18 September 2017

REGAL PETROLEUM PLC

2017 INTERIM RESULTS

Regal Petroleum plc (the "Company", and with its subsidiaries, the "Group"), the AIM-quoted (RPT) oil and gas exploration and production group, today announces its unaudited results for the six month period ended 30 June 2017.

Principal Developments

Ukraine Operations

Finance

Outlook

This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014.

For further information, please contact:

Philip Frank, PhD Geology, Chartered Geologist, FGS, PESGB, consultant to the Company, has reviewed and approved the technical information contained within this press release in his capacity as a qualified person, as required under the AIM Rules for Companies.

Chairman's Review

The Group is continuing with the development of its MEX-GOL, SV and VAS gas and condensate fields in north-eastern Ukraine, which are each held under 100% owned and operated production licences.  

Production at the fields was reasonably stable during the first half of 2017, averaging 1,752 boepd in aggregate from all fields.  In June 2017, the new MEX-109 well, utilising improved drilling and completion techniques developed as a result of the recent studies, was completed successfully and put on production, and in August 2017, following completion of its workover, the SV-2 well in the SV field was also put on production. Together, these successes have nearly doubled output from the MEX-GOL-SV licence areas.  With the contribution from these new wells, current aggregate production from all fields is 2,879 boepd, an improvement of approximately 64% on the average production rates in the first half of 2017.

The fiscal and economic situation in Ukraine is improving slowly, with a better economic outlook, GDP growth, slightly lower rates of inflation and improved stability in the Ukrainian Hryvnia exchange rates.  The Ukrainian Government has implemented a number of reforms in the oil and gas industry, which include the deregulation of the gas supply market in late 2015.  Nevertheless, there continue to be stresses in the economy and weaknesses in the Ukrainian banking sector.

The deregulation of the gas supply market, supported by electronic gas trading platforms and improved pricing transparency, has meant that the market gas prices now broadly correlate to the imported gas prices.  During the first half of 2017, gas prices were reasonably stable, allowing for some seasonal variation, and were higher than in the first half of 2016.  Furthermore, condensate and LPG prices were also higher by comparison with the same period last year.

As regards the Group's financial performance in the six months ended 30 June 2017, the Group made an operating profit of $1.0 million (1H 2016: $0.2 million loss), and cash generated from operations during the period was positive at $5.5 million (1H 2016: $3.8 million).  Overall, the Group made a reduced loss of $0.3 million (1H 2016: $0.9 million loss) during the period, mainly due to improved revenues as a result of higher hydrocarbon prices offset by a higher income tax charge.

Average daily production of gas, condensate and LPG from the MEX-GOL and SV fields for the six months ended 30 June 2017 was 133,951 m³/d of gas, 35.7 m³/d of condensate and 18.9 m³/d of LPG (1,140 boepd in aggregate) (1H 2016: 167,541 m³/d of gas, 42.4 m³/d of condensate and 19.8 m³/d of LPG (1,395 boepd in aggregate)), which was lower compared to the first half of 2016 due to normal field decline. 

The average daily production of gas and condensate from the VAS field for the six months ended 30 June 2017 was 86,770 m³/d of gas and 6.7 m³/d of condensate (612 boepd in aggregate), adding material volumes to the Group's production output.

The average daily production from the MEX-GOL and SV fields for the period from 1 July 2017 to 14 September 2017 was 238,216 m³/d of gas, 61.6 m³/d of condensate and 31.7 m³/d of LPG, which equates to a combined total oil equivalent of 2,007 boepd.  The average daily production from the VAS field for same period was 83,903 m³/d of gas and 6.3 m³/d of condensate (591 boepd in aggregate).

The slowly improving geopolitical and economic climate in Ukraine is cause for some optimism and the Group is now stepping up its planning for the further development of the MEX-GOL, SV and VAS fields. 

At the MEX-GOL and SV fields, the Group is utilising the results of P.D.F Limited's comprehensive re-evaluation study to plan additional development of the MEX-GOL and SV fields. The study has provided an enhanced understanding of the subsurface at the fields, as well as recommendations for future development work.  Further geophysical studies using the latest processing technology to analyse existing seismic data are approaching completion.  This, together with further analysis and new well data, will enable the Group to refine its strategies for further development of these fields, including the timing and level of future capital investment required to exploit the hydrocarbon resources.

In addition, the Group is finalising the workover of the GOL-2 well, and planning the installation of additional compression equipment, further upgrading of the gas processing facilities and pipeline network, and remedial work on existing wells.  

At the VAS field, following the reinterpretation of existing 3D seismic data, the Group plans to commence drilling a new well, VAS-10, and to acquire new 3D seismic over the 2017/18 winter period.

I would like to congratulate Sergei Glazunov on his appointment as Chief Executive Officer and welcome Yevhen (Gene) Palyenka as Chief Financial Officer, with both appointments becoming effective on 1 August 2017.

I would also like to welcome Bruce Burrows to the Board following his appointment as a Non-executive Director on 29 August 2017, and to express my appreciation to Adrian Coates, who stepped down from the Board on the same day, for his valued contribution over the last nine years.

In conclusion, on behalf of the Board, I would like to thank all of our staff for the continued dedication and support they have shown over the period.

Keith Henry

Chairman

15 September 2017

Finance Review

The Group made an operating profit of $1.0 million (1H 2016: $0.2 million loss) during the period ended 30 June 2017, and overall, a reduced loss of $0.3 million (1H 2016: $0.9 million loss), mainly as a result of improved revenue offset by a higher income tax charge.  Revenue in the first half of 2017, derived from the sale of the Group's Ukrainian gas, condensate and LPG production, was higher at $12.4 million (1H 2016: $10.4 million) primarily due to improved realisations as a result of higher hydrocarbon prices and the contribution from the sale of production from the VAS field.

Cash generated from operations during the period was $5.5 million (1H 2016: $3.8 million), which was higher due to higher hydrocarbon prices and the contribution from the sale of production from the VAS field.

For the six month period ended 30 June 2017, the average realised gas, condensate and LPG prices were $226/Mm³ (UAH6,060/Mm³), $59/bbl and $49/bbl respectively (1H 2016: $209/Mm³ (UAH5,315/Mm³) gas, $42/bbl condensate and $29/bbl LPG).   

During the period from 1 July 2017 to 15 September 2017, the average realised gas, condensate and LPG prices were $228/Mm³ (UAH5,890/Mm³), $66/bbl and $63/bbl respectively.  The current realised gas price is $238/Mm³ (UAH6,239/Mm³). 

Since the deregulation of the gas supply market in Ukraine in October 2015, the market price for gas has broadly correlated to the price of imported gas, which generally reflects trends in European gas prices. Gas prices are also subject to seasonal variation. During in the first half of 2017, gas prices were reasonably stable, allowing for some seasonal variation, and were higher than in the first half of 2016, as were condensate and LPG prices by comparison with the same period in 2016.

In the first half of 2017, the Group commenced selling all of its gas production to LLC Smart Energy ("Smart Energy"), which is part of the PJSC Smart-Holding Group, which is ultimately controlled by Mr Vadim Novinskiy, who also controls an indirect 54% majority shareholding in the Group. This arrangement came about as a consequence of the introduction of a number of new taxation regulations in Ukraine, which significantly increased the regulatory burden on affected companies. Due to the corporate structure of the Group, a substantial proportion of its gas production is produced by a non-Ukrainian subsidiary of the Group, which operates in Ukraine as a branch, or representative office as it is classified in Ukraine. As a result, the new tax regulations impose additional regulatory obligations on the Group's potential customers, who may be less inclined to purchase the Group's gas and/or may seek discounts on sales prices. In light of this situation, the Group and Smart Energy reached an agreement under which Smart Energy will purchase all of the Group's gas production and assume responsibility for the regulatory obligations under the Ukrainian tax regulations, as well as combining the Group's gas production with Smart Energy's own gas production so as to sell such gas as combined volumes, which should result in higher sales prices due to the larger sales volumes. In order to cover Smart Energy's sales, administration and regulatory compliance costs, the Group sells its gas to Smart Energy at a discount of 0.5% to the gas sales prices achieved by Smart Energy, who sell the combined volumes in line with market prices. The terms of sale for the Group's gas to Smart Energy are (i) payment for one third of the estimated monthly volume of gas by the 20^th of the month of delivery, and (ii) payment of the remaining balance by the 10^th of the month following the month of delivery. As a consequence of their common ultimate control, the Company and Smart Energy are deemed to be related parties under the AIM Rules for Companies, and more details of this arrangement are set out in the announcement made on 30 June 2017, as well as in Note 3 below.

The subsoil taxes rates applicable to gas and condensate production have been stable during the first half of 2017 at 29% for gas produced from deposits at depths above 5,000 metres and 14% for gas produced from deposits below 5,000 metres, and 45% for condensate produced from deposits above 5,000 metres and 21% for condensate produced from deposits below 5,000 metres.   

With effect from 1 April 2017, a transmission tariff of UAH296.80/Mm³ ($11.00/Mm³) for use of the Ukrainian national pipeline system became applicable to oil and gas producers in Ukraine, including the Group.  However, on 13 June 2017, the tariff was suspended following a legal challenge to the imposition of the tariff, and it is currently uncertain if and/or when the tariff will be reinstated.

Cost of sales for the six months ended 30 June 2017 was higher at $9.2 million (1H 2016: $8.2 million), mainly due to the inclusion of the cost of sales of hydrocarbons from the VAS field of $2.8 million (1H 2016: nil).  

Administrative expenses for the period were slightly lower at $2.2 million (1H 2016: $2.4 million), primarily as a result of the inclusion of administrative expenses relating to LLC Prom-Enerho Produkt ("PEP"), the owner of the VAS field, of $1.5 million (1H 2016: nil) being offset by the absence of expenditure on consultants in connection with the acquisition of PEP as was the case in 2016.

The tax charge for the six month period ended 30 June 2017 of $2.0 million (1H 2016: $1.2 million charge) comprises a current tax charge of $0.9 million (1H 2016: $0.7 million) and a deferred tax charge of $1.1 million (1H 2016: $0.5 million charge).

The Group has recognised a deferred tax asset of $10.2 million at 30 June 2017 (31 December 2016: $11.1 million). This comprises a deferred tax asset of $2.2 million (31 December 2016: $3.7 million) in relation to UK tax losses carried forward, and $8.0 million (31 December 2016: $7.4 million) relating to the Group's MEX-GOL and SV asset in Ukraine, which is recognised on the tax effect of temporary timing differences between the carrying value of such asset and its tax base, following its impairment in 2013. The reduction in the deferred tax asset in the first half of 2017 is primarily due to a decrease of forecasted taxable income for the following five years caused by impairment and partial settlement of intra-group loans receivable by the Company.  The Group has also recognised a deferred tax liability of $1.1 million at 30 June 2017 31 December 2016: 1.2) relating to the Group's VAS asset in Ukraine, which is recognised on the tax effect of temporary timing differences between the carrying value of such asset and its tax base mainly due to revaluation of the VAS asset at the date of acquisition by the Group.

Increased capital investment of $2.1 million reflects investment in the Group's oil and gas development and production assets during the period (1H 2016: $0.4 million), primarily the expenditure associated with the drilling of the MEX-109 well. 

Under the agreement between the Group and NJSC Ukrnafta relating to the SV-2 well, which was a suspended well owned by NJSC Ukrnafta located within the Group's SV licence area, the Group agreed to carry out a workover of the well and, if successful, to operate, produce and sell the gas and condensate from the well under an equal net profit sharing arrangement with NJSC Ukrnafta. The workover was successful and production from this well commenced in August 2017.

Cash and cash equivalents held at 30 June 2017 were $24.5 million (31 December 2016: $20.0 million).  The Group's cash and cash equivalents balance at 15 September 2017 was $27.0 million, held as to $8.6 million equivalent in Ukrainian Hryvnia and the balance of $18.4 million equivalent predominantly in US Dollars and Pounds Sterling. 

Since early 2014, the Ukrainian Hryvnia has devalued significantly against the US Dollar, falling from UAH8.3/$1.00 on 1 January 2014 to UAH26.1/$1.00 on 30 June 2017, which resulted in substantial foreign exchange translation losses for the Group over that period, and in turn adversely impacted the carrying value of the MEX-GOL and SV asset due to the translation of two of the Group's subsidiaries from their functional currency of Ukrainian Hryvnia to the Group's presentation currency of US Dollars. However in the first half of 2017, the exchange rate between the Ukrainian Hryvnia and the US Dollar has been reasonably stable averaging UAH26.8/$1.00 during the period (rate as at 31 December 2016: UAH27.2/$1.00).  Nevertheless, further devaluation of the Ukrainian Hryvnia against the US Dollar may affect the carrying value of the Group's assets in the future.

Cash from operations has funded the capital investment during the period, and the Group's current cash position and positive operating cash flow are the sources from which the Group expects to fund the development programmes for its assets in the remainder of 2017.

Operational Environment, Principal Risks and Uncertainties

The Group has a risk evaluation methodology in place to assist in the review of the risks across all material aspects of its business. This methodology highlights technical, operational, external and fiduciary risks and assesses the level of risk and potential consequences. It is periodically presented to the Audit Committee and the Board for review, to bring to their attention potential concerns and, where possible, propose mitigating actions. Key risks recognised are detailed below:-

Risks relating to Ukraine

In recent years, the Ukrainian economy has been characterised by high political and economic risks, but more recently there have been gradual improvements in the political and economic environment in Ukraine. Nevertheless, as a developing economy, in addition to the impact of local political and economic issues, Ukraine's economy is vulnerable to market downturns and economic slowdowns elsewhere in the world.

Since late 2013, the political and economic situation in Ukraine has experienced significant instability and uncertainty, which has led to a deterioration of Ukrainian State finances, volatility of financial markets, illiquidity on capital markets, high inflation and a substantial depreciation of the Ukrainian Hryvnia against major foreign currencies. This instability and uncertainty continued during 2016 and 2017, but to a lesser extent than during 2014 - 2015.  During the first half of 2017, the economic improvement in Ukraine continued with Ukraine's GDP growing at a rate of 2% and annual inflation declining slightly to 12.2% (2016: GDP increased by 1%; annual inflation at 12.4%). 

The conflict in parts of eastern Ukraine, which started in spring 2014, has not been resolved to date.  However, there has been no substantial escalation of the conflict since the signing of a ceasefire agreement in February 2015.  Russia continues to occupy Crimea and has commenced the construction of a bridge directly between Russia and Crimea.

The Group has no assets in Crimea or the areas of conflict in the east of Ukraine, nor do its operations rely on sales or costs incurred there.

The conflict in the region has put further pressure on relations between Ukraine and Russia, and the political tensions have had an adverse effect on the Ukrainian financial markets, hampering the ability of Ukrainian companies and banks to obtain funding from the international capital and debt markets.

The relationship between Ukraine and Russia has remained strained.  On 1 January 2016, the agreement on the free trade area between Ukraine and the European Union came into force. The Russian Government reacted to this event by implementing a trading embargo on many key Ukrainian export products. In response, the Ukrainian Government implemented similar measures against Russian products.

The banking system in Ukraine remains fragile due to its weak level of capital, low asset quality caused by the economic situation, currency depreciation, changing regulations and other economic pressures generally.

The International Monetary Fund has continued to support the Ukrainian Government under the four-year Extended Funding Facility aggregating $17.5 billion approved in March 2015. The terms of this funding package stipulated a number of fiscal and economic reforms, including reforms in the banking and energy sectors.  Since then, Ukraine has received four tranches under the funding programme totalling $8.4 billion, with the most recent tranche of $1 billion in April 2017. Further disbursements of International Monetary Fund tranches depend on the implementation of Ukrainian Government reforms, and other economic, legal and political factors.

Despite some improvements in 2016 and 2017, the final resolution and the ongoing effects of the political and economic situation in Ukraine are difficult to predict but they may have severe effects on the Ukrainian economy and the Group's business. 

These events have not materially affected the Group's production operations to date, but the instability has disrupted the Group's development and operational planning for its assets. Furthermore, the political, fiscal and economic instability has impacted the Group's normal business activities, and increased the risks relating to its business operations, financial status, access to secure banking facilities and maintenance of its Ukrainian production licences.

The Ukrainian Government is keen to develop the country's domestic production of hydrocarbons since Ukraine imports a significant proportion of its gas. While this should put the Group in a well-placed position, as experienced previously, there are significant risks to carrying out business in the country. It is considered that the involvement of Energees Management Limited, as a major shareholder with extensive experience in Ukraine, has helped to mitigate such risks.

Going concern risk

The Group is exposed to risks relating to Ukraine as well as production, hydrocarbon price and other risks, as detailed in this Operational Environment, Principal Risks and Uncertainties section. In view of this, the Group prepares monthly cash flow forecasts which take into account the risks facing the business, to assess its ability to meet its obligations as they fall due, taking into account the risks of variances in revenues.

Having reviewed the financial statements, budgets and forward plans (including sensitivity analysis), the latest operational results, the risks outlined herein, and having taken into account the Group's cash holdings, the current practice of contracting for drilling services on a fixed-price basis for each well, the assessment of well results prior to entering into firm commitments for future drilling operations and the lower committed expenditure in Ukraine, the Directors continue to believe that the Group is able to manage its business risks successfully despite the current uncertain political and economic outlook. The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future regarded as at least 12 months from the date of signing of the Group's financial statements. Therefore they continue to adopt the going concern basis of accounting in preparing the financial statements.

Production risks

Producing gas and condensate reservoirs are generally characterised by declining production rates which vary depending upon reservoir characteristics and other factors. Future production of the Group's gas and condensate reserves, and therefore the Group's cash flow and income, are highly dependent on the Group's success in operating existing producing wells, drilling new production wells and efficiently developing and exploiting any reserves, and finding or acquiring additional reserves. The Group may not be able to develop, find or acquire reserves at acceptable costs. The experience gained from drilling undertaken to date highlights such risks as the Group targets the appraisal and production of these hydrocarbons. During 2016, the Group engaged external technical consultants to undertake a comprehensive review and re-evaluation study of the MEX-GOL and SV fields in order to gain an improved understanding of the geological aspects of the fields and reservoir engineering, drilling and completion techniques, and the results of this study and further planned technical work will be used by the Group in the future development of these fields.

Risks relating to further development and operation of the Group's gas and condensate fields in Ukraine

The planned development and operation of the Group's gas and condensate fields in Ukraine is susceptible to appraisal, development and operational risk. This could include, but is not restricted to, delays in delivery of equipment in Ukraine, failure of key equipment, lower than expected production from wells that are currently producing, or new wells that are brought on-stream, problematic wells and complex geology which is difficult to drill or interpret. The generation of significant operational cash is dependent on the successful delivery and completion of the development and operation of the fields.  These risks have been demonstrated by the previous downgrade in the Group's remaining reserves which resulted in the reduction in the value in use, and consequent impairment loss relating to the Group's MEX-GOL and SV asset in Ukraine. Furthermore, the optimisation of the Group's assets is dependent on maintaining constructive relationships between all business stakeholders.

Exposure to credit, liquidity and cash flow risk

The Group does not currently have any loans outstanding. Local customers are managed in Ukraine and their financial position, the Group's past experience and other factors are evaluated. Internal financial projections are regularly made based on the latest estimates available, and various scenarios are run to assess the robustness of the liquidity of the Group. The Group currently holds sufficient cash and cash equivalents for the anticipated short to medium term needs of the business. Whilst much of the future capital requirement is expected to be derived from operational cash generated from production, including from wells yet to be drilled, there is a risk that in the longer term insufficient operational cash is generated, or that additional funding, should the need arise, cannot be secured.  As the risk to future capital funding is inherent in the oil and gas exploration and development industry and reliant in part on future development success, it is difficult for the Group to take any particular measures at this time to mitigate this risk, other than tailoring its development activities to its available capital funding from time to time. 

Risks relating to the Ukrainian banking sector

The instability in Ukraine in recent years led to a significant deterioration of Ukraine's finances, volatility in financial markets, illiquidity on capital markets and a substantial depreciation of the Ukrainian Hryvnia against major foreign currencies.  As a result, significant external financing is required to maintain the country's economic stability.  During 2014 - 2015, the National Bank of Ukraine, amongst other measures, imposed comprehensive restrictions on the processing of client payments by banks, on the purchase of foreign currency on the inter-bank market and on the remittance of funds outside Ukraine, with particular restrictions on operations with foreign currency including temporary bans on the payment of dividends in foreign currency and the early repayment of debts to non-residents and the mandatory sale of 75% of revenue in foreign currency.  However, during 2017, there was some further easing of these restrictions, with the required share of foreign currency for mandatory sale being reduced to 50%, the settlement period for export-import transactions in foreign currency being increased from 120 to 180 days and Ukrainian companies continuing to be permitted to pay dividends to non-residents up to a limit of $5 million per month.

These banking restrictions and the many other economic issues in Ukraine during the period since 2013 put great strain on the Ukrainian banking system, with increased risks in the capital strength, liquidity and creditworthiness of a number of banks, and very high rates in the wholesale and overnight markets. In addition, there have been significant deposit outflows from the banking system and widespread restructuring of bank clients' maturing liabilities, as well as the failure and/or bail out of a number of Ukrainian banks. 

The Extended Funding Facility from the International Monetary Fund approved in March 2015, required significant reforms to the Ukrainian banking sector, which are now being implemented. The reforms are being overseen by the National Bank of Ukraine and involve all banks being inspected and assessed, with particular emphasis on lending to a bank's related parties. The inspections are designed to enable the National Bank to assess the financial strength and liquidity of the banks in Ukraine, and may lead to the National Bank imposing remedial measures, ranging from the imposition of requirements for a bank to bolster its capital strength, requirements for a bank to reduce its exposure to related party lending, the appointment of an administrator to manage the priority of payments by a bank, or in the most extreme cases, the liquidation of a bank.

The creditworthiness and potential risks relating to the banks in Ukraine are regularly reviewed by the Group, but the geopolitical and economic events since 2013 in Ukraine have significantly weakened the Ukrainian banking sector. In light of this, the Group has taken and continues to take steps to diversify its banking arrangements between a number of banks in Ukraine. These measures are designed to spread the risks associated with each bank's creditworthiness, and the Group endeavours to use banks that have the best available creditworthiness. Nevertheless, and despite some recent improvements, the Ukrainian banking sector remains weakly capitalised and so the risks associated with the banks in Ukraine remain significant, including in relation to the banks with which the Group operates bank accounts.

Currency risk

The Group's main activities are (i) investment into the development of the Group's Ukrainian gas and condensate assets; (ii) the production and sale of gas, condensate and LPG; and (iii) the continued exploration for further hydrocarbon reserves.

The Group receives sales proceeds in Ukrainian Hryvnia, and the majority of the capital expenditure costs for the 2017 investment programme will be incurred in Ukrainian Hryvnia, thus the currency of revenue and costs are largely matched. As with all currencies, the value of the Ukrainian Hryvnia is subject to foreign exchange fluctuations, but as the Ukrainian Hryvnia does not benefit from the range of currency hedging instruments which are available in more developed economies, the Group has adopted a policy that, where possible, funds not required for use in Ukraine be retained on deposit in the United Kingdom, principally in US Dollars. 

Furthermore, since the beginning of 2014, the Ukrainian Hryvnia has significantly devalued against major world currencies, including the US Dollar, where it has fallen from UAH8.3/$1.00 on 1 January 2014 to UAH26.1/$1.00 on 30 June 2017. However, the Ukrainian Hryvnia has appreciated slightly during the first half of 2017, strengthening from UAH27.2/$1.00 on 31 December 2016. As at 15 September 2017, the Ukrainian Hryvnia was trading at UAH26.2/$1.00.  The devaluation since 2014 was one of the main reasons for the imposition of the abovementioned banking restrictions by the National Bank of Ukraine.  In addition, the events in Ukraine over recent years, as outlined above in "Risks relating to Ukraine", are likely to continue to impact the valuation of the Ukrainian Hryvnia against major world currencies.  Further devaluation of the Ukrainian Hryvnia against the US Dollar will affect the carrying value of the Group's assets. 

Ukraine Production Licences

The Group operates in a region where the right to production can be challenged by State and non-State parties. During 2010, this manifested itself in the form of a Ministry Order instructing the Group to suspend all operations and production from its MEX-GOL and SV production licences, which was not resolved until mid-2011. In 2013, new rules relating to the updating of production licences led to further challenges being raised by the Ukrainian authorities to the production licences held by independent oil and gas producers in Ukraine, including the Group, which may result in requirements for remediation work, financial penalties and/or the suspension of such licences, which, in turn, may adversely affect the Group's operations and financial position. All such challenges affecting the Group have thus far been successfully defended through the Ukrainian legal system. However, the business environment is such that these types of challenges may arise at any time in relation to the Group's operations, licence history, compliance with licence commitments and/or local regulations. The Group endeavours to ensure compliance with commitments and regulations through Group procedures and controls or, where this is not immediately feasible for practical or logistical considerations, seeks to enter into dialogue with the relevant Government bodies with a view to agreeing a reasonable time frame for achieving compliance or an alternative, mutually agreeable course of action.

The Group's production licences for the MEX-GOL and SV fields currently expire in 2024.  However, in the estimation of its reserves, it is assumed that licence extensions will be granted in accordance with current Ukrainian legislation and that consequently the fields' development will continue until the end of the fields' economic life in 2036. Despite such legislation, it is possible that licence extensions will not be granted, which would affect the achievement of full economic field development and consequently the carrying value of the Group's MEX-GOL and SV asset in the future. 

Hydrocarbon price risk

The Group derives its revenue principally from the sale of its Ukrainian gas, condensate and LPG production. These revenues are subject to commodity price volatility and political influence. A prolonged period of low gas, condensate and LPG prices may impact the Group's ability to maintain its long-term investment programme with a consequent effect on growth rate, which in turn may impact the share price or any shareholder returns. Lower gas, condensate and LPG prices may not only decrease the Group's revenues per unit, but may also reduce the amount of gas, condensate and LPG which the Group can produce economically, as would increases in costs associated with hydrocarbon production, such as subsoil taxes and royalties.

The overall economics of the Group's key assets (being the net present value of the future cash flows from its Ukrainian projects) are far more sensitive to long term gas, condensate and LPG prices than short-term price volatility. However, short-term volatility does affect liquidity risk, as, in the early stage of the projects, income from production revenues is offset by capital investment.

Production based taxes

At the end of July 2014, the Ukrainian Government approved emergency fiscal measures designed to assist in alleviating the fiscal and economic pressures affecting the economy of Ukraine. These imposed significant increases to the subsoil tax rates payable on gas and condensate production, and were imposed for the period from 1 August 2014 to 31 December 2015.  With effect from 1 January 2016, the subsoil tax rates relating to gas production reverted to substantially the same levels as prior to the temporary increases, but it is possible that similar significant increases to subsoil tax rates may be implemented in the future.

With effect from 1 April 2017, a transmission tariff for use of the Ukrainian national pipeline system was introduced for oil and gas producers in Ukraine, including the Group.  However, on 13 June 2017, the tariff was suspended following a legal challenge to the imposition of the tariff, and it is currently uncertain if and/or when the tariff will be reinstated.

Industry risks

The Group's ability to execute its strategy is subject to risks which are generally associated with the oil and gas industry. For example, the Group's ability to pursue and develop its projects and  development  programmes depends on a number of uncertainties, including  the  availability of capital, seasonal  conditions, regulatory approvals, gas, oil, condensate and LPG prices, development costs and drilling success. As a result of these uncertainties, it is unknown whether potential drilling locations identified on proposed projects will ever be drilled or whether these or any other potential drilling locations will be able to produce gas, oil or condensate. In addition, drilling activities are subject to many risks, including the risk that commercially productive reservoirs will not be discovered. Drilling for hydrocarbons can be unprofitable, not only due to dry holes, but also as a result of productive wells that do not produce sufficiently to be economic. In addition, drilling and production operations are highly technical and complex activities and may be curtailed, delayed or cancelled as a result of a variety of factors.  Furthermore, whilst the Group is committed to maintaining the highest standards of health, safety, environmental and security in its operational activities, hydrocarbon drilling and production operations carry inherent risks, which in the event of an incident may significantly affect the operational, production, financial and/or business activities of the Group.  

Financial Markets and Economic Outlook

The performance of the Group will be influenced by global economic conditions and, in particular, the conditions prevailing in the United Kingdom and Ukraine. The economies in these regions have been subject to volatile pressures during the period, with the global economy having experienced a long period of difficulties, and more particularly the events that have occurred in Ukraine over recent years. If these events recur, the Group may be exposed to increased counterparty risk as a result of business failures in Ukraine or elsewhere and will continue to be exposed if counterparties fail or are unable to meet their obligations to the Group. The precise nature of all the risks and uncertainties the Group faces as a result of these risks cannot be predicted and many of these are outside of the Group's control.

Risks relating to key personnel

The Group has a relatively small team of executives and senior management. Whilst this is sufficient for a group of this nature, there is a dependency risk relating to the loss of key individuals.  However, the Group has developed relationships with a number of technical and other professional experts and advisers, who are used to provided specialist services as required.

Condensed Interim Consolidated Income Statement

The Notes set out below are an integral part of these condensed interim consolidated financial statements.

Condensed Interim Consolidated Statement of Comprehensive Income

The Notes set out below are an integral part of these condensed interim consolidated financial statements.

Condensed Interim Consolidated Balance Sheet

The Notes set out below are an integral part of these condensed interim consolidated financial statements.