Baron Oil Regulatory News (BOIL)

23 May 2022

Baron Oil Plc

("Baron Oil", "Baron", the "Company", or the "Group")

Final Results for the Year Ended 31 December 2022

Baron Oil (AIM: BOIL), the AIM-quoted oil and gas exploration company, is pleased to announce its audited financial results for the year ended 31 December 2022.

Operational Highlights (including post period)

Financial Highlights

Commenting on the results, John Wakefield, Non-executive Chairman, said: "2022 was a year of considerable progress for Baron. Our overriding task was to progress our two material projects, Chuditch and Dunrobin, to their key evaluation points which was achieved with the publication of CPRs on both projects in early 2023. The considerable and potentially transformative value for shareholders in the Company's assets offshore Timor-Leste and in the UK is now clearly defined and our efforts are now focused on the drilling decisions to be made in 2023 for a Chuditch-1 appraisal well and a Dunrobin West exploration well.

"Both assets continue to attract attention via our active farmout campaigns and presentations at relevant industry events. In particular, there are a number of ongoing discussions with third parties regarding participation in the Chuditch appraisal well and future activities. We are grateful for the support of our investors through the two funding events which took place during the year and as a result, we have a well-funded balance sheet covering our current activities and commitments.

"Baron is highly encouraged by the developments being made and I look forward to reporting on our further progress in due course." 

Posting of Annual Report and Notice of AGM

The Company's Annual Report and Financial Statements, for the year ended 31 December 2022, will be available for download from the Company's website (https://www.baronoilplc.com/) later today and will be despatched by post shortly to those shareholders that have requested a hard copy.

The Company will hold its Annual General Meeting at 11 a.m. BST on 29 June 2022 at 38-43 Lincoln's Inn Fields, London WC2A 3PE and the Notice of Annual General Meeting to that effect will be sent to shareholders shortly and will be available on the Company's website.

Online Investor Q&A

Baron intends to hold an investor Q&A session for existing and potential new shareholders around mid-June 2023. Further details of the date and time will be released in due course.

For further information, please contact:

Qualified Person's Statement

Pursuant to the requirements of the AIM Rules - Note for Mining and Oil and Gas Companies, the technical information and resource reporting contained in this announcement has been reviewed by Jon Ford BSc, Fellow of the Geological Society, Technical Director of the Company. Mr Ford has more than 40 years' experience as a petroleum geoscientist. He has compiled, read and approved the technical disclosure in this regulatory announcement and indicated where it does not comply with the Society of Petroleum Engineers' standard.

CHAIRMAN'S STATEMENT & OPERATIONS REPORT

Financial Review

The net result for the year was a loss before taxation of £1,387,000, which compares to a loss of £1,127,000 for the preceding financial year; the loss after taxation attributable to Baron Oil shareholders was £1,387,000, compared to a loss of £1,127,000 in the preceding year, representing a loss of 0.01p per share (2021: loss of 0.012p). It should be noted that the results for 2021 included a one-off non-cash gain on the deemed disposal of an associated undertaking amounting to £302,000.

Turnover for the year was £nil (2021: £nil), there being no sales activity during the period.

Exploration and evaluation expenditure incurred included in the Income Statement amounts to £213,000 (2021: £218,000). The Impairment provision in respect of Peru Block XXI was released and offset against the write off of the accumulated cost on the project. The Directors judged that no other exploration assets required impairment.

Administration expenses for the year were £1,191,000 (2021: £1,321,000), an overall reduction on the preceding year of £130,000. This is made up of a number of pluses and minuses. As anticipated last year, administration costs arising in SundaGas (Timor-Leste Sahul) Pte. Ltd. ("TLS") have increased from £285,000 previously to £441,000 this year as we moved to a full 12 month reporting period at the Group level and the Dili office in Timor-Leste is now fully operational. There were also non-recurring support costs of £65,000 in Peru. Directors and UK staff salaries and related costs are lower than 2021 by £37,000 with the earlier year including a severance payment to a former director. Finally, there have been no share-based payment charges this year (2021: £286,000).

Throughout 2022, the Pound Sterling weakened considerably against the US Dollar, with an opening rate of $1.35 and a closing rate of $1.21. This has given rise to a gain on holdings of US Dollar denominated balances of £43,000 (2021: gain of £22,000).

At the end of the financial year, cash reserves of the Group had increased to £5,807,000 from a level at the preceding year end of £1,650,000. The proceeds from the issue of new shares in the year amounting to £7,131,000 gross (£6,619,000 net of costs) bolstered the Company's cash reserves. The Group's investment in exploration and evaluation assets in the UK and Timor-Leste amounted to £806,000 in the period, and £602,000 was repaid to SundaGas Pte Ltd to settle the outstanding amount of the remaining share of the Timor-Leste Bank Guarantee resulting from the Company's acquisition of the remaining interest in TLS, as announced on 15 November 2022. In the case of the guarantee bond held in Peru, this was released in full on the relinquishment of the Block XXI licence resulting in a cash inflow of £128,000. After taking into account these items, operating cash outflow amounted to £1,182,000.

The Group continues to take a conservative view of its asset impairment policy, giving it a Statement of Financial Position that consists of significant net current assets and what the Board considers to be a realistic value for its exploration assets. The Board will continue to take a prudent approach in entering into new capital expenditures beyond those expected to be committed to existing ventures.

Report On Operations

Introduction

During 2022 both projects were subject to intensive technical work aimed at maturing the assets to "drill ready" status, which culminated in early 2023 with the publication of two Competent Person's Reports ("CPRs") which validate the projects to the industry standard SPE PRMS Contingent and/or Prospective Resource estimates.

Southeast Asia: Timor-Leste TL-SO-19-16 PSC ("Chuditch PSC" or "PSC") (Baron 75% interest)

Background

The Chuditch PSC is located approximately 185 kilometres south of Timor-Leste, 100 kilometres east of the producing Bayu-Undan field, 50 kilometres south of the potential Greater Sunrise development and covers approximately 3,571 km2 in water depths of 50-100 metres. The Chuditch-1 discovery well, drilled by Shell in 1998 in 64 metres water depth, encountered a 25 metre gas column in Jurassic Plover Formation sandstone reservoirs at a depth of around 3,000 metres on the flank of a large faulted structure. The discovery and neighbouring prospects are largely covered by a 3D seismic survey acquired in 2012.

Baron holds a 75% working interest and operates the PSC through its wholly owned subsidiary company SundaGas Banda Unipessoal Lda. ("Banda"), with the remaining 25% held by TIMOR GAP Chuditch Unipessoal Lda. ("TIMOR GAP"), a subsidiary of the state-owned national oil company, whose share of PSC expenditure is carried until first production.

The technical work programme obligations in the first two years of the initial three-year term of the PSC include the reprocessing of legacy seismic data, aimed at addressing reservoir imaging issues caused by sea-bed topography and shallow geological features, and for which a US$1 million Bank Guarantee is in place. The commitment within the PSC for contract year 3 is for the drilling of one appraisal well to the Plover Formation, subject to seismic reprocessing supporting the presence of a significant structure associated with the Chuditch discovery.

2022 and subsequent activities

The most significant component of the technical work programme in 2022 was the delivery of the reprocessed 3D seismic data and its interpretation. The reprocessing was performed to a high standard using the most modern Pre-Stack Depth Migration ("PSDM") techniques. We have significantly improved the subsurface image, enabling for the first time, the delineation of the Chuditch discovery and its adjacent prospects. This technical evaluation was enhanced through the completion of a number of further geological and engineering studies.

In October 2022, Baron announced its preliminary evaluation arising from the reprocessed data. The resultant mapping indicated a significant increase in management's aggregate Gas-in-Place and Recoverable Gas Resource estimates for the Chuditch PSC. In particular, it indicated a greater concentration of resources into the Chuditch-1 discovery in a simplified and robust structure. The understanding of the adjacent prospectivity was also matured, with three low-risk exploration targets confirmed on the Chuditch trend.

Consultancy group ERC Equipoise Ltd ("ERCE") was engaged to prepare a CPR to provide an independent assessment of the Chuditch resource to a SPE PRMS compliant standard. The CPR was released on 28 February 2023. For the Chuditch-1 discovery, ERCE assessed gross Pmean Contingent Resources of 1.16Tcf of gas. The recognition of the resources as being Contingent, rather than Prospective, is a major milestone and sets the foundation for the next stage of the project cycle. This phase typically includes pre-development feasibility studies and preliminary work on gas sales arrangements alongside the drilling of an appraisal well. Baron believes that the Chuditch-1 Contingent Resources are potentially sufficiently large to be economically viable to be developed standalone or in parallel with other developments in the region.

In addition, aggregated gross Pmean Prospective Resources attributable to the licence according to the CPR amounted to 1,562 Bscf gas across three prospects, Chuditch SW, Chuditch NE and Quokka. Geological Chances of Success ("GCOS") for these prospects range from 52% to 26%, providing substantial follow on, low risk exploration potential to any Chuditch-1 development. It is notable that Baron's in-house probabilistic estimates of aggregated gross Prospective gas Resources for these prospects, at 2,128 Bscf of gas, are higher that ERCE's estimates. This arises mainly through the Company's preferred use of the latest reprocessed seismic data velocity model to define the extent of the prospects.

Detailed tabulations of the resources assessed within the Chuditch PSC and further commentary can be accessed via the Company's RNS announcement of 28 February 2023 and the full CPR document which is available on Baron's corporate website (www.baronoilplc.com).

Also in October 2022, we announced a six-month extension to Contract Year Two of the Chuditch PSC granted by the relevant Timor-Leste national authority, Autoridade Nacional do Petróleo e Minerais ("ANPM"). The PSC Contract now has an expiry date of 18 June 2023.

On entry into Contract Year 3 of the PSC, the commitment will be to drill an appraisal well within a 12-month period. Such an appraisal well would likely be drilled to a total depth of around 3,000 metres and would include a production test. Recent geopolitical events and post-pandemic supply chain issues have led to considerable disruption in rig availability and drilling services globally such that a drill deadline of June 2024 could prove challenging.

There continues to be an excellent working relationship between the Company, the Government Ministry of Petroleum and Mineral Resources ("MPM"), Autoridade Nacional do Petróleo e Minerais ("ANPM"), the Government regulatory authority of petroleum and mining, and TIMOR GAP. We meet regularly with all of these bodies and provide detailed updates around our activities, plans and timelines on the PSC. The Company appreciates the support that we receive from these various state entities and will continue to work on maintaining these close relationships.

As part of our in-country activities, including the efforts of our local Dili offices, we are also undertaking various initiatives to develop the capabilities of the Timorese geological community, through relationships with local universities, welcoming student interns and sponsoring a new local chapter of the Society of Petroleum Engineers.

More generally in Timor-Leste, there was increased E&P activity during the year as Timor Resources Pty Ltd commenced an onshore drilling campaign, the first in 50 years. In addition, the Greater Sunrise development project continued to move towards development with negotiations between its many stakeholders. In April successful bidders of five blocks in the Second Licencing Round were announced by the Timor-Leste authorities, including Block P, which sits between the Chuditch PSC and Greater Sunrise, to a subsidiary of the Italian major ENI.

Throughout the period the Company hosted and kept updated a Virtual Dataroom for the benefit of potentially interested funding partners for the next phase of the Chuditch project, a process which continues.

United Kingdom Offshore Licence P2478 ("Dunrobin") (Baron 32% interest)

Background

Innovate Licence P2478, awarded in September 2019, is currently held by a joint operation comprising Reabold North Sea Limited ("Reabold", Licence Administrator, interest 36%), Baron (32%), and Upland Resources (UK Onshore) Limited (32%). The licence covers blocks 12/27c, 17/5, 18/1 and 18/2 in the Inner Moray Firth area of the North Sea and contains the Dunrobin and Golspie prospects, in a province where regional and local petroleum systems are considered by the partners to be proven. Target depths are as shallow as 660 metres subsea and water depths are less than 100 metres.

The work commitments on the Licence are to undertake reprocessing of legacy 3D and 2D seismic data and perform other studies, in order to better understand the subsurface risks, reduce the range of volumetric uncertainty, as well as providing drilling location candidates ahead of making a decision whether to proceed beyond the end of the Phase A evaluation stage of the licence on 14 July 2023.

2022 and subsequent activities

The key technical work components of the Phase A commitments - those of seismic reprocessing plus geochemical studies - were delivered during second half of 2022 on time and budget. Detailed seismic attribute analysis, designed to investigate candidate direct hydrocarbon indicators, followed in early 2023. A thorough revised evaluation of the prospectivity of P2478 is now finalised, with the UK's North Sea Transition Authority ("NSTA") recording that the work programme was fully complete during March 2023. Baron maintained direct technical involvement during 2022.

Towards the end of 2022, consultancy group RPS was engaged by the joint operation to prepare a CPR to provide an independent validation of resource estimates to a SPE PRMS compliant standard. The CPR was announced and published on Baron's website on 16 February 2023.

The CPR provided independent confirmation of the Company's belief that the western part of the Dunrobin complex had matured into a drillable prospect where a relatively low-cost exploration well can target more than 100 MMbbl of gross Pmean Prospective Resources with low geological risk. The key points from the CPR can be summarised as follows:

The CPR estimates indicate that Baron's farm-up arrangement of August 2021 increased the Company's share of aggregate net Pmean Prospective Resources on the Licence from 30mmboe to 64mmboe at a capped cost to Baron of £160,000.

Detailed tabulations of the resources assessed within the P2478 licence, and further commentary, can be accessed via the Company's RNS announcement of 16 February 2023, along with the full CPR document which is available on Baron's corporate website (www.baronoilplc.com). 

During the first quarter of 2023, the Licence Administrator, on behalf of the joint operation, hosted a Virtual Dataroom in order to attract funding for an exploration well on the Dunrobin West prospect, a process which continues.

Current gross cost estimates for an exploration well to be drilled to a total depth of approximately 700 metres are approximately US$10 million on a dry hole basis.

Block XXI, Peru

In April 2022, Baron requested the relinquishment of the legacy Licence Block XXI in Peru. The Licence had been largely under Force Majeure for a variety of reasons since 2017 and the Company had been frustrated in its attempts to access the area in order to carry out operations. The Bank Guarantee of US$160,000 was released in full to Baron in June. We continue to work with the Peruvian authorities to establish and file an Abandonment Plan. Ongoing costs are minimal and we hope to complete our withdrawal from Peru by the end of 2023.

New Ventures

In line with our strategy, the Company continued to screen early stage opportunities. In this context, in January 2023 the Company announced that, as a joint venture non-operating partner, it had submitted an application in the UK's 33rd Offshore Licensing Round.

Further potential new ventures remain under consideration in both our existing areas of activity and elsewhere.

Corporate

In April 2022, the Company completed an oversubscribed Placing and Subscription of new ordinary shares at 0.06p to raise £1.65 million (gross). The monies were to be applied to support the Chuditch PSC (Timor-Leste) and P2478 (UK) projects as they moved towards their key milestones.

In November 2022, the Company completed an oversubscribed Placing and Subscription and Rex Retail Offer of new ordinary shares at 0.12p, double the funding price achieved in April, to raise £5.36 million (gross). These monies were predominantly raised to support workstreams underpinning the ongoing farm-out discussions and to provide working capital into 2023.

The Company was pleased to announce on 15 November 2022 the appointment of Keith Bush, the former Chief Executive Officer of Cabot Energy Plc (previously known as Northern Petroleum Plc), as an independent non-executive Director. Keith has a petroleum engineering background, with significant experience in the oil and gas sector. He is a member of the Audit Committee and Chairman of the Remuneration Committee.

Conclusions

I am pleased to report that Baron's overriding task during 2022 - to progress our two material projects, Chuditch and Dunrobin, to their key evaluation points - was achieved, as signaled by the publication of CPRs on both assets in early 2023. This represents the culmination of large volumes of detailed, diligent and high quality technical work carried out by Baron's team of global consultants, employees and joint operation partners.

The considerable and potentially transformative value for shareholders in the Company's assets offshore Timor-Leste and UK is now clearly defined. We are now directing our efforts onto the drilling decisions to be made in 2023 for a Chuditch-1 appraisal well and a Dunrobin West exploration well.

In Timor-Leste, the independent assessment of approximately 1.1Tcf of gross Pmean Contingent Resources for the Chuditch-1 discovery underpins the viability of the project. We are updating the development and gas export option studies and commencing environmental baseline studies in preparation for a drilling campaign. The Board currently believes that a single appraisal well may be sufficient to determine commerciality without the need for an immediate follow-on exploration campaign.

In the UK an exploration well on Dunrobin West will be designed to test gross Pmean Prospective Resources of 71mmbbl in the primary, regionally proven, Jurassic target, and 45mmbbl in the vertically underlying secondary Triassic target. Due to the shallow target depths, gross drilling costs to test such a substantial volume are likely to be relatively modest. Success at Dunrobin West would de-risk the potential follow up targets Dunrobin Central & East plus Golspie, which are directly analogous prospects.

Both assets continue to attract attention via our active farmout campaigns and presentations at relevant industry events. In particular, there are a number of ongoing discussions with third parties regarding participation in the Chuditch appraisal well and future activities. We look forward to updating shareholders on progress as and when appropriate.

Our search for new venture opportunities to enhance and complement the existing portfolio resulted in an application as a non-operating partner for a licence in the offshore UK 33rd Round of Licensing and we continue to actively pursue other material new business opportunities.

We are grateful for the support of our investors through the two funding events in 2022. As a result we have a well-funded balance sheet covering our current activities and commitments. As at 31 December 2022 we had cash reserves of £5.8 million (2021: £1.65 million). The addition of Mr Keith Bush as an independent non-executive Director in 2022 also strengthens and broadens the Board's talents as we enter a decisive phase of operations.

John Wakefield

Non-executive Chairman

22 May 2023

CONSOLIDATED AND COMPANY STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2022

NOTES TO THE FINANCIAL STATEMENTS

General Information

Baron Oil Plc is a company incorporated in England and Wales and quoted on the AIM market of the London Stock Exchange. The address of the registered office is disclosed on page 2 of the financial statements. The principal activity of the Group is described in the Strategic Report in section 4 on page 9.

(1) Significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated.

Going concern basis

The Directors have prepared a cash ow forecast covering a period extending beyond 12 months from the date of these nancial statements which contains certain assumptions about the development and strategy of the business. The Directors are aware of the risks and uncertainties facing the business but the assumptions used are the Directors' best estimate of its future development.

After considering the forecasts and the risks, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis of accounting in preparing the annual nancial statements.

The nancial statements do not include any adjustments that would result if the Group was unable to continue as a going concern.

Basis of preparation

The financial statements have been prepared in accordance with UK adopted International Accounting Standards and IFRIC interpretations issued by the International Accounting Standards Board (IASB) and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention. The principal accounting policies adopted are set out below.

Changes in accounting policies and disclosures

Adoption of new and revised standards 

During the year the Group adopted the following IFRS amendments and standards for the first time:

Details of the impact of these standards on the Group are as follows:

Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37)

IAS 37 defines an onerous contract as a contract in which the unavoidable costs (costs that the Group has committed to as part of the contract) of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The amendments to IAS 37.68A clarify that the costs relating directly to the contract consist of both:

• The incremental costs of fulfilling that contract- e.g. direct labour and material; and

• an allocation of other costs that relate directly to fulfilling contracts: e.g. allocation of depreciation charge on property, plant and equipment used in fulfilling the contract.

The Board has assessed that under the revised definition the Group held no onerous contracts in the current or comparative periods.

Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16)

The amendment to IAS 16 prohibits an entity from deducting from the cost of an item of PP&E any proceeds received from selling items produced while the entity is preparing the asset for its intended use (for example, the proceeds from selling samples produced during the testing phase of a manufacturing facility after it is being constructed but before start of commercial production). The proceeds from selling such samples, together with the costs of producing them, are now recognised in profit or loss. The Board considers that there is no material impact of this amendment.

 Annual Improvements to IFRS Standards 2018-2020 (Amendments to IFRS 1, IFRS 9, IFRS 16 & IAS 41) .

• IFRS 1: Subsidiary as a First-time Adopter (FTA)

• IFRS 9: Fees in the '10 per cent' Test for Derecognition of Financial liabilities

• IAS 41: Taxation in Fair Value Measurements

The Board considers that there is no material impact of this amendment.

References to Conceptual Framework (Amendments to IFRS 3)

In May 2020, the IASB issued amendments to IFRS 3, which update a reference to the Conceptual Framework for Financial Reporting without changing the accounting requirements for business combinations. The Board considers that there is no material impact of this amendment.

a) New standards, interpretations and amendments not yet effective

The following IFRSs and amendments have been issued by the IASB but are not effective until a future period.

The Board is currently assessing the impact of these new amendments on the Group's financial reporting for future periods. However, the board does not expect any of the above to have a material impact on future results.

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries and associated undertakings.

Subsidiaries

Subsidiaries are all entities over which Baron Oil Plc has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights, or where Baron Oil Plc exercises effective operational control. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They 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 but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Impairment of non-financial assets

At each statement of financial position date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired.

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 discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a re-valued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior periods. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

Intangible Assets

Oil and gas assets: exploration and evaluation

The Group has continued to apply the 'successful efforts' method of accounting for Exploration and Evaluation ("E&E") costs, having regard to the requirements of IFRS 6 'Exploration for the Evaluation of Mineral Resources'.

The successful efforts method means that only the costs which relate directly to the discovery and development of specific oil and gas reserves are capitalised. Such costs may include costs of licence acquisition, technical services and studies, seismic acquisition; exploration drilling and testing but do not include costs incurred prior to having obtained the legal rights to explore the area. Under successful efforts accounting, exploration expenditure which is general in nature is charged directly to the income statement and that which relates to unsuccessful drilling operations, though initially capitalised pending determination, is subsequently written off. Only costs which relate directly to the discovery and development of specific commercial oil and gas reserves will remain capitalised and to be depreciated over the lives of these reserves. The success or failure of each exploration effort will be judged on a well-by-well basis as each potentially hydrocarbon-bearing structure is identified and tested. Exploration and evaluation costs are capitalised within intangible assets. Capital expenditure on producing assets is accounted for in accordance with SORP 'Accounting for Oil and Gas Exploration'. Costs incurred prior to obtaining legal rights to explore are expensed immediately to the income statement.

All lease and licence acquisition costs, geological and geophysical costs and other direct costs of exploration, evaluation and development are capitalised as intangible or property, plant and equipment according to their nature. Intangible assets comprise costs relating to the exploration and evaluation of properties which the Directors consider to be unevaluated until reserves are appraised as commercial, at which time they are transferred to tangible assets as 'Developed oil and gas assets' following an impairment review and depreciated accordingly. Where properties are appraised to have no commercial value, the associated costs are treated as an impairment loss in the period in which the determination is made.

Costs are amortised on a field by field unit of production method based on commercial proven and probable reserves, or to the expiry of the licence, whichever is earlier.

The calculation of the 'unit of production' amortisation takes account of the estimated future development costs and is based on the current period and un-escalated price levels. Changes in reserves and cost estimates are recognised prospectively.

E&E costs are not amortised prior to the conclusion of appraisal activities.

Property, plant and equipment

Non oil and gas assets

Non oil and gas assets are stated at cost of acquisition less accumulated depreciation and impairment losses. Depreciation is provided on a straight-line basis at rates calculated to write off the cost less the estimated residual value of each asset over its expected useful economic life. The residual value is the estimated amount that would currently be obtained from disposal of the asset if the asset were already of the age and in the condition expected at the end of its useful life.

Buildings, plant and equipment unrelated to production are depreciated using the straight-line method based on estimated useful lives.

The annual rate of depreciation for each class of depreciable asset is:

Equipment and machinery 4-10 years

The carrying value of tangible fixed assets is assessed annually and any impairment is charged to the income statement.

Investments

Investments are stated at cost less provision for any impairment in value.

Trade and other receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired.

Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held on call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the statement of financial position.

Taxation

Income tax

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

The tax currently payable is based on taxable profit or loss for the year. Taxable profit or loss differs from profit or loss as reported in the same income statement 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 Company's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the statement of financial position date.

Deferred tax

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the statement of financial position liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

The carrying amount of deferred tax is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited to income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

Trade payables are not interest bearing and are stated at their nominal value. Trade and other payables are initially recognised at fair value. They are subsequently measured at amortised cost using the effective interest method unless the effect of discounting would be immaterial, in which case they are stated at cost.

Fair values

The carrying amounts of the financial assets and liabilities such as cash and cash equivalents, receivables and payables of the Group at the statement of financial position date approximated their fair values, due to the relatively short term nature of these financial instruments.

Share-based compensation

Share based payments (Note 20)

The fair value of share-based payments recognised in the income statement is measured by use of the Black Scholes model, which takes into account conditions attached to the vesting and exercise of the equity instruments. The expected life used in the model is adjusted based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. The share price volatility percentage factor used in the calculation is based on management's best estimate of future share price behaviour and is selected based on past experience, future expectations and benchmarked against peer companies in the industry.

Ordinary shares are classified as equity.

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from proceeds.

Loans and receivables

The Group classifies all its financial assets as trade and other receivables. The classification depends on the purpose for which the financial assets were acquired.

Trade receivables and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables financial assets. Loans and receivables financial assets are measured at amortised cost using the effective interest method, less any impairment loss.

The Group's loans and receivables financial assets comprise other receivables (excluding prepayments) and cash and cash equivalents included in the Statement of Financial Position.

Lease accounting

Financial liabilities

Financial liabilities are recognised when, and only when, the Group becomes a party to the contracts which give rise to them and are classified as financial liabilities at fair value through the profit and loss or loans and payables as appropriate. The Group's loans and payables comprise trade and other payables.

When financial liabilities are recognised initially, they are measured at fair value plus directly attributable transaction costs and subsequently measured at amortised cost using the effective interest method other than those categorised as fair value through income statement.

The Group determines the classification of its financial liabilities at initial recognition and re-evaluates the designation at each financial year end.

A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires.

When an existing financial liability is replaced by another from the same party on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement.

Provisions

Provisions are recognised when the Company has a present obligation as a result of a past event, and it is probable that the Company will be required to settle that obligation. Provisions are measured at the Directors' best estimate of the expenditure required to settle the obligation at the statement of financial position date and are discounted to present value where the effect is material.

Financial instruments

Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables.

Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transactions costs, except as described below. Subsequent to initial recognition non-derivative financial instruments are measured as described below.

A financial instrument is recognised when the Group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised if the Group's contractual rights to the cash flows from the financial assets expire or if the Group transfers the financial assets to another party without retaining control or substantially all risks and rewards of the asset. Regular purchases and sales of financial assets are accounted for at trade date, i.e. the date that the Group commits itself to purchase or sell the asset. Financial liabilities are derecognised if the Group's obligations specified in the contract expire or are discharged or cancelled.

Foreign currencies

i) Functional and presentation currency

Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the entity operates (the functional currency), which are mainly in Pounds Sterling (£) and US Dollars (USD). The financial statements are presented in Pounds Sterling (£), which is the Group's presentation currency.

ii) Transactions and balances

Foreign currency transactions are translated into the presentational currency using exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

iii) Group companies

The results and financial position of all Group entities (none of which has the currency of a hyper-inflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

Management of capital

The Group's policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due. To achieve this aim, it seeks to raise new equity finance and debt sufficient to meet the next phase of exploration and where relevant development expenditure.

The Board receives cash flow projections on a regular basis as well as information on cash balances. The Board will not commit to material expenditure in respect of its ongoing exploration work prior to being satisfied that sufficient funding is available to the Group to finance the planned programmes.

Dividends cannot be issued until there are sufficient reserves available.

Critical accounting judgements and key sources of estimation uncertainty

The preparation of the consolidated financial statements requires management to make estimates and assumptions concerning the future that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The resulting accounting estimates will, by definition, differ from the related actual results.

Valuation of oil and gas properties: judgements regarding timing of regulatory approval, the general economic environment, and the ability to finance future activities has an impact on the impairment analysis of intangible exploration and evaluation assets. All these factors may impact the viability of future commercial production from unproved properties, and therefore may be a need to recognise an impairment. The timing of an impairment review and the judgement of when there could be a significant change affecting the carrying value of the intangible exploration and evaluation asset is a critical accounting judgement in itself.

The Board also assesses potential impairment of the Company's net investment in subsidiaries by reference to the same judgements around the circumstances of the Group's oil and gas exploration projects. At year end the Group's exploration assets which the board reviewed for impairment were carried at £3.7m and the Company's net investment in subsidiaries was held at £5.0m. Further details are given in Notes 9 and 12 respectively.

Commercial reserves estimates

Oil and gas reserve estimates: estimation of recoverable reserves include assumptions regarding commodity prices, exchange rates, discount rates, production and transportation costs all of which impact future cashflows. It also requires the interpretation of complex geological and geophysical models in order to make an assessment of the size, shape, depth and quality of reservoirs and their anticipated recoveries. The economic, geological and technical factors used to estimate reserves may change from period to period. Changes in estimated reserves can impact developed and undeveloped property carrying values, asset retirement costs and the recognition of income tax assets, due to changes in expected future cash flows.