Urals Energy Plc Regulatory News (UEN)

The following amendment has been made to the '2013 Half Year Results' announcement released on 27 September 2013 at 07:00 hrs under RNS No 0580P.

In the announcement released this morning it was stated "As at 30 June 2012 net cash was US$6.6 million" when in fact it should have read "As at 30 June 2012 net debt was US$6.6 million". This has now been amended.

All other details remain unchanged.

The full amended text is shown below.

Urals Energy Public Company Limited

("Urals Energy" or the "Company")

2013 Half Year Results - Replacement

Urals Energy PCL (AIM:UEN), the independent exploration and production company with operations in Russia, is pleased to announce its half-year results for the six months ended 30 June 2013.

Operational highlights

Financial highlights

Post-period end and outlook

Alexei Maximov, Chief Executive, commented:

"The Board is pleased with the progress that Urals Energy has made since the start of 2013 and considers that the Company has finally turned the corner. During the period under review, the Company improved its production and cash generation at both Arcticneft and Petrosakh. In addition, our balance sheet was strengthened and for the first time since 2006 net working capital became positive.

"Well #53 has now been spudded, and the measures taken to halt the natural decline at Petrosakh, including the completion of successful workovers, has stabilised production. New well drilling and existing well optimisation programmes are in place and being implemented on both fields. Initial reports from the seismic survey appear extremely positive and provide a strong base for the improvement in anticipated production as well as encouraging data on deeper targets. More details on the seismic survey will be announced at the appropriate time.

"With the expected repayment of the loans from Petraco and the associated release of their charges, the Board believes that Urals Energy is now well positioned for growth. The Board continues to seek possible M&A and joint venture opportunities with a view to expanding and optimising the Company's portfolio."

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Chief Executive Officer's Statement

Financial Results

Operating Environment

The six months ended 30 June 2013 were characterised by a stable crude oil market price at an average level of US$108 per barrel (H1-2012: US$110). Domestic prices for light oil products ranged from US$110 to US$142 per barrel (H1-2012: US$85 to US$129). High and stable domestic prices secured the Company's operating cash flows at a level sufficient to maintain its operations and comply with license requirements at both fields.

There were no deliveries of crude oil exported from Arcticneft during the reporting period, resulting in 20,743 metric tons of crude oil that remained in stock. The tanker from Arcticneft is expected in late October 2013.

Operating Results

Gross Revenues (US$'000)

For the six months ended 30 June 2013, total gross revenues increased by US$0.9 million resulting from a raise of average net back prices for petroleum (refined) products of US$73.86 per barrel for the six months ended 30 June 2013 (US$57.73 for the six months ended 30 June 2012) and a higher crude oil net back price of US$59.46 per barrel for the six months ended 30 June 2013 (US$49.88 per barrel for the six months ended 30 June 2012). The increase was partially off-set by a decline of sales volumes totaling 184,861 barrels for the six months ended 30 June 2013 (compared with 219,010 barrels for the six months ended 30 June 2012). Netback, in the case of domestic crude oil sales, is the gross sales net of VAT. Netback for domestic product sales is defined as gross product sales minus VAT, transportation, excise tax and refining costs.

For the six months ended 30 June 2013 all domestic sales of crude oil and almost all petroleum (refined) products related to Petrosakh. During the six months ended 30 June 2013, Arcticneft sold petroleum (refined) products to FGUP "ArcticMorNefteGazRazvedka" ("AMNGR") for US$474,000 (H1-2012: US$356,000).

Summary table: Net backs (US$/bbl)

Gross profit (net revenues less cost of sales) for the first half of 2013 increased by 58% to US$4.9 million (H1-2012: US$3.1 million). The main driver of the increase was the higher netbacks.

Operating profit for the first half of 2013 was US$1.0 million as compared with an operating loss of US$0.6 million for the six months ended 30 June 2012.

The net finance costs during the first half of 2013 were US$3.3 million and net interest benefits was US$0.2 million (H1-2012: net finance costs of US$1.5 million and net interest cost of US$0.2 million). The main increase is caused by exchange rate movements. For H1-2013 US$ strengthened vs Russian Rouble by 8% while for the same period of 2012 it was 2%.

Increase of net finance costs for the six months ended 30 June 2013 resulted in a net loss of US$2.5 million (H1-2012: net loss of US$2.0 million).

Consolidated management EBITDA in the six months ended 30 June 2013 doubled to US$2.8 million as compared with US$1.4 million during the six months ended 30 June 2012.

Management EBITDA (US$'000) - Unaudited

Net debt position

As at 30 June 2013, the Company had net debt of US$3.3 million (calculated as long-term and short-term debt less cash in bank and less loans issued to related parties). As at 30 June 2012 net debt was US$6.6 million.

In June 2013, the Company received a loan of US$2.5 million from Petraco. As at 30 June 2013, the long-term and short-term part amounted to US$5.5 million (30 June 2012: US$10.2 million).

As at 30 June 2013 and 31 December 2012, the Group impaired a loan to a formerly related party by US$6.7 million and US$6.3 million, respectively. This amount relates to an overdue loan to a shareholder and former member of the Group's management team, Mr Rovneiko. On 9 January 2013, the Company received a final decision regarding its legal dispute with Mr Rovneiko from the London Court of International Arbitration. This decision ruled that the Company had won on all accounts. The Company has formally demanded payment from Mr Rovneiko and is committed to using all appropriate means to collect the outstanding amount, however to date Mr Rovneiko has shown no intent to comply with the decision. For accounting purposes management has reassessed the carrying value of the loan and has impaired this fully. However, this does not reduce the validity of the legal claim against Mr Rovneiko.

Operational update

Petrosakh

During the period under review the Company focused on two main areas, namely stabilising/minimising the natural decline in production, and the Company's drilling programme. In doing this, the following points were focused on:

1. complex geological studies of each well were performed with the intention of aiding the selection of optimal operating regime for producing wells. The work carried out enabled a significant reduction on the natural decline in production;

2. three new surface rod-pumping units were installed, again assisting in reducing the natural decline in production;

3. a programme to replace insert oil-well sucker-rod pumps on suspended pumps was launched, significantly reducing future repair times;

4. the repair of a second gas injection compressor was completed with minimum idle times for the Company's producing wells;

5. the Company commissioned an independent geological analysis of its existing well stock in Petrosakh with a view to ensuring the optimisation of its existing well stock development plan;

6. new cost reduction possibilities were evaluated, including,:

a. the conversion of part of the Company's oil field equipment for gas usage potentially enabling decreased costs of production;

b. testing of a new additive for gasoline production which the Company anticipates has the potential to increase the yield of light oil products at a lower cost; and

7. Development well #53 was been spudded following the reaching of the target depth.

Initial production testing on Well #53 will be completed during October 2013.

Downstream

Petrosakh refines and sells 100% of its crude oil production. Being the only company on the island which has a refinery, Urals Energy continues to work in a highly competitive refined products market brought to the island from mainland by the state-owned conglomerate Rosneft.

The Company works with existing and new customers, which allowed it to increase netbacks on the sales of oil and oil products by 19.2% and 27.9% respectively to US$59.46 per barrel and US$73.86 per barrel. This is in spite of the increase in excise rate of 25% from January 2013.

Presently, Petrosakh is participating in tenders with State-owned companies and has managed to win contracts with major local customers for fuel shipment during the winter period. The contracts were signed with JSC "Sakhalinenergo" (the main electricity and heating supplier on the island), Sakhalin Shipping Company and several municipal heating companies.

Starting from 1 July 2013, the federal Excise Law provides for further indexation of excise rates for gasoline. Currently the excise rate is equal to 8,960 Roubles per ton. However, the Company is confident that as a result of the seasonal favorable conditions on the internal market Urals Energy will manage to control and improve netbacks through to the year-end.

Arcticneft

During the reporting period the main efforts of the Company were focused on the following:

Petraco loan

In 2012, the Company met its obligations under the restructuring agreement and paid the final loan principal amount of US$7.3 million to Petraco Oil Company Limited. The remaining accrued interest is to be paid by the Company to Petraco by the end of November 2013.

In June 2013, the Company entered into a new short-term loan agreement with Petraco under which Petraco advances the sum of up to US$7.0 million to the Company. The proceeds of the loan will be used by the Company to both progress its 2013 drilling plan and working capital financing.

As at 30 of June 2013, total debt to Petraco was US$5.5 million. The repayment of all this debt coincides with the shipment of the tanker from Arcticneft.

Outlook

The Company anticipates loading the tanker for export from Arcticneft, in Q4 2013.

The Company continues to focus on increasing production and cash generation at both Arcticneft and Petrosakh. In addition to its existing operations, the Board is looking at new opportunities, be it in identifying ways of utilising the upside potential in downstream and marketing opportunities on the existing acreage, or evaluating possible acquisition and joint venture targets with a view to expanding and optimising the portfolio.

The Board aims to finish the year with repayment of outstanding debts, solid financial position allowing to restore and maximise value creation for shareholders.

Alexei Maximov

Chief Executive Officer

Consolidated Statement of Financial Position

(presented in US$ thousands)

Approved on behalf of the Board of Directors on 26 September 2013.

Consolidated Statement of Comprehensive Income

(presented in US$ thousands)

Consolidated Statements of Cash Flows

(presented in US$ thousands)

Consolidated Statements of Changes in Shareholders's Equity

(presented in US$ thousands)

Notes to the Consolidated Financial Statements (presented in US$ thousands)

1 Activities

Urals Energy Public Company Limited ("Urals Energy" or the "Company" or "UEPCL") was incorporated as a limited liability company in Cyprus on 10 November 2003. Urals Energy and its subsidiaries (the "Group") are primarily engaged in oil and gas exploration and production in the Russian Federation and processing of crude oil for distribution on both the Russian and international markets.

The registered office of Urals Energy is at 31 Evagorou Avenue, Suite 34, CY-1066, Nicosia, Cyprus. UEPCL's shares are traded on the AIM Market operated by the London Stock Exchange.

The Group comprises UEPCL and the following main subsidiaries:

2 Summary of Significant Accounting Policies

Basis of preparation.

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) under the historical cost convention as modified by the change in fair value of financial instruments.

The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the reporting date and the reported amounts of revenues and expenses during the reporting period. These policies have been consistently applied to all the periods presented, unless otherwise stated. Critical accounting estimates and judgments are disclosed in Note 4. Actual results could differ from the estimates.

Functional and presentation currency

The United States dollar ("US dollar or US$ or $") is the presentation currency for the Group's operations as management have used the US dollar accounts to manage the Group's financial risks and exposures, and to measure its performance. Financial statements of the Russian subsidiaries are measured in Russian Roubles, their functional currency.

The functional currency of the Company is the US Dollar as substantially all the cash flows affecting the Company are in US Dollars.

Translation to functional currency

Monetary assets and liabilities denominated in foreign currencies are retranslated into the functional currency at the rate of exchange ruling at the reporting date. Any resulting exchange differences are included in the profit or loss component of the consolidated statement of comprehensive income. Non-monetary assets and liabilities that are measured at historical cost and denominated in a foreign currency are translated into the functional currency using the rates of exchange as at the dates of the initial transactions. The US dollar to Russian Rouble exchange rates were 32.71 and 30.37 as of 30 June 2013 and 31 December 2012, respectively.

Translation to presentation currency 

The Group's consolidated financial statements are presented in US dollars in accordance with IAS 21, The Effects of Changes in Foreign Exchange Rates. The results and financial position of each group entity having a functional currency different from the presentation currency are translated into the presentation currency as follows:

(i) Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rate of exchange ruling at the reporting date. Any resulting exchange differences are included in the profit or loss component of the consolidated statement of comprehensive income. Non-monetary assets and liabilities that are measured at historical cost and denominated in a foreign currency are translated into the functional currency the Company using the rates of exchange as at the dates of the initial transactions. Goodwill and fair value adjustments arising on the acquisitions are treated as assets and liabilities of the acquired entity.

(ii) Income and expenses for each statement of comprehensive income are translated to the functional currency of the Company at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions).

(iii) All resulting exchange differences are recognised as a separate component of equity.

When a subsidiary is disposed of through sale, liquidation, repayment of share capital or abandonment of all, or part of, that entity, the exchange differences deferred in other comprehensive income are reclassified to the profit and loss.

Uncertain tax positions

The Group's uncertain tax positions are reassessed by management at the end of each reporting period. Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the end of the reporting period, and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on management's best estimate of the expenditure required to settle the obligations at the end of the reporting period.

Accounting standards adopted during the period

In the current period, the Group has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board (the IASB) and the International Financial Reporting Interpretations Committee (the IFRIC) of the IASB that are relevant to its operations and effective for reporting periods beginning on 1 January 2013.

3 Going Concern

A significant portion of the Group's consolidated net assets of US$99.0million (31 December 2012: US$106.3 million) comprises undeveloped mineral deposits requiring significant additional investment. The Group is dependent upon external debt to fully develop the deposits and realise the value attributed to such assets.

The Group had net current assets of US$0.7million as of 30 June 2013 (31 December 2012: net current liabilities of US$1.1 million). The most significant creditor as of 30 June 2013 was US$5.5 million loan from Petraco (31 December 2012: US$3.0 million) (Note 9).

Management have prepared monthly cash flow projections for periods throughout 2013and 2014. Judgements which are significant to management's conclusion that no material uncertainty exists for going concern this year include future oil prices and planned production which were required for the preparation of the cash flow projections and model. Positive overall cash flows are dependent on future oil prices (a price of US$110per barrel has been used for 2013 and for 2014). Despite the above matters, the Group still has funding and liquidity constraints, though these are less severe than in the prior year. Despite the uncertainties and based on cash flow projections performed, management considers that the application of the going concern assumption for the preparation of these consolidated financial statements is appropriate.

4 Critical Accounting Estimates and Judgments in Applying Accounting Policies

The Group makes estimates and assumptions that affect the amounts recognised in the consolidated financial statements and the carrying amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and are based on management's experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgments, apart from those involving estimations, in the process of applying the accounting policies. Judgments that have the most significant effect on the amounts recognised in the consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include:

Tax legislation

Russian tax and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management's interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant authorities.

Initial recognition of related party transactions 

In the normal course of business the Company enters into transactions involving various financial instruments with its related parties. IAS 39, Financial Instruments: recognition and measurement, requires initial recognition of financial instruments based on their fair values. Judgment was applied in determining if transactions are priced at market or non market interest rates, where there is no active market for such transactions. This judgment was based on the pricing for similar types of transactions with unrelated parties and effective interest rate analyses.

Estimation of oil and gas reserves 

Engineering estimates of hydrocarbon reserves are inherently uncertain and are subject to future revisions. Accounting measures such as depreciation, depletion and amortisation charges, impairment assessments and asset retirement obligations that are based on the estimates of proved reserves are subject to change based on future changes to estimates of oil and gas reserves.

Proved reserves are defined as the estimated quantities of hydrocarbons which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic conditions. Proved reserves are estimated by reference to available reservoir and well information, including production and pressure trends for producing reservoirs. Furthermore, estimates of proved reserves only include volumes for which access to market is assured with reasonable certainty. All proved reserves estimates are subject to revision, either upward or downward, based on new information, such as from development drilling and production activities or from changes in economic factors, including product prices, contract terms or development plans. In some cases, substantial new investment in additional wells and related support facilities and equipment will be required to recover such proved reserves. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of underground reserves are subject to change over time as additional information becomes available.

The Group last obtained an independent reserve engineers report as at 31 December 2007. Management believes that these reserves have not changed, other than through production, as the amount of subsequent additional drilling has been minimal.

In general, estimates of reserves for undeveloped or partially developed fields are subject to greater uncertainty over their future life than estimates of reserves for fields that are substantially developed and depleted. As those fields are further developed, new information may lead to further revisions in reserve estimates. Reserves have a direct impact on certain amounts reported in the consolidated financial statements, most notably depreciation, depletion and amortisation as well as impairment expenses. Depreciation rates on production assets using the units-of-production method for each field are based on proved developed reserves for development costs, and total proved reserves for costs associated with the acquisition of proved properties. Assuming all variables are held constant, an increase in proved developed reserves for each field decreases depreciation, depletion and amortisation expenses. Conversely, a decrease in the estimated proved developed reserves increases depreciation, depletion and amortisation expenses. Moreover, estimated proved reserves are used to calculate future cash flows from oil and gas properties, which serve as an indicator in determining whether or not property impairment is present. The possibility exists for changes or revisions in estimated reserves to have a significant effect on depreciation, depletion and amortisation charges and, therefore, reported net profit/(loss) for the year.

Deferred income tax asset recognition

The recognised deferred tax asset represents income taxes recoverable through future deductions from taxable profits and is recorded in the statement of financial position. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. The future taxable profits and the amount of tax benefits that are probable in the future are based on the medium term business plan prepared by management and extrapolated results thereafter. The business plan is based on management expectations that are believed to be reasonable under the circumstances. Key assumptions in the business plan are an average oil price of US$110for 2013 and US$90 in real terms for future sales.

Impairment provision for receivables

The impairment provision for receivables (including loans issued) is based on management's assessment of the probability of collection of individual receivables. Significant financial difficulties of the debtor/lender, probability that the debtor/lender will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the receivable is potentially impaired. Actual results could differ from these estimates if there is deterioration in a debtor's/lender's creditworthiness or actual defaults are higher than the estimates.

When there is no expectation of recovering additional cash for an amount receivable, the expected amount receivable is written off against the associated provision.

Future cash flows of receivables that are evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and the experience of management in respect of the extent to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods and to remove the effects of past conditions that do not exist currently.

Asset retirement obligations

Management makes provision for the future costs of decommissioning hydrocarbon production facilities, pipelines and related support equipment based on the best estimates of future cost and economic lives of those assets. Estimating future asset retirement obligations is complex and requires management to make estimates and judgments with respect to removal obligations that will occur many years in the future. Changes in the measurement of existing obligations can result from changes in estimated timing, future costs or discount rates used in valuation.

Useful lives of non-oil and gas properties 

Items of non-oil and gas properties are stated at cost less accumulated depreciation. The estimation of the useful life of an asset is a matter of management judgment based upon experience with similar assets. In determining the useful life of an asset, management considers the expected usage, estimated technical obsolescence, physical wear and tear and the physical environment in which the asset is operated. Changes in any of these conditions or estimates may result in adjustments to future depreciation rates. Useful lives applied to oil and gas properties may exceed the license term where management considers that licenses will be renewed. Assumptions related to renewal of licenses can involve significant judgment of management.

Impairment

Management have estimated the recoverable amount of cash generating units. Changes in the assumptions used can have a significant impact on the amount of any impairment charge.

5 Inventories

6 Property, Plant and Equipment

Average capitalisation rate of capitalised interest expense for the period ended 30 June 2012 is 5.5%.

Average capitalisation rate of capitalised interest expense for the period ended 30 June 2013 is 5.5%.

Included within oil and gas properties at 30 June 2013 and 31 December 2012 were exploration and evaluation assets:

The Group's oil fields are situated in the Russian Federation on land owned by the Russian government. The Group holds production mining licenses and pays production taxes to extract oil and gas from the fields. The licenses expire between 2037and 2067, but may be extended. Management intends to renew the licenses as the properties are expected to remain productive subsequent to the license expiration date.

Estimated costs of dismantling oil and gas production facilities, including abandonment and site restoration costs, amount to US$0.1 million and US$0.1 million at 30 June 2013 and 31 December 2012, respectively, are included in the cost of oil and gas properties. The Group has estimated its liability based on current environmental legislation using estimated costs when the expenses are expected to be incurred.

7 Other Non-Current Assets

8 Accounts Payable and Accrued Expenses

9 Borrowings

Short-term borrowings

Short-term borrowings were as follows at 30 June 2013 and 31 December 2012:

Petraco

On 12 April 2010 the Company reached an agreement (subsequently amended on 18 November 2010) with Petraco relating to the restructuring of the Petraco facility (the "Restructuring Agreement"). The principal terms of the Restructuring Agreement are as follows:

Total indebtedness owed by the Company to Petraco, as at 31 March 2010, was $34.3 million, made up as follows:

- capital amount outstanding (the "Capital Outstanding") of US$30.7 million; and

- accrued interest outstanding (the "Accrued Interest") of US$3.6 million.

As at 1 April 2010, the Capital Outstanding and Accrued Interest were added together and carried forward as principal ("Principal"). After 1 April 2010 interest was accrued on the Principal and was not compounded. All accrued interest from 1 April 2010 was paid once the Principal has been repaid and all payments made by the Company according to the payment schedule set out below was applied against the Principal outstanding. Interest will be charged on the Principal at a rate of 6 month LIBOR plus 5% per annum, non-compounding.

As part of the restructuring agreement the Company converted US$2 million of the Capital Outstanding into 8,693,006 ordinary shares of the Company (recorded in the consolidated statement of changes in shareholders' equity) and gave an option to Petraco to acquire additional new ordinary shares in the amount of 12,576,688 for GBP 0.26 per share. The fair value of the option is not material. This option is considered as non dilutive instrument.

In June 2010 the Company pledged 100% of the shares it currently holds in Arcticneft and 97.2% of shares it currently holds in Petrosakh to Petraco as security against the restructured Petraco facility. In August 2012 Petraco released its charge over the shares of Petrosakh in full.

Outstanding interest US$3.0 million is repayable on 31 December 2013 (as amended on 18 November 2010).

In June 2013 the Company entered into a short-term loan agreement with Petraco under which Petraco will advance the sum up to US$7.0 million. The key terms of the loan are that:

- it is repayable immediately following the loading of the next tanker shipment, scheduled for Autumn 2013 or 30 November 2013 (whichever is earlier);

- interest is chargeable at the rate of 5% over LIBOR until the date of the bill of lading of the tanker at which point it reduces to 2% over LIBOR; and

- it is included in Petraco's existing security over CJSC Arcticneft, further details of which appear in the Company's announcement dated 12 April 2010.

Weighted average interest rate 

The Group's weighted average interest rates on borrowings were 5.5% and 5.5% at 30 June 2013 and 31 December 2012, respectively.

Interest income and expense

Interest income and expense for the six months ended 30 June 2013 and 30 June 2012, respectively, comprised the following:

10 Equity

At 30 June 2013 authorised share capital was $1,890 thousand divided into 300 million shares of $0.0063 each.

Restricted Stock Plan

At 30 June 2012, restricted stock grants for 3,194,914 shares were fully issued.

As of 30 June 2013, the number of unvested restricted stock grants and their respective vesting dates are presented in the table below.

Profit/(loss) per share

Basic profit/(loss) per share is calculated by dividing the profit/(loss) attributable to equity holders of the company by the weighted average number of ordinary shares in issue during the year.

11 Revenues

12 Cost of Sales

13 Selling, General and Administrative Expenses

14 Balances and transactions with Related Parties

Parties are generally considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial or operational decisions as defined by IAS 24 Related Party Disclosures. Key management personnel are considered to be related parties. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.

Balances and transactions with related parties

As of 30 June 2013 and 31 December 2012 the Group has an impairment provision against a loan to a related party of US$6.7 million and US$6.3 million, respectively. This amount relates to a loan to shareholder and former member of management of the Group. This loan is overdue.

For accounting purposes management reassessed the carrying value of the loan and impaired this fully. However, this does not reduce the validity of the legal claim against this related party. Management formally demanded repayment of the full amount by 20 May 2011.

By 20 May 2011 management did not receive any response from the related party. Considering that according to the loan agreement all disputes shall finally be resolved by arbitration under the Rules of Arbitration of the London Court of International Arbitration (the LCIA) the Company filed a claim to the LCIA in June 2011. This arbitration has confirmed the Company's legal rights, vindicated its position and issued a final award that the sum in the amount of US$6.3 million (including loan amount and interest) and legal cost in the amount of US$1.2 million must be repaid to Urals Energy together with a daily accumulating interest. As of 30 June 2013 the Group has an impairment provision against other receivables from the shareholder of US$1.2 million (31 December 2012: US$1.2 million). The Company has formally demanded payment from Mr Rovneiko and is committed to using all appropriate means to collect the outstanding amount.

Loans receivable include amounts due by OOO Komineftegeophysica in the amount of US$0.9 million (31 December 2012: US$0.9 million), where shareholders of the Group hold the majority of shares. The loans bear interest 10%. Loans in the amount of US$0.4 million is short term in nature. Loans in the amount of US$0.3 million mature on 31 December 2014, in the amount of US$0.2 million mature on 31 December 2015. These loans are not secured.

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