LEK.L Regulatory News (LEK)

19 June 2019

LEKOIL Limited

("LEKOIL", "the Company" or "the Group")

Audited Final Results for the Year to 31 December 2018

LEKOIL (AIM: LEK), the Africa focused oil and gas exploration and production company with interests in Nigeria, announces its final audited results for the year to 31 December 2018.

Operational Highlights

Otakikpo

· Production levels averaged approximately gross 5,345 bopd, (2,076 bopd net to LEKOIL)

· Phase Two preparations for development commenced with acquisition of 3D seismic in February, with an updated CPR being finalised ahead of publication

· Subject to agreement on funding with one or more industry partners, plans underway for a three to five well drilling programme, targeting to increase production levels to approximately gross 15,000 to 20,000 bopd (6,000 - 8,000 bopd net to LEKOIL)

OPL 310

· Plans have advanced for the OGO appraisal drilling programme with well locations selected. Funding discussions are currently underway with certain industry partners.

· Despite this, the Federal High Court ruled that LEKOIL's acquisition of Afren Oil and Gas (Nigeria) Limited ("AIOGNL") (and its 22.86% interest in OPL 310) inchoate and invalid given the failure to obtain Ministerial consent.

· In response LEKOIL has withdrawn its lawsuit and continues engagement with its partner, Optimum Petroleum Development Limited ("Optimum"), and the regulator, to conclude agreements and resolve all outstanding issues

· The OPL 310 licence has lapsed, however Optimum in its capacity as Operator has begun the extension process and whereas there is no guarantee that the licence will be renewed, LEKOIL is hopeful for a favourable response from the regulators in this regard

OPL325

· Technical Evaluation completed in January 2018 by consultants Lumina identified and reported on 11 prospects and leads which were estimated to contain potential gross aggregate Oil-in-Place volumes of over 5,700 mmbbls (un-risked, Best Estimate case)

· After finalising terms for a Production Sharing Contract on the block, LEKOIL intends to farm-down a portion of its 62 per cent. working interest following a detailed prospect/lead risking study

Financial Highlights

· Equity crude sales proceeds of US$48.7 million

· Total entitlement crude consisted of 1,346,525 total barrels net to LEKOIL

· The Group lifted 1,305,888 barrels of its entitlement, realising an average sales price of approximately US$66 per barrel

· Loss for the year of US$7.8 million (2017: profit of US$6.5 million)

· Cash and bank balances of US$10.4 million as at 31 December 2018 (31 December 2017: US$6.9 million, 30 June 2018: US$9.8 million). Cash at 31 May 2019: US$13.1 million

· As at 31 December 2018, total outstanding debt financing, net of cash, was US$10.1 million (2017: US$22.6 million)

· Target of 25% reduction of general and administrative costs annually, including Board remuneration.

LEKOIL's annual report and accounts for the year ended 31 December 2018, together with the Notice of Annual General Meeting will be posted to shareholders shortly and a further announcement will be made as and when this has occurred. The Company also intends to publish an operational update and financial guidance for FY2019 in short order.

CEO, Olalekan Akinyanmi, said: "The priority for 2019 is to grow production volumes at Otakikpo through Phase Two development (subject to funding) to reach gross volumes of 15,000 to 20,000 bopd. The first step has already occurred, with 3D seismic data acquisition and interpretation now completed.

"We also continue to advance toward the start of the appraisal drilling programme on Ogo in OPL 310. We will work with our joint venture partner, Optimum to negotiate agreements that will allow us to make progress on the block, after securing all relevant regulatory extensions and approvals.

"In light of delays to key initiatives on assets, the Company is taking action on general and administrative costs with the aim of a reduction of 25% annually including a 25% cut in Board remuneration.

"The next year should therefore provide key catalysts for value appreciation for shareholders as we move forward in building a leading Africa-focused exploration and production business."

For further information, please visit www.lekoil.com or contact:

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR").

Chairman's and CEO's Statement

2018 marked LEKOIL's first full year as a producing company and represents a major milestone as we continue to implement our strategy to build a diversified, self-funded Africa-focused exploration and production business. We seek to achieve this through growing production at the Otakikpo marginal field, our existing producing asset, situated in oil mining lease (OML) 11 in the south eastern coastal swamp of the Niger Delta and through unlocking the value of our interest in OPL 310, the offshore block adjacent to Lagos which contains the world class Ogo discovery. In addition to the Otakikpo marginal field and OPL 310, the Group also has an interest in OPL 325 which in our view has significant exploration upside potential.

Otakikpo

In 2018, production levels at Otakikpo averaged approximately gross 5,345 bopd, (2,076 bopd net to LEKOIL). Phase Two preparations for development commenced with the acquisition of 3D seismic in February. Plans are underway for a three to five well drilling programme, which is targeting to increase production levels to around gross 15,000 to 20,000 bopd, and further investment in infrastructure facilities for crude oil evacuation.

In 2018, LEKOIL had equity crude sales proceeds of US$48.7 million from 739,106 barrels, exclusive of cost recovery barrels and cash call barrels (US$34 million from 507,176 barrels and US$6.6 million from 100,243 barrels, respectively). The Group's total entitlement crude consisted of 1,346,525 total barrels net to LEKOIL which includes both cost recovery barrels and barrels produced post the end of cost recovery. Of these, the Group lifted 1,305,888 barrels. LEKOIL realised an average sales price of approximately US$66 per barrel.

In November, the 3D seismic acquisition and processing operations undertaken by Sinopec Changjiang Engineering Services Limited ("Sinopec") at Otakikpo was completed. The data interpretation stage has also now been completed and the results will form the basis of an updated Competent Person's Report (CPR), to be finalised and then published.

The completion of the seismic survey and CPR is assisting the joint venture, with LEKOIL as Technical Partner and Green Energy International Limited as Operator, in optimising the planned Phase Two development.

Appraisal and exploration asset - OPL 310

On March 28, 2019, the Federal High Court, sitting in Ikoyi, Lagos State, Nigeria ruled that LEKOIL's purported acquisition of shares in Afren Investment Oil and Gas (Nigeria) Limited ("AIOGNL") and by that, the 22.86 per cent interest in OPL 310, is inchoate and invalid given the failure to obtain Ministerial Consent in respect of the transfer of the said shares. The Judge also ruled that pursuant to Articles 13.1.4 and 13.1.5 of the Joint Operating Agreement (JOA) between Optimum and AIOGNL, Optimum's consent is required to effect a transfer of AIOGNL's interest in OPL 310, or any part thereof, to LEKOIL.

The implication of the Judge's pronouncement that our subsidiary LEKOIL 310 Limited has not acquired the shares of AIOGNL is that pending receipt of Ministerial consent to the acquisition, AIOGNL retains its 22.86 per cent participating interest in OPL 310. On the basis that the Group still requires Ministerial consent in order to control the entity and associated mineral rights, the entity is not consolidated into the Group accounts of LEKOIL.

LEKOIL 310 Limited had initially filed an appeal against the decision of the Federal High Court, but decided to withdraw legal action following receipt of a letter dated 8 May 2019 from the Ministry of Petroleum Resources relating to an application for an extension (re-award) to the OPL 310 licence (the "Letter"). The Letter states that the Government has noted that the OPL 310 licence expired on 10 February 2019 and ownership of OPL 310 has accordingly reverted to the Government in line with Petroleum Act. The Letter further sets out that the re-award will not be considered by the Honourable Minister of Petroleum Resources ("HMPR") until such point as the suit filed by LEKOIL against the HMPR is withdrawn by LEKOIL and other parties to the action. Failure by LEKOIL and others to withdraw the suit within thirty (30) days of the Letter forecloses any consideration of re-award to Optimum Petroleum Development Limited, LEKOIL and their affiliates or subsidiaries.

LEKOIL 310 Limited decided to withdraw legal action on 16 May 2019 but will continue engagements with the regulator and the Operator of the Asset to conclude agreements and resolve all outstanding issues.

Although the ten-year tenure granted to OPL 310 licence in 2009 has lapsed, Optimum in its capacity as Operator has begun the extension process and whereas there is no guarantee that the license will be renewed, LEKOIL is hopeful for a favourable response from the regulators in this regard.

Exploration asset - OPL 325

OPL 325 is located in the offshore Dahomey Basin, some 50km to the south of OPL 310. In January 2018, we announced the completion of a Technical Evaluation Report for OPL 325 which is available on our web site. The Report was compiled by independent oil and gas industry specialists Lumina Geophysical, which carried out a geophysical evaluation of approximately 800 sq km of 3D seismic data provided by LEKOIL.

Lumina identified and reported on a total of eleven prospects and leads on the block, estimated to contain potential gross aggregate Oil-in-Place volumes of over 5,700 mmbbls (un-risked, Best Estimate case). Lumina focused primarily on the Paleocene section of the block, generating new structural and stratigraphic maps using 3D pre-stack time migrated seismic data. These maps were used in the volumetric approach to come to an estimation of potential resources in OPL 325.

The independent report underlined our belief in the prospectivity of this asset that was part of LEKOIL's original Dahomey Basin study. We believe that the deep water turbidite fan play is particularly exciting for OPL 325 in which we have a significant interest via our subsidiary, Ashbert Oil and Gas Limited. After finalising terms for the Production Sharing Contract (the "PSC") on the block, we intend to farm-down a portion of our 62 per cent. working interest following a detailed prospect/lead risking study.

LEKOIL holds its 62 per cent equity interest in OPL325, through Ashbert Oil & Gas Limited ("Ashbert"). LEKOIL will seek the consent of HMPR for the OPL 325 acquisition when Ashbert either transfers interest in the PSC directly to LEKOIL or farms down to a third party. 

Financial

In the year ended 31 December 2018, LEKOIL recorded a loss of US$7.8 million (2017: profit of US$6.5 million) and ended the period with cash and bank balances of US$10.4 million (31 December 2017: US$6.9 million, 30 June 2018: US$9.8 million). Total outstanding debt financing net of cash was US$10.1 million (2017: US$22.6 million)

In June 2018 LEKOIL and its bankers re-denominated approximately N3.1 billion of debt facilities into one new US$8.55 million facility which reduced the high financing costs of local currency debt. The documentation to complete this was finalised in March 2019.

There was also a concerted effort during the year to pay off vendor financing from prior periods, as can be seen by the improved gearing position and reduction in liabilities.

The Board and Management regularly monitors the Company's cashflow projections. The cash balance as at the end of May 2019 was US$13.1 million. In light of delays with progressing key assets, we have decided to take action in order to reduce our overheads. Management has created a project team to review costs with the aim to decrease general and administrative costs by 25 per cent. This includes a 25 per cent reduction in Board remuneration. 

LEKOIL Exploration and Production (PTY) Limited

In July 2017, LEKOIL Exploration and Production (Pty) Limited, a subsidiary of LEKOIL, relinquished Namibian block 2514A and renewed block 2514B until July 2019. It has been noted that there is low prospectivity on Block 2514B. The Directors have decided to relinquish the Company's interest in block 2514B and commence a voluntary winding up of LEKOIL Exploration and Production (Pty) Limited.

Board

In May 2019 we announced Lisa Mitchell's departure as the Company's Chief Financial Officer. Greg Eckersley, currently Non-Executive Director, will assume the role of interim Chief Financial Officer, to oversee, with the support of the Company's financial controller, the Company's finance function, following publication of the 2018 annual report and accounts. Greg is currently Chairman of LEKOIL's Remuneration Committee and is a member of the Company's Audit Committee.

The Company has commenced the search to identify candidates for the role of a permanent Chief Financial Officer. In view of the needs of the business, the Company is focusing the search on a candidate that will be based primarily in Nigeria.

Outlook

Creating long-term value for our shareholders is our focus and thus the priority for 2019 is to advance toward the start of the appraisal drilling programme on Ogo in OPL 310. We will continue to work with our joint venture partner, Optimum and negotiate agreements that will allow us to make progress on the block, after securing all relevant regulatory extensions and approvals.

At Otakikpo we seek to grow production volumes with Phase Two development and expect to reach gross volumes of 15,000 to 20,000 bopd. The first step has already occurred, with 3D seismic data acquisition and interpretation now completed.

We continue to look at new, promising opportunities in-country that are consistent with LEKOIL's original portfolio strategy of securing assets with robust production and exploration upside. The Group will continue to focus on new ventures-driven growth for producing or near producing assets.

The next year should therefore provide key catalysts for value appreciation for shareholders as we move forward in building a leading Africa-focused exploration and production business.

On behalf of the Board, we would again like to thank all our people for their continued hard work and support as we build an exciting future for the Company. We would also like to thank LEKOIL's wider stakeholders - our local communities, our partners, our regulators in Nigeria, our lenders, and of course our shareholders.

LEKOIL - Operational Review

Otakikpo Marginal Field - Producing Asset

Situated in a swamp area in OML 11, Otakikpo commenced commercial production in February 2017.

Background

LEKOIL farmed-in to Otakikpo in May 2014. The consideration paid to Green Energy International Limited ("GEIL") for the acquisition of the interest comprised a signature bonus of US$7 million (an implied US$0.5/bbl acquisition price) and, contingent on production and Ministerial Consent, a production bonus of US$4 million (fully paid in December 2017). In addition, LEKOIL was to, and did, fund costs to first oil and was entitled to recover this expenditure preferentially from 88 per cent. of production cash flow from Otakikpo. The license terms also include a commitment to develop a small-scale gas utilisation project. LEKOIL has exited the cost recovery phase and has now reverted to its 40 per cent participating interest share of production from Otakikpo.

Commercial production commenced in February 2017 and reached approximately gross 7,600 bopd (net with cost recovery barrels 6,688) in December of that year. In 2018, production averaged gross 5,345 bopd (2,076 bopd net to LEKOIL) for the year and total production was approximately gross 1,951,249 barrels of oil (total to LEKOIL including cost recovery crude 1,346,525 barrels). The initial target of 10,000 bopd was not achieved due to compartmentalisation issues on Well -003 and another area as revealed from the newly acquired 3D seismic. 

Average realised prices were US$65.64/bbl during the year. This combined with production volumes, enabled LEKOIL to recover its initial costs of development under the terms of the carry agreement with GEIL. The joint venture is now planning for Phase Two development which targets 3 to 5 wells and gross production of 15,000 to 20,000 bopd (6,000 to 8,000 bopd net to LEKOIL).

In anticipation of increased production levels, we plan to upgrade our existing production facilities and construct additional onshore storage. Location preparation is underway at selected well locations. 

The most recent 3D seismic data was acquired during 2018 with interpretation continuing to the end of the year which will lead to the publication of an updated Competent Person's Report.

Ogo Discovery and OPL 310 - Appraisal Asset and Exploration

LEKOIL originally commissioned a regional basin study and identified the Dahomey Basin block OPL 310 as a key target. The OPL 310 is located in the Upper Cretaceous fairway that runs along the West African Transform Margin. The block extends from the shallow water continental shelf close by the City of Lagos, Nigeria into deeper water. The main prospects within the licence area are in water depths ranging from 100 to 800 metres and are within proximity to the West Africa Gas Pipeline.

*LEKOIL entered into a Share Purchase Agreement to acquire the entire issued share capital of AIOGNL which owned a 22.86 per cent participating interest in OPL 310. However, pursuant to a ruling of the Federal High Court sitting in Lagos on 28 March 2019, the share acquisition transaction is inchoate and invalid given that Ministerial Consent to the transaction has not been obtained. Pending the receipt of the said Ministerial Consent to the transaction, LEKOIL 310 Limited has not acquired the shares of AIOGNL, which remains with Afren Nigeria Holdings Limited. LEKOIL is however still in the process of negotiating definitive agreements with Optimum that would enable parties to continue to work OPL 310 pending receipt of Ministerial Consent.

**Although the OPL 310 licence has expired, Optimum in its capacity as Operator has begun the extension application process and whereas there is no guarantee that the license will be renewed, LEKOIL is hopeful for a favourable response from the regulators in this regard.

Background

In 2013, Mayfair Assets and Trust Limited, a subsidiary of LEKOIL, farmed into Afren Investments Oil and Gas (Nigeria) Limited's (AIOGNL) interest in OPL 310 for a 17.14 per cent participating interest and 30 per cent economic interest, subject to Ministerial Consent from Nigeria's Minister for Petroleum Resources. Ministerial Consent was granted for the acquisition of the 17.14 per cent interest on 9 June 2017.

In 2013, we drilled an appraisal well and side-track with our partners targeting the Eko, Agege and the Syn-rift prospects. This resulted in a significant discovery in the Ogo prospect. Based on data from the wells, revised estimates for the P50 gross recoverable resources attributable to LEKOIL from the Ogo field were identified as being 232 mmboe (P50), from gross recoverable resources of 774 mmboe. This exceeded the expected pre-drill P50 gross recoverable resource estimates of 202 mmboe. Additionally, Syn-rift leads identified within OPL 310 were expected to contain light oil or condensate-rich gas with further shallow water leads also being identified. This year we have taken steps forward in appraisal drilling planning, which will eventually lead to conversion of the block to an Oil Mining License and working to extend/renew the expiry of the license as a result of its expiration in February 2019. 

On 31 July 2015, Afren plc was put into administration and its assets put up for sale. On 1 December 2015, LEKOIL announced an agreement with the administrator of Afren PLC and Afren Nigeria Holding Limited to acquire certain intra-company debt and the shares of AIOGNL, which held a 22.86 per cent participating interest in OPL 310. This interest was also subject to Consent from the Minister for Petroleum Resources. 

An application for Ministerial Consent to the transfer of the 22.86 per cent interest was duly made by Afren Nigeria in January 2016. In March 2016, LEKOIL was notified by the Ministry of Petroleum Resources that the necessary due diligence exercise would be conducted that month. The due diligence exercise did not take place and is yet to be rescheduled by the Department of Petroleum Resources.

In the last year, we were dedicated to advancing plans for the Ogo appraisal drilling programme, readying operations throughout the year. Rig contracting due diligence work commenced, logistical plans were put in place and long lead items such as well heads and OCTG equipment were ordered. 

Despite progressing exploration and appraisal activities on OPL 310, given that LEKOIL had not yet been granted Ministerial Consent for its acquisition of the additional 22.86 per cent interest in OPL 310 over twenty four months after its application for same, as well as the impending expiration of the OPL 310 licence, LEKOIL took the decision at the end of March 2018 to apply to the Federal High Court of Nigeria for a declaration that was expected to expedite the consent process, and preserve the unexpired tenure in the licence which was otherwise due to expire in February 2019.

Following a series of adjournments, a Federal High Court sat in Ikoyi, Lagos State, Nigeria, on 7 February 2019 and heard the matters presented before it and on 28 March 2019, the Court delivered its ruling, stating that the Company's purported acquisition of shares in AIOGNL and by that, the transfer of interest in OPL 310, is inchoate and invalid given the failure to obtain Ministerial Consent in respect of the transfer of the said shares. The Judge also ruled that pursuant to Articles 13.1.4 and 13.1.5 of the Joint Operating Agreement between Optimum and AIOGNL, Optimum's consent is required to effect a transfer of AIOGNL's interest in OPL 310 or any part thereof to Lekoil. LEKOIL is however still in the process of negotiating definitive agreements that would enable Lekoil to continue to work the OPL 310 asset pending receipt of Ministerial Consent. LEKOIL had initially filed an appeal against the decision of the Federal High Court but decided to withdraw legal action following receipt of a letter dated 8 May 2019 from the Ministry of Petroleum Resources relating to an application for an extension (re-award) to the OPL 310 licence (the "Letter"). The Letter states that the Government has noted that the OPL 310 licence expired on 10 February 2019 and ownership of OPL 310 has accordingly reverted to the Government in line with Petroleum Act. The Letter further sets out that the re-award will not be considered by the Honourable Minister of Petroleum Resources ("HMPR") until such point as the suit filed by LEKOIL against the HMPR is withdrawn by LEKOIL and other parties to the action. Failure by LEKOIL and others to withdraw the suit within thirty (30) days of the Letter, which was dated 8 May 2019, forecloses any consideration of re-award to Optimum Petroleum Development Limited, LEKOIL and their affiliates or subsidiaries. LEKOIL will continue its engagements with the regulator and Optimum to conclude agreements and resolve all outstanding issues on the Asset.

The implication of the Judge's pronouncement that LEKOIL 310 Limited has not acquired the shares of AIOGNL is that, pending the receipt of Ministerial consent to the acquisition, the 22.86 per cent participating interest in OPL 310 is still held by AIOGNL.

With regards to the license extension, Optimum, in its capacity as operator and LEKOIL, had previously requested that the Federal Ministry of Petroleum Resources grant an extension of the OPL 310 license beyond February 2019 in order to recover over three years lost due to regulatory delays beyond the Company's control. The Company understands that the Department for Petroleum Resources has made its recommendation for an extension to the Honourable Minister of Petroleum Resources and is currently awaiting final approval of such extension by the President of Nigeria. Whilst the Company is hopeful that such extension will be granted, there can be no guarantee that it will be granted or the period of such extension.

LEKOIL continues to make progress with partner Optimum towards resolving the remaining issues regarding this matter in the interest of moving forward and beginning appraisal activities on OPL 310.

OPL 325 - Exploration Asset

OPL 325 was also identified as a target in LEKOIL's regional basin study covering the Dahomey Basin. The OPL 325 licence area is located in the offshore Dahomey Basin within the wrench zone that straddles the western Niger Delta and is located 50km to the south of OPL 310.

*via LEKOIL's majority stake in Ashbert Oil & Gas Limited, which holds 70% working interest in OPL 325 and is Operator.

*\* The Production Sharing Contract ("PSC") terms have been negotiated and the document awaits signatures. Until the PSC is issued and signed we do not believe a right, power or interest in a petroleum asset exists as outlined in the original Letter of Award that would trigger a requirement for consent. LEKOIL is prepared to address the consent requirements for OPL 325 when Ashbert either transfers interest in the PSC directly to LEKOIL or farms down to a third party.

Background

In October 2015, LEKOIL entered into an agreement with Ashbert Limited to acquire, via LEKOIL Exploration and Production Nigeria Limited (LEPNL), 88.57 per cent of the issued share capital of Ashbert Oil and Gas Limited, which was awarded the PSC in OPL 325 for an initial consideration of US$16.1 million, with other payments due at developmental milestones totalling US$24.1 million.

We have had access to 3D seismic data over 740km2 and are encouraged by the results and our interpretation of the analysis. In January 2018, a thorough, independent technical study by consultants Lumina, prepared for LEKOIL, affirmed their preliminary review of oil in place volumes of 5.7 billion boe as an un-risked, Best Estimate case. We intend to farm-down a portion of our working interest in OPL 325 following a detailed prospect and lead risking study and finalising the PSC, which we expect to be complete in the near future. A prospect/lead risking study is already underway on the block. We expect to commence the farm down process before year end 2019.

Corporate & Social Responsibility

LEKOIL's high, ethical standards in its business activities are reflected in the Company's respect for all our people regardless of age, designation and gender. We work in an environment that fosters effective communication and we deal courteously with all stakeholders, respecting the customs and rules of the countries in which we operate.

We act responsibly, promoting accountability as individuals and as a company. We operate with ethics and fairness and comply with all required rules and regulations.

We are committed to the welfare and development of the communities around our operations. In our dealings with the local communities surrounding our producing asset, Otakikpo, LEKOIL's corporate and social responsibility ("CSR") plan continues to focus on three strategic aims:

i) Education,

ii) Economic and social empowerment (including women and children) and,

iii) Environmental and social sustainability.

We are a part of the communities in which we operate. In the coastal town of Ikuru, close to Otakikpo, we recognised the need for community support for our work and, to that end, LEKOIL has been helping improve the quality of life for the residents. We have signed a land lease agreement with the people of Ikuru backed by a memorandum of understanding that places on us a responsibility to develop sustainably. As a cluster, other coastal communities of Ugama Ekede, Ayama Ekede, Asuk Ama and Asuk Oyet have a similar memorandum of understanding.

We have demonstrated through the memoranda of understanding a commitment to Free, Prior and Informed Consent principles and established Incorporated Communities' Trust Funds with annual appropriation. These trusts have proven to be veritable vehicles for informed communities' consultation and participation, whereby the communities conduct their needs analysis through their governance processes, decide on annual programmes based on their needs analysis and available resources, and prioritise development in a sustainable manner. These programs and activities cover:

i) Infrastructures including construction of school buildings, roads and bridges, public toilets, markets, water reticulation projects, etc.;

ii) Scholarship and bursaries to secondary, undergraduate and graduate students;

iii) Entrepreneurship and skills acquisition support for the youths and women; and

iv) Community health outreaches and projects, safety and security.

LEKOIL provides active help to the communities surrounding our first development, Otakikpo. We support better education and skills development for our colleagues and communities, specifically in Science, Technology, Engineering and Mathematics ("STEM") to enhance employability. We also support programmes geared towards elevating the status of women and their contributions to nation building, increasing the success rate of female entrepreneurs and the proportion of women in senior positions in corporate organisations. Examples are the WIMBIZ (Women in Business) initiative and ENACTUS which are outlined below.

We promote diversity and equality through support for the WIMBIZ initiative, a Nigeria based non-profit organisation with an overriding vision "to be the catalyst that elevates the status and influence of women and their contribution to nation building". The WIMBIZ conference is an opportunity to get involved with equipping participants with the tools and skills to harness and embrace opportunities in Nigeria, to become fore runners for change.

LEKOIL also supports ENACTUS, an international not-for-profit organisation with a community of students, academic and business leaders. ENACTUS is committed to using the power of entrepreneurial action to transform lives and shape a better more sustainable world by providing a platform for teams of outstanding university students to create community development projects that put people's own ingenuity and talents at the centre of improving their livelihoods.

In addition, LEKOIL supports humanitarian response initiatives in partnership with the Murtala Muhammed Foundation ("MMF"), a non-profit organisation, with a mission to improve the living conditions of Africans by contributing to the reduction of poverty and the elimination of conflict, while promoting self-reliance and self-fulfilment. MMF seeks to be an institution that transcends all boundaries, dedicated to the socio-economic development of Africa. The MMF monitors disasters as they occur and assess their impact and the needs of the victims in order to determine how they can be addressed to provide relief and seek solutions in addressing the effects.

Environment

Nigeria's Environmental Impact Assessment Act ("EIAA") requires every company whose activity or project is likely to have a significant effect on the environment to carry out an impact assessment programme prior to the commencement of the project.

LEKOIL is committed to demonstrating leadership in stewardship of the environment, and in complying with the requirements and regulations in Nigeria, as well as in every other territory in which we operate. We believe we have demonstrated this commitment in our operations in the communities surrounding our Otakikpo development.

These outcomes do not happen by accident. They occur because of the technical expertise of our people and partners. They happen because of a strong leadership team. And they happen because we hold true to our values - especially our ability to think differently.

Financial Review

Overview

LEKOIL had its first full year of commercial oil production ending the year 2018 with an average production volume of 2,076 bopd, net. The year saw a concerted effort to reduce debt from vendor financing while we agreed in principle to refinance a portion of and redenominate outstanding Naira debt facilities totalling 3 billion Naira into United States Dollars (USD). This was finalised during March 2019 and provided a moratorium on the last two 2018 quarter principal repayments while the tenors were extended from June 2019 to June 2021.

The results reflect the first full year with production and net gearing has decreased to 17 per cent (2017: 31 per cent) providing the financial requirement to invest in the business. The Group recorded a total comprehensive loss of US$7.8 million for the year ended 31 December 2018 (2017: gain of US$6.5 million). Cash and cash balances at the end of the year were US$10.4 million (2017: US$6.9 million), with total outstanding debt financing net of cash significantly reduced to US$10.1 million (2017: US$22.6 million).

Production and Revenues

Revenues derived from a full year of commercial production from Otakikpo were US$48.7 million. Total production from the Otakikpo marginal field for the year was 1,951,249 gross barrels (2017: 1,560,125 gross barrels). The Group's entitlement crude was 1,346,525 barrels. Of these barrels, the Group lifted 1,305,888 barrels (2017: 1,188,732 barrels) and the balance of 40,637 barrels representing the Group's share of overriding royalty crude was lifted on its behalf by its joint venture partner based on an agreed lifting arrangement. The entitlement crude is comprised of equity crude of 739,106 (2017: 583,720 barrels (sales value US$30.8 million), cost recovery crude of 507,176 barrels (US$34.1 million) and GEIL cash call crude of 100,243 barrels (sales value US$6.6 million) (see note 8(a)). The cost recovery crude is not included in revenue and is utilised to reduce pre-paid development costs borne by the Group on behalf of partner GEIL. The Group's realised oil price was US$65.64 per barrel for the year. The Group does not currently have oil price hedging in place apart from amounts required under the current debt facilities however as part of the Company's risk management strategy this approach will be reviewed during 2019.

Cost of sales, depreciation, impairments and administrative expenditure

Underlying cost of sales were US$18.1 million or US$23.2/bbl (2017: US$15.9 million or US$25.5/bbl). The decrease in cost per barrel was largely due to the cessation of rental charges for the 2017 early production facility ("EPF") and ancillaries. The permanent EPF ("PEPF") was commissioned during the year. Depletion and amortisation costs on oil and gas assets were US$7.9 million US$10.1/bbl (2017: US$6.2 million and US$9.9/bbl).

Operating expenses were US$7.9 million or US$10.2/bbl (2017: US$11.32 million and US$18.1/bbl). Operating expenses captures sole expenditure incurred on production operation support activities such as accommodation for field personal. This was significantly lower in 2018 compared to 2017, largely due to the discontinuation in the use of rented accommodation facilities on-site (US$0.03 million/ US$1.0 million for 2018 and 2017 respectively). In addition, there were lower recharges to Otakikpo operating expenses from common costs pool following increased activities in OPL 310 and others assets in 2018 compared to 2017 (US$1.7 million/ US$5.6 million for 2018 and 2017 respectively). 

General and administrative expenses were US$19.1 million compared to US$17.0 million for the same period in 2017. The increase in general & administrative expenses in 2018 was largely due to a rise in personnel expenses and the associated oncosts, increases in IT costs and IT software to support higher staff numbers. Other contributing factors were increases in rental costs of accommodation for rotational employees in Lagos, plus increased consultancy costs and legal costs for new business development, and legal and consultancy costs relating to OPL 310.

Capital investment

The Group's capital expenditure for the year was US$12.3 million (2017: US$8.4 million) and focused on production facilities in the Otakikpo marginal field of US$10.4 million and exploration and appraisal activities of the Group's interests in OPL 310 and OPL 325 of US$1.9 million.

Taxes

As a Nigerian producing business, the Group is subject to the Petroleum Profit Tax Act of Nigeria (PPTA) and the Company Income Tax Act of Nigeria (CITA). Tax expense for year was US$10.1 million. (2017: tax benefit of $21.3 million.) The variance year on year is due to the increase in earnings and assessable profit in 2018 compared to 2017.

Profit/ (loss) for the year and loss per share

The Group recorded a total comprehensive loss of US$7.8 million for the year to 31 December 2018 (2017: gain of US$6.5 million) and a basic and diluted loss per share of US$2 cents (2017: profit of US$1 cent).

Cash and bank balances

The Group had cash and bank balances of US$10.4 million as at 31 December 2018 (2017: US$6.9 million). Restricted cash of US$3.2 million (2017: US$3.3 million), which represents cash funding of the debt service reserve accounts for two quarters of interest for the FBN Capital Notes and one quarter of interest and principal payment of the Shell Western facility, has been reported as part of other assets.

Loans and borrowings

The Group had the following debt facilities in place at year end:

Please refer to note 28 in the financial statements for a further breakdown.

Assets and liabilities

The Group's non-current assets were US$194.9 million as at 31 December 2018 (US$210.4 million at 31 December 2017), reflecting depreciation, depletion and amortisation of oil and gas assets during the year, and reduction in deferred tax assets to US$18.3 million (2017: US$23.2). Current assets, which represent the Group's cash resources, other assets and other receivables, decreased from US$66.1 million as at 31 December 2017 to US$31.5 million as at 31 December 2018. The decrease is a result of a reduction in pre-paid development costs which relate to the Otakikpo field cost recovery arrangement under the GEIL farm out agreement. Inventories which consist of the Group's share of crude stock increased from US$1.1 million as at 31 December 2017 to US$1.6 million as at 31 December 2018.

Current liabilities consist of the loan facilities set out above due within twelve months, amounting to US$11.4 million (31 December 2017: US$17.3 million), trade and other payables amounting to US$13.6 million (31 December 2017: US$32.5 million) and income tax payable amounting to US$5.1 million (31 December 2017: US$1.9 million). There was a concerted effort during the year to pay off vendor financing from prior periods, as can be seen by the improved gearing position and large reduction in liabilities (total liabilities US$41.0 million in 2018, down from US$70.7 million in 2017).

Dividend

The Directors do not recommend the payment of a dividend for the year ended 31 December 2018 (2017: Nil).

Accounting policies

The Group's significant accounting policies and details of the significant judgments and critical accounting estimates are disclosed within the notes to the financial statements. The Group adopted IFRS 9 and IFRS 15 during the year and the impact to the financial statements have been disclosed in notes to the financial statements. Other than IFRS 9 and IFRS 15 adoption, there were no material changes to its accounting policies in the year ended 31 December 2018.

Liquidity risk management and going concern

The Group closely monitors and manages its liquidity risk and ability to service debt as it falls due. Cash forecasts are regularly produced, and sensitivities run for different scenarios including (but not limited to) changes in production rates and commodity pricing, and cost overruns for approved projects.

At 31 December 2018, the Group had liquid resources of approximately US$10.4 million in the form of cash and bank balances available to meet capital, operating and administrative expenditure. 

During the year we agreed in principle to refinance a portion of and redenominate outstanding Naira debt facilities totalling 3 billion Naira into United States Dollars (USD). This was finalised during March 2019 and provided a moratorium on the last two 2018 quarter principal repayments. The tenors were extended from June 2019 to June 2021, giving the Group additional headroom owing to a reduction in interest rate and the principal payment moratorium.

LEKOIL is taking action to manage its operating costs and overheads and is implementing a cost review to look at measures to reduce overheads by 25%. Board remuneration will be reduced by 25%.

There is however a material uncertainty that can cast a significant doubt on the Group's ability to continue as a going concern which is discussed below:

· The ability of the Group to maintain steady state production and lifting on the Otakikpo marginal field;

· The operational success of the Otakikpo Phase 2 field development and planned growth in production to around gross 15,000 - 20,000 bopd (net to LEKOIL 6,000 - 8,000 bopd);

· Commodity pricing given there is no oil price hedging currently in place other than that required by lenders for debt service;

· Availability of financing for development of OPL 310, which is not currently factored into the cash forecasts;

· Ability to defer capital activities to future periods;

· Financing available from debt markets, equity markets and/or alternative sources of capital; and

· Approvals:

o Joint venture and DPR approvals for Phase 2 Otakikpo field development;

o Ministerial approvals for the Afren acquisition and, hence the OPL 310 22.86% working interest; and

o OPL 310 license extension.

The Directors have determined that over the course of the next 12 months and taking into consideration the factors mentioned above, there is a reasonable expectation that there will be sufficient sources of funds for the Group. In making their assessment, the Directors have considered the Group's current cash position and the generation of funds from forecast production over the period, against the need to service the Group's debt portfolio, and tested the scenarios at different commodity prices. The Board may consider raising further funds from either the equity or debt markets or industry sources during the year to provide further headroom and ensure the Group has the necessary resources to fund future growth.

The annual consolidated financial statements therefore have been prepared on the going concern basis of accounting, which assumes the Group will continue in operation for the foreseeable future and be able to realise its assets and discharge its liabilities and commitments in the normal course of business. 

Lisa Mitchell

Chief Financial Officer

18 June 2019

Independent Auditor's report

To the Shareholders of Lekoil Limited

Report on the Audit of the Annual Report and Consolidated Financial Statements

Opinion

We have audited the consolidated financial statements of Lekoil Limited ("the Company") and its subsidiaries (together referred to as "the Group") which comprise the consolidated statement of financial position as at 31 December 2018, and the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and the notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of Lekoil Limited as at 31 December 2018, and the consolidated financial performance and statement of cash flows for the year then ended in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union (EUIFRS).

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the requirements of the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code) and other independence requirements applicable to performing audits of financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Material Uncertainty Related to Going Concern

We draw attention to Note 2(b) in the consolidated financial statements, which indicates that the Group has a negative operating cash flows of US$1.6 million for the year ended 31 December 2018 (2017: US$11.7 million) and as of that date, the Group's accumulated deficit amounts to US$83.7 million (2017: US$61.9 million).These events or conditions as set forth in Note 2(b), indicate that a material uncertainty exists that may cast significant doubt on the Group's ability to continue as a going concern. Our opinion is not modified in respect of this matter.

Key Audit Matter

Key audit matter is the matter that, in our professional judgment, was of most significance in our audit of the consolidated financial statements of the current year. This matter was addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on this matter. In addition to the matter described in the Material Uncertainty Related to Going Concern section, we have determined the matter described below to be the key audit matter to be communicated in our report.

Other Information

The Directors are responsible for the other information. The other information comprises the Chairman's and CEO's Statements, Financial Review, Directors' Report and Remuneration Committee's Report, which we obtained prior to the date of this auditor's report. The other information does not include the consolidated financial statements and our auditor's report thereon.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

Based on the work we have performed on the other information that we obtained prior to the date of this auditor's report, if we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the Directors for the Consolidated Financial Statements

The Directors are responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as the Directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the Directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

Auditor's Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

· Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

· Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control.

· Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors.

· Conclude on the appropriateness of the Directors' use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern.

· Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

· Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with the Audit Committee and the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the Audit Committee and the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the Audit Committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Olufemi Abegunde FCA-FRC/2013/ICAN/000000004507

for: Deloitte & Touche

Chartered Accountants

Lagos, Nigeria

Consolidated statement of profit or loss and other comprehensive income

For the year ended 31 December

The notes below are an integral part of these consolidated financial statements.

Consolidated statement of financial position

As at 31 December

These consolidated financial statements were approved by the Board of Directors on 18 June 2019 and signed on its behalf by:

The notes below are an integral part of these consolidated financial statements.

Consolidated statement of changes in equity

For the year ended 31 December

The notes below are an integral part of these consolidated financial statements.

Consolidated statement of cash flows

For the year ended 31 December

**Changes in liabilities arising from financing activities have been disclosed in note 28(e).

The notes below are an integral part of these consolidated financial statements.

Notes to the financial statements

1 Reporting entity

LEKOIL Limited (the "Company" or "LEKOIL") is a company domiciled in the Cayman Islands with registration number WK- 248859. The address of the Company's registered office is Intertrust Group, 190 Elgin Avenue, Georgetown, Grand Cayman, Cayman Islands. These consolidated financial statements comprise the Company and its subsidiaries (together referred to as the "Group" and individually as "Group entities"). The Group's principal activity is exploration and production of oil and gas.

2 Basis of preparation

(a) Statement of compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union (EU). The consolidated financial statements were authorised for issue by the Board of Directors on 18 June 2019.

A number of new standards, amendments to standards and interpretations effective for annual periods beginning after 1 January 2019, have not been applied in preparing these consolidated financial statements.

(b) Going concern basis of accounting

These consolidated financial statements have been prepared on the going concern basis of accounting which assumes the Group will realise its assets and discharge its liabilities in the normal course of business. There is however a material uncertainty that can cast a significant doubt on the Group's ability to continue as a going concern which is discussed below.

In the reporting year, the Group had a negative operating cash flow of US$1.6 million (2017: US$11.7 million) and as of the year end 2018, the Group's accumulated deficit amounts to US$83.7 million (2017: US$61.9 million).

During the year there was a concerted effort to reduce debt from vendor financing while we agreed in principle to refinance a portion of and redenominate outstanding Naira debt facilities totalling 3 billion Naira into United States Dollars (USD). This was finalised during March 2019 and provided a moratorium on the last two 2018 quarter principal repayments. The tenors were extended from June 2019 to June 2021, giving the company additional headroom from a reduction in interest rate and with the principal moratorium.

The Board and Management regularly monitors the Company's cashflow projections. Considering delays with progressing key assets, we have decided to act in order to reduce our overheads. Management has created a project team to review costs with the aim to decrease general and administrative costs by 25%. This includes a 25% reduction in Board remuneration.

The ability of the Group to continue to operate as a going concern is dependent on several factors considered by the Directors as disclosed below:

· The ability of the Group to maintain steady state production and lifting on the Otakikpo marginal field;

· The operational success of the Otakikpo Phase 2 field development and planned growth in production to around gross 15,000 to 20,000 bopd (Net to LEKOIL 6,000 to 8,000 bopd);

· Commodity pricing given there is no oil price hedging currently in place other than that required by lenders for debt service;

· Availability of financing for development of OPL 310, which is not currently factored into the cash forecasts;

· Ability to defer capital activities to future periods;

· Financing available from debt markets, equity markets and/or alternative sources of capital; and

· Approvals:

o Joint operation and DPR approvals for Phase 2 Otakikpo field development;

o Ministerial approvals for the Afren acquisition and, hence the OPL 310 22.86% working interest; and

o OPL 310 license extension.

The Directors have determined that over the course of the next 12 months and taking into consideration the factors mentioned above, there is a reasonable expectation that there will be sufficient sources of funds for the Group. In making their assessment, the Directors have considered the Group's current cash position and the generation of funds from forecast production over the period, against the need to service the Group's debt portfolio, and tested the scenarios at different commodity prices. The Board may consider raising further funds from either the equity or debt markets or industry sources during the year to provide further headroom and ensure the Company has the necessary resources to fund future growth.

Accordingly, the Directors continue to adopt the going concern basis of preparation of the financial statements for the year ended 31 December 2018.

(c) Basis of measurement

These consolidated financial statements have been prepared on the historical cost basis except for financial instruments and share based payments which are measured at fair values.

(d) Functional and presentation currency

These consolidated financial statements are presented in US Dollars which is the Company's functional currency. All amounts have been rounded to the nearest thousands of dollars (1,000), unless otherwise indicated.

(e) Use of estimates and judgments

In the application of the Group's accounting policies, which are described in Note 3, management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

(i) Judgments

Information about judgments made in applying accounting policies that have the most significant effects on the amounts recognised in the consolidated financial statements is included in the following notes:

- Note 2(b) - Going concern basis of accounting.

- Note 17(c) -The Company's judgment on the conclusive outcome of the license extension request.

On March 28, 2019, the Federal High Court, sitting in Ikoyi, Lagos State, Nigeria ruled that LEKOIL's purported acquisition of shares in Afren Investment Oil and Gas (Nigeria) Limited ("AIOGNL") and by that, the 22.86% interest in OPL 310, is inchoate and invalid given the failure to obtain Ministerial Consent in respect of the transfer of the said shares. The Judge also ruled that pursuant to Articles 13.1.4 and 13.1.5 of the Joint Operating Agreement (JOA) between Optimum and AIOGNL, Optimum's consent is required to effect a transfer of AIOGNL's interest in OPL 310, or any part thereof, to LEKOIL.

The implication of the Judge's pronouncement is that pending receipt of Ministerial consent to the acquisition, AIOGNL retains its 22.86% participating interest in OPL 310. On the basis that the Group still requires Ministerial consent in order to control the entity and associated mineral rights, the entity is not consolidated into the Group accounts of LEKOIL.

LEKOIL 310 Limited had initially filed an appeal against the decision of the Federal High Court but decided to withdraw legal action following receipt of a letter dated 8 May 2019 from the Ministry of Petroleum Resources relating to an application for an extension (re-award) to the OPL 310 licence (the "Letter"). The Letter states that the Government has noted that the OPL 310 licence expired on 10 February 2019 and ownership of OPL 310 has accordingly reverted to the Government in line with Petroleum Act. The Letter further sets out that the re-award will not be considered by the Honourable Minister of Petroleum Resources ("HMPR") until such point as the suit filed by LEKOIL against the HMPR is withdrawn by LEKOIL and other parties to the action. Failure by LEKOIL and others to withdraw the suit within thirty (30) days of the Letter forecloses any consideration of re-award to Optimum Petroleum Development Limited, LEKOIL and their affiliates or subsidiaries.

LEKOIL 310 Limited decided to withdraw legal action on 16 May 2019 but will continue engagements with the regulator and the Operator of the Asset to conclude agreements and resolve all outstanding issues.

Although the ten-year tenure granted to OPL 310 licence in 2009 has lapsed, Optimum in its capacity as Operator has begun the extension process and whereas there is no guarantee that the license will be renewed, LEKOIL is hopeful for a favourable response from the regulators in this regard.

In the event that the extension is not granted, all the costs associated with the asset would be impaired to the profit and loss.

- Note 17(d) - Exploration and evaluation accounting judgment. The Group policy is to capitalise all expenditure incurred during the exploration and appraisal phase until the determination process has been completed or until such point as commercial reserves have been established. Exploration and evaluation assets are expected to be recouped in future through successful development and exploitation of the area of interest.

- Note 22 - On the basis that the Group requires Ministerial Consent to take control of the OPL 310 oil mineral rights interest held by Afren Oil and Gas, the Group has not consolidated Afren Oil and Gas and has accounted for payments made in respect of the Afren Oil and Gas acquisition as other assets. However, with the implementation of IFRS 9, these balances have been impaired.

(ii) Assumptions and estimation uncertainties

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the year ending 31 December 2019 is included in the following notes:

Note 2(b) - Going concern. Key assumptions made, and judgment exercised by the Directors in preparing the Group's cash forecast.

Note 14(c) - Recognised deferred tax assets. Availability of future taxable profit against which carry forward losses can be utilised.

Notes 16, 17 and 18 - Impairment test of property plant and equipment, exploration and evaluation assets and intangible assets: Key assumptions underlying the recoverable amounts.

Note 26- Provisions for asset retirement obligation. Key assumptions underlying the asset retirement obligation as at year end.

Note 35 - Financial commitments and contingencies. Key assumptions about the likelihood and magnitude of future outflow of economic resources.

3 Significant accounting policies

The Group has consistently applied the following accounting policies to all periods presented in these consolidated financial statements.

(a) Basis of consolidation and Business combinations

(i) Basis of consolidation

· Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealised income and expenses arising from intra-Group transactions, are eliminated. Unrealised gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group's interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

· Subsidiaries

Subsidiaries are entities controlled by the Group. The Group controls an entity if:

i) it has power over the investee i.e. it has existing rights that give it the ability to direct the relevant activities (the activities that significantly affect the investee's returns);

ii) it has exposure, or rights, to variable returns from its involvement with the investee; and/or

iii) it has the ability to use its power over the investee to affect the amount of the investor's returns.

The Group is deemed not to control an entity where regulatory approval is a substantive requirement for the passing of control. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date on which control ceases.

· Non-controlling interests

Non-controlling interests ("NCI") are measured at their proportionate share of the acquiree's identifiable net assets at the acquisition date.

(ii) Business combinations

The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss.

Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured, and settlement is accounted for within equity. Otherwise, other contingent consideration is remeasured at fair value at each reporting date and subsequent changes in the value of the contingent consideration are recognised in profit or loss.

If share-based payments awards (replacement awards) are required to be exchanged for awards held by the acquiree's employees (acquiree's awards), then all or a portion of the amount of the acquirer's replacement awards is included in measuring the consideration transferred in the business combination. This determination is based on the market-based measure of the replacement awards compared with the market-based measure of the acquiree's award and the extent to which the replacement awards relates to pre-combination service.

(b) Foreign currency

The US dollar is the presentation currency of the Group.

Transactions in foreign currencies are recorded at the rates of exchange ruling at the transaction dates. Monetary assets and liabilities are translated into functional currency at the exchange rate ruling at the balance sheet date, with a corresponding charge or credit to the profit or loss account.

Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated into the functional currency at the exchange rate when the fair value was determined. Non-monetary items that are measured based on historical cost in a foreign currency are translated at the exchange rate at the date of the transaction.

However, foreign currency differences arising from the translation of the following items are recognised in Other Comprehensive Income ("OCI"):

- a financial liability designated as a hedge of the net investment in a foreign operation to the extent that the hedge is effective; and

- qualifying cash flow hedges to the extent that the hedges are effective.

(c) Revenue

(i) Sale of crude

Revenue represents sales value of Group's share of liftings in the year. Revenue is recognised when or as the Group satisfies a performance obligation by transferring control of a promised good or service to a customer. The transfer of control of oil usually coincides with title passing to the customer and the customer taking physical possession.

When, or as a performance obligation is satisfied, the Group recognises as revenue the amount of the transaction price that is allocated to that performance obligation. The transaction price is the amount of consideration to which the Group expects to be entitled.

(ii) Costs of sales

Production expenditure, crude treatment and processing expenditure, crude evacuation and lifting expenditure, depreciation, depletion and amortisation of oil and gas assets and crude handling expenditure are reported as costs of sales.

(iii) Interest income

Interest income, including income arising from finance leases and other financial instruments, is recognised using the effective interest method.

(iv) Overlift and underlift

Lifting or offtake arrangements for oil and gas production in certain of the Group's jointly owned operations are such that each participant may not receive and sell its precise share of the overall production in each period. The resulting imbalance between cumulative entitlement and cumulative production less stock is underlift or overlift. Underlift and overlift are valued at market value and included within receivables and payables respectively. Movements during an accounting period are adjusted through cost of sales such that gross profit is recognised on an entitlement's basis.

In respect of redeterminations, any adjustments to the Group's net entitlement of future production are accounted for prospectively in the period in which the make-up oil is produced. Where the make-up period extends beyond the expected life of a field, an accrual is recognised for the expected shortfall.

(d) Share capital

(i) Ordinary shares

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects.

(e) Financial instruments

Financial assets and financial liabilities are recognised in the Group's statement of financial position when the Group becomes a party to the contractual provisions of the instrument.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss ("FVTPL")) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at FVTPL are recognised immediately in profit or loss.

Financial assets

Financial assets are classified in the following categories:

(i) financial assets measured at amortised cost;

(ii) financial assets measured at fair value through other comprehensive income ("FVTOCI"); and

(iii) financial assets measured at FVTPL.

At initial recognition, a financial asset is measured at its fair value; at initial recognition, trade receivables that do not have a significant financing component are measured at their transaction price. After initial recognition, financial assets whose contractual terms give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding are measured at amortised cost. For financial assets measured at amortised cost, interest income determined using the effective interest rate, foreign exchange differences and any impairment losses are recognised in the profit or loss account.

Conversely, financial assets that are debt instruments are measured at FVTOCI. In these cases: (i) interest income determined using the effective interest rate, foreign exchange differences and any impairment losses are recognised in the profit or loss account; (ii) changes in fair value of the instruments are recognised in equity, within other comprehensive income. The accumulated changes in fair value, recognised in the equity reserve related to other comprehensive income, is reclassified to the profit and loss account when the financial asset is derecognised.

Financial assets that do not meet the criteria for being measured at amortised cost or FVTOCI are measured at FVTPL. Financial assets at FVTPL are measured at fair value at the end of each reporting period, with any fair value gains or losses recognised in profit or loss account.

Impairment of financial assets

The Group assesses the expected credit losses associated with financial assets classified as measured at amortised cost at each balance sheet date. Expected credit losses ("ECL's") are measured based on the maximum contractual period over which the Group is exposed to credit risk. The measurement of ECL's is a function of the probability of default, loss event default and exposure at default. The ECL is estimated as the difference between the asset's carrying amount and the present value of the future cash flows the Group expects to receive discounted at the financial asset's original effective interest rate. The carrying amount of the asset is adjusted, with the amount of the impairment gain or loss recognised in the income statement.

ECL's are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECL's are provided for credit losses that result from default events that are possible within the next 12-months ("a 12-month ECL"). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default ("a lifetime ECL"). For trade receivables, the Group applies a simplified approach in calculating ECL's.

For all other financial instruments, the Group recognises lifetime ECL when there has been a significant increase in credit risk since initial recognition. However, if the credit risk on the financial instrument has not increased significantly since initial recognition, the Group measures the loss allowance for that financial instrument at an amount equal to 12-month ECL.

The Group recognises an impairment gain or loss for all financial instruments with a corresponding adjustment to their carrying amount through a loss allowance account, except for investments in debts instruments that are measured at FVTOCI, for which the loss allowance is recognised in other comprehensive income and accumulated in the investment revaluation reserve, and does not reduce the carrying amount of the financial asset in the statement of financial position.

Derecognition of financial assets

The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and recognises a collateralised borrowing for the proceeds received.

On derecognition of a financial asset measured at amortised cost, the difference between the asset's carrying amount and the sum of the consideration received and receivable is recognised in profit or loss.

Financial liabilities and equity

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all its liabilities. Equity instruments issued by the Group are recognised at the proceeds received, net of direct issue costs.

Financial liabilities

All financial liabilities are measured subsequently at amortised cost using the effective interest method or at FVTPL.

Financial liabilities at FVTPL

Financial liabilities are classified as at FVTPL when the financial liability is:

· contingent consideration of an acquirer in a business combination;

· it is designated as at FVTPL.

A financial liability is classified as held for trading if:

· it has been acquired principally for repurchasing it in the near term; or

· it is a derivative, except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument.

A financial liability or contingent consideration of an acquirer in a business combination may be designated as at FVTPL upon initial recognition if:

· such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or

· the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis; or

· it forms part of a contract containing one or more embedded derivatives, and IFRS 9 permits the entire combined contract to be designated as at FVTPL.

Financial liabilities at FVTPL are measured at fair value, with any gains or losses arising on changes in fair value recognised in profit or loss to the extent that they are not part of a designated hedging relationship.

However, for financial liabilities that are designated as at FVTPL, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is recognised in other comprehensive income, unless the recognition of the effects of changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. The remaining amount of change in the fair value of liability is recognised in profit or loss. Changes in fair value attributable to a financial liability's credit risk that are recognised in other comprehensive income are not subsequently reclassified to profit or loss; instead, they are transferred to retained earnings upon derecognition of the financial liability.

Financial liabilities measured subsequently at amortised cost

Financial liabilities that are not:

· contingent consideration of an acquirer in a business combination;

· designated as at FVTPL, are measured subsequently at amortised cost using the effective interest method.

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the amortised cost of a financial liability.

Derecognition of financial liabilities

The Group derecognises financial liabilities when, and only when, the Group's obligations are discharged, cancelled or have expired. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.

(f) Property, plant and equipment

(i) Recognition and measurement

Items of property, plant and equipment are measured at cost, which includes capitalised borrowing costs, less accumulated depreciation and any accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.

(ii) Subsequent expenditure

Subsequent expenditure is capitalised only if it is probable that the future economic benefits associated with the expenditure will flow to the Group.

(iii) Depreciation

Items of property, plant and equipment are depreciated from the date they are available for use or, in respect of self-constructed assets, from the date that the asset is completed and ready for use.

Depreciation is calculated to write off the cost of items of property, plant and equipment less their estimated residual values using the straight-line basis over their estimated useful lives. Depreciation is generally recognised in profit or loss, unless the amount is included in the carrying amount of another asset. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term.

The estimated useful lives of property, plant and equipment for the current and comparative years are as follows:

Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.

(g) Exploration and Evaluation (E&E) expenditures

(i) License acquisition costs: License acquisition costs are capitalised as intangible E&E assets. These costs are reviewed on a continual basis by management to confirm that activity is planned and that the asset is not impaired. If no future activity is planned, the remaining balance of the license and property acquisition costs are written off. Capitalised license acquisition costs are measured at cost less accumulated amortisation and impairment losses. Costs incurred prior to having obtained the legal rights to explore an area are expensed directly as they are incurred.

(ii) Exploration expenditure: All exploration and appraisal costs are initially capitalised in well, field or specific exploration cost centres as appropriate pending future exploration work programmes and pending determination. All expenditure incurred during the various exploration and appraisal phase is capitalised until the determination process has been completed or until such point as commercial reserves have been established. Payments to acquire technical services and studies, seismic acquisition, exploratory drilling and testing, abandonment costs, directly attributable administrative expenses are all capitalised as exploration and evaluation assets. Capitalised exploration expenditure is measured at cost less impairment losses.

Treatment of E & E assets at conclusion of exploratory and appraisal activities

Exploration and evaluation assets are carried forward until the existence, or otherwise, of commercial reserves has been determined. If commercial reserves have been discovered, the related E&E assets are assessed for impairment on a cost pool basis as set out below and any impairment loss is recognised in the income statement. The carrying value, after any impairment loss, of the relevant E&E assets is then reclassified as development and production assets within property, plant and equipment or intangible assets. If, however, commercial reserves have not been found, the capitalised costs are charged to expense after the conclusion of the exploratory and appraisal activities. Exploration and evaluation costs are carried as assets and are not depreciated prior to the conclusion of exploratory and appraisal activities.

An E&E asset is assessed for impairment when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. Such circumstances include the point at which a determination is made as to whether or not commercial reserves exist. Where the E&E asset concerned falls within the scope of an established full cost pool, the E&E asset is tested for impairment together with any other E&E assets and all development and production assets associated with that cost pool, as a single cash generating unit.

The aggregate carrying value is compared against the expected recoverable amount of the pool, generally by reference to the present value of the future net cash flows expected to be derived from production of commercial reserves. Where the E&E asset to be tested falls outside the scope of any established cost pool, there will generally be no commercial reserves and the E&E asset concerned will be written off in full.

(h) Development expenditure

Once the technical feasibility and commercial viability of extracting oil and gas resources are demonstrable, expenditure related to the development of oil and gas resources which are not tangible in nature are classified as intangible development expenditure. Capitalised development expenditure is measured at cost less accumulated amortisation and impairment losses. Amortisation of development assets attributable to the participating interest is recognised in profit or loss using the unit-of-production method based on proved developed reserves.

(i) Leases

(i) Determining whether an arrangement contains a lease

At inception of an arrangement, the Group determines whether the arrangement is or contains a lease.

At inception or on reassessment of an arrangement that contains a lease, the Group separates payments and other consideration required by the arrangement into those for the lease and those for other elements based on their relative fair values. If the Group concludes for a finance lease that it is impracticable to separate the payments reliably, then an asset and a liability are recognised at an amount equal to the fair value of the underlying asset; subsequently, the liability is reduced as payments are made and an imputed finance cost on the liability is recognised using the Group's incremental borrowing rate.

(ii) Leased assets

Assets held by the Group under leases that transfer to the Group substantially all the risks and rewards of ownership are classified as finance leases. The leased assets are measured initially at an amount equal to the lower of their fair value and the present value of the minimum lease payments. After initial recognition, the assets are accounted for in accordance with the accounting policy applicable to that asset.

Assets held under other leases are classified as operating leases and are not recognised in the Group's statement of financial position.

(iii) Lease payments

Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease.

Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term to produce a constant periodic rate of interest on the remaining balance of the liability.

(j) Inventories

Inventories comprise of crude oil stock at period end and consumable materials.

Inventories are valued at the lower of cost and net realisable value. Cost of consumable materials is determined using the weighted average method and includes expenditures incurred in acquiring the stocks, and other costs incurred in bringing them to their existing location and condition.

Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Inventory values are adjusted for obsolete, slow-moving or defective items where appropriate.

(k) Intangible assets

An intangible asset is an identifiable non-monetary asset without physical substance. The Group expends resources or incurs liabilities on the acquisition, development, maintenance or enhancement of intangible resources such as scientific or technical knowledge, design and implementation of new processes on systems, licenses, signature bonus, intellectual property, market knowledge and trademarks.

The Group recognises an intangible asset if, and only if;

i. economic benefits that are attributable to the asset will flow to the entity; and

ii. the costs of the asset can be measured reliably.

The Group assesses the probability of future economic benefits using reasonable and supportable assumptions that represent management's best estimate of the set of economic conditions that will exist over the useful life of the asset. Intangible assets are measured initially at cost.

Amortisation is calculated to write off the cost of the intangible asset less its estimated residual value using the straight-line basis over the estimated useful lives or using the units of production basis from the date that they are available for use. The estimated useful life and methods of amortisation of intangible assets for current and comparative years are as follows:

(l) Employee benefits

(i) Short-term employee benefits

Short-term employee benefits are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount because of past service provided by the employee and the obligation can be estimated reliably.

(ii) Share-based payment transactions

The grant-date fair value of equity-settled share-based payment awards granted to employees and others providing similar services is recognised as an employee expense and other general and administrative expense respectively, with a corresponding increase in equity, over the vesting period that the employees become unconditionally entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. For share-based-payment awards with non-vesting conditions, the grant-date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.

(iii) Post-employment benefits

Defined contribution plan

A defined contribution plan is a post-employment benefit plan (pension fund) under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to the employee service in the current and prior periods.

In line with the provisions of the Pension Reform Act 2014, a subsidiary domiciled in Nigeria has instituted a defined contribution pension scheme for its permanent staff. Staff contributions to the scheme are funded through payroll deductions while the subsidiary's contribution is recognised in profit or loss as employee benefit expense in the periods during which services are rendered by employees. Employees contribute 8% each of their gross salary to the fund monthly. The subsidiary's contribution is 10% of each employee's gross salary.

(m) Provisions

A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost.

The Group's Asset Retirement Obligation ("ARO") primarily represents the estimated present value of the amount the Group will incur to plug, abandon and remediate its areas of operation at the end of their productive lives, in accordance with applicable legislations. The Group determines the ARO on its oil and gas properties by calculating the present value of estimated cash flows related to the liability when the related facilities are installed or acquired.

Contingent liabilities

A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group, or a present obligation that arises from past events but is not recognised because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or the amount of the obligation cannot be measured with sufficient reliability.

Contingent liabilities are only disclosed and not recognised as liabilities in the statement of financial position. If the likelihood of an outflow of resources is remote, the possible obligation is neither a provision nor a contingent liability and no disclosure is made.

(n) Finance income and finance costs

Finance income comprises, where applicable, interest income on funds, dividend income, gains on the disposal of financial assets, fair value gains on financial assets at fair value through profit or loss, gains on the remeasurement to fair value of any pre-existing interest in an acquiree in a business combination, gains on hedging instruments that are recognised in profit or loss and reclassifications of net gains previously recognised in other comprehensive income. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Dividend income is recognised in profit or loss on the date that the Group's right to receive payment is established.

Finance costs comprise, where applicable, interest expense on borrowings, unwinding of the discount on provisions and deferred consideration, dividends on preference shares classified as liabilities, fair value losses on financial assets at fair value through profit or loss and contingent consideration, impairment losses recognised on financial assets (other than trade receivables), losses on hedging instruments that are recognised in profit or loss and reclassifications of net losses previously recognised in other comprehensive income.

Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method.

Foreign currency gains and losses are reported on a net basis as either finance income or finance cost depending on whether foreign currency movements are in a net gain or net loss position.

(o) Earnings per share

The Group presents basic and diluted earnings per share ("EPS") data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares which comprise share options granted to employees. Potential ordinary shares are treated as dilutive when, and only when, their conversion to ordinary shares would decrease earnings per share or increase loss per share from continuing operations.

(p) Segment reporting

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incurs expenses, including revenues and expenses that relate to transactions with any of the Group's other components. The Group defines geographical areas as operating segments in accordance with IFRS 8- Operating Segments.

(q) Income tax

Income tax expense comprises current and deferred tax. It is recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or other comprehensive income.

(i) Current tax

Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to tax payable or receivable in respect of previous years. The amount of current tax payable or receivable is the best estimate of the tax amount expected to be paid or received that reflects uncertainty related to income taxes, if any. It is measured using tax rates enacted or substantively enacted at the reporting date. Current tax also includes any tax arising from dividends.

(ii) Deferred tax

Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for taxation purposes.

Deferred tax is not recognised for:

- temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;

- temporary differences related to investments in subsidiaries, associates and joint arrangements to the extent that the Group is able to control the timing of the reversal of the temporal differences and it is probable that they will not reverse in the foreseeable future; and

- taxable temporary differences arising on the initial recognition of goodwill.

Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profit will be available against which they can be used. Future taxable profits are determined based on the reversal of relevant taxable temporary differences. If the amount of taxable temporary difference is insufficient to recognise a deferred tax asset in full, then future taxable profits, adjusted for reversals of existing temporary differences, are considered, based on the business plans for individual subsidiaries in the Group. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised; such reductions are reversed when the probability of future taxable profits improves.

Unrecognised deferred tax assets are reassessed at each reporting date and recognised to the extent that it has become probable that future profits will be available against which they can be used.

Deferred tax is measured at the tax rates that are expected to be applied to temporary difference when they reverse, using tax rates enacted or substantively enacted at the reporting date.

The measurement of deferred tax reflects the tax consequences that would follow from the way the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset only if certain criteria are met.

4 Measurement of fair values

Several of the Group's accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities.

The Group has an established control framework with respect to the measurement of fair values. This includes a valuation expert that has responsibility for overseeing all significant fair value measurements, including Level 3 fair values, and reports directly to the General Manager of Commercial.

When measuring the fair value of an asset or a liability, the Group uses observable market data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:

· Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

· Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

· Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.

The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred. Further information about the assumptions made in measuring fair values is included in the following notes:

Note 31 - share-based payment arrangements

Note 36 - financial risk management and financial instruments

5 Adoption of new and revised International Financial Reporting Standards

5.1 Accounting standards and interpretations issued that became effective during the year 2018

In the current year, the Group considered several amendments to IFRSs issued by the International Accounting Standards Board ("IASB") that are mandatory and effective for an accounting period that begins on or after 1 January 2018.

IFRS 9 - Financial Instruments

IFRS 9 'Financial Instruments' was issued in July 2014 and replaced IAS 39 'Financial Instruments: Recognition and Measurement'.

The Group adopted IFRS 9 and the related consequential amendments to other IFRSs in the financial reporting commencing 1 January 2018. The Group has applied the new standard in accordance with the transition provisions of IFRS 9. Comparatives have not been restated and adjustments on transition have been reported in opening accumulated deficit at 1 January 2018.

The Group's revised accounting policies in relation to financial instruments are provided in Note 3e.

The overall impact on transition to IFRS 9 was a reduction of US$13.87 million in net assets, net of tax. This adjustment mainly relates to the recognition of loss allowance on for financial assets in the scope of IFRS 9's impairment requirements. As comparatives have not been restated, the closing balance at 31 December 2017 for certain line items in the statement of financial position differ from the opening balance at 1 January 2018 (as summarised below).

(a) Other assets

(b) Other receivables

IFRS 15 - Revenue from contracts with customers

The implementation of IFRS 15 has not impacted the presentation of the Group's sales revenue.

The Group's accounting policy under IFRS 15 is that revenue is recognised when the Group satisfies a performance obligation by transferring oil to a customer. The title to oil typically transfers to a customer at the same time as the customer takes physical possession of the oil. Typically, at this point in time, the performance obligations of the Group are fully satisfied.

The accounting for revenue under IFRS 15 does not, therefore, represent a substantive change from the Group's previous accounting policy for recognising revenue from sales to customer.

5.2 Accounting standards and interpretations issued but not yet effective

The following revisions to accounting standards and pronouncements that are applicable to the Group were issued but are not yet effective. Where IFRSs and International Financial Reporting Interpretations Committee ("IFRIC") interpretations listed below permits early adoption, the Group has elected not to apply them in the preparation of these consolidated financial statements. The Group plans to adopt the standard when it becomes effective.

The full impact of these IFRS's and IFRIC interpretations is currently being assessed by the Group, but none of these pronouncements are expected to result in any material adjustments to the consolidated financial statements.

6 Operating segments

The Group has a single class of business which is exploration, development and production of petroleum oil and natural gas. The geographical areas are defined by the Group as operating segments in accordance with IFRS 8- Operating Segments. As at the year end, the Group had operational activities mainly in one geographical segment, Nigeria.

Geographical information

In presenting information based on geographical segments, segment assets are based on the geographical location of the assets.

Non-current assets

Non-current assets presented consists of property, plant & equipment, E&E assets, intangible assets, deferred tax assets other receivables and other assets.

7 Capital Management

The Group's policy is to maintain a strong capital base to maintain investor, creditor and market confidence and to sustain future development of the business.

The Group monitors capital using a ratio of adjusted net debt to adjusted equity. For this purpose, adjusted net debt is defined as total liabilities less cash and bank balances.

The Group's net debt to equity ratio at the end of the reporting year was as follows:

There were no changes in the Group's approach to capital management during the year. The Group is not subject to externally imposed capital requirements.

8 Revenue

(a) Crude proceeds of US$48.7 million represents the Group's share of crude oil sales from Otakikpo operation during the year, which is recognised as revenue ("equity crude"), (31 December 2017: US$30.9 million). The Group's entitlement crude was 1,346,525 barrels (31 December 2017: 1,223,248 barrels) out of which the Group lifted 1,305,888 barrels (31 December 2017: 1,188,732 barrels). The balance of 42,390 barrels (31 December 2017: 34,515 barrels) representing the Group's share of overriding royalty crude was lifted on its behalf by its joint operating partner GEIL based on an agreed lifting arrangement. The entitlement crude comprises equity crude of 739,106 (31 December 2017: 583,720 barrels) barrels and cost recovery crude of 507,176 barrels (31 December 2017: 639,528 barrels), which were applied as recoveries for pre-paid development costs; and GEIL cash call crude* of 100,243 barrels (31 December 2017: nil).

* During the year, the allocation of crude for cost recovery was suspended for the February and June liftings because of the cost recovery audit, and the proceeds were allocated to the joint operating partners in accordance to their equity stake. The Group's share of the proceeds was applied to cost recovery while GEIL's share were utilised to fund its cash call contribution in the joint operation.

9 Costs of sales

10 Operating expenses

11 Exploration and evaluation expenses

Exploration and evaluation expenses comprise US$0.6 million (2017: US$0.3million) impairment expenses on Block 2514B following the decision of the Directors to relinquish the block and exit Namibia.

12 General and administrative expenses

* the Company looked at a number of potential investment opportunities during the year and conducted extensive due diligence on a select few, which incurred c. US$1.8 million in additional financial advisory, consultancy and legal costs. The Company also incurred a charge of approximately US$500 thousand in relation to ECL write offs.

(a) Personnel expenses

(b) Operating leases

The Group leases office and residential facilities under cancellable operating leases. Lease payments are made upfront covering the lease period with no additional obligations.

(c) Key management personnel and Director compensation

In addition to their salaries, the Group also provides non-cash benefits to key management personnel, in the form of share-based payments.

(i) Key management personnel an Director compensation comprised the following:

(ii) Key management personnel and Director compensation comprised the following:

Details of Directors' remuneration (including the fair value of share-based payments) earned by each Director of the Company during the period have been disclosed in the remuneration report.

13 Finance income and costs

(a) Joint operating partner carry interest income

Joint operating partner carry interest income represents interest earned on pre-paid development costs. The interest earned on the pre-paid development costs have been classified to finance income for the year due to the majority of pre-paid development costs being recovered/adjusted.

(b) Other interest income

Other interest income represents interest earned on short term deposits and call accounts transactions with the Group's bankers.

(c) Net foreign exchange loss/gain

Net foreign exchange loss/gain represents exchange differences resulting from the conversion of US$ amounts to Nigerian Naira amounts, to meet obligations settled in Nigerian Naira. The net foreign loss during the year was largely due to foreign exchange adjustments arising from the cost recovery audit. (Refer to Note 23(b)).

(d) Finance expenses

Finance costs consist largely of interest costs on third party loans during the year. Also included as finance expenses are transaction costs for the refinancing of the FBNC dollar facility.

14 Taxes

(a) Petroleum profit tax

The Group with its principal assets and operations in Nigeria is subject to the Petroleum Profit Tax Act of Nigeria ("PPTA"). The Group's Petroleum Profit Tax charge for the period is summarised below:

(b) Company income tax

Interest on recovered carried cost and technical fees earned on Otakikpo operations of the Group is subject to Company Income Tax Act of Nigeria ("CITA"). The Group's Company Income Tax charge for the year is summarised below:

(c) Deferred tax assets

The Group has an estimated deferred tax asset of US$95.7 million (2017: US$72.7 million), out of which the Group has recognised deferred tax assets of US$18.3 million (2017: US$23.2 million); derived from the activities of its subsidiary LEKOIL Oil and Gas Investments Limited. The Directors have assessed the future profitability of its operation in Otakikpo marginal field and have a reasonable expectation that the Group will make enough taxable profit from LEKOIL Oil and Gas Investments Limited in the near future to utilise the deferred tax assets. The balance of US$77.5 million (2017: US$49.45 million) of unrecognised deferred tax assets relates to unutilised capital allowances and tax losses from other subsidiaries in which the Directors are not certain when there will be available taxable profit from the subsidiaries to utilise the deferred tax assets.

(d) Total income tax (expense)/ benefit recognised in the year.

(e) Current tax liabilities

15 Profit/ (loss) per share

(a) The calculation of basic (loss)/profit per share has been based on the following (loss)/ profit attributable to ordinary shareholders and weighted-average number of ordinary shares outstanding.

(b) The calculation of diluted (loss)/profit per share has been based on the following (loss)/profit attributable to ordinary shareholders and weighted-average number of ordinary shares outstanding after adjustment for the effects of all dilutive potential ordinary shares. Basic and diluted loss per share are equal as all options are anti- dilutive.

(c) (Loss)/profit per share is calculated by dividing the (loss)/profit for the year attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year.

16 Property, Plant and Equipment

(a) The movement on this account was as follows:

\* The additions of US$10.4 million during the year consist largely of capital expenditure on production facilities in the Otakikpo marginal field of US$8.6 million and; reallocation from pre-paid development costs, of sole capital expenditure of US$1.8 million incurred by the Group on the Otakikpo field following the completion of the cost recovery audit.

17 Exploration and Evaluation (E&E) assets

E&E assets represents the Group's oil mineral rights acquisition and exploration costs.

(a) The movement on the E&E assets account was as follows:

(b) The additions during the year consists largely of US$1.7 million E&E expenditure in OPL 310 and US$0.2 million E&E expenditure in OPL 325. Total expenditure incurred on OPL 310 from inception of the farm-in agreement to 31 December 2018 amounts to US$115.5 million.

(c) LEKOIL and the Operator of the OPL 310 block, Optimum, had previously requested that the Federal Ministry of Petroleum Resources grant an extension of the OPL 310 license beyond February 2019 to recover its position over the past three years, lost due to regulatory delays beyond the Company's control. The Company advises that it has received correspondence by letter (the "Letter") from the Ministry of Petroleum Resources relating to an application for an extension (re-award) to the OPL 310 licence. The Letter states that the Government has noted that the OPL 310 licence expired on 10 February 2019 and ownership of OPL 310 has accordingly reverted to the Government in line with Petroleum Act. The Letter further sets out that the re-award will not be considered by the Honourable Minister of Petroleum Resources ("HMPR") until such point as the suit filed by LEKOIL against the HMPR is withdrawn by LEKOIL and other parties to the action. Failure by LEKOIL and others to withdraw the suit within thirty (30) days of the Letter, which was dated 8 May 2019, forecloses any consideration of re-award to Optimum, LEKOIL and their affiliates or subsidiaries. The Company therefore withdrew legal action on 16 May 2019. The Company will also continue engagements with the regulator and the Operator of OPL 310, to conclude agreements and resolve all outstanding issues.

The Company also notes that the Letter, does not state that the application for a licence extension was denied and thus it is still pending because the application was submitted prior to the expiry date. The Company is hopeful that having complied with the direction of the HMPR, such extension (re-award) will be granted.

If the extension is not granted, all the costs associated with the asset would be impaired to the profit and loss.

(d) OPL 310 was assessed for impairment by the Directors and it was concluded no impairment charge was necessary. This was based upon management's assessment of the asset's value in use, its expectation on the extension of the licence and the planned expenditure for 2019 to enable appraisal drilling.

(e) The Directors have decided to relinquish the interest in Namibian block 2514B held by LEKOIL Exploration and Production (Pty) Limited and to wind down the company. Consequently E&E asset held in LEKOIL Exploration and Production (Pty) Limited has been written-off.

18 Intangible Assets

The movement on the intangible assets account was as follows:

*Adjustment to software maintenance cost capitalised in prior year.

**Mineral rights acquisition costs represent the signature bonus for the Otakikpo marginal field amounting to US$7.0 million.

19 Inventories

Inventories consist of the Group's share of crude stock of US$1.6 million as at 31 December 2018 (2017: US$1.1 million).

20 Trade receivables

(a) Trade receivables consist of the Otakikpo crude proceeds balance due from the crude offtaker from the last lifting for the year.

21 Other receivables

(a) The cash call due receivable from Otakikpo joint operating partner (GEIL), represents GEIL's share of cash calls paid by the Group on their behalf.

(b) The Director's loan represents the balance due on an unsecured loan of US$1,500,000 granted to a Director on 9 December 2014. The loan had a three-year term and bore interest at a rate of four per cent per annum. In September 2017, the loan was extended for another 3 years to 9 December 2020 under the same terms and conditions (note 32 (a) (i)).

Following the adoption of IFRS 9, the Group recognised US$0.07 million ECL provisions at the beginning of the year (see note 5.1).

(c) The amount due from Afren Investment Oil & Gas (Nigeria) Limited (Afren) represents Afren's share of Optimum's overheads paid by the Group on Afren's behalf. The Group has recognised an ECL provision for the entire receivable from Afren Investment Oil & Gas (Nigeria) Limited.

22 Other assets

(a) On 30 November 2015, LEKOIL 310 Limited, a wholly owned subsidiary of LEKOIL Limited executed a sale and purchase agreement with the Administrators of Afren Nigeria Holdings Limited and Afren Plc relating to the entire issued share capital of Afren Investment Oil & Gas (Nigeria) Limited and certain intra-company debts.

In accordance with the agreement, LEKOIL 310 Limited shall acquire the entire share capital of Afren Investment Oil & Gas (Nigeria) Limited and will be assigned the intra-company debts of Afren Nigeria Holdings Limited and Afren Plc, with Afren Investment Oil & Gas (Nigeria) Limited for considerations of US$1, US$6.4 million and US$6.6 million respectively.

Consequently, on 18 November 2015, LEKOIL 310 Limited made the Initial Payments of US$5.9 million and US$6.1 million for Afren Investment Oil & Gas (Nigeria) Limited intra-company debts with Afren Plc and Afren Nigeria Holdings Limited respectively. The Group further paid the balance US$1 million in December 2017. The cumulative payment of US$13 million was reported as a deposit for shares pending the receipt of the consent of the Minister of Petroleum.

Following the adoption of IFRS 9, the Group has recognised an ECL provision of the entire amount of US$13 million. (See note 5.1)

(b) Restricted cash represents cash funding of the debt service reserve accounts for two quarters of interest for the FBN Capital Notes and one quarter of interest and principal payment of the Shell Western facility.

23 Pre-paid development costs

(a) Pre-paid development costs represent GEIL's share of costs (60% of joint operations' costs) in the Otakikpo marginal field. Under the terms of the farm-in agreement, LEKOIL Oil and Gas Investment Limited undertakes to fund GEIL's participating interest share of all costs relating to the joint operation on the Otakikpo marginal field, until the completion of the Initial Work Programme. The Group will recover costs at a rate of LIBOR plus a margin of 10% through crude oil lifting as the field commences production. However, for expenditure above US$70 million, the recovery rate increases to LIBOR plus a margin of 13%. The interest on carried costs has been included as part of the pre-paid development costs.

The Group commenced recovery of pre-paid development costs in April 2017, following the commencement of crude lifting. The sum of US$34.1 million was recovered during the year ended 31 December 2018 (2017: US$33.7 million). The outstanding pre-paid development costs balance as at year end was fully recovered in February 2019.

(b) Following the completion of the cost recovery audit and resultant agreement reached by the joint operating partners, a reduction of US$10.6 million was made to the balance of pre-paid development costs. This adjustment reflected several factors relating to agreed adjustments to the working capital, foreign exchange and a reclassification of capital expenditure.

24 Cash and bank balances

25 Trade and other payables

26 Provisions for asset retirement obligation

The Group has recognised a provision for Asset Retirement Obligation ("ARO") which represents the estimated present value of the amount the Group will incur to plug, abandon and remediate the Otakikpo operation at the end of its productive life, in accordance with applicable legislation. The provision has been estimated at a US inflation rate of 2% and discounted to present value at 10%. The provision recognised represents 40% of the net present value of the estimated total future cost as the Company's partner, GEIL is obligated to bear 60% of the cost.

A corresponding amount equivalent to the provision is recognised as part of the cost of the related property, plant and equipment. The amount recognised is the estimated cost of decommissioning, discounted to its net present value, and is reassessed each year in accordance with local conditions and requirements, reflecting management's best estimates.

The unwinding of the discount on the decommissioning is included as a finance cost. Changes in the estimated timing of decommissioning, or decommissioning cost estimates are dealt with prospectively by recording an adjustment to the provision and a corresponding adjustment to property, plant and equipment.

During the year, there was revision in the Group's decommissioning costs estimate to include decommissioning costs for additional capital expenditure incurred since the last estimate was determined. Management has also revised the timing of the decommissioning event to 2025. Management believe the estimates form a reasonable basis for the expected future costs of decommissioning expected to be incurred in approximately 2025.

27 Deferred income

The movement in deferred income was as follows:

(a) The Group reclassifies the interest portion of the pre-paid development costs to finance income proportionately over the period which the cost recovery occurs by reference to cost recoveries in each period as a percentage of the total capital and operating costs incurred to date in the development of the field. However, in 2018 and following the near completion of cost recovery, the balance of deferred income was fully reclassified to finance income.

28 Loans and borrowings

(a) FBN Capital Limited Notes Issuance Agreements - two-tranche facility

The Company entered into notes issuance agreements dated 16 June, 2016 with FBN Capital Limited ("FBNC") providing for a loan of US$10 million with a 3-year tenor ("FBNC Dollar Facility") and a loan of 2 billion Naira (approximately US$10 million at the time of issuance) with a three-year tenor ("FBNC Naira Facility", together the "FBNC Facilities"). The FBNC facilities are fully drawn and are secured by the LEKOIL Oil and Gas Limited ("LOGL") assets as well as a LEKOIL Limited guarantee.

(i) FBNC Dollar Facility

Interest is charged on the FBNC Dollar Facility at 3-month LIBOR plus 11.25% per annum and interest payments are due at the end of each quarterly period. The loan is repayable in 10 quarterly instalments starting from March 2017 in accordance with a repayment schedule.

The loan has a final maturity date of 30 June 2019 and is secured by the Company's interest in the Otakikpo field and facilities as well as a parent company guarantee.

In August 2018, the Company entered into a transaction to revise the interest rate of the facility to 3-month LIBOR plus 10% per annum. As part of the transaction, the tenor of the facility was extended to June 30, 2021 with principal repayment moratoriums for two quarters and equal quarterly principal repayments thereafter.

(ii) FBNC Naira Facility

The full 2 billion Naira was drawn on the facility in June 2016 to fund the Otakikpo field development. Interest is charged on the FBNC Naira Facility at the greater of 3-month NIBOR plus 6% or 20% per annum, and interest payments are due at the end of each quarterly period. The loan is repayable in 10 quarterly instalments starting from March 2017 in accordance with a repayment schedule.

The loan had a final maturity date of 30 June 2019 and is secured by the Company's interest in the Otakikpo field and facilities as well as a parent company guarantee.

In September 2016, the Company upsized the FBNC Naira Facility by 2.5 billion Naira. The fully drawn amount was used to fund Otakikpo expenditures.

In September 2017, FBNC moved the loan to its affiliate, FBN Merchant Bank (FBNM) for administrative purposes.

In June 2018, the Company entered into a transaction to redenominate the currency of the facility from Naira into United States Dollars. The FBNC Naira Facility will be denominated in US$ ("FBNM Dollar Facility"). Subsequently, the facility was also upsized to refinance the outstanding balance on the Sterling facility referred to below. The balance on the 4.5 billion Naira FBNM Naira Facility and the refinanced outstanding balance on Sterling bank facility will be re-denominated into a new US$8.45 million facility.

The FBNM Dollar Facility has an interest rate of 3-month LIBOR plus 10% per annum and will mature in June 30, 2021 with a principal repayment moratorium for two quarters and equal quarterly principal repayments thereafter.

The documentation for the transactions was completed in March 2019.

(b) US$5 million FBN Merchant Bank Working Capital Facility

The Company put in place a one-year US$5 million revolving credit facility (the "FBNM Working Facility") in December 2017. The primary purpose of the revolver was to manage the working capital funding requirements of the Company. The facility has a 60-day repayment cycle for any drawn down amount and interest is charged at 90-day LIBOR plus 11.25% per annum. As at 31 December 2018 the Company has repaid all funds drawn from this facility.

(c) 5-billion Naira Sterling Bank Corporate Loan Facility

On 23 June 2016, the Company signed an agreement with Sterling Bank Plc ("Sterling") to secure a three-year Corporate Loan Facility for 5 billion Naira (the "Sterling Bank Facility). The purpose of the facility was to fund the Otakikpo field development.

In September 2016, the Company drew down 1 billion Naira on the facility. Interest charged on the Sterling Bank Facility was initially at the greater of 3-month NIBOR plus 10% per annum and interest payments are due at the end of each quarterly period from June 2017. The interest rate was subsequently amended to 26% per annum in February 2017. The loan is repayable in ten quarterly instalments starting from June 2017 in accordance with a repayment schedule.

The loan had a final maturity date of 30 September 2019 and is secured by the Company's interest in the Otakikpo field and facilities as well as a parent company guarantee.

In June 2018, the Company entered into a transaction to refinance the outstanding balance on the facility into the FBNM Dollar Facility.

The documentation for the transactions was completed in March 2019.

(d) US$15 Million Shell Western Supply and Trading Limited Advance Payment Facility

On 30 March 2017, the Company signed an agreement with Shell Western Supply and Trading Limited ("Shell"), a member of the Royal Dutch Shell Group of companies (LSE: RDSA, RDSB) to secure a three-year advance payment facility for US$15 million (the "Shell Facility").

The full US$15 million was drawn on the facility in March 2017 to fund the residual pre-production development costs in the Otakikpo field.

Interest is charged on the Shell Facility at 3-month LIBOR plus 10% per annum and interest payments are due at the end of each quarterly period. The loan is repayable in 10 quarterly instalments starting from December 2017 in accordance with a repayment schedule.

The loan has a final maturity date of 31 March 2020 and is secured by the Company's interest in the Otakikpo field and facilities as well as a parent company guarantee.

The following is the outstanding balance of interest-bearing loans and borrowings as at the year-end:

The movement in the loan account was as follows:

(e) Changes in liabilities arising from financing activities:

29 Capital and reserves

(a) Share capital

(b) Share premium

Share premium represents the excess of amount received over the nominal value of the total issued share capital as at the reporting date.

30 Non-controlling interest

This shows the net assets of the non-controlling interest analysed to the relevant companies.

31 Share-based payment arrangements

At 31 December 2018, the Group had the following share-based payment arrangements:

Long-term incentive plan scheme (equity-settled)

The long-term incentive plan ("LTIP") was approved on 19 November 2014 and amended on 21 December 2015. Further to previous awards under the LTIP, the Board on 3rd August 2018 approved the grant of 2,500,000 stock options to the CEO, Olalekan Akinyanmi and 1,500,000 stock options to the CFO, Lisa Mitchell. The Board also approved the grant of 3,630,000 stock options to employees of the Group.

Out of the 7,630,000 options, 5,625,000 were granted to the senior management team that the Group has designated as persons discharging managerial responsibilities ("PDMRs") and these options have the following performance conditions.

(i) No shares may be acquired, and the option will lapse in full if annual compound Total Shareholder Return ("TSR") is less than 10%

(ii) 30% of the shares subject to the option may be acquired by exercise if annual compound TSR is 10%

(iii) 100% of the shares subject to the option may be acquired by exercise if annual compound TSR is 20% or more

(iv) The number of shares subject to the option which may be acquired on exercise will be determined on a straight-line basis between 30% and 100% if annual compound TSR is between 10% and 20%

The remainder of the options are not subject to any performance criteria. All granted options have a three-year vesting period from the grant date and will remain exercisable for seven years after the vesting date.

The number and weighted average exercise prices of share options are as follows:

The options outstanding at 31 December 2018 had exercise prices in the range of US$0.16 to US$0.4 and a weighted average contractual life of 7.51 years.

Inputs for measurement of grant date fair values

The fair value of each stock option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following inputs:

Volatility was estimated with reference to empirical data for proxy companies with listed equity.

Share option scheme (equity-settled)

The Group established a share option scheme available to Directors, key management personnel, employees and consultants providing employment-type services, which provides the opportunity to purchase shares in the Group. In accordance with the scheme, holders of vested options are entitled to purchase shares at prices of the shares established at the date of grant, during a period expiring on the tenth anniversary of the effective date i.e. grant date. The grant dates for awards were 3 December 2010, 1 June 2011, 1 November 2011, 4 June 2012, 19 February 2013, 7 April 2013, 17 May 2013 and 26 March 2014 based upon a shared understanding of the terms of the awards at that time. This share option scheme has been replaced by the LTIP scheme described above. As such, no new options were granted in 2018 under this scheme.

The number and weighted average exercise prices of share options are as follows:

The options outstanding at 31 December 2018 have a weighted average contractual life of 3.18 years (2017: 4.05 years).

Non-Executive Director Share Plan (equity-settled)

The Board established the Non-Executive Director share plan on 21 December 2015.

These stock options are not subject to any performance criteria and vest three years from the grant date, subject to successful completion of a three-year service period starting on the grant date. The options can be exercised over a seven-year period beginning on the expiry of the service period.

Further to previous awards under the Non-Executive Director Share Plan, the Board approved the award of 600,000 stock options on 3 August 2018.

The number and weighted average exercise prices of share options are as follows:

The options outstanding at 31 December 2018 had a weighted average exercise price of 0.16 to 0.4 and a weighted average contractual life of 8.36 years.

Inputs for measurement of grant date fair values

The fair value of each stock option granted was estimated on the date of grant using the Black-Scholes Option Pricing Model with the following inputs:

Employee benefit expenses

32 Related Party Transactions

The Group had transactions during the period with the following related parties:

(a) Transactions with key management personnel

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly. These are the Directors of the Group.

(i) Loans to key management personnel

An unsecured loan of US$1,500,000 was granted to a Director on 9 December 2014. The loan had a three-year term and bears interest at a rate of four per cent per annum. Repayment was due at the end of the term. In September 2017, the loan was extended for another 3 years up to 9 December 2020 under the same terms and conditions.

Following the adoption of IFRS 9, the Group recognised a US$0.07 million ECL provision at the beginning of the year (see note 5.1).

At 31 December 2018, the balance outstanding was US$1,707,947 (2017: US$1,691,364) and is included in 'Other receivables'. Interest income from the loan during the year amounted to US$68,000 (2017: US$ 65,000)

(ii) Key management personnel transactions

Transactions with key management and related parties are summarised below:

· The Group sponsored an entrepreneurship development initiative valued at US$5,600 as part of its corporate social responsibility activities. The programme was organized by Accent Entrepreneurship Initiative, a company promoted by persons related to a Director.

· The Group also donated US$2,800 to Murtala Muhammed Foundation which is led by a Director toward corporate social responsibility activities.

· The Group engaged the services of Aluko & Oyebode, a company related to a Director for legal advisory services valued at US$9,800.

· There is an outstanding balance of US$0.33 million (2017: US$1.72 million) with respect to well completion services rendered by SOWSCO Wells Services Nigeria Limited, a company controlled by a Director.

(iii) Key management personnel compensation

Details of key management personnel compensation during the year have been disclosed in the remuneration report in the Annual Report and Accounts.

(iv) Key management personnel and director transactions

Directors of the Company control 8.27% (2017: 8.27%) of the voting shares of the Company.

(b) LEKOIL Limited, has a Management & Technical Services Agreement with LEKOIL Management Corporation ("LMC") under the terms of which LMC was appointed to provide management, corporate support and technical services. The remuneration to LMC includes reimbursement for charges and operating costs incurred by LMC.

33 Group entities

(a) Significant subsidiaries:

(i) Although the Company holds less than a 50% ownership interest in LEKOIL Nigeria Limited, it has control over the entity through common Directors and it is entitled to 90% of the economic benefits related to its operations and net assets based on the terms of agreements under which the entity was established. Consequently, the Company consolidates LEKOIL Nigeria Limited.

LEKOIL Nigeria Limited has ten wholly owned subsidiaries, namely: Mayfair Assets and Trust Limited, LEKOIL Oil & Gas Investments Limited, LEKOIL Exploration and Production Nigeria Limited, LEKOIL Energy Nigeria Limited, Princeton Assets and Trust Limited, Lekgas Nigeria Limited, Lekpower Limited, LEKOIL Supply and Trading Limited, LEKOIL Oil and Gas Integrated Limited and LEKOIL 24 Limited. The results of these subsidiaries have been included in the consolidated financial results of LEKOIL Nigeria Limited.

(b) Non-controlling interests (NCI)

The following table summarises the information relating to each of the Group's subsidiaries, before any intra-group eliminations: