Final Results

FOR IMMEDIATE RELEASE 28 MARCH 2012

JKX Oil & Gas plc

PRELIMINARY RESULTS

 FOR THE YEAR ENDED 31 DECEMBER 2011

Key Financials

·; Revenue up 23% to a record $236.9m (2010: $192.9m)

·; Operating profit down 14% to $82.1m (2010: $95m before exceptional item)

·; Increase in Ukrainian production tax of $61.7m

·; Production down 12% to 9,045 boepd (2010: 10,324 boepd)

·; Capital expenditure of $162.0m (2011: $178.5m)

·; Total cash at period end of $28.9m (2010: $62.0m)

Operational Highlights 

·; Achieved a key milestone with completion of the Koshekhablskoye gas field facility in Russia

·; LPG project in Ukraine completed mid-year, averaging 61tpd and enhancing gas stream revenues

·; Booked reserves grew to 90.7MMboe, with a reserves replacement ratio of 2.7

·; Drilling of two successful Ukrainian exploration wells in the Molchanovskoye "Wedge Zone"  and the Zaplavskoye exploration licence

Outlook

·; Russian gas contract signed early March 2012

·; Phase II Koshekhablskoye development planned to double production from booked reserves

·; Oil and gas realisations expected to remain high

·; Growth opportunities in existing markets

JKX Chief Executive, Dr Paul Davies, commented:

"With the completion of the Koshekhablskoye gas field facility in Russia, we have achieved a milestone which is transformational for JKX. Southern Russia is one of the fastest growing gas markets and, similarly to Ukraine, we have positioned ourselves early. We have signed a sales contract agreement and are currently awaiting our permit to operate. We will start delivering gas to our buyer shortly and expect to build to plant capacity by mid-year."

"Ukraine continued to be the engine of the Group in 2011, providing the bulk of our record turnover of $237 million. Its strong cash flow allowed us to absorb a significant $62 million increase in production taxes in the period. We have experienced a period of very intensive capital investment, notably in Russia. The Board will therefore not recommend a final dividend for 2011."

ENDS

For further information please contact:

Nadja Vetter / Alexandra Stoneham Cardew Group 020 7930 0777

A presentation to analysts will be held at 9.30am at N+1Brewin, 12 Smithfield Street, London, EC1A 9BD.

Chairman's statement

A Year of Demand

As I complete my first year as Chairman of your Company, I reflect on a year which has demanded in full the capabilities of the organisation in order to bring to fruition our large development project in Russia which has depended on the cash flow from our Ukraine operations, albeit a cash flow depleted by the increase in taxation.

I am pleased to report that commercial production is imminent in Russia and we have met our 2011 revenue targets in Ukraine.

We have benefitted from strong and stable oil and condensate realisations during the period which are projected to continue during 2012. The Ukrainian gas market also remained buoyant in 2011 although concern has been evident in the market that the current level of gas realisations may need to ease during 2012.

Gas realisations in Russia are forecast to continue their annual upward movement towards European netback convergence following the recent presidential elections, although the date for this convergence is now anticipated towards the end of the decade.

Strategy

The Company remains committed to its strategy of acquiring and developing production assets in eastern and central Europe. Ukraine and Russia remain our primary markets and we are actively seeking to broaden our development and operational footprint in both countries.

Acquisition of new assets in Ukraine remains difficult, although we have been successful in extending our exploration acreage in Poltava in the period; we are excited about the possibilities of this large area which is contiguous to our existing production licences. 

The independent gas sector in Russia continues to grow and, following the start-up of our production at Koshekhablskoye, provides a number of opportunities for us to pursue in southern Russia.

Performance

A key factor in the growth of our operating capability is the continuous improvement of the quality and expertise of our personnel, particularly at our Ukrainian and Russian operating centres. The rapid increase in the last 18 months in the Russian workforce has placed additional demands on our supervisory staff and they are to be commended for their resilience and professionalism.

In particular, I would highlight the outstanding record for health, safety, environmental matters and community liaison that we have achieved in 2011 with zero lost time injuries in more than 2.3 million manhours of safety exposure, and an all injury frequency rate which is well below the industry benchmark.

Production in Ukraine again underpinned the operations of the Group. The development drilling programme at Poltava has continued on schedule and has achieved success in finding additional reserves within our licence areas. Strong product prices and the successful start-up of our LPG facility at mid-year in Poltava have both contributed to a record Company revenue generation of $237m for the period.

 Delays on completion of our large Russian project have pushed initiation of gas sales into this year, and this together with our cost of borrowings, has continued to put pressure on our cash position. This is forecast to ameliorate during the second half of 2012 with the reduction of capital spend in Russia and inflow of Russian production revenues.

Progress has been made in our exploration programme with a successful well on our new Ukrainian acreage and a gas discovery in Hungary. We have also initiated a review of available exploration prospects in Russia in the vicinity of our Koshekhablskoye licence.

We have completed a reserve review of our licence portfolio as of 31 December 2011, and I am pleased to announce that, after a total 2011 production of 3.3 MMboe, we have increased our 2P reserves to 90.7 MMboe (a reserves replacement ratio of 2.7).

Your Board

This year has seen a number of changes in the composition of the Board. I noted in my Interim Statement that your Board supports the longer term aspirations of Lord Davies's report on gender diversity on appointment of directors to boards. I would have been indeed prescient if I had been aware that we were shortly to appoint a woman as Finance Director who met our criteria for "the highest quality people with the most appropriate experience for the requirements of the business, be they men or women."

Cynthia Dubin joined the Company as Finance Director in November and brings with her a wide experience of the oil and gas and energy sectors. Cynthia has a strong project finance and banking background and is an invaluable addition to the management team.

November also saw Alastair Ferguson join the Board as a Non-Executive Director. Alastair has held a wide range of senior positions with BP during his 33 years in the oil and gas industry, culminating in an eight year assignment in Moscow leading the gas and power business of TNK-BP in Russia and Ukraine. Alastair's extensive knowledge of the specific area in which we are working will be of great benefit to the Company.

Bruce Burrows retired as Finance Director at the end of September and I thank him and wish him well for the future.

Michel-Marc Delcommune retired from the Board in December and I thank him on behalf of the Board and all staff and shareholders for his contribution to the Company over the last three and a half years.

Lord Oxford has stepped down as Senior Independent Director (SID), but I am delighted that he has agreed to remain as a member of the Board. Nigel Moore, the Chairman of the Audit Committee, has taken over the role of SID, effective 1 November 2011.

Dividend

In my Interim Statement, I highlighted the impact on available cash flow of the combination of a significant increase in taxation in Ukraine in 2011, the delay in start-up of the Russian project and the attendant increased project costs. This led to our decision to forgo an interim dividend for 2011. These pressures continue. Your Board recognises that we will need the rest of this year to pay down our existing short-term borrowings, reshape the balance sheet and provide a greater element of liquidity to our operations going forward. Consequently, the Board is not recommending any final dividend is paid for 2011.

Outlook

The critical issue for your Company in the coming second quarter of 2012 is to complete all aspects of our Russian project to enable the Company to sell its gas at plant capacity. Further work is also required on well 25 to bring it into production.

Our financial resources over the next 6 months will be stretched and it may be necessary to delay some drilling projects and the frac in Ukraine until later in the year. Ukraine remains the engine of the Group and we will continue our endeavours to broaden our licence position there.

Finally, I wish to thank all our shareholders for their continuing support of the Company and all staff for their sterling work in what has been a demanding year.

Sir Ian Prosser

Chairman

Chief Executive's Statement

We have added an important operating centre in Russia to our production portfolio which now covers three countries in our core area.

Our performance

2011 was dominated by completion of construction activities on our Russian project and maintaining the pace of development drilling and start-up of our LPG facility in Ukraine.

Average oil and gas production for the year decreased by 12% to 9,045 boepd (2010: 10,324 boepd) due to a modest decline in Ukrainian production and workover delays on the Hajdunanas field in Hungary.

Production shortfalls were more than offset by strong rises in oil and gas realisations in both Ukraine and Hungary. Additionally, our Ukrainian LPG plant came on-stream in July and made a $10.9m contribution to the 23% rise in Group revenue for the year to a record $236.9m (2010: $192.9m).

Operating profit declined on a like to like basis by 14% to $82.1m (2010: $95.0m excluding exceptional impairment provision of $74.6m), reflecting the significant rise in Ukrainian production taxes in 2011 to $67.1m (2010: $5.2m).

Milestones and progress

In last year's Report, I identified a number of near term objectives which support our long term strategy. Progress against these objectives are summarised below:

Design/perform multi-frac of 1 km horizontal wellbore of well R-103 in the Rudenkovskoye field, Ukraine: Geological and geotechnical studies and design of the multi-frac were completed in the period. Tenders were issued to a number of international contractors for frac operation, and award is now scheduled in the second quarter of this year for the operation to be carried out in the second half of the year, subject to financial resources.

Delivery, hook-up commissioning and start-up of the LPG facility in Ukraine: Installation of the facility was completed on-time and on-budget, with start-up in early July 2011.

Complete work-over of Callovian well-09 and deepen well-22 to the Callovian reservoir in the Koshekhablskoye field, Russia: The workover of well-09 was successfully completed in the period. Side-tracking out of the existing casing into virgin reservoir is underway and is scheduled for completion in the second quarter. Well-22 was worked over to the Oxfordian horizon in the period. Completion of the workover is now scheduled for the second half of this year when equipment for repair of damage to the existing casing is sourced.

Test Oxfordian well-25 and Callovian wells 09 and 22 in the Koshekhablskoye field, Russia: Well-25 was tested in the period with sustained gas flows of 6MMcfd. It is apparent that an obstruction still exists deep in the well, below the packer, which is choking back the flow. A workover is planned to clear the obstruction in the second quarter. Testing of Callovian well-09 will take place following the completion of the side-track in the second quarter. Testing of well-22 will follow the deepening of the well in the second half of the year.

Complete installation, hook-up, testing and commissioning of facility and start-up of production of the Koshekhablskoye field, Russia: All construction activities were completed in the period. Delays were experienced in starting our operations in the first quarter due both to a change to the well-head piping required by the local regulator, and an extended period in obtaining regulatory approval of all as-built documentation which is required before a Permit to Operate can be requested for issue by the federal authorities in Moscow.

Add reserves and double production in Hungary: Operator delays in executing workovers on the Hajdunanas field have caused a fall in production in 2011. Limited exploration success on the Turkeve area farm-in has not provided the increase in reserves anticipated.

Continue to develop exploration portfolio in Hungary, Ukraine, Slovakia and Bulgaria: Exploration activity in 2011 has included seismic acquisition and exploration drilling in Hungary, workover and drilling preparation in Ukraine and seismic acquisition in Slovakia and Bulgaria.

Our business model, which is centred on the development of onshore production, is robust but we will experience changes in the fiscal regimes where we operate and also experience some delays in bringing production on-stream from deep and complex reservoirs.

In Ukraine, the success of the LPG project has demonstrated the strength and breadth of expertise of our operating company PPC. Drilling operations continue apace and most recently we have seen exploration success with the Z-04 well in the recently awarded extension to our Zaplavskoye exploration licence.

Encouragingly, we have finally reached an agreement with the state Naftogaz of Ukraine company to begin workover operations on three existing wells on our Elizavetovskoye exploration licence. We anticipate gas deliveries to commence in the second quarter.

Completion of the Koshekhablskoye field in southern Russia adds an important operating asset to our production portfolio. We are optimistic that the significant Oxfordian reserve position will be enhanced by positive results this year from the appraisal wells to the underlying Callovian reservoir. The independent gas market in Russia is growing and we intend to pursue opportunities to extend our operations in southern Russia, a region rich in potential.

Our operations in Hungary, where we are non-operator, have not progressed in 2011 to the extent we had hoped. We have a more modest exploration programme scheduled for 2012, with the emphasis shifting to restoring full production at the Hajdunanas facility.

Organisation

We have made a number of key organisational and staffing changes this year. Cynthia Dubin has joined us as Finance Director and will be implementing a restructuring of our finance, accounting and compliance functions during 2012. We have made an important change to our London-based technical group in the period with the establishment of an experienced sub-surface function staffed by experienced geologists and geophysicists. Finally, we have changed the senior management at our Russian subsidiary and strengthened the technical and financial support provided to it by its experienced Ukrainian sister company.

Managing our risks

Risk is intrinsic to our industry and we expend considerable resources and expertise in managing it. During 2011, we revised our risk register and reviewed our procedures to ensure that robust risk management processes were in place, with continued oversight at Board level. We have reviewed our existing policies and introduced new processes and procedures to comply with the UK Bribery Act and its guidance.

Outlook

The Company is anticipating an increase in production volumes in 2012 as Russian gas production begins in the second quarter and builds to the processing plant capacity by mid-year. Ukrainian production will show a moderate decline until the proposed multi-frac is performed on our deep tight Rudenkovskoye gas field later in the year.

We anticipate oil realisations to remain buoyant during 2012 but are budgeting an easing in Ukrainian gas realisations going forward. The Company has absorbed substantially increased production related taxes in Ukraine in 2011 but we are pleased to report that the production tax for oil has been reduced for 2012 by approximately 30%.

Prospects for 2012 are bright with significant progress anticipated on development of the Rudenkovskoye field and further exploration success on the Zaplavskoye licence. We await test results from the underlying Callovian reservoir on our Russian licence, in the second quarter, which will allow us to complete our scoping work for the second production train at Koshekhablskoye before the end of the year.

I anticipate that 2012 will be a year of operational consolidation, with increased focus on expansion of our licence portfolio.

Dr Paul Davies

Chief Executive

Operations Review - Ukraine

2011 update

The focus of our busy year in Ukraine has been the completion of the LPG plant adjacent to our Central Processing Facility and drilling in-fill production wells on existing fields. 

Our key achievements have been:

·; the start-up of LPG production in July on time and on budget with an average production rate of 61 tonnes per day

·; the drilling of a successful exploration well (M-170) in the Molchanovskoye "Wedge Zone" encountering a 116m gas column with a net pay of 54m

·; the drilling, testing and/or completing of a further eight appraisal and development wells

·; completing 21 workover operations, including three recompletions, nine well repairs, one fishing operation and eight well abandonments

·; restoration of a faulty key compressor unit in just 18-days downtime

·; the upgrade and de-bottlenecking of the production facility enhancing future production and compressor capacity.

Ukrainian Reserves

A reassessment of the reserves in the Ignatovskoye, Molchanovskoye and Novo-Nikolaevskoye production licences was made during 2011. This, together with the existing reserves within the Rudenkovskoye production licence and taking account of 2011 production, has resulted in proved and probable remaining reserves at the end of the year of 155.3 Bcf of gas and 2.6 MMbbl of oil (total 28.5 MMboe).

Ignatovskoye production licence

2011 update

During 2011 one new well was drilled and four workovers took place on the Ignatovskoye field:

·; well IG-137 (Bis) was a re-drill of the junked 2009 well and produced at approximately 100 bopd with 100 Mcfd gas

·; well I-106 was recompleted in the Devonian sandstone finally testing at 6.2 MMcfd with 53 bcpd

·; well I-128 workover involved successful water shut-off and gas lift installation, doubling oil production to 228 bopd with 0.4 MMcfd gas

·; the replacement of the rod pumping system in well I-105 by a surface driven progressing cavity pump to counter reliability issues with the rods, unfortunately this proved to be unsuccessful too

·; following the subsequent re-installation of the rod pump in well I-105 it currently produces around 45 bopd with 50 bbl water.

Plans for 2012 include drilling the deferred west flank well I-135, a further Tournasian (T-2) Carbonate infill well and a possible extension of the western flank play.

Recompletions will also form a significant part of the continuing development of the Ignatovskoye area but timing is dependent on the depletion of the deeper reservoirs. 

Ignatovskoye reserves

Reserves in Ignatovskoye are unchanged with remaining reserves at 14.9 Bcf gas and 1.0 MMbbl oil (total 3.5 MMboe).

Molchanovskoye production licence

2011 update

Molchanovskoye North and Main reservoirs

Work in Molchanovskoye North and Main reservoirs in 2011 focussed on optimising oil recovery from the Devonian sandstone with three new wells drilled to ensure maximum oil recovery ahead of gas blow-down from the upper parts of the reservoir; two workovers were also performed:

·; development well M-169 was completed in March 2011 as a 600m horizontal well in the Molchanovskoye North Devonian reservoir. It replaced both wells M-151 and M-152 which had watered out. Optimisation of the flowlines enabled the gas rate to be increased to 8.1 MMcfd with 260 bcpd

·; development well M-171 was drilled and completed in 29 days with a 150m horizontal section in the Devonian sandstone on the Molchanovskoye North field. It is in production after testing at 309 bopd with 1.8 MMcfd gas

·; development well M-166ST was drilled in the Molchanovskoye North field as a recompletion of the 600m long horizontal well M-166 which was rapidly watering out. Well M-166ST was completed with a shorter 170m horizontal section in the Devonian sandstone, offset and some 11m higher than the original well and close to the overlying gas-water contact. After testing, the well was choked back and commenced production at 1,616 bopd with 3.2 MMcfd gas at a FWHP of 874 psi

·; workover of well M-162 in the Tournaisian sandstone restored gas production to more than 1 MMcfd

·; recompletion of well M-152 in the Molchanovskoye North Devonian reservoir for water shut-off was unsuccessful and the well was subsequently replaced by well M-169.

Activity planned for 2012 includes at least one more in-fill well in the Devonian reservoir and a second well to appraise the Visean V-16 sandstone reservoir in Well I-161 which was drilled in 2010.

Molchanovskoye Wedge Zone

Two wells were drilled on this field during the year:

·; exploration well M-170 was drilled early in the year and encountered a 116m gas column with a net pay of 54m in a lower Devonian sandstone beneath the main uppermost Devonian reservoir which is water bearing. A 35m zone in well M-170 was perforated and, after an initial flow rate of 17.1 MMcfd, production settled at around 2.8 MMcfd with 80 bcpd; this zone is approximately 400m deeper than any gas or oil found to date in the adjacent Molchanovskoye fields

·; following remapping, appraisal well M-172 was drilled some 500m south of the discovery well. After reaching the base of the Devonian reservoir at a total depth of 3203m logging indicated some zones of low porosity with possible hydrocarbons but all the better sands were water wet. The Devonian reservoir was plugged back and the well completed in preparation for a Visean sandstone reservoir test.

This disappointing result from Well M-172 has led to a further review of the seal and structural integrity of the other potential prospects in this promising deep Devonian play. The 3D seismic on the field is being reprocessed and drilling activity has been deferred until the review is complete. 

Molchanovskoye reserves

Reserves in the Molchanovskoye licence area have been revised downwards by 10.7 MMboe and remaining proved and probable reserves are now 4.8 Bcf gas and 0.3 MMbbl oil (total 1.1 MMboe). This reflects the disappointing results from early recompletions to the overlying reservoirs in the Molchanovskoye Main structure which have proved to be productive elsewhere in the complex.

Reserve additions in the Devonian, Tournasian and Visean reservoirs of Molchanovskoye North have been small this year. No reserves have been recognised for the deep Devonian discovery in well M-170 while appraisal is in progress.

Novo-Nikolaevskoye production licence

2011 update

Activity during the year on the Novo-Nikolaevskoye licence comprised three new wells drilled and one workover:

·; development well N-75 was drilled and completed in the Visean V-16 reservoir, some 260m to the west of the surface location. Following a workover operation the well was recompleted and production increased to 1.53 MMcfd and 4 bcpd

·; development well N-76 targeted the same reservoir some 670m to the east of the same surface location as N-75. Well N-76 came on-stream at a modest initial rate and increased slowly to plateau at 1.34 MMcfd with 80 bopd

·; the Skytop rig then drilled well N-77 to a bottom hole location in the northwest of the field. Log results from both the V-15 and V-16 reservoirs indicated poorly developed structures and subsequent testing, with very low flow rates, confirms these results. A beam pump is under consideration

·; the TW-100 rig worked over and recompleted well N-73 to the Visean V-15 reservoir (following water influx in the V-16 reservoir); current production is now 1.7 MMcfd with 15 bcpd.

Despite the disappointment of well N-77, further drilling is planned in 2012 with well N-78 due to spud in the second quarter.

Novo-Nikolaevskoye reserves

The continuing success of development drilling in Novo-Nikolaevskoye Field added 15.1 Bcf and 0.2 MMbbl (total 2.8 MMboe) to the proved and probable reserves with 12.4 Bcf gas and 0.1 MMbbl oil (total 2.2 MMboe) remaining after 2011 production.

The Rudenkovskoye production licence

2011 update

During 2011 a workover was carried out to replace the 3½" tubing in well R-103 by 2 7/8" tubing to overcome liquids loading. The well is now producing on a cyclical basis to promote maximum flow rates and liquid recovery.

Preparations for the multi-stage frac in the Rudenkovskoye long horizontal well R-103 are well advanced with the technical evaluation completed and bids received for the frac operation. This is scheduled to be carried out as soon as conditions and logistics permit in the second half of 2012, subject to financial resources.

Despite a successful frac of the uppermost, but thin, Devonian reservoir of well R-102 in 2009, production continued to decline and in 2011 R-102 was worked over to add perforations in the Tournasian sandstone. Following perforation, there was a small increase in gas rate but the well has since been suspended pending the completion of a further workover to add another zone of potential Tournasian reservoir.

Rudenkovskoye reserves

Reserves in the Rudenkovskoye field areas will be fully reassessed after the results of the R-103 multi-frac and the subsequent drilling programme.

Novo-Nikolaevskoye Complex production facilities

Liquefied Petroleum Gas (LPG) Production Facilities

2011 update

The highlight of 2011 for PPC was the completion of the LPG processing, storage and delivery system as an add-on to the existing plant at the Central Processing Facility. 

The system was commissioned on time and on budget with first LPG sale taking place on the 5 July and stabilised production achieved by the 8 July.

Average LPG sales through the second half of the year were 61 tonnes per day. By the end of 2011 total revenues from our LPG sales had exceeded the value of the capital cost of the new system.

Other gas production facilities

The K-300 compressor provides support for the lower pressure gas wells and makes an increasingly significant contribution to production as natural reservoir pressures decline.

An unexpected failure of its gas engine crankshaft in May reduced PPC's overall production by nearly 20% over an 18-day period. A replacement crankshaft was installed during the May field shut-down. This coincided with a planned upgrade to the unit which resulted in an increase of almost 10% to PPC's field production.

2011 saw continued improvements to the Central Production Facility at Poltava aimed at enhancing production from the available well stock with work continuing throughout the year on debottlenecking the plant, enhancing the compressor capacity, re-routing flowlines to reduce back pressure and wax clearance.

Other improvements were principally to the infrastructure and included upgrades to the roads, sewage system and camp facilities.

A major upgrade to the K-220 compressor will take place in 2012 and, together with the newly installed low pressure manifold, will further increase the facility's flexibility in handling declining reservoir pressure.

Zaplavskoye exploration licence

The Zaplavskoye exploration licence surrounds the Ignatovskoye, Molchanovskoye and Novo-Nikolaevskoye licenses and, following its extension in 2010, now comprises an area of 197.5 sq km and is valid until 2014.

Exploration well Z-04 has recently been completed and tested. During a multi-choke test the well flowed at a rate of 20.8 MMcfd of gas and 1,040 bpd of condensate though a 41/64" choke with a flowing wellhead pressure of 2,684 psi. The well was tied back to the main Novo-Nikolaevskoye complex processing facility with a 9km flow line and placed on production.

Well Z-04 was drilled to a total depth of 2,937m and penetrated over 20m of Visean sandstones. The well is located to the northwest of the Novo-Nikolaevskoye group of fields within the recently acquired 41.9 sq km extension of the existing Zaplavskoye exploration licence.

Condensate rich gas is being produced for the first time in the Novo-Nikolaevskoye area from this particular Visean reservoir layer. These initial flow rates are expected to decline and the well will be monitored closely as we seek to assess the extent of the accumulation and the potential for further appraisal of this discovery.

Elizavetovskoye exploration licence

The Elizavetovskoye exploration licence is located in the central part of the Dnieper-Donets basin and covers an area of 70 sq km. It is approximately 45km from PPC's existing production licences.

Three shut-in production wells on the licence are owned by Ukrgasvydobuvannya, a subsidiary of Naftogaz of Ukraine, the state oil and gas company, and are tied into its production facility.

2011 update

Agreement has been reached with Ukrgasvydobuvannya and its associate company KhAS to re-start the three shut-in wells on the basis of a Joint Production Agreement (JPA). PPC will receive 33.3% of the production and control the operation.

Operations have commenced on well M-53 and production is expected to start early in the second quarter. Well M-53 will provide valuable reservoir performance data ahead of a decision to complete the remaining two wells and upgrade the temporary facilities.

The data will also enable PPC to assess whether it is commercially viable to drill the proposed E-301 well and install its own permanent facility. If successful, PPC would own 100% of gas production from well E-301.

Under the terms of the licence renewal, PPC had an obligation to install a hot tap to the nearby gas trunk line together with a short spur line and the work was completed in 2011.

Elizavetovskoye reserves

Reserves recognised for the Elizavetovskoye Field are restricted to 2 Bcf gas (0.3 MMboe) representing potential production under the JPA. Further resources can be added once the updated field development plan has been prepared and approved.

Operations Review - Russia

2011 update

Koshekhablskoye Field Redevelopment

The Koshekhablskoye Gas Processing Facility (GPF) was designed, fabricated and shipped from Sharjah, United Arab Emirates, in modular form at the end of 2010, arriving at Novorossiysk in January 2011. Heavy rain and landslides delayed its arrival on site until late March.

Progress was made with site preparation during this time and the modules were put in place quickly. Hook up of the modules took longer than expected with numerous small modifications required to comply with local regulations and to complete the work. This inevitably led to further delays taking completion of construction to the end of 2011. 

Construction of the utilities and services was taking place simultaneously during the year. The generator station, firewater storage and distribution, boiler house and steam generation systems were all commissioned during the fourth quarter.

Also completed were the flare stack, thermal oxidiser, manifold and separators, condensate, nitrogen, methanol and water storage systems, together with the offices, laboratory, workshop, canteen, power distribution centre and, finally, the control room - the centre of this highly automated plant.

Mechanical completion and plant commissioning permitted the introduction of gas to the GPF in mid March. The plant is ready to process the gas and is awaiting final technical approval from the authorities to finalise the specification and commence exporting.

Upstream of the plant:

·; all flowlines are in place and connected to the manifold at the GPF

·; wells 20 and 27 have been tested and suspended in preparation for production. A change to the well-head pipeline was required by an update to the local regulations. Once this is complete the two wells should provide most of the initial throughput to the plant

·; completion and stimulation of well 25, at 5500m the deepest in the field, has proved to be problematic and at start-up its contribution is expected to be modest; a workover is planned

·; Oxfordian well 26 remains suspended with 1,376m of tubing still stuck in the hole. It is planned to return with a smaller rig to complete fishing more economically

·; Oxfordian well 15 remains suspended following a successful sidetrack operation but unsuccessful test - possibly due to an obstruction deep in the well.

Downstream of the plant:

·; the metering system is in place and commissioning is complete

·; the export line has been laid and the final flange to tie in to the nearby gas trunk line will be set as soon as technical authority has been received

·; the gas sales contract has been concluded with Kubangazifikatzia.

Koshekhablskoye Field Exploration and Appraisal

Through its wholly-owned Russian subsidiary, YGE, JKX inherited an obligation to drill an exploration well to appraise the production potential of the underlying Callovian sandstone reservoir.

YGE has subsequently undertaken a significant amount of exploration and appraisal activity on the Callovian reservoir and the drilling obligation has been replaced by the Company's proposal to work over and test the Callovian horizon in well 9 (an exploration well drilled in the 1980s) and to deepen an existing dry Oxfordian appraisal well (well-22) to the Callovian reservoir. Both operations have commenced.

Callovian well 9 is being sidetracked and will re-drill the full Callovian reservoir sequence and, if successful, will deliver additional throughput to the plant as well as providing invaluable information on the potential for further development of the Callovian reservoir.

Callovian well 22 remains suspended while equipment to repair the casing is sourced.

Koshekhablskoye Licence Obligations

YGE maintains a regular dialogue with Rosnedra, the licencing authority, to ensure that the authorities are kept abreast with progress on the field development and the associated exploration and reserves determination commitments.

Rosnedra, is fully aware that there are commitments under our Koshekhablskoye licence which have not, and will not, be met. At our meeting with Rosnedra in February 2012 we confirmed that production was imminent. We also agreed to submit a proposal to complete the assessment of reserves at a later date and are working with Rosnedra to agree our proposed changes to the timetable.

Koshekhablskoye Reserves

Following the results of the well 27 and well 20 tests, the production characteristics of the field have been revised and the reserves reassessed. This has resulted in an increase of the proved and probable reserves from 44.8 MMboe assessed in 2009 to 61.2 MMboe at the year-end (being 364.8 Bcf gas and 0.4 MMbbl oil).

In line with licence requirements the Oxfordian reserves will be reassessed later this year once the results of the well 25 testing can be incorporated.

Callovian reserves, which we also expect to revise during 2012, are dependent on the results from well 09 and well 22.

Operations Review - Hungary

Hernad (I and II) Exploration Licences and Gorbehaza Mining Plot (development and production licence) (JKX 50%) 

2011 update

The Hadjunanas and Gorbehaza fields produce from three wells (Hn-1, Hn-2 and Gh-1) into a single separator, and then via a 14.5 km export line to an existing facility for input to the Hungarian gas pipeline system.

Production in 2011 was affected by water influx which caused the operator to shut-in both fields in August. Remedial work in September brought well Hn-2 back into production and work on well Hn-1 has focussed on a recompletion of the oil reservoir in the Miocene volcanoclastics.

The wellhead pressure on well Gh-1 fell below the line back pressure and the well has been suspended until a small compressor can be sourced and fitted.

At year-end in Hungary:

·; Hn-2 well was back in production at 3.5 MMcfd and 80 bcpd (gross)

·; Hn-1 well had tested liquids production rates at around 400 bpd of predominantly black oil, and was still cleaning up. A permanent separator will be installed at the end of the first quarter of 2012 to ensure that the full market price can be obtained for the product

·; a small compressor was about to be installed on well Gh-1 for a February re-start of gas production

·; a second production well is under consideration in Gorbehaza but is contingent on the performance of well Gh-1 after it re-commences production

·; the local gas market remains strong with 2011 realisations in excess of $13/Mcf.

Further Hernad Exploration Activity

·; The Tiszavasvari-6 well was tested in January 2011 after encountering a 300m gross reservoir interval with excellent gas shows below 2,580m. Three reservoir intervals were tested with a maximum rate of 1.5 MMcfd being recorded. The well was suspended in anticipation of a possible reservoir stimulation programme. 

·; A larger tilted fault block structure with amplitude supported Lower Pannonian reservoir intervals lies updip from the first structure and appraisal drilling is planned for the second half of 2012

·; The Tiszavasvari-5 well was drilled in May 2011 to a TD of 800m and tested a new play on the northern end of the Pegasus Ridge. The stacked sands encountered were all water wet and the well was plugged and abandoned

·; The 200 sq km 3D seismic data acquisition in the Jaszsag area to the south of the Hernad II licence was completed and interpretation of the preliminary data indicated a number of small but low risk prospects. Two of these prospects were selected for drilling in the first quarter 2012

·; The larger of the two prospects, Pely-02, was drilled in January but with disappointing results: the primary target reservoir interval was poorly developed and a secondary objective, while evidently gas bearing, had insufficient reservoir quality to justify completing and testing. The well has been plugged and abandoned and the decision to drill the second well has been deferred pending further study of the seismic and Pely-02 well correlation.

Hernad (I and II) and Gorbehaza Reserves

Hadjunanas field: The unsurprising consequence of the water influx in the main Pannonian gas reservoirs during the year has been to reduce the reserves and field life; this was has been partially offset by the success of the Miocene oil reservoir test.

Remaining gross reserves in the field are now 7.8 Bcf gas and 0.6 MMbbl oil (JKX net 1.0 MMboe).

Veszto Exploration Licence (JKX 25%)

In March 2009, JKX farmed-in for a 25% interest in a 15.6 sq km area of the Veszto exploration licence held by HHE in the east Hungarian Pannonian Basin.

Following the extended well test production in 2010, a Mining Plot is under application and is expected to be granted in the first quarter of 2012. The Operator is continuing the evaluation of appraisal locations and a further well is under consideration for the second half of 2012, following award of the Mining Plot.

Turkeve Exploration Licence (JKX 50%)

JKX entered into a farm-in agreement to participate in the drilling of up to seven shallow wells located in the Turkeve area of north east Hungary in late 2010. Under the terms of the agreement, JKX funded 66.67% of the drilling and completion costs to earn 50% of future mining plots formed to develop discoveries, and funding 75% of any pipeline connection costs.

·; six wells were drilled during the period of which five were dry or sub-commercial

·; Turkeve Ny-7 well encountered gas, flowing at 2.0 MMcfd through a 6mm choke with a WHP of 1,680 psi, but with more than 25% of carbon dioxide. The operator is evaluating treatment and development options with a view to bringing the field into production

·; limited rate pilot production is planned from Ny-7 for the second quarter of 2012 with full rate production expected to start towards the end of 2012 once a suitable development option is approved.

Turkeve reserves

Based on the proposed development plan, Turkeve P50 reserves are 3.2 Bcf gas and 70 Mbbl condensate (net to JKX 0.3 MMboe).

Operations Review - Slovakia

Svidnik, Medzilaborce and Snina licences (JKX 25%)

JKX holds a 25% interest in the Svidnik, Medzilaborce and Snina exploration licences, covering a total area of 2,278 sq km in the Carpathian Fold Belt in north east Slovakia.

Acquisition of 500 km of 2D seismic data in 2008 through 2010 provided basic regional information in the two eastern licences, as well as infill data in the western Svidnik licence.

During 2011:

·; acquisition of a further 300km of regional 2D seismic data acquisition was completed

·; the Cierne-1 exploration well location in the westernmost Svidnik licence was selected and drilling is expected to commence in the fourth quarter of 2012. The well will be drilled to more than 3,500m with multiple targets identified in this sub-thrust play.

Operations Review - Bulgaria

Golitza Licences (JKX 40% and operator)

JKX operates the B1 Golitza licence, covering 971 sq km in eastern Bulgaria.

Following the lack of success in the 2010 drilling programme JKX and its co-venturers reviewed the information from these wells together with the 3D seismic data and concluded that there was insufficient prospectivity to justify applying for a production licence.

There are now no plans for further activity and the licence expires in March 2012.

Provadia licence (JKX 18%)

JKX has an 18% carried interest in the 1,787 sq km Provadia licence operated by Overgas. The 380 km 2D seismic survey has been completed and the data is now being processed.

Financial review

Strong commodity prices, particularly for Ukrainian gas and LPG sustained our profitability in 2011 from our Ukrainian subsidiary Poltava Petroleum Company ("PPC") despite reduced production volumes.

In 2011 we produced $82.1m in profit from operations compared to $95.0m (before exceptional items) in 2010. This is an extraordinary result given reduced production of 12% and the absorption of the effect of the new tax code which increased our production based taxes in Ukraine by $61.9m from $5.2m in 2010 to $67.1m in 2011. The new tax code is discussed in detail in notes to the financial statements.

Cash flow from operations of $124.2m (2010: $146.3m) in addition to gross borrowings* of $40.5m has provided us with the required funding to complete construction of our Russian subsidiary's gas processing facility, continue investment in our Ukrainian asset complex, explore in Hungary and to maintain a year-end total cash balance of $28.9m (2010: $62.0m).

*Gross Borrowings is Borrowings gross of unamortised effective interest and arrangement fees.

Profit for the Year

The profit after tax was $59.1m for 2011 (2010: $21.2m). On a comparative basis, this was $22.2m below profit after tax in 2010 of $81.3m (before exceptional items). This translates into basic earnings per share of 34.37 cents (2010: 47.56 cents).

This is the combined result of a 23% increase in revenues to $236.9m (2010: $192.9m) due to increased oil and gas realisations, despite a 12% overall production decline, maintaining operating and administrative charges to $49.6m (2010: $51.1m) and absorbing a $61.9m additional production tax cost (2011: $67.1m versus 2010: $5.2m).

The Group profit before tax of $82.1m was reduced to a $59.1m net profit by a current tax charge of $21.8m (2010: $30.3m) and deferred tax charge of $1.2m (2010: credit $30.7m).

Revenue

The Group benefited from high international oil and gas prices. The Group enjoyed a 42.1% improvement in the oil price achieved moving from $69.15/bbl in 2010 to $98.27/bbl in 2011. From a total revenue perspective, the gas price strengthening dwarfed the oil price increase as volumes of gas sold represent 75% (2010: 69%) of our total production volume. The Group gas price achieved rose 28.4% from $268/Mcm in 2010 to $344/Mcm in 2011.

The Ukrainian gas price achieved had the biggest impact increasing from $284/Mcm at the beginning of the period to $418/Mcm at year-end, giving an absolute price increase of 47.2% during the year.

The other important component to impact this year's revenue was the commissioning of the new LPG facility within the PPC operational complex in July. The Group achieved $10.9m in LPG revenue for the second half of the year as we were able to take advantage of high LPG prices in Ukraine, realising an average price of just under $1,000/tonne.

These positive price movements more than offset the production decline of 12% (7% and 5% attributable to oil and gas, respectively, on a boe basis) due to reduced production from Hungary, greater than expected oil decline rates in producing wells and some disappointing well results in Ukraine.

Future Ukrainian Gas prices

Recent press contains much speculation concerning Ukrainian gas prices and the Ukrainian push for a renegotiation of the gas supply agreement between Russia and Ukraine; this has a direct impact on the industrial tariff that applies to our Ukrainian gas sales. The two countries have yet to reach any agreement on whether this contract will or will not be adjusted and consequently, the terms of the Supply Agreement of January 2009 still prevail. This resulted in a border price of $416/Mcm during the first quarter of 2012, translating into the price of gas in the industrial market in excess of $430/Mcm. The Ukrainian Parliament recently passed the Budget Law on the assumption that the import price remains at $416/Mcm for the remainder of 2012.

Operating Profit

The operating profit of $82.1m was 13.6% below the same figure of $95.0m in 2010 (before exceptional item). This is a small reduction in comparison to the stark increase in production based taxes in Ukraine, increasing the Group's production based taxes by 1,363% from $1.39/boe to $20.33/boe. Our charge for production based taxes increased from $5.2m in 2010 to $67.1m in 2011 as a direct result.

Within cost of sales, underlying operating costs remained constant at $17.2m (2010: $17.9m).

Despite the 12.4% fall in production, the depreciation, depletion and amortisation fell only 2.8% as the unit of production charge was increased due to higher capital costs in the year, increasing the unit of production charge from $8.82/bbl in 2010 to $9.80/bbl in 2011.

Administrative expenses remained constant at $25.7m (2010: $25.3m).

Taxation

The total tax charge for the year was $22.9m (2010: credit $0.4m) comprising current tax of $21.8m (2010: $30.3m) and deferred tax $1.2m (2010: credit $30.7m). The fall in current tax charge reflects a combination of the lower profitability being driven down by the production based taxes noted above, in addition to a reduced rate of corporation tax applicable in Ukraine.

The effective all-in total tax rate (i.e. combining production and corporation taxes) has increased despite the fall in the corporation tax charge.

In December 2010 a new Ukrainian corporation tax rate was introduced starting at 25% to March 2011 and progressively reducing to 16% by 1 January 2014.

In addition a new tax code became effective in Ukraine on 1 January 2011 in the area of production related tax. The fees are levied on production volumes in accordance with a rates schedule which may change from time to time. The production based taxes expense for the year is $67.1m (2010: $5.2m) and has been recognised in cost of sales.

Effective tax rate

The table below shows the Group's effective tax rate as well as the all-in effective tax rate which takes into account the impact of production based taxes and removes the effect of special items and non-recurring items on the Group's tax charge.

1 The all-in effective tax rate is calculated as the income tax expense plus production related taxes and removing the tax effect of non-recurring items, divided by profit before tax which is adjusted for production based taxes, special items and other non-recurring items.

The effective rate of tax for 2011 was 27.9% compared to a rate of (1.8)% in 2010. The effective tax rate in 2010 was distorted mainly by the recognition of deferred tax asset of $5.7m in respect of the UK; adding back this deferred tax asset to the 2010 tax charge results in an effective tax rate of 25.7% in 2010.

The all-in effective tax rate, which is a more representative tax rate on the recurring profits of the Group's subsidiary businesses, was 59.1% in 2011 compared to 29.6% for 2010. The Group's all-in effective tax rate is higher in 2011 when compared to the prior year mainly due to the proportionately higher production based taxes charged as compared to the increased underlying profitability of the Group.

Rental fees charged on oil and gas production comprise more than 90% of the Group's production taxes for the year. This production tax is not only influenced by volumes but also by the rise or fall of commodity prices.

Capital Expenditure

2011 was a capital intensive year, with the Group spending $162.0m, 10% less than the 2010 programme of $178.5m. The Group's main focus was to complete its Russian gas processing facility and well redevelopment activities for the Koshekhablskoye gas field in the southern autonomous Republic of Adygea. 

The Group spent $103.4m during the year to bring this project to fruition. At the end of 2011, the carrying value of our oil and gas assets in Russia totalled $246.2m. 

The remaining portion of capital expenditure spent during 2011 was $41.4m (2010: $56.1m) in Ukraine on the LPG facility and further drilling, $12.4m (2010: $9.8m) on drilling and exploration activity in Hungary and $4.8m (2010: $4.8m) on our other exploration interests in Slovakia and Bulgaria. The carrying value of our Ukrainian oil and gas assets at year end was $226.7m (2010: $214.3m).

Specifically, in Ukraine, our investment in the LPG facility, where sales commenced in July, has proven to yield far more attractive economic returns than expected. For the second half of 2011, it contributed $10.9m to the Group's revenue. Additionally, we continued with our development drilling programme in order to exploit the Group's reserves as further described in the Operations Review.

In Hungary, we embarked on an exploration programme at the end of 2010 in our Turkeve acreage, drilling six wells in the year. Only one of those wells was considered a commercial success and we have accordingly written off $6.7m in the year relating to the drilling and related costs. Additionally, disappointing results in Bulgaria have necessitated the write off of the remaining book value of the assets of $6.2m. The total of these comprises the $12.9m for impairment of oil and gas assets/write off of explorations costs in the consolidated income statement.

The review of asset carrying values in the statement of financial position concluded that no other impairments were required.

Operating cash flow

The Group continued to reap the rewards of past investments with cash generated from operations of $124.2m (2010: $146.3m). This was 15% lower than in 2010 due to $61.7m (2010: nil) of payments made in respect of Ukrainian rental fees. Absent this production tax increase, cash generated from operations would have been $185.9m, a 27% increase over the same figure of $146.3m in 2010.

On 12 January 2012, the Ukrainian government reduced the tax applicable to oil production decreasing it by 30% on a gross per barrel basis. This brought a welcome improvement to the Group's forecast cash flow, albeit minor in light of the level of our oil production in Ukraine. 

The overall production tax burden for the Group will remain significantly higher than in prior years thereby rebasing Group profit and cash flow.

Financing cash flow

In the first half of the year the Group raised funds through entering into a prepaid swap arrangement with Credit Suisse and drew cash of $49.5m after expenses in June 2011. A portion of the proceeds ($9.5m) was deposited in a debt service reserve over which Credit Suisse has security and which is restricted exclusively to pay amounts due under the facility. The remaining proceeds were applied towards the completion of the redevelopment of the Koshekhablskoye field in south west Russia. 

Including principal repayments due, swap payments and financing costs, the net cash generated from financing activities (excluding dividend payments) was $29.8m (2010: $58.4m).

Financial Instruments

The Group employs a number of financial instruments to manage the liquidity associated with the Group's operations. These include cash and cash equivalents, together with receivables and payables that are typical and arise directly from our operations. 

Separate and apart from these, the main financial instrument of the Group is the Credit Suisse facility mentioned above. 

The repayment is structured over an 18 month period and commenced in October 2011 with full repayment due to occur in December 2012. Repayments are straight line at $3.3m per month. At year end, gross borrowings* stood at $40.5m (2010: nil). 

There was a zero coupon rate on the outstanding balance due; however, the overall finance charge to JKX is the cost of the related oil price hedge on 36,000 bbl/month at $94/bbl up to a Urals Med price of $130/bbl. Urals Med prices in excess of $130/bbl are excluded from the calculation of the monthly payment due to Credit Suisse and any benefit of such prices is solely attributable to the Company's account.

In addition we are still required to settle the Ukrainian production taxes on the oil production for the hedged barrels without realising any benefit of the current market price of hedged oil above $94/bbl.

As the oil price increases from $94/bbl our effective finance charge and payment to Credit Suisse increases; for every $1 increase in the average Urals Med oil price above $94/bbl, the monthly finance charge increases by $36,000.

The average Urals Med oil price over the term of the finance to date has been $110/bbl. If the Urals Med price remains at $90/bbl, $110/bbl and $120/bbl through to the end of the loan period the effective interest rate on the Credit Suisse loan over the 18 month period will be 5.7%, 23.8% and 34.3% respectively; clearly this is likely to place a strain on our cash resources in the near term.

Total cash

Total cash (cash and cash equivalents plus restricted cash) closed at $28.9m comprising $19.1m (2010: $62.0m) unrestricted cash and $9.8 million of restricted cash, the majority of which is represented by the $9.5m debt service reserve for the prepaid swap facility with Credit Suisse. We also have in place a net $10.0m working capital facility from Credit Agricole which comprises a gross facility of $15.0m but requires a cash deposit to match any facility used over $10.0m. 

The $33.1m decrease in total cash balances (cash plus restricted cash) is mainly attributable to the significant payments made for our property, plant, equipment and intangible exploration assets of $159.7m (2010: $172.8m), of which $105.4m related to our Russian redevelopment project.

The continued increase in the cash requirements of our Russian project due to the schedule delays and the short-term repayment profile of the Credit Suisse finance used to meet the unplanned costs has been the largest contributing factor to the reduction in our cash balances during the year.

Our total net cash used in investing activities of $161.2m (2010: $175.1m) was only partially funded by net cash generated from operating activities of $96.0m (net of corporation tax and interest payments of $25.2m) (2010: $117.7m) and net cash from financing activities of $32.4m excluding the movement in restricted cash (2010: $45.2m). We also incurred a foreign exchange loss on our cash of $0.3m (2010: $0.2m).

Dividends paid

Dividends of $7.2 million (2010: $13.2 million) paid relate to the final 2010 dividend approved by shareholders at the AGM in June 2011. The reduction from the 2010 level is due to the passing on an interim dividend payment in relation to 2011.

Liquidity

Our immediate priority with our cash resources is to support realisation and operational risks in Ukraine and the nascent Russian operations.

With the on-going cash requirements of the Credit Suisse finance repayments through to the end of the year and delays experienced with our Russian production and related cash flow, in addition to restrictions over $9.8m of our cash balances, Group liquidity will be carefully managed.

Despite the imminent start-up of our Russian plant, we do not expect our Russian operations to become net cash positive until 2013 and therefore we may have to delay some of the Group's planned capital expenditure in 2012, subject to additional financial resources; this includes the proposed multi-frac of well R103 in the Rudenkovskoye field.

The Group intends to fund its future operating and capital expenditures through existing working capital, cash flow from operations and borrowings under its Credit Facility with Crédit Agricole. With our current low level of gearing we have a wide variety of options available to maximise our financial flexibility to support our operating and growth objectives.

Outlook

In Ukraine and Hungary we expect the increased realisations from our oil and gas production achieved in 2011 to ease slightly through 2012 but to remain strong.

In Russia, gas sales from the Koshekhablskoye field will commence imminently and the cash-intensive investment programme on this first phase is now complete. We expect to pay down our short-term borrowings during 2012 and see a strengthening of the Group's liquidity toward the end of the year and into 2013.

Cynthia Dubin

Finance Director

1 Earnings before interest, tax, depreciation and amortisation is a non-IFRS measure and calculated using Profit from operations of $82.0m (2010: $20.3m) and adding back depletion, depreciation and amortisation of $34.3m (2010: $35.5m)

2 Total cash is Cash and cash equivalents plus Restricted Cash.

3 Gross Borrowings is Borrowings gross of unamortised effective interest and arrangement fees.

4Net (debt)/cash is Total cash less Gross Borrowings.

5 Return on average capital employed is the annualised Profit for the period divided by average capital employed.

Consolidated income statement

for the year ended 31 December

Consolidated statement of comprehensive income

for the year ended 31 December

Consolidated statement of financial position

as at 31 December

Consolidated statement of changes in equity

Consolidated statement of cash flows

for the year ended 31 December

1. Basis of preparation

The financial information in this statement is audited but does not have the status of statutory accounts within the meaning of Section 434 of the Companies Act 2006. The financial information in this statement contains extracts from the 2011 Annual Report, which will be mailed to shareholders in April 2011 and has been prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted for use in the European Union. The accounting policies used by JKX Oil and Gas plc (the 'Group,) are consistent with those set out in the 2010 Annual Report. A full list of accounting policies will be presented in the 2011 Annual Report.

Full accounts for JKX Oil and Gas plc for the year ended 31 December 2010 have been delivered to the Registrar of Companies. The Auditors' report on the full financial statements for the year to 31 December 2010 was unqualified and did not contain statements under Section 498 (1) (regarding adequacy of accounting records and returns), or under Section 498 (3) (regarding provision of necessary information and explanations) of the United Kingdom Companies Act 2006.

The financial information has been prepared on a going concern basis following review by the Directors of forecast cash flows for the next 12 months. In making their assessment the Directors have considered sensitivities to their forecast cash flows including reducing forecast oil and gas realisations.

2. Segmental analysis

The Group has one single class of business, being the exploration for, appraisal, development and production of oil and gas reserves. Accordingly the reportable operating segments are determined by the geographical location of the assets.

There are five reportable operating segments which are based on the internal reports provided to the Chief Operating Decision Maker. The Ukraine and Hungary are involved with production and exploration; Russia and the 'Rest of World' are involved in exploration and development and the UK is the home of the head office and purchases material, capital assets and services on behalf of other segments. The 'Rest of the World' segment comprises operations in Bulgaria and Slovakia. Transfer prices between segments are set on an arms length basis in a manner similar to transactions with third parties. Segment revenue, segment expense and segment results include transfers between segments. Those transfers are eliminated on consolidation.

Segment results and assets include items directly attributable to the segment. Segment assets consist primarily of property, plant and equipment, inventories and receivables. Capital expenditures comprise additions to property, plant and equipment.

There are 2 (2010: 2) customers in the Ukraine that exceed 10% of the Group's total revenues.

3. (a) Property, plant and equipment

*Finance costs that have been capitalised within oil and gas properties during the year total $3.2m (2010: nil), at a weighted average interest rate of 25.2 per cent.

Oil and gas fields in Ukraine and Russia include $14.3m and $246.2m respectively relating to items under construction (2010: $42.4m and $161.5m).

Reclassifications of $1.4m relates to Hungarian assets being reclassified to property, plant and equipment.

3. (b) Intangible assets: exploration and evaluation expenditure

The amounts for intangible exploration and appraisal assets represent costs incurred on active exploration and appraisal projects.

The write off of exploration and evaluation costs of $12.9m (2010: $10.8m) recognised in Cost of sales comprises Bulgarian exploration and license costs for B-Golitza ($6.2m) and exploration and drilling costs incurred in Hungary in respect of our Turkeve licence ($6.7m).

3. (c) Impairment test for property, plant and equipment and goodwill

In 2010 a review was undertaken at the reporting date of the carrying amounts of property, plant and equipment to determine whether there was any indication of triggers that may have led to these assets suffering an impairment loss. Following this review in 2010 impairment triggers were noted in relation to Poltava Petroleum Company (PPC) in Ukraine. In addition goodwill in relation to Yuzhgazenergie (YGE) in Russia was assessed for indications of impairment and triggers were noted.

In 2011 another review was undertaken at the reporting date of property, plant and equipment and impairment triggers were noted in relation to Yuzhgazenergie (YGE) in Russia.

Ukraine - 2010 disclosures in respect of the impairment review

The new Tax Code in Ukraine which became effective since 1 January 2011 resulted in rental charges being levied on oil and gas production since that date. In 2010 this represented an impairment trigger for its Novo-Nikolaevskoye Complex which consists of four production licences, Ignatovskoye, Molchanovskoye, Novo-Nikolaevskoye and Rudenkovskoye.

The impairment test compared the recoverable amount of the Cash Generating Unit (CGU), being the Novo-Nikolaevskoye Complex, to the carrying value of the CGU. The estimate of recoverable amount was based on fair value less costs to sell, derived by estimating discounted after tax cash flows for the CGU reflecting what a typical market participant would use to value such assets.

The key assumptions used to estimate of the recoverable amount of the CGU were:

·; Production profiles: these were based on the latest available 2P reserves (39.1 MMboe), which were provided by independent reserve engineers.

·; Gas prices: these were based on current prices being achieved, escalated for the remainder of 2011 only, in line with public statements made by Ukrainian Government officials. The gas price is assumed to increase in line with expected US Dollar inflation after 2012.

·; Capital and operating costs: based on current development programmes and previous experience.

·; Post tax nominal discount rate: 12.2%.

It was concluded that the Novo-Nikolaevskoye Complex was not impaired.

3. (d) Impairment test for Property plant and equipment

Yuzhgazenergie (YGE), Russia

Following the 2007 acquisition of YGE in Russia, a technical and environmental re-evaluation of YGE's Koshekhablskoye gas field redevelopment was undertaken by the Group. The re-evaluation resulted in a revised development plan and production profile. The development plan and production profile have continued to be refined since that time.

The anticipated cost of the development plan has continued to increase in 2011 and although first gas sales from the project are imminent they are delayed from when originally planned and from the assumptions used for the 2010 impairment review.

In 2011 and in 2010, the anticipated convergence of Adygean gas prices to net back European levels is forecast to be later than assumed in the prior year's impairment review and in 2010 the level of gas prices in Russia was lower than previously anticipated. Historically gas prices in the Adygea Region are higher than the average gas price across all regions in Russia.

In 2010, the reduced gas price and uncertainty about the future rates of increase in Russian gas prices gave rise to an impairment charge and all of the Group's goodwill of $2.0m was written off and $72.6m of the underlying property, plant and equipment was provided against. In 2011 the Company considered that the delay to production start-up and the resulting additional capital expenditure incurred to constitute an impairment trigger. Accordingly an impairment test was undertaken in 2011.

The tests in both years compared the recoverable amount of the Cash Generating Unit (CGU), being YGE for the purpose of the review, to the carrying value of the CGU (including goodwill in 2010).

The estimate of recoverable amount was based on fair value less costs to sell, using a discounted cash flow (DCF) methodology. The DCF was derived by estimating discounted after tax cash flows for the CGU based on estimates that a typical market participant would use in valuing such assets. In accordance with IAS 36, the impairment review in both 2010 and 2011 was been undertaken in Russian Roubles.

Key Assumptions - Russia

The key assumptions used in the 2011 and 2010 impairment testing were:

·; Production profiles: these were based on the latest available information provided by independent reserve engineers, Senergy (GB) Limited, such information included 2P reserves of 61.2 MMboe (2010: 44.8 MMboe). No value was attributed to the unconfirmed expectations of the 3P and contingent resources (2010: no value) which may be relevant to any valuation by a market participant.

·; Economic life of field: it was assumed that YGE will be successful in extending the licence term beyond its current 2026 expiration to the economic life of the field (expected to be around 2059 (2010: 2032)). The discounted cash flow methodology used has not taken account of any opportunities that may exist to extract reserves in a shorter timeframe by investing to increase the current plant capacity.

·; Gas prices: for 2012 these were based on the gas sales agreement that the Company has negotiated with Kubangazifikatziya for the forecast gas production in 2012.

·; Gas prices: for 2013 and thereafter, the gas price increases were based on Russian regional gas market price expectations and the Russian government's stated intention to achieve net-back convergence with the European gas markets. The principle of achieving European net-back parity is the driver of regulatory price change in Russia and it was originally anticipated that this would be achieved by 2011, later revised to 2015 and subsequently 2017. Due to the recent sustained period of high international oil prices and hence high European gas prices, it is now unlikely to achieve parity in this time-frame. The Company assumed net-back convergence occurring in 2020 (2010: 2017) and applied the Russian government's stated intention to increase gas sector tariffs by 15% on 1 July 2012 and by 15% per annum in 2013 and 2014 to calculate expected future Russian gas prices in those years, and by 15% thereafter to achieve European net-back convergence in 2020. This timing of convergence is consistent with current views expressed by many market commentators.

·; Gas prices: the gas price was assumed to increase in line with forecast Rouble inflation after 2020 (2010: US Dollar inflation after 2017), consistent with operating cash flow assumptions.

·; Capital and operating costs: these were based on current operating and capital costs in Russia, project estimates provided by third parties and supported by estimates from our own specialists, where necessary.

·; Post tax nominal Rouble discount rate of 13.0% (2010: 13.5%). This was based on a Capital Asset Pricing Model analysis consistent with that used in previous impairment reviews.

Based on the key assumptions set out above YGE's recoverable amount exceeds its carrying value by $35m in 2011. In 2011 it was concluded that YGE's Koshekhablskoye gas field was not impaired (2010: impairment of $74.6m).

Any impairment is dependent on judgement used in determining the most appropriate basis for the assumptions and estimates made by management, particularly in relation to the key assumptions described above. Sensitivity analysis to likely and potential changes in key assumptions has therefore been reviewed below.

The impact on the 2011 impairment calculation of applying different assumptions to gas prices, production, future capital expenditure and post-tax discount rates, all other inputs remaining equal, would be as follows:

2011 Sensitivity Analysis

Future impairment testing

With Russian gas prices assumed to increase on 1 July 2012 by 15% and on 1 January 2013 by 15%, in line with Russian government guidance, and again in 2013 and 2014, in addition to imminent gas production from YGE which will provide a greater understanding of the well performance of the contributing wells, the assumptions adopted in the impairment test will be reviewed at the next reporting date to identify whether a further impairment test is required.

2010: Exceptional item - impairment of Russian assets

In 2010, the changes in the key assumptions used from previous periods resulted in the asset being impaired by $74.6m in 2010 consisting of goodwill of $2.0m and property, plant and equipment of $72.6m. The main driver of the impairment was the lower sales prices anticipated in the early years together with a longer period before net back European gas price parity is achieved. The Group has recognised the impairment charge as an exceptional charge within the 2010 financial statements. The associated tax effect on the exceptional charge in 2010 was a deferred tax credit to the 2010 income statement of $14.5m.

The impact on the 2010 impairment calculation of applying different assumptions to production, gas prices, capital expenditure and post-tax discount rates based on 2P reserves, would have been as set out below.

2010 Sensitivity Analysis

3. (e) Goodwill

Goodwill was recognised in 2007 in relation to the Group's acquisition of Yuzhgazenergie LLC (YGE). The goodwill arose after the application of IAS 12 "Income Taxes", and was attributable principally to expanded growth opportunities in Russia.

2010 impairment disclosures

In 2010, in accordance with IAS 36 "Impairment of Assets", and following the Group's decision that an indication of potential impairment arose in relation to the property, plant and equipment a review for impairment of the related goodwill was undertaken. The carrying amount of the goodwill was allocated to the YGE Cash Generating Unit (CGU) as described above. The test compared the recoverable amount of the CGU, being YGE for the purpose of the review, to the carrying value of the CGU including goodwill. The calculations use the same assumptions as used for property, plant and equipment.

4. Borrowings

Pre-paid Swap

The Group's borrowings relate to a term loan (pre-paid swap) which the Group entered into on 14 June 2011 with Credit Suisse International. The transaction which secured $50m for capital expenditure and other purposes is repayable over an 18 month schedule commencing in September 2011, concluding with a final payment in November 2012. There is a zero coupon rate on the outstanding balance however under the transaction JKX has hedged forward sales of oil.

The pre-paid swap is secured over the shares of all those Group subsidiaries which own, control or have an interest in the Group's oil and gas licences.

Credit Facility

On 31 March 2011, Poltava Petroleum Company (PPC), our subsidiary in Ukraine, entered into a reducing credit facility agreement with Crédit Agricole CIB (France) secured by indemnity provided by the parent company, JKX Oil & Gas plc. The credit facility is for a maximum of Ukrainian Hryvnia equivalent of $15.0m but requires a cash deposit to match any facility used over $10.0m and is available until 29 June 2012. All provisions contained in the credit facility documentation have been negotiated on normal commercial and customary terms for such finance arrangements. The interest is calculated at prevailing Crédit Agricole CIB (France) bank rate plus a margin.

5. Cost of sales

Production based taxes have increased following a new tax code becoming effective in Ukraine on 1 January 2011.

The 2011 provision for impairment of oil and gas assets/write off of exploration and evaluation costs of $12.9m (2010: $13.7m) comprises Bulgarian exploration and license costs for B-Golitza ($6.2m) and exploration and drilling costs incurred in Hungary in respect of our Turkeve licence ($6.7m).

The 2010 provision for impairment of fixed assets/write off of exploration costs of $13.7m (2009: $5.0m) includes Ukrainian assets, Zaplavskoye 3 Well ($6.2m) which was dry and licence cost for Chervonoyarske ($1.0m), additionally costs were written off in Hungary for Well Gy-3 ($1.9m) and Bulgarian wells, Staro Oryahovo ($1.1m) and Well Shkorpilovtci ($0.6m). A provision of $2.9m was also made against an asset held for Russia. The exceptional item consists of impairment of Russian assets.

The cost of inventories (calculated by reference to production costs) expensed in cost of sales in 2011 was $115.3m (2010: $56.2m).

6. Taxation

Factors that affect the total tax charge

The total tax charge/(credit) for the year of $22.9m (2010:$0.4m) is higher (2010: lower) than the average rate of UK corporation tax of 26.5% (2010: 28%). The differences are explained below:

No liability to UK taxation has arisen during the year (2010: $nil) due to the availability of tax losses and relief for overseas taxes paid on dividends received. The current tax charged in the period relates to Ukrainian corporation tax which has arisen in the Group subsidiary, Poltava Petroleum Company. Taxes charged on production of hydrocarbons in Ukraine and Hungary are included in cost of sales.

Factors that may affect future tax charges

A significant proportion of the Group's income will be generated overseas. Profits made overseas will not be able to be offset by costs elsewhere in the Group. This could lead to a higher than expected tax rate for the Group.

The main rate of UK corporation tax effective from 1 April 2011 was reduced from 27% to 26%. The 2012 Budget announced a reduction to the main rate of corporation tax from 26% to 24% from 1 April 2012 and proposes to make further reductions to the main rate of 1% per annum to 22% by 1 April 2014.The impact of the rate reduction is not expected to have a material impact on provided and unprovided UK deferred taxation.

In December 2010 a new Ukrainian tax rate was introduced. New corporation tax rates in the Ukraine for 2011 are as follows: from 1 January 2011 to 31 March 2011 - 25%; from 1 April 2011 to 31 December 2011- 23%;and the expected corporation tax rates in 2012 - 21%; in 2013 - 19%; after 31 December 2013 - 16%.

Taxation in Ukraine - production taxes

The Group is subject to uncertainties relating to the determination of its tax liabilities. Ukrainian tax legislation and practice are in a state of continuous development, with new laws coming into effect at times which can conflict with others and, therefore, are subject to varying interpretations and changes which may be applied retrospectively. Management's interpretation of tax legislation as applied to the transactions and activities of the Group may at times not coincide with that of the tax authorities. As a result, the tax authorities may challenge transactions and the Group may be assessed for additional taxes, penalties and fines which could have a material adverse effect on the Group's financial position and results of operations.

Since PPC's inception in 1994 the Company has operated in a regime where conflicting laws have often existed, including in relation to effective taxes on oil and gas production. Various laws and regulations have existed and have implied a number of variable rates.

PPC has at times since 1994 sought clarification of their status regarding a number of production related taxes, and has been subject to a number of such taxes, at various rates, which have been paid and accounted for within Operating Costs within the Group Income Statement. In late 2009, coinciding with the lead up to the Presidential election in Ukraine, PPC was subjected to increased operational pressures in several areas, including broader taxation.

On 1 January 2010 yet another law came into force in Ukraine in the area of production related tax, the Law of Ukraine on "On Rent Charges for Oil, Natural Gas and Gas Condensate" which had been suspended since 2004. During 2010 conflicting laws (most particularly the Law of Ukraine on "Amending Certain Legislative Acts of Ukraine") which may be a basis for the Ukrainian Tax Authorities to assert that further production related taxes are due from various oil and gas companies, including PPC, for periods through to 31 December 2010.

PPC continues to defend itself in court against action initiated by the tax authorities concerning rules of calculation and payment of various production related taxes for the period from January to March 2007. The statutory period of limitation in Ukraine for such matters is three years. If PPC was subject to maximum production related taxes for the periods from January to March 2007 and from April 2009 to December 2010, additional production related taxes could be approximately twenty per cent of Ukraine gross revenues for those periods (net of corporate tax savings), plus interest and penalties. The Group considers that the likelihood of additional production related taxes for the period from January 2008 to March 2009 is remote on the basis of tax audits completed, the related legal position and the three year statute of limitation. The Group would exhaustively challenge the payment of any further production related taxes (over and above those it has already paid) for the period through 31 December 2010. Given the lack of clarity over the legal position together with arguments that the Group has to defend its position, the Group considers that no payments are likely to be made in the next 12 months.

A new tax code became effective in Ukraine on 1 January 2011 replacing most of the previous tax laws. The new tax code has removed uncertainty over the applicability of rental fee payment by PPC from 2011 and accordingly PPC has been liable to, and has paid, $67.1m during the year (2010: nil). The fees are levied on production volumes in accordance with a rates schedule which may change from time to time. Such payments are recorded in cost of sales.

7. Earnings per share

The calculation of the basic and diluted earnings per share attributable to the owners of the parent is based on the following data:

Earnings before exceptional item in 2010 of $81,256,000 is calculated from the 2010 earnings of $21,156,000 and adding back the exceptional item of $74,600,000 less the related deferred tax on the exceptional item of $14,500,000.

There were 2,759,824 (2010: 2,593,724) outstanding share options at 31 December 2011, of which 766,518 (2010: 744,988) have a dilutive effect.

8. Dividends

In respect of the full year 2010 a final dividend of 2.6 pence per share was paid to shareholders on 24 June 2011 (in respect of the full year 2009: 2.7 pence per share on 11 June 2010); no interim dividend for 2011 was paid (2010: 2.4 pence per share).

Total dividends paid during the year were 2.6 pence per share (2010: 5.0 pence per share) and amounted to $7.2m (2010: $13.2m).

In respect of the full year 2011, the directors do not propose any final dividend (2010: 2.6 pence per share). The total estimated dividend to be paid is $nil (2010: $7.2m).

9. Reconciliation of profit from operations to net cash inflow from operations

10. Events after the reporting date

Since the reporting date we have continued to progress our exploration and business growth strategies.

In March 2012 we successfully completed and tested exploration well Z-04 in the Zaplavskoye exploration licence in Poltava, Ukraine. On completion of a 36-hour multi-choke test, well Z-04 flowed gas and condensate and was tied back to the main Novo-Nikolaevskoye complex processing facility with a 9km flow line and placed on production.

In Hungary, Pely-02 well was drilled in January but with disappointing results: the primary target reservoir interval was poorly developed and a secondary objective, while evidently gas bearing, had insufficient reservoir quality to justify completing and testing. The well has been plugged and abandoned and the costs of the well will be written off in 2012. The decision to drill the second well has been deferred pending further study of the seismic and Pely-02 well correlation.

Also in March 2012 we announced that our wholly owned Russian subsidiary, YGE, signed a sales agreement with Kubangazifikatziya for the sale of 100% of the gas produced in 2012 from its Koshekhablskoye field in southern Russia.

Kubangazifikatziya is a large Krasnodar-based gas trading company which has been active in the wholesale supply of gas and LPG products since 2008. Kubangazifikatziya will take delivery of gas from the Koshekhablskoye field at the export flange and will be responsible for transport through the Gazprom pipeline network to end users.

Glossary

2P reserves Proved plus probable

P50 Reserves and/or resources estimates that

have a 50 per cent probability of being met

or exceeded

AIFR All Injury Frequency Rate

Bcf Billion cubic feet

Bcpd Barrel of condensate per day

Boe Barrel of oil equivalent

Boepd Barrel of oil equivalent per day

Bopd Barrel of oil per day

Bpd Barrel per day

Cfpd Cubic feet per day

Hryvna The lawful currency of Ukraine

HSEC Health, Safety, Environment and Community

LIBOR London InterBank Offered Rate

LPG Liquefied Petroleum Gas

LTI Lost Time Injuries

Mbbl Thousand barrels

Mboe Thousand barrels of oil equivalent

Mcf Thousand cubic feet

MMcfd Million cubic feet per day

MMbbl Million barrels

MMboe Million barrels of oil equivalent

Roubles The lawful currency of Russia

sq.km Square kilometre

TD Total depth

$ United States Dollars

US United States

Conversion factors 6,000 standard cubic feet of gas = 1 boe