JKX.L Regulatory News (JKX)

21 September 2016

JKX Oil & Gas plc ("JKX", the "Company" or the "Group")

Operational Update

· Completion of updated Field Development Plans ('FDPs') for Ukraine and Russia and related independent evaluation of the Company's gas and condensate reserves at its Koshekhablskoye Field in Russia.

· The FDP for Ukraine identifies a technical solution to potentially unlock approximately 600 billion cubic feet of recoverable gas reserves previously considered uneconomic at the Rudenkivske gas field.

· Group production for the year to 31 August up 17.5% compared to January-August 2015, while revenue was 19.5% down primarily due to Hryvnia and Rouble devaluation as well as oil and gas price declines.

· JKX continues its efforts to optimize operating costs, including overhead reductions at the head office and at subsidiary level.

New Field Development Plans

As previously reported, new management undertook a comprehensive review of all fields in the Company's portfolio beginning in February of this year. Field development plans have been rebuilt by reviewing and correlating primary technical data with current production and by applying modern development and completion techniques such as those used in North America. Several technical advisors with a broad range of global and regional expertise were engaged. We have now completed revised FDPs for Ukraine and Russia, and a reserves audit for Russia.

In Ukraine, in addition to identifying several new drilling locations and significant enhanced oil recovery opportunities in existing fields, this work has focused on unlocking the potential of a gas field in our current portfolio previously considered uneconomic.

According to the FDP, the Rudenkivske field is estimated to contain 2.8 trillion cubic feet of gas in place (2C). Utilizing modern development and completion techniques could result in the production of as much as 600 billion cubic feet of gas over the field's lifetime. Analogous fields to Rudenkivske's structure and depositional environment in North America were identified and their experience and empirical data were used in the Company's planning. These North American fields were also previously considered uneconomic, and have recently been successfully developed using advanced well construction and field development design.

The full field development model for the Rudenkivske field includes 135 wells over ten years and results in plateau production of approximately 110 million standard cubic feet per day (18,300 barrels of oil equivalent per day). Total capital investment over the same period is currently estimated at US$660 million.

Despite Rudenkivske's significant potential, the project is technically challenging. This is due to the complex stratigraphic architecture of the sands and inconsistent well drainage volume. Full field development will require the use of modern equipment and services that are not currently available in Ukraine. Further reform of Ukraine's upstream investment environment, in particular royalty tax rates, would significantly reduce the financial risk of full field development. We are working closely with the Government of Ukraine to implement an investment environment supportive of innovation and risk-taking.

Russian Reserves Update

The FDP in Russia covers the Koshekhablskoye gas field operated by Yuzhgazenergy ('YGE'), a 100% subsidiary of JKX. The focus is on the drilling of a new well that will initiate the development of the deeper Callovian reservoir, compared to working over old wells envisioned in previous development plans.

An independent reserves assessment was completed by DeGolyer and MacNaughton in support of the asset monetization process using the new FDP. As a result, compared to the last independent reserves assessment results from 2014, proved reserves have been slightly reduced, due to higher resolution geological modeling showing slightly less drainage area. Probable and possible reserve categories have increased significantly due to the addition of probable reserves attributed to the new Callovian well and net pay maps revealing volumes previously not accounted for by material balance. Contingent resources have reduced slightly due to their conversion to probable reserves. Migrating remaining contingent resources to reserves is dependent on drilling results, which could roughly double the size of our Russian reserves if successful.

Results are summarized in the table below and the full report is available on the JKX website:

Production

For the period from January to August 2016, the Company produced 10,271 barrels of oil equivalent per day, an increase of 17.5% on the same period in 2015. Gas production in Russia was higher by 37.9% due to well-27 coming on line in late 2015 and ongoing successful acid stimulations. Despite the cancellation of all development expenditure since early 2015, total production in Ukraine was relatively stable period-on-period with oil production being higher by 16.2% compared to the same period in 2015. These results were achieved due to the implementation of an enhancement program targeting the technical potential of existing well stock.

Technical Update

Production enhancements in Ukraine have continued through the period as follows:

o• M171 production was re-started by working over the well to deepen the tubing and introduce gas lift above the top perforations. This increased production by 96 bopd and 0.3 MMscf/d.

•o IG137-Bis was acidized which increased the oil production by 34 bopd.

•o IG106 was acidized, followed by the installation of a velocity string, resulting in an increase in gas production of 1 MMscf/d and 7 bopd after clean-up.

•o Pressure increases, as a result of the re-start of water injection into IG126 in April, lead to the re-opening of IG138 delivering an initial oil rate of 268 bopd.

•o Perforations were added in IG123 prior to investigating the upside potential of installing a velocity string in this well.

In Russia during a routine wireline drifting operation in well-20 the wire parted leaving a fish in the well. Stable production has been maintained at 13 MMscf/d however future acid stimulations on this well will not be possible until the well is worked over. Efforts are being made to offset the reduction in gas production from well-20 with more regular acid stimulations on well-27 and an acid stimulation has been carried out on well-25 together with larger chokes on both of these wells.

Revenue

Preliminary unaudited results show YTD revenues at the end of August down 19.5% on the same period for the previous year. Increased production was offset by weakening of local currencies and the decline in oil and gas prices, in line with international and local market trends.

Overheads and Operating Costs

Following a detailed review of London head office costs the Board has made reductions to staff numbers and has moved the remaining staff on to one floor of the building where JKX previously occupied four floors. The Company is searching for new tenants for the vacated floors in order to mitigate the rent being paid on the long-term lease agreements that the Company is tied into.

In Ukraine, headcount reductions totaling 125 have been made, representing a 29% lowering of staffing levels which will lower costs in the final quarter of 2016. In Russia, a staff reduction program is under way that will result in a 20% decrease in headcount by early 2017. 

Ukrainian Dividends

Following the lifting of restrictions on dividends payments for Ukrainian companies for 2014 and 2015, the Company has restarted the repatriation of dividends from PPC for these periods, which has improved the Group's liquidity. 

International Arbitration

As reported in previous announcements, in 2014 the Company commenced arbitration proceedings against Ukraine on the basis of overpayment of production taxes ('Rental Fees'). The main arbitration case, which relates to the overpayment of approximately $180 million in Rental Fees plus damages to the business, was heard in London in early July and we expect the tribunal's decision by the end of 2016.

Ukrainian Legal Cases

As previously reported, PPC has several near-term contingent liabilities arising from two separate court proceedings over the amount of rental fees paid in Ukraine for certain periods since 2010, which in total amount to a potential liability of approximately $34 million, including interest and penalties.

For claims relating to 2010, amounting to approximately $10.5 million, PPC lost an appeal to the High Administrative Court of Ukraine and the Supreme Court of Ukraine refused to consider the case. The Company filed a second appeal on 23 August 2016 to the Supreme Court and is awaiting confirmation as to whether or not the Supreme Court will rule in favor of PPC or order the case to be reheard.

As previously reported, PPC is in the process of court hearings in respect of claims relating to 2015 valued at $23 million. The Company has considered such claims to be in violation of the interim award received under the main arbitration case referred to above. The proceedings in all but two of these cases have recently been suspended pending the outcome of the main arbitration case.

Police Investigation in Poltava

As previously disclosed, the Ukrainian police visited the office of PPC and the homes of two of our employees on 14 June. The searches undertaken were the result of an investigation of claims of alleged underpayment of taxes which have been made against PPC by a local prosecutor. Since then we have received a number of information requests from the police, many of which were unrelated to the original warrants. As stated in our earlier release, we cooperated fully with the searches but vigorously contest the validity of the claims. The Company notified both British and US embassies in Kiev and is considering further legal action in this respect.

Convertible debt

As set out in the previous operational update, bonds with a face value of $2.2 million were repurchased by the Company on 7 June 2016 and subsequently cancelled. As a result, liability facing the Company in February 2017 has fallen from $30.1 million to $27.6 million. The Company continues to pursue strategies that will mitigate this liability.

Looking ahead 

The completion of new Field Development Plans since the Company's June operational update, and the technical plan for Rudenkivske, set the stage for refocusing the Company on the production of oil and gas. The Group continues to make progress on litigation and financing challenges, but now does so with a substantial development plan for the future.

ENDS

For further information please contact EM:

Stuart Leasor

leasor@em-comms.com

T: +44 20 3709 5711

M: +44 7703 537721

Jeroen van de Crommenacker

crommenacker@em-comms.com

T: +44 20 3709 5713

M: +44 7887 946719

This announcement may contain statements that are, or may be deemed to be, forward-looking statements. Any such forward-looking statements are based on the Company's current expectations and are, by their nature, subject to a number of risks and uncertainties that could cause the Company's actual results and performance to differ materially from any expected future results or performance expressed or implied by such forward-looking statements. Forward looking statements should, therefore, be construed in light of such risk factors and undue reliance should not be placed on them. Some of the most important risks in this regard are described in the 2014 JKX Annual Report. Forward-looking statements speak only as of the date of this announcement and, save where required by applicable law or regulation, the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Certain information included in this announcement is based on management estimates. Such estimates have been made in good faith and represent the current beliefs of the Company's management. The Company's management believes that such estimates are founded on reasonable grounds. However, by their nature, estimates may not be correct or complete. Accordingly, no representation or warranty (express or implied) is given that such estimates are correct or complete.