which could adverselyimpact on Cadogan's ability tooperate in the market. Since November 2013, Ukraine has beenin a political and economic turmoil.The Ukrainian Hryvnia devalued againstmajor world currencies and significantexternal financing is required tomaintain stability of teh economy.In February 2014, Ukraine's sovereignrating has been downgraded to CCC witha negative outlook. The Governmenthowever is expecting significantfunding from the international creditorsin 2014, with Interntaional Monetary Fund("IMF") being the largest. The further political developments arecurrently unpredictable and mayadversely affect the Ukrainian econmy. The Group's success depends upon The Group periodically reviewsskilled management, technical and the compensation and contractadministrative staff. The loss of terms of its staff.service of critical members from theGroup's team could have an adverseeffect on the business. Statement of Reserves and Resources The Group did not commission an independent Reserves and ResourcesEvaluation of the Group's oil and gas assets in Ukraine as at 31 December2013, due to insufficient new information arising from operational activitybefore the year end. The summary of the Reserves and Resources below are basedon the Independent Reserves and Resources Evaluation performed by GaffneyCline and Associates as at 31 December 2009, adjusted for subsequent actualproduction and expert review and studies performed with an external firm inKiev and in house. Summary of Reserves As of 31 December 2013 Working interest basis Gas Condensate Oil bcf mmbbl mmbblProved and Probable Reserves at 1 January 2013 11.3 0.6 -Production (0.2) - -Proved and Probable Reserves at 31 December 2013 11.1 0.6 -Possible Reserves at 1 January 2013 and 31 December 19.5 1.5 -2013 Summary of Contingent Resources As of 31 December 2013 Working interest basis Gas Condensate Oil Total Bcf mmbbl mmbbl mmboeContingent Resources at 1 January 2013 2,357.3 97.9 - 522.2Change in working interest - - - -Contingent Resources at 31 December 2013 2,357.3 97.9 - 522.2 Reserves are assigned only to the Pirkovskoe, Debeslavetska andCheremkhivska fields. Contingent Resources are assigned to the Zagoryanska, Pirkovskoe,Borynya and Bitlya fields, where development is contingent on furtherappraisal. Prospective Resources of 165.9 billion cubic feet ("bcf")(2011: 165.9 bcf) of gas and 5.9 mmbl (2011: 5.9 mmbl) of condensate are attributedto the Pokrovskoe field (reflecting Cadogan's working interest), where therehas not yet been a production test. The Board recognises the requirement under Section 414C of the Actto detail information about employees, human rights and community issues,including information about any policies it has in relation to these mattersand the effectiveness of these policies. The Group considers the sustainability of its business as a key andcompetitive element of its strategy. Meeting the expectations of ourstakeholders is the way in which we secure our licence to operate, and to berecognised in the values we declare is the best added value we can bring inorder to profitably prolong our business. The Board recognises that the healthand safety of its employees and of the communities and protecting theenvironment it impacts are the key drivers for the sustainable development ofthe Company's activity. Our Code of Ethics and the adoption of internationallyrecognised best practices and standards are our and our employees' referencesfor conducting our operations. Our activities are carried out in accordance with a policy manual,endorsed by the Board, which has been disseminated to all staff. The manualincludes policies on business conduct and ethics, anti-bribery, the acceptanceof gifts and hospitality, and whistleblowing. The Group's Health, Safety and Environment Manager reports directlyto the Chief Operations Officer. His role is to ensure that the Group hasdeveloped suitable procedures and that operational management haveincorporated them into daily operations, and he has the necessary level ofautonomy and authority to discharge his duties effectively and efficiently. The Board believes that health and safety procedures and trainingacross the Group should be to the standard expected in any company operatingin the oil and gas sector. Accordingly, it has set up a Committee to reviewand agree health and safety initiatives and report back on progress. Themonthly management report to the Board contains a full report on both healthand safety, and environmental issues, and key safety and environmental issuesare discussed by the Executive Management. The Health, Safety and EnvironmentCommittee Report is below. Health, safety and environment The Group has developed an integrated Health, Safety andEnvironmental ('HSE') management system. The system aims, by a continuousimprovement programme, to ensure that a safety and environmental protectionculture is embedded in the organisation. The HSE management system ensuresthat both Ukrainian and international standards can be met with the UkrainianHSE legislation requirements taken as an absolute minimum although theinternational requirements are in the main met or exceeded. All the Group'slocal operating companies in East and West Ukraine have all the necessarydocumentation and systems in place to ensure compliance with Ukrainianlegislation. A proactive approach to the prevention of incidents has been inplace throughout 2013, which relies on an observation cards system andreliable near-miss reporting. Staff training on HSE matters is recognised asthe key factor to generate continuous improvement. In-house training isprovided to help staff meet international standards and follow best practice.At present, special attention is being given to training on risk assessments,incident reporting and investigation, as well as hazard and operational('HAZOP') studies to ensure that international standards are maintained evenif they exceed those required by Ukrainian legislation. The Board monitors lost time incidents as a key performanceindicator of the business, to reasonably verify that the procedures in placeare robust. The Board has benchmarked safety performance against the HSEperformance index measured and published annually by the InternationalAssociation of Oil & Gas Producers. In 2013, the Group recorded a total of440,386 man hours worked. There were no Lost Time Incidents ('LTIs') recordedin 2013 and a total of over one million man hours have been worked without anLTI since the previous incident was recorded in July 2011. Vehicle safety and driving conduct remain among the Company'spriorities in controlling hazards and preventing injuries. As of the end of2013, the Company has recorded almost 8.4 million kilometres driven without anLTI. The European Bank for Reconstruction and Development ('EBRD') was,until February 2013, a substantial shareholder in the Company and closelymonitored the environmental and community aspects of the Group's activities.An environmental report was submitted to the EBRD each year summarising theGroup's compliance with local HSE regulation and standards. The EBRD requiredand reviewed the results of audits undertaken by external consultants whichwere used to generate an environmental action plan. The Group remains highlyconscious of the need to optimise its activities in order to reduce theirenvironmental impact of its operations. In 2012, a number of steps were takenin this direction, such as replacing the old compressor unit at theDebeslavetske Gas Treatment Facility, which benefited the environment bydecreasing fuel consumption and air emissions while improving the overallefficiency of the plant. Starting from 2013, the Company is committed to prepare a baselineto assess and monitor its environmental performance, namely, the consumptionof electricity and industrial water and fuel consumption by cars, plants andother work sites. We have developed of procedures necessary forimproving the Group's environmental performance, taking into accountthe requirements of any applicable policies, such as UKregulations on mandatory reporting of greenhouse gas emissions. Employees Certain of the Group's operations are undertaken by sub-contractors' specialistshaving the technical knowledge required for complex wells' drilling operations.Local interest is part of the Company's sustainable development policy and whereverpossible local staff are recruited and procedures are in place to ensure that allrecruitments are undertaken on a transparent and fair basis with no discriminationbetween applicants. Each operating company has its own Human Resources staff toensure that the Group's employment policies are properly implemented and followed.As required by Ukrainian legislation, Collective Agreements are in place with the Group'sUkrainian subsidiary companies which provide an agreed level of staff benefitsand other safeguards for employees. The Group's Human Resources policy coverskey areas such as equal opportunities, wages, overtime and non-discrimination.All staff are aware of the Group's grievance procedures. Sufficient levels of health insurance are provided by the Group toemployees to ensure they have access to good medical facilities. Eachemployee's training needs are assessed on an individual basis to ensure thattheir skills are adequate to support the Group's operations, and to help themto develop. Gender diversity The Board of Directors of the Company comprised of five maleDirectors throughout the year to 31 December 2013. The appointment of any newDirector is made on the basis of merit. See below for more information onthe composition of the Board. There were no females holding Senior Managerposition as at 31 December 2003 (1). As at 31 December 2013, the Company comprised a total of 121employees, as follows: Male FemaleNon-executive directors 3 0Executive directors 2 0Other employees 85 31All employees 90 31 (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. Human rights Cadogan's commitment to the fundamental principles of human rights is embeddedin our HSE policies 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 supplierswherever we do business. Community The Group's activities are carried out in rural areas of Ukraineand the Board is aware of its responsibilities to the local communities inwhich the Group operates and from which some of the employees are recruited.At current operational sites, management works with the local councils toensure that the impact of operations is as low as practicable by putting inplace measures to mitigate their effect. Key projects undertaken includeimprovement of the road infrastructure in the area, which provides easieraccess to the operational sites while at the same time minimisinginconvenience for the local population and allowing improved roadcommunications in the local communities. Specific charitable activities areundertaken for the direct benefit of local kindergartens, schools, sportingfacilities and medical services, as well as other community-focusedfacilities. All activities are followed and supervised by managers who aregiven specific responsibility for such tasks. The Group's local companies see themselves as part of the communityand are involved not only with financial assistance, but also with practicalhelp and support. The recruitment of local staff generates additional incomefor areas that otherwise are predominantly dependent on the agriculturalsector. Approval The Strategic Report was approved by the Board of Directors on28 April 2014 and signed on its behalf by: Laurence SudwartsCompany Secretary28 April 2014 Board of Directors Zev Furst, 66, AmericanChairman Appointed to the Board on 2 August 2011, Mr Furst is a leadingglobal business and communications strategist who has advised politicalleaders, foreign principals and corporate executives of Fortune 100 companies.He is the Chairman and CEO of First International Resources, an internationalcorporate and political consulting firm he founded in 1992. Mr Furstspecialises in providing strategic counsel on crisis management, market entry,corporate positioning and personal reputational issues. In recent years, hehas also advised and consulted with candidates running for national office inIsrael, Japan, Mexico and Ukraine. In 1986, Mr Furst was a founding partner of Meridian Resources andDevelopment Ltd, an international commodities trading company specialising inchemicals and petroleum products. Mr Furst currently serves as Chairman of the International Board ofthe Peres Center for Peace and is a member of the Advisory Board of the KennanInstitute in Washington, DC. He has written and lectured extensively oninternational affairs, business and political strategy and the role of mediain politics and diplomacy. Mr Furst is Chairman of the Company's Nomination Committee and amember of the Remuneration Committee. Bertrand des Pallieres, 47, FrenchChief Executive Officer Mr des Pallieres was appointed as Chief Executive Officer on 1August 2011, having joined the Board as a non-executive Director on 26 August2010. Mr des Pallieres is also the CEO of SPQR Capital Holdings SA, a majorshareholder of the Company. Previously he was the Global Head of Principal Finance and memberof the Global Market Leadership Group of Deutsche Bank from 2005 to 2007. From1992 to 2005 he held various positions at JPMorgan including Global Head ofStructured Credit, European Head of Derivatives Structuring and Marketing, andCo-head of sales for Europe, Middle East and Africa. He is a non-executivedirector of Versatile Systems Inc. listed on the Toronto and London StockExchanges and Equus Total return, Inc., listed on the NYSE. Mr des Pallieres is a member of the Nomination Committee. Adelmo Schenato, 62, ItalianChief Operating Officer Mr Schenato was appointed to the Board as Chief Operating Officeron 25 January 2012. He joined the Company after a 35-year career at Eni S.p.A('Eni'), the Italian integrated energy business, where he served in seniorglobal and regional positions. His global roles at Eni included Well Operations Research andDevelopment and Technical Management, and Vice President HSE & Sustainability.His regional roles include General Manager of Tunisia, Gabon and Angola aswell as CEO of Eni's Italian gas storage company. Gilbert Lehmann, 68, FrenchSenior Independent non-executive Director Mr Lehmann was appointed to the Board on 18 November 2011. He iscurrently acting as an adviser to the Executive Board of Areva, the Frenchnuclear energy business, having previously been its Deputy Chief ExecutiveOfficer responsible for finance. He is also a former Chief Financial Officerand deputy CEO of Framatone, the predecessor to Areva, and was CFO of Sogee,part of the Rothschild Group. Mr Lehmann is also Deputy Chairman and Chairmanof the Audit Committee of Eramet, the French minerals and alloy business. Heis Deputy Chairman and Audit Committee Chairman of Assystem SA, the Frenchengineering and innovation consultancy. He was Chairman of ST MicroelectronicsNV, one of the world's largest semiconductor companies, from 2007 to 2009, andstepped down as Vice Chairman in 2011. Mr Lehmann is currently Chairman of the Company's Audit Committeeand a member of the Remuneration and Nomination Committees. Enrico Testa, 62, Italian Independent non-executive Director Appointed to the Board on 1 October 2011, Mr Testa has a long andvaried background in the energy market. He was Chairman of the Board of ACEA(the Rome electricity and water utility company) from 1996 to 2002. He wasChairman of the Board of Enel S.p.A, the major Italian electricity supplier,during its privatisation. From 2005 to 2009 he was Chairman of RomaMetropolitane, the Rome council-owned company constructing new undergroundlines. He was also Chairman of the Organising Committee for the 20th WorldEnergy Congress held in Rome in November 2007, Senior Partner at the FrancoBernabè Group which owns several investments in the IT sector and, from 2002to 2005, he was member of the Advisory Board of Carlyle Europe and Chairman ofthe Italian Nuclear Forum since 2010. In addition, between 2004 and August2012 Mr Testa was Managing Director of Rothschild S.p.A. He is currently Chairman of the AIM listed telecommunicationscompany Telit Communications Plc, Vice Chairman of Intecs S.p.A and Chairmanof E.VA - Energie Valsabbia S.p.A. - a company developing hydropower and solargenerating plants. Mr Testa is Chairman of the Company's Remuneration Committee and amember of the Audit and Nomination Committees. Directors The Directors in office during the year and at the date of this report are asshown below: Non-executive Directors Executive Directors Zev Furst (Chairman) Bertrand des Pallieres Gilbert Lehmann Adelmo Schenato Enrico Testa Directors' re-election The Board has decided previously that all Directors must be subjectto annual election by shareholders, in accordance with the best practiceguidance for FTSE 350 companies contained in the UK Corporate Governance Codethat was issued in 2012 by the Financial Reporting Council(the 'Code').As such, all of the Directors will be seeking re-election at theAnnual General Meeting to be held on 26 June 2014. The biographies of the Directors in office at the date of thisreport are shown above. Appointment and replacement of Directors The Board may appoint any individual willing to act as a Directoreither to fill a vacancy or act as an additional Director. The appointee mayhold office only until the next annual general meeting of the Companywhereupon his or her election will be proposed to the shareholders. The Company's Articles of Association prescribe that there shall beno fewer than three Directors and no more than fifteen. Directors' interests in shares The beneficial interests of the Directors in office as at31 December 2013 and their connected persons in the Ordinary shares of theCompany at 31 December 2013 are set out below. Shares as at December 31 2013 2012Z Furst - -B des Pallieres 200,000 200,000G Lehmann - -E Testa - -A Schenato - - Directors' indemnities and insurance The Company continues to maintain Directors' and Officers'Liability Insurance. The Company's Articles of Association provide, subject tothe provisions of the Companies Act 2006, an indemnity for Directors inrespect of any liability incurred in connection with their duties, powers oroffice. Save for such indemnity provisions, there are no qualifying thirdparty indemnity provisions. Powers of Directors The Directors are responsible for the management of the businessand may exercise all powers of the Company (including powers to issue or buyback the Company's shares), subject to UK legislation, any directions given byspecial resolution and the Articles of Association. The authority to buy backshares, granted at the 2013 Annual General Meeting, remains unused. Dividends The Directors do not recommend payment of a dividend for the year to31 December 2013 (2012: $nil). Principal Activity and Status The Company is registered as a public limited company (registrationnumber 05718406) in England and Wales. Its principal activity is oil and gasexploration, development and production. Structure of share capital The authorised share capital of the Company is currently£30,000,000 divided into 1,000,000,000 Ordinary shares of 3 pence each. Thenumber of shares in issue as at 31 December 2013 was 231,091,734 Ordinaryshares of 3 pence each with a nominal value of £6,932,752. The Companies(Acquisition of Own Shares) (treasury Shares) Regulations 2003 (the`Regulations') allow companies to hold shares in treasury rather than cancelthem. Following the consolidation of the issued capital of the Company on10 June 2008, there were 66 residual Ordinary shares which were transferred totreasury. No dividends may be paid on shares whilst held in treasury and novoting rights attach to shares held in treasury. Rights and obligations of Ordinary shares On a show of hands at a general meeting every holder of Ordinaryshares present in person or by proxy and entitled to vote shall have one voteand, on a poll, every member present in person or by proxy, shall have onevote for every Ordinary share held. In accordance with the provisions of theCompany's Articles of Association, holders of Ordinary shares are entitled toa dividend where declared and paid out of profits available for such purposes.On a return of capital on a winding up, holders of Ordinary shares areentitled to participate in such a return. Exercise of rights of shares in employee share schemes None of the share awards under the Company's incentive arrangementsare held in trust on behalf of the beneficiaries. Agreements between shareholders The Board is unaware of any agreements between shareholders whichmay restrict the transfer of securities or voting rights. Restrictions on voting deadlines The notice of any general meeting of the Company shall specify thedeadline for exercising voting rights and appointing a proxy or proxies tovote at a general meeting. It is the Company's policy at present to take allresolutions at a general meeting on a poll and the results of the poll arepublished on the Company's website after the meeting. Substantial shareholdings As at 31 December 2013 and 28 April 2014, the Company had beennotified of the following voting rights attached to the Company's shares: 31 December 2013 28 April 2014 % of total % of total Number of voting Number of votingMajor shareholder shares held rights shares held rights SPQR Capital Holdings SA 67,298,498 29.12 67,298,498 29.12Mr Pierre Salik 40,550,000 17.55 40,550,000 17.55Mr Michel Meeus 26,000,000 11.25 26,000,000 11.25J Benaim 21,660,582 9.37 21,660,582 9.37Credit Agricole Indosuez (Suisse) SA 12,050,000 5.21 12,050,000 5.21Credit Suisse Private Banking 7,477,091 3.24 7,477,091 3.24 Amendment of the Company's Articles of Association The Company's Articles of Association may only be amended by a special resolution of shareholders. Disclosure of information to auditors As required by section 416 of the Companies Act 2006, each of theDirectors as at 28 April 2014 confirms that: (a) so far as the Director is aware, there is no relevant auditinformation of which the Company's auditor is unaware; and (b) the Director has taken all the steps that he ought to havetaken as a Director in order to make himself aware of any relevant auditinformation and to establish that the Company's auditor is aware of thatinformation. This confirmation is given and should be interpreted in accordance withsection 416 of the Companies Act 2006. Going concern After making enquiries, the Directors have a reasonable expectationthat the Company and the Group have adequate resources to continue inoperational existence for the foreseeable future. Accordingly, they continueto adopt the going concern basis in preparing the Consolidated and CompanyFinancial Statements. For further detail refer to the detailed discussion ofthe assumptions outlined in note 3(b) to the Consolidated FinancialStatements. Change of control - significant agreements The Company has no significant agreements containing provisionswhich allow a counterparty to alter and amend the terms of the agreementfollowing a change of control of the Company. Should a change in control occur then certain senior staff areentitled to a payment of salary and benefits for a period of six months. Certain of the Company's long-term incentive arrangements containprovisions which permit awards or options to vest or become exercisable on achange of control in accordance with the rules of the plans. Global greenhouse gas emissions This section contains information on greenhouse gas ("GHG")emissions required by the Companies Act 2006 (Strategic Report and Directors'Report) Regulations 2013 ("the Regulations"). Reporting year The reporting year coincides with the Company's fiscal year, whichis 1 January 2013 to 31 December 2013. This is the first year in which GHGreporting has been conducted by the Company, and it will be used as thebaseline year for comparison in future years. Methodology The principal methodology used to calculate the emissions is drawnfrom the 'Environmental Reporting Guidelines: including mandatory greenhousegas emissions reporting guidance (June 2013)', issued by the Department forEnvironment, Food and Rural Affairs ("DEFRA"). Additionally, 'PetroleumIndustry Guidelines for Reporting Greenhouse Gas Emissions (2nd edition, May2011)' were used to cover issues specific for the petroleum industry. DEFRAGHG conversion factors for company reporting were utilised to calculate theCO2 equivalent of emissions from various sources. In certain limited cases,where information was available only for a part of the reporting period, thetotal emissions were extrapolated by extending the available information tocover the full reporting period. This occurred where it was not possible toretrieve information on the amount of heating supplied to one of the Company'soffice buildings, due to an office move. The Company has reported on all of the emission sources requiredunder the Regulations. The Company does not have responsibility for any emission sourcesthat are not included in our consolidated statement. Consolidation approach and organisation boundary An operational control approach was used to define the Company'sorganisational boundary and responsibility for GHG emissions. All materialemission sources within this boundary have been reported upon, in line withthe requirements of the Regulations. Scope of reported emissions Emissions data from the sources within Scope 1 and Scope 2 of theCompany's operational boundaries is detailed below. This includes directemissions from assets that fall within the Company's organisational boundaries(Scope 1 emissions), as well as indirect emissions from energy consumption,such as purchased electricity and heating (Scope 2 emissions). Intensity ratio In order to express the GHG emissions in relation to a quantifiablefactor associated with the Company's activities, wellhead production of crudeoil, condensates and natural gas has been chosen as the normalisation factorfor calculation of the intensity ratio. This will allow comparison of theCompany's performance over time, as well as with other companies in theCompany's peer group. Total greenhouse gas emissions data for the period from 1 January2013 to 31 December 2013 Greenhouse gas emissions source Tonnes of CO2 equivalentScope 1Direct emissions, including combustion offuel and operation of facilities 1,313Scope 2Indirect emissions from energy consumption,including electricity and heating purchasedfor own use 705Total (Scope 1 & 2) 2,018 Annual General Meeting A notice for the Annual General Meeting (the `AGM') to be held at10.30 am on 26 June 2014 at Chandos House, 2 Queen Anne Street, London W1G 9LQis set out below. The following notes provide an explanation ofall of the Resolutions to be put to the AGM. Resolutions 1 to 12 will beproposed as ordinary resolutions requiring the approval of more than 50 percent. of the votes cast at the meeting and Resolutions 13 to 15 will beproposed as special resolutions requiring the approval of at least 75 per centof the votes cast at the meeting. The Board considers that the resolutions tobe put to the meeting are in the best interests of the Company and theshareholders as a whole. Accordingly, the Directors unanimously recommend thatyou vote in favour of the proposed resolutions at the AGM, as they intend todo in respect of their own beneficial holdings. Annual Financial Report (Resolution 1) Shareholders are being asked to receive the Annual Financial Reportof the Company for the financial year ended 31 December 2013. The AnnualFinancial Report comprises the Annual Accounts of the Group together with theDirectors' Report, Annual Report on Remuneration and the auditor's report onthose Accounts and the auditable part of the Annual Report on Remuneration. Approval of Annual Report on Remuneration (Resolution 2) Shareholders are being asked to approve the Annual Report onRemuneration for the financial year ended 31 December 2013, as set out onpages 38 to 43. Approval of Directors' Remuneration Policy (Resolution 3) A new directors' remuneration reporting regime came into effect on1 October 2013. Shareholders will now have an annual advisory vote on thereport on Directors' remuneration and a binding vote, to be held every threeyears, on the remuneration policy of the Directors. Accordingly, shareholdersare being requested to vote on the receipt and approval of the Annual Reporton Remuneration 2013 as set out below and on the Directors' Remuneration Policybelow. Election and re-election of Directors (Resolutions 4 to 9) Under Article 118 of the Company's Articles of Association, everyDirector must seek re-election by members at least once every three years.However, it is now the Board's practice for every Director to seek re-electionby shareholders every year as recommended by the Code. Accordingly,resolutions 4 to 8 deal with the re-election of each of the Company'sDirectors. Biographies of each of the Directors seeking re-election are setout above. All of the Directors proposed for re-election have wideranging business knowledge and bring valuable skills and experience to theBoard and the Board considers that each of the Directors continues to make aneffective and valuable contribution and demonstrates commitment to the role.Accordingly, the Board recommends the re-election of each of these Directors. Resolution 9 deals with the election of Mr Michel Meeus to the Board ofDirectors of the Company. Given Mr Meeus' more than three decades' experiencespanning both the financial and the energy sectors, sectors of vitalimportance to the Company at the present time, the Board believes that MrMeeus will make a valuable and effective contribution to the Company andtherefore recommends that shareholders vote in favour of his election. Auditor (Resolutions 10 and 11) Deloitte LLP have indicated that they are willing to continue inoffice as the Company's auditor. Resolution 10 seeks shareholders' approval toreappoint Deloitte LLP as auditor of the Company to hold office until theconclusion of the next general meeting at which the Annual Financial Report islaid before the shareholders. Resolution 11 seeks shareholders' authorisationfor the Directors to determine the auditor's remuneration. Authority to Allot Shares (Resolution 12) The Directors may allot or grant rights over Ordinary shares onlyif authorised to do so by a resolution of shareholders. Resolution 12 seeks anew authority under section 551 of the Companies Act 2006 to authorise theDirectors to allot shares or grant rights to subscribe for, or convert anysecurity into, shares in the Company. It will expire at the conclusion of nextyear's AGM or, if earlier, on 30 June 2015. Resolution 12 followsinstitutional investor guidelines regarding the authority to allot shares. Paragraph (a) of resolution 12 would give the Directors authorityto allot shares or grant rights to subscribe for, or convert any securityinto, shares (`Rights') up to a maximum nominal amount of £2,310,917,representing approximately one third of the Company's existing issued sharecapital. This maximum is reduced by the nominal amount of shares allotted orRights granted pursuant to paragraph (b) of resolution 12 in excess of£2,310,917. Paragraph (b) of resolution 12 gives the Directors authority toallot shares or grant Rights in connection with a rights issue only up to amaximum nominal amount of £4,621,834 representing approximately two-thirds ofthe Company's existing issued share capital. This maximum is reduced by thenominal amount of shares allotted or Rights granted pursuant to paragraph (a)of resolution 12. Therefore, the maximum nominal amount of shares allotted or Rightsgranted under resolution 12 is £4,621,834, representing approximatelytwo-thirds of the Company's existing issued share capital. As at close of business on 28 April 2014, the Company did not holdany treasury shares. The Directors do not currently intend to use this authority.However, if they do use it, then they intend to follow best practice(including as regards standing for re-election in certain cases), asrecommended by institutional investor guidelines. Disapplication of Pre-Emption Rights (Resolution 13) If the Directors wish to allot any shares or grant rights overshares or sell treasury shares for cash (other than under an employee sharescheme) they are required by the Companies Act 2006 to offer them to existingshareholders pro rata. In certain circumstances, it may be in the interests ofthe Company to raise capital without such a pre-emptive offer. Resolution 13therefore seeks a waiver of shareholders' pre-emptive rights and (aside fromrights issues or other pro rata offers), the authority will be limited to theissue of securities for cash up to a maximum aggregate nominal value of£346,637 - approximately five per cent of the Company's issued Ordinary sharecapital as at 23 April 2014 (being the latest practicable date prior to thedate of the Notice of AGM). The Directors confirm their intention to adhere to the provisionsin the Pre Emption Group Statement of Principles regarding cumulative usage ofauthorities over more than 7.5 per cent of the Company's issued Ordinary sharecapital in any three-year period. This resolution also seeks a disapplication of the pre-emptionrights on a rights issue to permit such arrangements as may be appropriate toresolve legal or practical problems which, for example, might arise withoverseas shareholders. The authority will expire at the conclusion of nextyear's AGM or, if earlier, on 30 June 2015. Directors' Authority to Purchase Shares (Resolution 14) The Company may wish to purchase its own shares and resolution 14seeks authority to do so. If passed, the Company would be authorised to makemarket purchases up to a total of 23,109,173 shares - just under ten per centof the Company's issued Ordinary share capital as at 28 April 2014. TheDirectors will generally only exercise this power when the effect of suchpurchases is expected to increase earnings per share and will be in the bestinterests of shareholders generally. Shares purchased may be cancelled and thenumber in issue will be reduced accordingly. The Company may hold in treasuryany of its own shares that it purchases in this manner. The Company does not have any outstanding share options. Notice of General Meetings (Resolution 15) The purpose of resolution 15 is to allow the Company to continue tocall general meetings (other than AGMs) on 14 clear days' notice. TheDirectors do not expect to use this power unless urgent action is required onthe part of the shareholders. If resolution 15 is passed, the approval will beeffective until the Company's next AGM when it is expected that a similarresolution will be proposed. It should be noted that, in order to be able to call a generalmeeting on less than 21 clear days' notice, the Company must make a means ofelectronic voting available to all shareholders for that meeting. This Directors' Report has been approved by the Board and signed on its behalf by: Laurence SudwartsCompany Secretary 28 April 2014 The Board of the Company is committed to the highest standards ofcorporate governance and bases its actions on the principles set out in theCode issued by the Financial Reporting Council ('FRC') in September 2012 (the'Code'). The Code can be found on the FRC's website at www.frc.org.uk This statement describes how the Group applies the principles ofthe Code. On 20 December 2011 the Company's listing category on the LondonStock Exchange was transferred from `Premium Listing' to `Standard Listing'.Although companies with a standard listing are subject to less stringentcorporate governance requirements, the Board has decided that the Group willcontinue to govern itself in accordance with the principles of the Code andexplain why it has chosen not to comply with any of the provisions of theCode. During the year under review, the Group has complied with theCode's provisions with the following exceptions: - Code provision A.4.2 - During the year, the Chairman did not holdmeetings with the non-executive Directors without the executives present - Code provision E.1.1 - The Senior Independent Director has notattended meetings with major shareholders The reasons for these two areas of non-compliance are as follows: - Although the Chairman did not hold formal meetings of thenon-executive Directors during the year, regular discussions took place bytelephone and email. - The Senior Independent Director, Mr Lehmann, did not attend meetings withmajor shareholders as this responsibility was undertaken by theChairman and the Executive Directors. Mr Lehmann is available to shareholderswho have concerns that they feel would be inappropriate to raise via theChairman or Executive Directors. Board The Board provides leadership and oversight. The Board comprises anon-executive Chairman, Chief Executive Officer, Chief Operating Officer andtwo independent non-executive Directors. The membership of the Board andbiographical details for each of the Directors are incorporated into thisreport by reference and appear above. As at the date of this report, the Chairman had no significantcommitments that might affect his ability to allocate sufficient time to theCompany to discharge his responsibilities effectively. Under the Company's Articles of Association, all Directors mustseek re-election by members at least once every three years. However, theBoard has agreed that all Directors will be subject to annual election byshareholders, as recommended by the Code in respect of FTSE 350 companies.Accordingly, all members of the Board will be standing for re-election at theAnnual General Meeting to be held on 26 June 2014. The Board has a formal schedule of matters specifically reservedfor it to decide, including approval of acquisitions and disposals, majorcapital projects, financial results, Board appointments, dividendrecommendations, material contracts and Group strategy. Five Board meetingstook place during 2013. The Chairman, in conjunction with the Company Secretary, plans theprogramme for the Board during the year. The agenda for Board and Committeemeetings is considered by the relevant Chairman and issued with supportingpapers during the week preceding the meeting. For each Board meeting, theDirectors receive a Board pack including detailed monthly management accounts,briefing papers on commercial and operational matters and major capitalprojects including acquisitions. The Board also receives briefings from keymanagement on specific issues. The attendance of those Directors in place atthe year end at Board and Committee meetings during the year was as follows: Audit Nomination Remuneration Board Committee Committee CommitteeNo. Held 5 3 1 1No. Attended:Z Furst 4 n/a 0 0B des Pallieres 5 n/a 0 n/aG Lehmann 5 3 1 1E Testa 4 3 1 1A Schenato 5 n/a n/a n/a A procedure exists for the Directors, in the furtherance of theirduties, to take independent professional advice if necessary, under theguidance of the Company Secretary and at the Company's expense. All Directorshave access to the advice and services of the Company Secretary, who isresponsible to the Chairman for ensuring that Board procedures are compliedwith and that applicable rules and regulations are followed. Board independence The roles and responsibilities of Chairman and Chief ExecutiveOfficer are separate. A formal division of each individual's responsibilitieshas been agreed and documented by the Board. Mr Lehmann is the SeniorIndependent Director. The non-executive Directors bring an independent view to theBoard's discussions and the development of its strategy. Their range ofexperience ensures that management's performance in achieving the businessgoals is challenged appropriately. The three non-executive Directors, MessrsFurst, Lehmann and Testa, are considered by the Board, in accordance with theCode, to be independent. The letters of appointment for the independentnon-executive Directors are available for review at the Registered Office andprior to the Annual General Meeting. For information regarding the AnnualGeneral Meeting please refer to the Notice of Meeting below. Responsibilities and membership of Board Committees The Board has agreed written terms of reference for the NominationCommittee, Remuneration Committee and Audit Committee. The terms of referencefor all three Board Committees are published on the Company's website,www.cadoganpetroleum.com, and are also available from the Company Secretary atthe Registered Office. A review of the terms of reference, membership andactivities of all Board Committees is provided below. Board performance evaluation Principle B.6 of the Code recommends that boards undertake a formaland rigorous annual evaluation of its own performance and that of itscommittees and individual directors. The Board is mindful that it needs tocontinually monitor and identify ways in which it might improve itsperformance and recognises that board evaluation is a useful tool forenhancing a board's effectiveness. For the year ended 31 December 2013, theBoard opted to undertake self-evaluation by way of a questionnaire designedspecifically to assess the strengths of the Board and identify any areas fordevelopment. The process was led by Mr Furst as Chairman and the evaluation ofthe Chairman's performance was led by Mr Lehmann as the Senior IndependentDirector. The Board discussed the evaluation questionnaire findings, whichwere also used by the Nomination Committee in its annual assessment of theBoard's composition. The Directors are committed to ensuring that the Boardcontinues to represent a broad balance of skills, experience, independence andknowledge and that there is sufficient diversity within the composition of theBoard. All appointments are made on merit against objective criteria - whichinclude gender and diversity generally - in the context of the requirements ofthe business and the overall balance of skills and backgrounds that the Boardneeds to maintain in order to remain effective. Internal control The Directors are responsible for the Group's system of internalcontrol and for maintaining and reviewing its effectiveness. The Board hasdelegated responsibility for the review of the Group's internal controls tothe Audit Committee. The Group's systems and controls are designed tosafeguard the Group's assets and to ensure the reliability of information usedboth within the business and for publication. Systems are designed to manage, rather than eliminate, the risk offailure to achieve business objectives and can provide only reasonable, andnot absolute, assurance against material misstatement or loss. The key features of the internal control systems which operatedduring 2013 and up to the date of signing the accounts are documented in theGroup's Corporate Governance Policy Manual and Finance Manual. These manualshave been circulated throughout the Group. In addition, the Company's jointventure entities adopted policies that mirror the Company's own, except WGI,where ENI's policies are adopted. Day-to-day responsibility for the management and operations of thebusiness has been delegated to the Chief Executive Officer and seniormanagement. Certain specific administrative functions are controlled centrally.Taxation, treasury and insurance functions report to the Director of GroupFinance who reports directly to the Chief Executive Officer. The legalfunction is managed by the General Counsel who reports to the Board and alsoattends all Board meetings. The Health and Safety and Environment functionsreport to the Chief Operating Officer. An overview of the Group's Treasurypolicy is set out above. The Group does not have an internal audit function. Due to thesmall scale of the Group's operations at present, the Board do not feel thatit is appropriate or economically viable to have this function in place. TheAudit Committee will continue to consider the position annually. The Board has reviewed the process, which has been in place fromthe start of the year to the date of approval of this report and which is inaccordance with revised guidance on internal control published in October 2005(the 'Turnbull Guidance'). During the course of its review of the riskmanagement and internal control systems, the Board has not identified nor beenadvised of any failings or weaknesses which it has deemed to be significant.Therefore a confirmation in respect of necessary actions has not beenconsidered appropriate. Relations with shareholders The Chairman and Executive Directors of the Company have a regulardialogue with analysts and substantial shareholders. The outcome of thesediscussions is reported to the Board and discussed in detail. Mr Lehmann, asthe Senior Independent Director, is available to shareholders who haveconcerns that they feel would be inappropriate to raise via the Chairman orExecutive Directors. The Annual General Meeting is used as an opportunity to communicatewith all shareholders. In addition, financial results are posted on theCompany's website, www.cadoganpetroleum.com, as soon as they are announced.The Notice of the Annual General Meeting is contained in this report below.It is intended that the Chairmen of the Nomination, Audit andRemuneration Committees will be present at the Annual General Meeting. Theresults of all resolutions will be published on the Company's website,www.cadoganpetroleum.com. Audit Committee Report The Audit Committee is appointed by the Board, on therecommendation of the Nomination Committee, from the non-executive Directorsof the Group. The Audit Committee's terms of reference include all mattersindicated by the Code. They are reviewed annually by the Audit Committee andany changes are then referred to the Board for approval. The terms ofreference of the Committee are published on the Company's website,www.cadoganpetroleum.com, and are also available from the Company Secretary atthe Registered Office. Two members constitute a quorum. Responsibilities - To monitor the integrity of the annual and interim financialstatements, the accompanying reports to shareholders, and announcementsregarding the Group's results. - To review and monitor the effectiveness and integrity of theGroup's financial reporting and internal financial controls. - To review the effectiveness of the process for identifying,assessing and reporting all significant business risks and the management ofthose risks by the Group. - To oversee the Group's relations with the external auditor and tomake recommendations to the Board, for approval by shareholders, on theappointment and removal of the external auditor. - To consider whether an internal audit function is appropriate toenable the Audit Committee to meet its objectives. - To review the Group's arrangements by which staff of the Groupmay, in confidence, raise concerns about possible improprieties in matters offinancial reporting or other matters. Governance Mr Testa and Mr Lehmann, who are both independent non-executiveDirectors under provision B.1.1 of the Code, are the members of the AuditCommittee. The Audit Committee is chaired by Mr Lehmann who has recent andrelevant financial experience as a former finance director of major Europeancompanies as well as holding several non-executive roles in majorinternational entities. At the invitation of the Audit Committee, the Group Director ofFinance and external auditor regularly attend. The Company Secretary attendsall meetings of the Audit Committee. The Audit Committee also meets the external auditor withoutmanagement being present. Activities of the Audit Committee During the year, the Audit Committee discharged itsresponsibilities as follows: Financial statements The Audit Committee examined the Group's consolidated and Company'sfinancial statements and, prior to recommending them to the Board, consideredthe appropriateness of accounting policies adopted and whether the financialstatements represented a true and fair view. Internal controls and risk management The Audit Committee reviews and keeps under review financial andcontrol issues throughout the Group including the Group's key risks and theapproach for dealing with them. External auditor The Audit Committee is responsible for recommending to the Board,for approval by the shareholders, the appointment of the external auditor. The Audit Committee considers the scope and materiality for the audit work,approves the audit fee, and reviews the results of the external auditor'swork. Following the conclusion of each year's audit, it considers theeffectiveness of the external auditor during the process. An assessment of theeffectiveness of the audit process was made, giving consideration to reportsfrom the auditors on their internal quality procedures. The Committee reviewedand approved the terms and scope of the audit engagement, the audit plan andthe results of the audit with the external auditors, including the scope ofservices associated with audit-related regulatory reporting services.Additionally, auditor independence and objectivity were assessed, givingconsideration to the auditors' confirmation that their independence is notimpaired, the overall extent of non-audit services provided by the externalauditors and the past service of the auditors who were first appointed. We have also taken account of the latest recommendations of the Code inrelation to the regular tendering of the external audit appointment. Deloitte LLP was first appointed in 2005. Having satisfied itselfas to their qualifications, expertise, resources and independence and theeffectiveness of the audit process, the Audit Committee has recommended to theBoard, for approval by shareholders, the reappointment of Deloitte LLP as theCompany's external auditor. There is an agreed policy on the engagement of the external auditorfor non-audit services to ensure that their independence and objectivity aresafeguarded. Work closely related to the audit, such as taxation or financialreporting matters, can be awarded to the external auditor by the executiveDirectors provided the work does not exceed £50,000 in fees per item. Workexceeding £50,000 requires approval by the Audit Committee. All othernon-audit work either requires Audit Committee approval or forms part of alist of prohibited services, where it is felt the external auditor'sindependence or objectivity may be compromised. A breakdown of the non-audit fees is disclosed in note 10 to thenotes to the Consolidated Financial Statements. The Company's externalauditor, Deloitte LLP, has provided non-audit services (excluding auditrelated services) which amounted to $105,000 (2012: $119,000). The AuditCommittee has reviewed the level of these services in the course of the yearand is confident that the objectivity and independence of the auditor is notimpaired by the reason of such non-audit work. Internal audit The Audit Committee considers annually the need for an internalaudit function and believes that, due to the size of the Group and its currentstage of development, an internal audit function will be of little benefit tothe Group. The Group's whistleblowing policy encourages employees to reportsuspected wrongdoing and sets out the procedures employees must follow whenraising concerns. The policy, which was implemented during 2008, was refreshedin 2013 and recirculated to staff as part of a manual that includes theCompany's policies on anti-bribery, the acceptance of gifts and hospitality,and business conduct and ethics. Political and economic uncertainty in Ukraine Recent political turmoil in Ukraine has made it necessary for management toassess the extent of its impact on the Group's operations and assets. The Committee reviewed reports from management which considered whetheradjustments are required to the carrying values of assets and theappropriateness of the going concern assumption. As a result management haveconcluded that there were no significant adverse consequences in relation tothe Group's operations, cash flows and assets that impact the 2013 financialstatements, apart from continuous uncertainty related to key assumptions usedby management in assessment of the recoverable amount of production assetsincluding the gas price and the discount factor in particular. Any furtherescalations of the political crisis may impact the Group's normal businessactivities, and increase the risks relating to its business operations,financial status and maintenance of its Ukrainian production licences. In discussion with the external auditors, the Committeeacknowledged the inherent difficulty in making any assessment as to theeventual outcome of the present political situation and, as a consequence, thedifficulty of making a reliable judgement as to the future impact, if any, onthe Group's business. The Committee concurs with conclusions reached bymanagement summarized in Note 4 to the financial statements. Other significant issues related to 2013 financial statements For the year ended 31 December 2013 the Audit Committee identifiedthe significant issues that should be considered in relation to the financialstatements, being areas which may be subject to heightened risk of materialmisstatement. The Group estimates of oil and gas reserves have a significantimpact on the financial statements, in particular in relation to depletion,depreciation and decommissioning ("DD&A") and impairment. Oil and gasreserves, as discussed in the Statement of Reserves and Resources, are basedon the Independent Reserves and Resources Evaluation performed by GaffneyCline and Associates as at 31 December 2009, adjusted for subsequent actualproduction and expert review and studies performed with external firm in Kievand in house. Following discussions with management and the auditors, includingdiscussing the range of sensitivities, the Committee is satisfied with resultsof the assessment of recoverable amount of production assets. However,reserves estimates are inherently uncertain, especially in the early stages ofa field's life, and are routinely revised over the producing lives of oil andgas fields as new information becomes available and as economic conditionsevolve. The Audit Committee acknowledges that such revisions may impact theGroup's future financial position and results, in particular, in relation toDD&A and impairment testing of oil and gas property, plant and equipment. The Audit Committee considered the Group's intangible explorationand evaluation assets and interests in exploration and evaluation assets heldthrough joint ventures individually for any indicators of impairment includingthose indicators set out in IFRS 6 Exploration for and Evaluation of Mineralresources. The Audit Committee has not found any evidence for the existence ofany such indicators of impairment. The Audit Committee has discussed theGroup's exploration and evaluation assets with both management and theauditor's and concur with the treatment adopted. Overview As a result of its work during the year, the Audit Committee hasconcluded that it has acted in accordance with its terms of reference and hasensured the independence and objectivity of the external auditor. A formalreview of the Audit Committee's performance was undertaken after the year endand concluded that the Committee is effective in its scrutiny of the accountsand financial reporting process, its oversight of risk management systems andits monitoring of internal control testing. The Chairman of the Audit Committee will be available at the AnnualGeneral Meeting to answer any questions about the work of the Audit Committee. Health, Safety and Environment Committee Report The Health, Safety and Environment Committee (the `HSE Committee')is appointed by the Board, on the recommendation of the Nomination Committee.The HSE Committee's terms of reference are reviewed annually by the HSECommittee and any changes are then referred to the Board for approval. Theterms of reference of the Committee are published on the Company's website,www.cadoganpetroleum.com, and are also available from the Company Secretary atthe Registered Office. Two members constitute a quorum, one of whom must be aDirector. Responsibilities - To develop a framework of the policies and guidelines for themanagement of health, safety and environment issues within the Group. - Evaluate the effectiveness of the Group's policies and systemsfor identifying and managing health, safety and environmental risks within theGroup's operation. - Assess the policies and systems within the Group for ensuringcompliance with health, safety and environmental regulatory requirements. - Assess the performance of the Group with regard to the impact ofhealth, safety, environmental and community relations decisions and actionsupon employees, communities and other third parties and also assess the impactof such decisions and actions on the reputation of the Group and makerecommendations to the Board on areas for improvement. - On behalf of the Board, receive reports from managementconcerning any fatalities and serious accidents within the Group and actionstaken by management as a result of such fatalities or serious accidents. - Evaluate and oversee, on behalf of the Board, the quality andintegrity of any reporting to external stakeholders concerning health, safety,environmental and community relations issues. - Where it deems it appropriate to do so, appoint an independentauditor to review performance in regard to health, safety, environmental andcommunity relations matters and review any strategies and action plansdeveloped by management in response to issues raised and, where appropriate,make recommendations to the Board concerning the same. Governance The HSE Committee was in place throughout 2013. Members of the HSECommittee as of April 2014 are Mr Adelmo Schenato (Chief Operating Officer andHSE Committee Chairman), Mr Oleg Sybira (HSE Manager), Mr Luciano Kovacic(Exploration Manager). The Company Secretary attends meetings of the HSECommittee. The HSE Committee meets monthly to monitor continuously progress bymanagement. Activities of the Health, Safety and Environment Committee During the year the HSE Committee discharged its responsibilitiesas follows: - The ongoing review of existing HSE policies and procedures, aswell as development of new ones, was regularly discussed at the Committeemeetings in relation to the current activities. - Compliance with HSE regulatory requirements was ensured throughdiscussion of any inspections, both internal ones and those carried out by theAuthorities. - HSE statistics were a standing item on the agenda, allowing theHSE Committee to assess the Company's performance by analysing any lost-timeincidents (of which there were none during 2013), near misses, HSE trainingand other indicators. - Interaction with contractors, Authorities, local communities andother stakeholders was discussed among other HSE activities. Overview As a result of its work during the year, the HSE Committee hasconcluded that it has acted in accordance with its terms of reference. Nomination Committee Report The Nomination Committee is appointed by the Board predominantlyfrom the non-executive Directors of the Group. The Nomination Committee'sterms of reference include all matters indicated by the Code. They arereviewed annually by the Nomination Committee and any changes are thenreferred to the Board for approval. The terms of reference of the NominationCommittee are published on the Company's website, www.cadoganpetroleum.com,and are also available from the Company Secretary at the Registered Office.Two members constitute a quorum. Responsibilities - To regularly review the structure, size and composition(including the skills, knowledge and experience) required of the Boardcompared to its current position and make recommendations to the Board withregard to any changes. - Be responsible for identifying and nominating for the approval ofthe Board candidates to fill Board vacancies as and when they arise. - Before appointment is made by the Board, evaluate the balance ofskills, knowledge, experience and diversity on the Board and, in the light ofthis evaluation, prepare a description of the role and capabilities requiredfor a particular appointment. In identifying suitable candidates, the Nomination Committee shalluse open advertising or the services of external advisers to facilitate thesearch and consider candidates from a wide range of backgrounds on merit,taking care that appointees have enough time available to devote to theposition. The Nomination Committee shall also make recommendations to theBoard concerning: - Formulating plans for succession for both executive andnon-executive Directors and in particular for the key roles of Chairman andChief Executive Officer. - Membership of the Audit and Remuneration Committees, inconsultation with the Chairmen of those committees. - The reappointment of any non-executive Director at the conclusionof their specified term of office, having given due regard to theirperformance and ability to continue to contribute to the Board in the light ofthe knowledge, skills and experience required. - The re-election by shareholders of any Director having due regardto their performance and ability to continue to contribute to the Board in thelight of the knowledge, skills and experience required. Any matters relating to the continuation in office of any Directorat any time including the suspension or termination of service of an executiveDirector as an employee of the Company subject to the provisions of the lawand their service contract. Governance Mr Zev Furst (Board and Nomination Committee Chairman), Mr Bertranddes Pallieres (Chief Executive Officer), and Messrs Gilbert Lehmann and EnricoTesta (independent non-executive Directors) are the members of the NominationCommittee. The Company Secretary attends all meetings of the NominationCommittee. Activities of the Nomination Committee The Nomination Committee carried out a review of the size,structure and composition of the Board after the year end and concluded thatit had the appropriate balance of skills, knowledge, independence andexperience. Overview As a result of its work during the year, the Nomination Committeehas concluded that it has acted in accordance with its terms of reference. TheChairman of the Nomination Committee will be available at the Annual GeneralMeeting to answer any questions about the work of the Nomination Committee. This report has been prepared in accordance with Schedule 8 of theLarge and Medium-sized Companies and Groups (Accounts and Reports) RegulationsAmendment 2013 and an Ordinary resolution will be submitted to theshareholders seeking their approval of the report at the Annual GeneralMeeting of the Company. Statement from the Chairman I am pleased to present the Annual Report on Remuneration for theyear ended 31 December 2013. Shareholders may be aware that new rules for the reporting ofdirectors' remuneration came into effect on 1 October 2013. These now requirecompanies to ask shareholders to approve the annual remuneration paid todirectors every year and to formally approve the Directors' RemunerationPolicy on a three-yearly basis. Any change to the Directors' RemunerationPolicy will require shareholder approval. The vote on the Annual Report onRemuneration is, as previously, an advisory vote, whilst the Directors'Remuneration Policy is subject to a binding vote. Accordingly, OrdinaryResolutions will be put to Shareholders at the forthcoming Annual GeneralMeeting to be held on 26 June 2014, to receive and approve the Annual Reporton Remuneration and to receive and approve the Directors' Remuneration Policy. Given the challenging political situation present in Ukraine overthe past months, the company's aim to develop a revised, long-term andbalanced Remuneration Policy aligned to strategy and performance and linked toshareholder preferences has of necessity taken second precedence to otherpressing matters. In the circumstances, the Company proposes to maintain itscurrent approach to remuneration, already long-term, balanced and aligned tostrategy and performance, until the situation in the country has settled. Atthat point, the Company will bring its revised Remuneration Policy toshareholders for consideration. Enrico TestaChairman of the Remuneration Committee28 April 2014 Information not subject to audit: Remuneration Committee The Remuneration Committee is committed to principles ofaccountability and transparency to ensure that remuneration arrangementsdemonstrate a clear link between reward and performance. In its work, theRemuneration Committee considers fully the principles and provisions of theCode. In designing performance-related remuneration schemes for executiveDirectors, the Remuneration Committee has considered and applied Schedule A ofthe Code. Remuneration Committee Report Responsibilities In summary, the Remuneration Committee's responsibilities, as setout in its terms of reference, are as follows: - To determine and agree with the Board the policy for theremuneration of the executive Directors, the Company Secretary and othermembers of executive management as appropriate. - To consider the design, award levels, performance measures andtargets for any annual or long-term incentives and approve any payments madeand awards vesting under such schemes. - Within the terms of the agreed remuneration policy, to determinethe total individual remuneration package of each executive Director and othersenior executives including bonuses, incentive payments and share options orother share awards. - To ensure that contractual terms on termination, and any paymentsmade, are fair to the individual and the Company, that failure is not rewardedand that the duty to mitigate loss is fully recognised. Governance The Remuneration Committee consists of Mr Enrico Testa , Mr Zev Furst andMr Gilbert Lehmann. At the discretion of the Remuneration Committee,the Chief Executive Officer is invited to attend meetings when appropriate,but is not present when his own remuneration is being discussed. TheRemuneration Committee is also supported by the Company Secretary. Activities of the Remuneration Committee During the year, the Remuneration Committee: - Approved the outline structure of a Long-Term Incentive Plan(as recommended by PricewaterhouseCoopers, the Group's appointed external advisers)and directed management to develop a detailed proposal for the Remuneration Committee'sconsideration. - Reviewed and confirmed the Company's remuneration policy, as setout in this Annual Report on Remuneration 2013. No awards or payments were made under incentive schemes during2013. No new incentive schemes were introduced during the period. Overview As a result of its work during the year, the Remuneration Committeehas concluded that it has acted in accordance with its terms of reference. Thechairman of the Remuneration Committee will be available at the Annual GeneralMeeting to answer any questions about the work of the Committee. The Remuneration Committee unanimously recommends that shareholdersvote to approve the Annual Report on Remuneration and the Directors'Remuneration Policy at the 2014 Annual General Meeting. Your Company's performance A graph may be found in the Comapny's full Annual Report and Accountsand appears on the Company's website www.cadoganpetroleum.com which highlightsthe Company's total shareholder return ('TSR') performance since listing comparedto the FTSE All Share Oil & Gas Producers index. This index has been selected onthe basis that it represents a sector-specific group which is an appropriate groupfor the Company to compare itself against. TSR is the return from a share or indexbased on share price movements and notional reinvestment of declared dividends. The Chairman and Executive Directors of the Company have a regulardialogue with analysts and substantial shareholders, which includes thesubject of Directors' Remuneration. The outcome of these discussions arereported to the Board and discussed in detail both there and during meetingsof the Remuneration Committee. Mr Lehmann, as the Senior Independent Director,is available to shareholders who have concerns that they feel would beinappropriate to raise via the Chairman or Executive Directors. The Annual General Meeting is used as an opportunity to communicatewith all shareholders. In addition, financial results, including details ofDirectors' remuneration, are posted on the Company's website,www.cadoganpetroleum.com, as soon as they are announced. It is intended thatthe Chairmen of the Nomination, Audit and Remuneration Committees will bepresent at the Annual General Meeting. The results of all resolutions will bepublished on the Company's website, www.cadoganpetroleum.com. Arrangements for past Directors Mr Ian Baron resigned as a Director on 15 June 2012 and receivedcompensation of £80,000 for termination of his consultancy agreement withoutnotice. Whilst a Director, Mr Baron was entitled to a payment of 10 per centof his base salary into a suitable pension arrangement as long as he coulddemonstrate that he had made a contribution equating to 5 per cent of salaryto the arrangement. A payment relating to the accrued value from February 2011to February 2012 was made in 2013 and 2014. Arrangements for existing Directors During 2013, Mr Bertrand des Pallieres continued as Chief ExecutiveOfficer. Mr des Pallieres' salary is £246,000 ($384,941) per annum, comprising£216,000 ($337,997) per annum under a consultancy agreement (the terms ofwhich are reviewed by the Remuneration Committee annually) and £30,000($46,944) per annum under a services agreement. Any bonus to be awarded toMr des Pallieres is at the discretion of the Board. In addition, Mr des Pallieresis entitled to participate in an incentive scheme, the performance conditionsfor which are set by the Remuneration Committee. Adelmo Schenato continued as Chief Operating Officer of the Companythroughout 2013. Mr Schenato's basic salary is £212,093 ($331,728) comprising€225,000 per annum under a consultancy agreement and £21,000 under a servicesagreement. Any bonus to be awarded to Mr Schenato is at the discretion of theBoard. In addition, Mr Schenato is entitled to participate in an incentivescheme, the performance conditions for which are set by the RemunerationCommittee. Information subject to audit: 2013 Directors' emoluments Director $ $ $ $ $ $ $ $ Salary/fees Pension Loss of Total Salary/fees Pension Loss of office Total office in 2013 in 2012 Z Furst 133,008 - - 133,008 131,714 - - 131,714B des Pallieres 384,941 - - 384,941 389,935 - - 389,935A Schenato 331,728 - - 331,728 308,849 - - 308,849G Lehmann 70,416 - - 70,416 71,330 - - 71,330E Testa 54,768 - - 54,768 55,479 - - 55,479I Baron (resigned 15 - - - - 121,524 31,966 126,808 280,298June 2012)TOTAL 974,861 - - 974,861 1,078,831 31,966 126,808 1,237,605 The remuneration of the highest paid Director, Mr des Pallieres, was $384,941 (2012: $389,935). There were no performance payments or benefits in kind paid in 2013 (2012: $nil). Mr des Pallieres is a non-executive Director of Versatile SystemsInc. and Equus Total Returns Inc. Any fees paid are retained by Mr desPallieres. Share Incentive Arrangements The Company currently operates the following incentive plans: 2008 Performance Share Plan ('PSP') The PSP offers the opportunity to earn shares in the Companysubject to the achievement of stretching performance targets. Awards can bemade under the PSP at the direction of the Remuneration Committee with a valueof up to a maximum of 200 per cent of base salary (400 per cent in exceptionalcircumstances). No Directors who held office during the year have received anyawards under the PSP. Share options The Company operates two share option plans: the 2008 Share OptionPlan (unapproved for HMRC purposes) and the 2008 Approved Option Plan ('CSOP')(which is an HMRC approved plan). No options have been exercised under any Option Scheme and thus nogain on exercise has been realised. There are no options outstanding at 31 December 2013. Non-Executive Directors In May 2011 the Board agreed that the Chairman's fee be set at£85,000 ($131,714) and that the fee for acting as an independent non-executiveDirector be set at £35,000 ($55,479) with an additional £10,000 ($15,851) foracting as Chairman of the Audit Committee. There has been no increase innon-executive Directors' fees since that time. Directors' Remuneration Policy The Company adheres to the recommendation of the Code, that levelsof remuneration should be sufficient to attract, retain and motivate directorsof the quality required to run the Company successfully. The Company, however,will not pay more than is necessary to achieve these objectives. Those aspects of executive directors' remuneration which relate toperformance will be testing in nature, and designed to promote the long-termsuccess of the Company. At present, however, there are no plans to increasethe level of fees paid to directors. In addition, views expressed byshareholders on the fees paid to directors, will be taken into considerationby the Board, when reviewing the Directors' Remuneration Policy and in theannual review of directors' fees. The Company's policy when determining theduration of notice periods, and the extent of termination payments, will bebased on prevailing best practice. The Directors' Remuneration Policy will beput to a shareholders' vote, at least once every three years. An Ordinary Resolution, for the approval of the Directors'Remuneration Policy, will be put to shareholders at the forthcoming AnnualGeneral Meeting. The Directors' Remuneration Policy will be effectiveimmediately, if and when the Ordinary Resolution is passed by shareholders. The Remuneration Committee is appointed by the Board from thenon-executive Directors of the Group. The Remuneration Committee's terms ofreference include all matters indicated by the Code. They are reviewedannually by the Remuneration Committee and any changes are then referred tothe Board for approval. The terms of reference of the Remuneration Committeeare published on the Company's website, www.cadoganpetroleum.com, and are alsoavailable from the Company Secretary at the Registered Office. Two membersconstitute a quorum. Service agreements The Company's policy on service agreements is that executiveDirectors' agreements should, following any necessary initial notice period,be terminable by either the Company or the Director on not more than sixmonths' notice. The service agreements contain provision for earlytermination, among other things, in the event of a breach by the executive butmake no provision for any termination benefits except in the event of a changeof control of the Company where the executive becomes entitled to 12 months'salary on termination by the Company. The service agreements containrestrictive covenants for a period of 12 months following termination of theagreement. Details of service agreements in place as at the date of thisreport are set out below: Director Current agreement start date Notice periodB des Pallieres 1 August 2011 Six monthsA Schenato 25 January 2012 Six months Remuneration policy and package for executive Directors The Remuneration Committee's philosophy is that remunerationarrangements should be appropriately positioned to support the Group'sbusiness strategy over the longer term and create value for shareholders. Inthis context the following key principles are considered to be important: - remuneration arrangements should align executive and employeeinterests with those of shareholders; - remuneration arrangements should help retain key executives andemployees; and - remuneration arrangements should incentivise executives toachieve short, medium and long-term business targets which represent valuecreation for shareholders. Targets should relate to the Group's performance interms of overall revenue and profit and the executive's own performance.Individual targets should reflect the role of the executive in question butmight relate, for example, to the generation of new revenue streams protectionof the Company's existing tangible and intangible assets and the promotion ofthe Company's business interests. Exceptional rewards should only be deliveredif there are exceptional returns. Share Incentive Arrangements The Company currently operates the following incentive plans: - 2008 Performance Share Plan; and - 2008 Share Option Plan with a corresponding HMRC approved plan. The Company made no awards in 2013 under the 2008 Share OptionPlan. There were no outstanding options as at 31 December 2013. 2008 Performance Share Plan ('PSP') The PSP offers the opportunity to earn shares in the Companysubject to the achievement of stretching performance targets. Awards can bemade under the PSP at the direction of the Remuneration Committee with a valueof up to a maximum of 200 per cent of base salary (400 per cent in exceptionalcircumstances). No Directors who held office during the year have received anyawards under the PSP. Directors' interests in shares The beneficial interests of the Directors in office as at 31 December 2013and their connected persons in the Ordinary shares of theCompany at 31 December 2013 are set out below. Shares as at December 31 2013 2012Z Furst - -B des Pallieres 200,000 200,000G Lehmann - -E Testa - -A Schenato - - Share options The Company operates two share option plans: the 2008 Share OptionPlan (unapproved for HMRC purposes) and the 2008 Approved Option Plan ('CSOP')(which is an HMRC approved plan). No options have been exercised under any Option Scheme and thus nogain on exercise has been realised. There are no options outstanding at 31 December 2013. Remuneration policy for non-executive Directors Independent non-executive Directors The payment policy for independent non-executive Directors is topay the market rate to secure persons of a suitable calibre. The remunerationof the non-executive Directors is determined by the Board. Externalbenchmarking data and specialist advisers are used when setting fees, whichwill be reviewed at appropriate intervals. In May 2011 the Board agreed that the Chairman's fee be set at£85,000 ($131,714) and that the fee for acting as an independent non-executiveDirector be set at £35,000 ($55,479) with an additional £10,000 ($15,851) foracting as Chairman of the Audit Committee. There has been no increase innon-executive Directors' fees since that time. The non-executive Directors' fees are non-pensionable. Thenon-executive Directors have not to date been eligible to participate in anyincentive plans; however, the Board considers that it may be appropriate inthe future to enable such participation, subject to suitably stretchingperformance thresholds. All non-executive Directors have a letter ofappointment that appoints them to the Board for an initial three year period.Under the Company's Articles of Association, they are subject to retirementand reappointment by shareholders at the first Annual General Meetingfollowing appointment, and then at least once every three years thereafter.The Board has agreed, however, that all Directors should stand for annualre-election by the shareholders. Appointments can be terminated by the Companyon three months' notice or immediately due to a breach. Other non-executive Directors The dates of the non-executive Directors' original appointment andexpiry of current term in accordance with their letters of appointment are: Date of Expiry ofNon-executive appointment current termDirectorZ Furst 2 August 2011 1 August 2014E Testa 1 October 2011 1 October 2014G Lehmann 18 November 2011 18 November 2014 Approval The Annual Report on Remuneration 2013 was approved by the Board on28 April 2014 and signed on its behalf by: Zev FurstChairman28 April 2014 Statement of Directors' Responsibilities in respect of the AnnualReport and the Financial Statements The Directors are responsible for preparing the Annual Report andthe financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statementsfor each financial year. The Directors are required under that law to preparethe Group financial statements in accordance with International FinancialReporting Standards ('IFRSs') as adopted by the European Union and Article 4of the IAS regulation and have also elected to prepare the Parent Companyfinancial statements under IFRSs as adopted by the European Union. UnderCompany law, the Directors must not approve the accounts unless they aresatisfied that they give a true and fair view of the state of affairs of theCompany and Group and of the profit or loss for that period. In preparing theCompany and Group's financial statements, International Accounting Standards('IAS') Regulation requires that Directors: - properly select and apply accounting policies; - present information, including accounting policies, in a mannerthat provides relevant, reliable, comparable and understandable information; - provide additional disclosures when compliance with the specificrequirements in IFRSs are insufficient to enable users to understand theimpact of particular transactions, other events and conditions on the entity'sfinancial position and financial performance; and - make an assessment of the Company's and Group's ability tocontinue as a going concern. The Directors are responsible for keeping adequate accountingrecords that are sufficient to show and explain the Company and Group'stransactions and disclose with reasonable accuracy at any time the financialposition of the Company and Group and enable them to ensure that the financialstatements comply with the Companies Act 2006. They are also responsible forsafeguarding the assets of the company and hence for taking reasonable stepsfor the prevention and detectiln of fraud and other irregularities. Under applicable law and regulations, the Directors are alsoresponsible for preparing a Directors' Report (including Business Review),Annual Report on Remuneration, Directors' Remuneration Policy and CorporateGovernance Statement that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity ofthe corporate 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 AnnualReport We confirm to the best of our knowledge: (1) the financial statements, prepared in accordance withInternational Financial Reporting Standards as adopted by the European Union,give a true and fair view of the assets, liabilities, financial position andprofit or loss of the Company and the undertakings included in theconsolidation as a whole; and (2) the management report, which is incorporated into theDirectors' Report along with the Strategic Report, includes a fair review ofthe development and performance of the business and the position of theCompany and the undertakings included in the consolidation taken as a whole,together with a description of the principal risks and uncertainties that theyface; and (3) the annual report and the financial statements, taken as awhole, are fair, balanced and understandable and provide the informationnecessary for the shareholders to assess the Group's performance, businessmodel and strategy. On behalf of the Board Zev FurstChairman28 April 2014 The Auditors have reported on the accounts for 2013; their report was(i) unqualified, (ii) did not include a reference to any matters towhich the Auditors drew attention by way of emphasis without qualifyingtheir report and (iii) did not contain a statement under Section 498(2) or (3) of the Companies Act 2006. The text of the Auditor's reportcan be found in the Company's full Annual Report and Accounts on theCompany's website www.cadoganpetroleum.com CONSOLIDATED INCOME STATEMENTFor the year ended 31 December 2013 Restated 2013 2012 Notes $'000 $'000CONTINUING OPERATIONSRevenue 5 3,772 3,761Cost of sales (3,019) (2,616)Gross profit 753 1,145 Administrative expenses:Other administrative expenses (8,919) (7,456)Impairment of oil and gas assets 8 - (25,717)Reversal of impairment of other assets 8 234 669 (8,685) (32,504) Share of losses in joint ventures 19 (6,630) (58,277)Other operating expenses, net 6 (266) (2,926)Operating loss (14,828) (92,562) Investment revenue 12 434 118Finance (costs)/income 13 (6) 34Loss before tax (14,400) (92,410) Tax charge 14 (289) (251)Loss for the year 9 (14,689) (92,661) Attributable to:Owners of the Company (14,660) (92,631)Non-controlling interest (29) (30) (14,689) (92,661) Loss per Ordinary share cents centsBasic and diluted 15 (6.3) (40.1) COMSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFor the year ended 31 December 2013 Restated 2013 2012 $'000 $'000 Loss for the year (14,689) (92,661) Items that may be reclassified subsequentlyto profit or loss:Unrealised currency translation differences (3,551) 4,384 Total comprehensive loss for the year (18,240) (88,277) Attributable to:Owners of the Company (18,211) (88,247)Non-controlling interest (29) (30) (18,240) (88,277) CONSOLIDATED BALANCE SHEETAs at 31 December 2013 Restated Restated 2013 2012 2011 Notes $'000 $'000 $'000ASSETSNon-current assetsIntangible exploration and evaluation assets 16 5,958 3,017 2,207Property, plant and equipment 17 43,886 46,378 47,985Investments in joint ventures 19 65,965 67,908 106,286 115,809 117,303 156,478Current assetsInventories 20 2,951 3,482 4,007Trade and other receivables 21 6,879 39,621 63,647Cash and cash equivalents 21 56,484 40,477 64,301 66,314 83,580 131,955Total assets 182,123 200,883 288,433 LIABILITIESNon-current liabilitiesDeferred tax liabilities 22 (675) (586) (458)Long-term provisions 24 (195) (219) (395) (870) (805) (853)Current liabilitiesTrade and other payables 23 (3,442) (4,087) (3,625)Current provisions 24 (513) (453) (140) (3,955) (4,540) (3,765)Total liabilities (4,825) (5,345) (4,618) NET ASSETS 177,298 195,538 283,815 EQUITYShare capital 25 13,337 13,337 13,337Retained earnings 282,871 297,438 388,407Cumulative translation reserves (120,838) (117,287) (121,671)Other reserves 1,589 1,682 3,344Equity attributable to owners of the Company 176,959 195,170 283,417 Non-controlling interest 339 368 398TOTAL EQUITY 177,298 195,538 283,815 The consolidated financial statements of Cadogan Petroleum plc,registered in England and Wales no. 5718406, were approved by the Board ofDirectors and authorised for issue on 28 April 2014. They were signed on itsbehalf by: Bertrand Des PallieresChief Executive Officer28 April 2014 The notes below form an integral part of these financial statements. CONSOLIDATED CASH FLOW STATEMENTFor year ended 31 December 2013 Restated 2013 2012 Note $'000 $'000Net cash inflow/(outflow) from operating 23,994 (525)activities 26 Investing activitiesInvestments in joint ventures (4,687) (22,478)Purchases of property, plant and equipment (783) (1,083)Purchases of intangible exploration and evaluation (3,069) (87)assetsProceeds from sale of property, plant and 127 227equipmentInterest received 434 118Net cash used in investing activities (7,978) (23,303) Net increase/(decrease) in cash and cash 16,016 (23,828)equivalentsEffect of foreign exchange rate changes (9) 4Cash and cash equivalents at beginning of year 40,477 64,301Cash and cash equivalents at end of year 56,484 40,477 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Other reserves Cumulative Non- Share Retained translation Share-based Reorgani- controlling capital earnings reserves payment sation interest Total $'000 $'000 $'000 $'000 $'000 $'000 $'000 As at 1 January 2012 13,337 389,734 (123,784) 1,755 1,589 398 283,029Adoption of new standard - (1,327) 2,113 - - - 786As at 1 January 2012 (asrestated) 13,337 388,407 (121,671) 1,755 1,589 398 283,815Net loss for the year - (93,106) - - - (30) (93,136)Exchange translationdifferences on foreignoperations - - 4,384 - - - 4,384Total comprehensive lossfor the year - (93,106) 4,384 - - (30) (88,752)Share-based payments - 1,662 - (1,662) - - -Adoption of new standard - 475 - - - - 475As at 1 January 2013 (asrestated) 13,337 297,438 (117,287) 93 1,589 368 195,538Net loss for the year - (14,660) - - - (29) (14,689)Exchange translationdifferences on foreignoperations - - (3,551) - - - (3,551)Total comprehensive loss (3,551) -for the year - (14,660) - (29) (18,240)Share-based payments - 93 - (93) - - -As at 31 December 2013 13,337 282,871 (120,838) - 1,589 339 177,298 Notes to the Company Financial StatementsFor year ended 31 December 2013 1. General information Cadogan Petroleum plc (the `Company', together with itssubsidiaries the `Group'), is registered in England and Wales under theCompanies Act. The address of the registered office is 1st Floor, 40 Dukes Place, London, EC3A 7NH.The nature of the Group's operations and its principal activities are set out in the OperationsReview above and the Financial Review also above. 2. Adoption of new and revised Standards In the current year, the following new and revised Standards andInterpretations are effective but have not had any significant impact on thefinancial statements: IFRS 3(amended) Business Combinations IFRS 13 Fair Value Management IAS 24(amended) Related Party Disclosures IAS 32(amended) Classification of Rights Issues IFRIC 19 Extinguishing Financial Liabilities with EquityInstruments IFRIC 14(amended) Prepayments of a Minimum Funding Requirement At the date of authorisation of the financial statements, thefollowing Standards and Interpretations which have not been applied in thefinancial statements were in issue but not yet effective (and in some caseshad not yet been adopted by the EU): IFRS 9 Financial Instruments (effective 1 January 2015)IFRS 10, IFRS 12, Investment entities (effective 1 January 2014)IAS 27 (amended)IAS 32 (amended) Offsetting Financial Assets and Financial Liabilities (effective 1 January 2014) The Directors do not expect that the adoption of the standardslisted above will have a material impact on the financial statements of theGroup in future periods, except as follows: - IFRS 9 will impact both the measurement and disclosures offinancial instruments. Beyond the information above, it is not practicable to provide areasonable estimate of the effect of these standards until a detailed reviewhas been completed. 2. Adoption of new and revised Standards The following accounting amendments, standards and interpretationswere not yet effective in the current reporting period but were early adopted: IFRS 10 Consolidated Financial Statements IAS 27 Separate Financial Statements IFRS 11 Joint Arrangements IAS 28 Investment in Associates and Joint Ventures IFRS 12 Disclosure of Interests in Other Entities The Group has not early adopted any other amendment, standard orinterpretation that has been issued but is not yet effective. It is expectedthat where applicable, these standards and amendments will be adopted on eachrespective effective date. A number of other amendments to accountingstandards issued by the International Accounting Standards Board also applyfor the first time in 2013. These do not have a significant impact on theaccounting policies, methods of computation or presentation applied by theGroup. The nature and the impact of each new amendment, standard orinterpretation are described below: IFRS 10 Consolidated Financial Statements and IAS 27 Separate Financial Statements IFRS 10 replaces the parts of the previously existing IAS 27 thatdealt with consolidated financial statements. The new standard changes thedefinition of control such that an investor controls an investee when it isexposed, or has rights, to variable returns from its involvement with theinvestee and has the ability to control those returns through its power overthe investee. The adoption of IFRS 10 has had no impact on the consolidationof investments held by the Group. IFRS 11 Joint Arrangements and IAS 28 Investment in Associates and Joint Ventures IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13Jointly-controlled Entities - Non-monetary Contributions by Venturers andchanges the classifications for joint arrangements. Under IFRS 11, investmentsin joint arrangements are classified as either joint ventures or jointoperations based on the rights and obligations of the parties to thearrangement. When a joint arrangement has been structured through a separatevehicle, consideration is given to the legal form of the separate vehicle, theterms of the contractual arrangement and, when relevant, other facts andcircumstances. When the activities of an arrangement are primarily designedfor the provision of output to the parties and the parties are substantiallythe only source of cash flows contributing to the continuity of the operationsof the arrangement, this indicates the parties to the arrangement have rightsto the assets and obligations for the liabilities. The Group has consideredthese facts and circumstances, among others, in assessing whether thearrangement is a joint operation or a joint venture. The standard removes theoption to account for joint ventures using proportionate consolidation andinstead joint arrangements that meet the definition of a joint venture underIFRS 11 must be accounted for using the equity method. The application of this standard has resulted in the existing jointventures LLC Astroinvest-energy, LLC Gazvydobuvannya and LLC Westgasinvestbeing accounted for under the equity method where previously they wereproportionately consolidated. No other material joint arrangements within theGroup were affected. The Group has applied IFRS 11 retrospectively inaccordance with the transitional provisions and the 2012 results have beenrestated accordingly. Further detail of the impact on the Group financialstatements for the year ended 31 December 2013 and the year ended 31 December 2012is set out in note 30. 3. Significant accounting policies (a) Basis of accounting The financial statements have been prepared in accordance withInternational Financial Reporting Standards ('IFRS') as issued by theInternational Accounting Standards Board ('IASB') and as adopted by theEuropean Union ('EU'), and therefore the Group financial statements complywith Article 4 of the EU IAS Regulation. The financial statements have been prepared on the historical costconvention basis, except for share-based payments, accounting for the WGItransaction, and other financial assets and liabilities, which have beenmeasured at fair values, and 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 likelyto affect future development, performance and position are set out in theBusiness Review above. The financial position of the Group, itscash flow and liquidity position are described in the Financial Review above. The Group's cash balance at 31 December 2013 was $56.5 million(2012: $40.5 million) excluding $0.2 million (2012: $0.7 million) of Cadogan'sshare of cash and cash equivalents in joint ventures with no external debt(2012: $nil) and the Directors believe that the funds available at the date ofthe issue of these financial statements is sufficient for the Group to manageits business risks successfully. The Group's forecasts and projections, taking into accountreasonably possible changes in operational performance, start dates and flowrates for commercial production and the price of hydrocarbons sold toUkrainian customers, show that there are reasonable expectations that theGroup will be able to operate on funds currently held and those generatedinternally, for the foreseeable future without the requirement to seekexternal financing. As the Group engages in oil and gas exploration and developmentactivities, the most significant risk faced by the Group is delays encounteredin achieving commercial production from the Group's major fields. The Groupalso continues to pursue its farm-out campaign, which, if successful, willenable it to farm-out a portion of its interests in its oil and gas licencesto spread the risks associated with further exploration and development. After making enquiries and considering the uncertainties describedabove, the Directors have a reasonable expectation that the Company and theGroup have adequate resources to continue in operational existence for theforeseeable future and consider the going concern basis of accounting to beappropriate. Thus they continue to adopt the going concern basis of accountingin preparing 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 financialstatements of the Company and entities controlled by the Company (itssubsidiaries) made up to 31 December each year. IFRS 10 defines control to beinvestor control over an investee when it is exposed, or has rights, tovariable returns from its involvement with the investee and has the ability tocontrol those returns through its power over the investee. The results of subsidiaries acquired of or disposed of during theyear are included in the consolidated income statement from the effective dateof acquisition or up to the effective date of disposal, as appropriate. Wherenecessary, adjustments are made to the financial statements of subsidiaries tobring accounting policies used into line with those used by the Group. Allintra-group transactions, balances, income and expenses are eliminated onconsolidation. (c) Basis of consolidation Non-controlling interests in subsidiaries are identified separatelyfrom the Group's equity therein. Those interests of non-controllingshareholders that are present ownership interests entitling their holders to aproportionate share of net assets upon liquidation may be initially measuredat fair value or at the non-controlling interests' proportionate share of thefair value of the acquiree's identifiable net assets. The choice ofmeasurement is made on an acquisition-by-acquisition basis. Othernon-controlling interests are initially measured at fair value. Subsequent to acquisition, the carrying amount of non-controllinginterests is the amount of those interests at initial recognition plus thenon-controlling interests' share of subsequent changes in equity. Totalcomprehensive income is attributed to non-controlling interests even if thisresults in the non-controlling interests having a deficit balance. Changes in the Group's interests in subsidiaries that do not resultin a loss of control are accounted for as equity transactions. The carryingamount of the Group's interests and the non-controlling interests are adjustedto reflect the changes in their relative interests in the subsidiaries. Anydifference between the amount by which the non-controlling interests areadjusted and the fair value of the consideration paid or received isrecognised directly in equity and attributed to the owners of the Company. When the Group loses control of a subsidiary, the profit or loss ondisposal is calculated as the difference between (i) the aggregate of the fairvalue of the consideration received and the fair value of any retainedinterest and (ii) the previous carrying amount of the assets (includinggoodwill), less liabilities of the subsidiary and any non-controllinginterests. Amounts previously recognised in other comprehensive income inrelation to the subsidiary are accounted for (i.e. reclassified to profit orloss or transferred directly to retained earnings) in the same manner as wouldbe required if the relevant assets or liabilities are disposed of. The fairvalue of any investment retained in the former subsidiary at the date whencontrol is lost is regarded as the fair value on initial recognition forsubsequent accounting under IAS 39 Financial Instruments: Recognition andMeasurement or, when applicable, the costs on initial recognition of aninvestment in an associate or jointly controlled entity. (d) Business combinations The acquisition of subsidiaries is accounted for using theacquisition method. The cost of the acquisition is measured at the aggregateof the fair values, at the date of exchange, of assets given, liabilitiesincurred or assumed, and equity instruments issued in exchange for control ofthe acquiree. Acquisition-related costs are recognised in profit or loss asincurred. The acquiree's identifiable assets, liabilities and contingentliabilities that meet the conditions for recognition under IFRS 3 BusinessCombinations are recognised at their fair value at the acquisition date,except for non-current assets (or disposal groups) that are classified as heldfor resale in accordance with IFRS 5 Non-Current Assets held for sale andDiscontinued Operations, which are recognised and measured at fair value lesscosts 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 venturer recognises its interest in a joint venture as an investment andshall account for that investment using the equity method in accordance withIAS 28 Investments in Associates and Joint Ventures. (f) Revenue recognition Revenue is measured at the fair value of the consideration receivedor receivable 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 are recognised when the title has passed. Interest income is accrued on a time basis, by reference to theprincipal outstanding and at the effective interest rate applicable, which isthe rate that exactly discounts estimated future cash receipts through theexpected life of the financial asset to that asset's net carrying amount oninitial recognition. To the extent that revenue arises from test production during anevaluation programme, an amount is charged from evaluation costs to cost ofsales, so as to reflect a zero net margin. (g) Foreign currencies The individual financial statements of each Group company arepresented in the currency of the primary economic environment in which itoperates (its functional currency). The functional currency of the Company ispounds sterling. For the purpose of the consolidated financial statements, theresults and financial position of each Group company are expressed in USdollars, which is the presentation currency for the consolidated financialstatements. In preparing the financial statements of the individual companies,transactions in currencies other than the functional currency of each Groupcompany (`foreign currencies') are recorded in the functional currency at therates of exchange prevailing on the dates of the transactions. At each balancesheet date, 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 aretranslated at the rates prevailing at the date when the fair value wasdetermined. Non-monetary items that are measured in terms of historical costin a foreign currency are not retranslated. Exchange differences are recognised in the profit or loss in theperiod in which they arise except for exchange differences on monetary itemsreceivable from or payable to a foreign operation for which settlement isneither planned nor likely to occur, which form part of the net investment ina foreign operation, and which are recognised in the foreign currencytranslation reserve and recognised in profit or loss on disposal of the netinvestment. For the purpose of presenting consolidated financial statements,the results and financial position of each entity of the Group are translatedinto US dollars as follows: i. assets and liabilities of the Group's foreign operations aretranslated at the closing rate on the balance sheet date; ii. income and expenses are translated at the average exchangerates for the period, unless exchange rates fluctuate significantly duringthat period, in which case the exchange rates at the date of the transactionsare used; and iii. all resulting exchange differences arising, if any, arerecognised in other 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 aforeign entity 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 2013 GBP/USD USD/UAHClosing rate 1.6491 8.3920Average rate 1.5648 8.2545 (h) Taxation The tax expense represents the sum of the tax currently payable anddeferred tax. The tax currently payable is based on taxable profit for the year.Taxable profit differs from net profit as reported in the 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 taxrates that have been enacted or substantively enacted by the balance sheetdate. Deferred tax is the tax expected to be payable or recoverable ondifferences between the carrying amounts of assets and liabilities in thefinancial statements and the corresponding tax bases used in the computationof taxable profit, and is accounted for using the balance sheet liabilitymethod. Deferred tax liabilities are generally recognised for all taxabletemporary differences and deferred tax assets are recognised to the extentthat it is probable that taxable profits will be available against whichdeductible temporary differences can be utilised. Such assets and liabilitiesare not recognised if the temporary difference arises from the initialrecognition of goodwill or from the initial recognition (other than in abusiness combination) of other assets and liabilities in a transaction thataffects neither the taxable profit nor the accounting profit. Deferred taxliabilities are recognised for taxable temporary differences arising oninvestments in subsidiaries and associates, and interests in joint ventures,except where the Group is able to control the reversal of the temporarydifference and it is probable that the temporary difference will not reversein the foreseeable future. The carrying amount of deferred tax assets is reviewed at eachbalance sheet date and reduced to the extent that it is no longer probablethat sufficient taxable profits will be available to allow all or part of theasset to be recovered. Deferred tax is calculated at the tax rates that areexpected to apply in the period when the liability is settled or the asset isrealised. Deferred tax is charged or credited in the income statement, exceptwhen it relates to items charged or credited in other comprehensive income, inwhich case the deferred tax is also dealt with in other comprehensive income. Deferred tax assets and liabilities are offset when there is alegally enforceable right to set off current tax assets against current taxliabilities and when they relate to income taxes levied by the same taxationauthority and the Group intends to settle its current tax assets andliabilities on a net basis. (i) Property, plant and equipment Property, plant and equipment ('PP&E') are carried at cost lessaccumulated depreciation and any recognised impairment loss. Depreciation and amortisation is charged so as to write off thecost or valuation of assets, other than land, over their estimated usefullives, using the straight-line method, on the following bases: Buildings 4% Fixtures and equipment 10% to 30% The gain or loss arising on the disposal or retirement of an assetis determined as the difference between the sales proceeds and the carryingamount of the asset and is recognised in income. (j) Impairment of Property, plant and equipment At each balance sheet date, the Group reviews the carrying amountsof its PP&E to determine whether there is any indication that those assetshave suffered an impairment loss. If any such indication exists, therecoverable amount of the asset is estimated in order to determine the extentof the impairment loss (if any). Where the asset does not generate cash flowsthat are independent from other assets, the Group estimates the recoverableamount of the cash-generating unit to which the asset belongs. The recoverableamount is the higher of fair value less costs to sell and value in use. Inassessing value in use, the estimated future cash flows are discounted totheir present value using a pre-tax discount rate that reflects current marketassessments of the time value of money and the risks specific to the asset forwhich the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) isestimated to be less than its carrying amount, the carrying amount of theasset (cash-generating unit) is reduced to its recoverable amount. Animpairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amountof the asset (cash-generating unit) is increased to the revised estimate ofits recoverable amount, but so that the increased carrying amount does notexceed the carrying amount that would have been determined had no impairmentloss been recognised for the asset (cash-generating unit) in prior years. Areversal of an impairment loss is recognised as income immediately. (k) Intangible exploration and evaluation assets The Group applies the modified full cost method of accounting forintangible exploration and evaluation ('E&E') expenditure as set out in IFRS 6Exploration for and Evaluation of Mineral Resources. Under the modified fullcost method of accounting, expenditure made on exploring for and evaluatingoil and gas properties is accumulated and initially capitalised as anintangible asset, by reference to appropriate cost centres being theappropriate oil or gas property. E&E assets are then assessed for impairmenton a cost pool basis as described below. E&E assets comprise costs of (i) E&E activities which are inprogress at the balance sheet date, but where the existence of commercialReserves has yet to be determined (ii) E&E expenditure which, whilstrepresenting part of the E&E activities associated with adding to thecommercial Reserves of an established cost pool, did not result in thediscovery of commercial Reserves. Costs incurred prior to having obtained the legal rights to explorean area are expensed directly to the income statement as incurred. Exploration and Evaluation costs E&E expenditure is initially capitalised as an E&E asset. Paymentsto acquire the legal right to explore, costs of technical services andstudies, seismic acquisition, exploratory drilling and testing are alsocapitalised as intangible E&E assets. Tangible assets used in E&E activities (such as the Group'svehicles, drilling rigs, seismic equipment and other property, plant andequipment) are normally classified as PP&E. However, to the extent that suchassets are consumed in developing an intangible E&E asset, the amountreflecting that consumption is recorded as part of the cost of the intangibleasset. Such intangible costs include directly attributable overheads,including the depreciation of PP&E items utilised in E&E activities, togetherwith the cost of other materials consumed during the exploration andevaluation phases. E&E assets are not amortised prior to the conclusion of appraisalactivities. Treatment of E&E assets at conclusion of appraisal activities Intangible E&E assets related to each exploration property arecarried forward, until the existence (or otherwise) of commercial Reserves hasbeen determined. If commercial Reserves have been discovered, the related E&Eassets are assessed for impairment on a cost pool basis as set out below andany impairment loss is recognised in the income statement. Upon approval of adevelopment program, 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 aredetermined not to have resulted in the discovery of commercial Reserves remaincapitalised as intangible E&E assets at cost less accumulated amortisation,subject to meeting a pool-wide impairment test in accordance with theaccounting policy for impairment of E&E assets set out below. Such E&E assetsare amortised on a unit-of-production basis over the life of the commercialReserves of the pool to which they relate. Impairment of E&E assets E&E assets are assessed for impairment when facts and circumstancessuggest that the carrying amount may exceed its recoverable amount. Suchindicators include, but are not limited to, those situations outlined inparagraph 20 of IFRS 6 Exploration for and Evaluation of Mineral Resources andinclude the point at which a determination is made as to whether or notcommercial Reserves exist. Where there are indications of impairment, the E&E assets concernedare tested for impairment. Where the E&E assets concerned fall within thescope of an established full cost pool, they are tested for impairmenttogether with all development and production assets associated with that costpool, as a single cash generating unit. The aggregate carrying value of the relevant assets is comparedagainst the expected recoverable amount of the pool, 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 E&E assets to betested fall outside the scope of any established cost pool, there willgenerally be no commercial Reserves and the E&E assets concerned willgenerally be impaired in full. Impairment losses are recognised in the incomestatement as additional depreciation and amortisation and are separatelydisclosed. The Group considers the whole of Ukraine to be one cost pool andtherefore aggregates all Ukrainian assets for the purposes of determiningwhether impairment of E&E assets has occurred. (l) Development and production assets Development and production assets are accumulated on afield-by-field basis and represent the cost of developing the commercialReserves discovered and bringing them into production, together with E&Eexpenditures incurred in finding commercial Reserves transferred fromintangible 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 producingassets on a field-by-field basis using the unit of production method. The unitof production method refers to the ratio of production in the reporting yearas a proportion of the proved and probable Reserves of the relevant field,taking into account future development expenditures necessary to bring thoseReserves into production. (l) Development and production assets Producing assets are generally grouped with other assets that arededicated to serving the same Reserves for depreciation purposes, but aredepreciated separately from producing assets that serve other Reserves. (m) Inventories Raw materials and oil stock are stated at the lower of cost and netrealisable value. Costs comprise direct materials and, where applicable,direct labour costs and those overheads that have been incurred in bringingthe inventories to their present location and condition. Cost is allocatedusing the weighted average method. Net realisable value represents theestimated selling price less all estimated costs of completion and costs to beincurred in marketing, selling and distribution. (n) Financial instruments Recognition of financial assets and financial liabilities Financial assets and financial liabilities are recognised on theGroup's balance sheet when the Group becomes a party to the contractualprovisions of the instrument. Derecognition of financial assets and financial liabilities The Group derecognises a financial asset only when the contractualrights to cash flows from the asset expire; or it transfers the financialasset and substantially all the risks and rewards of ownership of the asset toanother entity. If the Group neither transfers nor retains substantially allthe risks and rewards of ownership and continues to control the transferredasset, the Group recognises its retained interest in the asset and anassociated liability for the amount it may have to pay. If the Group retainssubstantially all the risks and rewards of ownership of a transferredfinancial asset, the Group continues to recognise the financial asset and alsorecognises a collateralised borrowing for the proceeds received. The Group derecognises financial liabilities when the Group'sobligations are discharged, cancelled or expired. Financial assets The Group classifies its financial assets in the followingcategories: loans and receivables; available-for-sale financial assets; heldto maturity investments; and financial assets at fair value through profit orloss ("FVTPL"). The classification depends on the purpose for which thefinancial assets were acquired. Management determines the classification ofits financial assets at initial recognition and re-evaluates this designationat every reporting date. Loans and receivables are non-derivative financial assets withfixed or determinable payments that are not quoted in an active market. Theyare included 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 "otherreceivables" and "cash and cash equivalents" in the balance sheet. Trade and other receivables Trade and other receivables are measured at initial recognition atfair value, and are subsequently measured at amortised cost using theeffective interest rate method. Cash and cash equivalents Cash and cash equivalents comprise cash on hand, on-demanddeposits, and other short-term highly liquid investments that are readilyconvertible to a known amount of cash with three months or less remaining tomaturity and are subject to an insignificant risk of changes in value. Financial assets at FVTPL Financial assets at FVTPL are stated at fair value, with any gainsor losses arising on remeasurement recognised in profit or loss which isincluded in the 'Other gains and losses' line item in the consolidated incomestatement. Fair value is determined in the manner described in note 28. Impairment of financial assets Financial assets, other than those at FVTPL, are assessed forindicators of impairment at each balance sheet date. Appropriate allowancesfor estimated irrecoverable amounts are recognised in profit or loss whenthere is objective evidence that the asset is impaired. The allowancerecognised is measured as the difference between the asset's carrying amountof the financial asset and the present value of estimated future cash flowsdiscounted at the effective interest 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 orfinancial re-organisation. For certain categories of financial assets, such as tradereceivables, assets that are assessed not to be impaired individually are, inaddition, assessed for impairment on a collective basis. The carrying amount of the financial assets is reduced by theimpairment loss directly for all financial assets with the exception of tradereceivables, where the carrying amount is reduced through the use of anallowance account. Subsequent recoveries of amounts previously written off arecredited against the allowance account. Changes in the carrying amount of theallowance account are recognised in profit or loss. If, in a subsequent period, the amount of the impairment lossdecreases and the decrease can be related objectively to an event occurringafter the impairment was recognised, the previously recognised impairment lossis reversed through profit or loss to the extent that the carrying amount ofthe investment at the date the impairment is reversed does not exceed what theamortised cost would have 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 anyresultant gain or loss recognised in profit or loss and is included in the'Other gains and losses' line item in the income statement. Fair value isdetermined in the manner described in note 28. Trade payables and short-term borrowings Trade payables and short-term borrowings are initially measured atfair value, and are subsequently measured at amortised cost, using theeffective interest rate method. (o) Provisions Provisions are recognised when the Group has a present obligation(legal or constructive) as a result of a past event, it is probable that theGroup will be required to settle that obligation and a reliable estimate canbe made of the amount of the obligation. The amount recognised as a provision is the best estimate of theconsideration required to settle the present obligation at the balance sheetdate, taking into account the risks and uncertainties surrounding theobligation. 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 therelated facilities are installed. The decommissioning provision is calculatedas the net present value of the Group's share of the expenditure expected tobe incurred 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) Leases Leases are classified as finance leases whenever the terms of thelease transfer substantially all the risks and rewards of ownership to thelessee. All other leases are classified as operating leases. Rentals payableunder operating leases are charged to income on a straight-line basis over theterm of the relevant lease. (r) Share-based payments The Group issued equity-settled share-based payments to certainparties in return for services or goods. The goods or services received andthe corresponding increase in equity are measured directly at the fair valueof the goods or services received at the grant date. The fair value of theservices or goods received is recognised as an expense except in so far asthey relate to the cost of issuing or acquiring its own equity instruments.The costs of an equity transaction are accounted for as a deduction fromequity to the extent they are incremental costs directly attributable to theequity transaction that would otherwise have been avoided. The Group also issued equity-settled share-based payments tocertain Directors and employees. Equity settled share-based payments aremeasured at fair value (excluding the effect of non market-based vestingconditions) at the date of grant. The fair value determined at the grant datefor each tranche of the equity-settled share-based payments is expensed on astraight-line basis over the vesting period, based on the Group's estimate ofshares that will eventually vest and adjusted for the effect of nonmarket-based vesting conditions. At each balance sheet date, the Group revisesits estimate of the number of equity instruments expected to vest as a resultof the effect of non market-based vesting conditions. The impact of the revision of the original estimates, if any, isrecognised in profit or loss such that the cumulative expense reflects therevised estimate, with a corresponding adjustment to the equity-settledemployee benefits reserve. (r) Share-based payments For those equity-settled share-based payments with market-basedperformance conditions, fair value is measured by use of the Stochastic model.For those which are not subject to any market based performance conditions,fair value is measured by use of the Black-Scholes model. The expected lifeused in the models has been adjusted, based on management's best estimate, forthe effects of non-transferability, exercise restrictions, and behaviouralconsiderations. 4. Critical accounting judgements and key sources of estimationuncertainty In the application of the Group's accounting policies, which aredescribed in note 3, the Directors are required to make judgements, estimatesand assumptions about the carrying amounts of the assets and liabilities thatare not 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 ongoingbasis. Revisions to accounting estimates are recognised in the period in whichthe estimate is revised if the revision affects only that period or in theperiod of the revision and future periods if the revision affects both thecurrent and future periods. The following are the critical judgements and estimates that theDirectors have made in the process of applying the Group's accounting policiesand that have the most significant effect on the amounts recognised in thefinancial statements: (a) Impairment of E&E and PP&E IAS 36 Impairment of Assets and IFRS 6 Exploration for andEvaluation of Mineral Resources require that a review for impairment becarried out if events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. For PP&E assets the aggregate carrying value of each cashgenerating unit ('CGU') was compared against the expected recoverable amountof the related asset, by reference to the net present value of the future cashflows expected to be derived from the production of commercial Reserves(2P Reserves) of that unit. The Group considers the whole of Ukraine to be one cost pool andtherefore aggregates all Ukrainian assets for the purposes of determiningwhether impairment of E&E assets has occurred. E&E assets are assessed forimpairment when facts and circumstances suggest that the carrying amount mayexceed its recoverable amount. Such indicators include, but are not limitedto, those situations outlined in paragraph 20 of IFRS 6 Exploration for andEvaluation of Mineral Resources and include the point at which a determinationis made as to whether or not commercial Reserves exist. In 2013, the Group hasperformed significant volume of work which it continues in 2014, including theextension of the Pokrovskoe license exploration for a shallow stratigraphiclevels, re-interpretation of the existing 3D seismic, in order to evaluate theremaining potential of the full Pokrovskoe license. Management assessed whether any impairment triggers were present at31 December 2013 and concluded that the following impairment indicatorsexisted for the Pirkovska license area: - High uncertainty about the impact of political and economicturmoil in Ukraine on Group operations; - Significant market capitalization discount to the carrying amountof the net assets of the entity; and - Lack of production at Pirkovska license area since 2009 Management determined the recoverable amount of the Pirkovskalicense as its fair value less cost to sell (FVLCS). The key assumptions forthe FVLCS calculations are those regarding the production flow rates, discountrates, relevant elements of Ukraine fiscal regime for petroleum operators, andexpected selling prices and direct costs. These assumptions reflectmanagement's best estimates. Management estimates discount rates that reflectthe current market assessments of the time value of money and the risksspecific to the CGUs. Changes in selling prices and direct costs are based onpast practices and expectations of future changes in the market. - The key assumptions used to forecast cash flows from Ukraine operations areas follows: pre-tax discount rate of 17.86% (post-tax of 15%); Due to therecent events in Ukraine, there is an increased level of risk associated withoperating in Ukraine, and consequently a revision of discount rate might berequired if the escalation of political turmoil results in significant downgradingof country risk, or company' own risk, or both; - expected future selling prices based on current and anticipated marketconditions for oil, condensate and gas. The regulated gas price for theindustrial users in Ukraine was set at about 10% lower than during 2013.However, it has been announced by Gazprom that the price for Ukraine, which isthe reference price for the Regulator setting the maximum price for theindustrial consumers, from 1 April 2014 onwards will not include any discountsand will be in line with the original Gazprom and Naftogaz contract.Nevertheless, there continues to be a level of uncertainty in forecasting theUkraine gas price due to the current events. The estimate used in thecalculation uses the gas price referenced to Gazprom and Naftogaz contract(conservatively including $100/mcm discount as the result of Kharkivagreements of 2010), there is however declarations by Gazprom that thisdiscount will no longer apply; - cash flows projected up to 2034 depending on the field to which they relateand an assumption has been made that the relevant licenses will be extended.The assumption has been made based on the most recent analysis of politicalturmoil impacts. Further escalations of the political crisis may impact theGroup's normal business activities, including maintenance of its Ukrainianproduction licences; - production flow rates confirmed by experienced in-house geologists andengineers, supported by report produced in 2009 by an independent reservoirengineer, Gaffney, Cline & Associates Ltd; - costs based on best estimates with consideration to previous experience andinflation; and - inclusion of relevant elements of Ukraine fiscal regime for petroleumoperators (such as production and royalty tax relevant to each license; (c) Reserves Commercial Reserves are proven and probable ('2P') oil and gasreserves, which are defined as the estimated quantities of crude oil, naturalgas and natural gas liquids which geological, geophysical and engineering datademonstrate with a specified degree of certainty to be recoverable in futureyears from known reservoirs and which are considered commercially producible.There should be a 50 per cent statistical probability that the actual quantityof recoverable Reserves will be more than the amount estimated as proven andprobable Reserves and a 50 per cent statistical probability that it will beless. Commercial Reserves used in the calculation of depreciation and forimpairment test purposes are determined using estimates of oil and gas inplace, recovery factors and future oil and gas prices. Management base theirestimate of oil and gas Reserves and Resources upon the Report provided byindependent advisers. (d) Recoverability of VAT The Group has significant receivables from the State Budget ofUkraine relating to reimbursement of VAT arising on purchases of goods andservices from external service and product providers. Due to the budgetaryproblems of Ukraine, the recovery of VAT has been an issue for most companiesoperating in Ukraine. In the past the Group has taken a conservative view inrelation to VAT and has impaired all outstanding balances due to theuncertainty of the recovery of these balances in cash from the State Budget ofUkraine and uncertainty of future production, VAT on which would be offsetagainst the VAT recoverable amounts the Group has. The Group will continue to use an approach consistent with prioryears by impairing Ukrainian VAT and recognising the recovery in the period ithas been made. A cumulative provision of $9.5 million (2012: $10.1 million)against Ukrainian VAT receivable has thus been recognised as at31 December 2013, excluding VAT recoverable balances in the JV which are reportedunder the equity method in these financial statements. (e) Accounting for the WGI transaction As a consequence of the WGI transaction, outlined in note 19, twoareas of significant judgement were identified by the Group, being theaccounting treatment of the WGI transaction and the valuation of the Group'scontribution of the two licenses to WGI. After considering the requirementsper IAS 31 Interest In Joint Ventures, the Directors have deemed the criteriaunder this standard to have been met, and have therefore accounted for WGI asa joint venture. In accounting for the contribution of the licenses, the Group haveapplied IAS 31 and SIC Interpretation 13 - Jointly Controlled Entities -Non-Monetary Contributions by Venturers, which states that any profit or lossarising on the contribution of non-monetary assets in exchange for an equityinterest should be recognised to the extent they are attributable to theequity interests of the other venturers. Whilst the licenses contributed had anil NBV in the books of the Group at the date of contribution, the associatedfair value of the licenses contributed in return for the 15.0% interest in WGIhas been estimated at $6.4 million. The resultant profit recognised in theincome statement is $5.4 million which represents the un-eliminated 84.9%share of the gain on contribution of these licenses. The Group has accordinglyrecognised an intangible asset of $5.4 million as its share of the licenses. As at 31 December 2012 the Group has adopted IFRS 11, according towhich joint ventures have been recognized in the financial statements of the Groupusing the equity method (see note 19). (f) Assessment of political and economic turmoil in Ukraine impact on Groupoperations Since November 2013, Ukraine has been in a political and economicturmoil. The Ukrainian Hryvnia devalued against major world currencies andsignificant external financing is required to maintain stability of theeconomy. In February 2014, Ukraine's sovereign rating has been downgraded toCCC with a negative outlook. The Government however is expecting significantfunding from the international creditors in 2014, with International MonetaryFund ("IMF") being the largest. In February 2014, the Parliament of Ukraine voted for reinstatementof the 2004 Constitution and dismissal of the incumbent President. Newpresidential elections are scheduled for May 2014 and a transitionalgovernment has been formed. In March 2014, Crimea, an autonomous republic ofUkraine, was effectively annexed by the Russian Federation. The furtherpolitical developments are currently unpredictable and may adversely affectthe Ukrainian economy. 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 2013 financial statements, apart fromcontinuous uncertainty related to key assumptions used by management inassessment of the recoverable amount of production assets as described above.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. Revenue 2013 2012 $'000 $'000 Sale of hydrocarbons 2,619 2,999Other revenues 1,153 762 3,772 3,761 Other revenues represent revenues from services provided to third parties of$1.2 million (2012: $0.8 million). Information about major customersIncluded in revenues for the year ended 31 December 2013 are revenues of$1.2 million (2012 - $2.4 million) which arose from sales to the Group'slargest customer. 6. Other operating expenses, net 2013 2012 $'000 $'000 Out of court settlements 65 597Transactions with JV partner (60) 88Net foreign exchange losses (271) (3,611) (266) (2,926) Net foreign exchange loss of $0.3 million mainly relates to therevaluation of the USD-denominated monetary assets of the Group's UK entitieswhich have GBP as a functional currency. 7. Business and geographical segments The Directors continue to consider there to be only one businesssegment, the exploration and development of oil and gas assets and only onegeographical segment, being Ukraine. 8. Impairment 2013 2012 $'000 $'000 Impairment of oil and gas assets - (25,717)Inventories (note 20) 97 (323)VAT recoverable (note 4(d)) 137 992Impairment of other assets 234 669 The carrying value of inventory as at 31 December 2013 and 2012 hasbeen impaired to reduce it to net realisable value (see note 20). During 2013the Group gross sales of inventory to third parties comprised $0.4 million(2012: $1.6 million) and some sales were for the higher amounts than the bookvalue of inventories, therefore $0.1 million of the inventory impairmentprovision previously recognised has been released. During the year a net release of impairment $0.1 million (2012: $0.9 million)in respect of Ukrainian VAT as the result of VAT recovery ofhistorical balances through offset of VAT liabilities arising on sales. Total impairment for 2012 of oil and gas assets of $25.7 millionincludes $24.7 million ($35.0 million undiscounted) impairment of the bonus tobe received from Eni on obtaining the production licence on Zagoryanskalicence which formed part of the consideration on disposal of 60% in theZagoryanska licence to Eni in 2011. 9. Loss for the year The loss for the year has been arrived at after charging/(crediting): Restated 2013 2012 $'000 $'000 Depreciation of property, plant and equipment (1,201) (1,352)Loss on disposal of property, plant and equipment (227) (285)Reversal of impairment of other assets (note 8) 234 669Impairment of oil and gas assets (note 8) - (25,717)Staff costs (4,790) (4,753)Net foreign exchange losses (271) (3,611) In addition to the depreciation of PP&E of $1.2 million (2012: $1.4 million)in the year ended 31 December 2013, depreciation of $0.2 million(2012: $0.4 million) was capitalised to E&E assets being depreciation oftangible assets used in E&E activities. 10. Auditor's remuneration The analysis of auditor's remuneration is as follows: Restated 2013 2012 $'000 $'000Audit feesFees payable to the Company's auditor and their associates for 201 232the audit of the Company's annual accountsFees payable to the Company's auditor and their associates forother services to the Group:- The audit of the Company's subsidiaries 13 27Total audit fees 214 259 Non-audit fees- Audit-related assurance services 20 21- Taxation compliance services 45 98- Other taxation advisory services 40 -Non-audit fees 105 119 11. Staff costs The average monthly number of employees (including ExecutiveDirectors) was: 2013 2012 Number NumberExecutive Directors 2 2Other employees 116 124 118 126 Total number of employees at 31 December 118 126 $'000 $'000Their aggregate remuneration comprised:Wages and salaries 5,102 5,191Other pension costs - 36Social security costs 725 748 5,827 5,975 Within wages and salaries $0.7 million (2012: $0.7 million) relatesto amounts accrued and paid to executive Directors for services rendered. Included within wages and salaries, is $0.3 million (2012: $0.2 million)capitalised to intangible E&E assets and $0.1 million (2012: $0.2 million)capitalised to development and production assets. 12. Investment revenue 2013 2012 $'000 $'000 Interest on bank deposits 283 118Interest on loans issued 151 - 434 118 13. Finance (costs)/income 2013 2012 $'000 $'000 Unwinding of discount on decommissioning provision (note 24) (6) 34 14. Tax 2013 2012 $'000 $'000Current tax 169 121Deferred tax (note 22) 120 130 289 251 The Group's operations are conducted primarily outside the UK. Themost appropriate tax rate for the Group is therefore considered to be19 per cent (2012: 21 per cent), the rate of profit tax in Ukraine which is theprimary source of revenue for the Group. Taxation for other jurisdictions iscalculated at the rates prevailing in the respective jurisdictions. The taxation charge for the year can be reconciled to the loss perthe income statement as follows: 2013 2013 2012 2012 $'000 % $'000 % Loss before tax (14,400) 100 (92,410) 100Tax credit at Ukraine corporation tax rate of (2,736) (19,406)19% (2012: 21%) 19 21Permanent differences 3,004 -21.0 17,776 -19.2Foreign exchange on operating activities (552) 3.8 730 -0.8Tax losses generated in the year not yet 857 1,041recognised -6.0 -1.1Other temporary differences - 0.0 446 -0.5Effect of different tax rates (284) 2.0 (336) 0.4Tax credit and effective tax rate for the year 289 -2.1 251 -0.2 15. Loss per Ordinary share Basic loss per Ordinary share is calculated by dividing the netloss for the year attributable to owners of the Company by the weightedaverage number of Ordinary shares outstanding during the year. The calculationof the basic and diluted loss per share is based on the following data: 2013 2012Loss attributable to owners of the Company $'000 $'000 Loss for the purposes of basic loss per share being net loss (14,660) (92,631)attributable to owners of the Company 2013 2012 Number NumberNumber of shares `000 `000 Weighted average number of Ordinary shares for the purposes of 231,092 231,092basic profit per shareEffect of dilutive potential ordinary shares:Options and warrants outstanding - 93Weighted average number of Ordinary shares for the purposes of 231,092 231,185diluted profit per share 2013 2012 Cent CentLoss per Ordinary shareBasic (6.3) (40.1)Diluted (6.3) (40.1) Diluted loss per Ordinary share equals basic loss per Ordinaryshare as there is no dilutive effect from the outstanding share warrants. 16. Intangible exploration and evaluation assets Cost $'000At 1 January 2012 (as restated) 31,951Additions 973Change in estimate of decommissioning assets (note 24) (89)Transfer to property, plant and equipment (note 17) (31)Disposals 30Exchange differences 215At 1 January 2013 (as restated) 33,049Additions 3,276Change in estimate of decommissioning assets (note 24) 16Transfer from property, plant and equipment (note 17) 34Disposals (118)Exchange differences (1,362)At 31 December 2013 34,895 ImpairmentAt 1 January 2012 (as restated) 29,941Exchange differences 91At 1 January 2013 (as restated) 30,032Exchange differences (1,095)At 31 December 2013 28,937 Carrying amountAt 31 December 2013 5,958At 31 December 2012 (as restated) 3,017 Additions during the year include $0.2 million (2012: $0.3 million)of capitalised depreciation of development and production assets used inexploration and evaluation activities. 17. Property, plant and equipment Development and production Other assets TotalCost $'000 $'000 $'000 At 1 January 2012 (as restated) 2,846 59,712 62,558Additions 293 783 1,076Transfer from intangible exploration and evaluation 28 3 31assetsChange in estimate of decommissioning assets (note - 263 26324)Disposals (156) (1,381) (1,537)Exchange differences 43 493 536At 1 January 2013 (as restated) 3,054 59,873 62,927Additions 217 585 802Transfer to intangible exploration and evaluation - (34) (34)assetsTransfer to other assets 80 (80) -Change in estimate of decommissioning assets (note - 42 4224)Disposals (138) (416) (554)Exchange differences (112) (2,479) (2,591)At 31 December 2013 3,101 57,491 60,592 Accumulated depreciation and impairmentAt 1 January 2012 (as restated) 1,448 13,182 14,630Impairment - 1,036 1,036Charge for the year 397 1,315 1,712Disposals (59) (985) (1,044)Exchange differences 33 182 215At 1 January 2013 (as restated) 1,819 14,730 16,549Charge for the year 326 1,062 1,388Disposals (82) (360) (442)Exchange differences (65) (724) (789)At 31 December 2013 1,998 14,708 16,706 Carrying amountAt 31 December 2013 1,103 42,783 43,886At 31 December 2012 (as restated) 1,235 45,143 46,378 18. Subsidiaries The Company had investments in the following subsidiaryundertakings as at 31 December 2013, which principally affected the profitsand net assets of the Group: Country of Proportion incorporation of voting and operation interest % ActivityDirectly heldCadogan Petroleum Holdings Ltd UK 100 Holding companyRamet Holdings Ltd Cyprus 100 Holding company Indirectly heldRentoul Ltd Isle of Man 100 Holding companyCadogan Petroleum Holdings BV Netherlands 100 Holding companyCadogan Bitlyanske BV Netherlands 100 Holding companyCadogan Delta BV Netherlands 100 Holding companyCadogan Astro Energy BV Netherlands 100 Holding companyCadogan Pirkovskoe BV Netherlands 100 Holding companyMomentum Enterprise (Europe) Ltd Cyprus 100 Holding companyCadogan Ukraine Holdings Limited Cyprus 100 Holding companyCadogan Momentum Holdings Inc Canada 100 Holding companyUSENCO International Inc. USA 100 Holding companyRadley Investments Ltd UK 100 Holding companyCadogan Petroleum Trading SAGL Switzerland 100 Trading companyLLC AstroInvest -Ukraine Ukraine 100 ExplorationLLC Astro Gas Ukraine 100 ExplorationDP USENCO Ukraine Ukraine 100 ExplorationLLC USENCO Nadra Ukraine 95 ExplorationJV Delta Ukraine 100 ExplorationLLC WestGasInvest Ukraine 100 ExplorationLLC Astro-Service Ukraine 100 Service CompanyOJSC AgroNaftoGasTechService Ukraine 79.9 Construction servicesLLC Cadogan Ukraine Ukraine 100 Corporate services During the year ended 31 December 2013, the Group structurecontinued to be rationalised both so as to reduce the number of legal entitiesinside Ukraine and also to replace the structure of multiple jurisdictionswith one based on a series of sub-holding companies incorporated in theNetherlands for each licence area. 19. Joint ventures Details of each Group's joint ventures at the end of the 2013 and2012 reporting periods are as follows: Company name Licenses held Country of Ownership Activity incorporation share % and operation LLC Zagoryanska exploration Ukraine 40 ExplorationAstroinvest-Energy licenseLLC Industrial Pokrovska exploration Ukraine 70 ExplorationCompany licenseGazvydobuvannyaLLC Westgasinvest Reklynetska, Ukraine 15 Exploration Zhuzhelianska, Cheremkhivsko-Strupkivska, Baulinska, Filimonivska, Kurinna, Sandugeyivska, Yakovlivska, and Debeslavetska Exploration, Debeslavetska Production license All of the above joint ventures are accounted for using the equitymethod in these consolidated financial statements. According to theshareholders' agreements, which regulate the activities of the jointlycontrolled entities, all key decisions require unanimous approval from theshareholders, therefore these entities are jointly controlled. Summarised financial information in respect of each of the Group'smaterial joint ventures is set out below. The summarised financial informationbelow represents amounts shown in the joint venture's financial statementsprepared in accordance with IFRSs. LLC Astroinvest-Energy 2013 2012 $'000 $'000 Non-current assets 34 392Current assets 3,001 6,941Non-current liabilities (1,194) (2,228)Current liabilities (4,288) (12,369)Revenue - 4,711Loss for the period (6,997) (155,124)Other comprehensive income/(loss) 111 (174)Total comprehensive loss (6,886) (155,298)Net deficit of the joint venture (2,447) (7,264) LLC Industrial Company Gazvydobuvannya 2013 2012 $'000 $'000 Non-current assets 101,041 101,556Current assets 1,041 2,224Non-current liabilities (8,484) (8,126)Current liabilities (2,617) (2,231)Revenue - -Loss for the period (4,899) (2,349)Other comprehensive income/(loss) 71 (40)Total comprehensive loss (4,828) (2,389)Net assets of the joint venture 90,981 93,423 2012 transactions: LLC Westgasinvest In February 2012, the Group set up a joint venture LLCWestgasinvest ("WGI") with a Ukrainian state-owned company, NAK Nadra Ukrainy.As part of the transaction the Group contributed two unconventional licenses,the Debeslavetske production license and the Debeslavetske exploration licenseto WGI, while keeping all the economic benefit from the existing conventionalactivities on these licenses. Whilst the licenses contributed had a nil NBV in the books of theGroup at the date of contribution, the associated fair value of the licensescontributed in return for the 15% interest in WGI has been estimated at$6.4 million. The resultant profit recognised in the income statement is$5.4 million which represents the un-eliminated 85% share of the gain oncontribution of these licenses. The Group accordingly recognised an intangibleasset of $5.4 million. The Group's resultant equity holding, post this transaction was15.01%, with Nadra owning the remaining 84.99%. On 3 October 2012, 50.01% of ownership in WGI was sold by Nadra andCadogan to ENI completing the current ownership structure of WGI. LLC Westgasinvest 2013 2012 $'000 $'000 Non-current assets 164 25Current assets 662 20Non-current liabilities - -Current liabilities (2,672) (102)Revenue - -Loss for the period (3,364) (93)Other comprehensive income 55 -Total comprehensive loss (3,309) -Net assets of the joint venture (1,846) 57 The carrying amounts of the Group's interest in joint venturesrecognized in the financial statements of the Group using the equity methodare set out in the tables below: LLC LLC Industrial LLC Total Astroinvest-Energy company Westgasinvest Gazvydo-buvannya $'000 $'000 $'000 $'000 (Deficit)/ net assets (2,906) 65,396 5,418 67,908recognized as at 31 December2012Investments during the year 4,420 267 - 4,687Loss for the year (2,754) (3,380) (496) (6,630)Carrying amount of Group's (1,240) 62,283 4,922 65,965interest as at 31 December2013 The Group is committed together with ENI to fund LLC Astroinvest-Energysubsequently to year end with the necessary amount of $1.2 million in order toclose current liabilities of the joint venture. 20. Inventories Restated 2013 2012 $'000 $'000 Cost 3,846 4,596Impairment provision for obsolete inventory (895) (1,114)Carrying amount 2,951 3,482 The impairment provision as at 31 December 2013 and 2012 is made soas to reduce the carrying value of the obsolete inventories to net realisablevalue. 21. Other financial assets Trade and other receivables Restated 2013 2012 $'000 $'000 Other receivables 591 31,796Receivable from joint venture 4,077 6,907Loans issued 1,559 -VAT recoverable 251 81Prepayments 401 837 6,879 39,621 All sales are made on a prepayment basis, so there are no tradedebtors. Out of $31.8 million of other receivables $30.0 million as at31 December 2012 represent receivables from the settlement agreement with GPSwhich has been repaid in April 2013. Receivable from joint ventures comprise $1.6 million fromAstroinvest-energy LLC (2012: $5.2 million) and $2.5 million fromGazvydobuvannya LLC (2012: $1.7 million). Loans issued of $1.6 million as at 31 December 2013 represents a loanissued in June 2013 to Oil and Gas Management Services Group Limited ("OAGSG")as part of a $3 million Loan Facility on a fully secured basis againstreceivables due to OAGSG with the term of loan of 24 months and annualinterest of 15%. Cash and cash equivalents Cash and cash equivalents as at 31 December 2013 of $56.5 million(2012: $40.5 million) comprise cash held by the Group and the Company. TheDirectors consider that the carrying amount of these assets approximates totheir fair value. 22. Deferred tax The following are the major deferred tax liabilities and assetsrecognised by the Group and movements thereon during the current and priorreporting period: Temporary differences $'000 Liability as at 1 January 2012 (as restated) 458Deferred tax expense 130Exchange differences (2)Liability as at 1 January 2013 (as restated) 586Deferred tax expense 120Exchange differences (31)Liability as at 31 December 2013 675 At 31 December 2013, temporary differences of $6.0 million (2012: $6.3 million)existed in respect of foreign exchange gains arising on netinvestments in foreign subsidiaries for which deferred tax liabilities havenot been recognised. No deferred tax liabilities have been recognised inrespect of these differences because the Group is in a position to control thetiming of the reversal of the temporary differences and it is probable thatsuch differences will not reverse in the foreseeable future. At 31 December 2013, the Group had the following unused tax lossesavailable for offset against future taxable profits: Restated 2013 2012 $'000 $'000 UK 13,623 9,486Netherlands 938 -Ukraine 46,719 46,906 61,280 56,392 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 $13.6 million (2012: $9.5 million)relating to losses incurred in the UK are available to shelter futurenon-trading profits arising within Cadogan Petroleum plc. These losses are notsubject to a time restriction on expiry. Unused tax losses incurred by Ukraine subsidiaries amount to $46.7 million,(2012: $46.9 million). Under general provisions, these losses may becarried forward indefinitely to be offset against any type of taxable incomearising from the same company of origination. Tax losses may not besurrendered from one Ukraine subsidiary to another. However, in the past,Ukrainian legislation has been imposed which restricted the carry forward oftax losses. During 2011 a new tax legislation in Ukraine was implemented whichresulted in the restriction to recognition of accumulated losses at 1 April2011. Starting 1 January 2012 only 25% of accumulated losses as at this dateare allowed to be utilised each year for the period from 2012 till 2015 in thecalculation of taxable income of the company. Tax losses accumulated after 1January 2012 have no restrictions. There are further temporary differencesarising on intangible exploration and evaluation assets and property, plantand equipment assets in Ukraine for which deferred tax assets of $5.2 million(2012: $4.6 million) have not been recognised due to the uncertainty of futurerecovery. 23. Other financial liabilities Trade and other payables Restated 2013 2012 $'000 $'000 Trade creditors 1,125 1,122Payables to joint ventures 801 423Other taxes and social security 21 31Other creditors and payables 347 166Accruals 1,148 2,345 3,442 4,087 Trade creditors and accruals principally comprise amountsoutstanding for capital work program purchases and ongoing costs. The averagecredit period taken for trade purchases is 70 days (2012: 55 days). The Grouphas financial risk management policies to ensure that all payables are paidwithin the credit timeframe. The Directors consider that the carrying amount of trade and otherpayables approximates to their fair value. No interest is generally charged onbalances outstanding. 24. Provisions Decommissioning Total $'000 $'000 At 1 January 2012 (as restated) 528 528Change in estimate (note 16 and 17) 174 174Unwinding of discount on decommissioning (34) (34)provision (note 13)Exchange differences 3 3At 1 January 2013 (as restated) 671 671Change in estimate (note 16 and 17) 58 58Unwinding of discount on decommissioningprovision (note 13) 6 6Exchange differences (27) (27)At 31 December 2013 708 708 At 1 January 2012 (as restated) 528 528Included in long-term provisions 219 219Included in current provisions 453 453At 1 January 2013 (as restated) 672 672Included in long-term provisions 195 195Included in current provisions 513 513At 31 December 2013 708 708 In accordance with the Group's environmental policy and applicablelegal requirements, the Group intends to restore the sites it is working onafter completing exploration or development activities. A short-term provision of $0.5 million (2012: $0.5 million) hasbeen made for decommissioning costs, which are expected to be incurred withinthe next year as a result of the demobilisation of drilling equipment andrespective site restoration. The long-term provision recognised in respect of decommissioningreflects management's estimate of the net present value of the Group's shareof the expenditure expected to be incurred in this respect. This amount hasbeen recognised as a provision at its net present value, using a discount ratethat reflects the market assessment of the time value of money at that date, andthe unwinding 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 one and seventeen years). 25. Share capital Authorised and issued equity share capital 2013 2012 Number Number '000 $'000 '000 $'000AuthorisedOrdinary shares of £0.03 each 1,000,000 57,713 1,000,000 57,713 IssuedOrdinary shares of £0.03 each 231,092 13,337 231,092 13,337 Authorised but unissued share capital of £30 million has beentranslated into US dollars at the historic exchange rate of the issued sharecapital. The Company has one class of Ordinary shares which carry no rightto fixed income. Issued equity share capital Ordinary shares of £0.03 NumberAt 31 December 2012 and 2013 231,091,734 26. Notes to the cash flow statement Restated 2013 2012 $'000 $'000 Operating loss ( 14,828) (92,562)Adjustments for:Depreciation of property, plant and equipment 1,201 1,352Share of losses in joint ventures 6,630 63,987Reversal of impairment of inventories (note 8) (97) (787)Reversal of impairment of VAT recoverable (note 8) (137) (994)Loss on disposal of property, plant and equipment 103 285Effect of foreign exchange rate changes (1,571) 4,536Operating cash flows before movements in working capital (8,699) (24,183)Decrease in inventories 628 1,429Decrease in receivables 32,879 23,759Decrease in payables and provisions (645) (1,409)Cash from/(used in) operations 24,163 (404)Income taxes paid (169) (121)Net cash inflow/(outflow) from operating activities 23,994 (525) 27. Financial instruments Capital risk management The Group manages its capital to ensure that entities in the Groupwill be able to continue as a going concern, while maximising the return toshareholders. The capital resources of the Group consists of cash and cashequivalents arising from equity attributable to owners of the Company,comprising issued capital, reserves and retained earnings as disclosed in theConsolidated Statement of Changes in Equity. Externally imposed capital requirement The Group is not subject to externally imposed capitalrequirements. Significant accounting policies Details of the significant accounting policies and methods adopted,including the criteria for recognition, the basis of measurement, the basis onwhich income and expenses are recognised, in respect of each class offinancial asset, financial liability and equity instrument are disclosed innote 3 to the Consolidated Financial Statements. Categories of financial instruments Restated 2013 2012 $'000 $'000Financial assets - loans and receivables (includes cash and cashequivalents)Cash and cash equivalents 56,484 40,477Receivable from joint venture 4,077 6,907Loans issued 1,559 -Other receivables (current and non-current) 590 31,796 62,710 79,180Financial liabilities - measured at amortised costTrade creditors 1,259 1,545Payables to joint ventures 801 423Other taxes and social security 21 31Other creditors and payables 347 166Accruals 1,148 2,345 3,576 4,510 Financial risk management objectives Management provides services to the business, co-ordinates accessto domestic and international financial markets and monitors and manages thefinancial risks relating to the operations of the Group in Ukraine throughinternal risks reports which analyse exposures by degree and magnitude ofrisks. These risks include commodity price risks, foreign currency risk,credit risk, liquidity risk and cash flow interest rate risk. The Group doesnot enter into or trade financial instruments, including derivative financialinstruments, for speculative purposes. As the Group has no committed borrowings, the Group is not exposedto any significant risks associated with fluctuations in interest rates onloans. The Audit Committee of the Board reviews and monitors risks facedby the Group through meetings held throughout the year. 27. Financial instruments Commodity price risk The commodity price risk related to Ukrainian gas and condensateprices and, to a lesser extent, prices for crude oil are the Group's mostsignificant market risk exposures. World prices for gas and crude oil arecharacterised by significant fluctuations that are determined by the globalbalance of supply and demand and worldwide political developments, includingactions taken by the Organisation of Petroleum Exporting Countries. These fluctuations may have a significant effect on the Group'srevenues and operating profits going forward. The principal factor in thecurrent Ukrainian gas price is bilateral negotiations with Gazprom toestablish the price of gas imports from Russia. The price for Ukrainian gas isbased on the current price of these gas imports from Russia, which arenonetheless influenced by world prices. Management continues to expect thatthe Group's principal market for gas will be the Ukrainian domestic market. The Group does not hedge market risk resulting from fluctuations ingas, 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 foreigncurrencies. Hence, exposures to exchange rate fluctuations arise. The Group to date has elected not to hedge its exposure to the riskof changes in foreign currency exchange rates. The carrying amounts of the Group's foreign currencydenominated monetary assets and monetary liabilities at the reporting date areas follows: Liabilities Assets 2013 2012 2013 2012 $'000 $'000 $'000 $'000 US dollars ('$') 106 51 53,277 66,388 Foreign currency sensitivity analysis The Group is exposed primarily to movements in currencies againstthe US dollar as this is the presentation currency of the Group. In order tofund operations, US dollar funds are converted to UAH just before beingcontributed to the Ukrainian subsidiaries. Sensitivity analyses have beenperformed to indicate how the profit or loss would have been affected bychanges in the exchange rate between the GBP and US dollar. The analysis isbased on a weakening of the US dollar by 10 per cent against GBP, a functionalcurrency in the entities of the Group which have significant monetary assetsand liabilities at the end of each respective period. A movement of 10 percent reflects 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 ten per cent change inforeign currency rates. A number below indicates a decrease in profit where US dollarstrengthens 10 per cent against the other currencies. For a 10 per centweakening of the US dollar against the other currencies, there would be anequal and opposite impact on the profit or loss, and the balances would benegative. The Group is not exposed to significant foreign currency risk inother currencies. Inflation risk management The following table details the Group's sensitivity to a 10 percent decrease in the US dollar against the GBP. 2013 2012 $'000 $'000 Income statement (4,587) (5,912) Inflation in Ukraine and in the international market for oil andgas may affect the Group's cost for equipment and supplies. The Directorsexpect that the Group's practices of keeping deposits in US dollar accountsuntil funds are needed and selling its production in the spot market, coupledwith the linkage of the currency in Ukraine to the US dollar, to enable theGroup to manage 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 Groupdoes not have any significant credit risk exposure on trade receivables as thenormal terms for sales of gas and condensate to the Group's customers requirepayment before delivery. The Group makes allowances for impairment of receivables wherethere is an identified event which, based on previous experience, is evidenceof a reduction in the recoverability of cash flows. The credit risk on liquid funds (cash) is considered to be limitedbecause the counterparties are financial institutions with high and goodcredit ratings, assigned by international credit-rating agencies in the UK andUkraine respectively. The carrying amount of financial assets recorded in the financialstatements represents the Group's maximum exposure to credit risk. Liquidity risk management Ultimate responsibility for liquidity risk management rests withthe Board of Directors, which has built an appropriate liquidity riskmanagement framework for the management of the Group's short, medium andlong-term funding and liquidity management requirements. The Group managesliquidity risk by maintaining adequate cash reserves and by continuouslymonitoring forecast and actual cash flows. The following tables set out details of the expected contractualmaturity of financial liabilities. Within 3 months More than Total 3 months to 1 year 1 year $'000 $'000 $'000 $'000 At 31 December 2013 1,326 2,250 - 3,576Trade and other payables 1,326 2,250 - 3,576At 31 December 2012 4,115 395 - 4,510Trade and other payables 4,115 395 - 4,510 28. Commitments and contingencies Joint activity agreements The Group has working interests in nine licences for the conduct ofits exploration and development activities within Ukraine. Each licence isheld with the obligation to fulfil a minimum set of exploration activitieswithin its term and is summarised on an annual basis, including the agreedminimum amount forecasted expenditure to fulfil those obligations. Theactivities and proposed expenditure levels are agreed with the governmentlicensing authority. The required future financing of exploration and development workon fields under the licence obligations are as follow: Restated 2013 2012 $'000 $'000 Within one year 1,258 18,506Between two and five years 1,863 20,315 3,121 38,821 The Group has revised its minimum working programs and resubmitted the requireddocumentation to the government authorities; updated commitments has decreasedfor all licenses from $38.8 million to $3.1 million. License obligations of thejoint ventures as at 31 December 2013 amounted to $0.4 million (2012: $0.5 million)of obligations within one year and $0.1 million (2012: $10.5 million) of obligationsbetween two and five years. 29. Related party transactions All transactions between the Company and its subsidiaries, whichare related parties, have been eliminated on consolidation and are notdisclosed in this note. The application of IFRS 11 has resulted in theexisting joint ventures LLC Astroinvest-energy, LLC Gazvydobuvannya and LLCWestgasinvest being accounted for under the equity method and disclosed asrelated parties. During the period, Group companies entered into the followingtransactions with joint ventures who are considered as related parties of theGroup: 2013 2012 $'000 $'000 Revenues from services provided and sales of 1,892 4,487goodsPurchases of goods 22 51Amounts owed by related parties 4,077 6,907Amounts owed to related parties 801 423 Remuneration of key management personnel The remuneration of the Directors, who are the key managementpersonnel of the Group, is set out below in aggregate for each of thecategories specified in IAS 24 Related Party Disclosures. Further informationabout the remuneration of individual Directors is provided in the audited partof the Annual Report on Remuneration above. Purchase of services Amounts owing 2013 2012 2013 2012 $'000 $'000 $'000 $'000 Short-term employee benefits 911 1,048 69 973Share-based payments - (695) - - 911 353 69 973 The total remuneration of the highest paid Director was $0.3 million in the year (2012: $0.4 million). The amounts outstanding are unsecured and will be settled in cash.No guarantees have been given or received and no provisions have been made fordoubtful debts in respect of the amounts owed by related parties. 30. Accounting policy changes - adoption of IFRS 11 As discussed in note 2, the Group has restated the financialperformance and position of the Group for the year ended 31 December 2012 toreflect the adoption of IFRS 11. The quantitative impact of adopting thesestandards on the prior year consolidated financial statements is set out inthe tables below: Adjustments to the Consolidated Income Statements Year ended 31 December 2012 as IFRS 11 restated previously reported $'000 $'000 $'000CONTINUING OPERATIONSRevenue 5,653 ( 1,892) 3,761Cost of sales (4,158) 1,542 (2,616)Gross profit 1,495 (350) 1,145 Administrative expenses:Other administrative expenses (10,783) 3,327 (7,456)Impairment of oil and gas assets (83,584) 57,867 (25,717)(Impairment)/reversal of impairment of other (2,684) 3,353 669assets (97,051) 64,547 (32,504) Other losses 5,417 (63,694) (58,277)Other operating income/(expenses) (2,940) 14 (2,926)Operating loss (93,079) 517 (92,562) Investment revenue 128 (10) 118Finance costs 67 (33) 34Loss before tax (92,884) 474 (92,410) Tax (252) 1 ( 251)Loss for the period/year (93,136) 475 (92,661) 30. Accounting policy changes - adoption of IFRS 11Adjustments to the Consolidated Balance Sheets as at 1 January 2012 as at 31 December 2012 as IFRS 11 as previously adjust- previously adjust- reported ments restated reported ments restated $'000 $'000 $'000 $'000 $'000 $'000ASSETSNon-current assetsIntangible exploration 65,972 (63,765) 2,207 78,231 (75,214) 3,017and evaluation assetsProperty, plant and 99,373 (51,388) 47,985 46,627 (249) 46,378equipmentInvestments in joint - 106,286 106,286 - 67,908 67,908ventures 165,345 (8,867) 156,478 124,858 (7,555) 117,303Current assetsInventories 6,556 (2,549) 4,007 5,177 (1,695) 3,482Trade and other 66,251 (2,604) 63,647 35,537 4,084 39,621receivablesCash and cash 65,039 (738) 64,301 42,404 (1,927) 40,477equivalents 137,846 (5,891) 131,955 83,118 462 83,580Total assets 303,191 (14,758) 288,433 207,976 (7,093) 200,883 LIABILITIESNon-current liabilitiesDeferred tax (11,538) 11,080 (458) (4,553) 3,967 (586)liabilitiesLong-term provisions (548) 153 (395) (414) 195 (219) (12,086) 11,233 (853) (4,967) 4,162 (805)Current liabilitiesTrade and other (7,552) 3,927 (3,625) (7,793) 3,706 (4,087)payablesCurrent provisions (524) 384 (140) (939) 486 (453) (8,076) 4,311 (3,765) (8,732) 4,192 (4,540)Total liabilities (20,162) 15,544 (4,618) (13,699) 8,354 (5,345) Net assets 283,029 786 283,815 194,277 1,261 195,538 EQUITYShare capital 13,337 - 13,337 13,337 - 13,337Retained earnings 389,734 (1,327) 388,407 298,290 (852) 297,438Cumulative translation (123,784) 2,113 (121,671) (119,400) 2,113 (117,287)reservesOther reserves 3,344 - 3,344 1,682 - 1,682Equity attributable to 282,631 786 283,417 193,909 1,261 195,170equity holders of theparentNon-controlling 398 - 398 368 - 368interestTotal equity 283,029 786 283,815 194,277 1,261 195,538 30. Accounting policy changes - adoption of IFRS 11 Adjustments to the Consolidated Cash Flow Statements Year ended 31 December 2012 as previously adjust- reported ments restated $'000 $'000 $'000Net cash (outflow)/inflow from operating activities (5,609) 5,084 (525) Investing activitiesDisposal of subsidiaries 4,142 (4,142) -Investments in joint ventures - (22,478) (22,478)Purchases of property, plant and equipment (15,749) 14,666 (1,083)Purchases of intangible exploration and evaluation (6,239) 6,152 (87)assetsProceeds from sale of property, plant and equipment 688 (461) 227Interest received 128 (10) 118Net cash used in investing activities (17,030) (6,273) (23,303) Financing activitiesProceeds from short-term borrowings - - -Net cash used in financing activities - - - Net increase/(decrease) in cash and cash equivalents (22,639) (1,189) (23,828)Effect of foreign exchange rate changes 4 - 4Cash and cash equivalents at beginning of 65,039 (738) 64,301period/yearCash and cash equivalents at end of period/year 42,404 (1,927) 40,477 30. Accounting policy changes - adoption of IFRS 11 Adjustments to Notes to the condensed cash flow statements Year ended 31 December 2012 as previously IFRS 11 reported adjust-ments restated $'000 $'000 $'000Operating loss (93,079) 517 (92,562)Adjustments for:Depreciation of property, plant and equipment 1,967 (615) 1,352Impairment of oil and gas assets 83,584 (83,584) -Gain on acquisition of jointly controlled entity/ (5,454) 5,454 -disposal of subsidiariesLoss from investments into joint ventures - 63,987 63,987Reversal of impairment of inventories 291 (1,078) (787)(Reversal of impairment)/Impairment of VAT 2,394 3,388) (994)recoverable(Gain)/loss on disposal of property, plant and 52 233 285equipmentEffect of foreign exchange rate changes 4,014 522 4,536Operating cash flows before movements in working (6,231) (17,952) (24,183)capitalDecrease in inventories 1,269 160 1,429Decrease/(increase) in receivables (766) 24,525 23,759(Decrease)/Increase in payables and provisions 241 (1,650) (1,409)Cash (used in)/from operations (5,487) 5,083 (404)Income taxes paid (122) 1 (121)Net cash inflow/(outflow) from operating activities (5,609) 5,084 (525) 31. Events after the balance sheet date Political and economic turmoil in Ukraine We are monitoring the current political situation in Ukrainecarefully and there have been no disruptions to the Company's operations ineither of our operating locations. As a result of the recent political and economic turmoil inUkraine, there has been a significant devaluation of the Ukrainian Hryvniaagainst the US Dollar which is likely to affect the carrying value of theGroup's assets in the future. Since 1 January 2014, the Ukrainian Hryvnia hasdevalued against the US Dollar by approximately 35%. We have reassessed the key judgements and critical accountingestimates as at the date of this report and, based on the current status ofoperations, no adjustments have been made. COMPANY BALANCE SHEETAs at 31 December 2013 2013 2012 Notes $'000 $'000ASSETSNon-current assetsInvestments 34 - -Receivables from subsidiaries 35 77,506 97,289 77,506 97,289Current assetsTrade and other receivables 35 1,763 102Cash and cash equivalents 35 50,280 32,092 52,043 32,194Total assets 129,549 129,483 LIABILITIESCurrent liabilitiesTrade and other payables 36 (1,211) (1,290) (1,211) (1,290)Total liabilities (1,211) (1,290) Net assets 128,338 128,193 EQUITYShare capital 37 13,337 13,337Retained earnings 210,297 212,497Cumulative translation reserves 38 (95,296) (97,734)Share-based payment reserve - 93Total equity 128,338 128,193 The financial statements of Cadogan Petroleum plc, registered inEngland and Wales no. 5718406, were approved by the board of Directors andauthorised for issue on 28 April 2014. They were signed on its behalf by: Bertrand Des PallieresChief Executive Officer28 April 2014 The notes form part of these financial statements. COMPANY CASH FLOW STATEMENTFor the year ended 31 December 2013 2013 2012 Note $'000 $'000 Net cash outflow from operating activities 39 ( 4,034) (1,007) Investing activitiesInterest received 258 13Settlement received - 1,070Repayment of loans to subsidiary companies 19,783 (1,037)Net cash from investing activities 20,041 46 Net increase/(decrease) in cash and cash 16,007 (961)equivalentsEffect of foreign exchange rate changes 2,181 2,197Cash and cash equivalents at beginning of year 32,092 30,856Cash and cash equivalents at end of year 50,280 32,092 COMPANY STATEMENT OF CHANGES IN EQUITYFor the year ended 31 December 2013 Share Cumulative Share-based capital Retained translation payment capital earnings reserves reserve Total $'000 $'000 $'000 $'000 $'000 As at 1 January 2012 13,337 212,428 (102,176) 1,755 125,344Share-based payment - 1,662 - (1,662) -Net loss for the year - 1,593) - - (1,593)Exchange translation differences - - 4,442 - 4,442As at 1 January 2013 13,337 212,497 (97,734) 93 128,193Share-based payment - 93 (93) -Net loss for the year - (2,293) - - (2,293)Exchange translation differences - - 2,438 - 2,438As at 31 December 2013 13,337 210,297 (95,296) - 128,338 32. Significant accounting policies The separate financial statements of the Company are presented asrequired by the Companies Act 2006 (the 'Act'). As permitted by the Act, theseparate financial statements have been prepared in accordance withInternational Financial Reporting Standards. The financial statements have been prepared on the historical costbasis. The principal accounting policies adopted are the same as those set outin note 3 to the Consolidated Financial Statements except as noted below. As permitted by section 408 of the Act, the Company has elected notto present its profit and loss account for the year. Cadogan Petroleum plcreports a loss for the financial year ended 31 December 2013 of $2.3 million(2012: $1.6 million). Investments Investments in subsidiaries are stated at cost less, whereappropriate, provisions for impairment. Critical accounting judgements and key sources of estimationuncertainty The Company's financial statements, and in particular itsinvestments in and receivables from subsidiaries, are affected by certain ofthe critical accounting judgements and key sources of estimation uncertaintydescribed in note 4 to the Consolidated Financial Statements. 33. Auditor's remuneration The auditor's remuneration for audit and other services isdisclosed in note 10 to the Consolidated Financial Statements. 34. Investments The Company's subsidiaries are disclosed in note 18 to theConsolidated Financial Statements. The investments in subsidiaries are allinitially stated at cost. 35. Financial assets Receivables from subsidiaries At the balance sheet date gross amounts receivable from the fellowGroup companies were $348.5 million (2012: $363.0 million). No impairment wasrecognised in 2012 or 2013. The carrying value of the receivables from thefellow Group companies as at 31 December 2013 was $77.5 million(2012: $97.3 million). There are no past due receivables. Trade and other receivables 2013 2012 $'000 $'000 Loans issued 1,559 -VAT recoverable 138 -Prepayments 51 71Other receivables 15 31 1,763 102 35. Financial assets The Company's principal financial assets are bank balances and cashand cash equivalents 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. Cash and cash equivalents Cash and cash equivalents comprise cash held by the Company andshort-term bank deposits with an original maturity of three months or less.The carrying value of these assets approximates to their fair value. 36. Financial liabilities Trade and other payables 2013 2012 $'000 $'000 Trade creditors 317 321Other creditors and payables 238 969Accruals 656 - 1,211 1,290 Trade payables principally comprise amounts outstanding for tradepurchases and ongoing costs. The average credit period taken for tradepurchases is 45 days (2012: 42 days). The Directors consider that the carrying amount of trade and otherpayables approximates to their fair value. No interest is charged on balancesoutstanding. 37. Share capital The Company's share capital is disclosed in note 25 to theConsolidated Financial Statements. 38. Cumulative translation reserve The functional currency of the Company is pounds sterling. Thefinancial statements of the Company are expressed in US dollars, which is itspresentation currency. Cumulative translation reserve represents the effect oftranslating into US dollars the results and financial position of the Company. 39. Notes to the cash flow statement 2013 2012 $'000 $'000 Operating loss from continuing operations (2,293) (1,593)Operating cash flows before movements in working capital (2,293) (1,593)(Increase) in receivables (1,662) (38)(Decrease) in payables (79) 624Cash used in operations (4,034) (1,007)Income taxes paid - -Net cash outflow from continuing operations (4,034) (1,007) 40. Financial instruments The Company manages its capital to ensure that it is able tocontinue as a going concern while maximising the return to shareholders. Referto note 27 for the Group's overall strategy and financial risk managementobjectives. The capital resources of the Group consists of cash and cashequivalents arising from equity, comprising issued capital, reserves andretained earnings. Categories of financial instruments 2013 2012 $'000 $'000Financial assets - loans and receivables (includes cash andcash equivalents)Cash and cash equivalents 50,280 32,092Amounts due from subsidiaries 77,506 97,289 127,786 129,381Financial liabilities - measured at amortised costTrade creditors (317) (321) (317) (321)Interest rate risk All financial liabilities held by the Company are non-interestbearing. As the Company has no committed borrowings, the Company is notexposed to any significant risks associated with fluctuations in interestrates. Credit risk Credit risk refers to the risk that a counterparty will default onits contractual obligations resulting in financial loss to the Company. Forcash and cash equivalents, the Company only transacts with entities that arerated the equivalent to investment grade and above. Other financial assetsconsist of amounts receivable from related parties. The Company's credit risk on liquid funds is limited because thecounterparties are banks with high credit-ratings assigned by internationalcredit-rating agencies. The carrying amount of financial assets recorded in the Companyfinancial statements, which is net of any impairment losses, represents theCompany's maximum exposure to credit risk. Liquidity risk management Ultimate responsibility for liquidity risk management rests withthe Board of Directors, which has built an appropriate liquidity riskmanagement framework for the management of the Company's short, medium andlong-term funding and liquidity management requirements. The Company maintainsadequate reserves, by continuously monitoring forecast and actual cash flows. The Company's financial liabilities are not significant andtherefore no maturity analysis has been presented. Foreign exchange risk and foreign currency risk management The Company undertakes certain transactions denominated in foreigncurrencies. Hence, exposures to exchange rate fluctuations arise. The Companyholds a large portion of its foreign currency denominated monetary assets andmonetary liabilities in US dollars. More information on the foreign exchangerisk and foreign currency risk management is disclosed in note 27 to theConsolidated Financial Statements. 41. Related parties Amounts due from subsidiaries The Company has entered into a number of unsecured related partytransactions with its subsidiary undertakings. The most significanttransactions carried out between the Company and its subsidiary undertakingsare mainly for short and long-term financing. Amounts owed from these entitiesare detailed below: 2013 2012 $'000 $'000 Cadogan Petroleum Holdings Limited 77,506 97,289 77,506 97,289 Refer to note 35 for a discussion on the Company's receivables duefrom subsidiaries. The remuneration of the Directors, who are the key managementpersonnel of the Group, is set out below in aggregate for each of thecategories specified in IAS 24 Related Party Disclosures. Further informationabout the remuneration of individual Directors is provided in the audited partof the Annual Report on Remuneration 2013 above. Remuneration Amounts owing 2013 2012 2013 2012 $'000 $'000 $'000 $'000 Short-term employee benefits 326 296 - 476 326 296 - 476 The total remuneration of the highest paid Director was $0.3 million in the year (2012: $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. ANNUAL GENERAL MEETINGThe Annual General Meeting of the Company held at 10.30am on Thursday 26 June 2014 at Chandos House, 2 Queen Anne Street, London W1G 9LQ. NATIONAL STORAGE MECHANISMA copy of the Annual Report and Financial Statements will be submitted shortly to the National Storage Mechanism (“NSM”)and will be available for inspection at the NSM, which is situated at: www.morningstar.co.uk/uk/nsm Neither the contents of the Company’s website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement. Investor relationsEnquiries to: [email protected] Registered office1st Floor,40 Dukes Place,London EC3A 7NHRegistered in England and Wales no. 5718406 Ukraine27A Taras Shevchenko Boulevard01032 Kiev UkraineEmail: [email protected]: +38 044 591 03 90Fax: +38 044 591 03 91

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