LEK.L Regulatory News (LEK)

18 October 2021

Lekoil Limited

("LEKOIL" or the "Company")

Annual Results for the year ended 31 December 2020 - Operational update

LEKOIL (AIM: LEK), the oil and gas exploration and production company with a focus on Nigeria and West Africa, announces its final audited results for the year to 31 December 2020 (the "Accounts") and a corporate and operational update.

A copy of the Accounts will shortly be available on the Company's website: https://lekoilplc.com/corporate-documents

On 30 September 2021, the Company announced that trading in the Company's Ordinary Shares ("Shares") on AIM would be suspended (under AIM Rule 19) with effect from 7.30 a.m. on 1 October 2021 pending publication of the Accounts, which has now been complied with.

Notwithstanding this, the Company has been advised by its nominated adviser that trading in its Shares will remain suspended (under AIM Rule 40) until such time as it has clarified, for the purposes of the AIM Rules, its relationship with its operating subsidiary. The Company will provide updates on the suspension when it has further information.

Operational update for the month of September 2021 taken from information provided by Lekoil Nigeria

· Otakikpo:

o Oil production in September 2021 of circa 5,169 bopd (gross)/2,067 bopd (net).

o Oil production in September 2021 was largely interruption free.

o Ongoing technical work for drilling of two (2) additional production wells.

o No material progress/update on financing required to drill additional production wells.

· OPL 310 (Ogo):

o No material update.

· OPL 325:

o No material update.

· OPL 276

o Ongoing technical and commercial work for appraisal well drilling.

o Engagement with vendors for vendor financing of appraisal wells.

For further information, please visit www.lekoilplc.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 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 ('MAR'). Upon the publication of this announcement via Regulatory Information Service ('RIS'), this inside information is now considered to be in the public domain.

Chairman's Statement

Introduction

2020 was a difficult year for the Company. The year was book ended by the QIA loan fraud in early 2020 and the shareholder triggered Extraordinary General Meeting ("EGM") in January 2021. The challenge we have faced during 2020/2021 was to try to implement changes to governance against the backdrop of the Shareholders Agreement that was entered in to at IPO/Admission. The Shareholders Agreement severely limits the ability of the Company's Board to implement its strategy and change if Lekoil Nigeria does not agree. The Group has struggled for a number of years to create any shareholder value and this led to growing shareholder frustration during 2020 that culminated in the EGM where the Board of the Company was sent a very strong message by a large majority of shareholders. The EGM led to the appointment of new directors to the Board in early January 2021. This gave the Board a renewed focus on corporate governance but this was met with some resistance by the then current management of the Company and Lekoil Nigeria. In relatively quick time this led to the resignation of the then Chairman of the Company.

Many of the issues encountered in late 2020/2021 stem from the Shareholders Agreement with its limitations on what influence the Company has over the governance of the operations of Lekoil Nigeria and its subsidiaries. The Board is working to ensure that it uses all the tools available to it to protect shareholders interests and hold to account any individuals who have acted against shareholders' interests in the past. The Board will require some time to carry out the work to ascertain exactly what the legal position of Company is. The Company is also limited in terms of funds available to it so it will need to seek additional funding to be able to carry out this work.

The financial information that the Company is presenting today reflects a picture of the wider Lekoil Group consistent with past presentations. Further to the announcements made in September 2021, the Company does not currently have day-to-day operational control over, nor access to the day-to-day entity-level financial information relating to Lekoil Nigeria and its subsidiaries. As a result, I would like to stress that this Annual Report and Accounts needs to be read in that context.

The Board is currently working to present a standalone financial position of the Company (and its wholly owned subsidiaries) prior to its next fundraising so that shareholders and investors have a clear picture of the assets and liabilities of the Company and its wholly owned subsidiaries.

Looking forward, the Board envisages delivering the following:

· Presenting a clear and accurate picture of the financial current position of the Company and its wholly owned subsidiaries, as distinct from the wider Lekoil Group;

· Ensuring that the Company is fully financed so it can recover as much value as possible for its shareholders from the investments made to date; and

· Ensuring that the Company enforces its rights under the Shareholders Agreement, including the Company being represented on the Lekoil Nigeria board. That board representation will be with the aim of assisting in the efficient management of Lekoil Nigeria, streamlining the company to become a low-cost producer without the drag of large exploration assets that the Group has been unable to fund.

Whilst in the Boardroom the Company was undergoing significant change in 2020 and 2021, I would like to note that the majority of the employees within the Lekoil Group and its partners working in the assets continued their hard work without interruption. I'd like to thank those colleagues who were working at the Otakikpo field, who ensured that operations continued in a safe and secure manner despite the challenges COVID bought about. Thanks to their diligence our operations continued uninterrupted during the pandemic.

Financial review

In 2021, the Company commenced a formal review of the various intercompany and related party loan positions. Although this has not yet been finalised, the Directors expect the findings of that review will confirm, inter alia, that the amount owing to the Company (together with its wholly owned subsidiaries) from Lekoil Nigeria (as ultimate parent to the Lekoil Nigeria group which includes its own wholly owned subsidiaries) will exceed USD$300 million (as at 31 December 2020). Several amounts owing from related parties to the Company (together with its wholly owned subsidiaries) are currently passed due and the Company has initiated action to recover those amounts. In addition, the review will consider the likely recoverability of the loan amounts due and whether or not any balance might be impaired. In light of the current Board's decision to impair OPL310, the Board believes it is highly likely there will be the need to impair a number of loans related to the entities holding the exploration assets. The Company is aware that it and Lekoil Nigeria may not agree on the exact intercompany debt position.

This Annual Report and Accounts has been presented on a group consolidated basis, in line with the previous practice of the Company. The current Board of Directors note that given Lekoil Nigeria's position with respect to the Shareholder Agreement, investors and shareholders should consider all relevant factors including those noted above, when making an investment decision and not place undue reliance only on the "consolidated" accounts. The Board is working on presenting a set of accounts of the Company and its wholly owned subsidiaries to provide a clearer picture of the Company's (and its wholly owned subsidiaries) assets and liabilities. Further to the announcements made in September 2021, the Board will be assessing the appropriate form of accounting for the Company during 2021 and will update its shareholders at the appropriate time.

In September 2021, the Company provided a corporate and operational update and announced the entry into a convertible facility agreement allowing the Company to draw down up to £200,000, primarily to fund legal costs and ongoing operational costs. The Company notes that Lekoil Nigeria has stated that it would no longer fund any of the costs of the Company. As such, whilst the Company has access to the funds under the convertible facility agreement, it remains in need of further funding (for the repayment of the convertible facility and working capital) and is looking at all possible options to achieve this, including means by which all shareholders can participate in the relevant funding mechanism.

Asset base

Otakikpo - producing asset

Despite the wider impact of COVID-19, operations at Otakikpo continued to run effectively. In 2020, production levels at Otakikpo averaged approximately gross 5,062 bopd, (2,025 bopd net to Lekoil).

In 2020, total production from Otakikpo was approximately 740,655 barrels net for the full year. The Group had equity crude sales proceeds of US$31.8 million from 839,341 barrels lifted during the year. Lekoil realised an average sales price of approximately US$37.9 per barrel.

OPL 310 - appraisal and exploration asset

During 2020 the Group engaged advisors to run a farm out process of Lekoil's share for OPL 310. This farm out process was completed without any offers being received during 2020.

As described in the Strategic Report, during 2020 and early 2021, the Group had extensive discussions and negotiations with Optimum Petroleum Development Company ("Optimum"), the operator of OPL 310, about the operation of the Cost and Revenue Sharing Agreement ("CRSA"). Optimum submitted a letter, announced on 24 February 2021, proposing the termination of the CRSA. The Group is seeking the appropriate legal advice and will engaged with Optimum to ensure that the appropriate steps outlined in the Agreement are followed. There is a material risk that this dispute will end up in litigation.

In light of the lack of interest during the farm out process, the inability of the Company to raise financing for the last two years to fund the next two development wells, the proximity to the end of the license and the ongoing legal dispute with Optimum, the Board has decided to take an impairment under IFRS 6 of US$107.5 million reducing the carrying value of the asset to US$10 million. The Board believes there remains some option value given the current high oil price environment.

OPL 276 - appraisal and exploration asset

The acquisition of the 45% participating interest in the Production Sharing Contract ('PSC") for OPL 276 is conditional upon, among other things, the extension of the term of the Licence and the PSC, obtaining the consent of the Nigerian National Petroleum Corporation ("NNPC") and obtaining the approval of the Minister of Petroleum Resources of the Federal Republic of Nigeria. The application for extension has been filed with the NNPC and awaits approval from both the NNPC and ultimately the Minister of Petroleum Resources. There can be no certainty that the extension will be granted and therefore access to the Licence and PSC could be lost.

OPL 325 - exploration asset

Terms for a PSC in relation to OPL 325 have been negotiated and agreed between the NNPC and the contractor parties which is made up of the National Petroleum Development Company ("NPDC") and Local Content Vehicles. Execution of the PSC was expected to occur in 2020 but was not completed. Subsequent to the execution of the PSC, the Group intends to farm-down a portion of its interest following a detailed prospect and lead risking study. There can be no certainty that the PSC will be executed and thus there is a risk that access to the PSC could be lost.

Corporate Structure and Board and Management update

During 2020 and 2021, the Company saw a significant change in the composition of the Board, details of which can be found in the Strategic Report.

A significant post balance sheet event was the termination of the Company's employment contract with its then CEO, Mr. Olelekan Akinyanmi. Mr. Akinyanmi remains a significant shareholder of the Company and continues to be employed by Lekoil Nigeria. The Company is currently in dispute with Mr Akinyanmi over a number of issues, as previously disclosed to the market.

In September 2021, the Company provided a corporate and operational update and noted that it was in day-to-day dispute with Lekoil Nigeria about the implementation of the Shareholders Agreement. Whilst Lekoil Nigeria has stated that it will provide such financial information as the Company requires to comply with its reporting obligations, there can be no guarantee that this and other relevant information will be provided to the Company.

Pursuant to the Shareholders Agreement, the Company has a 40% equity interest in, and is entitled to 90% of any distributions (i.e., dividends, other distributions and any return of capital (whether following winding-up, reduction of capital or any other forms of return of capital) from, Lekoil Nigeria. The Shareholders Agreement also limits the Company's control over the day-to-day operations of Lekoil Nigeria and its subsidiaries. Furthermore, pursuant to the Shareholders Agreement, the Company has very little control over when distributions (if any) are paid. Notwithstanding this, the current Board is committed to running the Company in an efficient, cost-effective manner. It is also committed to protecting and recovering as much value for shareholders as possible from the assets of the Company. We look forward to engaging with all our shareholders to discuss those goals and we ask for your support to help us achieve them.

Outlook

The Company has faced considerable challenges in 2020 that have also extended into 2021. The current Board is committed to running the Company in an efficient, cost-effective manner. It is also committed to recovering as much value as possible for shareholders from the assets of the Company. Looking forward we have three clear objectives we will seek to achieve:

· Presenting a clear and accurate picture of the current financial position of the Company and its wholly owned subsidiaries, as distinct from the wider Lekoil Group;

· Ensuring that the Company is fully financed so it can implement its plan in order to recover as much value as possible for its shareholders from the investments made to date; and

· Ensuring that the Company enforces its rights under the Shareholders Agreement, including the Company being represented on the Lekoil Nigeria board. That board representation will be with the aim of assisting in the efficient management of Lekoil Nigeria, streamlining the company to become a low-cost producer without the drag of large exploration assets that the Group has been unable to fund.

We thank our shareholders for their support in 2021 whilst we pursue these objectives.

Anthony Hawkins,

Interim Executive Chairman

15 October 2021

OPERATIONS REPORT AND ASSET SUMMARY

Otakikpo Marginal Field - Producing Asset

Overview

In 2020, production averaged gross 5,062 bopd with 2,025 bopd[i] net to Lekoil (2019: 5,305 bopd with 2,122 bopd[ii] net to Lekoil) for the year and total production was approximately 740,655 barrels of oil (2019: 759,666 barrels of oil).

For the next phase of development, targeting a gross production of 15,000 to 20,000 bopd (6,000 to 8,000 bopd net to Lekoil), the joint operations executed additional service agreements with Schlumberger which cover the comprehensive infrastructure upgrades and field management services in relation to the planned upstream drilling programme. The Group has been seeking funding for this development for the last two years and as of today has not been successful in raising funding. The Group is working to try and raise funding but currently cannot confirm if it will be able to do this and deliver the ramp up in production stated above.

Ogo Discovery and OPL 310 - Appraisal Asset and Exploration

Overview

In the last year, we were dedicated to advancing plans for the Ogo appraisal drilling programme with particular focus on raising the requisite financing for the project.

On 21 January 2020, pursuant to the Cost and Revenue Sharing Agreement ("CRSA"), Lekoil was required to pay US$5.6 million to the Operator of OPL 310 Licence, Optimum Petroleum Development Company ("Optimum"). The payment represented a portion of Optimum's sunk costs. Optimum and Lekoil agreed for this payment and the balance of consent fees (US$4.0 million) which comes to a total of US$9.6 million to be deferred such that US$2.0 million and US$7.6 million are paid by the 20 March 2020 and 2 May 2020, respectively.

Following the payment of US$2.0 million to Optimum due in March 2020, a further agreement was obtained for a deferred payment schedule for the final payment due in May 2020 of US$7.6 million such that US$1.0 million was to be paid on or before 15 July 2020, US$2.0 million to be paid by 30 September 2020 and the balance of US$4.6 million by 30 November 2020. As announced on 15 July 2020, the Company confirmed the payment of US$1.0 million as agreed.

On 11 December 2020, the Company received a letter from Optimum communicating its enforcement of the default clause which specifies the conditions for establishing default contained within the CRSA. This letter was received as payments of US$6.6 million, to cover the portion of sunk costs and consent fees, had not been received by 30 November 2020. The Company continues to discuss with Optimum, a deferment of these payments as the Company intends to focus its financial and other resources in support of securing funding for the second phase of the Otakikpo development as well as the Ogo appraisal programme. The Company, working with Optimum, has identified and engaged an appropriate rig for the appraisal drilling where the service provider has accepted the result of the early performed site survey. To finance the appraisal programme, the Company has explored and is in constructive discussions with potential financiers to provide a combination of cost-effective vendor and alternative financing solutions.

Optimum submitted a letter, announced on 24 February 2021, proposing the termination of the CRSA. Mayfair is seeking the appropriate legal advice and has engaged with Optimum to ensure that the appropriate steps outlined in the Agreement are followed.

During 2020 the Group engaged an advisor to run a farm out process. This process did not result in any offer or expression of interest. As a result the Group cannot assume it will be able to raise the required funding to drill the two exploration wells. This, in combination with several other qualitative factors, has given rise to the US$107.5 million impairment adjustment in relation to this asset

OPL 310 expires in August 2022 if an appraisal well is not drilled prior to that time.

OPL 276 - Development Asset

Overview

In August 2019, Lekoil entered into an agreement with Newcross to acquire, subject to the receipt of the required consents, a 45% participating interest in the PSC in relation to the Oil Prospecting Licence 276.

The agreed acquisition from Newcross is for a total staged consideration of US$5.0 million, payable subject to the extension of the term of the Licence and the PSC, obtaining the approvals by the NNPC and the Minister of Petroleum Resources of the Federal Republic of Nigeria. Following this acquisition, the contractor parties will be Lekoil (45%), Newcross (45%) and Albright Waves Petroleum Development Limited (10%).

OPL 325 - Exploration Asset

Overview

Subsequent to the execution of the PSC, the Company intends to farm-down a portion of its interest following a detailed prospect and lead risking study.

FINANCIAL REVIEW

The Financial Statements and notes set out below should be read in conjunction with this review which has been included to assist in the understanding of the Group's financial performance and position for the period ending 31 December 2020.

The Lekoil Group reports an average production volume of 2,025 bopd[1], net for the year ended 31 December 2020 (2019: 2,122 bopd, net). The challenges of the COVID-19 pandemic which significantly impacted the average crude oil price for the year, led to the significant rise in current liabilities as the Group faced low cash receipts from its crude sales to meet its obligations. Consequently, despite significant effort in reducing current liabilities in the prior year, current liabilities increased by over 38% in the current year. This is in spite of the high crude sales volume in 2020 relative to 2019.

In July 2020, the Group executed a Restructuring Offer Letter with its existing lenders, FBNQuest Merchant Bank ("FBNQuest") to restructure its existing secured interest-bearing term loans. The Restructuring Agreement significantly reduced the Groups near term quarterly amortisations thus providing flexibility and liquidity for the Company in light of the challenging macro-economic environment due to COVID-19.

The Group recorded a total comprehensive loss of US$119.3 million for the year ended 31 December 2020 (2019: loss of US$12.0 million). Total cash and bank balances at the end of the year were US$4.8 million with US$1.7 million recognised as restricted cash (2019: US$3.8 million with US$1.1 million recognised as restricted cash), with total outstanding debt financing net of cash (excluding restricted cash) decreased to US$11.1 million (2019: US$16.5 million).

Production and Revenues

Total production from the Otakikpo marginal field for the year attributable to Lekoil was approximately 740,655 barrels (2019: 759,666 barrels). Total revenue for the year was US$32.9 million, down 24% from the previous year of US$42.0 million, despite the additional revenue of US$1.1 million (2019: nil) the Group earned from Third party crude handling. This decrease was as a result of lower average crude prices brought about by the adverse macro-economic environment due to COVID-19 pandemic, in spite of the significantly higher liftings in 2020. The Group's equity crude was 887,811 barrels for the year 2020 (2019: 677,788 barrels). The Group's realised oil price was US$35.8 per barrel for the year (2019: US$62.0 per barrel). The Group does not currently have oil price hedging in place apart from amounts required under the debt facilities.

Cost of sales, depreciation, impairments and administrative expenditure

Underlying cost of sales were US$19.6 million or US$26.5/bbl (2019: US$14.1 million or US$18.6/bbl). The increase in cost per barrel was largely due to the increase in lifting costs as a result of the higher volumes lifted in 2020. Depletion and amortisation costs on oil and gas assets were US$6.6 million or US$9.0/bbl (2019: US$6.2 million and US$8.2/bbl).

Operating expenses were US$5.8 million or US$7.9/bbl (2019: US$7.7 million and US$10.2/bbl). Operating expenses captures the Group's share of expenditure incurred on production operation support activities such as accommodation for field personal. This was higher in 2020 due to an increase in facility costs brought about by increased lifting costs.

Impairment charge of US$111.5 million was recognised during the year (2019: Nil). This follows from the write-down of the carrying value of OPL310 (US$107.5 million), given unsuccessful efforts to fundraise or farm-out the asset during 2020 and the resultant difficulties in the Group's ability to adhere to its commitments on the license prior to its expiry. Given the Directors believe failure to meet such obligations would likely mean an extension on the license would not be granted the asset has been impaired. In addition, the significant crash in oil price as a result of decline in oil demand due to the corona-virus pandemic. Consequently, the directors carried out an impairment assessment on the oil and gas assets and the assessment showed net recoverable value of US$29.6 million against the carrying value of oil and gas assets of US$33.6 million.

General and administrative expenses were US$16.3 million compared to US$21.4 million for the same period in 2019. The decrease in general & administrative expenses in 2020 was due to the Group's concerted efforts in bringing down costs in light of the adverse macro-economic environment during the year.

Capital investment

The Group's capital expenditure for the year was US$7.4 million (2019: US$18.0 million), focused largely on exploration activities in OPL 310 obligation of US$2.0 million, Optimum and Third party funded obligation of US$2.9 million and production facilities in the Otakikpo marginal field of US$2.4 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 benefit for year was US$2.6 million. (2019: tax expense of $7.1 million.) The variance year on year is due to lower earnings and assessable profit including deferred tax expense credit in 2020 relative to 2019.

Loss for the year and loss per share

The Group recorded a total comprehensive loss of US$119.3 million for the year to 31 December 2020 (2019: loss of US$12.0 million) and a basic and diluted loss per share of approximately US$23 cents (2019: loss of US$2 cent).

Cash and bank balances

The Group had total cash and bank balances of US$4.8 million with US$1.7 million recognised as restricted cash as at 31 December 2020 (2019: US$3.8 million with US$1.1 million recognised as restricted cash). Restricted cash of US$1.7 million (2019: US$1.1 million), represents cash funding of the debt service reserve accounts of FBNQuest Merchant Bank loan and restricted cash on a bank guarantee for the MT Nox and Busy Snail contracts. Restricted cash 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 26 in the financial statements for a further breakdown.

Assets and liabilities

The Group's non-current assets decreased to US$98.3 million as at 31 December 2020 (US$206.1 million at 31 December 2019), reflecting depreciation, depletion and amortisation of oil and gas assets, and amortisation of deferred tax assets during the year which outweighed investments in Otakikpo marginal fields and exploration and evaluation expenditure in OPL 310. Current assets, which represent the Group's cash resources, other assets, other receivables and crude inventory, decreased significantly from US$11.4 million as at 31 December 2019 to US$8.9 million as at 31 December 2020. The decrease is a result of significant decrease in crude inventory and decrease in other receivables following from significant settlement of cash call receivable from joint operations partner as at 2020 year-end.

Current liabilities which consist of the loan facilities set out above due within twelve months, trade and other payables and income tax payable, significantly increased by 42% from US$28.8 million as at 31 December 2019 to US$41.1 million as at 31 December 2020. The increase was largely driven by 61% increase in trade payables in 2020 financial year. The challenges of the COVID-19 pandemic which significantly impacted the Group's cash resources led to the slow pace in settlement of trade payables.

Non-current liabilities which consist of portion of loan facilities due after twelve months and provisions for asset retirement obligation decreased from US$14.3 million as at 31 December 2019 to US$10.7 million as at 31 December 2020.

Dividend

The Directors did not recommend the payment of a dividend for the year ended 31 December 2020 (2019: 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.

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 2020, the Group had liquid resources of approximately US$3.0 million in the form of cash and bank balances available to meet capital, operating and administrative expenditure.

The Group executed a Restructuring Offer Letter with FBNQuest Merchant Bank ("FBNQuest") to significantly reduce the Groups near term quarterly amortisations and provide flexibility and liquidity for the Company.

The Group took significant steps including reduction in staff numbers by about 40% plus other measures to reduce overheads. This resulted into significant reduction in general and administrative expenses by about 33%.

The Directors have assessed the ability of the Group to continue as a going concern having prepared detailed cash, funding and liquidity forecast through to October 2022. The Directors believe that there is a material uncertainty that may cast significant doubt on the Group's ability to continue as a going concern. Notwithstanding the material uncertainty, the Directors' confidence in the Group's forecast and the mitigating actions available supports the preparation of the financial statements on a going concern basis. Details on the going concern disclosure are shown in Note 2.2 to the financial statements.

Audit Report

The Company's Auditor does not express an opinion on the consolidated financial statements of the Company and its subsidiaries. This Auditor noted that because of the significance of the matters described in their Basis for Disclaimer of Opinion section of their Audit report, they have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the consolidated financial statements.

Consolidated statement of profit or loss and other comprehensive income or loss

The notes form an integral part of these financial statements.

Consolidated statement of financial position

As at 31 December 2020

These consolidated financial statements were approved by the Board of Directors on 15 October 2021 and signed on its behalf by:

___________________________

Anthony Hawkins,

Interim Executive Chairman

The notes form an integral part of these financial statements.

Consolidated statement of changes in equity

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

Consolidated statement of cash flows

** Changes in liabilities arising from financing activities have been disclosed in note 26.

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 c/o Walkers Corporate Limited, Cayman Corporate Centre, 27 Hospital Road, George Town, Grand Cayman KY1-9008, 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

2.1. Statement of compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board (IASB) and IFRS Interpretations Committee (IFRS IC) as adopted by the European Union (EU). The consolidated financial statements were authorised for issue by the Board of Directors on 15 October 2021.

The consolidated financial statements comprise:

- Consolidated statement of profit or loss and other comprehensive income

- Consolidated statement of financial position

- Consolidated statement of changes in equity

- Consolidated statement of cash flows and

- Notes to the consolidated financial statements

2.2. Material uncertainty related to Going concern basis of accounting

These consolidated financial statements have been prepared on the going concern basis of accounting, which assumes that 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. There is however a material uncertainty that can cast significant doubt on the Group's ability to continue as a going concern which is discussed below.

The Directors of the Group draw the users' attention to the recurring losses after tax of US$119.3 million incurred in the current year (2019: US$12.0 million). The Group also has a negative working capital position of US$32.2 million (2019: US$17.5 million) and this is an indicator of a possible liquidity concern.

The Group closely monitors and carefully manages its liquidity risk. Cash forecasts are regularly produced and sensitivities run for different scenarios but not limited to, changes in commodity prices and different production rates from the Group's producing asset. Cash forecasts have been prepared with the base case run using an average crude oil price US$67/bbl. for the periods covered by the Going concern model (i.e. 12 months from the signing date).

The Group is able to take mitigating actions to improve liquidity, including further reducing its operational costs; deferment of capital activities on OPL 310 and other capital projects until it has raised the required funds to execute them; to further renegotiate its debt obligation; and to raise additional funds if the need arise from either the equity or debt markets.

The Group has reached agreements on the deferral of re-payment terms of its current liabilities with certain of its creditors which alleviates cash flow requirements within the next 12 months. However, included in the account payable balance is an amount of US$6.6 million due to one of its joint operating partners which the Directors have deferred for 18 months in its cash flow forecast. The Group has not been able to conclude on negotiations with this joint operating partner to defer the payment for the next 18 months when the Group will be able to commence repayment of the liability. The Group also relies on the ability to manage the payment of taxes to the Nigerian government. This situation indicates that a material uncertainty exists that may cast significant doubt on the Group's ability to continue as a going concern.

The Group's base assumptions show that it will be able to operate within its contractual financial obligations taking into consideration the Group's ability to defer its creditors' payments, manage the payment of taxes and (if necessary) relinquish assets over the next 12 months. The Company is also limited in terms of funds available to it so it will need to seek additional funding to be able to carry out its work.

The Group continues to monitor its cash flow forecasts and would take mitigating actions in advance including further negotiations with creditors for the deferment of their payments and deferment of capital expenditure until it has raised the required funds to execute them.

Notwithstanding the material uncertainty, the Directors' confidence in the Group's cash forecast supports the preparation of the financial statements on a going concern basis.

2.3. 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.

2.4. 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.

2.5. 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.

2.5.1. 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 2.2 - Going concern basis of accounting.

· Note 17 - 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 - The Group's assumption that Optimum funded obligation will not be fully recovered through successful development of OPL (Oil Prospecting License) 310.

· 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.

· Note 31 - The Group has applied relevant judgement in the consolidation of LEKOIL Nigeria Limited as supported by the standard and interpretation of the shareholder's agreement which has been disclosed alongside key judgements in note 31, given its less than 50% ownership interest but 90% economic interest in LEKOIL Nigeria Limited. 

2.5.2. 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 2020 is included in the following notes:

· Note 2.2 - Going concern. Key assumptions made, and judgment exercised by the Directors in preparing the Group's cash forecast.

· Note 14.3 - Recognised deferred tax assets. Availability of future taxable profit against which carry forward losses can be utilised.

· Note 11 - Impairment of oil and gas assets. Key assumptions underlying the impairment assessment relate to, amongst other things: the carrying value of exploration and appraisal assets, the potential that the Group will fail to meet its obligations under the license agreement, projected crude prices, estimated production and considerations around the applicable weighted average cost of capital (WACC).

· Note 25 - Provisions for asset retirement obligation. Key assumptions underlying the asset retirement obligation as at year end.

· Note 32.5 - Litigations and claims. Key assumptions about the likelihood and magnitude of future outflow of economic resources arising from ongoing legal disputes. The Group does not expect any adverse judgement regarding these cases based on advice received from its solicitors.

3. Significant accounting policies

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

3.1. Basis of consolidation and Business combinations

3.1.1. Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. Control is achieved when the Company:

· has the power over the investee

· is exposed, or has rights, to variable returns from its involvement with the investee; and

· has the ability to use its power to affects its returns.

The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

When the Company has less than a majority of the voting rights of an investee, it considers that it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company's voting rights in an investee are sufficient to give it power, including:

· the size of the Company's holding of voting rights relative to the size and dispersion of holdings of the other vote holders;

· potential voting rights held by the Company, other vote holders or other parties;

· rights arising from other contractual arrangements; and

· any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders' meetings.

Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, the results of subsidiaries acquired or disposed of during the year are included in profit or loss from the date the Company gains control until the date when the Company ceases to control the subsidiary.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with the Group's accounting policies.

All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between the members of the Group are eliminated on consolidation.

Non-controlling interests in subsidiaries are identified separately from the Group's equity therein. Those interests of non-controlling shareholders that are present ownership interests entitling their holders to a proportionate share of net assets upon liquidation may initially be measured at fair value or at the non-controlling interests' proportionate share of the fair value of the acquiree's identifiable net assets. The choice of measurement is made on an acquisition-by-acquisition basis. Other non-controlling interests are initially measured at fair value. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests' share of subsequent changes in equity.

Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of the subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

Changes in the Group's interests in subsidiaries that do not result in a loss of control are accounted for as equity transactions. The carrying amount of the Group's interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the Company.

When the Group loses control of a subsidiary, the gain or loss on disposal recognised in profit or loss is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), less liabilities of the subsidiary and any non-controlling interests. All amounts previously recognised in other comprehensive income in relation to that subsidiary are accounted for as if the Group had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to profit or loss or transferred to another category of equity as required/permitted by applicable IFRS Standards). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IFRS 9 when applicable, or the cost on initial recognition of an investment in an associate or a joint venture.

3.1.2. 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.

When the consideration transferred by the Group in a business combination includes a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the 'measurement period' (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date.

3.1.3. Interest in joint operations

A joint operation is a joint arrangement whereby the parties that have joint operation of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

The Group has determined that the relevant activities for its joint arrangements are those relating to the operating and capital decisions of the arrangement, including the approval of the annual capital and operating expenditure work programme and budget for the joint arrangement, and the approval of chosen service providers for any major capital expenditure as required by the joint operating agreements applicable to the Group's joint arrangements. All the Group arrangements have been classified as joint operations addition, the Group has also its joint arrangement as a joint operations. Making this classification requires the Group to assess their rights and obligations arising from the arrangement. Specifically, the Group considers:

· The structure of the joint arrangement - whether it is structured through a separate vehicle

· When the arrangement is structured through a separate vehicle, the Group also considers the rights and obligations arising from:

§ The legal form of the separate vehicle.

§ The terms of the contractual arrangement; and

§ Other facts and circumstances, considered on a case-by-case basis.

When a Group entity undertakes its activities under joint operations, the Group as a joint operator recognises in relation to its interest in a joint operation:

Otakikpo marginal field

The Otakikpo marginal field lies in a coastal swamp location in OML 11, adjacent to the shoreline in the south-eastern part of the Niger Delta.

The Group farmed-in to Otakikpo in May 2014 for the acquisition of 40 percent participating interest from Green Energy International Limited ("GEIL"), the operator of the field. The consideration paid to GEIL for the acquisition of the interest comprised a signature bonus of US$7 million and a production bonus of US$ 4 million.

Commercial production commenced in February 2017 and the asset has been producing steadily till date.

OPL 310

OPL 310 is located in the Dahomey Basin on the West African Transform Margin. The block extends from the shallow water continental shelf close by the City of Lagos, into deeper water.

The Group farmed-in to OPL 310 in 2013 for a 17.14 percent participating interest but received the consent of the Minister of Petroleum Resources of Nigeria for the approval of the acquisition of the 17.14 participating interest on 9 June 2017.

The operator of the field is Optimum Petroleum Development Limited having 60 percent participating interest while the remaining 22.86 percent is held by Afren Investments Oil and Gas (Nigeria) Limited.

The Federal Government of Nigeria granted during the year, an extension of the asset's licence for additional 3 years effective 2 August 2019. The asset is at appraisal and exploration stage.

OPL 325

OPL 325 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.

Ashbert Oil and Gas Limited has 70 percent participating interest in the OPL 325. The other partners to OPL 325 are National Petroleum Development Company Limited (NPDC) that has 20 percent working interest and a Local content vehicle that has 10 percent working interest.

In October 2015, the Group entered into an agreement with Ashbert Limited to acquire, via Lekoil Exploration and Production Nigeria Limited, 88.57 percent of the issued share capital of Ashbert Oil and Gas Limited.

Ashbert Oil & Gas Limited was awarded the OPL 325 licence for an initial consideration of US$16.1 million, with other payments due at development milestones totalling US$24.1 million. The Production Sharing Contract is yet to be finalised.

3.2. Foreign currency

The US Dollar is the presentation and functional 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

· exchange differences on transactions entered to hedge foreign currency risks.

3.3. Revenue

3.3.1. 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.

3.3.2. 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. These costs are directly attributable costs in the production of revenue.

3.3.3. Interest income

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

3.3.4. 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.

3.3.5. Third party crude handling revenue

This represents revenue earned for storage, handling and exportation of crude for third party. Revenue is recognised when or as the Group satisfies a performance obligation for crude storage, handling and export of crude on behalf of third party and when the volume of the third-party crude can be reasonably estimated. The transaction charge out rate is pre-agreed with the Third party. Revenue is recognised at a point in time.

3.4. Share capital

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.

3.5. 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.

3.5.1. Financial assets

Financial assets are classified in the following categories:

· financial assets measured at amortised cost;

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

· 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.

3.5.2. 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.

3.6. Property, plant and equipment

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.

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.

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.

3.7. Exploration and Evaluation (E&E) expenditures

Licence acquisition costs

Licence 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 licence and property acquisition costs are written off. Capitalised licence 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.

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.

3.8. 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.

3.9. Leases

The Group as lessee

The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets (such as tablets and personal computers, small items of office furniture and telephones). For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate.

Lease payments included in the measurement of the lease liability comprise:

· Fixed lease payments (including in-substance fixed payments), less any lease incentives receivable;

· Variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date;

· The amount expected to be payable by the lessee under residual value guarantees;

· The exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and

· Payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease.

The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.

The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:

· The lease term has changed or there is a significant event or change in circumstances resulting in a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

· The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using an unchanged discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used).

· A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured based on the lease term of the modified lease by discounting the revised lease payments using a revised discount rate at the effective date of the modification.

The Group did not make any such adjustments during the periods presented.

The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day, less any lease incentives received and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses.

Whenever the Group incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognised and measured under IAS 37. To the extent that the costs relate to a right-of-use asset, the costs are included in the related right-of-use asset, unless those costs are incurred to produce inventories.

Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease.

3.10. 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.

3.11. 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, licences, 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:

3.12. Employee benefits

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.

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.

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.

3.13. 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.

3.14. Finance income, other Income and finance costs

Finance income comprises, where applicable, interest income on funds, dividend income, gains on the disposal of financial assets.,

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. Cash payments relating to finance costs are recognized in cashflow from financing activities because they are costs of obtaining financial resources.

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.

Other income comprises, 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.

3.15. 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.

3.16. 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 its producing assets as operating segments in accordance with IFRS 8 Operating Segments.

3.17. 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.

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.

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

3.18. Prepaid assets

The prepaid assets recognised as a result of OPL 310 are released to the income statement on a unit of production method.

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 29- share-based payment arrangements

Note 33 - financial risk management and financial instruments

5. Adoption of new and revised International Financial Reporting Standards

5.1. New and amended IFRS Standards that are effective for the current year

Impact of the initial application of Interest Rate Benchmark Reform amendments to IFRS 9 and IFRS 7.

In September 2019, the IASB issued Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7). These amendments modify specific hedge accounting requirements to allow hedge accounting to continue for affected hedges during the period of uncertainty before the hedged items or hedging instruments affected by the current interest rate benchmarks are amended as a result of the on-going interest rate benchmark reforms.

The amendments also introduce new disclosure requirements to IFRS 7 for hedging relationships that are subject to the exceptions introduced by the amendments to IFRS 9.

The amendments has no impact on the business operation of the Group.

Impact of the initial application of Covid-19-Related Rent Concessions Amendment to IFRS 16

In May 2020, the IASB issued Covid-19-Related Rent Concessions (Amendment to IFRS 16) that provides practical relief to lessees in accounting for rent concessions occurring as a direct consequence of COVID-19, by introducing a practical expedient to IFRS 16. The practical expedient permits a lessee to elect not to assess whether a COVID- 19-related rent concession is a lease modification. A lessee that makes this election shall account for any change in lease payments resulting from the COVID-19-related rent concession the same way it would account for the change applying IFRS 16 if the change were not a lease modification.

The practical expedient applies only to rent concessions occurring as a direct consequence of COVID-19 and only if all of the following conditions are met:

· The change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change;

· Any reduction in lease payments affects only payments originally due on or before 30 June 2021 (a rent concession meets this condition if it results in reduced lease payments on or before 30 June 2021 and increased lease payments that extend beyond 30 June 2021); and

· There is no substantive change to other terms and conditions of the lease

In the current financial year, the Entity has applied the amendment to IFRS 16 (as issued by the IASB in May 2020) in advance of its effective date.

Impact on accounting for changes in lease payments applying the exemption. The Entity has applied the practical expedient retrospectively to all rent concessions that meet the conditions in IFRS 16:46B and has not restated prior period figures. There was no material impact to the business from application of the amendment to IFRS 16

Impact of the initial application of other new and amended IFRS Standards that are effective for the current year.

The directors do not expect that the adoption of the Standards listed below will have a material impact on the financial statements of the Group in future periods, except as noted below:

IFRS 10 and IAS 28 (amendments) Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

The amendments to IFRS 10 and IAS 28 deal with situations where there is a sale or contribution of assets between an investor and its associate or joint venture. Specifically, the amendments state that gains or losses resulting from the loss of control of a subsidiary that does not contain a business in a transaction with an associate or a joint venture that is accounted for using the equity method, are recognised in the parent's profit or loss only to the extent of the unrelated investors' interests in that associate or joint venture. Similarly, gains and losses resulting from the remeasurement of investments retained in any former subsidiary (that has become an associate or a joint venture that is accounted for using the equity method) to fair value are recognised in the former parent's profit or loss only to the extent of the unrelated investors' interests in the new associate or joint venture.

The effective date of the amendments has yet to be set by the IASB; however, earlier application of the amendments is permitted. The directors of the Company anticipate that the application of these amendments will have an impact on The Entity's financial statements in future periods should such transactions arise. However, the Group did not early adopt the amendments.

Amendments to IFRS 3 Definition of a business

The amendments clarify that while businesses usually have outputs, outputs are not required for an integrated set of activities and assets to qualify as a business. To be considered a business an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs.

Additional guidance is provided that helps to determine whether a substantive process has been acquired.

The amendments introduce an optional concentration test that permits a simplified assessment of whether an acquired set of activities and assets is not a business. Under the optional concentration test, the acquired set of activities and assets is not a business if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or Entity of similar assets.

The amendments are applied prospectively to all business combinations and asset acquisitions for which the acquisition date is on or after the first annual reporting period beginning on or after 1 January 2020, with early application permitted. However, the Group did not early adopt the amendments.

Amendments to IAS 1 and IAS 8 Definition of material

The amendments are intended to make the definition of material in IAS 1 easier to understand and are not intended to alter the underlying concept of materiality in IFRS Standards. The concept of 'obscuring' material information with immaterial information has been included as part of the new definition.

The threshold for materiality influencing users has been changed from 'could influence' to 'could reasonably be expected to influence'.

The definition of material in IAS 8 has been replaced by a reference to the definition of material in IAS 1. In addition, the IASB amended other Standards and the Conceptual Framework that contain a definition of material or refer to the term 'material' to ensure consistency.

The amendments are applied prospectively for annual periods beginning on or after 1 January 2020, with earlier application permitted. The amendments have no impact on the business operation of the Group.

Amendments to References to the Conceptual Framework in IFRS Standards

Together with the revised Conceptual Framework, which became effective upon publication on 29 March 2018, the IASB has also issued Amendments to References to the Conceptual Framework in IFRS Standards. The document contains amendments to IFRS 2, IFRS 3, IFRS 6, IFRS 14, IAS 1, IAS 8, IAS 34, IAS 37, IAS 38, IFRIC 12, IFRIC 19, IFRIC 20, IFRIC 22, and SIC-32.

Not all amendments, however, update those pronouncements with regard to references to and quotes from the framework so that they refer to the revised Conceptual Framework. Some pronouncements are only updated to indicate which version of the Framework they are referencing to (the IASC Framework adopted by the IASB in 2001, the IASB Framework of 2010, or the new revised Framework of 2018) or to indicate that definitions in the Standard have not been updated with the new definitions developed in the revised Conceptual Framework.

The amendments, where they actually are updates, are effective for annual periods beginning on or after 1 January 2020, with early application permitted. The amendments have no impact on the business operation of the Group.

5.2. New and revised IFRS Standards in issue but not yet effective

At the date of authorization of these financial statements, the Company has not applied the following new and revised IFRS Standards that have been issued but are not yet effective:

· IFRS 17- Insurance Contracts

· IFRS 10 and IAS 28 (amendments) - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

· Amendments to IAS 1 - Classification of Liabilities as Current or Non-current

· Amendments to IFRS 3 - Reference to the Conceptual Framework

· Amendments to IAS 16 - Property, Plant and Equipment Proceeds before Intended Use

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

· Annual Improvements to IFRS Standards 2018-2020 Cycle - Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 9 Financial Instruments, IFRS 16 Leases, and IAS 41 Agriculture

IFRS 17 Insurance Contracts

IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts and supersedes IFRS 4 Insurance Contracts. IFRS 17 outlines a general model, which is modified for insurance contracts with direct participation features, described as the variable fee approach. The general model is simplified if certain criteria are met by measuring the liability for remaining coverage using the premium allocation approach.

The general model uses current assumptions to estimate the amount, timing and uncertainty of future cash flows and it explicitly measures the cost of that uncertainty. It considers market interest rates and the impact of policyholders' options and guarantees.

The Standard is effective for annual reporting periods beginning on or after 1 January 2021, with early application permitted. It is applied retrospectively unless impracticable, in which case the modified retrospective approach or the fair value approach is applied. An exposure draft Amendments to IFRS 17 addresses concerns and implementation challenges that were identified after IFRS 17 was published. One of the main changes proposed is the deferral of the date of initial application of IFRS 17 by one year to annual periods beginning on or after 1 January 2022.

For the purpose of the transition requirements, the date of initial application is the start of the annual reporting period in which the entity first applies the Standard, and the transition date is the beginning of the period immediately preceding the date of initial application.

The newly revised standard has no impact on the business operation of the Group. Furthermore, the Group did not early adopt the new standard.

Amendments to IFRS 10 and IAS 28 - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

The amendments to IFRS 10 and IAS 28 deal with situations where there is a sale or contribution of assets between an investor and its associate or joint venture. Specifically, the amendments state that gains or losses resulting from the loss of control of a subsidiary that does not contain a business in a transaction with an associate or a joint venture that is accounted for using the equity method, are recognised in the parent's profit or loss only to the extent of the unrelated investors' interests in that associate or joint venture.

Similarly, gains and losses resulting from the remeasurement of investments retained in any former subsidiary (that has become an associate or a joint venture that is accounted for using the equity method) to fair value are recognised in the former parent's profit or loss only to the extent of the unrelated investors' interests in the new associate or joint venture.

The effective date of the amendments has yet to be set by the Board; however, earlier application of the amendments is permitted. The directors of the Company anticipate that the application of these amendments will have an impact on the Company's financial statements in future periods should such transactions arise. However, the impact is not considered to be material.

Amendments to IAS 1 - Classification of Liabilities as Current or Non-current

The amendments to IAS 1 affect only the presentation of liabilities as current or non-current in the statement of financial position and not the amount or timing of recognition of any asset, liability, income or expenses, or the information disclosed about those items.

The amendments clarify that the classification of liabilities as current or non-current is based on rights that are in existence at the end of the reporting period, specify that classification is unaffected by expectations about whether an entity will exercise its right to defer settlement of a liability, explain that rights are in existence if covenants are complied with at the end of the reporting period, and introduce a definition of 'settlement' to make clear that settlement refers to the transfer to the counterparty of cash, equity instruments, other assets or services.

The amendments are applied retrospectively for annual periods beginning on or after 1 January 2023, with early application permitted. The directors of the Company anticipate that the application of these amendments does not have any material impact on the Company's financial statements.

Amendments to IFRS 3 - Reference to the Conceptual Framework

The amendments update IFRS 3 so that it refers to the 2018 Conceptual Framework instead of the 1989 Framework.

They also add to IFRS 3 a requirement that, for obligations within the scope of IAS 37, an acquirer applies IAS 37 to determine whether at the acquisition date a present obligation exists as a result of past events. For a levy that would be within the scope of IFRIC 21 Levies, the acquirer applies IFRIC 21 to determine whether the obligating event that gives rise to a liability to pay the levy has occurred by the acquisition date.

Finally, the amendments add an explicit statement that an acquirer does not recognise contingent assets acquired in a business combination.

The amendments are effective for business combinations for which the date of acquisition is on or after the beginning of the first annual period beginning on or after 1 January 2022. Early application is permitted if an entity also applies all other updated references (published together with the updated Conceptual Framework) at the same time or earlier. The directors of the Company anticipate that the application of these amendments will not have any material impact on the Company's financial statements in future periods should such transactions arise.

Amendments to IAS 16 - Property, Plant and Equipment-Proceeds before Intended Use

The amendments prohibit deducting from the cost of an item of property, plant and equipment any proceeds from selling items produced before that asset is available for use, i.e. proceeds while bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Consequently, an entity recognises such sales proceeds and related costs in profit or loss. The entity measures the cost of those items in accordance with IAS 2 Inventories.

The amendments also clarify the meaning of 'testing whether an asset is functioning properly'. IAS 16 now specifies this as assessing whether the technical and physical performance of the asset is such that it is capable of being used in the production or supply of goods or services, for rental to others, or for administrative purposes.

If not presented separately in the statement of comprehensive income, the financial statements shall disclose the amounts of proceeds and cost included in profit or loss that relate to items produced that are not an output of the entity's ordinary activities, and which line item(s) in the statement of comprehensive income include(s) such proceeds and cost.

The amendments are applied retrospectively, but only to items of property, plant and equipment that are brought to the location and condition necessary for them to be capable of operating in the manner intended by management on or after the beginning of the earliest period presented in the financial statements in which the entity first applies the amendments.

The entity shall recognise the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the beginning of that earliest period presented.

The amendments are effective for annual periods beginning on or after 1 January 2022, with early application permitted. The directors of the Company anticipate that the application of these amendments will not have any material impact on the Company's financial statements in future periods should such transactions arise.

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

The amendments specify that the 'cost of fulfilling' a contract comprises the 'costs that relate directly to the contract'. Costs that relate directly to a contract consist of both the incremental costs of fulfilling that contract (examples would be direct labour or materials) and an allocation of other costs that relate directly to fulfilling contracts (an example would be the allocation of the depreciation charge for an item of property, plant and equipment used in fulfilling the contract).

The amendments apply to contracts for which the entity has not yet fulfilled all its obligations at the beginning of the annual reporting period in which the entity first applies the amendments. Comparatives are not restated.

Instead, the entity shall recognise the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings or other component of equity, as appropriate, at the date of initial application.

The amendments are effective for annual periods beginning on or after 1 January 2022, with early application permitted. The directors of the Company anticipate that the application of these amendments will not have any material impact on the Company's financial statements in future periods should such transactions arise.

Annual Improvements to IFRS Standards 2018-2020

The Annual Improvements include amendments to four Standards.

· IFRS 1 First-time Adoption of International Financial Reporting Standards

The amendment provides additional relief to a subsidiary which becomes a first-time adopter later than its parent in respect of accounting for cumulative translation differences. As a result of the amendment, a subsidiary that uses the exemption in IFRS 1:D16(a) can now also elect to measure cumulative translation differences for all foreign operations at the carrying amount that would be included in the parent's consolidated financial statements, based on the parent's date of transition to IFRS Standards, if no adjustments were made for consolidation procedures and for the effects of the business combination in which the parent acquired the subsidiary. A similar election is available to an associate or joint venture that uses the exemption in IFRS 1: D16(a).

The amendment is effective for annual periods beginning on or after 1 January 2022, with early application permitted.

· IFRS 9 Financial Instruments

The amendment clarifies that in applying the '10 per cent' test to assess whether to derecognise a financial liability, an entity includes only fees paid or received between the entity (the borrower) and the lender, including fees paid or received by either the entity or the lender on the other's behalf.

The amendment is applied prospectively to modifications and exchanges that occur on or after the date the entity first applies the amendment.

The amendment is effective for annual periods beginning on or after 1 January 2022, with early application permitted.

· IFRS 16 Leases

The amendment removes the illustration of the reimbursement of leasehold improvements. As the amendment to IFRS 16 only regards an illustrative example, no effective date is stated.

· IAS 41 Agriculture

The amendment removes the requirement in IAS 41 for entities to exclude cash flows for taxation when measuring fair value. This aligns the fair value measurement in IAS 41 with the requirements of IFRS 13 Fair Value Measurement to use internally consistent cash flows and discount rates and enables preparers to determine whether to use pre-tax or post-tax cash flows and discount rates for the most appropriate fair value measurement.

The amendment is applied prospectively, i.e. for fair value measurements on or after the date an entity initially applies the amendment. The amendment is effective for annual periods beginning on or after 1 January 2022, with early application permitted.

6. Operating segments

The Group has a single class of business which is exploration, development and production of crude oil and natural gas. For management purposes, the Group is organised into geographical locations and has one reportable segment under IFRS 8 Operating Segment which is Nigeria. Other geographic locations within the group are classified within Other operating segments.

The Chief Operating Decision Maker (CODM) monitors the operating results of the production asset entities for of the consolidated group for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on total profit or loss.

The accounting policies used by the Group in reporting segments internally are the same as those described in the significant accounting policies in Note 3.

The following is an analysis of the Group's revenue and results by reportable segment in 2020. Profit / (loss) for the year represents total profit or loss for the year after taxation. This is the measure reported to the Group's CODM for the purpose of resource allocation and assessment of segment performance.

Other segment information represents information included in the measure of segment profit or loss reviewed by the Group's CODM.

6.1. Geographical information

The Group's revenue from external customer and information about non-current assets excluding financial instruments, deferred tax assets and other financial assets are detailed below:

6.2. Information about major customer

The Group has a single customer which contributes 100 percent of the Group's revenue in 2020 and 2019. The Group's revenue from this customer is disclosed in note 8.

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 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

Crude proceeds of US$31.8 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 2019: US$42.0 million). The Group's equity crude was 887,811 barrels (31 December 2019: 677,788 barrels) out of which the Group lifted 839,341 barrels (31 December 2019: 634,407 barrels). The balance of 48,470 barrels (31 December 2019: 43,381 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 Group has a single customer Shell Western Supply and Trading Limited whom it executed a crude off take agreement with.

The Group earned revenue from Ubima Crude Handling Service Fee Agreement totalling US$1.1 million for storage, handling and exportation services provided to Ubima Joint operations. The Otakikpo joint operations processed 385,395 barrels of crude for Ubima Joint operations during the year.

9. Cost of sales

10. Operating expenses

11. Impairment loss

As at 31 December 2020, the Company performed an impairment test for its cash-generating unit (Otakikpo marginal field) and estimated its recoverable value using a discounted cash flow method. Based on the test results with net recoverable value of US$29.6 million as against initial assets carrying value of US$33.6 million, the Company has recorded an impairment loss of c. US$4.0 million with respect to this asset.

The impairment loss was calculated by comparing the future discounted pre-tax cash flows expected to be derived from production of commercial reserves (the value-in-use) against the carrying value of the asset.

The net recoverable value of Otakikpo marginal field was determined based on the following assumptions:

· Cash-flows are based on internal model used for business plan and include future production, revenue, costs and capital expenditures

· Cash-flows are calculated for the period from 1 January 2021 to the end of license

· The discount rates are pre-tax and are calculated based on the weighted average cost of capital (WACC) for Lekoil Oil and Gas Investments Limited and market data. Directors have used two separate discount rates for different future periods (46.9% for cash flow projections up to 2021 and 45.6% for cash flow projections for the remainder of the asset's life) due to the sensitivity of the value-in-use to the difference in risks in these periods.

· The Company based its cash flow projections on the following price deck determined based on internal and external analysis:

In addition, the Company performed an impairment test on its exploration and appraisal assets. The result of this testing was an assessment of recoverable value of OPL 310, based on an estimate of the asset's remaining option value, to be approximately US $10 million which has resulted in an impairment charge of US $107.5 million. 

During 2020, efforts to raise the development funding required, whether through farm-out or fundraise proved to be unsuccessful. The current Board considers Lekoil Nigeria, via its subsidiary Mayfair Assets and Trust Limited, would be unable to meet its commitments on the license prior to the expiry of the license in August 2022. Furthermore, it is expected that securing an extension would lie outside Lekoil Nigeria's or Mayfair Assets and Trust's control and with no evidence of funding the current Board was of the opinion the carrying value should be impaired given the risk of the license being lost. 

12. General and administrative expenses

12.1. Personnel expenses

12.2. Operating leases

The Group leases office and residential facilities under short term cancellable leases. The Group discontinued the use of its office spaces in the current year as a large portion of its staff began working from home.

12.3. 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.

Key management personnel and Director compensation comprised the following:

Short-term benefits for 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 year have been disclosed below.

13. Finance income and costs

13.1. Other interest income

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

13.2. Net foreign exchange gain

Net foreign exchange gain represents exchange differences resulting from the conversion of US$ amounts to Nigerian Naira amounts, to meet obligations settled in Nigerian Naira and revaluation of Nigerian Naira balances to US$ at reporting periods.

13.3. Finance expenses

Finance costs consist largely of interest costs on third party loans during the year.

13.4. Other finance expenses

Other finance costs consist largely of crude hedge premiums expenses and crude early payment discount charges.

14. Taxes

14.1. 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:

14.2. 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:

14.3. Deferred tax asset

The Group has an estimated deferred tax asset of US$139 million (2019: US$114.0 million), out of which the Group has recognised deferred tax assets of US17.5 million (2019: US$13.6 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. There is no expiration period to utilize the deferred tax assets. The balance of US$120.5 million (2019: US$100.45 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.

No deferred tax adjustment has been recorded in respect of the impaired asset OPL325.