Enwell Energy Regulatory News (ENW)

17 September 2020

ENWELL ENERGY PLC

2020 INTERIM RESULTS

Enwell Energy plc (the "Company", and with its subsidiaries, the "Group"), the AIM-quoted (ENW) oil and gas exploration and production group with assets in Ukraine, today announces its unaudited results for the six month period ended 30 June 2020.

Sergii Glazunov, CEO, commented: "2020 has been a good operational year so far, with record production from the MEX-GOL, SV and VAS fields helping to offset the continued impact of lower gas prices. We are looking forward to further progressing our development programme and continuing to improve production rates. Our solid operational base in tandem with our robust cash resources positions us well as we continue our value delivery initiatives, despite current reduced commodity prices. We are closely monitoring the unprecedented developments of the ongoing COVID-19 pandemic, and although we have experienced no material impact so far, we have taken and will continue to take action to ensure the safety of our employees and local communities."

This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014.

For further information, please contact:

Dmitry Sazonenko, MSc Geology, MSc Petroleum Engineering, Member of AAPG, SPE and EAGE, Director of the Company, has reviewed and approved the technical information contained within this press release in his capacity as a qualified person, as required under the AIM Rules.

Chairman's Statement

During the first half of 2020, the Group continued with the development of the MEX-GOL, SV and VAS gas and condensate fields in north-eastern Ukraine, with a good operational performance during the period. Drilling of the SV-54 development well was successfully completed and brought on production in May 2020, with strong flow rates.

At the MEX-GOL and SV fields, production was stable during the first half of 2020, with higher production volumes compared with the same period last year. At the VAS field production was also steady, but lower than during the first half of 2019 after a decline in production from the VAS-10 well in late 2019.

Aggregate average daily production from the MEX-GOL, SV and VAS fields during the first half of 2020 was a record 4,545 boepd, which compares with an aggregate daily production rate of 4,192 boepd during the first half of 2019, an increase of approximately 8%, and average daily production of 4,263 boepd for the 2019 year.

During the first half of 2020, the Group's operating profit was $5.2 million (1H 2019: $13.7 million), with the decrease from the same period last year predominantly as a result of weakened European gas prices, despite higher production rates. Cash generated from operations during the period was also lower at $11.0 million (1H 2019: $17.6 million) for the same reasons.

The fiscal and economic environment in Ukraine remains positive despite the effects of the COVID-19 outbreak, resulting in lower GDP growth, declining inflation and weakening Ukrainian Hryvnia exchange rates. Nevertheless, fiscal and economic challenges in Ukraine remain and we continue to be vigilant.

The deregulation of the gas supply market, supported by electronic gas trading platforms and improved pricing transparency, has meant that the market gas prices in Ukraine broadly correlate with the imported gas prices. During the first half of 2020, gas prices trended lower, reflecting a similar trend in European gas prices, and were significantly lower than in the same period in 2019. Similarly, condensate and LPG prices were also lower by comparison with the first half of 2019.

Arkona Acquisition

As announced on 24 March 2020, the Group has acquired the entire issued share capital of LLC Arkona Gas-Energy ("Arkona") for total consideration of up to $8.63 million, subject to satisfaction of certain conditions. Arkona holds a 100% interest in the Svystunivsko-Chervonolutskyi ("SC") exploration licence in north-eastern Ukraine, some 15 km east of the SV field. The SC licence was granted in May 2017, with a duration of 20 years, and is prospective for gas and condensate. As with the productive reservoirs in the SV field, the prospective reservoirs in this licence are Visean, at depths between 4,600 - 6,000 metres.

However, NJSC Ukrnafta has issued legal proceedings against Arkona, in which NJSC Ukrnafta has made claims about the procedure involved in the grant of the SC licence to Arkona in May 2017 (see announcements dated 3 July and 31 July 2020). In early July 2020, the First Instance Court in Ukraine announced a ruling in favour of NJSC Ukrnafta, which found that the grant of the SC licence was irregular, which would mean the licence is invalid. Arkona disputes these claims and is defending such legal proceedings, and consequently has filed an appeal in the Appellate Administrative Court in Kyiv. Pending the outcome of the appeal process, the SC licence remains valid.

COVID-19

We continue to closely monitor the current volatility in global financial markets, and the implications on the operational, economic and social environment within which we work caused by the COVID-19 pandemic, coupled with the recent sharp decline in hydrocarbon prices. As of the date hereof, there has been no operational disruption linked to the COVID-19 pandemic, and no material impact is currently envisaged on the Group's prospects. However, the Board and management remain acutely aware of the risks, and continue to take action to mitigate them where possible, not only to protect our staff and stakeholders but also to minimise disruption to our business. We have taken steps to continually monitor the health of our operational staff, including temperature checks for such staff at the commencement of each shift, as well as investing in technology to enable many staff to work from remote locations. We continue to reassess our medium-term forecasts based on current pricing and are confident we have the resources to continue to deliver on our plans. Of course, we cannot be certain of the duration of the pandemic's impact but will remain focussed on monitoring and protecting our business through the period of uncertainty. In protecting our stakeholders' interests, we are conscious of our wider obligations to the communities, and country, in which we operate. Accordingly, as previously announced, we have acted, alongside other corporate entities in Ukraine, to directly acquire critical equipment and supplies from Chinese suppliers to donate to the Ukrainian State to assist its efforts to manage the pandemic in Ukraine. Our monetary contribution of $2 million to this initiative is reflected in the results for the period.

Outlook

Whilst there are still challenges in the business environment in Ukraine, the situation is relatively stable despite the COVID-19 outbreak. After the steady operational performance during the first half of 2020, and the increased production output during the period, we are looking forward to the results of the SV-25 appraisal well, which are expected in the first half of 2021. We are also looking forward to achieving further success in the development activities planned for the remainder of 2020 and delivering a steadily increasing production and revenue stream in the future.

In conclusion, on behalf of the Board, I would like to thank all of our staff for the continued dedication and support they have shown during the year and especially in the midst of the COVID-19 pandemic.

Chris Hopkinson

Chairman

16 September 2020

Chief Executive Officer's Statement

Introduction

The Group continued its good progress at its Ukrainian fields during 2020 with development activity at the MEX-GOL and SV fields, including the successful drilling of the SV-54 development well, which came on production in May, the commencement of the SV-25 well and work to upgrade the gas processing facilities and flow-line network and undertake remedial work on existing wells.

At the VAS field, planning for the proposed new well to explore the VED prospect within the VAS licence area has continued, and upgrades to the gas processing facilities, flow-line network and other infrastructure are underway.

Overall production continued its upward trend during the period, achieving record levels for the Group and being 8% higher than in the first half of 2019, with a substantial boost in the second quarter, once the SV-54 well came on production.

Production

The average daily production of gas, condensate and LPG from the MEX-GOL, SV and VAS fields for the six month period ended 30 June 2020 was as follows:-

Production rates were higher when compared with the corresponding period in 2019, predominantly due to the contributions of the MEX-119 well, which commenced production in October 2019, and the SV-54 well, which commenced production in May 2020.

The Group's average daily production for the period from 1 July 2020 to 31 August 2020 from the MEX-GOL and SV field was 18.3 MMscf/d of gas, 640 bbl/d of condensate and 292 bbl/d of LPG (4,079 boepd in aggregate) and from the VAS field was 2.9 MMscf/d of gas and 30 bbl/d of condensate (577 boepd in aggregate).

Operations

The relatively stable fiscal and economic conditions in Ukraine, coupled with reductions in the subsoil tax rates and improvements in the regulatory procedures in the oil and gas sector in Ukraine over recent periods, have given the Board confidence to continue the Group's development programme at its Ukrainian fields during 2020. However, lower realised gas prices significantly impacted revenues, following a general decline in gas prices in Europe.

The Group continued to refine its geological subsurface models of the MEX-GOL, SV and VAS fields, in order to enhance its strategies for the further development of the fields, including the timing and level of future capital investment required to exploit the hydrocarbon resources.

At the MEX-GOL and SV fields, the drilling of the SV-54 development well was completed to a final depth of 5,322 metres. One interval, at a drilled depth of 5,303 - 5,308 metres in the B-23 Visean formation, was perforated, and after successful testing, the well was hooked-up to the gas processing facilities. The well has demonstrated good production rates and is currently producing at approximately 2.0 MMscf/d of gas and 9.3 bbl/d of condensate (355 boepd in aggregate).

In July 2020, the SV-25 well was spudded. This well has a target depth of 5,320 metres, with drilling operations scheduled to be completed by the end of the first quarter of 2021, and, subject to successful testing, production hook-up during the second quarter of 2021. The well is an appraisal well, with its primary targets being the B-20, B-22 and B-23 horizons in the Visean formation.

The Group continues to operate each of the SV-2 and SV-12 wells under joint venture agreements with NJSC Ukrnafta, the majority State-owned oil and gas producer. Under the agreements, the gas and condensate produced from the respective wells is sold under an equal net profit sharing arrangement between the Group and NJSC Ukrnafta, with the Group accounting for the hydrocarbons produced and sold from the wells as revenue, and the net profit share due to NJSC Ukrnafta being treated as a lease expense in cost of sales. Both of these wells have proven to be strong producers since being brought back on production.

At the VAS field, planning has continued for a new well to explore the VED prospect within the VAS licence area. However, a decline in production rates from the VAS-10 well impacted overall production at the VAS field during the fourth quarter of 2019, and as a result, compression equipment was installed to increase production from this well, with a longer term plan to undertake a workover of the well to access an alternative reservoir horizon.

In March 2019 (see announcement made on 12 March 2019), a regulatory issue arose when the State Service of Geology and Subsoil of Ukraine issued an order for suspension (the "Order") of the production licence for the VAS field. Under the applicable legislation, the Order would lead to a shut-down of production operations at the VAS field, but the Group has issued legal proceedings to challenge the Order, and has obtained a ruling suspending operation of the Order pending a hearing of the substantive issues. The Group does not believe that there are any grounds for the Order, and intends to pursue its challenge to the Order through the Ukrainian Courts.

New Acquisitions

As announced on 24 March 2020, the Group has acquired the entire issued share capital of LLC Arkona Gas-Energy ("Arkona") for total consideration of up to $8.63 million, with $4.3 million subject to the satisfaction of certain conditions as set out therein. Arkona holds a 100% interest in the Svystunivsko-Chervonolutskyi ("SC") exploration licence, which is located in the Poltava region in north-eastern Ukraine. The SC licence has an area of 97 km2, and is approximately 15 km east of the SV field. The licence was granted in May 2017 with a duration of 20 years. The licence is prospective for gas and condensate, and has been the subject of exploration since the 1980s, with 5 wells having been drilled on the licence since then, although none of these wells are currently on production. As with the productive reservoirs in the SV field, the prospective reservoirs in the licence are Visean, at depths between 4,600 - 6,000 metres.

According to the recorded information on the Ukrainian State Balance of Natural Resources as at 1 January 2020, the licence has hydrocarbon reserves, in the category of C1 and C2 under the Ukrainian classification, DKZ, of approximately 38.0 MMboe (4.9 Bm3 of gas and 0.86 Mtonnes of condensate). It should be noted, however, that whilst the Group's review of existing technical data for the licence is considered supportive of such assessment of hydrocarbon reserves, such hydrocarbon reserves have not been verified by an independent reserves assessor and do not correspond to the SPE/WPC/AAPG/SPEE Petroleum Resources Management System ("PRMS") standard for classification and reporting.

However, NJSC Ukrnafta, as claimant, has issued legal proceedings against Arkona, as defendant, in which NJSC Ukrnafta has made claims about the procedure involved in the grant of the SC licence to Arkona in May 2017 (see announcements dated 3 July and 31 July 2020). NJSC Ukrnafta was the holder of a previous licence over this area which expired prior to the grant of the SC licence. In early July 2020, the First Instance Court in Ukraine announced a ruling in favour of NJSC Ukrnafta, which found that the grant of the SC licence was irregular, which would mean the licence is invalid. Arkona disputes these claims and is defending such legal proceedings, and consequently has filed an appeal in the Appellate Administrative Court in Kyiv. Pending the outcome of the appeal process, the SC licence remains valid. The Group considers Arkona has strong grounds for a successful appeal since the subject matter of these legal proceedings, including the validity of the SC licence, has already been ruled upon by the Supreme Court of Ukraine in similar proceedings in October 2019 involving, inter alia, NJSC Ukrnafta and Arkona, in which the SC licence was held to be valid. As a result, the Group is confident that the challenge to the SC licence will be resolved in favour of Arkona.

Under the terms of the acquisition agreement for Arkona, half of the consideration payable (split into two equal tranches) was deferred and only payable on satisfaction of certain conditions including the favourable resolution of these legal proceedings, as well as certain other conditions, with the further proviso that if the conditions for payment of these deferred tranches are not satisfied, then neither of these tranches shall become payable. In addition, the acquisition agreement contains customary warranties and indemnities allowing the Group to seek recovery of consideration previously paid in the event of a breach of such warranties and indemnities, which include an adverse outcome of these legal proceedings.

As announced on 1 April 2020, the Memorandum of Understanding (the "Memorandum") for the potential acquisition of PJSC Science and Production Concern Ukrnaftinvest ("Ukrnaftinvest"), announced on 26 November 2019, expired and was consequently terminated as a result of the parties to the Memorandum, being (1) the Company and (2) Ms Lidiia Chernysh and Bolaso Investments Limited, being unable to reach a final agreement for such potential acquisition on the contemplated terms at the time. As a result, the provisions relating to such termination set out in the Memorandum became applicable, which included the refund of the deposit of $0.5 million previously paid to the sellers under the Memorandum. This remains to be paid. In addition, the Group made a series of advances, now totalling UAH47.3 million (approximately $1.8 million) to Ukrnaftinvest over the period from October 2019 to March 2020 in conjunction with the MOU. The payments were to fund certain operational works in preparation for a well which is scheduled under the work commitments for the licences held by Ukrnaftinvest, and these advances are also now repayable. Notwithstanding these provisions and the terminated Memorandum, the parties to it continue to be engaged in discussions in relation to the acquisition of Ukrnaftinvest, and the Group believes revised terms will be agreed, albeit there can be no certainty. Accordingly, these amounts are regarded as recoverable at the date of this announcement.

Outlook

During the remainder of 2020, the Group will continue to develop the MEX-GOL, SV and VAS fields. At the MEX-GOL and SV fields, the development programme includes continuing drilling operations of the SV-25 appraisal well, planning for a further well or sidetracking of an existing well in the SV field, investigating workover opportunities for other existing wells, installation of further compression equipment, further upgrading of the gas processing facilities and flow-line network, and remedial and upgrade work on existing wells, pipelines and other infrastructure.

At the VAS field, planning for the proposed new well to explore the VED prospect within the VAS licence area is continuing, and upgrades to the gas processing facilities, pipeline network and other infrastructure are planned.

Ongoing legislative reforms and the general stability in the business climate in Ukraine, are encouraging and supportive of the independent oil and gas producers in Ukraine.

Finally, I would like to add my thanks to all of our staff for the continued hard work and dedication they have shown during this year, and to especially recognise their continuing efforts and professionalism during the current COVID-19 pandemic.

Sergii Glazunov

Chief Executive Officer

Finance Review

The Group's financial performance in the first half of 2020 was shaped largely by two factors, the significant drop in average gas realisations materially affecting revenue but partly mitigated by the record level of gas production, and sale of gas from storage. Despite the challenges during the period, the Group was delighted to make a net profit of $1.2 million (1H 2019: $9.9 million).

Average gas realisations in the period were down 46% at $139/Mm3 compared to $256/Mm3 in 1H 2019, with condensate and LPG sales also down by 22% and 23% at $42/bbl and $40/bbl respectively (1H 2019: $256/Mm3 (UAH6,921/Mm3), $54/bbl and $52/bbl respectively).

Since the deregulation of the gas supply market in Ukraine in October 2015, the market price for gas has broadly correlated to the price of imported gas, which generally reflects trends in European gas prices. Gas prices are also subject to seasonal variation. During the first half of 2020, gas prices were depressed, as a combined result of lower international prices reducing the price of imported gas, and the unseasonally warm 2019/20 winter.

During the period from 1 July 2020 to 14 September 2020, the average realised gas, condensate and LPG prices were $159/Mm3 (UAH4,352/Mm3), $54/bbl and $65/bbl respectively.

Over and above the record level of production in the period, the Company also sold 24 MMm3 of gas held in inventory at 31 December 2019. The inventory was valued at its cost of $3.0 million, all of which was recognised in the period as costs of sales, along with the associated revenue.

Revenue for the period, derived from the sale of the Group's Ukrainian gas, condensate and LPG production, was $24.7 million (1H 2019: $31.3 million). The gas price-driven fall in revenue also impacted cash generated from operations during the period, which was 59% lower at $7.2 million (1H 2019: $17.4 million).

Gross profit for the six months period to 30 June 2020 was $7.5 million (2019: $13.9 million).

Cost of sales for the period ended 30 June 2020 was marginally lower at $17.2 million (1H 2019: $17.3 million). Whilst broadly consistent with the same period in 2019, there were some significant intra-total movements: production taxes declined by 27% as a result of reduced gas revenues, in turn a function of the reduced gas prices as noted above; a 35% decrease in rent expense, a function of decreased gas prices; and the transmission tariff for use of the Ukrainian gas transit system of UAH101.93/Mm3 of gas was applicable to the Group (1H 2019: UAH91.87/Mm3), resulting in a $0.4 million (1H 2019: $0.4 million) charge in the period.

The subsoil tax rates applicable to gas production were stable during the period at 29% for gas produced from deposits at depths shallower than 5,000 metres and 14% for gas produced from deposits deeper than 5,000 metres, but reductions in the subsoil rates applicable to new wells and to condensate production were applicable, under which (i) for new wells drilled after 1 January 2018, the subsoil tax rates were reduced from 29% to 12% for gas produced from deposits at depths shallower than 5,000 metres and from 14% to 6% for gas produced from deposits deeper than 5,000 metres for the period between 2018 and 2022, and (ii) with effect from 1 January 2019 and applicable to all wells, the subsoil tax rates for condensate were reduced from 45% to 31% for condensate produced from deposits shallower than 5,000 metres and from 21% to 16% for condensate produced from deposits deeper than 5,000 metres.

Administrative expenses for the period were higher at $3.9 million (1H 2019: $2.9 million), primarily as a result of: a 173% increase in consultancy fees mainly due to legal and advisory costs associated with the acquisition activity in the period; and a 61% increase in other expenses primarily in relation to increased costs for managing gas transportation and storage, and marketing.

Other expenses in the period significantly increased due to charitable donations of $2.1 million (1H 2019: nil) for the supply of COVID-19-related medical equipment for Ukrainian authorities and charitable foundations.

The tax charge for the six month period ended 30 June 2020 of $1.4 million (1H 2019: $3.4 million charge) comprises a current tax charge of $1.4 million (1H 2019: $1.7 million charge) and a deferred tax charge of $10,000 (1H 2019: $1.7 million charge).

Capital investment of $8.8 million reflects investment in the Group's oil and gas development and production assets during the period (1H 2019: $6.7 million), primarily relating to the expenditure associated with the drilling of the SV-54 well.

Cash and cash equivalents held at 30 June 2020 were $54.2 million (31 December 2019: $62.5 million cash and cash equivalents). The Group's cash and cash equivalents balance at 13 September 2020 was $55.5 million, held as to $15.5 million equivalent in Ukrainian Hryvnia, and the balance of $40.0 million equivalent predominantly in US Dollars, Euros and Pounds Sterling.

Between early 2014 and 2018, the Ukrainian Hryvnia devalued significantly against the US Dollar, falling from UAH8.3/$1.00 on 1 January 2014 to UAH27.7/$1.00 on 31 December 2018, which resulted in substantial foreign exchange translation losses for the Group over that period, and in turn adversely impacted the carrying value of the MEX-GOL and SV asset due to the translation of two of the Group's subsidiaries from their functional currency of Ukrainian Hryvnia to the Group's presentation currency of US Dollars. In the first half of 2020, global financial markets have become extremely volatile as a combined function of a significant fall in oil prices and the effects of the COVID-19 pandemic, and the Ukrainian Hryvnia has weakened against the US Dollar with the exchange rate at 30 June 2020 being UAH26.69/$1.00. The impact of this devaluation was $10.8 million of foreign exchange losses (1H 2019: $4.9 million of foreign exchange gain). Further devaluation of the Ukrainian Hryvnia against the US Dollar may affect the carrying value of the Group's assets in the future.

Cash from operations has funded the capital investment during the period, and the Group's current cash position and positive operating cash flow are the sources from which the Group plans to fund the development programmes for its assets in the remainder of 2020 and beyond. This is coupled with the fact that the Group is currently debt-free, and therefore has no debt covenants that may otherwise impede the ability to implement contingency plans if domestic and/or global circumstances dictate. This flexibility and ability to monitor and manage development plans and liquidity is a cornerstone of our planning, and underpins our assessments of the future. With cash resources at the end of the period in excess of $54 million, and annual running costs (both operating, and general and administrative) of less than $16 million, the Group remains in a very strong position should any local or global shocks occur to the industry and/or the Group.

Bruce Burrows

Finance Director

Principal Risks and Uncertainties

The Group has a risk evaluation methodology in place to assist in the review of the risks across all material aspects of its business. This methodology highlights external, operational and technical, financial and corporate risks, and assesses the level of risk and potential consequences. It is periodically presented to the Audit Committee and the Board for review, to bring to their attention potential risks and, where possible, propose mitigating actions. Key risks recognised and mitigation factors are detailed below:

Condensed Interim Consolidated Income Statement

The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.

Condensed Interim Consolidated Statement of Comprehensive Income

The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.

Condensed Interim Consolidated Balance Sheet

The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.

Condensed Interim Consolidated Statement of Changes in Equity

* Predominantly as result of exchange differences on retranslation, where the subsidiaries' functional currency is not US Dollar

The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.

Condensed Interim Consolidated Statement of Cash Flows

* Expected credit losses

The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

1. General Information and Operational Environment

Enwell Energy plc (formerly Regal Petroleum plc) (the "Company") and its subsidiaries (together the "Group") is a gas, condensate and LPG production group.

Enwell Energy plc is a company quoted on the AIM Market of the London Stock Exchange and incorporated in England and Wales under the Companies Act 2006. The Company's registered office is at 16 Old Queen Street, London SW1H 9HP, United Kingdom and its registered number is 4462555.

As at 30 June 2020, the Company's immediate parent company was Pelidona Services Limited, which is 100% owned by Lovitia Investments Limited, which is 100% owned by Mr Vadym Novynskyi. Accordingly, the Company is ultimately controlled by Mr Vadym Novynskyi.

The Group's gas, condensate and LPG extraction and production facilities are located in Ukraine. The ongoing political and economic instability in Ukraine, which commenced in late 2013, has led to a deterioration of Ukrainian State finances, volatility of financial markets, illiquidity in capital markets, higher inflation and a depreciation of the national currency against major foreign currencies, although there have been some gradual improvements lately.

In recent years, the Ukrainian economy demonstrated growth amid overall macroeconomics stabilisation supported by structural reforms, a rise in domestic investment, revival in household consumption, increase in industrial production, construction activity and improved environment on external markets.

Starting from the first quarter of 2020, the Ukrainian economy has been contracting following a decrease in industrial output and the COVID-19 outbreak, which started in March 2020. The National Bank of Ukraine ("NBU") follows an interest rate policy consistent with inflation targets and keeps the Ukrainian Hryvnia floating. The annualised inflation rate in Ukraine slowed to 2.0% in the first half of 2020 (compared with 3.6% in the first half of 2019 and 4.1% over the 2019 year), which allowed the NBU to continue key policy rate cuts after a lengthy period of rate increases - from 18.0% effective 7 September 2018 to 6.0% effective 12 June 2020, which is historically the lowest ever rate in Ukraine. At the same time, the NBU has madke appropriate market interventions in order to contain abnormal fluctuations of the exchange rate.

As at the date of this report, the official NBU exchange rate of the Ukrainian Hryvnia against the US Dollar was UAH28.06/$1.00, compared with UAH26.69/$1.00 as at 30 June 2020 and UAH23.69/$1.00 as at 31 December 2019. In 2019, the NBU cancelled some of the currency control restrictions, such as the required share of foreign currency proceeds subject to mandatory sale and the amount of dividend payments allowed to non-residents, which were implemented in 2014 - 2015.

In order to manage external debt repayments and secure access to external financing, Ukraine continues cooperation with international financial institutions, which are major creditors of its economy. In June 2020, the Executive Board of the International Monetary Fund approved a new 18-month Stand-by Arrangement ("SBA") for Ukraine with the total access of approximately $5 billion. The approval of the SBA enabled the immediate disbursement of approximately $2.1 billion, with the remainder being phased over four reviews. In July 2020, Ukraine and the European Union signed an agreement granting Ukraine €1.2 billion in macro-financial assistance funds. Ukraine has remained active on international debt capital markets to manage external debt maturity profile.

Further details of risks relating to Ukraine can be found within the Principal Risks and Uncertainties section earlier in this announcement.

As a consequence of the COVID-19 pandemic, the Group is re-visiting processes and controls intended to ensure protection of all our stakeholders and minimise any disruption to our business. The Group is closely monitoring the current volatility in global financial markets, and the implications on the operational, economic and social environment within which the Group works caused by the COVID-19 pandemic, coupled with the recent sharp decline in hydrocarbon prices. As of the date hereof, there has been no operational disruption linked to the COVID-19 pandemic, and no material impact is currently envisaged on the Group's prospects. However, the Board and management remain acutely aware of the risks, and continue to take action to mitigate them where possible, not only protect the Group's staff and stakeholders but to minimise disruption to the Group's business. The Group has taken steps to continually monitor the health of its operational staff, including temperature checks for such staff at the commencement of each shift, as well as investing in technology to enable many staff to work from remote locations. The Group continues to reassess the medium-term forecasts based on current pricing and is confident that it has the resources to continue to deliver on its plans. Of course, it is not possible to forecast the duration of the pandemic's impact but the Group will remain focussed on monitoring and protecting its business through the period of uncertainty, as further explained below in the Going Concern section.

The unaudited condensed interim consolidated financial statements for the six month period ended 30 June 2020 have been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' as adopted by the European Union. The unaudited condensed interim consolidated financial statements do not include all the notes of the type normally included in annual financial statements. Accordingly, this report should be read in conjunction with the annual consolidated financial statements for the year ended 31 December 2019, which have been prepared in accordance with International Financial Reporting Standards (hereinafter "IFRSs") as adopted by the European Union.

These unaudited condensed interim consolidated financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2019 were approved by the Board of Directors on 8 April 2020 and subsequently filed with the Registrar of Companies. The Auditor's Report on those accounts was not qualified and did not contain any statement under section 498 of the Companies Act 2006.

Going Concern

The Group's business activities, together with the factors likely to affect its future operations, performance and position are set out in the Chairman's Statement, Chief Executive Officer's Statement and Finance Review above. The financial position of the Group, its cash flows and liquidity position are set out in these unaudited condensed interim consolidated financial statements.

The Directors have performed a robust assessment, including a review of the budget and forecast for the year ending 31 December 2020 and longer-term strategic forecasts, plans, and models including consideration of the principal risks faced by the Group and taking into account the ongoing impact of the global COVID-19 pandemic on the macroeconomic situation and any potential impact to operations and plans. In particular, the Directors considered a number of sensitivities on key assumptions which included downside (reverse stress) sensitivities in relation to production rates, gas price, fixed operating and administration costs and foreign exchange rates, which estimated the extent to which the key assumptions would need to be adversely impacted in order to eliminate the forecast headroom. Following this review, the Directors are satisfied that, taking into consideration reasonably possible downside sensitivities, the Group has adequate resources to continue to operate and meet its liabilities as they fall due for the foreseeable future, a period considered to be twelve months from the date of signing these unaudited condensed interim consolidated financial statements. The Directors noted that with cash resources at the end of the period in excess of $54 million, and annual running costs (both operating, and general and administrative) of less than $16 million, the Group remains in a very strong position should any local or global shocks occur to the industry and/or the Group. For these reasons, the Directors continue to adopt the Going Concern Basis for preparing the unaudited condensed interim consolidated financial statements.

2. Accounting Judgements and Estimates

The accounting policies and methods of computation and presentation used are consistent with those used in the Group's Annual Report and Financial Statements for the year ended 31 December 2019, with the exception of the following new or revised standards and interpretations:

New and amended standards adopted by the Group

A number of new or amended standards became applicable for the current reporting period. The following amendments to standard, which is relevant to the Group's condensed consolidated interim financial statement, have been issued:

Definition of a business - Amendments to IFRS 3 (issued on 22 October 2018 and effective for acquisitions from the beginning of annual reporting period that starts on or after 1 January 2020).The amendments revise definition of a business. A business must have inputs and a substantive process that together significantly contribute to the ability to create outputs. The new guidance provides a framework to evaluate when an input and a substantive process are present, including for early stage companies that have not generated outputs. An organised workforce should be present as a condition for classification as a business if there are no outputs. The definition of the term 'outputs' is narrowed to focus on goods and services provided to customers, generating investment income and other income, and it excludes returns in the form of lower costs and other economic benefits. It is also no longer necessary to assess whether market participants are capable of replacing missing elements or integrating the acquired activities and assets. An entity can apply a 'concentration test'. The assets acquired would not represent a business if substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets).

The Group had to changed its accounting policies as a result of the adoption of amendments to IFRS 3, however this change had no impact on the reporting period.

Amendments to IFRS 7, IFRS 9 and IAS 39 regarding interest rate benchmark reform» and amendments to IAS 1 and IAS 8 regarding definition of material did not have a material impact on this unaudited condensed consolidated interim financial statements.

Significant accounting judgements and estimates

The preparation of the unaudited condensed interim consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates.

In preparing these unaudited condensed interim consolidated financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were consistent with those that applied to the consolidated financial statements for the year ended 31 December 2019 with certain updates described below.

Significant judgement

Acquisition of LLC Arkona Gas-Energy

The Group gained control over LLC Arkona Gas-Energy ("Arkona") on 24 March 2020. The transaction is treated as an asset acquisition as there were no employees and processes acquired, which could be used to produce outputs. The same treatment is achieved by applying the concentration test under amended IFRS 3 Business Combinations. The test revealed that the fair value acquired, being the Svystunivsko-Chervonolutske licence ("SC Licence"), comprises the vast amount (more than 90%) of the consideration. The SC Licence is classified as the exploration and evaluation intangible asset at the acquisition date. Management believes there are no impairment indicators which exist at the reporting date due to the following:

However, NJSC Ukrnafta, as claimant, has issued legal proceedings against Arkona, as defendant, in which NJSC Ukrnafta has made claims about the procedure involved in the grant of the SC Licence to Arkona in May 2017 (see announcements dated 3 July and 31 July 2020). NJSC Ukrnafta was the holder of a previous licence over this area which expired prior to the grant of the SC Licence. In early July 2020, the First Instance Court in Ukraine announced a ruling in favour of NJSC Ukrnafta, which found that the grant of the SC Licence was irregular, which would mean the SC Licence is invalid. Arkona disputes these claims and is defending such legal proceedings, and consequently has filed an appeal in the Appellate Administrative Court in Kyiv. The Group considers Arkona has strong grounds for a successful appeal since the subject matter of these legal proceedings, including the validity of the SC Licence, has already been ruled upon by the Supreme Court of Ukraine in similar proceedings in October 2019 involving, inter alia, NJSC Ukrnafta and Arkona, and in which the SC Licence was held to be valid. Pending the outcome of the appeal process, the SC Licence remains valid. The current legal proceedings are not an indicator of impairment of the SC Licence as the risk is assessed to be remote as at 30 June 2020.

Under the terms of the sale and purchase agreement (the "SPA") for Arkona, half of the consideration payable (split into two equal tranches) was deferred and only payable on satisfaction of certain conditions including the favourable resolution of these legal proceedings, as well as certain other conditions, with the further proviso that if the conditions for payment of these deferred tranches are not satisfied, then neither of these tranches shall become payable. In addition, the SPA contains customary warranties and indemnities allowing the Group to seek recovery of consideration paid in the event of a breach of such warranties and indemnities.

The following items comprise Arkona's assets and liabilities at their fair value at the date of acquisition:

Under the SPA, the total consideration payable is $8,630,000, with payment divided into three tranches. The first tranche of $4,153,000 was paid on 24 March 2020 upon completion of the acquisition of 100% of the issued share capital of Arkona.

The second and third tranches of $2,157,500 respectively are contingent on satisfaction of the certain conditions, including the favourable resolution of the abovementioned legal proceedings brought by NJSC Ukrnafta against Arkona relating to the SC Licence (the "Licence Case"), the absence of any contractual, warranty or indemnity claims, and the delivery of certain documentation by the sellers of Arkona, with proviso that if such conditions are not satisfied, then neither the second tranche nor the third tranche shall become payable.

The second tranche equals the fair value at the date of acquisition and the estimated date of the relevant Court's decision in the Licence Case is assumed to be before 31 December 2020. 

The third tranche is payable in twelve months from the date of payment of the second tranche. At the date of acquisition, the fair value of the third tranche amounts to the discounted value at the effective interest rate, being the Company's effective borrowing rate of 9%. The Group recognised $306,000 of discounting effect calculated against the value of the acquired assets.

The total consideration comprising the three tranches estimated at the date of acquisition amounts to $8,163,000. The outstanding balance as at 30 June 2020, consists of the non-current portion of the liability of $1,852,000 (see Note 13) and the current portion of $2,158,000 reflected in trade and other payables. Provided the date of payment of the second tranche occurs 6 months later than the abovementioned date (31 December 2020), the additional discounting effect will amount to $301,000.

The second and third tranches are contingent on the outcome of the Licence Case and thus constitute a contingent consideration. Management made an accounting policy choice to use the cost accumulation approach to account for the contingent consideration based on the estimated payment amount at the acquisition date. Subsequent to the acquisition date, the liability is not remeasured until the change becomes at least highly probable. Any further remeasurement of the liability would be recognised in the Income Statement to the extent of unwinding of the discount and would adjust the carrying value of the acquired asset or the remeasurement of expected payment amount. The payment would not be probable if the Licence Case is expected to be lost, in which case the full amount of the SC Licence is likely to be impaired.

At the acquisition date and as at 30 June 2020, Management assumes that all three tranches will be payable as there are sufficient legal grounds for challenging and successfully appealing the First Instance Court Decision in the Licence Case (see Note 16).

Estimates

Recoverability of Development and Production Assets in Ukraine

According to the Group's accounting policies, costs capitalised as assets are assessed for impairment at each balance sheet date if impairment indicators exist. In assessing whether an impairment loss has occurred, the carrying value of the asset or cash-generating unit ("CGU") is compared to its recoverable amount. The recoverable amount is the greater of fair value less costs to dispose and value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount and the respective impairment loss is recognised as an expense immediately. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised. If that is the case, the carrying amount of the asset is increased to its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversals are recognised as income immediately.

MEX-GOL, SV and VAS gas and condensate fields

The impairment assessment carried out at 30 June 2020 has not resulted in an impairment loss. Further details of this assessment, including the sensitivity to the above assumptions, are set out in Note 7.

Depreciation of Development and Production Assets

Development and production assets held in property, plant and equipment are depreciated on a unit of production basis at a rate calculated by reference to proven and probable reserves at the end of the period plus the production in the period, and incorporating the estimated future cost of developing and extracting those reserves. Future development costs are estimated using assumptions about the number of wells required to produce those reserves, the cost of the wells, future production facilities and operating costs, together with assumptions on oil and gas realisations, and are revised annually. The reserves estimates used are determined using estimates of gas in place, recovery factors, future hydrocarbon prices and also take into consideration the Group's latest development plan for the associated development and production asset. Additionally, the latest development plan and therefore the inputs used to determine the depreciation charge, assume that the current licences for the MEX-GOL and SV fields, which are due to expire in July 2024, can be extended until the end of the economic life of the fields, which is assessed to be 2038 and 2042 respectively, based on the assessment contained in the DeGolyer & MacNaughton reserves report for these fields.

Provision for Decommissioning

The Group has decommissioning obligations in respect of its Ukrainian assets. The full extent to which the provision is required depends on the legal requirements at the time of decommissioning, the costs and timing of any decommissioning works and the discount rate applied to such costs.

A detailed assessment of gross decommissioning cost was undertaken on a well-by-well basis using local data on day rates and equipment costs. The discount rate applied on the decommissioning cost provision at 30 June 2020 was 4.67% (31 December 2019: 3.68%). The discount rate is calculated in real terms based on the yield to maturity of Ukrainian Government bonds denominated in the currency in which the liability is expected to be settled and with the settlement date that approximates the timing of settlement of decommissioning obligations.

The change in estimate applied to calculate the provision as at 30 June 2020 resulted from the revision of the estimated costs of decommissioning (increase of $75,000 in provision) and the increase in the discount rate applied (decrease of $978,000 in provision). The increase in discount rate at 30 June 2020 resulted from the increase in Ukrainian Eurobonds yield and the respective increase of country risk premium. The costs are expected to be incurred by 2038 on the MEX-GOL field, by 2042 on the SV field, and by 2028 on the VAS field, which is the end of the estimated economic life of the respective fields. If the costs on the MEX-GOL and SV fields were to be incurred at the current expiry of the production licences in 2024, the provision for decommissioning at 30 June 2020 would be $10,128,000 (31 December 2019: $11,564,000).

Recognition of Deferred Tax Asset

The recognition of deferred tax assets is based upon whether it is more likely than not that sufficient and suitable taxable profits will be available in the future against which the reversal of temporary differences can be deducted. This requires judgement for forecasting future profits. Further details of the deferred tax assets recognised can be found in Note 7.

3. Segmental Information

In line with the Group's internal reporting framework and management structure, the key strategic and operating decisions are made by the Board of Directors, who review internal monthly management reports, budgets and forecast information as part of this process. Accordingly, the Board of Directors is deemed to be the Chief Operating Decision Maker within the Group.

The Group's only class of business activity is oil and gas exploration, development and production. The Group's operations are located in Ukraine, with its head office in the United Kingdom. These geographical regions are the basis on which the Group reports its segment information. The segment results as presented represent operating profit before depreciation and amortisation.

6 months ended 30 June 2020 (unaudited)

6 months ended 30 June 2019 (unaudited)

*Comprises additions to property, plant and equipment and intangible assets (Notes 7 and 8).

There are no inter-segment sales within the Group and all products are sold in the geographical region in which they are produced. The Group is not significantly impacted by seasonality.

4. Cost of Sales

5. Other operating income/(expenses), (net)

6. Other income/(expenses), (net)

Charitable donations for the 6 month period ended 30 June 2020 comprise the supply of medical equipment and COVID-19 tests to Ukrainian authorities and charitable foundations. Charitable donations are disclosed in line with the accounting policy of the Group as other expenses.

7. Taxation

The income tax charge of $1,366,000 for the six month period ended 30 June 2020 relates to a сurrent tax charge of $1,356,000 and a deferred tax charge of $10,000 (1H 2019: current tax charge of $1,684,000 and deferred tax charge of $1,684,000).

The movement in the period was as follows:

Taxes on income in the interim periods are accrued using the tax rate that would be applicable to the expected total annual profit or loss.

The deferred tax asset relating to the Group's provision for decommissioning at 30 June 2020 of $190,000 (31 December 2019: $326,000) was recognised on the tax effect of the temporary differences of the Group's provision for decommissioning at the MEX-GOL and SV fields, and its tax base. The deferred tax liability relating to the Group's development and production assets at the MEX-GOL and SV fields at 30 June 2020 of $2,386,000 (31 December 2019: $2,467,000) was recognised on the tax effect of the temporary differences between the carrying value of the Group's development and production asset at the MEX-GOL and SV fields, and its tax base.

The deferred tax asset relating to the Group's provision for decommissioning at 30 June 2020 of $280,000 (31 December 2019: $329,000) was recognised on the tax effect of the temporary differences on the Group's provision on decommissioning at the VAS field, and its tax base. The deferred tax liability relating to the Group's development and production assets at the VAS field at 30 June 2020 of $255,000 (31 December 2019: $476,000) was recognised on the tax effect of the temporary differences between the carrying value of the Group's development and production asset at the VAS field, and its tax base.

UK Corporation tax change

In the Spring Budget 2020, the UK Government announced that from 1 April 2020 the corporation tax rate would remain at 19% (rather than reducing to 17% as previously enacted) and the effect of these change is included in these unaudited condensed interim consolidated financial statements.

Double tax treaty

On 30 October 2019, the Parliament of Ukraine ratified a new Protocol amending the Double Tax Treaties between Ukraine and the United Kingdom. This Protocol increased withholding tax rates from 0% to 5% with effect from 1 January 2020. The Group accounts for and pays withholding tax on current amounts of interests at the moment the interest is paid.

8. Earnings per Share

The calculation of basic and diluted earnings per ordinary share has been based on the profit for the six month period ended 30 June 2020 and 30 June 2019 and 320,637,836 ordinary shares, being the average number of shares in issue for the period. There are no dilutive instruments.

9. Property, Plant and Equipment

In accordance with the Group's accounting policies, oil and gas development and production assets are tested for impairment at each balance sheet date. The Group determines the recoverable amount of its oil and gas development and production assets based on a Fair Value Less Costs of Disposal ("FVLCD") approach using a discounted cash flow methodology, where the cash flows are derived based on estimates that a typical market participant would use in valuing such assets.

The impairment assessment carried out at 30 June 2020 has not resulted in an impairment loss.

The key assumptions on which the Group has based its determination of FVLCD for its oil and gas development and production assets and to which these CGU's recoverable amounts are most sensitive are described below:

The Group's discounted cash flow model for the VAS field in US Dollars, flexed for sensitivities, produced the following results:

*Net book value of the VAS asset is derived from property, plant and equipment, mineral reserve rights and other intangible assets (Note 8).

The Group's discounted cash flow model for the MEX-GOL and SV fields in Ukrainian Hryvnia is not sensitive.

10. Intangible Assets

Intangible assets consist mainly of the hydrocarbon production licence relating to the VAS gas and condensate field which is held by one of the Group's subsidiaries LLC Prom-Enerho Produkt and a new hydrocarbon production licence relating to the Svystunivsko-Chervonolutske ("SC") gas and condensate field which is held by LLC Arkona Gas-Energy. The Group amortises the hydrocarbon production licence relating to the VAS gas and condensate field using the straight-line method over the term of the economic life of the VAS field until 2028. The hydrocarbon production licence relating to the SC gas and condensate field is not amortised due to being in an exploration and evaluation stage.

In accordance with the Group's accounting policies, intangible assets are tested for impairment at each balance sheet date as part of the impairment testing of the Group's oil and gas development and production assets. Pursuant to the results of the impairment tests performed, there is no impairment of the Group's intangible assets as at 30 June 2020 (Note 9).

11. Trade and Other Receivables

Due to the short-term nature of the current trade and other financial receivables, their carrying amount is assumed to be the same as their fair value. All trade and other financial receivables, except those provided for, are considered to be of high credit quality.

The majority of the trade receivables are from a related party, LLC Smart Energy, that purchases all of the Group's gas production. The applicable payment terms are payment for one third of the estimated monthly volume of gas by the 20th of the month of delivery, and payment of the remaining balance by the 10th of the month following the month of delivery. The trade receivables were paid in full after the end of the period.

Prepayments and accrued income mainly consist of prepayment of $4,249,000 relating to the development of the SV field (31 December 2019: $3,987,000 relating to the development of the SV field and $1,094,000 relating to development of the VAS field).

The deposit of $500,000 paid under the Memorandum of Understanding dated 21 November 2019 for the acquisition of the entire share capital of PJSC Science and Production Concern Ukrnaftinvest remains a receivable as at the date of this announcement, as do the funds of UAH47.3 million (approximately $1.8 million) advanced to PJSC Science and Production Concern Ukrnaftinvest by the Group.

12. Provision for Decommissioning

The provision for decommissioning is based on the net present value of the Group's estimated liability for the removal of the Ukraine production facilities and well site restoration at the end of production life.

The non-current provision of $5,849,000 (31 December 2019: $7,447,000) represents a provision for the decommissioning of the Group's MEX-GOL, SV and VAS production facilities, including site restoration. None of the provision was utilised during the reporting period.

As described in Note 2, the change in estimates applied to calculate the provision as at 30 June 2020 resulted from the revision of the estimated costs of decommissioning (increase of $75,000 in provision) and the increase in the discount rate applied (decrease of $978,000 in provision).

13. Other non-current liabilities

Other non-current liabilities as at 30 June 2020, consist of the long-term portion of the deferred consideration for the acquisition of LLC Arkona Gas-Energy of $1,851,861 (Note 2) and the long-term obligations for the State special purpose fund of $142,000 measured at amortised cost using an interest rate of 20%.

14. Financial Instruments

The Group's financial instruments comprise cash and cash equivalents and various items such as debtors and creditors that arise directly from its operations. The Group has bank accounts denominated in British Pounds, US Dollars, Euros, and Ukrainian Hryvnia. The Group does not have any borrowings. The main future risks arising from the Group's financial instruments are currency risk, interest rate risk, liquidity risk and credit risk.

The Group's financial assets and financial liabilities, measured at amortised cost, which approximates their fair value, comprise the following:

All assets and liabilities of the Group where fair value is disclosed are of level 2 value hierarchy and valued using current cost accounting techniques.

At 30 June 2020, the Group held cash and cash equivalents in the following currencies:

All of the cash and cash equivalents held in Ukrainian Hryvnia are held in banks within Ukraine, and all other cash and cash equivalents are held in banks within Europe, Ukraine and the United Kingdom.

15. Reconciliation of Operating Profit to Operating Cash Flow

16. Contingencies and Commitments

Amounts related to works contracted but not yet undertaken in relation to the Group's 2019 investment programme at the MEX-GOL, SV and VAS gas and condensate fields in Ukraine, but not recorded in the unaudited condensed interim consolidated financial statements at 30 June 2020, were $5,207,000 (31 December 2019: $2,306,000).

During 2010 - 2020, the Group has been in dispute with the Ukrainian tax authorities in respect of VAT receivables on imported leased equipment, with a disputed liability of up to UAH8,487,000 ($324,000) inclusive of penalties and other associated costs. There is a level of ambiguity in the interpretation of the relevant tax legislation, and the position adopted by the Group has been challenged by the Ukrainian tax authorities, which has led to legal proceedings to resolve the issue. The Group had been successful in three court cases in respect of this dispute in сourts of different levels. On 20 September 2016, a hearing was held in the Supreme Court of Ukraine of an appeal of the Ukrainian tax authorities against the decision of the Higher Administrative Court of Ukraine, in which the appeal of the Ukrainian tax authorities was upheld. As a result of this appeal decision, all decisions of the lower courts were cancelled, and the case was remitted to the first instance court for a new trial. On 1 December 2016 and 7 March 2017, the Group received positive decisions in the first and second instance courts, but further legal proceedings may arise. Since the Group had been successful in previous court cases in respect of this dispute in сourts of different levels, the date of the next legal proceedings has not been set and as the Group believes that adequate defences exist to the claim, no liability has been recognised in these unaudited condensed interim consolidated financial statements for the six months ended 30 June 2020 (31 December 2019: nil).

On 12 March 2019, the Group announced the publication of an Order for suspension (the "Order") by the State Service of Geology and Subsoil of Ukraine affecting the production licence for its VAS gas and condensate field. The Group is confident there are no violations of the terms of the licence or in relation to the operational activities of the Group that would justify the Order or the suspension of the licence. The Group has issued legal proceedings in the Ukrainian Courts to challenge the validity of the Order, and in these proceedings, on 18 March 2019 the Court made a ruling on interim measures to suspend the Order pending hearings of the substantive issues of the case to be held subsequently. The effect of this ruling is that the suspension of operational activities at the VAS licence is deferred until the result of the legal proceedings is determined. These legal proceedings are continuing through the Ukrainian Court system and the ultimate outcome is not yet known. However, the Group considers that the Order is groundless and that the outcome of the legal proceedings challenging the Order will ultimately be in favour of the Group, and consequently, the Group does not expect any negative effect on its operations in respect of this matter.

There are current legal proceedings between NJSC Ukrnafta as claimant and Arkona as defendant, relating to claims made by NJSC Ukrnafta about the procedure involved in the grant of the SC Licence to Arkona in May 2017. NJSC Ukrnafta was the holder of a previous licence over this area which expired prior to the grant of the SC Licence. Arkona is defending the claims in such legal proceedings and asserts that the claims are unwarranted and without merit. In early July 2020, the First Instance Court in Ukraine made a ruling in favour of NJSC Ukrnafta that the grant of the SC Licence was irregular, which would mean the SC Licence is invalid. The Company and Arkona have carefully reviewed this decision and written judgement with their legal advisers in Ukraine, and consider there are strong grounds for a successful appeal. This view is supported by the fact that the subject matter of these legal proceedings, including the validity of the SC Licence, has already been ruled upon by the Supreme Court of Ukraine in similar proceedings in October 2019 involving, inter alia, NJSC Ukrnafta and Arkona, and in which the SC Licence was held to be valid. Accordingly, an appeal has been filed by Arkona in the Appellate Administrative Court in Kyiv. Pending the outcome of the appeal process, the SC Licence remains valid. Under the terms of the acquisition agreement for Arkona, half of the consideration payable (split into two equal tranches) was deferred and only payable on satisfaction of certain conditions including the favourable resolution of these legal proceedings, as well as certain other conditions, with the further provision that if the conditions for payment of these deferred tranches are not satisfied, then neither of these tranches shall become payable and the full amount of the SC Licence is likely to be impaired.

17. Related Party Disclosures

Key management personnel of the Group are considered to comprise only the Directors. Remuneration of the Directors for the six month period ended 30 June 2020 was $532,000 (six month period ended 30 June 2019: $369,000, and year ended 31 December 2019: $977,000).

During the period, Group companies entered into the following transactions with related parties which are not members of the Group:

All related party transactions were with subsidiaries of the ultimate Parent Company, and primarily relate to the sale of gas to LLC Smart Energy, the rental of office facilities and vehicles and the sale of equipment. The amounts outstanding were unsecured and have been or will be settled in cash.

As of 30 June 2020, the Company's immediate parent company was Pelidona Services Limited, which is 100% owned by Lovitia Investments Limited, which is 100% owned by Mr Vadym Novynskyi. Accordingly, the Company was ultimately controlled by Mr Vadym Novynskyi.

The Group operates bank accounts in Ukraine with a related party bank, Unex Bank, which is ultimately controlled by Mr Vadym Novynskyi. There were the following transactions and balances with Unex Bank during the period:

At the date of this announcement, none of the Company's controlling parties prepares consolidated financial statements available for public use.

18. Events occurring after the Reporting Period

In early July 2020, the First Instance Court in Ukraine made a ruling in favour of NJSC Ukrnafta that the grant of the SC Licence held by Arkona was irregular, which would mean the SC Licence is invalid. The Company and Arkona have carefully reviewed this decision with their legal advisers in Ukraine, and consider there are strong grounds for a successful appeal. This view is supported by the fact that the subject matter of these legal proceedings, including the validity of the Licence, has already been ruled upon by the Supreme Court of Ukraine in similar proceedings in October 2019 involving, inter alia, NJSC Ukrnafta and Arkona, and in which the SC Licence was held to be valid. Accordingly, an appeal has been filed by Arkona in the Appellate Administrative Court in Kyiv. Pending the outcome of the appeal process, the SC Licence remains valid.

Negotiations are continuing between the Group and the shareholders of PJSC Science and Production Concern Ukrnaftinvest in relation to the acquisition of the entire share capital of PJSC Science and Production Concern Ukrnaftinvest, and the Group believes revised terms will be mutually agreed for the Group to acquire PJSC Science and Production Concern Ukrnaftinvest, albeit there can be no certainty.