Exillon Energy plc Full Year Results 2009

RNS Number : 5903K

Exillon Energy Plc

22 April 2010

 

For Immediate Release

22 April 2010

  

Exillon Energy plc

Full Year Results 2009 

Exillon Energy plc ("Exillon Energy", the "Company" or the "Group") (EXI.LN), an independent oil producer with assets in two oil-rich regions of Northern Russia, Timan-Pechora ("Exillon TP") and West Siberia ("Exillon WS"), today announces its results for the year ended 31 December 2009.

Highlights of 2009 

·; Admitted to trading on the London Stock Exchange's main market on 17 December 2009, generating gross proceeds of $100.7 million

·; Became sole owner of Exillon WS after acquiring remaining 50% stake for $51.0 million

·; Achieved a virtually debt free balance sheet and raised sufficient capital to fund the current development programme

·; 2P reserves increased by 6% to 131 million bbl; 3P reserves increased by 75% to 370 million bbl

·; Produced 714,672 bbl at Exillon TP, equivalent to an average production of 1,958 bbl per day

·; Successfully opened wells at Exillon WS (EWS I -13) and Exillon TP (ETP V - 60)

Achievements January - April 2010 

·; Acquired the North Kenyunskoye licence adjacent to Exillon TP's ETP field in February 2010. The licence's recoverable oil reserves and resources are currently estimated at C2 - 16.0 million bbl, C3 - 3.6 million bbl and D1 - 8.7 million bbl

·; In March 2010 successfully completed EWS - 15 well that contained pre drill estimates of 18.3 million bbl of prospective resource and discovered 15.2m of net oil pay versus 5m average net oil pay anticipated for this field

·; In April 2010 successfully finished drilling EWS - 34 and EWS - 31 wells within 23 days, further details of which will be announced shortly

·; On schedule to complete the remaining four wells at Exillon WS

Outlook for 2010

·; Exillon WS is expected to start uninterrupted production in Q3 2010, upon completion of the pipeline, infield infrastructure and drilling projects

·; Production at Exillon TP is expected to increase by over 50% to 1.1 million bbl, equivalent to an average production of 3,000 bbl  per day, following well optimisation programme in early 2010

·; Capital expenditure of $31 million for 2010, focussed on development drilling and infrastructure

Alessandro Manghi, Chief Executive Officer of Exillon Energy plc commented: "2009 was a transformational year for Exillon Energy, as it completed the acquisition of Exillon WS and became a London Stock Exchange main market listed company. Despite the challenging market environment, Exillon Energy completed two successful wells and raised capital needed to develop further. A generally improving macroeconomic backdrop enabled the Company to reach its revenue targets for 2009 and lay the foundations for growth in 2010."  

For further information please contact:

Exillon Energy plc
Nurlan Assilbekov, Investor Relations	+971 56 657 0440
	+44 79 2001 5131
Buchanan Communications
Bobby Morse	+44 207 466 5000
Ben Romney
Chris McMahon

  

Forward Looking Statements

This announcement may contain forward looking statements and information that both represents management's current expectations or beliefs concerning future events and are subject to known and unknown risks and uncertainties. A number of factors could cause actual results, performance or events to differ materially from those expressed or implied by these forward-looking statements.

   

Chief Executive's Statement 

Corporate

The highlight of 2009 was the Group's successful Initial Public Offering ("IPO"). Exillon Energy was admitted to trading on the London Stock Exchange's main market on 17 December 2009, generating gross proceeds of $100.7 million, of which $51.0 million was spent acquiring the remaining 50% stake in Exillon WS which the company did not previously own. The remaining proceeds will be used to fund infrastructure and drilling projects.  

2009 also saw important developments to streamline management of our operations. Recognising the importance of Exillon WS to the Group's performance, Exillon Energy moved its operational center to Urai, Western Siberia, the nearest city to the Exillon WS oil fields. In order to optimise sales and marketing, Exillon Energy established a Moscow-based company, Regional Resources LLC in October 2009 to act as its oil broker. In November 2009 the Company formed a new subsidiary, Exillon Finance Limited, to provide treasury services to the Group. 

Operations

Exillon TP had a successful year, producing 714,672 bbl and generating revenue of $26.3 million, thus significantly exceeding its revenue target of $13.2 million. A new well (ETP V - 60) was completed and put into production in August 2009, contributing 595 bpd of additional production (80 tons /day).

A major breakthrough for the Group was the acquisition of the remaining 50% stake in Exillon WS in December 2009. Sole ownership of Exillon WS has enabled the Group to streamline decision-making and accelerate asset development.

Exillon WS has a current shut-in capacity to produce approximately 4,000 bpd. Exillon WS did not produce oil in 2009 due to seasonal and infrastructure constraints. One of the priorities for 2010 is to resolve the seasonal production bottleneck by completing a 40km pipeline from the EWS I field to the year-round state road. To reduce dependence on third parties and improve economics of oil production, Exillon Energy is also planning to complete an infield oil processing facility.  

Production at Exillon WS commenced in March 2010 upon signing an oil processing agreement with Aki Otir, a subsidiary of Russneft. The Group is planning to temporarily stop oil production in April 2010 until the completion of infield infrastructure, and resume uninterrupted oil production in Q3 2010.

As of 1 September 2009, Exillon Energy had 2P reserves of 131 million bbl and 3P reserves of 370 million bbl, representing increases of 6% and 75% respectively since 2008.  

In March 2010 Exillon Energy completed well EWS -15 in Exillon WS, which successfully tested an 18.71 sq km northern extension to the EWS I field and contained 18.3 million bbl of prospective resource.

In addition, the Company acquired a new licence adjacent to its fields at Exillon TP in February 2010. Recoverable reserves of the new licence are estimated at C2 16.0 million bbl and C3 3.6 million bbl.  

Exillon Energy will continue to work to prove up reserves, using the Company's technical expertise to create further value for the shareholders.  

Financial

Exillon Energy delivered a solid financial performance in 2009, complemented by the acquisition of the remaining interest in Exillon WS, strong growth in reserves and a successful IPO.  

The Group's revenue for the year ended 31 December 2009 comprised revenues from sales of crude oil and amounted to $22.5 million. 100% of the revenue was derived from Exillon TP, which represents just 43.8% of the Group's 2P reserves and 26.5% of the 3P reserves. Exillon WS, which represents the remainder of the reserves, did not produce in 2009. Uninterrupted production is expected to start at Exillon WS in Q3 2010.

At year end the Group had a strong financial position with cash of $34.3 million, which provides sufficient capital for the Group's future development.

Corporate Governance

In 2009 we established the structures and processes which should ensure strong corporate governance and effective management going forward. A board of directors was formed in November 2009 including three independent Directors: L. Stuard Detmer, Ezio Bracco and Anne Belvèze. The independent Directors bring with them significant experience in the oil and

gas industry and successful track records of doing business in Russia, and I look forward to working with them in 2010. The Board also established Committees for Audit, Nomination, Remuneration, Corporate Social Responsibility and Conflicts. Our newly established Executive Committee will oversee the effective day-to-day running of the business.

Outlook for 2010

 Exillon Energy's strategy revolves around three main objectives:

·; Increase production through additional drilling, well optimisation and infrastructure development

·; Increase and migrate reserves to higher quality categories through additional drilling, improved geological models and adjacent licence acquisition 

·; Improve operational efficiency through infrastructure development and production optimisation

 

The key milestones for 2010 will be the successful execution of the drilling programme and completion of the budgeted infrastructure projects, which should remove production bottlenecks at Exillon WS and improve operational efficiency at both Exillon TP and Exillon WS.

The launch of production at Exillon WS will mean a significant improvement in the Group's performance, and the Group is predominantly focussed on completing all projects required to begin uninterrupted production in Exillon WS from Q3 2010.  

At Exillon TP the Company will focus predominantly on production optimisation through the well workover programme scheduled for the start of 2010, and construction of a Gas Power Generating Unit, which will bring about a considerable reduction in diesel costs.

With a consolidated corporate structure, experienced Board and senior management team in place, and IPO proceeds available for infrastructure and development, Exillon Energy is well placed to fulfil its potential and deliver value for its shareholders over the coming year.  

 

Alessandro Manghi, Chief Executive Officer

 

OPERATIONAL REVIEW

Exillon TP

Exillon TP had a successful year, producing 714,672 bbl and generating revenue of $26.3 million, thus significantly exceeding its revenue target of $13.2 million. In August 2009 the Group successfully completed and put into production Well 60, which added 595 bpd (80 tons /day) to Exillon TP's daily production. The crude oil extracted from the Exillon TP fields is of high quality, with an average density of 35 to 38 API, low sulphur content of less than 0.4% and low paraffin content. 

In 2009 Exillon TP owned four licences - three for production and one for production and exploration. In February 2010, Exillon Energy acquired an additional licence in a state auction, which covers 119 sq km, most of which is covered by 2D and 3D seismic. The licence borders the west margin of the ETP V field. The new licence represents a significant addition to the Group's asset portfolio and we hope will contribute to the future growth of reserves and production.

At Exillon TP the main focus will be on production optimisation through the well workover programme which commenced in early 2010, and on construction of a Gas Power Generating Unit which will bring about a considerable reduction in diesel costs. 

Subject to the completion of the Yenisey refinery in Q4 2010, Exillon TP may improve the economics of oil production through processing its high quality oil.

In Q3 2009, the Group established a trading subsidiary in Moscow, Regional Resources LLC, to act as an oil trader for the Group. Regional Resources LLC will help the Company to optimise its sales revenue by taking advantage of fluctuations between domestic and international oil prices. 

Exillon WS

Exillon WS did not produce oil in 2009, largely due to a lack of transport infrastructure. Since acquiring sole ownership of Exillon WS in December 2009, the Group has been able to increase the pace of infrastructure development at the site.  

Production at Exillon WS commenced in March 2010 upon signing an oil processing agreement with Aki Otir, a subsidiary of Russneft. The Company is planning to temporarily stop oil production until the completion of infield infrastructure, and resume uninterrupted oil production in Q3 2010.

In February 2010, Exillon Energy started construction of a 40km pipeline from the EWS I oil field to a year-round state road. The pipeline is scheduled for completion in Q3 2010, and will enable the Group to unlock the potential of Exillon WS.  

To reduce dependence on third parties and improve economics of oil production, the Group is also planning to complete an infield oil processing facility.

The pipeline will be the largest capital expenditure project at Exillon WS for 2010, budgeted at $4.9 million. A further $17.3 million will be spent on drilling seven wells and various other infrastructure improvements.  

Exillon WS operates under a single exploration and production licence. Having successfully fulfilled previous exploration commitments at Exillon WS, the Group gained approval for a new scheme of development in 2009.   

Reserves 

Exillon Energy's reserves were audited by Miller and Lents, showing a significant increase in reserves since 2008. The Group had proved and probable reserves as of 1 September 2009 of 58 million bbl at Exillon TP and 74 million bbl at Exillon WS, an increase of 6% from 2008 (on a gross basis). 3P reserves totalled 370 million bbl on 1 September 2009, an increase of 75% from 2008.

In March 2010 Exillon Energy completed well EWS - 15 at Exillon WS, which successfully tested an 18.71 sq km northern extension to the EWS I field and contained 18.3 million bbl of prospective resource. The well flowed water-free oil naturally to the surface with a flow rate of 1,140 bpd on a 10mm choke, and was drilled on a turn-key contract for a total consideration of $0.975 million. Whilst the average net oil pay within the EWS I field according to the Miller and Lents September 2009 reserve report disclosed at IPO is less than 5m, this new well had 15.2m of net pay within the Jurassic, making it the thickest Jurassic net oil pay encountered in the EWS I field to date.

In February 2010, the Company acquired the North Kenyunskoe licence in a state auction. The new licence covers 119 sq km and lies immediately to the east of Exillon TP's ETP V field. The new licence is mostly covered by 2D and 3D seismic, and consists of four main structures with recoverable oil reserves and resources currently estimated at: C2 - 16 million bbl, C3 - 3.6 million bbl and D1 - 8.7 million bbl.

In April 2010, Exillon Energy finished drilling EWS - 34 and EWS-31wells within 23 days and is on schedule to complete the remaining four wells at Exillon WS. Exillon Energy will continue to work to prove up reserves using the Group's technical expertise and create further value for the shareholders. 

 

Consolidated Financial Statements for the year ended 31 December 2009 

Consolidated statement of comprehensive income

 

	Note	For the year ended 31 December 2009	For the period from 27 March to 31 December 2008
		$'000	$'000
Revenue	9	22,526	-
Cost of sales	10	(10,463)	-
Exploration and evaluation expenses		(97)	-
Depreciation, depletion and amortisation		(3,457)	-
GROSS PROFIT		8,509	-
Selling expenses	11	(8,096)
Administrative expenses	12	(9,388)	(357)
Foreign exchange loss, net		(38)
Other income		60	-
IPO costs	15	(7,755)	-
Bargain purchase gain	7	197,562	-
OPERATING PROFIT/(LOSS)		180,854	(357)
Finance income	16	220	-
Finance cost	17	(1,019)	-
PROFIT/(LOSS) BEFORE INCOME TAX		180,055	(357)
Income tax credit	18	277	-
NET PROFIT/(LOSS) FOR THE YEAR AND PERIOD		180,332	(357)
OTHER COMPREHENSIVE INCOME:
Currency translation differences recognised directly in equity		39,072	-
TOTAL COMPREHENSIVE INCOME/(LOSS) FOR THE YEAR AND PERIOD		219,404	(357)
Earnings per share for profit attributable to the equity holders of the Company
- Basic ($)	19	15.87	-
- Diluted ($)	19	15.80	-

  

Consolidated Statement of Financial Position

 

		As at 31 December
	Note	2009	2008
		$'000	$'000
ASSETS:
Non-current assets:
Property, plant and equipment	20	430,406	-
Long-term prepayments	23	317	-
		430,723	-
Current assets:
Inventories	21	1,067	-
Trade and other receivables	22	1,800	-
Prepaid consideration	28	-	56,835
Other assets	23	1,646	-
Cash and cash equivalents	24	34,280	5
		38,793	56,840
TOTAL ASSETS		469,516	56,840
LIABILITIES AND EQUITY:
Equity:
Share capital	28	1	-
Share premium	28	95,783	-
Other invested capital	28	68,536	57,096
Retained earnings/(accumulated loss)		180,421	(357)
Translation reserve		39,072	-
		383,813	56,739
Non-current liabilities:
Provision for decommissioning	25	2,704	-
Deferred income tax liabilities	18	70,308	-
Trade and other payables	26	1,908	-
Long-term borrowings	27	240	-
		75,160	-
Current liabilities:
Trade and other payables	26	7,651	101
Taxes payable		1,420	-
Short-term borrowings	27	1,472	-
		10,543	101
TOTAL LIABILITIES AND EQUITY		469,516	56,840

  

Consolidated statement of changes in equity

	Note	Share capital	Share premium	Other invested capital	(Accumulated loss)/ Retained earnings	Translation reserve	Total equity
		$'000	$'000	$'000	$'000	$'000	$'000
Balance at 27 March 2008		-	-	-	-	-	-
Other contributions from shareholders	28	-	-	57,096	-	-	57,096
Net loss for the period		-	-	-	(357)	-	(357)
Balance at 31 December 2008		-	-	57,096	(357)	-	56,739
Share capital	28	1	-	-	-	-	1
Additional paid-in-capital	28	-	999	-	-	-	999
Ordinary shares issued for cash	28	-	100,644	-	-	-	100,644
Share based payment charge		-	-	-	446	-	446
Share issue costs	28	-	(5,860)	-	-	-	(5,860)
Other contributions from shareholders	28	-	-	11,440	-	-	11,440
Net profit for the year		-	-	-	180,332	-	180,332
Translation difference		-	-	-	-	39,072	39,072
Balance at 31 December 2009		1	95,783	68,536	180,421	39,072	383,813

   

Consolidated Statement of Cash Flows

	Note	For the year ended 31 December 2009	For the period from 27 March to 31 December 2008
		$'000	$'000
CASH FLOWS FROM OPERATING ACTIVITIES:
Profit/(loss) before income tax Adjustments for:		180,055	(357)
Depreciation, depletion and amortisation	20	3,509	-
Loss on disposal of property, plant and equipment	20	77	-
Finance income	16	(220)	-
Finance cost	17	1,019	-
Bargain purchase gain	7	(197,562)	-
Non-cash transactions		3,200	-
Operating cash flow before working capital changes		(9,922)	(357)
Changes in working capital:
Increase in inventories		(140)	-
Increase in trade and other receivables		(26)	-
Increase in trade and other payables		2,937	101
Increase in taxes payable		558	-
Cash used in operations		(6,593)	(256)
Interest paid		(550)	-
Interest received		48	-
Net cash used in operating activities		(7,095)	(256)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment		(4,687)	-
Purchase consideration paid	7	(60,645)	(56,835)
Cash acquired in acquisition of Exillon WS	7	21	-
Cash acquired in acquisition of Exillon TP	7	1,610	-
Net cash used in investing activities		(63,701)	(56,835)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from share issuance		95,784	-
Contribution to equity		7,729	57,096
Proceeds from borrowings		6,223	-
Repayment of loan		(1,000)	-
Loan received from related parties	30	2,828	-
Repayment of loan from related parties	30	(6,656)	-
Net cash from financing activities		104,908	57,096
NET INCREASE IN CASH		34,112	5
Translation difference		163	-
Cash at beginning of the year and period		5	-
Cash at end of the year and period		34,280	5

 

 

Notes to Financial Statements

1. BACKGROUND 

The principal activity of the Company and its subsidiaries (together "the Group") is the exploration, development and production of oil within the Commonwealth of Independent States ("CIS") region. The Group's production facilities are based in the Republic of Komi and the Khanty-Mansiysk Region of the Russian Federation. The Group's structure is given in Note 32.

Exillon Energy plc (the "Company" or the "Parent") is a public limited company which is listed on the London Stock Exchange and is incorporated and domiciled in the Isle of Man. The company was formed on 27 March 2008. Its registered address is 15-19 Athol Street, Douglas, Isle of Man, IM1 1LB. 

Prior to the Annual General Meeting held on 11 July 2009, the name of the Company was Caspian Minerals plc.

The Group's ultimate controlling shareholder at 31 December 2009 was Mr. Maksat Arip. 

The Group's operations are conducted primarily through subsidiaries, Dinyelneft LLC ("Exillon TP") and KNG-Dobycha LLC ("Exillon WS").

 

2. BASIS OF PREPARATION

The consolidated financial statement have been prepared in accordance with International Financial Reporting Standards ('IFRSs') issued by the International Accounting Standards Board ('IASB') and the Listing Rules of the United Kingdom Financial Service Authority ('FSA'). These standards are subject to interpretations issued from time to time by the International Financial Reporting Interpretation Committee ('IFRIC'). These consolidated financial statements have also been prepared under the historical cost convention as modified for the revaluation of certain financial instruments. 

The preparation of the financial statements requires the use of certain critical accounting estimates. It also necessitates management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 5.

The Group believes that it has sufficient financial resources to manage its business risks successfully despite the current uncertain economic outlook. The Company's forecasts and projections, taking account of reasonably possible changes in trading performance (including oil price), show that the Company should be able to operate with its current cash holding. 

The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

 

3. ADOPTION OF NEW AND REVISED STANDARDS

(I) Certain new and revised standards and interpretations have been published that are mandatory for the Group's accounting periods beginning on or after 1 January 2009 and which the Group has adopted:IFRS 7 'Financial Instruments: Disclosures' amendments (effective for periods beginning on or after 1 January 2009) which requires additional disclosures about fair value measurement and liquidity risk;IFRS 8 'Operating Segments' (effective for periods beginning on or after 1 January 2009) has replaced IAS 14 Segment Reporting and introduced a management approach to segment reporting;IAS 23 'Borrowing Costs' (revised March 2007); effective for annual periods beginning on or after 1 January 2009;Revised IAS 1 'Presentation of Financial Statements' relating to the presentation of the statement of comprehensive income; andAmendment to IFRS 2 'Share-based Payment' relating to vesting conditions and cancellations.

Adoption of these Standards and Interpretations in current period had no material impact on these consolidated financial statements.

(II) Standards, amendments and interpretations to existing standards that are not effective yet and have not been early adopted by the Group:

IFRIC 17 Distribution of non-cash assets to owners (effective on or after 1 July 2009);IAS 27 Consolidated and separate financial statements (revised, effective from 1 July 2009);IFRS 3 Business combinations (revised, effective from 1 July 2009);IAS 38 Intangible Assets, (amendment);IFRS 5 Measurement of non-current assets (or disposal groups) classified as held-for-sale, (amendment);IAS 1 Presentation of financial statements, (amendment); andIFRS 2 Group cash-settled and share-based payment transactions, (amendments). 

Management anticipates that the adoption of these Standards and Interpretations in future periods will have no material impact on the consolidated financial statements of the Group.

 

4. SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation - The Group's consolidated financial statements incorporates the financial statements of the Company and its subsidiaries. Control comprises the power to govern the financial and operating policies of the investee so as to obtain benefit from its activities and is achieved through direct and indirect ownership of voting rights; currently exercisable or convertible potential voting rights; or by way of contractual agreement. Subsidiaries are consolidated from the date on which control is transferred to the Group and are de-consolidated from the date that control ceases. 

Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Segmental reporting - Operating segments are reported in a manner consistent with the internal reporting provided to the directors of the Company. The Group's primary format for reporting segment information is operational segments. 

Functional and presentation currencies - The items included in this consolidated financial statement relating to the Group companies are measured using their functional currency that is the currency in the main environment in which they operate. These consolidated financial statements are presented in US Dollars or $, which is the Exillon Energy plc functional and presentation currency. The functional currency of the Group's trading subsidiaries is the Russian Rouble and for the other companies it is US dollar.

Foreign currency translation - Transactions in foreign currencies are initially recorded in the functional currency at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated to the functional currency at the rate of exchange ruling at the balance sheet date. All differences are taken to the statement of comprehensive income. 

On consolidation, assets and liabilities denominated in foreign currencies are translated into US dollars at closing rates of exchange. Trading results of subsidiary undertakings are translated into US dollars at average rates of exchange. Differences resulting from the retranslation of the opening net assets and the results for the year are taken to reserves.

Business combinations - The acquisitions of subsidiaries and businesses from third parties are accounted for using the purchase method. The cost of the business combination is measured as the aggregate of the fair values (at the date of exchange) of assets acquired, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree's identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combinations are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell.

Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss. 

Property, plant and equipment - The Group uses the cost model by which items of property, plant and equipment are measured initially at their acquisition cost.

a) Cost 

The cost of property, plant and equipment items includes their acquisition cost, all the costs directly related to bringing the assets to the location and condition ready for their intended use and any costs of dismantling and removing the item or restoring the site on which it is located.

Staff costs and other operating expenses incurred in the construction of the asset are also capitalised. 

The costs of expansion, modernisation or improvements leading to increased productivity, capacity or efficiency or to a lengthening of the useful lives of the assets are capitalised.

Repair, upkeep and maintenance expenses are recognised in the consolidated statement of comprehensive income as incurred. Furthermore, certain of the Group's facilities require periodic reviews. In this respect, a portion of the items requiring replacement are recognised specifically and are depreciated over the period until the next repairs are carried out.  

Property, plant and equipment also include investments relating to oil and gas exploration, development and production activities, and the cost of assets held under finance leases.

Exploration and evaluation assets 

Exploration and evaluation assets are measured at cost less provision for impairment, where required.

The Group recognises oil and gas exploration and evaluation activities using successful efforts accounting, whereby the accounting treatment of the various costs incurred is as follows:

·; The costs incurred in the acquisition of new interests in areas with proved and unproved reserves including exploration licence acquisition costs, are capitalised as incurred to the account "Exploration and Evaluation Assets" of the field concerned.

·; Exploration costs (geological and geophysical expenditures, expenditures associated with the maintenance of unproved reserves and other expenditures relating to the exploration activity), excluding exploratory drilling expenditures, are expensed as incurred.

·; Administrative and other general overhead costs, administrative expenses of the site offices (office rent, office cars, administrative personnel) and other overhead costs that are not directly attributable to the exploration and evaluation activities are expensed as incurred.

·; Exploratory drilling costs are capitalised to the account "Exploration and Evaluation Assets" of the field concerned, pending determination of whether potentially economic oil and gas reserves have been discovered by the drilling effort. If the well does not demonstrate potential economic oil and gas quantities, the well costs are expensed as a dry hole and are reported in exploration expenses. It is not unusual to have exploration wells remaining suspended on the balance sheet for several years while additional appraisal drilling and seismic work on the potential oil and gas field is performed or while the optimum development plans and timing are established.

·; The Group classifies exploration and evaluation assets as tangible assets since its tangible element (underlying reserves) is significant and exploration and evaluation assets represent an integral part of the underlying reserves.

·; Borrowing costs are capitalised to the account "Exploration and Evaluation Assets" in accordance with IAS 23 as described in Borrowing costs section below. Other borrowing costs relating to exploration and evaluation activity are expensed as incurred.

·; Activities preceding the acquisition of oil and gas properties are defined as

·; pre-exploration (or pre-licence). All pre-exploration expenditures are recognised as an expense in the consolidated statement of comprehensive income when incurred and include project feasibility studies, surface mapping and appraisal activities, as well as other overhead costs related to pre-exploration activities.

An exploration and evaluation asset is no longer classified as such when the technical feasibility and commercial viability of extracting a mineral resource is proved. Once commercial reserves are found, exploration and evaluation assets are transferred to account "Oil and Gas Properties" and amortised using the unit-of-production method as described in paragraph b) Depreciation and depletion below. 

Development costs 

Expenditures related to the development of hydrocarbons are not recognised as exploration and evaluation assets but as oil and gas properties.

Development costs include the cost of development wells to produce proved reserves, the cost of production facilities (such as flow lines, separators, oil treatment facilities, heaters, storage tanks, improved recovery systems and gas processing facilities), borrowing costs and other costs necessary to obtain access to proved and probable reserves. 

b) Depreciation and depletion

Property, plant and equipment related to oil and gas production activities are depreciated using the unit-of-production method as described below, except in the case of assets whose useful life is shorter than the lifetime of the field (roads, pipelines, pumps etc), in which case the straight-line method is applied. Exploration and evaluation assets are only depreciated when the field is in production.

Producing wells, well pads and other producing items are depleted over Proved and Probable (2P) reserves on a field-by-field basis.

·; Capitalised future decommissioning costs are depleted over Proved and Probable reserves (2P).

·; Other development costs that cannot be attributed to particular producing units are allocated to cost centres of related oil fields based on their reserve share in the total portfolio. Such costs are depleted over Proved and Probable (2P) reserves on a field-by-field basis.

Since 2P reserves assume future development costs to access proved undeveloped and probable reserves, an adjustment is made to the depreciation base to reflect the effect of future development costs.

Property, plant and equipment, other than those described above, are depreciated using the straight-line method on the basis of the acquisition cost of the assets less their estimated residual value, over the years of estimated useful life of the assets, as follows:

 

Buildings and constructions		5 to 30 years
Machinery and equipment		3 to 20 years
Other		3 to 7 years

The residual values and useful lives of these assets are reviewed annually. Depreciation and depletion starts when the assets become available for use.

Impairment of assets - In order to ascertain whether its assets have become impaired, the Group compares their carrying amount with their recoverable amount at the balance sheet date, or more frequently if there are indications that the assets might have become impaired. For that purpose, assets are grouped into cash-generating units as they generate cash flows which are independent from other units. 

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax risk adjusted discount rate.

If the recoverable amount of an asset (or a cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or the cash-generating unit) is reduced to its recoverable amount, and an impairment loss is recognised in the consolidated statement of comprehensive income. 

The basis for future depreciation or amortisation will take into account the reduction in the value of the asset as a result of any accumulated impairment losses.

When an impairment loss subsequently reverses, the carrying amount of the asset (or the cash-generating unit) is increased to the revised estimate of its recoverable amount, so that the increased carrying amount does not exceed the carrying amount that would have been determined in case no impairment loss had been recognised for the asset (or the cash-generating unit) in prior years. A reversal of an impairment loss is recognised in the consolidated statement of comprehensive income. The reversal is capped at the value that the asset would have been held at had it continued to be depreciated. An impairment loss recognised for goodwill can not be reversed in a subsequent period.  

Impairment of oil and gas properties

For oil and gas properties, assets are tested for impairment whenever facts and circumstances indicate potential impairment. Impairment reviews compare the carrying amount of an asset with its recoverable amount. Recoverable amount is the higher of value in use and fair value less costs to sell. As the company is in the development phase, recoverable amount is based on fair value less costs to sell based on market participant assumptions of the future cash flows to be obtained from the proved and probable reserves.

Recognition and measurement of financial instruments - The Group recognises financial assets and liabilities on its balance sheet when it becomes a party to the contractual obligation of the instrument.

Financial assets and liabilities are initially recognised at fair value. The accounting policies for subsequent re-measurement of these items are disclosed in the respective accounting policies set out below.

Cash and cash equivalents - Cash and cash equivalents comprise cash in hand, current balances with banks and similar institutions; and short-term highly liquid investments that are readily convertible to known amounts of cash, are subject to insignificant risk of changes in value and have a maturity of three months or less from the date of acquisition.

Trade and other receivables - Trade and other receivables are carried at the original invoice amount, less allowance made for doubtful receivables. Where the time value of money is material, receivables are initially recognised at fair value and subsequently carried at amortised cost.

The primary factors that the Group considers when determining whether a receivable is impaired is its overdue status. The following other principal criteria are also used to determine that there is objective evidence that an impairment loss has occurred:

·; any portion of the receivable is overdue and the late payment cannot be attributed to a delay caused by the settlement systems;

·; the counterparty experiences a significant financial difficulty as evidenced by its financial information that the Group obtains;

·; the counterparty considers bankruptcy or a financial reorganisation;

·; there is adverse change in the payment status of the counterparty as a result of changes in the national or local economic conditions that impact the counterparty.

Inventories - Inventories are stated at the lower of cost and net realisable value. Cost is determined by the weighted average method and comprises direct purchase costs, cost of production, transportation and custom clearance costs.  

Trade and other payables - Trade and other payables are carried at payment or settlement amounts. Where the time value of money is material, payables are initially recognised at fair value and subsequently carried at amortised cost.

Borrowings - Borrowings are initially recognised at fair value, being the fair value of the proceeds received net of issue costs associated with the borrowing.  

Borrowing costs are recognised in the statement of comprehensive income in the period in which they are incurred. According to revised IAS 23, effective on or after 1 January 2009, interest costs on borrowings to finance the construction of property, plants and equipment are capitalised, during the period of time that is required to complete and prepare the asset for its intended use. Borrowing costs on exploration and evaluation assets are also capitalised. All other borrowing costs are expensed. 

Operating leases - Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Group, the total lease payments are recognised on a straight-line basis over the period of the lease and charged to the consolidated statement of comprehensive income.

Provisions and contingencies - Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognised as a separate asset, but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of comprehensive income net of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as finance expense. Any change in the amount recognised for environmental and litigation and other provisions arising through changes in discount rates is included within finance expense.

A contingent liability is disclosed where the existence of an obligation will only be confirmed by future events or where the amount of the obligation cannot be measured with reasonable reliability. Contingent assets are not recognised, but are disclosed where an inflow of economic benefits is probable. 

Provision for decommissioning - Provision for decommissioning is recognised only to the extent of the expected costs needed to remediate the actual damage made to the environment. A corresponding amount equivalent to the provision is also recognised as part of the cost of the related property, plant and equipment. The amount recognised is the estimated cost of decommissioning, discounted to its net present value, and is reassessed each year in accordance with local conditions and requirements. Changes in the estimated timing of decommissioning or decommissioning cost estimates are dealt with prospectively by recording an adjustment to the provision, and a corresponding adjustment to property, plant and equipment. The unwinding of the discount on the decommissioning provision is included as a finance cost. 

Income taxes - Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on the taxable profits for the period. Taxable profit differs from net profit as reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other periods and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred income tax is recognised, using the balance sheet liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. 

Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred income tax is provided on arising temporary differences, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. 

Tax relating to items recognised directly in equity is recognised in equity and not in the statement of comprehensive income.

Pensions and post-employment benefits - Wages, salaries, contributions to the pension and social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the Group.  

Share based payments - the fair value of share incentives and awards to employees is measured with reference to the fair value of the equity instruments awarded at the date of grant. The Black-Scholes option pricing model is used to determine the fair value of the award made. The impact of performance conditions is not considered in determining the fair value of on the date of grant. The cost of the share based incentives is recognised as an expense over the vesting period of the award, with a corresponding increase in equity.

Advances and prepayments - Advances and prepayments are carried at cost less provision for impairment. An advance or prepayment is classified as non-current when the goods or services relating to the advance or prepayment are expected to be obtained after one year, or when the advance or prepayment relates to an asset which will itself be classified as non-current upon initial recognition. Advances or prepayments to acquire assets are transferred to the carrying amount of the asset once the Group has obtained control of the asset and it is probable that future economic benefits associated with the asset will flow to the Group. Other advances and prepayments are written off to profit or loss when the expenses relating to the advances or prepayments are incurred. If there is an indication that the assets, goods or services relating to an advance or prepayment will not be received, the carrying value of the advance or prepayment is written down accordingly and a corresponding impairment loss is recognised in the consolidated statement of comprehensive income.  

Revenue recognition - Revenues from sales of goods are recognised at the point of transfer of risks and rewards of ownership of the goods, normally when the goods are shipped. If the Group agrees to transport goods to a specified location, revenue is recognised when the goods are passed to the customer at the destination point. Sales of services are recognised in the accounting period in which the services are rendered, by reference to stage of completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Sales are shown net of VAT and discounts.

Revenues are measured at the fair value of the consideration received or receivable. Interest income is recognised on a time-proportion basis using the effective interest method. 

 

5. SEGMENTAL ANALYSIS

Management has determined the operating segments based on the reports reviewed by Directors that are used to make strategic decisions. 

Segmental information for the Group for the year ended 31 December 2009 is presented below. Comparative information has not been provided on the basis that there was only one reportable segment in prior periods.

Exillon Energy plc manages its business as 3 operating segments, Exillon WS, Exillon TP and Regional Resources.

 

·; Exillon TP: oil company based in the Timan-Pechora basin in the Komi Republic in the Russian Federation.

·; Exillon WS: oil company based in Western Siberia in the Russian Federation.

·; Regional Resources: oil trading company based in Moscow in the Russian Federation. 

 

	Exillon TP	Exillon WS	Regional Resources	Head office	Total
	$'000	$'000	$'000	$'000	$'000
Gross segment revenue	22,526	-	487	-	23,013
Inter-segment revenues	-	-	(487)	-	(487)
Revenue	22,526	-	-	-	22,526
Operating (loss)/profit (pre bargain purchase)	(1,497)	(618)	121	(14,714)	(16,708)
Bargain purchase gain	-	-	-	197,562	197,562
Operating profit	(1,497)	(618)	121	182,848	180,854
Depreciation	(3,484)	(2)	-	(23)	(3,509)
Total assets	203,710	231,214	309	34,283	469,516

 

A reconciliation of the operating segments' measure of profit to total profit before taxation is provided on the face of the income statement.

Revenues and non current assets originate in the companies country of domicile, being the Russian Federation.

  

6. REVENUE

 

	For the year ended 31 December 2009	For the period from 27 March to 31 December 2008
	$'000	$'000
Export sales	12,918	-
Domestic sales	9,608	-
	22,526	-

  

 

7. COST OF SALES, NET OF DEPRECIATION, DEPLETION AND AMORTISATION

 

	For the year ended 31 December 2009	For the period from 27 March to 31 December 2008
	$'000	$'000
Minerals extraction tax	6,315	-
Salary and related taxes	1,428	-
Oil treatment and in field transportation	814	-
Materials	683	-
Taxes other than income tax	577	-
Licence maintenance cost	445	-
Current repair of property, plant and equipment	314	-
Rent	185	-
	10,761	-
Change in finished goods	(298)	-
	10,463	-

 

 

8. INCOME TAXES

 

	For the year ended 31 December 2009	For the period from 27 March to 31 December 2008
	$'000	$'000
Current tax	25	-
Deferred tax	(302)	-
Income tax benefit for the period	(277)	-

 

The Group provides for taxes based on the tax accounts maintained and prepared in accordance with the tax regulations of the Russian Federation which differ from IFRS. 

The income tax rate applicable to major part of the Group's income is 20% (2008: 20%). Reconciliation between the expected and the actual taxation charge is provided below.

 

 

	For the year ended 31 December 2009	For the period from 27 March to 31 December 2008
	$'000	$'000
Profit/(loss) before income tax	180,055	(357)
Theoretical tax charge at statutory rate 20%	36,011	(71)
- Non-taxable gain from business combination	(39,513)	-
- Other non-deductible expenses	3,225	71
Income tax benefit	(277)	-

 

Differences between IFRSs and statutory taxation give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these temporary differences is detailed below and is recorded at the rate of 20%.

 

	On acquisition date	Charged to profit or loss	Translation difference	31 December 2009
	$'000	$'000	$'000	$'000
Tax effect of deductible temporary differences and tax loss carry forwards
Provision for decommissioning	(435)	(67)	(40)	(542)
Provision for unused vacation	(23)	1	(2)	(24)
Tax loss carry forward	(428)	20	(35)	(443)
Other	(42)	(8)	(3)	(53)
Gross deferred tax asset	(928)	(54)	(80)	(1,062)
Tax effect of taxable temporary differences
Property, plant and equipment	65,893	(253)	5,706	71,346
Borrowings	19	(19)	-	-
Other	-	24	-	24
Gross deferred tax liability	65,912	(248)	5,706	71,370
Net deferred tax liability	65,984	(302)	5,626	70,308

 

The deferred tax liability mainly arises from the measurement at fair value of property, plant and equipment.

The Group estimated that $170 thousand of gross deferred tax assets relating to tax losses and provision for decommissioning will be recovered within 12 months from the financial position date. Under Russian tax legislation tax losses are available for use for a period of 10 years. In addition, the Group estimated that $338 thousand of the gross deferred tax liabilities relating to property plant and equipment will be reversed within 12 months from the financial position date. The Group estimated that all other deductible and taxable temporary differences will reverse after 12 months from the financial position date.

 

9. EARNINGS PER SHARE 

Basic earnings per share ("EPS") is calculated by dividing net profit for the year attributable to ordinary equity shareholders of the Group by weighted average number of ordinary shares outstanding during the period.

The following reflects the income and adjusted share data used in the EPS computations:

 

	Note	For the year ended 31 December 2009	For the period from 27 March to 31 December 2008
		$'000	$'000
Net profit/(loss) attributable to equity shareholders of the Group		180,332	(357)
Number of shares:
Weighted average number of ordinary shares		11,364,384	-
Adjustments for:			-
IPO share awards		48,145	-
Weighted average number of ordinary shares for diluted earnings per share		11,412,529	-
Basic ($)		15.87	-

 

 

 

10. TRANSACTIONS WITH RELATED PARTIES

For the purposes of the financial statements, parties are considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. The nature of the related party relationships for those related parties with whom the Group entered into significant transactions or had significant balances outstanding are detailed below or elsewhere in this report. The balances and transactions are predominantly with entities under common control or joint ventures. 

The Group has been formed from a collection of entities controlled by the founder shareholder Mr. Maksat Arip, as well as acquisition of interests in Exillon TP and Exillon WS from third parties. During 2009 the Group undertook significant related party transactions with entities controlled by the founder shareholders. These transactions were undertaken at contracted rates, which were not necessarily on an arm's length basis. The principal activities conducted with related parties related mainly to financing of the Group's acquisitions and operations, and management compensation.

The Group's outstanding balances with related parties were as follows: 

	As at 31 December
	2009	2008
	$'000	$'000
Borrowings:
Loan from Shareholder	500	-
Tredall Ltd	140	-
Caspian Minerals LLP	100	-
	740	-

 

Transactions with related parties during the period were as follows:

	For the year ended 31 December 2009	For the period from 27 March to 31 December 2008
	$'000	$'000
NK KNG
Loan receipt	866	-
Loan repayment	(13,874)	-
Interest expenses	120	-
San Roche
Loan repayment	(1,905)	-
Tredall Ltd
Loan receipt	1,362	-
Loan assignment	5,223	-
Loan repayment	(6,446)	-
Caspian Minerals LLP
Loan receipt	100	-
Loan from Shareholder
Loan receipt	500	-
Entities under common control:
Disposal of Tredall Limited	2	-
Other contributions from shareholders	8,516	57,096

 

Compensation of key management personnel - Key management personnel consist of independent non-executive directors, executive directors, directors and presidents of operational subsidiaries. Compensation of key management personnel is set by senior executives of the Group. Compensation of key management includes salary and other short-term benefits. Total compensation to key management personnel included in administrative expenses in the consolidated statement of comprehensive income was $4,433 thousand for the year ended 31 December 2009 (2008: $124 thousand).

 

Key management compensation is summarised below:

	For the year ended 31 December 2009	For the period from 27 March to 31 December 2008
	$'000	$'000
Salaries and other short-term employee benefits, including bonuses	1,587	124
Share based payment	1,346	-
IPO bonus	1,500	-
Total	4,433	124

Risks and uncertainties 

The Board has overall responsibility for ensuring that risk is effectively managed across the Exillon Group, while the efficacy of the internal control system is monitored by the Audit Committee. The day-to-day responsibility for managing risk and maintaining the Group's system of internal control lies with the Executive Committee. Plans to mitigate known risks and the effectiveness of and progress in implementing these plans will be reviewed regularly in accordance with Turnbull Guidance. Despite the Group's best efforts to factor these known risks into its business strategy, inevitably risks will exist of which the Group is currently unaware. 

Exillon's risk assessment process is currently being developed, using work undertaken on risks at the time of the IPO as the basis for this activity. This will be used to develop a fuller risk matrix which will be assessed as to impact and likelihood and evolved as the macro environment as well as country- and industry-specific circumstances evolve. As internal processes are developed and become more institutionalised, new risks may arise and others recede. Similarly, the ranking of these risks (based on probability and severity) may fluctuate. Management will develop the processes for monitoring, measuring and reporting risk over the course of 2010.

 

Principal risks 

Risk	Mitigation / control
The Group may be adversely affected by a substantial or extended decline in the prices for crude oil.	The Russian taxation regime serves as a hedge against oil price declines, as the most significant components of taxation such as Export Duty and Mineral Extraction Tax decline to zero as the oil price decreases to $15. An extended decline in prices for crude oil is likely to result in a depreciation of the Rouble, which will lower production costs per barrel.
The Group's business depends on exploration and production licences issued by the Russian authorities which could be suspended, restricted, terminated or not extended.	The Group's licences are subject to periodic review by the regional authorities and as part of the most recent reviews, the authorities indicated that the Group is in compliance with the terms of its licences. In addition, the Group is in compliance with all tax obligations and none of the Group's oilfields is regarded as a strategic deposit, which significantly reduces the risk of suspension, restriction or termination of the licence.
Leases relating to some of the Group's oil wells have expired.	In accordance with existing law and practice, Exillon TP leases from the Russian government three of the oil wells it operates (ETP IV - 1, ETP III - 1 and ETP II - 74). The three wells represent approximately 2.1% of Exillon TP's reserves and a small portion of its expected production. In continuing to use these wells, the Group relies on Article 621(2) of the Civil Code of the Russian Federation, which states that such leases are extended for an indefinite term if the tenant continues to use the property after the term of the lease has expired in the absence of objections from the lessor, although either party is entitled to terminate the lease upon three months' notice. The Group believes that the Russian authorities are unlikely to exercise this termination right as the Group has the exclusive right to extract the oil resources underlying the wells and it continues to make lease payments.
Fluctuations in currency exchange rates may materially and adversely affect the Group's financial results and condition.	Most of the Group's revenues from the sale of crude oil are denominated in U.S. dollars, while a substantial proportion of its costs are denominated in Roubles. Accordingly, the real appreciation of the Rouble agains the U.S. dollar may negatively affect the Group's revenues, but the Group anticipates that such appreciation will most likely be the result of high crude oil prices which would neutralise the effect. In addition, the effect on net income would be even less as the applicable mineral extraction tax would be reduced as a result of such appreciation.
The Group relies on the services of third party providers.	The Group's assets are located in well developed regions, which means that services are available on commercially reasonable terms from a number of providers.
Most of the crude oil produced by the Group is transported via a single pipeline system operated by an external provider - Transneft.	The oil produced by the Group is of high quality with 35 to 40 API gravity and less than 0.5% sulphur content, which allows it to be refined into higher value products than heavier crude, when it is not mixed with oil in the Transneft pipeline system. This makes the Group's oil attractive to refinery and pipeline operators, thereby increasing the Group's delivery options. In addition, the Group's fields are located near existing infrastructure. Exillon TP's fields are adjacent and located near Usinsk, one of the most developed areas of the Komi Republic, and approximately 30km from the site on which a major refinery is currently being built. The Exillon WS oilfields are located only 12km from a Transneft pipeline.
The Group's oilfields are located in areas subject to variable weather conditions which may limit production during certain times of the year.	Completion of a 40km pipeline from the Group's oilfields in West Siberia to a year round state road is planned for Q3 2010. Upon completion of the pipeline, the Group is expecting to start uninterrupted production of oil.
The Group could be subject to claims and liabilities under environmental, health, safety and other laws and regulations.	In the last three years, the authorities have not imposed any fines on Exillon WS or instructed it to improve its procedures or infrastructure in relation to any environmental laws and regulations. At Exillon TP, the authorities imposed a fine of $1,133 for certain violations of health and safety laws and regulations, which were paid and the neccessary improvements made. The Group endeavours to comply with all the environmental and health and safety laws and regulations at all times.
The Group faces drilling, exploration and production risks which may prevent it from realising profits and may result in substantial losses.	The Group's core technical and operational team have extensive experience gained from their work on a wide variety of projects in Russia and the top twelve operational and technical executives have over 300 years' of combined experience in the oil industry. Since the end of 2006, Exillon Energy's management has had a 100% drilling success rate with eleven exploration, appraisal and development wells. The Group has continued to optimise its development plan through the application of advanced subsurface evaluation techniques, including utilising its extensive 3D seismic database to build robust 3D subsurface models; implementation of advanced oilfield technology such as Schlumberger's borehole imaging technology and successful development of hydrofracturing techniques.
The Group does not carry the types of insurance normally carried by a business of its size and nature.	The Group currently maintains all mandatory insurance required by law and has enhanced its policies with respect to medical insurance and accidents. The Group does not maintain property insurance.
The Company will be subject to restrictions on foreign ownership in future.	None of the Group's oilfields is regarded as a strategic deposit and none of the Group's subsidiaries is engaged in any other activities of strategic importance envisaged by the Strategic Investment Law. The Group estimates that the possibility of the future discovery of such deposits at one of its current oilfields, or the acquisition of such deposits, to warrant restrictions on foreign ownership as low.
There are high levels of inflation in Russia	The Group anticipates that high levels of inflation in Russia will be balanced by higher domestic oil prices and/or Rouble devaluation.
Russian tax law and practice are not fully developed and are subject to frequent changes	There can be no assurance that the Russian Tax Code will not be changed in the future in a manner adverse to the stability and predictability of the tax system. The Group, however, is committed to continue to comply with all the provisions of the Tax Code.

 

Statement of Directors Responsibilities 

Directors

The names and functions of the directors of Exillon Energy plc will be listed in the Exillon Energy plc's Annual Report 2009. Members of the senior management team are identified on the Group website:

www.exillonenergy.com.

Responsibility Statement of the Directors

Each of the Directors, whose names and functions are listed in the Directors' Report in the Annual Report 2009, confirm that, to the best of their knowledge:

The consolidated financial statements, which have been prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (IASB), give a true and fair view of the assets, liabilities, financial position and profit of the group; and the Directors' Report contained in the Annual Report 2009 includes a fair review of the development and performance of the business and the position of the group, together with a description of the principal risks and uncertainties that it faces." 

Publication of Annual Report 

Exillon Energy Plc will publish its Annual Report and Accounts for the year ended 31 December 2009 on the Company's website: www.exillonenergy.com and will distribute copies of the Annual Report to shareholders when it convenes its Annual General Meeting which is scheduled to be held on 21 June 2010.

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