ZOL.L Regulatory News (ZOL)

Embargoed: 0700hrs 25 September 2014

Zoltav Resources Inc.

("Zoltav" or the "Company")

Half Yearly Report for the Six Months Ended 30 June 2014

Zoltav (AIM: ZOL), the CIS-focused oil and gas exploration and production company, announces results for the six months ended 30 June 2014.

Corporate Highlights

· Acquired 100 per cent. interest in the Bortovoy Licence in the Saratov Oblast of the Russian Federation on 18 June 2014 for US$180 million - 3,215 square kilometre area containing a number of productive gas fields, a processing plant and significant appraisal upside

· Bortovoy Licence contains Proved plus Probable Reserves of 750 billion cubic feet (21.2 billion cubic metres) of gas and 3.9 million barrels of oil and condensate

· Considerable upside potential from additional prospects within the Bortovoy Licence area and scope for increased production through the construction of additional facilities

· Transaction supported by major shareholders - raised US$66 million from ARA Capital, Crediton Invest and Matteson Overseas through the issue of Zoltav shares at US$1.60 (100 pence) per share; and the vendor, Bandbear, accepted one-third of consideration in Zoltav shares

· Appointed Marcus Rhodes and Alastair Ferguson as non-executive directors on 19 May 2014 (Alastair Ferguson became an executive director on 23 September 2014) - Marcus Rhodes is an experienced director of major companies operating in Russia/CIS; Alastair Ferguson has extensive experience in the Russian oil and gas market

· Appointed new Director Technical and Chief Geologist of Bortovoy Licence operating company; and welcomed 287 new employees to the Company

Operational Highlights - Bortovoy

· Production of 36.4 million cubic feet/gas per day and 457 barrels/oil per day during the period (only 13 days of Zoltav ownership included in H1 2014 financial results)

· Focus has been on restoring Western Gas Plant to full production capacity of 14.2 billion cubic feet per annum during H1 2015

· Conducted extensive workover operations and in the process of drilling an infill well on Karpenskoye field; advanced programme of hooking-up Zhdanovskoye field to Western Gas Plant

· Running pre-feasibility study for gas plant construction in east of Bortovoy Licence

Operational Highlights - Koltogor

· Completed major 3D seismic acquisition programme over the Koltogor Licence - processing/interpretation ongoing

· Completed successful testing of Well 141 on the Koltogor Licence confirming field commerciality

· Completed successful testing of Well 103 on Koltogor 10 in both the Upper Jurassic and Bazhenov shale zones resulting in discovery of new West Koltogor oil field

· Registration of additional 221 million barrels of Russian standard C1+C2 oil reserves, bringing current registered Russian reserves on Koltogor Licences to 487 million barrels

Summary financials

· Maiden revenues for Zoltav of US$1.6 million from 13 days' production from Bortovoy Licence

· Operating loss US$6.7 million (H12013: US$2.3 million)

· Cash resources and undrawn facilities at 30 June 2014 were $21.3 million

Symon Drake-Brockman, Executive Chairman, said:

"The first half of 2014 saw a significant corporate milestone in the recording of Zoltav's first revenues from 13 days of gas and oil production.

"With the acquisition of the Bortovoy Licence now complete, our focus there is on operations and in particular on ensuring that the Western Gas Plant is operating at full capacity; while concurrently developing an appraisal strategy for the highly prospective eastern fields. At Koltogor, the work programme which was completed during the period under review has resulted in the prospect that the licences are substantially larger assets than previously envisaged."

Contacts:

Chairman's statement

I am pleased to present Zoltav's half yearly report for the six month period to 30 June 2014.

Activity in the first half was dominated by two significant projects: the seismic work programme on the Koltogor Licences in Khantiy-Mansisk, Western Siberia and the acquisition of the Bortovoy Licence in the Saratov Oblast.

The Bortovoy Licence

The primary focus of the company in the first half of 2014 was the acquisition of the Company's second oil and gas asset in Russia (and its first commercially producing field). In June, Zoltav completed this acquisition of a 100 per cent. interest in the Bortovoy Licence in the Saratov Oblast of the Russian Federation. Bortovoy is a 3,215 square kilometre area containing a number of productive gas fields, a processing plant and potential significant upside from further exploration. The acquisition was completed through the Company's purchase of Royal Atlantic Energy (Cyprus) Limited ("Royal Atlantic Energy") whose subsidiary, Diall Alliance, holds and operates the licence.

The Bortovoy Licence is a sizeable asset situated along the northern margin of the Pre-Caspian basin, one of the largest hydrocarbon basins in the CIS. It contains Proved plus Probable Reserves of 750 billion cubic feet (21.2 billion cubic metres) of gas and 3.9 million barrels of oil and condensate. In the year to 31 December 2013 the Bortovoy Licence produced 13.9 billion cubic feet (392.6 million cubic metres) of gas and 300,000 barrels of condensate and oil (2.8 million BOE).

Zoltav's interest in the Bortovoy Licence stemmed not only from its existing reserve base and ongoing gas and liquids production, but also from the considerable upside potential that exists from additional prospects within the licence area and the scope for increased future production. The latter will be accomplished through the hooking-up of additional fields to the existing gas processing facility and, longer-term, through the construction of additional gas production facilities in the eastern part of the licence.

Zoltav paid a total consideration of US$180 million to the vendor of Royal Atlantic Energy, Bandbear (a significant Zoltav shareholder), which was satisfied through the issue of 38,263,095 new Ordinary Shares at an effective price of US$1.60 (100 pence) per share (equivalent to US$61.22 million); the payment of US$58.94 million in cash and the assumption of US$59.84 million of bank debt held by Diall Alliance.

The Company was pleased to enjoy the support for the transaction of several investors including Bandbear, whose agreement to accept approximately one-third of the consideration payable in Zoltav shares further demonstrates its confidence in the Company; and ARA Capital, whose investment of a further US$45.615 million into the Company by way of a subscription for Zoltav shares at US$1.60 (100 pence) per share funded the majority of the cash component of the acquisition consideration. Further investments received from two new shareholders, Crediton Invest and Matteson Overseas, each of US$10.166 million by way of a subscription on the same terms, made up the balance of the cash component of the acquisition consideration; and provided approximately US$7 million of additional working capital.

The Koltogor Licences

The Koltogor Exploration and Production Licence covers a contiguous area of 528 square kilometres in Khantiy-Mansisk, Western Siberia. On 31 December 2013 Zoltav relinquished all but one of the remaining legacy exploration licences which surrounded the Koltogor Exploration and Production Licence but retained Koltogor Exploration Licence 10 ("Koltogor 10"), a 167 square kilometre licence due west of the Koltogor Exploration and Production Licence, which the Company considers to have significant potential. Zoltav was able to negotiate a zero cost extension to Koltogor 10 through to 31 December 2015.

A substantial work programme was carried out on the Koltogor Licences during the period under review which resulted in a new discovery and a 51 per cent. increase in the Company's Russian standard C1 plus C2 oil reserves attributed to this acreage.

A substantial seismic acquisition programme was completed in the period, resulting in the acquisition of 466 square kilometres of 3D seismic data and 71 kilometres of 2D seismic data over the Koltogor Exploration and Production Licence. The objective of the seismic programme was to better understand the characteristics of the Koltogor oil field that lies within the Koltogor Exploration and Production Licence in order to assist the Company in its field development plan. The Directors believe that the Koltogor Licences can generate substantial value for the company in the medium term.

A detailed review of operations during the first half of 2014 accompanies this report.

Corporate and managerial developments

As the scale of Zoltav's operations has increased, the board and senior management team has been expanded to match the requirements of the business.

In May 2014 we announced the appointments of Marcus Rhodes and Alastair Ferguson as non-executive directors. Mr Rhodes is an experienced director of major publicly-listed companies operating in Russia and the CIS; while Mr Ferguson has an extensive background in the oil and gas industry and considerable experience of the Russian gas market. After the period end, Mr Ferguson was appointed as an executive director. In this capacity Mr Ferguson will assist in developing the Group's leadership function. He will oversee the development planning for both the Bortovoy and Koltogor Licences and the Company's acquisition strategy.

John Grimshaw and Oliver Donagher, previously non-executive directors of the Company, retired from the board in May 2014, having made valuable contributions to the development of the Company during its transition from an investing company into an operational oil and gas business.

In June 2014, alongside the completion of the acquisition of the Bortovoy Licence, we welcomed 287 new employees to the group; and further strengthened the management of Bortovoy's operating company, Diall Alliance, through the appointments of Alexei Khomyakov as Director Technical and Airat Ganeev as Chief Geologist and Technical Director respectively. Mr Khomyakov has held a number technical positions at Yukos, SamaraNafta and, most recently, RusPetro; while Mr Ganeev has worked for 18 years in the Russian oil and gas industry, most recently as Chief Geologist for Tatneft Samara.

Outlook

The work programme at Koltogor, which was completed during the period under review, has resulted in the prospect that the Koltogor licences are substantially larger assets than previously envisaged. The immediate focus will be on developing an appraisal programme for the conventional Upper Jurassic formations. The discovery of oil in the Bazhenov shale formation has been particularly interesting given the prospect of its extension across substantial acreage under licence to Zoltav. Our subsequent work programme will seek to confirm the extent of the oil-bearing Bazhenov shales. Having significantly enhanced the Koltogor Licences' value potential as a 100 per cent. interest holder we will, in due course, consider bringing on a partner with the capacity to accelerate the appraisal - and ultimately development - programmes.

With the acquisition of the Bortovoy Licence now complete, our focus there is on operations and in particular on ensuring that the Western Gas Plant is operating at full capacity; while concurrently developing an appraisal strategy for the highly prospective eastern fields of the Bortovoy Licence.

Symon Drake-Brockman

Chairman

The results included below are for periods in which, except for the period 18 June 2014 to 30 June 2014, Diall Alliance was not owned by Zoltav. These results are shown to provide an understanding of the operating performance of Diall Alliance over the period, despite the fact that the Company was not its owner of the majority of the period.

Financial review

Zoltav completed the acquisition of Royal Atlantic Energy (Cyprus) Limited ("Royal Atlantic Energy") and OOO Vostok Energy (the "Management Company") on 18 June 2014 and, with it, the Company's readmission to trading on the AIM Market. The accounts to 30 June 2014, which follow, therefore include only 13 days of trading of Royal Atlantic Energy's licence holding entity, Diall Alliance.

You will find in the review of operations, which precedes this financial review, a summary of Diall Alliance's key production and financial metrics. These demonstrate that the lack of investment by the prior owners in to the western fields resulted in a decline in production rates and hence revenue and ultimately cash generation. Our immediate focus since assuming managerial responsibility at Bortovoy has been on returning the Western Gas Plant to its full capacity during 2014. The benefits of this will be partially reflected in the second half of this year with full plant capacity expected to be achieved in early 2015.

Revenue

Group revenues - the first since Zoltav's establishment as an oil and gas company - for the 13 days in which Diall Alliance was owned by the Company were $1.6 million (2013: nil). Gas sales are priced in Roubles ("RUB") and are not tied to either the United States dollar ("US$") or the Euro. Accordingly, revenues in US$, the Group's reporting currency, will naturally be affected by fluctuations in the rate of US$ to RUB.

Gas realisations were US$2.37 per thousand cubic feet (2013: US$2.29 or RUB3,450). Gas produced was sold to Mezhregiongaz, a Gazprom subsidiary, at the transfer point on entry to the Central Asian Centre Pipeline.

Oil and condensate realisations were US$50.5 per barrel (2013: US$42.9 or RUB1,366). Oil and condensate are sold directly at the Western Gas Plant to a small number of different purchasers through a tender process.

While revenues from gas production are expected to increase, sales of oil and condensate are expected to continue to decline as the oil reservoirs on the Karpenskoye field reach the end of their life.

Operating loss

The operating loss for the period was US$7.2million (2013:US$2.3 million), reflecting that, for the substantial majority of the period under review, Zoltav was not producing any revenues but bore the costs associated both with the acquisition of Royal Atlantic Energy and its Management Company; and of the work programme at the Koltogor Licences.

Finance costs are represented by interest on the Sberbank facility of RR2,400 million (US$69.6 million) entered by Diall Alliance on 4 April 2014 and under which RUB2,162 million (US$64.3 million) was outstanding at 30 June 2014.

Taxation

The total tax charge for the year was US$1.0 million (2013: US$ nil). Despite the Group being predominantly in a development phase it is not able to use losses incurred in one part of the Group against profits in another.

Other taxation

The production based tax for the period was US$0.3 million (2013: nil) which has been recognised in cost of sales. The gas and condensate mineral extraction tax ("MET") rate applicable in the period was RUB471 per thousand cubic metres (2013: RUB376). A new MET formula was implemented from 1 July 2014 and is based on a combination of average gas prices, gas production as a share of total hydrocarbon output and complexity of gas reservoirs. The rate applicable from 1 July 2014 is approximately RUB655 per thousand cubic metres.

In addition to production taxes the Company was subject to a 2.2 per cent. property tax which is based on the net book value of Russian assets calculated for property tax purposes. This figure is included in the cost of sales in the consolidated income statement.

Cash

Total cash resources and undrawn facilities at the end of the period were US$21.3 million including the undrawn Sberbank facility.

Liquidity

Following the acquisition of Royal Atlantic Energy and the associated capital raise, the Company has sufficient liquidity to fund its improvements on the western fields at Bortovoy; and SibGeCo's investment plans through to the end of 2015. It is expected that the longer-term plans to appraise - and ultimately develop - the eastern fields on the highly prospective Bortovoy Licence will require additional funding.

Outlook

We do not expect to see any above-Russian inflation increases in gas realisations in the near future. As a result of the Company's investment programme to bring the Western Gas Plant at Bortovoy up to full capacity, the Company expects to see a small increase in production rates in the second half of 2014 as compared to the plant's performance in the first half; with the full impact of maximum capacity beginning in January 2015.

Alistair Stobie

Director Finance

Condensed consolidated statement of comprehensive income

(in '000s US dollars, unless otherwise stated)

Condensed consolidated statement of financial position

(in '000s US dollars, unless otherwise stated)

Condensed consolidated statement of cash flows

 (in '000s US dollars, unless otherwise stated)

Condensed consolidated statement of changes in equity

(in '000s US dollars, unless otherwise stated)

Notes to the condensed consolidated interim financial information

(in '000s US dollars, unless otherwise stated)

1 Background

1.1 The Company and its operations

The Zoltav Group (Group) comprises Zoltav Resources Inc. (Company), together with its subsidiaries:

The Company was incorporated in the Cayman Islands on 18 November 2003, which does not prescribe the adoption of any particular accounting framework. The Board has therefore adopted International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board and as adopted by the European Union.

The principal activities of the Company and its subsidiaries (the "Group") are the acquisition, exploration and development of hydrocarbon assets and production of hydrocarbons in the Russian Federation. The Company's shares are listed on the AIM of London Stock Exchange. The financial statements are prepared in United States Dollars.

CenGeo Holdings, incorporated in Cyprus, was acquired by Zoltav Resources Holdings (Jersey) Limited on 4 July 2013. CenGeo Holdings has a 100 per cent. interest in SibGeCo, a company incorporated in Russia, which holds the Koltogorsky production licence and the legacy Koltogorsky exploration licences.

Royal Atlantic Energy (Cyprus) Limited , incorporated in Cyprus, has a 100 per cent. interest in Diall Alliance LLC, incorporated in Russia, which holds the Bortovoy exploration and production licence. Vostok Energy LLC, incorporated in Russia, is a management company for Diall Alliance LLC. Together, Royal Atlantic Energy (Cyprus) Limited, its wholly owned subsidiary Diall Alliance LLC and Vostok Energy LLC are referred to as "Royal Atlantic Energy". Royal Atlantic Energy was acquired by Zoltav Resources Holdings (Jersey) Limited on 18 June 2014.

Zoltav Resources Holdings (Jersey) Limited was incorporated in Jersey as a private limited company on 9 January 2013.

ZRI Services (UK) Ltd was incorporated in the United Kingdom as a private limited company on 29 January 2013.

1.2 Russian business environment

The Company's operations are located in the Russian Federation. Consequently, the Company is exposed to the economic and financial markets of the Russian Federation which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue to develop, but are subject to varying interpretations and frequent changes which, together with other legal and fiscal aspects, contribute to the challenges faced by entities operating in the Russian Federation. The historical financial information reflects management's assessment of the impact of the Russian business environment on the operations and the financial position of the Company. The future business environment may differ from management's assessment.

Whilst not currently affecting the Company's operations, the sanctions being imposed by the European Union and the United States of America continue to evolve. The Company cannot confirm that the sanctions will not have an effect on the Company's operations or its ability to access international capital markets in the future.

2 Significant accounting policies

2.1 Basis of preparation

These condensed interim financial statements for the six months ended 30 June 2014 have been prepared in accordance with IAS 34, 'Interim financial reporting', as adopted by the European Union. The condensed interim financial statements should be read in conjunction with the annual financial statements for the year ended 31 December 2013, which have been prepared in accordance with IFRSs as adopted by the European Union.

The preparation of financial statements in conformity with IFRSs requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in this Note.

2.2 Going concern

The consolidated financial statements have been prepared on the going concern basis as the directors have concluded that the Group will continue to have access to sufficient funds in order to meet its obligations as they fall due for at least the foreseeable future as explained further in the Directors Report.

2.3 Disclosure of impact of new and future accounting standards

A number of new and amended IFRS and IFRIC interpretations became effective as of 1 January 2014 as described below.

(a) Amendments early adopted by the Company

There were no standards, amendments and interpretations adopted early by the Company.

(b) New Standards, Amendment to Standards and Interpretations effective and relevant

IAS 27 Separate Financial Statements, IFRS 10 Consolidated Financial Statements and IFRS 12 Disclosure of interests in other entities effective for periods beginning on or after 1 January 2014.

IFRS 10 replaces the portion of IAS 27 that addresses the accounting for consolidated financial statements and the issues raised in SIC 12 Consolidation - Special Purpose Entities. IFRS 10 establishes a single control model that applies to all entities including special purpose entities. The standard provides additional guidance to assist in the determination of control where this is difficult to assess.

IFRS 12 includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, structured entities and other off balance sheet vehicles.

The adoption of these Accounting Standards didn't have a material impact on the Company's condensed consolidated interim financial statements.

(c) Standards, Amendments and Interpretations effective but not relevant

The directors do not expect the new Standards, Amendments and Interpretations to have a material impact on the financial statements.

(d) Standards, Amendments and Interpretations not effective

The directors do not expect the new Standards, Amendments and Interpretations to have a material impact on the financial statements.

2.4 Consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries. Subsidiaries are all entities in which the Group directly or indirectly owns more than 50 percent of the voting stock or otherwise has the power to govern the financial and/or operating policies. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

The group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by acquisition basis, the group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest's proportionate share of the acquiree's net assets.

Investments in subsidiaries are accounted for at cost less impairment. Cost is adjusted to reflect changes in consideration arising from contingent consideration amendments. Cost also includes direct attributable costs of investment. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the group's share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the statement of comprehensive income. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered.

The Company and its subsidiaries outside the Russian Federation maintain their financial statements in accordance with IFRSs as adopted by the EU. The Russian subsidiaries of the Group maintain their statutory accounting records in accordance with the Regulations on Accounting and Reporting of the Russian Federation. The consolidated financial statements are based on these statutory accounting records, appropriately adjusted and reclassified for fair presentation in accordance with International Financial Reporting Standards as adopted by the EU. A list of the Company's subsidiaries is provided in Note 1.

2.5 Segment reporting

Segmental reporting follows the Group's internal reporting structure.

Management has determined therefore that the operations of the Group comprise one class of business, being oil and gas exploration, development and production and the Group operates in only one geographic area - the Russian Federation.

2.6 New accounting policies adopted

The accounting policies adopted are consistent with those of the previous financial year supplemented by the new accounting policies described below resulting from the acquisition of Royal Atlantic.

(a) Revenue recognition

Revenue, which is the fair value of consideration received or receivable, is recognised when it is probable that economic benefits will flow to the Group and when the revenue can be measured reliably. Revenue is shown net of value added tax, returns, rebates and discounts and after eliminating sales within the Group. The following criteria must also be met before revenue is recognised:

Revenue from the sale of oil, gas, and condensate is recognised when the title passes to the customer.

Interest income is recognised on a time-proportion basis using the effective interest method.

(b) Mineral Extraction Tax ("MET")

In the Russian Federation MET is payable on the extraction of hydrocarbons, including natural gas, crude oil and condensate, and is levied based on quantities of natural resources extracted multiplied by the applicable MET rate for the product and field in question. MET is a production based tax (as opposed to income) and is accrued as a tax on production and recorded within cost of sales.

(c) Property, plant and equipment - oil and gas assets

Oil and gas assets are stated at cost less accumulated depletion or accumulated depreciation and, where relevant, impairment costs.

Expenditure on the construction, installation or completion of infrastructure facilities such as platforms, pipelines and the drilling of development wells into commercially proved reserves, is capitalised within property, plant and equipment. When development is completed on a specific field, it is transferred to producing assets within property, plant and equipment. No depreciation or amortisation is charged during the development phase.

Development and production assets are accumulated generally on a field by field basis and represent the cost of developing the commercial reserves discovered and bringing them into production together with E&E expenditures incurred in finding commercial reserves and transferred from the intangible E&E assets as described above. The cost of development and production assets also includes the cost of acquisitions and purchases of such assets, directly attributable overheads, any costs directly attributable to bringing the asset into operation, and the cost of recognising provisions for future restoration and decommissioning, if any.

Major facilities may be capitalised separately if they relate to more than one field or to the licence area as a whole. Subsequent expenditure is capitalised only if it either enhances the economic benefits of the development/production asset or replaces part of the existing development/production asset. Any costs remaining associated with the part replaced are expensed. Directly attributed overheads are capitalised where they relate to specific exploration and development activities.

(d) Depletion

Oil and gas properties in production, including wells and directly related pipeline costs, are depreciated using the unit-of-production method. Sub-soil licences and other licenses capitalised as part of oil and gas properties in production are amortised also using the unit-of-production method. Unit-of-production rates are based on proved reserves of the field concerned, which are oil, gas and other mineral reserves estimated to be recovered from existing facilities using current operating methods. The unit-of-production rate for the amortisation of field development costs takes into account expenditures incurred to date.

(e) Depreciation

Major oil and gas facilities that have a shorter useful life than the lifetime of the related fields are depreciated on a straight-line basis over the expected useful life of the facility. Depreciation of items of such assets is calculated using straight-line method to allocate their cost to their residual values over their estimated useful lives:

Buildings and constructions - 15-30 years

Machinery and equipment - 5 years

The asset's residual values and useful lives are reviewed, and adjusted as appropriate, at the end of each reporting period.

(f) Property, plant and equipment - other business and corporate assets

Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to the working condition and location for its intended use. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other costs, such as repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

The gain or loss arising from a retirement or disposal is determined as the difference between the sales proceeds and the carrying amount of the assets, and is recognised in the income statement.

Depreciation is provided on buildings and facilities, motor vehicles, office equipment and furniture at rates calculated to write off the cost, less estimated residual value, evenly over its expected useful life.

For depreciation purposes, useful lives are estimated as follows:

Other equipment and furniture - 5 years

Motor vehicles - 5 years

(g) Impairment of non-current assets

Exploration and evaluation assets are tested for impairment when facts and circumstances assessed in accordance with IFRS 6 suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount and in any event prior to the transfer of the carrying value to development and production assets. Other non-current assets are tested for impairment whenever events or changes in circumstances assessed in accordance with IAS 36 indicate that the carrying amount may not be recoverable.

An impairment loss is recognised in profit or loss for the amount by which the asset's carrying amount exceeds its recoverable amount. Such review is undertaken on an asset by asset basis, except where such assets do not generate cash flows independent of other assets, in which case the review is undertaken at the cash generating unit level.

The recoverable amount of assets is the greater of their value in use and fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash generating unit to which the asset belongs. The Group's cash generating units are the smallest identifiable groups of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

For the purposes of assessing impairment, exploration and evaluation assets subject to testing are grouped with existing cash-generating units of production fields that are located in the same geographical region. For development and production assets the cash generating unit applied for impairment test purposes is generally the field. For shared infrastructure a number of field interests may be grouped together where surface infrastructure is used by several fields in order to process production for sale.

An impairment loss is reversed to the extent that the factors giving the rise to the impairment charge are no longer prevalent. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depletion, depreciation or amortisation, if no impairment loss had been recognised.

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

3 Acquisition of Royal Atlantic Energy

On 13 December 2013, the Company signed a Sale and Purchase Agreement with Bandbear Limited to acquire 100 per cent. of the share capital of Royal Atlantic Energy (and with it the Bortovoy Licence described above). The acquisition was completed on 18 June 2014 through the issue of 38,263,095 new Ordinary Shares at an effective price of US$1.60 (100 pence) per share (equivalent to US$61.22 million) and the payment of US$58.94 million in cash. In addition, following the transaction the Group assumed US$59.9 million of bank debt held by Royal Atlantic Energy. The acquired business will increase the Group's penetration of its chosen upstream gas and oil market, provide operating cash flow immediately and is expected to provide value to its shareholders through developing and producing hydrocarbons in the Saratov Region of the Russian Federation.

The acquisition-date fair value of the total purchase consideration and its components are as follows:

The fair value of the new issued shares of the acquirer was determined on the basis of the closing market price of the ordinary shares on the date which Zoltav signed an Acquisition Agreement with Bandbear.

Acquisition related transaction costs of US$ 3.2 million were expensed as operating, administrative, selling expenses.

In accordance with IFRS 3 "Business Combinations", the Group is required to account for acquisitions based on the fair values of the identifiable assets acquired and liabilities and contingent liabilities assumed.

Details of the assets and liabilities acquired and goodwill arising are as follows:

The fair values of assets and liabilities acquired are based on a combined valuation approach that considered both discounted cash flows expected to be generated from the acquired business and a multiple based approach looking to similar recent observable market transactions. The valuation of identifiable tangible and intangible assets was performed by an independent professional appraiser. Based on the appraisal report the following items were included in the purchase price allocation:

- Mineral rights valued at US$90.0 million;

- Property, plant and equipment valued at US$128.9 million.

The fair value of the assets acquired and liabilities assumed is greater than the purchase consideration given. The resultant negative goodwill of $35.0 million is as a result the initial acquisition of the assets by Bandbear following the administration of the former owner and the related party nature of the transaction. The negative goodwill on acquisition has been immediately recognised in the income statement as a gain on acquisition.

The revenue included in the consolidated income statement from 18 June 2014 to 30 June 2014 and contributed by Diall Alliance LLC was US$1.6 million. Had Diall Alliance been consolidated into the Group from 1 January 2014, the consolidated income statement for the six months ended 30 June 2014 would show pro-forma revenue of US$19.8 million (six month period ended 30 June 2013: US$22.0 million; year ended 31 December 2013: US$47.2 million ).

4 Determination of fair value

A number of the Company's accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

4.1 Other receivables

The fair value of other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. This fair value is determined for disclosure purposes.

4.2 Non-derivative financial liabilities

Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. The book value of the non-derivative financial assets is equal to their fair value.

4.3 Fair value measurements recognised in the statement of financial position

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into level 1 to 3 based on the degree to which the fair value is observable:

· level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets and liabilities;

· level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

· level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

There were no transfers between level 1, 2 and 3 during the year (2013: none).

5 Revenue

The Group's operations comprise one class of business being oil and gas exploration, development and production and all revenues are from one geographical region, Saratov Region in the Russian Federation. Companies incorporated outside of Russia provide support to the operations in Russia.

Revenue is primarily from the sale of three products:

All gas sales are to one customer, Gazprom Mezhreiongaz Saratov LLC under a long term contract effective till 31 December 2015 with terms reviewed annually. Condensate and oil are sold to regional buyers.

6 Taxation

Income tax expense is recognised based on management's estimate of the weighted average annual income tax rate expected for the full financial year. The current income tax expense together with the deferred tax charge creates an effective tax rate for the six months ended 30 June 2014 of 3.7 per cent. (six month period ended 30 June 2013: 0 per cent.).

7 Exploration and evaluation assets

Additions in the period include additions on acquisition of Royal Atlantic Energy of US$25.8 million, US$63.7 million and US$0.5 million in respect of 'licences and other intangibles', 'exploration, evaluation and other property plant and equipment' and 'decommissioning asset' respectively.

In management's opinion, as at 30 June 2014 there were no non-compliance issues in respect of the licences that would have an adverse effect on the financial position or the operating results of the Group.

8 Property, plant and equipment

Additions in the period include additions on acquisition of Royal Atlantic Energy of US$128.4 million, US$0.4 million and US$0.1 million in respect of 'oil and gas assets', 'motor vehicles' and 'other equipment and furniture' respectively.

9 Share capital

On 31 March 2014, Zoltav received US$5.0 million related to the third tranche of the subscription agreement entered with ARA Holdings at the time of the Company's readmission to AIM following the acquisition of SibGeCo. On 31 March 2014, 4,549,591 shares of US$0.20 were issued for consideration of US$5,000,000.

On 12 June 2014, 100,000 shares of nominal value of US$0.20 were issued as a result of the warrants exercise for a consideration of US$167,361. The amount of US$95,193 was transferred from employee share-based compensation reserve to share premium upon exercise of the warrants.

On 18 June 2014, 38,263,095 shares of US$1.60 were issued for a consideration of US$61,220,952. The subscription was received from Bandbear Limited as part of the consideration for the acquisition of the entire issued share capital of Royal Atlantic Energy (Cyprus) Limited.

On 18 June 2014, The Company raised a total of US$65,946,418 through the issue of 41,216,511 shares at US$1.60 (100 pence). Subscriptions were received from ARA Capital (US$45.615 million for 28,509,375 shares), Crediton Invest (US$10.166 million for 6,353,568 shares) and Matteson Overseas (US$10.166 million for 6,353,568 shares). An exchange rate of US$1.60: £1.00 was agreed in the Subscription Agreements.

On 20 June 2014, 250,000 shares of US$0.20 were issued as a result of the warrants exercise for a consideration of US$425,690. The amount of US$235,245 was transferred from employee share-based compensation reserve to share premium upon exercise of the warrants.

On 26 June 2014, 250,000 shares of US$0.20 were issued as a result of the options exercise for a consideration of US$85,138. The amount of US$271,246 was transferred from employee share-based compensation reserve to share premium upon exercise of the options.

10 Earnings/(loss) per share

Basic earnings/(loss) per share is calculated by dividing the profit/(loss) attributable to owners of the Company by the weighted average number of ordinary shares in issue during the period.

Diluted earnings/(loss) per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has one category of dilutive potential ordinary shares: share options/warrants.

The diluted earnings per share for the six months ended 30 June 2014 is US Cents 37.63 (six month period ended 30 June 2013: loss per share US Cents 0.53; year ended 31 December 2013: loss per share US cents 10.87) taking into account the existing warrants and share options.

11 Share-based payments

11.1 Share options

At 30 June 2014, the Company had a total of 2,117,500 outstanding share options (31 December 2013: 2,367,500). The only movement in share options was a result of the exercise which took place during the year.

Options which are lapsed or are cancelled prior to their exercise date are deleted from the register of outstanding options and are available for re-use.

No share options were granted during the six month period ended 30 June 2014.

11.2 Initial Share Options

The Company adopted an employee Share Option Scheme on 4 March 2005 (Share Option Scheme) in order to incentivise key management and staff. The following share options were granted to the former employees and directors of the Company under the Initial Share Option Scheme adopted on 4 March 2005 (Initial Share Options) and are still in existence:

Share options granted under the Initial Share Option scheme were exercisable as follows:

· the first 30 per cent. of the options between the first and tenth anniversary of the date of grant;

· the next 30 per cent. of the options between the second and tenth anniversary of the date of grant; and

· the remaining options between the third and tenth anniversary of the date of grant.

Equity-settled share-based payments are measured at fair value (excluding the effect of non-market-based vesting conditions) as determined through use of the binomial option pricing model, at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company's estimate of shares that will eventually vest. The options vested immediately.

The binomial option pricing model applied to the grant of share options in respect of calculating the fair values. Key inputs to the model are as follows:

Volatility has been based on the historical trading performance of the Company and comparable companies. The risk free rate has been determined based on 10 year government bonds.

Total fair value as considered in the employee share-based compensation reserve for Initial Share Options as at 30 June 2014 was US$1,235,000 (31 December 2013: US$1,235,000).

11.3 Directors Share Options

Share options granted to the then current Directors of the Company on 31 October 2012 (Directors Share Options) were exercisable at any time between the commencement of the option period and third anniversary of the date of grant. Share options granted under this scheme were as follows:

250,000 share options were exercised during the six month period ended 30 June 2014. The options were exercised on 24 June 2014 which resulted in 250,000 shares being issued with the nominal value of $US0.2 at a price of £0.2.

Equity-settled share-based payments are measured at fair value (excluding the effect of non-market-based vesting conditions) as determined through use of the Black-Scholes technique, at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company's estimate of shares that will eventually vest. The options vested immediately.

The Black-Scholes formula is the option pricing model applied to the grant of share options in respect of calculating the fair values. Key inputs to the model are as follows:

Volatility has been based on the Company's trading performance from 1 January 2011. The risk free rate has been determined based on 5 year government bonds.

Total fair value as considered in the employee share-based compensation reserve for Directors Share Options as at 30 June 2014 was US$1,900,791 (31 December 2013: US$2,172,332).

11.4 Warrants

In August 2011, the Company granted 10,550,000 warrants with an exercise price of 5.0 pence, vesting from 2 August 2011 to 2 August 2014. After share consolidation in 2013 the number of warrants was 527,500.

350,000 warrants were exercised during the six month period ended 30 June 2014. 100,000 warrants were exercised on 5 June 2014 and 250,000 warrants were exercised on 16 June 2014 which resulted in 350,000 shares being issued with the nominal value of $US0.2 at a price of £1.

All shares issued in respect of the warrants rank pari-passu in all respects with the ordinary shares.

Equity-settled share-based payments are measured at fair value (excluding the effect of non-market-based vesting conditions) as determined through use of the Black-Scholes technique, at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company's estimate of shares that will eventually vest. The options vested immediately.

The Black-Scholes formula is the option pricing model applied to the grant of warrants in respect of calculating the fair values. Key inputs to the model are as follows:

Volatility has been based on the Company's trading performance from 1 January 2011. The risk free rate has been determined based on 5 year government bonds.

Total fair value as considered in the employee share-based compensation reserve for warrants as at 30 June 2014 was US$168,023 (31 December 2013: US$498,943).

11.5 Total share options and warrants

Total fair value for both share options and warrants as considered in the employee share-based compensation reserve as at 30 June 2014 was US$3,303,814 (31 December 2013: US$3,906,275).

US$ nil of the employee share-based compensation is included in the statement of comprehensive income for the six month period ended 30 June 2014(2013: nil).

No liabilities were recognised due to share-based payment transactions.

12 Borrowings

12.1 Non-current borrowings

Non-revolving credit facility

On 4 April 2014, Diall Alliance entered into a non-revolving credit facility agreement with Sberbank of Russia OJSC. The maximum amount capable of being drawn down under the facility is RUB 2,400,000,000 (US$69.6 million). The facility may be drawn down in a single or several tranches starting from 30 April 2014 until 31 March 2015. The maturity date is 30 April 2021, being the 7 year anniversary of the facility being entered into. Diall Alliance is obliged to repay the principal amount of the loan in 24 tranches commencing on 11 May 2015 and on a quarterly basis from then on with a final repayment tranche being payable on the maturity date. The interest rate is 10.98 per cent. per annum. Sberbank may unilaterally amend the interest rate in the event of increases in refinancing rates of the Central Bank of Russia. Diall Alliance paid an upfront commission on the facility of 1 per cent. of the facility amount (RUB24,000,000 (US$0.8 million)) and there is a drawdown charge of 0.25 per cent. per year on the balance of the facility amount not withdrawn by Diall Alliance within the established timeframe. Diall Alliance has the option to prepay the loan in whole or in part at any time, subject to the payment of a fee. Diall Alliance provided certain warranties and representations to Sberbank in the agreement. The agreement contains certain loan covenants and events of default which are customary for a facility of this type. The loan is secured on the fixed assets of Diall Alliance, such security being granted pursuant to various pledge and mortgage deeds entered into by Diall Alliance on or about the date of the Sberbank Facility.

The amount of the draw down facility as of 30 June 2014 was RUB 2,186,273,565 (US$65 million). The credit facility is measured at amortised cost, using the effective interest method. As of 30 June 2014, the fair value of the credit facility approximated its carrying value of US$64.3 million.

12.2 Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company monitors the risk of cash shortfalls by means of current liquidity planning. The Company's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company's reputation. This approach is used to analyse payment dates associated with financial assets, and also to forecast cash flows from operating activities. The contractual maturities of financial liabilities presented include interest payments.

There is no material difference between the carrying value and fair value of financial liabilities.

13 Commitments and contingencies

13.1 Insurance

The insurance industry in the Russian Federation is in a developing state and many forms of insurance protection common in other parts of the world are not generally available. The Company's insurance currently includes cover for damage to or loss of assets, including business interruption insurance should an insurable incident result in a shut-down of the Western Plant for an extended period of time, insurance for out-of-control wells and environmental damage caused thereby, third party liability coverage (including employer's liability insurance) and directors and officers liability insurance, in each case subject to excesses, exclusions and limitations. However, there can be no assurance that such insurance will be adequate to cover losses or exposure for liability or that the Company will continue to be able to obtain insurance to cover such risks. Until the Company obtains adequate insurance coverage there is a risk that the loss or destruction of certain assets could have a material adverse effect on the Company's operations and financial position.

13.2 Litigation

The Company was involved in the number of court procedures (both as a plaintiff and as a defendant) arising in the course of business. In the opinion of management there are no current legal proceedings or other claims outstanding which could have a material adverse effect on the results of operation financial position or cash flows of the Company and which have not been accrued or disclosed in this historical financial information.

13.3 Taxation contingencies

The taxation system in the Russian Federation continues to evolve and is characterised by frequent changes in legislation official pronouncements and court decisions which are sometimes contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities which have the authority to impose severe fines penalties and interest charges. A tax year remains open for review by the tax authorities during the three subsequent calendar years; however under certain circumstances a tax year may remain open longer. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive and substance-based position in their interpretation and enforcement of tax legislation.

These circumstances may create tax risks in the Russian Federation that are substantially more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Russian tax legislation official pronouncements and court decisions. However the interpretations of the relevant authorities could differ and the effect on this historical financial information if the authorities were successful in enforcing their interpretations could be significant.

13.4 Environmental matters

The Group's operations are in the upstream oil industry in the Russian Federation and its activities may have an impact on the environment. The enforcement of environmental regulations in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligation related thereto. The outcome of environmental liabilities under proposed or future legislation, or as a result of stricter interpretation and enforcement of existing legislation, cannot reasonably be estimated at present, but could be material.

Under the current levels of enforcement of existing legislation, management believes there are no significant liabilities in addition to amounts which are already accrued and which would have a material adverse effect on the financial position of the Group.

14 Capital commitments

Capital expenditure contracted for at the end of the reporting period but not yet incurred at 30 June 2014 was US$2.8 million (31 December 2013 - no material commitments).

15 Related party transactions

15.1 Control relationships

Related parties include shareholders, affiliates and entities under common ownership and control with the Company and key management personnel.

15.2 Directors' remuneration

Seven Directors served during the six month period ended 30 June 2014. The remuneration of the highest paid Director was US$544,433 (six month period ended 30 June 2013: US$115,581; year ended 31 December 2013: US$234,769).

15.3 Management remuneration

There are no transactions or balances with key management and their close family members, except for remuneration in the form of salary and bonuses.

15.4 Other related parties

On 19 March 2013, the Company entered into the First ARA Subscription Agreement with ARA Capital, pursuant to which ARA committed to provide up to US$20,000,000 of funds principally to support the working capital requirements of the Company, such funding to be made at a price per Ordinary Share of £0.70. ARA Capital completed this subscription in full on 31 March 2014.

On 13 December 2013, the Company entered into the Second ARA Subscription Agreement with ARA Capital, pursuant to which ARA Capital committed to subscribe for US$45,615,000, such funding to be made at a price per Ordinary Share of £1.00.

On 13 December 2013, the Company entered into the Acquisition Agreement (as subsequently amended pursuant to the SPA Amendment) for the acquisition of 100 per cent. of the shares of Royal Atlantic Energy and 100 per cent. participatory interest in Vostok Energy Limited Liability Company. The following is a summary of certain terms and conditions of the Acquisition Agreement:

a) Zoltav Resources conditionally agreed to acquire 100 per cent. of the shares of Royal Atlantic Energy and 100 per cent. participatory interest in Vostok Energy Limited Liability Company and have the Diall Receivable and Royal Atlantic Energy Receivable (to the extent the same remain outstanding at completion of the Acquisition Agreement) novated to it. Bandbear agreed to sell such interest as is held by it in the shares of Royal Atlantic Energy and participatory interest in Vostok Energy Limited Liability Company to Zoltav Resources and to enter into novations of the Diall Receivable and the Royal Atlantic Energy Receivable.

b) The aggregate consideration for the purchase of 100 per cent. of the shares of Royal Atlantic Energy and 100 per cent. participatory interest in Vostok Energy Limited Liability Company and the novation of the Diall Receivable and the Royal Atlantic Energy Receivable was US$77,505,100, RUB10,000 and €5,100 in cash and US$102,500,000 to be satisfied by the allotment and issue to Bandbear of Ordinary Shares as set out in the Acquisition Agreement, credited as fully paid.

c) The parties to the Acquisition Agreement agreed therein that Diall Alliance should be able to enter into a new debt facility after the Acquisition Agreement had been entered into and before its completion and that all or part of such new facility be used to reduce amounts outstanding under the Diall Receivable to Bandbear. Accordingly, on 20 December 2013 RUB82,000,000 and on 29 April 2014 a further RUB2,186,273,565 was repaid to Bandbear by Diall Alliance.

d) Bandbear provided the Company and Zoltav Resources with warranties as to capacity and certain other limited warranties including as to title. The Company and Zoltav Resources also gave certain warranties and undertakings to Bandbear as to capacity and authority and certain other limited warranties.

e) Pursuant to the SPA Amendment, the Acquisition Agreement was amended by the parties to reflect, inter alia, an assignment to Zoltav Resources of a loan note issued by Royal Atlantic Energy in favour of Bandbear on 31 January 2014 and changes to the Subscription which have been agreed subsequent to the Acquisition Agreement having been entered into, together with consequential changes resulting therefrom.

There were no other related party transactions during the period.

16 Events after reporting date

16.1 Equity issues

On 15 July 2014, following the receipt of a notice to exercise warrants over 15,000 ordinary shares of $US0.2 in the Company ("Ordinary Shares") Zoltav has authorised the issue of 15,000 new Ordinary Shares (the "Warrant Exercise"). Admission of the new Ordinary Shares to trading on AIM occurred on 18 July 2014.

On 30 July 2014, following the receipt of a notice to exercise warrants over 150,000 ordinary shares of $US0.2 in the Company ("Ordinary Shares") Zoltav has authorised the issue of 150,000 new Ordinary Shares (the "Warrant Exercise"). Admission of the new Ordinary Shares to trading on AIM occurred on 31 July 2014.

16.2 Taxation regime

The calculation basis for Mineral Extraction Tax has been changed by the Russian tax authorities effective 1 July 2014. The revised basis takes into account an assessment of the type of production wells in use where more beneficial terms are potentially applied to technically complex wells with an increased tax burden levied on traditional wells.

17 Date of approval of financial statements

The financial statements were approved by the Board of Directors on 24 September 2014.