GROUP FINANCIAL STATEMENTS

Notes to the interim financial information

1. General information and accounting policies

JKX Oil & Gas plc (the ultimate parent of the Group hereafter, 'the Company') is a public limited company listed on the London Stock Exchange which is domiciled and incorporated in England and Wales under the UK Companies Act. The registered office is 6 Cavendish Square, London, W1G 0PD and the principal activities of the Group are exploration, appraisal, development and production of oil and gas reserves. The registered number of the Company is 03050645.

The condensed consolidated interim financial information incorporates the results of JKX Oil & Gas plc and its subsidiary undertakings as at 30 June 2021 and was approved by the Directors for issue on 9 August 2021.

This condensed consolidated interim financial information does not constitute accounts within the meaning of section 434 and of the Companies Act 2006. Statutory accounts for the year ended 31 December 2020 were approved by the Board of Directors on 31 March 2021 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified. The auditors' report on those accounts did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

This condensed consolidated interim financial information has not been audited, but was the subject of an independent review carried out by the Company's auditors, BDO LLP.

2. Basis of preparation

On 31 December 2020, IFRS as adopted by the European Union at that date was brought into UK law and became UK-adopted international accounting standards, with future changes being subject to endorsement by the UK Endorsement Board. The Group transitioned to UK-adopted international accounting standards in its consolidated financial statements on 1 January 2021. There was no impact or changes in accounting policies from the transition.

This condensed consolidated interim financial information for the six months ended 30 June 2021 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with the UK-adopted International Accounting Standard  34, 'Interim financial reporting'. The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2020 which were prepared in accordance with international accounting standards in conformity with the Companies Act 2006 and international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. A copy of the annual financial statements is available on the Company's corporate website (www.jkx.co.uk) or from the Company's registered office.

The Group's business activities, together with factors likely to affect its future development, performance and position are set out in the operational and financial review sections of this report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the financial review section.

Going concern

The Directors note that the Group is debt free and has generated $14.8m of operating cash flow in the first half of 2021 with $36.2m of cash held at 30 June 2021. In addition, the Group benefits from an undrawn Tascombank loan facility of UAH280m ($10.3m) and overdraft facility of UAH50m ($1.8m) that were both renewed in December 2019, although each draw down is subject to credit approval by the bank. The facility will be available through December 2021 (subject to planned renewal after this date, if required). Additionally, in July 2020 the Group secured a $5.0m facility with Alfa-Bank, although draw downs are conditional on credit approval by the bank and tranches are repayable 2 months from draw down.  The last date of the agreed loan facility is 21 July 2023.

The Board have reviewed the Group's forecast cash flows, sensitivities and combined stress case scenarios for a period of at least the next 12 months. In doing so, the Board considered risks and uncertainties associated with COVID-19 and the probability of those occurring noting the additional information available to assess such risks following the development of the pandemic over recent months. Factors considered included: a) market volatility in respect of commodity prices; and c) the Group's ability to utilise its credit facilities.

The forecasts have been based on the latest Board approved operational budgets. Gas prices in the regulated Russian market have been forecasted based on recent prices and contractual terms, oil price assumptions in Ukraine have been forecast at a discount to current market forward curves and Ukrainian gas prices have been estimated considering market prices, seasonal gas price trends and market outlooks.

The forecast cash flows reviewed include scenarios where potential liabilities arise in relation to the rental fee claims in Ukraine that the Group continues to contest. This included assessments of the timing of such potential payments that may fall due in the forecast period  following detailed analysis of Ukrainian legislation and the status of each claim with internal and external legal and tax experts, notwithstanding the previous experience of continued delays in the court proceedings.

The Board further considered separate scenarios including the effect of reductions in Ukrainian oil and gas prices of 10% on the base case, noting that the base case pricing is below market prices, sustained across the forecast period. The rental claims stress test scenario is based on the estimated earliest payment dates when the payments could fall due. This case was combined with the scenario listed above. All reasonably possible forecasts demonstrate that significant cash balances are maintained under such scenarios without draw down on the facilities and they would be sufficient to meet such obligations as they fall due.

Based on the Group's cash flow forecasts, the Directors believe that the combination of its current cash balances, net cash flows from operations and undrawn facilities mean that the Group will be able to meet its liabilities and commitments as they fall due across the forecast period. Accordingly the Board considers it is appropriate to adopt the going concern basis of accounting in preparing these financial statements.

3. Accounting policies

The accounting policies adopted together with critical accounting estimates, assumptions and judgements are consistent with those used in the annual financial statements for the year ended 31 December 2020. There were no new standards that became applicable for the current reporting period.

Taxes on income in the interim period are accrued using the tax rate that would be applicable on expected total annual earnings.

4. Segmental analysis

The Group has one single class of business, being the exploration for, evaluation, development and production of oil and gas reserves. Accordingly the reportable operating segments are determined by the geographical location of the assets and, therefore all information is being presented for geographical segments. This is consistent with the revenue information that is disclosed for each reportable segment under IFRS 8 Operating Segments.

There are four (2020: four) reportable operating segments which are based on the internal reports provided to the Chief Operating Decision Maker ('CODM'), the Group's Board of Directors. Ukraine and Russia segments are involved with production and exploration; the 'Rest of World' are involved in exploration, development and production and the UK is the home of the head office and purchases material, capital assets and services on behalf of other segments.

The Group derives revenue from the transfer of goods at a point in time.

Segment revenue, segment expense and segment results include transfers between segments. Those transfers are eliminated on consolidation.

Segment results and assets include items directly attributable to the segment. Segment assets consist primarily of property, plant and equipment, inventories and receivables. Capital expenditures comprise additions to property, plant and equipment and intangible assets.

¹            Total assets and liabilities exclude assets and liabilities of the Hungarian disposal group classified as held for sale. Please refer to Note 8 for details.

¹            Total assets and liabilities exclude assets and liabilities of the Hungarian disposal group classified as held for sale. Please refer to Note 8 for details.

5. Property, plant and equipment and other intangible assets

During the period the Group acquired $3.7m additional assets in Ukraine and Russia (2020: $7.5m in Ukraine, Russia), with 88% in respect of Group's oil and gas producing and development assets (2020: 86% in respect of Group's oil and gas producing and development assets).

At the reporting date a review of the carrying amounts of property, plant and equipment was undertaken to determine whether there was any indication of a trigger that may have led to these assets suffering an impairment loss. Following this review impairment triggers were noted in relation to the Ukrainian and Russian assets due to the carrying amount of the Group net assets exceeding the Company's market capitalisation. An impairment test was performed in respect of assets in Ukraine and Russia.

Key Assumptions - NNC and Elyzavetivske

The key assumptions used in the impairment testing were:

§ Production profiles: these were based on the latest available information assessed internally.  

§ Economic life of field: it was assumed that the title to the licences is retained based on legal right and that the NNC licence term will be successfully extended beyond its current 2024 expiration date through to the economic life of the field (expected to be around 2037). The economic life of the Elyzavetivske field is currently expected to be around 2034 as per management's current expectation.

§ Gas prices: during 2015 Ukraine acquired the ability to purchase gas from Europe rather than being completely dependent on Russia for imports. As such, Ukrainian gas prices are expected to be more aligned with European gas prices in future but also influenced by international oil prices. The gas price used for 2021 is based on estimates of gas prices to be realised by our Ukrainian subsidiary determined considering external market forecasts as at year end with consideration given the applicability or otherwise of relevant pricing adjustments for the local market. For the period of the model a forward gas price curve was used.

§ Oil prices: the Company used a forward price curve till the end of the model.

§ Production taxes: the Company has assumed production tax rates of 29% for gas and 31% for oil and condensate. A gas tax rate of 12% is applied to wells drilled since 1 January 2018.

§ Capital and operating costs: these were based on current operating and capital costs in Ukraine for both projects. Estimates were provided by third parties and supported by estimates from our own specialists, where necessary.

§  Post tax nominal discount rate of 16.7%. This was based on a Capital Asset Pricing Model analysis consistent with that used in previous impairment reviews.

Based on the key assumptions set out above:

§ the recoverable amount of NNC's oil and gas assets ($93.1m) exceeds its carrying amount ($85.7m) and therefore NNC's oil and gas assets were not impaired.

§ Elyzavetivske's recoverable amount (including the West Mashivska extension) ($11.3m) exceeds its carrying amount ($8.8m), and therefore the CGU's oil and gas assets were not impaired.

Sensitivity analysis for the NNC and Elyzavetivske

Any impairment is dependent on judgement used in determining the most appropriate basis for the assumptions and estimates made by management, particularly in relation to the key assumptions described above. Sensitivity analysis to potential changes in key assumptions has therefore been provided below.

The impact on the impairment calculation of applying different assumptions to gas prices, production volumes, future capital and operating expenditure and post-tax discount rates, all other inputs remaining equal, would be as follows:

Management performed sensitivity analysis on the estimates of recoverable amounts and found that the excess of recoverable amount over the carrying amount of both CGUs would be reduced to nil as a result of a reasonably possible change in the key assumption of oil and gas prices given the inherent volatility of prices. However, the pricing assumptions applied are considered appropriate best estimates considering market data and trends that support the base case. The discount rates involve judgment but are considered appropriately risk weighted. Management have considered the sensitivity scenarios associated with production, capital expenditure and operating costs and consider the base case estimates to be supportable based on detailed planning with such scenarios less than reasonably possible.

Key Assumptions - Russia

The key assumptions used in the impairment testing were:

§ Production profiles: these were based on the latest available information assessed internally. 

§ Economic life of field: it was assumed that YGE will be successful in extending the licence term beyond its current 2026 expiration to the economic life of the field.

§ Gas prices: from 1 July 2021 and annually thereafter, the gas prices have been increased by 3.0% through to 2026 based on historical experience.

§ Capital and operating costs: these were based on the revised budget for operating and capital costs in Russia, project estimates provided by third parties and supported by estimates from our own specialists, where necessary.  

§ Post tax nominal Rouble discount rate of 12.6%. This was based on a Capital Asset Pricing Model analysis. 

Based on the key assumptions set out above YGE's recoverable amount ($102.7m) exceeds it carrying amount of CGU's assets including deferred tax assets ($76.6m) and therefore YGE's Koshekhablskoye gas field was not impaired.

The impact on the impairment calculation of applying different assumptions to gas prices, production, future capital and operating expenditure and post-tax discount rates, all other inputs remaining equal, would be as follows:

Management performed sensitivity analysis on the estimates of recoverable amounts and found that the excess of recoverable amount over the carrying amount of both CGUs would be reduced to nil as a result of a reasonably possible change in the key assumptions of gas prices given the inherent volatility of prices. However, the pricing assumptions applied are considered appropriate best estimates considering market data and trends that support the base case. The discount rates involve judgment but are considered appropriately risk weighted. Management have considered the sensitivity scenarios associated with production, capital expenditure and operating costs and consider the base case estimates to be supportable based on detailed planning with such scenarios less than reasonably possible.

6. Investments

The carrying value of unlisted investments comprises:

Group unquoted equity investments comprise a 10% holding of the ordinary share capital of PJSC of "Mining Company Ukrnaftoburinnya" ("UNB"), a Ukrainian oil and gas company, and a 1.43% holding of the ordinary share capital of Linx Telecommunications Holding B.V. ("Linx"), a Netherlands telecommunications company. These investments were previously measured at cost as allowed by IAS 39 (paragraph 46 (c)) and were fully impaired at 31 December 2017. At 31 December 2019 and 2020 investment in Linx was valued at $0.5m.

As of 1 January 2018 the Group's investments in equity instruments were reclassified to financial assets at fair value through other comprehensive income in accordance with the provisions of IFRS 9. The Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income (FVOCI).

At 30 June 2021 the carrying value of UNB remained fully impaired following assessment by the Board considering relevant available information and valuation techniques, reflecting:

§ the lack of liquidity in the shares of UNB and considerations regarding the nature of markets for such an investment;

§ the absence of any history of dividends or other returns on the investment since acquisition in 2006 and the significant uncertainty regarding future returns;

§ the absence of regular formal communication with UNB;

§ the level of uncertainty regarding any market valuation method based on quoted Ukrainian oil and gas companies given key differences in the respective businesses and corporate structures;

§ the limited number of quoted Ukrainian oil and gas companies that can be used for the market valuation approach, defined in IFRS 13; and

§ a paper prepared by a specialist third party advisor to the Board of Directors noted the limited number of likely parties potentially interested in purchasing the investment and the difficulties in determining the consideration for which the investment might be disposed generally.

At 30 June 2021 the carrying value of Linx was reported as $0.2m (31 December 2020: $0.5m), with this valuation being based upon management's expectation of future and final dividends to be received from Linx. During half-year 2021 the management was informed that Linx completed disposal of the significant business unit in April 2021. Following the sale a dividend of $0.4m was received in June 2021. It is reported under "Other income" in the Profit and Loss account. The fair value of Linx was adjusted to $0.2m through Other Comprehensive Income.

Management attends Linx shareholder meetings and is in regular communication with its management. Management understands that Linx continues to dispose of its businesses units and dividend out all proceeds to shareholders prior to a liquidation of the company. Previously dividends were received during 2017 and 2019 of $0.1m and $0.03m respectively after disposals of other business units. The carrying value of $0.2m is consistent with Linx management expectations of consideration to be received for disposal of the remaining business units and also with the most recent financial statements of Linx.

7. Borrowings

Convertible bonds due 2020

On 19 February 2013 the Company successfully completed the placing of $40m of guaranteed unsubordinated convertible bonds with institutional investors which were due 2018 (prior to restructuring) raising cash of $37.2m net of issue costs.  

Please refer to Annual Group Consolidated financial statements for 2020 for the full disclosure on Borrowings in Note 11.

On 19 February 2020 the Company made the final payment of the third instalment to Bondholders of $5.4m (34% of the principal amount of the Bonds), together with $0.4m interest payment in accordance with the terms and conditions of the Bond.

Credit facility

On 11 December 2019, 12 month revolving credit line from Tascombank amounting to UAH280m has been renewed for 2  years by PPC, our subsidiary in Ukraine (originally secured 15 December 2017 for UAH150 m). At 30 June 2021 the total short-term line of credit amounted to $10.3m at an exchange rate of $1: 27.18 (31 December 2020: $9.9m at an exchange rate of $1: 28.27 Hryvnia). The amount outstanding at 30 June 2021 was nil (31 December 2020: nil), so the undrawn portion totaled $10.3m (2020: $9.9m). The facility will be available through December 2021 (subject to planned renewal after this date, if required) and draw downs are subject to certain bank credit approvals. In addition PPC holds a UAH50m ($1.8m) overdraft facility which remains undrawn and was renewed until 13 December 2021. 

The main terms and conditions of the revolving credit line with Tascombank are as follows:

§ drawdowns can be made either in USD or UAH and are individually subject to credit approval by the lender;

§ interest rate cost for USD drawn down is 9%;

§ interest rate cost for UAH drawn down: 17.0% to 30 days, 17.50% 31 to 90 days, 20.00% 91 to 180 days, 21.00% 181 to 365 days;

§ borrowing above UAH90m, equivalent to $3.3m at 30 June 2021 (2020: $3.2m) will require a corporate guarantee from JKX Oil & Gas plc. The corporate guarantee provided by the JKX Oil & Gas plc in respect of the credit facility with Tascombank is considered to be an insurance contract under the provisions of IFRS 4;

§ assets with a market value of UAH460m, equivalent to $16.9m at 30 June 2021  (2020: UAH460m, equivalent to $16.3m) have been identified for use as a collateral, collateral is to be provided only on a drawdown; and

§ amount borrowed will be repaid during the last 4 months, by equal-sized monthly payments, to be effected on the last day of the month/the last day of the credit limit period. Last date of repayment for the last part of amount borrowed is 13 December 2021.

The credit facility of $10.3m (31 December 2020: $9.9m) includes two financial covenants. If the covenants are not met an additional interest of 2% applies to the facility but failure to meet covenants does not represent an event of default:

§ to keep gross margin at no less than 50% during the period of the credit facility agreement, based on PPC's financial reporting results.  This covenant was not met, however this did not result in additional interest of 2% being applied as the credit facility was not used during the period ended 30 June 2021.

§ starting from the first quarter of 2019 and during the period of the credit  facility agreement, PPC is to maintain the ratio between financial (interest) debt and EBITDA (adjusted to the annual value) at no more than 3.0.  This covenant has been met as PPC had no debt during the period ended 30 June 2021.

In July 2020 PPC also signed a $5.0m loan facility agreement with Alfa-Bank valid for 3 years. The loan facility cannot exceed $5.0m, calculated at a fixed at the date of agreement exchange rate of $27.6647.

The main terms and conditions of the loan facility with Alfa-Bank are as follows:

§ drawdowns can be made either in USD, EUR or UAH and are individually subject to credit approval by the lender;

§ interest rate cost for USD drawn down is 4.9%, based on 2 months repayment;

§ interest rate cost for EUR drawn down 4.4%, based on 2 months repayment;

§ interest rate cost for UAH drawn down 11.3%, based on 2 months repayment;

§ full loan facility will require a corporate guarantee from JKX Oil & Gas plc. The corporate guarantee provided by the JKX Oil & Gas plc in respect of the credit facility with Alfa-Bank is considered to be an insurance contract under the provisions of IFRS 4;

§ collateral shall be properly documented and provided in advance, the tranche cannot be granted otherwise; and

each amount borrowed shall be repaid within 2 months from the date when the tranche is agreed (agreed by signing of an additional agreement ). The last date of the agreed loan facility is 21 July 2023.

Significant financial penalties:

§ the non-payment penalty is 0.2% per day of the overdue amount but no more than National Bank of Ukraine (NBU) double discount rate;

§ if the covenants are not met (for each case) an additional interest of 0.1% applies to the facility; and

§ if the amount of the loan facility is not used for the purpose indicated in the loan facility agreement PPC is liable to pay 25% of the amount used not for the purpose indicated in the loan facility agreement.

Significant financial covenants:

All covenants listed below have been met during the period ended 30 June 2021.

§ EBITDA - should not be less than Nil at the end of each quarter during the period of the loan facility agreement;

§ Debt to EBITDA ratio - should be no more than 3.0 at the end of each quarter during the period of the loan facility agreement; and

EBITDA to Financial costs (Interest) ratio - should be not less than 2.0 at the end of each quarter during the period of the loan facility agreement.

8. Discontinued operations and assets classified as held for sale

In early February 2018 the Group announced its intention to exit its oil and gas operations in Hungary and initiated an active programme to dispose of its Hungarian business.

On 9 March 2020 the company announced that it had agreed terms for the disposal of the entire share capital of Hungarian business. Following pandemic related delays the Group received notification that the relevant Hungarian authorities had refused the necessary consent to the transaction pursuant to legislation introduced as a result of the current COVID-19 pandemic. Consequently, the transaction did not proceed.

The Hungarian business unit has been classified as held for sale for the period of more than 12 months.

An extension of the period required to complete the sale does not preclude the asset from being classified as held for sale as the delay is caused by events and circumstances beyond the Group's control. Management reviewed the classification criteria as defined by IFRS 5 and confirms that the sale is highly probable and the Group remains committed to its plan to sell the Hungarian business unit.

In February 2021 the Group signed Memorandum of Understanding with a new potential buyer in the amount of $2.9m. The purpose of this Memorandum is to establish the responsibilities/next steps of the parties in order to successfully conclude the possible deal, subject to the agreement and execution of a legally binding acquisition agreement.  The potential buyer did not proceed with the sale.

On 14 July 2021 the Group received Letter of Interest from a new potential buyer in the amount of $3.0m. The letter confirms their readiness to consider purchase of the Hungarian business unit.

The associated assets and liabilities were presented as held for sale in the financial statements at 31 December 2018 and remains as such at 31 December 2019, 31 December 2020 and 30 June 2021. Prior to the reclassification assets were measured at the lower of carrying amount and fair value less costs to sell.

The financial performance and cash flow information presented are for periods ended 30 June 2020 and 30 June 2021.

The following assets and liabilities were reclassified as held for sale in relation to the discontinued operation as at 31 December 2020 and 30 June 2021.

9. Share capital

Equity share capital, denominated in Sterling, was as follows:

Of which the following are shares held in treasury:

Treasury shares and Employee Benefit Trust

The Company did not purchase any treasury shares during the period (2020: nil). There were no treasury shares used in the period (2020: nil) to settle share options.

JKX Employee Benefit Trust was established in 2013 and acquired 5,000,000 shares in JKX Oil & Gas plc at a cost of $4.0m for the purpose of making awards under the Group's employee share schemes and these shares have been classified in the statement of financial position as treasury shares within retained earnings.

During 2019 JKX Employee Benefit Trust sold 1,186,547 shares at an average price of £0.30 per share. 180,525 shares were used in 2019 to settle share options, out of which 48,660 were sold in order to cover National insurance cost, therefore at 31 December 2019 JKX Employee Benefit Trust held 3,632,928 shares in JKX Oil & Gas plc . During January 2020 JKX Employee Benefit Trust sold remaining 3,632,928 shares at an average price of £0.28 per share.

There are no shares reserved for issue under options or contracts.

10. Provisions

Refer to note 12 for details of the disputed production based taxes in respect of 2010 and 2015, also referred to interchangeably as rental fee claims through this report.

The provision for production based taxes, is in respect of claims against PPC for additional rental fees for the periods August to December 2010 and January to December 2015. $1.8m was recognised as a credit in the half-year 2021 Consolidated income statement (30 June 2020: $1.1m charge) which is the net of a $2.1m reversal of provisions for one tax case that has been closed in favour of PPC relating to January to December 2015 claims and of $0.3m interest accrued for the remaining cases that have not been closed, of which $0.2m charge relates to the August to December 2010 claim (30 June 2020:$0.3m) and $0.1m charge relate to January to December 2015 claims  (30 June 2020: $0.8m). Remaining claims are being contested in the Ukrainian courts (see Note 12). The amount is denominated in Ukrainian Hryvnia ('UAH') and is stated above at its US$-equivalent amount using the half-year 2021 rate of UAH27.18/$ (31 December 2020: UAH28.27/$).

Case 816/685/16, principal only, amounting to $2.8m and related to January to December 2015 claims was reclassified from non-current to current at 30 June 2021. This case is expected to be considered on merits by the courts during the next twelve months.

Provision related to August to December 2010 case amounting to $14.6m was reclassified from current to non-current at 30 June 2021. Whilst PPC has been successful in the court hearings, the Board considers it appropriate to maintain a provision given the uncertainty that remains regarding the future development of the claim, although this required significant judgment given the recent nature of the court rulings and assessment of the legislative environment.  Any legal proceedings seeking to re-open the case and seek collection is anticipated to continue beyond 12 months after the reporting date given the legislative steps that would be required, and provisions in relation to this case has been presented as non-current liability based on the expected timing of any subsequent payments.  The provision against the case was previously classified as current based on the expected timing of the Supreme Court ruling in 2021 and potential payment.   

The provision for rental fee claims at 30 June 2021 includes estimated interest and penalties. Judgement is applied regarding application of the relevant legislation to determine estimates of the interest and penalties, together with aspects of the underlying claims which are considered overstated based on the legislation on which the claims are based, should this legislation be applied, notwithstanding that the Group disputes the claims in their entirety.

Changes in the judgement about the timing of the provision releases: during 2019 provisions were maintained for open cases unless judgments of the Supreme Court of Ukraine had been received in favour of PPC or appeals to this court were considered remote, based on assessment of facts and circumstances at the time. During 2020 the Group had determined that it was appropriate to release provisions when first and appellate Court rulings have been received in respect of the 2015 cases (on its merits) in the Group's favour. In reaching that conclusion Management have considered their experience of the legal process to date, the fact that the Supreme Court checks judgments of the first and appellate Courts and cannot review any new facts or circumstances and have sought advice from external counsel. Accordingly the risk of the lower court judgments on the merits of the cases being cancelled are considered very low. Consequently the Group's Management had released provisions after court judgments of first and appellate instances in favour of PPC.

The Board believes that the claims are without merit under Ukrainian law and the Company will continue to contest them vigorously. Whilst provisions are held by the Group, additional contingent liabilities exist in respect of the rental fee claims given the judgments required in forming the provisions and alternative potential outcomes.

Provision on decommissioning

11. Exceptional items

During the period exceptional items as detailed below have been included in cost of sales in the income statement:

¹            Please see Note 10 for details

12. Taxation

No UK tax liability has arisen during the six months ended 30 June 2021 (2020: nil) due to the availability of tax losses. The current tax charged in the period relates to Ukrainian corporation tax which has arisen in the Group's subsidiary, Poltava Petroleum Company. Taxes charged on production of hydrocarbons in Ukraine, Russia and Hungary are included in cost of sales.

Factors that may affect future tax charges

A significant proportion of the Group's income will be generated overseas. Profits made overseas will not be able to be offset by costs elsewhere in the Group. This could lead to a higher than expected tax rate for the Group.

At Budget 2020, the government announced that the Corporation Tax main rate (for all profits except ring fence profits) for the year starting 1 April 2021 would remain at 19%.

The corporation tax rate in Ukraine for 2021 is 18% (2020: 18%).

Taxation in Ukraine - disputed production taxes

Since Poltava Petroleum Company's ('PPC's') inception in 1994 the Company has operated in a regime where conflicting laws have existed, including in relation to effective taxes on oil and gas production.

In order to avoid any confusion over the level of taxes due, in 1994, PPC entered into a licence agreement with the Ukrainian State Committee on Geology and the Utilisation of Mineral Resources ('the Licence Agreement') which set out expressly in the Licence Agreement that PPC would pay rental fees on production at a rate of only 5.5% of sales value for the duration of the Licence Agreement.

Pursuant to the Licence Agreement, PPC was granted an exploration licence and four 20-year production licences, each in respect of a particular field. In 2004 PPC's production licences were renewed and extended until 2024 and operations continued as before.

In December 1994, a new fee on the production of oil and gas (known as a 'rental fee') was introduced through Ukrainian regulations. On 30 December 1995, JKX, together with its Ukrainian subsidiaries (including PPC), was issued with a Joint Decision of the Ministry of Economy, the Ministry of Finance and the State Committee for the Oil and Gas ('the Exemption Letter'), which established a zero rental fee rate for oil and natural gas produced in Ukraine by PPC for the duration of the Licence Agreement for Exploration and Exploitation of the Fields. Based on the Exemption Letter PPC did not expect to pay any rental fees until a new law on rental fees was enacted in 2011.

The new law enacted in 2011 established new mechanisms for the determination of the rental fees. Notwithstanding the Exemption Letter, in January 2011 PPC began to pay rental fees in order to avoid further issues with the Ukrainian authorities but without prejudice to its right to challenge the validity of rental fee demands.

During 2015 rental fees in Ukraine were increased to 55% and capital control restrictions were introduced.

International arbitration proceedings

In 2015, the Company and its wholly owned Ukrainian and Dutch subsidiaries commenced arbitration proceedings against Ukraine under the Energy Charter Treaty, the bilateral investment treaties between Ukraine and the United Kingdom and the Netherlands, respectively. In these proceedings, the Company sought repayment of more than $180 m in rental fees that PPC had paid on production of oil and gas in Ukraine since 2011, in addition to damages to the business.

The tribunal decision, in February 2017, did not find in favour of the Company in respect of the rental fees but awarded the Company damages of $11.8 m plus interest, and costs of $0.3 m in relation to subsidiary claims.

The arbitration award has now been legally recognised in Ukraine and in December 2019 JKX filed for its collection. No recognition will be made in the financial statements of any possible future benefit that may result from this award until there is further clarity on the process for, and likely success of, enforcing collection.

Rental fee demands

The Group currently has two claims (2020: two) for additional Rental Fees being contested through the Ukrainian court process. These arise from disputes over the amount of Rental Fees paid by PPC for certain periods since 2010, which in total amount to approximately $20.0million (2020: $21.0 million) (including interest and penalties), as detailed below. All amounts are being claimed in Ukrainian Hryvnia ('UAH') and are stated below at their US$-equivalent amounts using the year end rate of $1:UAH 27.18 (2020: $1: UAH 28.27).

August - December 2010: approximately $14.6 million (2020: $13.8 million) (including $10.1 million (2020: $9.5 million) of interest and penalties). The case is a split into three cases - two cases on merits (No. 816/539/14 and No. 816/4476/14) and one fiduciary case related to collection of the rental fees claimed (No. 816/3731/14).

§ 816/539/14 - Case lost historically on merits. Since this time, PPC have been incurring interest and penalty charges.

§ 816/4476/14 -PPC considered that there were in fact certain procedures in case 816/539/14 that were not followed regarding the tax notifications that formed the basis of the original claims against PPC. Certain documentation was found to be missing from the files of the tax authorities. On 05 April 2017 the Poltava Circuit Administrative Court found in favor of PPC. The Kharkiv Appellate Administrative Court on 01 June 2017 turned down PJTI's appellate complaint on merits. However, on 22 April 2021 the Supreme Court cancelled the judgments of the lower courts which had been in favor of PPC and decided to close the proceedings leaving the court judgments against PPC in the above case No. 816/539/14 the only effective ones. As a result PPC has now lost the case.

§ 816/3731/14 - This case is a fiduciary court dispute on forcible collection of the 2010 rental fees claimed and was historically initiated by PJSTI against PPC once PPC lost tax dispute No. 816/539/14 above. After two court judgments in favor of PPC in case No. 816/4476/14, on 29 June 2017, the PCAC having considered legal and tax expert evidence put forward by PPC along with PJSTI's objections, found in favor of PPC preventing collection of the amounts claimed. The KHAC by its ruling of 05th February 2018 and the Supreme Court by its ruling of 21st July 2021 upheld the judgment of the first instance court - thus, the case is closed in favor of PPC such that PJSTI is unable to enforce collection. However, the Board consider that there is a risk that the case may be re-opened if the PJSTI applies for reconsideration of the court judgments in this case due to newly discovered circumstances  i.e. utilizes the judgment of the Supreme Court in case No. 816/4476/14 in April 2021 to instigate a new collection motion.  

Whilst PPC has been successful in the court hearings, the Board considers it appropriate to maintain a provision given the uncertainty that remains regarding the future development of the claim, although this required significant judgment given the recent nature of the court rulings and assessment of the legislative environment.  Any legal proceedings seeking to re-open the case and seek collection is anticipated to continue beyond 12 months after the reporting date given the legislative steps that would be required, and provisions in relation to this case has been presented as non-current liability based on the expected timing of any subsequent payments.  The provision against the case was previously classified as current based on the expected timing of the Supreme Court ruling in 2021 and potential payment.      

January - December 2015: approximately $5.4 million (2020: $7.2 million) (including $3.5 million (2020: $5.4 million) of interest and

penalties). Following the commencement of international arbitration proceedings at the beginning of 2015 (see above), from July 2015

PPC reverted to paying a 28% Rental Fee for gas production (instead of the revised official rate of 55%) as a result of the awards

granted under the arbitration. PPC also declared part of its Rental Fee payments at 55% for the first 6 months of 2015 as

overpayments and consequently stopped paying the Rental Fee for gas in order to align the total payments made in 2015 with the 28%

rate awarded made under the arbitration proceedings. The Ukrainian tax authorities have issued PPC with the series of claims for the

difference between 28% and 55%, which were being contested in eight separate cases. Six of these cases have now been resolved in

PPC's favour and the others continue to be contested: 

Open 2015 cases for which provisions held:

Management have specifically assessed whether the success on cases during 2020 and 2021 provides a sufficient precedent to release the remaining provisions for the 2015 claims. It was concluded that given the inherent uncertainty associated with the Ukrainian Court system and political environment it remains appropriate to retain the remaining provisions.

§  Case No. 816/685/16 for $5.4m has already been suspended. PJSTI have filed cassation complaint with the Supreme Court to unsuspend it. A principal of $2.8m was reclassified from non-current to current at 30 June 2021. This case is expected to be considered on merits by the courts during the next twelve months.

Pending 2015 cases for which provisions released:

Notwithstanding that for the three cases below there are further cassation complaints from PJSTI, the Group's assessment is that once there is a judgment of the first and appellate instance court in favour of PPC, tax notification decision in respective case is cancelled and the provision released unless there are specific circumstances which would indicate provision should be retained.

§  On 4 May 2020 the Poltava Circuit Administrative Court found in favour of PPC in case No. 816/687/16 for $4.7m. The Kharkiv Appellate Administrative Court on 15 October 2020 turned down PJTI's appellate complaint. PJSTI filed a cassation complaint, however on 19 November 2020 the Supreme Court returned it to the PJTI stating that it sees no grounds on reconsideration of the lower instance courts. PJTI, ignoring the ruling of the Supreme Court, refiled another cassation complaint. The Supreme Court accepted it and commenced the cassation proceedings. The consideration is expected at the end of 2021. The provision was released in 2020.

§  On 22 December 2020 the Poltava Circuit Administrative Court found in favour of PPC in case No. 816/686/16 for $10.4m. PJSTI filed an appellate complaint and the Kharkiv Appellate Administrative Court accepted it. On 12 March 2021 Kharkiv Appellate Administrative Court found in favour of PPC and cancelled the tax notification decisions recognising them as illegal. We expect that PJSTI will file the cassation complaint against the above judgments within the following months. The provision was released in 2020.

§  On 18th November 2020 the Poltava Circuit Administrative Court found in favor of PPC in case No. 816/1191/16. PJSTI filed appellate complaint and the Kharkiv Appellate Administrative Court accepted it. The Kharkiv Appellate Administrative Court on 29 March 2021 turned down PJTI's appellate complaint on merits. PJSTI attempted to file several times the cassation complaint - however, twice the cassation complaints of PJSTI were turned down. Provision amounting to $2.1m was release on 1 April 2021 when decision was received.

It is expected that the process of hearings in respect of the remaining outstanding 2015 rental fee claim will continue into 2022 and possibly beyond. Full provisions are made for claim 816/685/16 and the 2010 cases.

2015 cases closed in favour of the Group for which provisions released in prior periods:

Case No. 816/846/16 for $5.3m. On 14 November 2019 the Poltava Circuit Administrative Court found in favour of PPC as well as ruled that Tax Notification Decisions previously issued against PPC were illegal and were cancelled. The KHAC by its judgment of 5 October 2020 and the Supreme Court by its judgment of 17 March 2021 upheld the judgment of the first instance court - thus, the case is fully closed in favour of PPC.

Changes in the judgement about the timing of the provision releases: during 2019 provisions were maintained for open cases unless judgments of the Supreme Court of Ukraine had been received in favour of PPC or appeals to this court were considered remote, based on assessment of facts and circumstances at the time. During 2020 the Group had determined that it was appropriate to release provisions when first and appellate Court rulings have been received in respect of the 2015 cases (on its merits) in the Group's favour. In reaching that conclusion Management have considered their experience of the legal process to date, the fact that the Supreme Court checks judgments of the first and appellate Courts and cannot review any new facts or circumstances and have sought advice from external counsel. Accordingly the risk of the lower court judgments on the merits of the cases being cancelled are considered very low. Consequently the Group's Management had released provisions after court judgments of first and appellate instances in favour of PPC.

$1.8m was recognised as a credit in the half-year 2021 Consolidated income statement (30 June 2020: $1.1m charge) which is the net of a $2.1m reversal of provisions for one tax case that has been closed in favour of PPC relating to January to December 2015 claims and of $0.3m interest accrued for the remaining cases that have not been closed, of which $0.2m charge relates to the August to December 2010 claim (30 June 2020:$0.3m) and $0.1m charge relate to January to December 2015 claims  (30 June 2020: $0.8m). Remaining claims are being contested in the Ukrainian courts (see Note 11). The amount is denominated in Ukrainian Hryvnia ('UAH') and is stated above at its US$-equivalent amount using the half-year 2021 rate of UAH27.18/$ (2020: UAH28.27/$).

13. Earnings per share

The calculation of earnings per ordinary share for the six months ended 30 June 2021 is based on the weighted average number of shares in issue during the period of 171,723,145 (30 June 2020: 171,723,145 and 31 December 2020: 171,723,145), including shares held to satisfy the Group's employee share schemes and shares purchased by the Company and held as treasury shares of 402,771 (30 June 2020: 402,771and 31 December 2020: 402,771), and the profit for the relevant period.

Profit before exceptional items in 2021 of $8,302,515 (30 June 2020: $2,817,230 and 31 December 2020 profit: $11,016,481) is calculated from the half-year 2021 profit of $ 9,936,932 (30 June 2020: $1,520,811 and 31 December 2020: $19,867,529) adjusted for exceptional items of $1,856,596 credit (30 June 2020: $1,099,420 charge 31 December 2020: $13,221,048 credit) and the related deferred tax on the exceptional items of $222,179 charge (30 June 2020: $197,000 charge  and 31 December 2020: $4,370,000 charge).

There were no outstanding share options at 30 June 2021 (30 June 2020: nil).

There are no dilutive instruments.

14. Other reserves

Merger reserve was created on 30 May 1995 when JKX Oil & Gas plc acquired the issued share capital of JP Kenny Exploration & Production Limited for the issue of ordinary shares and represents the difference between the fair value of consideration given for the shares and the nominal value of those instruments.

Capital redemption reserve relates to the buyback of shares in 2002, there have been no additional share buy-backs since this time.

Equity investments with FVOCI reserve includes movements that relate to changes in the fair value of unlisted investments in equity.

Foreign currency translation reserve includes movements that relate to the retranslation of the subsidiaries whose functional currencies are not the US Dollar.

During the first half of 2021, the Russian Rouble ('RR') strengthened by approximately 0.02% from RR73.88/$ to RR72.37/$ (30 June 2020: weakened by approximately by 13% from RR61.91/$ to RR69.95/$) Ukrainian Hryvnia ('UAH') strengthened by approximately 0.04% from UAH 28.27/$ to UAH 27.18/$ (30 June 2020: weakened by approximately 14% from UAH 23.69/$ to UAH 26.69/$).Currency translation differences of US$5.3m gain (2020: US$21.4m loss) included in the Consolidated statement of comprehensive income arose on the translation of property, plant and equipment denominated in RR and UAH and amounted to $2.0m and $3.3m respectively.

Post-employment benefit obligation reserve relates to a remeasurement of liability for defined benefit pension plan in PPC, our subsidiary in Ukraine.

15. Reconciliation of profit from operations to net cash generated from operations

16. Related-party transactions

Key management compensation amounted to $0.4m for the six months ended 30 June 2021 (2020: $0.4m).

The following transactions were carried out with PJSC "Mining Company Ukrnaftoburinnya" ("UNB") a Ukrainian oil and gas company in which Group holds a 10% of the ordinary share capital and which was considered a related party at 30 June 2021:

PPC received 100% prepayment from UNB for July's gas. $86,200 received is included under "Contract liabilities" in the period ending 30 June 2021.

Gas and condensate are sold and purchased on normal commercial terms and conditions.

17. Events after the reporting date

We are not aware of any events after the reporting date.