JKX Report 12m2010 (2011-05-16)

JKX Oil & Gas plc Report & Accounts 2010
JKX Oil & Gas plc Annual Report & Accounts 2010
01
At a glance
An overview of our business
In detail
Our business in greater depth
CONTENTS 02 03 04 06 08 10 12 What we do Highlights Our regions Our marketplace Our strategy and progress Our resources Our performance
CONTENTS 14 16 19 20 20 26 30 33 34 38 Chairmans statement Chief Executives statement Delivering our strategy Operational review Ukraine Russia Hungary Rest of world Financial review Risks we face and how we manage them Corporate Social Responsibility review CSR case study Russia Health and safety Environment Employment Community Directors reports The Directors Directors report Corporate governance Remuneration Financial statements Group accounts Company accounts Notice of Annual General Meeting
42 44 46 48 49 49 50 50 52 55 60 69 72 110 118
02
At a glance What we do / Highlights
What we do
We draw on our extensive, long-established regional experience and expertise to develop oil and gas interests in eastern and central Europe, with a particular focus on Ukraine and Russia.
03
Highlights
Rudenkovskoye development
We completed and tested horizontal well R-103 at Rudenkovskoye in Ukraine, which produced encouraging initial results.
131.7
207.0 184.5
196.5 192.9
Revenue ($m)
-2%
Workover acceleration
We accelerated the workover programme in Russia and tested an additional well.
06
07
08
09
10
125.4 105.8 108.6
119.6 95.0
Operating profit before exceptional item ($m)
-21%
Operating profit after exceptional item: $20.4m
LPG facility
We completed the design and fabrication stages and commenced the installation of the LPG facility in Ukraine.
06
07
08
09
10
Development and exploration

We continued our development and exploration in Hungary, Bulgaria and Slovakia.
43.4 147.9 110.2 107.6
178.5
Capital expenditure ($m)
+66%
06
07
08
09
10
81.1 68.1 64.8
Net cash ($m)

74.4 62.0
-17%
06
07
08
09
10
04
At a glance Our regions
We have operational experience and expertise in the eastern and central regions of Europe...
755km2
Svidnik
Medzilaborce
720km2
Snina 996km2
S L O V A K I A
Hernad Nyirseg
5,410km2 120km2 1,018km2* 15km2
H U N G A R Y
Turkeve Veszto
1,787km2
Provadia
Golitza 1,241km2
B U L G A R I A
* Final Turkeve area subject to drilling results
Reserves proved and probable MMboe/depth as at 31st December 2010

Ukraine Russia
Molchanovskoye North & Main NovoNikolaevskoye Rudenkovskoye Koshekhablskoye
Hungary
Hernad and Nyirseg
Ignatovskoye
1,000m 2,000m 3,000m 4,000m 5,000m 6,000m
Note: Pantone 376c Illustrator File pro le is - US WE RGB (ADOBE RGB pro le) Gree R - 159 G - 197 B - 76
0.3 44.5 0.2 1.0
Oil Gas
1.0 3.8
4.3 8.4
0.0 0.0
1.2 20.4
05
...with a particular focus on Ukraine and Russia
Elizavetovskoye
71km2
Novo-Nikolaevskoye Complex
265km2
U K R A I N E R U S S I A
Koshekhablskoye
32km2
T H E
B L A C K
S E A G E O R G I A
Group reserves as at 31st December 2010

1st Jan 2010 Revisions Production 31st Dec 2010
EB COATED (SWOP2) UKRAINE en should be Oil MMbbl
TOTAL Oil + Gas MMboe Oil MMbbl Gas Bcf Gas MMboe
88.7 8.1 483.7 80.6 7.6 209.7 34.9 0.3 267.0 44.5 0.2 7.0 1.2
0.1 0.0 0.5 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.5 0.1
(3.7) (1.1) (15.7) (2.6) (1.1) (14.4) (2.3) 0.0 0.0 0.0 0.0 (1.3) (0.3)
85.1 7.0 468.5 78.1 6.5 195.3 32.6 0.3 267.0 44.5 0.2 6.2 1.0
Gas Bcf Gas MMboe RUSSIA Oil MMbbl Gas Bcf Gas MMboe HUNGARY Oil MMbbl Gas Bcf Gas MMboe
06
At a glance Our marketplace
a marketplace that is rich in opportunity for us, across both the oil and gas sectors.
Marketplace
As an upstream company, the oil and gas we produce is sold at or near the edge of our facilities, at which point responsibility passes to our customers.
Oil
Proved world reserves (Billion barrels)
ng ary :0 rai ne: 0.02 00. Rus 40 sia: 60.0 0
Hu
Uk
World: 1,340.00
Gas
Proved world reserves (Trillion cubic feet)
Ru
ssi a
1,6 8
0.0
Ukraine: 39.00
: World
6,261
.00
07
Each of the regional markets in which we operate is a net consumer of oil and gas, (whilst overall as a country Russia is a net producer, the south west Russian regional market within which we operate is a net consumer). We believe that the opportunities open to us in these markets are likely to expand, as governments and relevant authorities recognise that investment by non-state companies is an attractive route towards increasing production regionally. We are well-positioned to exploit these opportunities.
Production (000 bpd)
Consumption (000 bpd)
400 347
10,000
9,934
200 156
300
7,500
150
200 102
5,000 2,740 2,500
100
100
50
36
Ukraine
Russia
Hungary
Production (Bcf per annum)
Consumption (Bcf per annum)
2,000 1,560 1,500
20,000
20,610
400 15,524
399
15,000
300
1,000 715 500
10,000
200 92
5,000
100
Ukraine
Russia
Hungary
Source: USA Energy Information Administration
08
At a glance Our strategy and progress
This is the strategy via which we aim to seize that opportunity

Objective Strategic priorities Achievements
Growth
Increase production. Explore new opportunities across our existing portfolio. Acquire new licences. Continue to enhance and exploit our local expertise and know-how. Increase oil and gas reserves. Maximise exposure to, and deliver value from, the Ukrainian and Russian gas markets. Drilled and tested horizontal WellR103 on Rudenkovskoye field in Ukraine as next phase of development programme. Accelerated the redevelopment of the Koshekhablskoye field in Russia. Further exploration drilling in Hungary. Enhancement of dedicated specialist teams in each country, including geological, geophysical, materials and drilling resource. Enhancement of London-based Group technical team.
To build on our well-established strength as an efcient and successful developer and producer of oil and gas interests in eastern and central Europe.
Maintenance of efficient cost base.
HSEC & Sustainability

Continually strive to improve on our strong record on: HSE performance. Environmental performance. Supporting our people. Supporting local communities. Rigorous monitoring of All Injury Frequency Rate. Good progress made in reduction of emissions towards 12.5% target from 2008 to 2012. Introduction of new system for employee dialogue.
Deliver long-term shareholder value

Regularly assess and ensure adherence to comprehensive and clear policies, procedures and controls to budget forecast and control all group expenditures. Maintain payment of a dividend in line with performance and capital requirements. Add reserves and enhance production profile. Clear commitment to the Combined Code. Dividend of 5.0p announced for 2010. Expenditure controls maintained during a period of heightened capital investment.
09
the progress we are making and the performance measures we use.

Performance measures
Production volumes (boepd)

10 09 08
10,324 11,665 11,012
The Board considers the future production profile of the Groups interests to underpin the value of its asset portfolio. Accordingly, the level of annual production is the measure by which management monitors delivery of portfolio development. The 11% fall in average combined oil and gas production is the result of the unscheduled delay in mobilisation of a second drilling rig to our PPC producing fields. Capital expenditure is used by management to monitor levels of investment, on both a country specific and regional basis. Capital expenditure increased significantly on 2009 (up 66%) as the redevelopment of the Koshekhablskoye field in Russia accelerated in the period.
Capital expenditure ($m)

10 09 08
107.6 110.2 178.5
Production costs ($ per boe)

10 09 08
4.74 4.85 5.97
The Board believes a core skill of the Group to be the low cost development of onshore gas assets in and around Ukraine. A key measure used to monitor this is the level of production costs which remained materially consistent with 2009.
Ukrainian gas realisations ($ per Mcf)

10 09 08
5.27 7.30 7.16
The Board has pursued a strategy to maximise exposure to and deliver value from the Ukrainian and Russian gas markets. This is based on the belief that as occurred in Ukraine, the Russian domestic gas price will, after accounting for net-backed transportation costs, converge with gas prices in western Europe. In 2010 the 2% increase in Ukrainian gas realisations is evidence of the convergence that has occurred and from which the Group is benefitting. With the Groups first Russian gas production expected in Autumn 2011, Russian gas realisations will be the realisations KPI going forward. We are committed to continuously improving our health and safety performance. During 2010 we again maintained our progress, with a significant 59% decrease in our AIFR (All Injury Frequency Rate) figures. The AIFR represents the health and safety incidents per 200,000 man-hours. To put our achievement in to context, the industry benchmark for 2010 was 3.4.
All Injury Frequency Rate

10 09 08
0.62 1.50 5.00
Return on average capital employed (%)

10 09 08
Exceptional item: 12.1%
17.1 23.1 25.2
The Board believes its strategic objective of returning value to shareholders is most appropriately measured by the return on average capital employed. It believes that this measure reflects the underlying ability to return value by a combination of dividends, share buy-backs and any capital appreciation in the Companys equities as may be determined by the capital markets. The 26% decrease (excluding exceptional impairment) in 2010 reflects the continued significant investment programmes, particularly in Russia and the decreased net profit achieved in the period. The Board believes that a significant component of the Groups ability to add shareholder value lies in its success in adding to its reserves base. Total reserves decreased by less than 5% in the period, following additions which accounted for a 3% replacement of the 3.7 MMboe reserves produced in the year. Reserves of 0.1 MMboe were added following performance driven reassessment of Hungarian reserves.
Reserves at the end of the period (MMboe)

10 09 08
85.1 88.7 89.2
10
At a glance Our resources
This is how we organise our people and resources

Group Operations Employee prole
Ukraine
Operational staff 583
Offices: Kiev Poltava Sokolova Balka Workforce % locally employed
98%
Russia
Operational staff 151 JKX Oil & Gas plc Group staff 21 Operational staff 738
Offices: Moscow Maikop Koshekhabl Workforce % locally employed
91%
Rest of World
Operational staff 25
Offices: London Tbilisi Amsterdam Workforce % locally employed
97%
11
and the investment we make to ensure we deliver our objectives

Outcome
Ratio Male | Female
2010 training investment
79% 21%
$66,500
Ratio Male | Female
We develop strong local presences, drawing on extensive industry and country-specific knowledge to deal with the local operating environment. We have proven expertise in efficient oil and gas production and also the practical, on-the-ground experience of working where there can be a significant bureaucratic element in how everyday business is conducted. Across the lifecycle of each project, from first exploration to abandonment, we focus on having the right people with the right skills in the right place at the right time. Although we use expatriate teams during the formative stages of a project, over time their numbers will reduce significantly and the operation will ultimately rely on a high percentage of local employees. The training of local staff underpins our strategy and is an important aspect of how we do business.
78% 22%
$35,500
Ratio Male | Female
78% 22%
$27,500
12
At a glance Our performance
and this is our performance during 2010, from a nancial perspective.

Total 2010 Second half 2010 First half 2010 Total 2009
PRODUCTION SUMMARY Production Oil (Mbbl) Gas (Bcf) Oil equivalent (Mboe) Daily production Oil (bopd) Gas (MMcfd) Oil equivalent (boepd) 3,049 44 10,324 2,371 40 8,980 3,740 48 11,689 3,991 46 11,665 1,113 15.9 3,768 436 7.3 1,652 677 8.6 2,116 1,457 16.8 4,258
Total 2010 $m
Second half 2010 $m
First half 2010 $m
Total 2009 $m
OPERATING RESULTS Revenue Oil Gas Other 78.8 112.9 1.2 192.9 Cost of sales Operating costs Depreciation, depletion and amortisation oil and gas assets Production based taxes (17.9) (33.2) (5.2) (56.3) Provision for impairment of fixed assets/write off of exploration costs Exceptional item impairment of Russian assets Total cost of sales Gross profit/(loss) Operating expenses Administrative expenses Gain/(loss) on foreign exchange Profit on sale of assets Operating profit before exceptional item Operating profit/(loss) after exceptional item (25.3) (2.6) 95.0 20.4 (13.8) 0.5 46.4 (28.2) (11.5) (3.1) 48.6 48.6 (14.7) (2.3) 2.5 119.6 119.6 (13.7) (74.6) (144.6) 48.3 (5.6) (14.7) (2.6) (22.9) (5.8) (74.6) (103.3) (14.9) (12.3) (18.5) (2.6) (33.4) (7.9) (41.3) 63.2 (20.6) (32.8) (4.0) (57.4) (5.0) (62.4) 134.1 32.4 55.1 0.9 88.4 46.4 57.8 0.3 104.5 76.4 118.1 2.0 196.5
13
Total 2010
Second half 2010
First half 2010
Total 2009
EARNINGS Net profit/(loss) ($m) Basic weighted average number of shares in issue (m) Earnings per share before exceptional item (basic, cents) Earnings per share after exceptional item (basic, cents) Earnings before interest, tax, depreciation and amortisation ($m) 21.2 171 47.56 12.38 55.8
Total 2010
(13.9) 171 26.84 (8.34) (12.4)

Second half 2010
35.1 170 20.72 20.72 68.2

First half 2010
85.3 157 54.23 54.23 154.9

Total 2009
REALISATIONS Oil (per bbl) Gas (per Mcf) $69.15 $7.59

Total 2010
$74.29 $7.79
Second half 2010
$65.97 $7.41
First half 2010
$53.90 $7.19
Total 2009
COST OF PRODUCTION ($/boe) Operating costs Depreciation, depletion and amortisation Production based taxes $4.74 $8.82 $1.39
Total 2010
$3.36 $8.92 $1.61

Second half 2010
$5.81 $8.74 $1.21

First half 2010
$4.85 $7.71 $0.93

Total 2009
CASH FLOW Cash generated from operations ($m) Operating cash flow per share (cents) 146.3 85.6
Total 2010
79.1 46.0
Second half 2010
67.2 39.6
First half 2010
160.0 101.7
Total 2009
BALANCE SHEET Net cash ($m) Net cash to equity (%) Return on average capital employed (%) Additions to property, plant and equipment/intangible assets ($m): Ukraine Russia Other Total 56.1 107.8 14.6 178.5 34.8 64.7 10.7 110.2 21.3 43.1 3.9 68.3 45.2 41.9 20.5 107.6 62.0 13.2 4.9 62.0 13.2 (6.0) 107.2 22.1 15.8 74.4 18.4 23.1
14
Chairmans statement
Chairmans statement
Sir Ian Prosser Chairman
15 015
Clearly, we benefit from a very strong production base in Ukraine, complemented by the development prospects in Russia and, albeit to a lesser extent, in Hungary.
served on the Boards of several other major companies, such as GlaxoSmithKline, and believe that this background can aid JKX in its plans for growth. Having been in my position for only one month at the date of this release, it is too soon for me to comment on achievements with which I have had no involvement. Clearly, we benefit from a very strong production base in Ukraine, complemented by the development prospects in Russia and, albeit to a lesser extent, in Hungary. Although considerable progress was made in 2010 on the large redevelopment project in Russia, the Company has experienced delays and capital cost increases; the commencement date for production in Russia is now expected in the autumn of 2011. More significantly, a delayed convergence of Russian domestic gas prices to European net-back levels is impacting our overall project economics and consequently we are making an impairment provision of $74.6m. Commitment to HSEC My predecessor commented on the importance of protecting and nurturing our people, their communities and the environment, and this is a view which I share wholeheartedly. As a resource-based company, JKX rightly places great value on health, safety, environmental matters and community liaison (HSEC). I note that the AIFR (All Injury Frequency Rate) figures decreased in 2010 and are well below the industry benchmark. Furthermore, we were successful in our attempt to achieve ISO 14001 Environmental Accreditation during the year. Your Board My appointment has been the only change to the composition of the Board. I would like to place on record my thanks to Lord Fraser, whose sterling service of over 13 years saw JKX grow into an established operator in eastern and central Europe, and also become
established in the FTSE 250 index. I know from conversations with senior management what a tremendous contribution Lord Fraser made, chairing the JKX Board with intelligence and great commitment. On behalf of the Board I thank him unreservedly. Dividend In a period of heavy investment, the Board recognises that increased taxation in Ukraine and delay in start-up of the Russian project inevitably impacts available cash flow. Consequently, the Board is recommending a final dividend of 2.6 pence per share, giving an unchanged total dividend for the year of 5.0 pence per share. The dividend will be paid on 24th June 2011 to shareholders on the Companys Register of Members on 6th May 2011. Outlook The Company is budgeting a strong increase in production volumes for 2011 with higher oil realisations and continued increases in gas realisations in Ukraine. Despite these benefits, the Company is absorbing substantially increased production related taxes in Ukraine which it did not bear in 2010 and this will impact 2011 earnings. Turning to our prospects for 2011, first gas in Russia in the autumn will be an important landmark for the Company. Ukraine will continue to provide the backbone of our cash flow and, together with Hungary, also provide us with exploration upside. In addition, we look forward to entering the fast-growing Ukrainian LPG market at mid-year and adding value to our existing gas business. Finally, I wish to thank our people for their commitment and expertise over the last 12 months, as well as our shareholders for their continuing support.
Annual dividends declared (pence)
Held
4.4
4.8
5.0
5.0
2.2
06
07
08
09
10
Earnings per share before exceptional item (basic, cents)
-12%
50.89
47.97 49.85
54.23 47.56
Exceptional item: 35.18 cents
06
07
08
09
10
In the short time I have been working with the senior team at JKX, I have been impressed by the management skills and operational potential in evidence. When I was approached to consider the role of Chairman of JKX following some 12 years on the Board at BP, I was attracted to the position because the company operates in a challenging area of the oil and gas sector, and one where I feel I can use my own experience and expertise to good effect. In addition to my time at BP, I have also
16
Chief Executives statement
Dr Paul Davies Chief Executive
17 017
We continue to focus on the proven strengths that form the backbone of JKX: an established presence in eastern and central Europe; extensive experience of local operating conditions; production and sales in buoyant local marketplaces; and locallybased and managed operating subsidiaries led by skilled and committed teams.
Our performance 2010 was a challenging year for JKX with drilling delays in Ukraine and construction delays on our Russian project. Notwithstanding these setbacks, the Company made significant progress on its key projects. Average oil and gas production for the year decreased by 11% to 10,324 boepd (2009: 11,665 boepd) due primarily to the unscheduled delay in mobilisation of a second drilling rig to our development licences in Poltava, Ukraine. The effect of this production shortfall was essentially offset by the rise in both oil and gas realisations, leaving revenues broadly flat for the year at $192.9m (2009: $196.5m). Operating profit (before deduction of an exceptional impairment provision) declined 20% to $95.0m (2009: $119.6m). The exceptional impairment provision of $74.6m to the carrying value of our Russian project is largely the result of delayed net-back convergence of Russian domestic gas prices to those of European gas markets and its impact on overall project economics. We are now forecasting European net-back parity for 2017. Milestones and progress In last years Annual Report, I laid out two key goals by which we would measure our performance. These were to: Reach in excess of 20,000 barrels of oil equivalent per day production during 2011. Increase production at Rudenkovskoye from 2% of JKXs Ukrainian production in 2009 to 25% in 2012. We remain on target to achieve the first milestone but have moved the second milestone to 2013 to reflect the current schedule for the multi-frac operations planned for the Rudenkovskoye field. We remain confident in our longterm prospects and are committed to our strategy, including the four near-term objectives outlined in last years Annual Report:
Accelerate the appraisal and development of non-producing fields and reserves in our existing portfolio, specifically at Rudenkovskoye in Ukraine and Koshekhablskoye in Russia. Continue to optimise production from the producing fields in Ukraine. Increase activity on our existing exploration and appraisal portfolio in central Europe. Maintain flexibility to acquire additional interests in our focus area, to increase production and diversify geographically. The fundamentals of our business and our markets are sound although we are experiencing some delay in turning upside into reality. The installation and hook-up of the gas facility at Koshekhablskoye is now proceeding at pace. Despite on-schedule delivery of the key components of the plant from Sharjah to Russia in January, we are experiencing some slippage in the hook-up and commissioning schedule. Consequently, we are revising our target for first gas to this autumn. We continue to see excellent forward value in the Russian gas market and, once production is underway at Koshekhablskoye, we will turn our focus to extending our Russian operations to exploit opportunities elsewhere in what we regard as a region rich in potential. In Ukraine, we drilled well R-103 on the deep Rudenkovskoye tight gas field as planned, and the encouraging initial results support our plans for the multi-frac stimulation of the well later in the year. Hook-up and commissioning of our LPG plant is underway at Poltava and we are currently scheduling to start initial deliveries by mid-year. LPG continues to be an increasingly important energy source in Ukraine and 2010 again saw a sharp rise in the number of vehicles powered by LPG. Our operations in Hungary, where we are a non-operator, have
Production volumes (boepd)
-11%
11,146
12,579 11,012 11,665 10,324
06
07
08
09
10
Net cash from operating activities ($m)
-7%
75.6
119.9 126.5 126.5 117.7
06
07
08
09
10
18
progressed well with production increasing in Hajdunanas supported by the tie-in of the Gorbehaza-1 discovery. Gas has been tested in the Tizsavasvari-6 and Nyekpuszta-2 exploration wells and further appraisal is planned in 2011. The farm-in to the Turkeve licence has had mixed results with only one discovery to date. Managing our risks Risk is intrinsic to our industry and we expend considerable resources and expertise in managing it. During 2010, we ensured that robust risk management processes were in place, with oversight at Board level. Outlook We have the people, the strategy and the resources to deliver a stepchange in performance during the coming 12 months. We are confident that we will commence production in Russia this autumn and I look forward to this operation becoming an important contributor to net cash inflow. We are working hard to increase production in Ukraine and this will play an important role in helping us reach our key objective of producing 20,000 barrels of oil equivalent per day during this year. Start-up of our Ukrainian LPG facility by mid-year will also contribute an important value-added cash flow stream to our operations at Poltava.
Our people will once again be at the heart of our ambitions. In the countries where we operate we have teams of highly skilled individuals, most of them drawn from local communities and many of them trained by JKX. In the UK, we have an experienced senior team that has been complemented in recent weeks by the appointment of Sir Ian Prosser as Chairman. A former Deputy Chairman of BP, Sir Ian has in-depth knowledge and experience of international business, particularly in the oil and gas sector. At JKX, we are committed to grow as a Company and our ability to attract somebody of Sir Ians calibre speaks volumes about our capability and intent. I welcome Sir Ian to the Company and am looking forward to working alongside him during what I believe will be an exciting, productive and ultimately rewarding year. I must also express my appreciation to our outgoing chairman, Peter Fraser, who for the last 13 years has chaired this Company and supported me through every challenge we have faced.
19 019
Delivering our strategy
Objectives for 2010*

Commence development of the Rudenkovskoye field in Ukraine. Construct, install and commission an LPG facility in Ukraine. Accelerate the workover programme in Russia.
Achievements of 2010
Completed and tested horizontal well R-103. Design and fabrication completed; installation commenced. Workover activity throughout the period with up to three rigs contracted. Oxfordian well-20 tested.
Objectives for 2011

Design/perform multi-frac of 1km horizontal wellbore of well R-103. Delivery, hook-up, commissioning and start-up. Complete workover of Callovian well-09 and deepen well-22 to Callovian. Test Oxfordian well-25 and Callovian wells 09 and 22. Complete installation, hook-up, testing and commissioning of facility; start-up of production.
Test additional wells in Russia.
Construct and commission the gas facility at Koshekhablskoye in Russia, with delivery in third quarter 2010 followed by installation in the fourth quarter. Double reserves and production in Hungary.
Fabrication completed and shipping to Russia commenced. Site preparation complete and installation commenced.
Hajdunanas production replaced by Nyirseg reserves. Production in period up 97%. Exploration wells drilled in Hungary and Bulgaria. Seismic acquired in Hungary, Slovakia and Ukraine.
Add reserves and double production.
Continue to develop the exploration portfolio, particularly in Hungary, Bulgaria and Slovakia.
Continue to develop exploration portfolio in Hungary, Ukraine, Slovakia and Bulgaria.
*As set out in the 2009 Annual Report.
20
Operational review
Operational review
UK RAINE
Our main Ukrainian interest is the Novo-Nikolaevskoye complex in the Poltava Oblast, eastern Ukraine. The complex is shown graphically below, with a NW/SE cross section of the fields in the licence complex.
Visean Basement Tournasian Salt Carboniferous Clastics
Novo-Nikolaevskoye complex
All measurements are in Kilometres.
Devonian Clastics
21 021
Ukraine update Completed: We carried out appraisal drilling in the Rudenkovskoye licence and completed the R-103 horizontal well. A second rig was mobilised, albeit later than scheduled. Planned: Drilling and workover activity will continue and we expect to reassess the reserves in the Ignatovskoye, Molchanovskoye and Novo-Nikolaevskoye fields towards the end of the year. Completion of the LPG plant at Poltava is on target for June 2011.
The year saw an extension of our Ukrainian development programme, with the focus on appraisal drilling in the Rudenkovskoye licence together with important progress on recompletions and stimulations. During 2010, we carried out a range of activities to drive value from our production licences. The key focus of the work programme was appraisal drilling in the Rudenkovskoye licence with the completion of the R-103 horizontal well in the fourth quarter. A second rig was contracted to maintain the development impetus in the second half of the period on the ongoing drilling programmes in the Ignatovskoye, Molchanovskoye and NovoNikolaevskoye fields. Delays in mobilisation resulted in the second rig completing only one additional well during the fourth quarter. The programme of recompletions and stimulations continued throughout the period to maintain production levels in the Ignatovskoye and Molchanovskoye North. Poltava Petroleum Company (PPC), a wholly owned subsidiary of JKX, holds four production licences covering 127sq.km in the Poltava region of Ukraine. Each production licence contains a number of fields which together form the NovoNikolaevskoye Complex. PPC also holds the Zaplavskoye and Hernad Elizavetovskoye exploration licences Budapest comprising a total exploration area Turkeve of 208sq.km. In summary, PPC: Drilled, tested and/or completed a total of six appraisal and development wells. Carried out an acid frac and a propped acid frac on two carbonate wells. Carried out 20 workover operations, including 12 recompletions, three well repairs, three fishing operations and two well abandonments. Commenced installation of the LPG recovery plant.
Continued to upgrade and de-bottleneck the production facility. Installed additional generating and compression facilities. Ukrainian Reserves No reserves reassessments took place in 2010. Drilling and workover activity will continue in 2011 and it is envisaged that a reassessment of the Ignatovskoye, Molchanovskoye and Novo-Nikolaevskoye fields will be completed towards the end of the year, although it will be 2012 before this can be concluded in the Rudenkovskoye field areas.
Ignatovskoye
LICENCE AREA
25.3 km
Probable
Remaining reserves as at 31st December 2010

Proved Prov+ Prob
Kiev
Elizavetovskoye Novo-Nikolaevskoye Complex
Oil (MMbbl) Gas (Bcf) Oil + Gas (MMboe) Veszto
1.0 19.0 4.1
0.0 3.6 0.7
1.0 22.6 4.8
THE BLACK SEA
The Ignatovskoye production licence is located in the centre of the Novo-Nikolaevskoye Complex and contains the first field to be developed by the Company. Evaluation of two additional structural trends continues, one to the west, and one to the southwest of the main field. The main field is an uplifted fault block containing Devonian sandstone and overlying Carboniferous Tournasian sandstone and limestone. On top of that is a
22
Operational review
Ukraine continued
carbonate reef build up of Visean age. There is also a series of thin sandstone channels on the flank of the structure, also of Visean age. Black oil is found in the Devonian sandstone and the lower parts of the Tournasian and Visean reservoirs. The oil is overlain by a rich condensate-bearing gas cap and the Visean channels can therefore be oil or gas bearing. Reservoir quality in the Devonian sandstone and Visean reef is generally good whilst both the Tournasian sandstone and limestone are variable and often dependent on local depositional and tectonic influences. Stimulation in these reservoirs is usually necessary and, although this can give high initial flow rates, the rates often decline to more modest levels. No additional wells were drilled or recompleted on the main structure of the field during the period. The focus of activity in 2010 was in recompleting and stimulating the wells in the west of the structure: Development well I-137 was drilled as a Visean carbonate oil producer in the southeast of the field but was suspended in late 2008 with a fish in the hole below the 7-inch casing. A sidetrack was drilled in the period but encountered problems setting the casing. A re-designed replacement well is planned for 2011 in preference to further sidetracking. Well I-105 was successfully worked-over with the recovery of broken downhole pump rods. A surface pump will replace the existing unit at a convenient time in 2011. The workover rig successfully recompleted well I-133 from the Tournasian sandstone to a Visean sandstone oil producer. Reservoir pressure was insufficient to maintain flow and a beam pump has been installed with the well now supporting intermittent, but regular production. Work began in well I-106 to carry out a water shut-off operation in
the Devonian sandstone and recompletion as a Tournasian sandstone producer. Problems recovering the tubing resulted in work being suspended until 2011. Well I-110 was recompleted from the depleted Tournasian sandstone to the Tournasian carbonate. A similar recompletion was performed on well I-158, but with only a small amount of gas being produced. The well is now a candidate for abandonment. Wells I-131 and I-150 were abandoned in the period and their completion and well-head equipment recovered. In addition to re-drilling well I-137, plans for 2011 include a well on the western flank of the main structure to appraise the potential in the down-dip fault blocks. Success on the flanks of the field would lead to a further re-appraisal of the field reserves which otherwise have remained relatively stable.
Molchanovskoye North & Main
LICENCE AREA
7.9 km
Probable

Proved Prov+ Prob
Oil (MMbbl) Gas (Bcf) Oil + Gas (MMboe)
2.9 32.0 8.2
1.4 18.4 4.5
4.3 50.4 12.7
The Molchanovskoye production licence is located approximately 8km to the south of the Ignatovskoye Field and contains the southernmost producing field within the complex. The licence now comprises two distinct field areas: Molchanovskoye North and Molchanovskoye Main. Molchanovskoye North is a black oil reservoir with a gas cap in the Devonian sandstone and an overlying Tournasian sandstone gas condensate reservoir. There are also newly appraised overlying Tournasian carbonate and sandstone gas condensate reservoirs that extend over the Ignatovskoye licence boundary. Work in 2010 addressed both the Devonian sandstone and the Tournasian carbonate reservoirs and also confirmed the presence of productive Visean sandstones within the licence area: Development well M-167 was drilled as a high angle Tournasian carbonate infill well across the main natural fracture system in the Molchanovskoye North field. Drilling was suspended in 2009 due to a stuck drill pipe in the
23 023
overlying swelling shale. The sidetrack was drilled successfully to a measured depth of 3,000m with a 400m section of Tournasian carbonate. Following a controlled acid squeeze on the low porosity formation, the well settled to a stabilised flow rate of 2.3 MMcfd of gas with 26 bpd of condensate through a 36/64" choke with a FWHP of 626 psi. Other areas of the extensive low porosity carbonate in the area are being evaluated for potential application of this development technique. In mid-year, well M-166, a long horizontal well in the Devonian reservoir, showed a sharp increase in water production and a commensurate decline in oil and gas production. The TW-100 rig was mobilised to the location and gas lift installed to restore production. The re-drilling of a new horizontal section at a higher level is scheduled for 2011. Devonian horizontal wells M-151 and M-152 watered out in the period and re-perforations higher in the well bores were unsuccessful. The wells are now candidates for abandonment. Well M-169 was spudded in 2010 and was completed in March 2011 as a 600m long horizontal well in the Devonian reservoir. It is designed to replace both wells M-151 and M-152 and has been set higher in the reservoir. Initial test production was 5.25 MMcfd with 634 bopd oil at a FWHP of 594 psi through a 2" choke. Testing is ongoing at different choke sizes to assess the most effective production rate. Well M-28, a long serving Devonian oil producer, was recompleted to the T2 sandstone and settled to a flow rate of 3.5 MMcfd with 90 bcpd. The surprise of the year was the speculative perforation of the unlogged V16 sandstone reservoir in well M-161. This had initial flow rates in excess of 1,000 bopd with a high gas cut, but has been
choked back to around 400 bopd for reservoir management purposes. Activity planned for 2011 will include further in-fill drilling in the Devonian reservoir and further mapping of the Visean sands to seek analogies to the M-161 discovery. Reserves are not expected to change significantly. Molchanovskoye Main produces gas condensate in the Devonian sandstone and is being evaluated for additional reserves in the overlying Tournasian carbonate and Visean sandstone reservoirs. Two wells were treated in 2010: Development well M-206 was identified in 2009 as a suitable candidate for a propped acid frac of the Tournasian carbonate. The 2010 frac operation was successful but post-frac analysis indicates lack of reservoir connectivity. Well M-205 was recompleted in the Visean sandstone where it flowed at an initial rate of 1.1 MMcfd of gas, despite more encouraging log results. Production enhancement by coiled tubing conveyed jet perforating was attempted but there was no noticeable improvement in flow rate. The results of both treatments were disappointing and further work in this area has been assigned a low priority; this may affect the reserves recognised in this field area going forward. A downthrown tilted fault block referred to as the Wedge Zone separates the Molchanovskoye North and Molchanovskoye Main fields. An exploration well M-170 is currently drilling ahead towards its planned TD of 3,100m in the Devonian sandstone to evaluate the potential of this 1sq.km block. A second well in the block is tentatively planned for later in 2011. No reserves are currently attributed to this area of the field complex.
Novo-Nikolaevskoye
LICENCE AREA
7.8 km
Probable

Proved Prov+ Prob
0.0 0.0 0.0
0.0 0.0 0.0
0.0 0.0 0.0
The Novo-Nikolaevskoye production licence lies 3km to the west of the Ignatovskoye Field. Following successful drilling in 2009, remapping and additional drilling was carried out in 2010 with plans for more wells in 2011. Development well N-73 was drilled as a Visean sandstone gas producer and flowed at a stabilised rate of 1.97 MMcfd of gas, 27 bcpd and 110 bwpd with a FWHP of 189 psi. A well intervention was subsequently carried out to isolate the water producing zone. Well N-74 was spudded in the fourth quarter and encountered gas in two Visean sandstone horizons; it is currently flowing at 3.5 MMcfd with 114 bcpd. The success of wells N-73, N-74 and M-161 will contribute to an increase in reserves in both the Novo-Nikolaevskoye and the Molchanovskoye licences when they are reassessed later in 2011. Three further wells are planned for 2011 with the first well (N75) scheduled to spud in the third quarter.
24
Operational review
Ukraine continued
Rudenkovskoye
declined, compounded by an inability to lift the remaining drilling and completion fluids, despite changing the tubing to a smaller size. Rates are currently around 650 Mcfd with 1-2 bcpd and intermittent water. Geological and engineering studies are underway for a multi-stage frac in the long horizontal wellbore.
2
Commencement of a review into the efficiency of the surface facilities to identify potential operating improvements. Implementation of the recommendations of an independent specialist team to debottleneck the plant and enhance the process facilities. Initial steps included replacement or duplication of some flowlines to reduce back pressure on the wells. Notably, the results for well I-125 were significant with gas production increasing from 1.9 MMcfd to 2.4 MMcfd and oil production from 31 bopd to 220 bopd. Further work will be undertaken during the annual field shut-down. Improvements to the sewage treatment facility at the production site are planned for 2011 and there will be minor improvements to the roads and walkways throughout the facility. LPG Plant Fabrication and construction of the LPG plant commenced during the year. All the LPG process equipment is now onsite and installation has commenced. Installation and construction of the storage and loading equipment is also in progress. Completion is now expected in June 2011.
LICENCE AREA
86.0 km
Probable

Proved Prov+ Prob
1.2 122.3 21.6
1.2 122.3 21.6
The Rudenkovskoye production licence is the most northern of the four production licences. Reservoirs in the licence are the Tournasian and Devonian sandstones at depths of between 3,000m and 5,000m with further potential in the overlying Visean sandstones. Productive areas have been identified in the northern and southern areas of the licence and, after the modest success of the 2009 propped frac programme, an initial three well horizontal drilling programme was planned for 2010-2012: Well R-103, in the southern part of the field, was drilled to a measured depth TD of 4,641m using the Skytop N-75 rig with 1,026m of the well drilled horizontally in the Devonian reservoir. On test, the well flowed at a stabilised rate of 8.1 MMcfd of gas and 18 bpd of condensate through a 85/64" choke with a flowing wellhead pressure of 930 psi over the final 8 hour period of a multi-rate test. The well has been tied back to the main field processing facility with an 8km flow line and placed on production. Since then production has
Well R-102, was drilled in early 2007 in the southern area of the field. It found two main gasbearing zones in the Devonian sandstone but the presence of water precluded any fracture stimulation testing in the lower interval. The well was plugged back to a higher, and much thinner, interval in the Devonian. The propped frac operation was relatively successful and the well flow rate increased four-fold to 0.5 MMcfd of gas. In 2010, the perforated zone was extended and this resulted in an increase in production to 1.6 MMcfd. The sites for the R-104 well in the north of the Rudenkovskoye area has been prepared and the programme for this 4,300m horizontal well to the Visean sandstone reservoir is ready, as is the programme for well R-105, a further well in the area of well R-103. Both wells R-104 and R-105 have been deferred until the results and prospects for well R-103 have been fully evaluated. Reserves reassessment in the Rudenkovskoye field areas will await the results of the R-103 multi-frac and the subsequent drilling programme. Poltava production facilities 2010 saw continued improvements to the Central Production Facility, including: Commissioning of the replacement compressor K220 early in the year to provide greater support for gas-lift and production optimisation an increasingly important aspect of field management.
25 025
Zaplavskoye
The Zaplavskoye exploration licence is adjacent to the Molchanovskoye production licence and now comprises an area of 137.6sq.km. The permit has been extended for a further five years until 2014. In addition, the area has been extended by 41.9sq.km and in-fills an area between the Novo-Nikolaevskoye and Ignatovskoye licences where existing seismic indicates potential drilling targets and extends the western flank of the Ignatovskoye field. The extension also includes the Shagarivske area to the east of the Ignatovskoye field where a 100km 2-D seismic programme was shot in late 2010 ahead of exploration drilling planned for 2012. The first well in the new block is likely to be in the area to the northwest of the NovoNikolaevskoye field and will target Visean sandstone reservoirs already encountered in drilling undertaken by the State in the 1980s.
Elizatovskoye
The Elizavetovskoye exploration licence is located in the central part of the Dnieper-Donets basin and covers an area of 70sq.km. It is approximately 45km from PPCs existing production licences. Three shut-in production wells on the licence are owned by Ukrgasvydobuvannya, a subsidiary of Naftogaz of Ukraine, the state oil and gas company, and are tied into its production facility. Negotiations with Ukrgasvydobuvannya were concluded in 2010 and enabled PPC to start preparations for drilling its own production wells in the field. Plans have been prepared for the drilling of a single well and the installation of basic separator and dehydration equipment tied to the local branch gas line via a hot tap. The project is currently scheduled to commence in early 2012. The hot tap installation is scheduled to be carried out by Ukrainian specialists in the second quarter of 2011 as an essential pre-requisite of the rest of the programme.
Chervonoyarske East
The Chervonoyarske East exploration licence was acquired in December 2005. The licence covers a total area of 5.5sq.km and is located about 75km from the PPC production licences on the northern margin of the Dnieper-Donets basin. Evaluation of the 42sq.km 3D seismic survey acquired in 2008 supports the interpretation of potential hydrocarbons trapped against the flanks of a major salt wall. However, the cost of drilling to below the salt and the geological risks associated with the traps are high. Attempts to farm-out the licence during 2010 were unsuccessful and the licence was relinquished in December 2010.
26
Operational review
RUSS IA
The Koshekhablskoye field is located in the southern Russian autonomous Republic of Adygea. The licence covers an area of 32.7sq.km The field is shown graphically below, with a NW/SE cross section.
Koshekhablskoye eld
Oxfordian Gas Reservoir Callovian Gas Reservoir
Cretaceous Middle Jurassic Upper Jurassic
27 027
Russia update Completed: We initiated and in many cases completed a range of workovers, tests and fishing operations. The GPF plant was fabricated and shipped, with installation well underway before the year-end. Planned: First commercial gas production is scheduled for the Autumn. We aim to have three wells in production at start-up, with further wells being brought on-stream in 2012.
Koshekhablskoye
completing the construction of the processing plant to ensure that construction and commissioning of the complete facility could be completed for first gas in the Autumn of 2011, delayed from our previous mid-year target. During the period, YGE: Completed the workover, sidetracking and successful testing of Well-20 at a final flow rate of 22.6 MMcfd of gas and 25 bcpd through a 60/64" choke with a flowing wellhead pressure of 1,510 psi.
0.3 267.0 44.8
LICENCE AREA
32.7 km
Probable

Proved Prov+ Prob
0.2 114.0 19.2
0.1 153.0 25.6
JKX completed the purchase of Yuzhgazenergie LLC (YGE) in November 2007. YGE holds the licence for the redevelopment of the Koshekhablskoye gas field which is located in the southern Russian autonomous Republic of Adygea. The licence covers an area of 32.7sq.km.
Koshekhablskoye
Re-entered Well-25 on the north flank of the field using the Geostream KES-536 rig, and recovered the remainder of the tubing. Drilling of the 260m sidetrack into the limestone reservoir kicked-off at 5,490m with a targeted TD of 5,760m. Completion and testing is scheduled for the beginning of the second quarter. Initiated milling and fishing operations on Well-26 and suspended operations after recovering 314m of fish with 1,375m remaining. It is planned to return with a smaller rig to complete fishing more economically. Completed fishing on Well-15, deep on the east flank of the field, and drilled a sidetrack to a depth of 5,755m with strong gas shows and encouraging logs. Disappointingly, the sidetracked well bore did not stay open during testing with an obstruction preventing deployment of the coiled tubing to TD in the open hole section. Due to the priority given to the other wells in the first phase programme, remedial action (which may include a new sidetrack to a more geologically prospective part of the field) will be undertaken as part of the second phase of well recompletions later in 2012. Recovered tubing from the Callovian appraisal Well-09 to a depth of 5,312m using the
Maikop
The field was discovered in 1972 and produced a total 89 Bcf of gas before operations were suspended in January 2006. In June 2006, YGE was granted a new 20 year licence to rehabilitate and further appraise and develop the field. Following the acquisition, the detailed technical and environmental re-evaluation by JKX concluded that the existing production facility would have to be completely replaced because it could meet neither the new gas specification required for entry to the Gazprom transit system nor the environmental standard for emissions to the immediate environment.
THE BLACK SEA
The focus during 2010 was on continuing the workover of wells to ensure that the Gas Processing Facility (GPF) would be brought on-stream at full capacity and
Tbilisi
28
Operational review
Russia continued
Kremco-900 rig. Preparations are currently underway to sidetrack the well through the Callovian sandstone reservoirs to a TD of 5,500m. Completion and testing of Well-09 is now scheduled for the fourth quarter of the year. Commenced fishing operations on Callovian exploration Well-22 using a lightweight A-125 rig. The well has been suspended at 4,885m awaiting mobilisation of the Geostream KES-536 rig to deepen the well to 5,570m in the Callovian sandstone reservoirs. Completion and testing of Well-22 is scheduled for the fourth quarter of the year. Completed the laying of replacement flowlines for the whole field, installation of the export line and the tie-in to the local trunk line. Completed the construction and hook up of additional temporary field camps to house construction workers and drilling teams. Fabrication of key components of the GPF plant in Sharjah was completed during the last quarter of 2010 with the final shipment leaving port at the end of December, slightly ahead of schedule. All equipment has now been off-loaded and cleared through customs in the Russian port of Novorossiysk, some 300km from the field, and transported to the site. Foundations for the equipment are in place and the construction teams have begun installation. Installation and construction of locally sourced equipment and buildings is nearing completion with hook-up and commissioning of the plant scheduled to commence by the end of the first quarter. First commercial gas production is scheduled for autumn 2011. The workover programme has encountered difficult conditions in some of the wells, and the
programme has been revised to ensure that production will meet the targets for the GPF as commissioning begins in the second quarter. The goal is to have three wells in production at start-up with further wells being brought on-stream in the second phase of workovers in 2012. Field exploration and appraisal JKX inherited a YGE obligation to drill an exploration well to appraise the production potential of the underlying Callovian sandstone reservoir. YGE has subsequently undertaken a significant amount of exploration and appraisal activity on this reservoir including: Acquisition, processing and interpretation of the 3D seismic. Integration of the maps with a complete re-evaluation of the well logs and other geological data to determine reservoir distribution and the potential resources in the Callovian sandstone. Acquisition of the shut-in Callovian production Well-09 for early testing. In recognition of YGEs commitment to the exploration programme and the high cost of deep drilling, the Russian State Geological Institute responsible for the YGE ongoing exploration and appraisal programme accepted the Companys proposal to deepen an existing dry Oxfordian appraisal well (Well-22) to the Callovian reservoir in order to reduce significantly the overall cost of the project. The testing of the Callovian V unit in Well-09 and the deepening and evaluation of Callovian zones I-V in Well-22 will be concluded later in 2011. Russian Reserves Following the results of the Well-27 test, the production characteristics of the field were revised and the material balance reserves forecast reassessed. This resulted in a revision of the P+P reserves to 44.8 MMboe during 2009. The Oxfordian reserves will be
reassessed (as a licence obligation) later this year once the results of the Well-25 testing can be incorporated. Callovian reserves are dependent on the results from Well-09 and Well-22, and will be revised in 2012. In addition, YGE has received a letter of assurance from the Russian authorities confirming that any field reserves lying outside the licence boundary could be included in a revised licence area (provided this did not exceed 125% of the existing licence). This permits YGE to increase the field reserves by up to a further 40% when the licence has been formally extended and is scheduled to occur after first gas production.
Right: Since year-end 2010 the pace of the Gas Processing Facility construction has increased significantly, as pre-constructed components have arrived on-site.
29 029
30
Operational review
HUNGAR Y
Within our Hungarian portfolio all production currently comes from the Hajdunanas area of the Hernad/ Nyirseg licences. The Hajdunanas area is shown graphically below, with a N/S cross section.
Oil Reservoir Middle Miocene Gas Reservoir Gas Reservoir Upper Miocene
Hernad eld
Kiev
31 031
Hungary update Completed: Our operations progressed well with production increasing in Hajdunanas supported by the tie-in of the Gorbehaza-1 discovery. Gas has been tested in the Tizsavasvari-6 and Nyekpuszta-2 exploration wells. Planned: Together with the field operator, we are planning a 20% increase in production at Hajdunanas during the second quarter of the year. Further appraisal of the Tizsavasvari-6 and Nyekpuszta-2 exploration wells are scheduled for 2011.
Hernad
fractured volcanoclastic sequence. Gas quality is excellent and requires minimal processing before export. The Gorbehaza discovery well Gh-1 in the Nyirseg licence has been tied in the Hajdunanas facility. Following the successful workover of the Hn-2 well and recompletion of the Gh-1 well in the fourth quarter of 2010, current gross production is approximately 7 MMcfd of gas and 180 bcpd. The field operator, HHE, and JKX are planning a 20% increase in production in the second quarter of the year. The local gas market remains strong with 2011 realisations to date in excess of $10 /Mcf. Hajdunanas Reserves No changes have been made to the Hajdunanas reserves in 2010. The effects of the minor water influx, now successfully shut-off, are being evaluated. Further Hernad exploration activity The Tiszavasvari-6 well was drilled in the second quarter of 2010 and tested during January 2011. The well encountered a 300m gross reservoir interval with excellent gas shows in the deeper secondary target below 2,580m. Three reservoir intervals were tested with a maximum rate of 1.5 MMcfd being recorded. The well has been suspended in anticipation of a possible reservoir stimulation programme. A larger tilted fault block structure with amplitude supported Lower Pannonian reservoir intervals lies updip from the first structure and is estimated to contain an initial gas in place of between 50 and 150 BCF. Appraisal drilling is scheduled for the second quarter of 2011. Additional amplitude supported exploration targets in Upper Pannonian shallow water sands have been identified to the north-east of the Hajdunanas Gas Facility. Permitting is underway for
LICENCE AREA
5,410 km
Probable

Proved Prov+ Prob
0.0 0.9 0.2
0.2 5.3 1.0
0.2 6.2 1.2
Hernad
Budapest
Turkeve
Veszto
JKX holds 50% equity in the northern Pannonian Basin Hernad licences in a joint venture with the operator, Hungarian Horizon Energy (HHE). The Hernad I licence covers 2,903sq.km and the Hernad II licence covers 2,507sq.km. The Pannonian Basin comprises numerous sub-basins developed across Hungary, Slovenia and Romania. It is prospective for gas and oil, and exploration risk can be reduced by the use of seismic data attributes (amplitude versus offset or AVO) and calibrated well log data. The post-rift sequence contains channelised and lobe turbidite sand reservoirs in combined structural/stratigraphic traps. Miocene age pro-delta shales provide the source for the gas and condensates. Hajdunanas The Hajdunanas Field was discovered in May 2008 with successful gas tests from three levels in well Hn-1. The discovery was confirmed by a second well Hn-2 which encountered a thicker sequence of Pannonian sands. The reservoirs include two Pannonian sand intervals and a Miocene
32
Operational review
Hungary continued
a test of a three way dip and fault closed structure with a TD of approximately 800m. Numerous low risk but small additional prospects would be de-risked by a successful well. The Tiszatarjan-1 exploration well, approximately 12km from the Hajdunanas field, remains suspended as an oil discovery, pending a forward programme of formation stimulation. A further 300sq.km 3D seismic data acquisition is planned for the Jaszsag area in the south of the Hernad II licence during the first half of 2011.
Nyirseg
JKX farmed-in for a 33.3% interest in 120sq.km of the adjacent Nyirseg licence operated by PetroHungaria in late 2008. JKX subsequently increased its holding to 50%, as did HHE, by buying out the minority partners. The first well Gorbehaza-1 tested 3.74 MMcfd of gas and 20 bcpd and has been tied into the Hajdunanas gas production facility some 2.5km away. First gas was achieved in August 2010. The offset Gorbehaza-5 well, drilled in early 2010, was water bearing and has been completed as a potential water disposal well for the Hajdunanas facility.
(175C), the Nyekpuszta-2 appraisal well was successfully drilled to 3,695m in late 2009. The well encountered a gross hydrocarbon column of 85m and was fracture stimulated and tested in 2010. Despite flow rates being constrained by the abrasion due to returning proppant, the rates were initially steady at 2.0 MMcfd and 600 bpd oil/ condensate with a FWHP of 4,500 psi. However, this rate was not sustained through the two month test period. After a one month final shut-in, reservoir pressure built back to original levels. The slow build up indicates a low permeability connection of the main reservoir volume to the fracced interval. It has been concluded that this potentially very large (200Bcf) structure will require additional appraisal drilling and formation stimulation. JKX and HHE continue the evaluation of the prospect specific and regional structural model in the light of the extended test results from the Nyekpuszta-2 well. A further well is planned for the third quarter of 2011. In addition to the testing and completion of the Nyekpuszta-2 well, activity under consideration for 2011 includes evaluation of a similar prospect within the Veszto Licence in which JKX has an option to participate.
Turkeve Acreage
JKX has entered into an agreement with HHE to farm-in to the drilling of up to seven wells located in the Turkeve area of north east Hungary. Under the terms of the agreement, JKX funds 66.67% of drilling and completion costs to earn 50% of future mining plots formed to develop discoveries, and also funds 75% of pipeline connection costs. There has been one encouraging result out of the five wells drilled to date and a tie-back to existing facilities is planned for the second quarter. The remaining two wells will also be drilled in the second quarter.
Veszto
In March 2009, JKX farmed-in for a 25% interest in a 15.6sq.km area of the Veszto exploration licence held by HHE in the eastern Pannonian Basin. A 3D seismic survey covering the entire 219sq.km licence has been completed and interpreted with two prospects identified. Following abandonment of the Nyekpuszta-1 well because of unexpected high pressures (12,000psi) and temperatures
33 033
RES T OF WO R L D
Bulgaria
JKX (40% and operator) operates two onshore exploration permits, B Golitza and B1 Golitza, covering a total of 3,355sq.km in eastern Bulgaria. The licences include the area of the Kamchia Trough, an onshore extension of the Tertiary age western Black Sea Basin, which is now the subject of renewed deepwater exploration activity. The 2009 seismic data acquisition of 250sq.km 3D was completed in the Kamchia Trough, south of the town of Varna. The initial interpretation revealed several prospects and a two well drilling campaign began in the third quarter of 2010. The Staro Oryahovo South R-01 exploration well was drilled to a total depth of 1,875m. Gas shows were encountered during drilling of the target Avren Formation submarine fan sandstones, but subsequent log analysis demonstrated that the target was water wet. The well was plugged and abandoned. The Shkorpilovtci South West R-01 exploration well was drilled to a total depth of 837m and was plugged and abandoned. Significant gas shows were observed during drilling of both the primary target Avren Formation channel sand complex and the underlying secondary target Dvoynitca Formation sandstones. However, wireline data in the Avren Formation indicated poor reservoir permeability, and consequently a well test was not performed. The well appeared to have encountered a channel margin in this location and the shallow depth to the primary target precluded a geological sidetrack. The highly laminated underlying secondary reservoir was determined to be water wet.
The lack of success of both recent Golitza wells was disappointing, but JKX and its co-venturers believe they can integrate the information from these wells with the 3D seismic to high-grade further exploration targets within the Avren Formation.
Slovakia
In 2008, the Company farmed-in for a 25% interest in the Svidnik, Medzilaborce and Snina exploration licences, covering a total area of 2,278sq.km in the Carpathian Fold Belt in north east Slovakia. Acquisition of 346km of 2D seismic data in 2008/2009 provided basic regional information in the two eastern licences, as well as infill data in the western Svidnik licence. In 2010, a further 150km of 2D seismic data were acquired to firm up leads identified in the 2008/2009 surveys. A structure has been confirmed in the vicinity of the Smilno discovery well in the Svidnik licence, and plans are being made for drilling an exploration well, possibly in the latter part of 2011. Further regional seismic data acquisition is planned for the third quarter of 2011.
34
Financial review
Financial review
Bruce Burrows Finance Director
35 035
2010 was a year of significant capital expenditure underpinned by continued solid operating cash flow, most importantly from our Ukrainian subsidiary Poltava Petroleum Company (PPC). Whilst production decreased as a consequence of delay in mobilising a second rig to Ukraine, increased international commodity prices, combined with effective operational cost control, resulted in the second highest operating cash flow generation in the Groups history.
Profit for the year The profit after tax for 2010 was $21.2m (2009: $85.3m) although, excluding the impact of the non-cash exceptional item of $74.6m and the resulting deferred tax credit of $14.5m, the profit after tax is $81.3m. The impact of the exceptional item is further discussed below. The basic earnings per share was 12.38 cents per share (2009: 54.23 cents per share) or, excluding the impact of the impairment provision, was 47.56 cents per share. Revenue Total revenues of $192.9m were down 2% (2009: $196.5m), a direct result of an 11% decrease in production offset by a 28% increase in oil price and 6% increase in gas price. The average oil price achieved was $69.15/bbl (2009: $53.90/bbl) with a gas price achieved of $7.59/ Mcf (2009: $7.19/Mcf). Operating profit The combined cost of sales and general administrative costs and loss on foreign exchange, before impairment, exceptional item and profit on sale of assets, were 13% higher at $84.2m (2009: $74.4m) comprising: Depreciation, depletion and amortisation which increased slightly to $33.2m (2009: $32.8m) despite the 11% drop in production, a function of the greater production contribution in 2010 from proportionally higher capital expenditure fields in Hungary and Rudenkovskoye in Ukraine. Production related taxes, which increased 30% in the period to $5.2m (2009: $4.0m), mainly because of a greater contribution from Hungary which accounted for 7% of production and 45% of production related taxes. Underlying operating costs (cost of sales less DD&A, impairment, exceptional item and production based taxes) declined 13% on last year to $17.9m (2009: $20.6m), due to savings and ongoing efficiencies being achieved in
operations. However, underlying operating costs combined with general and administrative expenses increased 22% during the period from $35.3m to $43.2m. This represents significant one off corporate costs in Ukraine along with increased expenditure associated with staffing up the Russian subsidiary Yuzhgazenergie, and a number of one off expenditures in our period of transition from project development towards an operating company. The net loss on foreign exchange of $2.6m was up 13% (2009: $2.3m). Provisions for impairment of fixed assets and write-off of exploration costs of $13.7m (2009: $5.0m) recognises the write off of Ukrainian exploration well Zaplavskoye 3 ($6.2m) and licence costs for the recently relinquished Chervonoyarske licence ($1.0m). Additionally, the Group wrote off during the period its share of two exploration wells in Bulgaria ($1.7m) and one in Hungary ($1.9m). A provision was also made for an asset which was previously held for Russia of $2.9m. The exceptional item relates to an impairment provision taken on our Russia asset, the details of this are documented below and within note 5(e) and 5(f) of the financial statements. Impairment A review was undertaken at the balance sheet date to determine whether there was any indication of triggers that may have led to any assets requiring an impairment review. Following this review, an impairment trigger was noted in relation to Yuzhgazenergie (YGE) in Russia and Poltava Petroleum Company (PPC) in Ukraine. Having undertaken the review, it was concluded that PPCs NovoNikolaevskoye complex was not impaired. An impairment review was undertaken for YGE.
Revenue oil ($m)
+3%
92.8
122.5 121.8 78.8 76.4
06
07
08
09
10
Revenue gas ($m)
-4%
118.1 83.1 59.4 37.7
112.9
06
07
08
09
10
36
Financial review
Financial review continued
The development plan and production profile have continued to be refined since the 2007 acquisition of YGE. First gas sales from the project are now expected autumn 2011, three years later than planned, and the anticipated convergence of Adygean gas prices to net back European levels is now delayed to 2017. The current level of gas prices in Russia are also lower than those anticipated in March 2010. The key assumptions used in the impairment testing were: Production profiles based on latest information provided by independent reserve engineers, such information including 2P reserves (44.8 MMboe) and 3P and contingent resources. Economic life of field (expected to be around 2032). Gas prices based on the Russian Governments intention to achieve net-back convergence with the European gas markets which the Group has assumed as occurring in 2017 (2009: 2015). Capital and operating costs: based on project estimates. Post tax Rouble discount rate of 13.5% (2009: 15.9%). The changes in the key assumptions used from previous periods have resulted in the asset being impaired by $74.6m. No value was attributed to 3P and contingent resources. The main driver of the impairment
has been lower sales prices anticipated in the early years together with a longer period before net back European gas price parity is achieved. The Group has recognised the impairment charge as an exceptional provision within the accounts. Taxation The effective tax rate for the Group in 2010 was (1.8%) (2009: 28.5%). The significant reduction results from three main factors: deferred tax effect of $14.5m in relation to the $74.6m Russian asset exceptional item; the recognition of a deferred tax asset in the UK; and reduced current tax on core Ukrainian operations resulting from reduced taxable income. Dividend The Board proposes a final dividend of 2.6 pence per share (2009: 2.7 pence per share) giving a full year dividend of 5.0 pence per share (2009: 5.0 pence per share). The proposed dividend will be recognised when paid. The Board has decided that not increasing the full year dividend is appropriate, following the continued extensive capital investment in the Groups YGE redevelopment project in southern Russia, coupled with the cash impact of rental payments in Ukraine following the 1st January 2011 introduction of Ukraines new tax code.
Realisations Oil ($ per bbl)
+28%
84.34 69.15 54.31 60.37 53.90
06
07
08
09
10
Realisations Gas ($ per Mcf)
+6%
7.19 5.47 3.95 2.83 7.59
06
07
08
09
10
Maturity of financial liabilities
Less than 1 year $000
Between 1 and 2 years $000
Between 2 and 5 years $000
Over 5 years $000
At 31st December 2010 Trade and other payables Deferred consideration, due within one year 51,369 2,000 53,369 At 31st December 2009 Trade and other payables Deferred consideration, due after one year 36,018 5,000 41,018
37 037
Net profit before exceptional item ($m)
Capital expenditure Total capital expenditure increased in 2010 by 66%. The mix reflects the increased investment in the Groups Russian project which accounted for 60% of total investment (2009: 39%). Russia $107.8m 60%
instruments is to finance the Groups operations. Foreign exchange risk sensitivities If as at 31st December the Ukrainian Hryvna had strengthened/ (weakened) by 10% against the US Dollar with all other variables held constant, post-tax profit for the year would have been $0.4m (2009: $0.1m) higher/lower, mainly as a result of Hryvna denominated gas trade receivables, cash balances and trade payables, and the foreign exchange in equity would have been $0.1m higher/lower (2009: remained the same). If as at 31st December the Russian Rouble had strengthened/ (weakened) by 10% against the US Dollar with all other variables held constant, equity would have increased/decreased by $0.5m (2009: $0.1m) mainly as a result of cash balances and trade payables. If as at 31st December the Euro had strengthened/(weakened) by 10% against the US Dollar with all other variables held constant, post-tax profit for the year would have been $0.3m (2009: $0.1m) higher/lower, and the foreign exchange in equity would have increased/decreased by $0.7m (2009: $0.1m) mainly as a result of trade receivable and cash balances. If as at 31st December Sterling had strengthened/(weakened) by 10% against the US Dollar with all other variables held constant, post-tax profit for the year would have been $2.5m (2009:$4.7m) higher/lower, mainly as a result of Sterling denominated trade receivables, cash balances and trade payables, and the foreign exchange in equity would have been $2.0m (2009:$0.3m) higher/lower. Fair value interest rate risk sensitivities At 31st December 2010, if interest rates had increased by 10% with all other variables held constant, post-tax profit would have remained the same (2009: remained the same).
-5%
77.8
74.4
78.2
85.3
81.3
Exceptional item: $60.1m (net of tax effect)
06
07
08
09
10
Production costs ($ per boe)
-2%
3.83
Total: $178.5m
5.97 4.85 4.01 4.74
06
07
08
09
10
Rest of world $4.7m 3% Hungary $9.9m 6%
Ukraine $56.1m 31%
Cash flow/Net cash Net cash from operating activities (after tax payments of $28.5m) was $117.7m, which is 7% lower than the previous year (2009: $126.5m). This reflects the lower PPC production in the period partially offset by higher commodity prices. There was an 81% increase in total net cash used in investing activities to $175.1m (2009: $96.7m). This was due to the increased capital expenditures to $172.8m (2009: $108.7m) mainly on the continued development of PPCs licences in Ukraine, the YGE redevelopment of the Koshekhablskoye field in south west Russia, and the Groups growing Hungarian asset portfolio. The Group raised funds in February 2010 via a share placing which,
together with share options exercised, resulted in a $58.4m cash inflow from financing. The dividends paid in the year were $13.2m (2009: $12.3m). The Group is confident in being sufficiently funded to meet the capital commitments of its current development programmes. This confidence comes from the Groups current cash position and positive operating cash flows. Financial instruments The Groups financial instruments comprise cash and liquid resources, various items such as trade and other receivables, and trade and other payables that arise directly from its operations. The main purpose of these financial
38
Financial review
Risks we face and how we manage them

The Groups business of oil and gas exploration and production and its chosen area of operation, central and eastern Europe, dictates that it is exposed to a broad range of risks. The Groups approach to this spectrum of risk is to monitor and mitigate identified risks and then actively manage them to the extent possible to minimise potential adverse effects on the Groups financial performance. Risk management is carried out by designated individuals under policies and procedures approved, reviewed and managed by the Board of Directors. An annual review of the Groups system of internal control is
Whats the risk?

Reservoir performance
Definition
Probability
The hydrocarbon reservoirs that generate production and cash flow to underpin the Groups growth may not perform as expected, exposing the Group to lower profits and challenges in funding planned development. Accordingly, forecast reservoir performance is critical in deciding on development options for specific assets, as well as allocation of resources generally across the Group.
MED
Capital expenditure
The Group operates in a capital intensive business requiring long lead time investment decisions. Deviations in forecasts of timing and quantum of exploration and development expenditures can expose the Group to funding challenges and to projects which may have diminished or negative economic return. Such deviations can result from a number of causes, including general economic and industry specific cost inflation, variations in foreign exchange rates, deficient project planning and monitoring of project spend.
MED
Commodity prices
The Group is exposed to international oil and gas price movements. The Group is a price taker and does not enter into hedge agreements unless required for borrowing purposes.
MED
Procurement and contract management
Inability to negotiate and manage purchases and contracts can increase costs to the Group and/or cause delays to project completions and operations, negatively impacting production, cash flow and value generation.
LOW
Capital management
An optimal capital structure should be maintained for the Group to continue maximising returns for shareholders and benefits to other stakeholders. Failure to manage the capital structure could reduce stakeholder returns and, in extreme circumstances, impact the Groups ability to operate as a going concern.
LOW
39 039
conducted by the Audit Committee, along with a review at each meeting of the Audit Committee of the Group risk landscape and management.
Potential impact
How we manage it
HIGH
As it has evolved, the Group has continued to recruit specialist and industry recognised personnel and consultants to model, monitor and manage reservoir performance. Increased levels of local operating experience both within and external to the Group assist in further mitigating this risk. The Group manages its key activities in Ukraine and Russia via strong local operating companies that have been developed and staffed with skilled personnel. The interaction between local and London based specialists and third party consultants is key to operational risk management. The continued intraregional diversification of interests (highlighted by Russian and Hungarian development participations) has aided in spreading this risk away from the previous very high concentration in Ukraine. With the increased diversification in assets, the Group has also expanded its UK technical team to ensure knowledge transfer to and between operating companies and the consistent application of the Groups strategic technical methodology.
MED
The Group operates its key interests in Ukraine and Russia via strong local operating companies, who interact with London based Group specialists, as well as UK and locally based contracted specialists to maximise project management capability. For individual capital projects which are material to the Group, Project Management teams are created to oversee planning and implementation. Recent examples of such teams include those established at the Rudenkovskoye development in Ukraine, and at the Koshekhablskoye workover programme and gas processing facility construction in Russia. These project management teams report to stakeholder groups comprising senior management and other appropriate project related staff and contractors.
MED
Most of the Groups gas sold in Ukraine and its share of Hungarian gas sales is through market related contracts to significant and creditworthy customers. This is intended to minimise exposure to abrupt price movements, ensuring sales are as closely matched as possible, in terms of timing and volume, to production. The balance of oil and gas production in Ukraine is sold by way of auctions, conducted with a frequency aimed to achieve as close as practicable the aforementioned matching principle. The Groups Russian gas production, scheduled to commence in autumn 2011, is intended to be sold on a similar basis to the bulk of Ukranian production, being to large credit worthy customers on contracts at market related prices.
LOW
The Group operates policies, procedures and controls intended to regularise procurement within strict levels of delegated authority. All significant purchases are tendered. Each operating entity manages a schedule of approved suppliers. All contracts are constructed specifically or in accordance with templates, targeted at the jurisdictions of supply and delivery, taking account of reviews of both internal lawyers and, where dictated by procedure, by third party legal advisors.
HIGH
Capital management is monitored by the Finance Director in accordance with policies and procedures approved by the Board. It is also assessed and monitored by the Groups financial advisor and by the Board. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, sell assets, or obtain borrowings from third parties. Two recent material examples of managing the Groups capital structure have been the February 2010 share placing ($58.4m net) and the concluding of a $15.0m draw-down facility for PPC in Ukraine with Credit Agricole CIB Ukraine.
40
Financial review
Risks we face and how we manage them continued
Whats the risk?

Country exposure
Definition
Probability
The Company operates in a variety of emerging markets where the accounting, tax and legal environment and the application of laws and regulations are constantly evolving. New laws can come into effect at times which can conflict with others and, therefore, are subject to varying interpretations and changes which may be applied retrospectively. This can result in the Group being subject to uncertainties relating to the determination of its tax as well as other liabilities. Managements interpretation of tax legislation as applied to the transactions and activities of the Group may at times not coincide with that of the tax authorities. As a result, the tax authorities in the countries of operation may challenge transactions and the Group may be assessed for additional taxes, penalties and fines which could have a material adverse effect on the Groups financial position and results of operations.
MED
Foreign exchange exposure
The Group operates internationally and is exposed to foreign exchange FX risk arising from various currency exposures, primarily with respect to Ukrainian Hryvna and the Russian Rouble. FX risk arises from future commercial transactions, recognised assets/liabilities and net investments in foreign operations.
LOW
Cash ow and interest rate exposure
The Groups income and operating cash flows are subject to changes in market interest rates.
LOW
Credit
Credit risk arises from cash and cash equivalents and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions.
LOW
Liquidity
Reduction in liquidity and working capital could result in delay or cancellation of capital projects. In extreme circumstances, this could impact day to day operations and the Groups ability to continue as a going concern.
LOW
Health, safety, environment & community relations
Failure to put in place and operate a rigorous HSEC regime can endanger and negatively affect stakeholders. Adverse publicity from any poor performance in this field could negatively affect the Group. The Group could be held responsible for addressing any contamination/damage to current or past licences and surrounding areas. The associated cost could be significant.
LOW
Production licences
The Group operates in a region where title to licences can be challenged by state and non-state parties. If a licence title is challenged, production could be suspended or terminated depending on the outcome. Such challenges may emanate from licence provenance or compliance with licence commitments.
LOW
41 041
Potential impact
How we manage it
HIGH
The Board and management recognise the constant need for expert advice to ensure full compliance with local and international regulations and laws. Our strategy is to employ skilled local staff in the countries of operation and provide them with ongoing training opportunities. In addition to such specialist staff employed in the Groups operating entities, the Company has established legal, tax and accounting advisors. In Ukraine, PPC has at times since 1994 sought clarification of its status regarding a number of production related taxes and has been subject to a number of such taxes. Specifically, application of production related tax pre 2009 has attracted scrutiny. This risk is further described in note 21 of the accounts. On 1st January 2011 a new tax code became effective in Ukraine replacing most of the previous tax laws. The new tax code has removed uncertainty over the applicability of rental fee payment by PPC from 2011, and accordingly PPC has been liable to and is paying such fees.
LOW
By matching, as far as is practicable, receipts and payments in the same currency and by following a range of commercial policies to minimise exposure to the Hryvna denominated sales, which continued to account for more than 90% of Group revenues in 2010.
LOW
Interest rates are continually monitored by the Finance Director. The Treasury sub-committee of the Audit Committee also reviews rates on a regular basis, as well as the Groups strategy with regards to cash deposits. This strategy, given the current banking environment, is focused on security of deposits (through bank selection and monitoring criteria) in preference to maximising interest rate return, a strategy which is regularly reviewed.
LOW
Credit risk on cash and cash equivalents is managed at a Group level through two Treasury Committees: one comprises management, which meets weekly, while the other is a sub-committee of the Audit Committee. These Committees evaluate the relative risks of banks and determine the appropriate allocation of Group funds across a range of banks in varying jurisdictions, with the aim of minimising credit risk associated with cash deposits. Local customers are managed at local level if there is no independent rating, the Group evaluates their financial position, past experience and other factors. Management does not expect any losses through non-performance by counterparties. The Company does not have any concentration of credit risk and management does not consider there to be any significant exposure to material loss.
HIGH
Management monitors rolling forecasts of the Groups liquidity on the basis of expected cash flow to ensure any remedial action can be taken with as much lead time as possible. The table on page 36 analyses the Groups financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date.
HIGH
The Group treats HSEC as a priority and has a London based HSEC manager who reports directly to the CEO. In addition, HSEC managers within local operations engender a safe operating environment. Significant expenditures are incurred to comply with applicable laws and regulations and to the extent reasonable practicable, create social and economic benefit in the surrounding area. Appropriate insurances are maintained to manage the Groups financial exposure.
HIGH
The Group conducts rigorous due diligence on licence title as part of any review of prospective interest acquisitions. For licences held, the Group ensures compliance with all commitments and where commitment adherence is for whatever reason likely to be out of time or scope, extensions/waivers as required are obtained from relevant authorities. Identification of any such potential infringement of commitments is ensured through rigorous project and company procedures and controls.
42
Corporate Social Responsibility review

We aim to be a good corporate citizen, supporting our people and their communities, and minimising our environmental impact.
review of progress was completed in December 2010 and plans were agreed for 2011. These plans include a renewed focus on continuous improvement and on making sure that all staff are aware of key HSEC issues. At JKX, we believe in running operations at a local level wherever possible. Accordingly, a nominated individual has executive responsibility within each operating company for HSEC. These representatives are fully trained and experienced as well as being familiar with local culture, regulations and working practices. For example, for the Koshekhablskoye project we have recruited and trained a full team which is now delivering a high standard of HSEC management. To ensure Group-wide consistency, our operationally-based teams report not only to the general director of the local operating company but also liaise with the Group HSEC manager. Rigorously applying policies and standards We have robust processes in place to oversee our CSR commitment. Our aim is to comply with all local laws and regulations as a minimum and to exceed them where possible. We expect our partners to reach the same standards. Our policies and standards cover: Safety reporting and incident management. Exposure man hours. Occupational health provision and record keeping. Environmental reporting and incident management. Behavioural based safety programmes. Continuing Professional Development and implementation. Human resources practices, covering areas such as equal opportunities. Handling of charitable requests. Local community relations.
Reporting to local and UK authorities. Open and transparent We have an open and transparent culture, one that encourages people to report every incident, in order that we can learn from our experiences and improve our safety performance. If they prefer, workers are able to report incidents anonymously via post-boxes. Corporate CSR objectives Protect people by providing information and advice; promoting and assuring a goal-setting system of compliance. Influence stakeholder organisations to embrace high standards of HSEC and to recognise the social and economic benefits. Seek to optimise the use of resources to deliver our mission and vision, and enhance our reputation as a good corporate citizen. Develop new ways to establish and maintain an effective HSEC culture in a changing economy, so that all employers take their responsibilities seriously, the workforce is fully involved and risks are properly managed. Exemplify Oil and Gas sector best practice in managing our resources. Achieve higher levels of recognition and respect for HSEC as an integral part of a modern, competitive business. Continue to work with the business to prevent catastrophic failures in major hazard industries. Undertake and encourage research, and enforce the law where necessary.
The highlights of 2010 include: Improving our health and safety record, with a decrease in the AIFR (All Injury Frequency Rate) Working for 1,000,000 man-hours at Koshekhablskoye, Russia with no Lost Time Injuries (LTI) Working for 1,500,000 man-hours at PPC, Ukraine with no LTI Achieving ISO 14001 Environmental accreditation Maintaining OHSAS 18001 Health & Safety accreditation Improvement plan for our Carbon Disclosure Project reporting
CSR informs everything that we do Our people, the environment and the communities where we operate are the keys to our business. We manage our business with due regard to our stakeholders best interests, and are committed to being recognised as a good corporate citizen and neighbour. We strive to support our people at work as well as in their broader lives and also to minimise our impact on the environment. Corporate Social Responsibility (CSR) informs all areas of our operations and is led by the Chief Executive Officer. Our Health, Safety, Environment and Community (HSEC) manager reports directly to the CEO and has responsibility for creating a framework and maintaining the HSEC Management System for the management of the Groups non-financial impacts. The Board is provided with quarterly updates relating to the major CSR issues. A management review of all HSEC systems is carried out every year: a full Board-level
43 043
Targets 2010
Reduce the AIFR by 5%. Meet or exceed the HSEC performance benchmark set by the Association of Oil and Gas Producers (OGP). Prepare PPC for OHSAS 18001 accreditation. Prepare JKX for ISO 14001 accreditation. Maintain OHSAS 18001 accreditation. Complete and implement the Carbon Management Plan.
Achievements 2010
Achieved. The AIFR for 2010 was 0.62 compared to 1.5 in 2009. Achieved. The OGP benchmark was 3.4. Achieved, with the first assessment due in Q1 of 2011. Achieved. Achieved. Achieved. Our reporting standards were assessed by the Carbon Disclosure Project. In progress. In progress.
Targets 2011
Reduce the AIFR to 0.4. Meet or exceed the benchmark set by the OGP for 2011. Complete OHSAS 18001 accreditation for PPC. Maintain and enhance ISO 14001 accreditation. Maintain and enhance OHSAS 18001 accreditation. Carry out new baseline study in 2011 and update the Carbon Management Plan to include new projects. Continue to improve the systems and increase awareness and training. Continue to improve and identify opportunities for improvement in competence and training, with particular emphasis on the Koshekhablskoye and the Ukrainian LPG projects. Continue to improve and identify opportunities for improvement in Community Liaison Plans with a particular focus on Koshekhablskoye. This is an ongoing initiative for 2011 and beyond, as new contractors or processes are introduced. This is an ongoing initiative for 2011 and beyond as new contractors or processes are introduced. This area is to be managed carefully during precommissioning and start-up at Koshekhablskoye. This is an ongoing initiative for 2011 and beyond as new processes are introduced, mainly on the Koshekhablskoye and the Ukrainian LPG projects. This will continue to be monitored and continuously improved throughout 2011 and beyond. Continually improve the contribution of local HSEC staff.
Introduce BBS/Health monitoring /COSHH initiatives. Identify opportunities to improve training and competence assurance.
Identify opportunities to improve consultation and Community Liaison Plans. Seek opportunities for improved contractor selection and management support. Improve contractor risk based approach to HSEC Management.
In progress, with high levels of communication established at Koshekhablskoye. In progress.
Auditing and sampling have been carried out. A programme of management site visits and training plans have improved contractor efforts in 2010. Achieved, with greater participation from local staff in the HAZOP process during 2010. Achieved, following discussions with operational locations and the development of plans to identify reductions for 2010. Achieved, with improvements to risk assessment techniques matched by better dissemination of information and consultation between locations by local HSEC staff. Achieved.
Identify opportunities for improved Risk Management and Assessment activities.
Examine opportunities to improve waste disposal and recycling.
Identify opportunities to improve the contribution of local HSEC staff.
Identify opportunities for improved hazard, near-miss and incident reporting. Identify opportunities to improve Emergency Response plans.
Continue to improve reporting, using workshops, site campaigns, training sessions, tool-box talks and briefings. Further improve plans. We have already reviewed the plans for Hungary, and enhancements are planned for Russia in 2011.
Achieved, with improved emergency response arrangements at PPC backed by closer collaboration with the Ministry of Emergency Response in the Ukraine.
44
CSR case study Koshekhablskoye, Russia
Health and safety

We will never compromise the safety of our people. The project poses signicant challenges to our workforce, including the presence of Hydrogen Sulphide (H2S). We enhanced the level of protection from H2S during 2010 and worked more than 1 million man-hours without a Lost Time Injury.
Environment
Waste management is a challenge in an area that has limited infrastructure for safe waste disposal. In addition to introducing a reduce, reuse, recycle scheme at the project, we are utilising temporary options such as storage while working with local industry to create a permanent solution to the issue of waste.
Employment
We are bringing valuable jobs to the region. The current number of YGE employees is 155, which is expected to peak at over 250. The project is also generating employment for contractors and supply chain vendors: the number varies but could be up to 600 support and associated personnel.
Community
We are keen to be good neighbours and to play our part in the local community whenever possible. In 2010, we were pleased to provide nancial and practical support to the town of Maikops Harvest Festival celebration, which is an important event in the lives of the community.
At Koshekhablskoye, some 1,500km south of Moscow, we are building a gas plant which has major implications for our four CSR pillars: health and safety, employment, community and the environment. A top priority for us is to deliver the project to its full potential while also ensuring that it provides benefits to the local people and their community. The nearest town, Maikop, is the capital of the Adygea Republic and is recognised as one of the most attractive cities in the Northern
Caucasus. However, it is also an area of above average unemployment. The local people need jobs but they also need them to be good, long-term and well-paid jobs provided within an effective HSEC framework. Our goal is to be a net contributor to the local community and to build a reputation as an important and positive influence. We can help drive social and economic development in local communities through the use of our resources and through our supply chain network. We used
extensive consultation, which included hosting a public meeting, to gather opinions and provide the community with information on the project. In particular, we explained how we can contribute to initiatives and events which support local companies and employment, develop skills and encourage entrepreneurship. We also carried out an Environmental Impact Assessment (EIA) with the Volgograd Design Institute. Our activities will result in higher-risk environmental
45 045
challenges, particularly in terms of water use and waste management. To address this, we are implementing systems to ensure minimal water use, minimal waste generation and that we have a clear baseline against which to measure our performance. An Oil Spill Contingency Plan (OSCP) has been prepared to ensure rapid and appropriate action in the event of a spill. Oil spill contingency training is planned for 2011 for YGE employees. Construction at Koshekhablskoye is continuing at pace, with first
commercial gas production on target for 2011. YGE, our operating company, currently employs 155 people, with this set to rise to over 250. The number of contractors and supply chain vendors will vary but we expect it to peak at up to 600 support and associated personnel. Their health and safety at work is very important to us. The Koshekhablskoye project poses a number of HSEC challenges, notably through the presence of Hydrogen Sulphide (H2S), an extremely dangerous substance
which can cause fatalities if not addressed correctly. Although H2S controls were already in place to meet legal requirements, the JKX Technical Director and the YGE Managing Director demanded greater protection for the workforce. We have now carried out a full review and introduced enhanced precautions covering such issues as training, additional H2S monitoring, enhanced drills and evacuation plans, and emergency response plans.
46
Health and safety
We work on projects and in environments that can be challenging and sometimes hazardous by nature. Our priority is to ensure that all JKX, subsidiary and contractor employees work in a safe environment, where effective systems of work are maintained and appropriate procedures and processes are in place. Continuous improvement We are committed to continuously improving our health and safety performance. During 2010 we again maintained our progress, with a significant decrease in our AIFR (All Injury Frequency Rate) figures from 1.5 in 2009 to 0.62 in 2010. The AIFR figures represent the health and safety incidents per 200,000 man-hours. To put our achievement into context, the industry benchmark for 2010 was 3.4. Although this is a good performance, we remain alert to potential issues at all times. Health and safety is a never-ending journey, not a destination. We work hard to ensure that suppliers and others meet the high standards we set ourselves, and during the year our team completed the fabrication of the new Russian gas processing facility without a Lost Time Injury. The last 12 months have seen us influence operating standards on our joint venture in Hungary, and also working with the Volgograd Design Institute to monitor the designs being produced for JKX plant. In occupational health, the drug and alcohol policy which was successfully introduced in Bulgaria has been rolled-out right across the Group.
Areas of focus
Awareness, competence and behaviours.
Policies
We select our people with care, train them in key safety-related skills and competences and regularly assess their performance. We rely on suppliers, contractors and partners to carry out our work safely and effectively. We ensure that they are aligned with our HSEC expectations and we monitor their performance against these expectations. We assess, manage and communicate the hazards associated with our products, communicating topical information to help users handle them in a safe and environmentallyresponsible manner.
Suppliers, contractors and partners in the supply chain.
Customers and products.
All Injury Frequency Rate 2010 (AIFR)
1.5 1.2 0.9 0.6 0.3

JKX LTI Frequency 2010 = 0 JKX AIFR 2010 = 0.62
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
AIFR Target 2010
AIFR 2010
LTI Target 2010
LTI Frequency 2010
All Injury Frequency Rate (AIFR) 20012010

5
5 4 3 2 1 0 2001 2 1 1 0 2002 2003 2004 2005 2006 2
1.5 1 0 2007 2008 2009 2010 0.62
47 047
Risk management We were proud to maintain our OHSAS 18001 Health & Safety accreditation during 2010. This is an internationally-recognised specification for occupational health and safety management systems, and our accreditation will help us meet our health and safety targets. The accreditation process demands regular and comprehensive management reviews, and we carried out such a review in 2010 which gave us the assurance that we have the appropriate systems and processes in place. As drilling operations can pose significant risk, we again improved the risk management aspects of these activities in 2010. We utilise the skills and knowledge of British supervisors, which has enabled us to define and manage risk more clearly. Our policy is to select these supervisors for their expertise as well as for their familiarity with the regions where we operate. They understand local working practices and their presence will significantly enhance our ability to educate and train our contract drillers. In both Russia and Ukraine, we continued to carry out risk management studies using our proven Hazard and Operability (HAZOP), Hazard Identification (HAZID) and As Low as Reasonably Practical (ALARP) methodologies.
We have developed an integrated assessment process for the safety assurance of development proposals which are potentially hazardous. The integrated hazardsrelated assessment process comprises: Preliminary hazard analysis to support the development application by demonstrating that risk levels do not preclude approval. A fire, safety and explosion study, emergency response plan and an updated hazard analysis undertaken during the design phase of the project. A construction safety study carried out to ensure facility safety during construction and commissioning, particularly when there is interaction with existing operations. Implementation of a safety management system to give safety assurance during ongoing operation. Regular independent hazard audits to verify the integrity of the safety systems and that the facility is being operated in accordance with its hazards-related conditions of consent.
48
Environment
Objectives
Reduce combustion loading and off-load emissions.
Achievements
Emissions reduction in 2010 was achieved through the procurement of more environmentally friendly compressors, new plant and the replacement of older equipment, together with more efficient methods of transport management including journey management and selection of vehicles. We continuously seek new initiatives to increase the use of trucks that use clean diesel or liquefied natural gas, and use best-in-class technology to optimise freight movements and make shorter trips. We have instituted a no-idle policy at all facilities to reduce air pollution, greenhouse gas emissions and improve fuel efficiency. While these programmes are a good start, we are committed to reducing our global carbon footprint. Continuously monitored. Achieved in 2010. Continuously monitored. Achieved in 2010. Continuously monitored. Achieved in 2010. Continuously monitored. Achieved a small reduction in 2010. Continuously monitored. By following the same rules and working together towards consistent goals, we can have a more meaningful and quicker impact on greenhouse gas reductions and improve our communities.
No.
Company
% disclosure scope
Zero discharge of chemicals to land or surface waters. Restored habitat and hydrological regime to pre-construction state as soon as reasonably practical. No loss of containment of product. Reduce waste to landfill. Consulting with local communities, NGOs and government agencies.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 20
Shell Premier Oil BG AMEC BP Dana Wellstream Holdings Cairn Energy Fortune Oil JKX Petrofac Hunting Tullow Oil Wood Group SOCO Salamander Energy Melrose Energy Lamprell Heritage
89 74 71 69 67 61 49 41 38 37 36 28 27 0 0 0 0 0 0
Source: Carbon Disclosure Project, FTSE 350 report info request February 2010
We work hard to protect our people, their communities and also the environment, both close to our projects and in the wider world. We were very proud to achieve ISO 14001 Environmental accreditation in 2010. ISO 14001 is the principal management system standard which specifies the requirements for the formulation and maintenance of an Environmental Management System. The environmental performance of our operations has implications for our relationships with our
people, their communities, partner organisations, the media, governments, investors and other stakeholders. In 2010, we again made good progress. In particular, we were pleased to continue the ongoing work with The Carbon Disclosure Project on our Carbon Management Plan. Although our performance was good for 2010, with an increase in production, we started a further, more detailed baseline study to identify those areas that could help us drive continuous improvement.
We have committed to reducing emissions by 12.5%, from 2008 to 2012, in line with EU targets. Having initiated a reduction programme in 2009, we are well on our way to achieving this target. With significant construction planned for 2010, our risk assessment processes identified the possibility that emissions would increase during the year. In reality, despite the increase in production and construction activity, emissions remained within expected levels. We are confident that 2011 will see a controlled reduction. Looking ahead, the LPG Plant which will soon be operational in the Ukraine will continue to help us reduce emissions.
49 049
Employment
Community
We want to be recognised as a Company where talented people of all disciplines, from managers and engineers to on-site operatives, can do their best work. At the year-end, the total number of employees was 751. In Russia, YGE employs 155 people, although this number is expected to increase to over 250. In the Ukraine, we employ 578 personnel in the Poltava Office and at the production site. The London office has a staff of 18. The number of contractors and supply chain vendors can vary from time to time and can peak at approximately 600 support and associated personnel. As we operate across a number of different countries, cultures and environments, we have a decentralised management structure, with employment policies designed to suit the needs of individual locations. However, each company complies with certain key principles, including: Providing safe and healthy working conditions for all employees. Creating an open, challenging, rewarding and participative environment through selection, development and training, the full talents, skills and abilities of all employees. Communicating the fullest possible understanding of the goals, directions and performance of the business. Providing compensation and benefits which reflect good current local practices and which reward collective and individual abilities and personal performance. Providing a working environment, development opportunities and incentives to promote team effort and commitment to the performance of JKX and subsidiary companies. Our Group-wide values of Integrity, Teamwork, Excellence and Respect, are essential in helping to guide our employees in the way that they behave.
We are an integral part of the communities in which we operate and are determined to play our part through financial donations as well as practical support. All our operations are managed with local interests in mind, thereby increasing public confidence in the integrity of our assets and underlining our commitment to HSEC performance. In 2009 we introduced a structured system for stakeholder dialogue and in 2010 we made further progress, engaging with stakeholders in key operational locations. The outcome of events such as the Town Hall meetings in Koshekhablskoye and Maikop, in Russia, has influenced the way in which we now manage carbon emissions. In practical terms, our community support frequently involves using the Companys plant and machinery as well as manpower to provide much-needed assistance. For example, our plant and equipment was used to clear snow in Koshekhablskoye. Human Rights JKX supports and respects the protection of internationally recognised human rights in our areas of operation. The policy is applicable to all our operations.
We uphold and promote human rights within our sphere of influence which includes, but is not limited to, employees, contractors, local communities, suppliers, and business partners. We also actively engage with key stakeholders to address the rights of the communities surrounding our operations. Charitable donations and volunteering Each operation has a limited budget for good causes and we handle charitable donations at a local level. In 2010 our operations budget was $329,000. Locally, donations from the Group amounted to: Ukraine $99,000; Russia $188,000; UK $30,000; and Georgia $3,000. Subject to management approval, staff may be given additional time off in order to join in certain charityrelated activities.
50
Directors Reports
The Directors
Sir Ian Prosser Chairman (67) Sir Ian was Chairman and Chief Executive of Bass plc and latterly Chairman of InterContinental Hotels until 2003. He was formerly NonExecutive Deputy Chairman of BP plc, having joined as a Non-Executive Director in 1997, and was also Senior Independent Director of GlaxoSmithKline, a Non-Executive of The Boots Company and of Lloyds TSB. He is Chairman of The Navy Army & Air Force Institutes, Chairman of BP Pension Trustees Ltd and a NonExecutive Director of Sara Lee Corporation.
Paul Davies Chief Executive Officer (61) Dr Paul Davies joined the Board on 30th January 1998. He has been active in the oil and gas industry since 1976 and was the co-founder of the JP Kenny Group of Companies which traded internationally in oil and gas engineering, oil and gas exploration and production, subsea survey and inspection, and shipping. He has extensive experience of business in the former Soviet Union and was a founder of JP Kenny Exploration & Production Ltd, the forerunner of JKX Oil & Gas plc. He holds an Honours degree in Civil Engineering and PhD in structural mechanics from University College London.
Bruce Burrows Finance Director (52) Bruce Burrows was appointed Finance Director on 31st December 1997. He joined JKX from Ernst & Young where he held positions in the Wellington (New Zealand) and London offices. He holds a BSc Honours degree from Canterbury University (New Zealand), a Diploma in Accounting from Victoria University (New Zealand) and is a member of the Institute of Chartered Accountants of New Zealand. Bruce is also Company Secretary. Bruce is a Non-Executive Director of European Goldfields, a TSX and AIM listed mining company.
Martin Miller Technical Director (63) Martin Miller joined JKX in 1994 as Chief Geologist and has held a number of senior positions in the Company, including directing JKXs Georgian operations. Most recently, he has assumed responsibility for JKXs ventures in Russia and Ukraine. He is a Chartered Engineer and has over 30 years of experience in the oil and gas industry, including senior positions with Mobil and BP.
51 051
Peter Dixon Commercial Director (56) Peter Dixon joined the Board on 1st July 2007 with 27 years of broad experience in the upstream oil and gas industry in the UK, Middle East, Africa and the former Soviet Union. Peter graduated in Physics and Geology from Sunderland University and spent 15 years working in geophysical and management roles within the SSL and Schlumberger group companies. Since joining JKX in 1995, Peter has occupied a number of senior positions within the group including Asset Manager Ukraine, Group Commercial Executive and General Director of Poltava Petroleum Company.
Lord Oxford Non-Executive Director (58) Earl of Oxford & Asquith, considered by the Board to be the senior independent Non-Executive Director, joined the Foreign Office in 1980 and was the Counsellor at the British Embassy in Kiev from 1992 until his resignation in 1997 to pursue private business interests. He is a member of the Remuneration and Nominations Committees.
Dipesh Shah Non-Executive Director (57) Dipesh Shah joined the Board with over 30 years experience of the oil and gas sector. He was Chief Executive of several businesses in BP and a member of the BP Group Leadership. He also served as Chief Executive of the UK Atomic Energy Authority, Chairman of Viridian Group plc, Chairman of HG Capital Renewable Power Partners LLP, and as a NonExecutive Director of Babcock International Group plc and Lloyds of London. Mr. Shah is currently a NonExecutive Director at Thames Water and Kemble Water Group of Companies, The Crown Estate, and the EU Marguerite Fund for Energy, Climate Change and Transport; Trustee of the British Youth Opera; Governor of Merchant Taylors School, and Chairman of ANHD International Advisory Services Ltd. He is a graduate of the Universities of London and Warwick and of the Harvard Business School management programme. Mr Shah was awarded an OBE in the 2007 New Year Honours List. He is Chairman of the Remuneration Committee and a member of the Audit Committee.
Nigel Moore Non-Executive Director (67) Nigel Moore is a NonExecutive Director and Chairman of the audit committee of Hochschild Mining plc, Vitec Group plc and Ascent Resources plc. He is also NonExecutive Chairman of TEG Group plc. He was formally a London based partner of Ernst & Young where he was responsible for the Ernst & Young operations in Russia and Eastern Europe for several years. Nigel is chairman of the Audit Committee and a member of the Remuneration and Nomination Committees.
Michel-Marc Delcommune Non-Executive Director (63) Michel-Marc Delcommune spent over 25 years with PetroFina Group where he held a number of prominent positions. In 1999 Mr Delcommune joined MOL Group. He was MOL Groups Chief Financial Officer and went on to serve as Group Chief Strategy Officer between 2004 and 2006. He retired from executive duties in 2006 but remains as Senior Adviser to MOLs Executive Chairman and is a Non-Executive Director of TVK, a MOL Group petrochemical company listed on the Budapest Stock Exchange. He is also Non-Executive Director of Slovnaft, a refining company listed on the Bratislava Stock Exchange. Mr Delcommune is a graduate of chemical engineering from the University of Liege and holds an MBA from Cornell. He is a member of the Audit Committee and joined the Remuneration Committee on 1st March 2010.
52
Directors Reports
Directors report
The Directors submit their report and the audited accounts for the year ended 31st December 2010. Results and dividends The result for the year is a profit before tax of $20.8m (2009: $119.3m). The profit for the year after tax is $21.2m (2009: $85.3m). Following payment of the interim dividend, details of which are set out in note 24 of the accounts, the Directors recommend a final dividend of 2.6p per share for the year ended 31st December 2010 to be paid on 24th June 2011 to shareholders on the register on 6th May 2011. This payment will bring the total dividend in respect of 2010 to 5.0p per share. A review of major financial developments during the year is contained in the Financial Review. Going concern The Directors have reviewed the Groups forecast cashflows for the next twelve months and through to the end of 2012. Capital and operating costs are based on approved budgets in the case of 2011 and current development plans in the case of 2012. Having considered the review, and the Groups ability to change the timing and scale of capital expenditure if required, and to draw up to $15m on a credit facility in Ukraine, the Directors have a reasonable expectation that the Company and Group have adequate resources to continue for the foreseeable future. The going concern basis for the accounts has therefore continued to be adopted. Activities The principal activities of the Group are oil and gas exploration, appraisal development and production, conducted through subsidiary undertakings. Business Review Details of the Companys 2010 operations are included in the Chairmans statement, the Chief Executives statement and Operational Review. A review of financial performance is included on pages 34 to 37 and the key performance indicators for the business included on pages 8 and 9 and incorporated by reference into this report. Annual General Meeting The Annual General Meeting of the Company will be held at 11.00am on 7th June 2011 at the premises of the Institute of Directors, 116123 Pall Mall, London SW1Y 5ED. The business for the meeting includes 10 resolutions as Ordinary Business and 3 special resolutions proposed as Special Business. Included as Ordinary Business are resolutions to elect a new Chairman and re-elect four Directors. After twelve years of distinguished service, Lord Fraser announced his intention in March 2010 to step down, and Sir Ian Prosser is proposed for election as Chairman to replace Lord Fraser and Lord Oxford is proposed for re-election given they have both served on the Board for more than nine years. [The Board has conducted a rigorous review and concluded that Rt Hon Lord Fraser of Carmyllie QC and Lord Oxford remain independent]. As was reported in the 2009 Report and Accounts, in the spirit of the principles of Corporate Governance contained in the Combined Code of Corporate Governance appended to the Listing Rules of the Financial Services Authority, the Board believes it appropriate to seek annual re-election of all NonExecutive Directors who serve on the Board for more than nine years. Nigel Moore, Martin Miller and Peter Dixon retire on rotation in accordance with the Articles of Association and are seeking re-election. Included in Special Business there are three special resolutions: (1) Purchase of own shares: The Directors recommend that the Company seeks authorisation at the Annual General Meeting to renew the authority for the Company to make on-market purchases of ordinary shares in the capital of the Company, such authority to expire on the earlier of 15 months from the date of the passing of the resolution and the conclusion of the next Annual General Meeting (if sooner). The minimum price payable per share under the proposed authority in this resolution is the nominal amount of each share (currently 10p) and the maximum price (exclusive of expenses) is 5% above the average market price per share for the five business days immediately preceding any purchase. If granted, the authority will allow the Company to take advantage, if appropriate, of stock market conditions to purchase its own shares. In assessing whether to purchase the Companys own shares, the Directors will take into account all relevant factors including the effect on earnings per share and assets per share ratios and other benefits to Shareholders. Any shares purchased would be held as treasury shares. (2) The Directors be empowered pursuant to section 570 of the Act to allot equity securities for cash as if section 561 (1) of the Act did not apply to the allotment up to an aggregate nominal value of 860,352 such power to expire on the date falling 15 months from the date of passing of the resolution unless previously revoked, varied or extended by the Company in General Meeting. (3) To allow a general meeting other than an annual general meeting to be called on not less than 14 clear days notice.
53 053
Exploration and production interests In the opinion of the Directors, the Groups exploration and production interests have a value in excess of the balance sheet figure. Expenditure for the year is detailed in note 5 to the financial statements. Political and charitable contributions The Group made charitable contributions of $684,000 most of which was for local educational, health and village infrastructure initiatives in Ukraine and Russia. The Group did not make any political contributions. Financial Instruments The Groups financial risk management objectives and policies are discussed in the Financial Review on pages 37 to 41 and in note 8 of the accounts. Disabled employees The Group gives full consideration to applications for employment from disabled persons where the requirements of the job can be adequately fulfilled by such persons. Should an existing employee become disabled, it is in the Groups policy wherever practicable to provide continuing employment under normal terms and conditions and to provide training and career development and promotion. Shares in JKX Oil & Gas plc Details of movements in share capital during the year are set out in note 11 to the financial statements.
Treasury Shares In 2010 the Company did not purchase in the market any of its own ordinary 10p shares, to be held as Treasury Shares. At 31st December 2010, 402,771 shares continued to be held as Treasury Shares representing 0.23% of the shares then in issue. Directors and their interests The Directors and their interests at the year end in the shares of the Company, all beneficially held, were as shown in table below. Details of Directors remuneration and share options are shown in the Remuneration Report on pages 60 to 68. There were no contracts existing during or at the end of the year in which a Director was, or is, materially interested. Significant contracts and transparency directive information The Group does not have any contracts which on their own are essential to the business nor does it have any significant agreements that would affect, alter or terminate upon a change of control of the Company following a takeover bid. There are no significant restrictions on the transfer of securities. The share capital structure is listed in note 11 in the notes to the financial statements and the significant holdings are listed below.
1st January 2010 Ordinary Share Numbers
31st December 2010 Ordinary Share Numbers
31st March 2011 Ordinary Share Numbers
Lord Fraser (retired 31/3/11) Lord Oxford Nigel Moore M-M Delcommune D Shah Dr P Davies
1
75,000 94,000 14,000 0 0 3,631,272 209,396 190,000 163,179 0
75,000 94,000 14,000 0 0 3,632,272 181,896 190,000 163,179 0
75,000 94,000 14,000 0 0 3,632,272 181,896 190,000 163,179 0
B J Burrows M Miller P Dixon Sir Ian Prosser (appointed 1/3/11)
1. Dr P Davies interest is partly indirect with 1,975,000 ordinary shares registered in the name of Investec Trust ITCL2513 and held in trust, the beneficiary of which is the family of Dr P Davies. Of the remaining ordinary shares 1,000 are held by Mr D Davies, the son of Dr P Davies with the balance held directly by Dr P Davies.
54
Directors Reports
Substantial shareholders At 31st March 2011, the Company had received notification from the following institutions of interests in excess of 3% of the total number of voting rights of the Company (see below).
Substantial shareholders Ralkon Commercial Ltd Glengary Overseas Ltd Interneft Ltd Aberforth Partners JSC Naftogaz of Ukraine Blackrock Investment Management (UK) Standard Life Investments
Number of shares % of total voting rights
46,432,027 19,656,344 11,368,460 9,977,849 9,957,214 7,318,052 5,186,780
27.05% 11.45% 6.62% 5.81% 5.80% 4.26% 3.02%
Environment The Group is aware of its responsibilities to protect the environment and will ensure that its operations at least meet statutory requirements and regulations, and are carried out with minimal environmental impact. Refer to the Corporate Responsibility report on page 48 for a more detailed description of the Companys approach and initiatives and targets with respect to the environment. Corporate governance The Companys statement on corporate governance can be found in the corporate governance report on pages 55 to 59 of the annual report. The corporate governance report forms part of this Directors reports and is incorporated into it by cross reference. Post balance sheet events Post balance sheet events are discussed in note 30 to the accounts. Creditor payment policy and practice It is the Companys policy that payments to suppliers are made in accordance with those terms and conditions agreed between the Company and its suppliers, providing that all trading terms and conditions have been complied with. The Company has no trade creditors.
By order of the Board B J Burrows Secretary 19th April 2011
55 055
Corporate governance
Statement by the Directors on compliance with the Combined Code The Company is committed to the principles of Corporate Governance contained in the Combined Code of Corporate Governance that is appended to the Listing Rules of the Financial Services Authority and for which the Board is accountable to shareholders. The Board The Board, which is responsible to shareholders for leading, developing and protecting the interests of the Company, comprises five Non-Executive Directors and four Executive Directors. Details are provided on pages 50 and 51. A clear division of responsibilities at the head of the Company is demonstrated in the separation of positions of the Non-Executive Chairman, Sir Ian Prosser, and the Chief Executive Officer, Dr Paul Davies. The NonExecutive Directors are of varied backgrounds and experience and the Board considers them to exercise independent and objective judgment. Matters reserved specifically for the Board are clearly laid down. The Board: sets and monitors strategy; reviews business plans, trading performance and overhead costs; approves major capital investment projects; examines acquisition opportunities, divestment possibilities and significant financial and operational issues; and reviews and approves the Companys financial statements and control and risk management systems. In executing these responsibilities the Board relies on the receipt of accurate, timely and clear information, the dissemination of which is the responsibility of the Chairman. All other authorities are delegated by the Board, supported by appropriate controls, to the Chief Executive Officer on behalf of senior management. Evaluation of the performance of Directors, the Board and its committees is undertaken as follows: the Executive Directors are evaluated by the Non-Executive
Board Meetings Lord Fraser Lord Oxford Nigel Moore Michel-Marc Delcommune Dipesh Shah Paul Davies Bruce Burrows Martin Miller Peter Dixon
Directors in informal session; the Chairman is evaluated by the other Non-Executive Directors, led by the Senior Independent Non-Executive Director, taking into account the views of the Executive Directors; the Committees are evaluated by the senior Independent Non-Executive Director along with the Chief Executive, taking into account the views of the other Executive Directors; the Non-Executive Directors, excluding the Chairman, are evaluated by the Chairman and Chief Executive, taking into account the views of the other Executive Directors; and the Board as a whole evaluates its own performance by consolidating and discussing the reviews set out above. Lord Oxford is the Senior Independent Non-Executive Director and, at the Boards request, maintains a special interest in the strategic issues in PPC, supporting the JKX Executive Directors and the PPC senior management as required. All Directors have access to the services of the Company Secretary and may, if needed, obtain independent professional advice, at the Companys expense, in the execution of their duties. In addition to Board meetings, the Non-Executive Directors meet in private session, both as a group and without the Chairman, at least once annually. It is confirmed that all the Non-Executive Directors have sufficient time to fulfil their commitments to the Company and that no Executive Director holds a Non-Executive Directorship, nor Chairmanship, in a FTSE 100 company. Attendance at meetings The attendance of Directors at Board Meetings and Audit and Remuneration meetings during 2010 was as detailed in the tables below and overleaf.
11.01.10
03.03.10
25.03.10
25.08.10
17.12.10
phone
56
Directors Reports
Corporate governance continued
Audit Committee Meetings Nigel Moore Michel-Marc Delcommune Dipesh Shah Remuneration Committee Meetings Dipesh Shah Lord Oxford Nigel Moore Michel-Marc Delcommune
11.01.10
25.03.10
25.08.10
17.12.10

08.02.10

06.05.10
phone
Compliance Throughout the year ended 31st December 2010, the Company has maintained policies and procedures that ensured compliance with the code provisions set out in Section 1 of the Combined Code and the related Financial Services Authority Listing Rule disclosure requirements. The Listing Rules of the UK Listing Authority require that companies report on the extent to which they comply with the Principles of Good Governance and Code of Best Practice. The Board believes the Company has been in full compliance with the provisions set out in Section 1 of the Combined Code with the following exception: A.7.2 The terms of appointment of the Non-Executive Directors are set out in their service contracts, which for Sir Ian Prosser is dated 1st March 2011, for Lord Oxford is dated 1st January 2002, for Nigel Moore is dated 12th July 2007, and for MichelMarc Delcommune and Dipesh Shah are dated 1st June 2008 and include a termination notice of three months by either party. However, the service contracts are for an indefinite term, not a finite term, subject to re-election on an as required basis. The Board continues to believe this is appropriate given the company size, Non-Executive skill set, and evaluation of performance and independence on an ongoing basis with regards to Non-Executives. The Company continues to believe the unspecified term continues to be reasonable and the Non-Executive contracts remain unchanged in this regard. In considering that the Company is, other than as noted above, in full compliance, the Board notes that excluding the Chairman, independent Non-Executive Directors comprise 50% of the Board, given the Board also considers that the four other Non-Executive Directors are wholly independent. The Executive Directors have undertaken a review of the independence of each of the Non-Executive Directors and Chairman. The review addressed the
matters highlighted at Section A.3.1 of the Code, which could appear to affect a Directors judgment. One specific matter addressed was that Lord Fraser and Lord Oxford had served on the Board for more than nine years (the Executive Directors however noted Lord Frasers stated intention in March 2010 to step down as Chairman). Following the review, the Executive Directors do not consider that this matter in any way influences the independent judgment of Lord Fraser or Lord Oxford. Accordingly the Executive Directors believe each of the Non-Executive Directors and Chairman to be independent in accordance with Section A 3.1 of the Code both during the period under review when Lord Fraser was Chairman, and subsequently, following the appointment on 1st March 2011 of Sir Ian Prosser as Chairman. Audit Committee The Audit Committee currently comprises Nigel Moore, Dipesh Shah and Michel-Marc Delcommune. The Committee is chaired by Mr Moore, who as a former audit partner with Ernst & Young LLP possesses recent and relevant financial experience. He also chairs the Audit Committee of four other UK listed companies, and maintains a regular pattern of attendance at relevant seminars and courses. The Audit Committee, which has Terms of Reference agreed by the Board and available to shareholders on request, aims to meet at least three times a year as a combination of formal meetings, site visits and audit closing meetings (attended by the Chairman) for operating subsidiaries. The Committee: reviews the Companys accounting policies; monitors the integrity of the financial statements of the Company and any announcements relating to the Companys financial performance, reviewing significant financial reporting judgements contained in them; reviews the Companys internal financial controls; reviews internal control and risk management systems and compliance procedures; reports to the Board any matters upon which it considers actions or improvement are required, with associated
57 057
recommendations as to steps to be taken; and makes recommendations to the Board, for it to put to shareholders for their approval in general meeting, in relation to the appointment, re-appointment and removal of the external auditor and to approve the remuneration and terms of engagement of the external auditor. During 2010 the Committee met four times with each Committee member attending all meetings. Meetings are attended, by invitation, by the Chief Executive Officer and the Finance Director. The Audit Committee reviews each of the Companys subsidiaries, interests and activities at least once a year. Site visits to significant operations are also undertaken by Committee members on a frequent basis. The Audit Committee maintains an objective and professional relationship with the Companys auditors, PricewaterhouseCoopers LLP, who have been auditors to the Group since 2006, and meets in private session with them on a periodic basis. From time to time, the auditor is requested to perform non-audit engagements for the Group. In such instances the continued objectivity and independence of the auditors in their capacity of auditor is an objective of the Group. To meet this objective the Audit Committee is delegated the role of vetting the appointment of the auditor on specific engagements including considerations of materiality and, where necessary, requiring a competitive tender for such work. The Company promotes a culture of openness and encourages staff to raise any concerns of possible improprieties in matters of financial reporting or other matters, if necessary in confidence. The Audit Committee has reviewed arrangements for such concerns to be raised, investigated and if necessary followed up. The Audit Committee has reviewed the UK Corporate Governance Code, specifically Section C that addresses audit committee aspects, and considers that it complies with all the provisions identified apart from the provision concerning the need to have a dedicated internal audit function, which is not established for the reasons listed below. Areas of non-compliance in addition to Section C are listed above. Remuneration Committee The Remuneration Committee currently comprises the three Non-Executive Directors and is chaired by Dipesh Shah. The Chief Executive Officer attends meetings by invitation. The Remuneration Committee, which has terms of reference agreed by the Board and available to shareholders on request, meets at least twice a year, to assist the Board in determining the remuneration arrangements and contracts of the Directors and senior employees.
During 2010 the Remuneration Committee met twice with three members attending the first meeting and the full four members attending the second. The Remuneration Committee employs the services of Kepler as remuneration consultants on an as required basis. Kepler have no other connection with the Company. No Director is involved in deciding his own remuneration. The report of the Directors remuneration, which involves details of the Directors interest in options together with information on service contracts, is set out on pages 60 to 68. The Remuneration Committee has reviewed the UK Corporate Governance Code, specifically Section B that addresses the level, make up and procedural aspects of remuneration. The Remuneration Committee considers that it complies with all the provisions and practices identified. Nomination Committee The members of the Nomination Committee are Sir Ian Prosser as Chairman, (who replaced Lord Fraser who was Chairman during the period), Lord Oxford and Mr Nigel Moore. The Nomination Committee did not meet formally in 2010 although the Committees members had a number of informal discussions to discuss the search for a replacement Chairman following Lord Frasers announced intention on 30th March 2010 to stand down. Separate to the Nomination Committee, the Board discusses the skill set and experience of the individual Board members, the need for additional appointments, succession planning and the need for progressive refreshing of the Board. The most recent comprehensive review was undertaken in 2005. Internal control The Board is responsible for identifying and evaluating the major business risks faced by the Company and for determining and monitoring the appropriate course of action to manage these risks. The Audit Committee monitors the integrity of the financial statements and announcements, reviews the Companys internal control processes and risk management systems and reports its conclusions to the Board. The Board regularly conducts reviews, and has reviewed, for the year under review and up to the date of approval of the 2010 Annual Report and Accounts, the effectiveness of the Companys systems of internal control and risk management. It has concluded that the Companys procedures, policies and systems are appropriate and suitable to enable the Board to safeguard shareholders investment and the Companys assets, and comply with Turnbull Guidance.
58
Directors Reports
Corporate governance continued
The Audit Committee annually reviews, and has reviewed for 2010, the need for a dedicated internal audit function. As noted above, it has recommended to the Board that, due to the scale and geographic distribution of the Companys licences and operating interests, the Board continues to be best served by using external specialist assistance on dedicated business and financial risk areas to supplement the Companys own risk analysis. The process and systems of internal control are designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The key procedures, which the Directors have established with a view to providing effective internal control, are described below. In addition, the Companys independent auditors present reports to the Audit Committee, which include any significant internal control matters that they have identified as part of their normal audit work. Business risk A process is in place to enable the Board to identify the major business, operational, financial and compliance risks faced by the Company and to determine the appropriate course of action to manage and monitor these risks. This process is regularly reviewed by the Audit Committee and reported to the Board as appropriate. The Company identifies and distinguishes High Profile Events, i.e. those risks that could have material effect on the Companys financial position or reputation, from other business risks that it assesses and considers to be acceptable for the Company to bear taking into account the industry and the markets in which it operates. The Audit Committee reviews annually the Companys subsidiaries and investments from a business, operational and financial risk perspective to ensure that the system of internal control and accountability is embedded in the operations of the Group. Members of the Audit Committee visit subsidiaries and operations on a regular basis. The Audit Committee considers that managers are conscious of the need to identify and assess risks in their operations and the effect of changes in the business environment, to respond quickly and appropriately and to report immediately any significant control failings and weaknesses that are identified, together with details of corrective action. Management structure The Board has overall responsibility for the Group and there is a formal schedule of matters specifically reserved for decision by the Board. Each executive has been given responsibility and is accountable for specific aspects of the Groups affairs.
Financial reporting The Company maintains an effective and reliable accounting and management information system. The Board receives a monthly report that monitors: actual performance against budget and forecast for oil and gas production; sales and costs; and provides the Board with information on issues including debtors, the cash position, cashflow forecasting and the financial implications of key sensitivities including changes in commodity prices and exchange rates. The Company also maintains an effective and reliable suite of policies, procedures and controls in preparing consolidated accounts. These controls include rigorous review of the process and output, and full IT support and review to ensure accounting tools and systems are robust. Budgetary process Each year the Board approves the annual budget with key risk areas identified. Performance is monitored and relevant action taken throughout the year through the monthly reporting to the Board of variances from the budget, updated forecasts for the year together with information on the key risk areas. Corporate accounting and procedures manual Responsibility levels are communicated throughout the Group as part of the corporate accounting and procedures manual. This sets out, inter alia, the general ethos of the Group, delegation of authority and authorisation levels, segregation of duties and control procedures together with accounting policies and procedures. The manual, which includes policies common to all Group companies along with company specific procedures and controls is reviewed regularly and updated as required. The application of internal financial control and operational procedures are reviewed during visits to the overseas offices by Head Office staff. Quality and integrity of personnel The integrity and competence of personnel is ensured through high recruitment standards and subsequent training courses. High quality personnel are seen as an essential part of the control environment. The ethical standards expected of staff are communicated through the corporate accounting and procedures manual. Investment appraisal Capital investment is regulated by the budgetary process and authorisation levels. For expenditure beyond specified levels, detailed written proposals have to be submitted to the Board. Capital expenditures are reviewed with major overruns in terms of cost and time being investigated. The internal financial control situation is reported to the Audit Committee, which has reviewed the effectiveness of the system of internal financial controls as it operated
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during the year and reported its conclusions to the Board. Communication with shareholders Extensive information about the Groups activities is provided in the Annual Report and Accounts and the Half-yearly Report which are sent to shareholders. There is a regular dialogue with institutional shareholders for which the Board as a whole has responsibility. Enquiries from individuals on matters relating to their shareholding and the business of the Group are welcomed and are dealt with in an informative and timely manner. Shareholders are encouraged to attend the Annual General Meeting to discuss the progress of the Group. Going concern After making enquiries and taking into consideration the Ukrainian and Russian business environments, as detailed in note 29 of the accounts, together with reviewing the Groups budget for 2011 and its medium term plans, the Directors have a reasonable expectation that the Group and Company have adequate resources to continue operations for the foreseeable future. The going concern basis for the accounts has therefore continued to be adopted.
By order of the Board Sir Ian Prosser Chairman 19th April 2011
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Remuneration
This report has been prepared in accordance with the relevant requirements of Schedule 992 to the Companies Act 2006, the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, the provisions of the Combined Code on Corporate Governance (the Combined Code) and the Listing Rules of the Financial Services Authority. As required by the regulations the report is approved by the Board of the Company and signed by the chairman of the remuneration committee on behalf of the Board. Unaudited information Remuneration Committee The Remuneration Committee (the Committee) operates under the delegated authority of the Board. The Committees primary role is to review, agree and approve, or as required under the Combined Code to make recommendations to the Board, on: the Companys remuneration policy for Executive Directors and senior management; service contracts of the Executive Directors; remuneration of the Executive Directors; remuneration of senior management identified by the Committee; and participation in, and operation of, the Companys long-term incentive plans. The full terms of reference are available from the Company Secretary.
Table 1: Independent Non-Executive Directors who served on the Remuneration Committee during 2010 Member Mr Dipesh Shah (Chairman) Lord Oxford Mr Nigel Moore Mr Michel-Marc Delcommune
From To
Mercer Limited provided information on remuneration levels at comparator oil and gas companies. Mercer provides no other services to the Group. The Companys legal advisers, Herbert Smith, provided assistance during the year with the formalisation of the revised long-term incentives schemes. The Committee met formally on two occasions during 2010 and the meeting attendance record is set out in the Corporate Governance report on page 56. The Committee also held a number of meetings with its advisers to finalise the changes to annual and long-term incentive schemes prior to submission to shareholders at the 2010 AGM. Committee activities during 2010 The Committees activities during 2010 were as follows: review and approval of payments to be made under the 2009 Annual Bonus Scheme; approval of executive salary levels for 2010; confirmation of lapse of share option awards made in 2007 due to failure to achieve vesting criteria in 2010; implementation of changes to annual and long-term incentive schemes approved by shareholders at the 2010 AGM, including award opportunities, performance conditions, targets and vesting schedules; review and approval of performance targets for the 2010 Annual Bonus Scheme; and review and approval of the allocation of and performance conditions applicable to performance shares and share option awards made in 2010. Remuneration policy The Companys overall approach to pay and benefits is to reward employees competitively, taking into account Company and individual performance, market value and competitive pressures in the independent oil and gas sector. The Company does not seek to maintain any strict market position but aims to ensure that total remuneration is set at an appropriate level relative to peer group comparator companies. The comparator companies are UK-based oil and gas companies which are primarily quoted on the London Stock Exchange or AIM. The Board believes that the performance-related elements of remuneration should form a significant proportion of the total remuneration package of Executive Directors. These are designed to align the interests of Executive Directors with those of shareholders and structured to provide significant incentives to perform at the highest level. The remuneration packages are prudently designed to attract, motivate and retain Directors of the calibre needed to maintain the Groups position in the market
1st June 2008 10th November 1997 26th June 2007 1st March 2010
to date to date to date to date
None of the Committee has any personal financial interest (other than as a shareholder as detailed on page 53, which given the level of holdings the Board accepts as not impairing independence), conflicts of interests arising from cross-directorships or day-to-day involvement in running JKX. No Director plays a part in any discussion regarding his own remuneration. Committee meetings are attended by the Chief Executive by invitation but he is not able to vote and is not present when his own remuneration arrangements are discussed. The Committee retains Kepler Associates (Kepler) as its independent executive remuneration advisers. Kepler provides no other services to the Group. During the year,
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and to reward them for enhancing value to shareholders. The balance of remuneration for Executive Directors is such that the majority of overall remuneration is subject to achieving performance conditions over both the short and long term. The pay mix for the Chief Executive (CEO) and the Finance Director (FD) is shown in the charts below, with incentive awards valued on a fair value basis. Under the scenario shown of on-target performance, around 45% of the package is performance-related for the CEO and FD.
Figure 2: Illustration of CEO and FD pay mix
CEO
Internal relativity The Committee is sensitive to the need to set Directors remuneration having regard to pay and conditions in the Group as a whole and is satisfied that the approach taken by the Company is fair and reasonable in light of current market practice and the best interests of shareholders. The Committee ensures that the incentive structure for Executive Directors does not raise environmental, social, governance or other operational risks by inadvertently motivating irresponsible behaviour. Basic salary An Executive Directors basic salary is determined by the Committee at the beginning of each year. In addition to basic salary, the Executive Directors receive certain benefits-in-kind, principally health cover. The individual salaries and benefits of Executive Directors are reviewed and adjusted taking into account individual performance and market factors, with reference to independent and objective research that provides up-to-date information on a comparator group of UK companies operating in the independent oil and gas sector. During its annual review of Executive Directors pay for the year commencing 1st January 2011, the Committee decided to award basic salary increases of 3% for the Chief Executive and for the other Executive Directors.
FD
0% Salary
20%
40% Pension
60% Annual Bonus
80%
100%
Performance Share Plan
Share Option Scheme
Table 3: Summary of the main elements of the remuneration package for 2011
Element Objective Policy Award level
Salary
To reflect individual performance and market factors To incentivise the achievement of short-term financial and strategic objectives To incentivise superior long-term financial and share price performance To incentivise superior TSR performance relative to peers
Reviewed annually on 1st January Paid in cash
Considered with reference to UK sector comparators and the Group as a whole Bonuses range from 0% to 100% of salary for CEO, 85% of salary for FD, 75% of salary for Commercial & Technical Directors 100% of salary for CEO and FD, 80% of salary for Commercial and Technical Directors. Between 30% and 70% of salary for senior managers 100% of salary for CEO and FD, 80% of salary for Commercial and Technical Directors
Annual bonus
Share Option Scheme
Option grants made annually to Executive Directors and senior managers Awards of nil-cost options made annually to Executive Directors, conditional on Group performance over 3 years Defined contribution plan Expressed as a % of salary. Applicable to Executive Directors only
Performance Share Plan
Pension Share retention policy
Provides competitive retirement benefits To support alignment with shareholder interests, Executive Directors will be required to build and hold a significant shareholding
Employer contributions of 15% of salary 100% of salary
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Remuneration continued
Table 4: Executive Director basic salaries for 2010 and 2011

Name Role Salary at 1st January 2011 (000 p.a.) Salary at 1st January 2010 (000 p.a.)
Paul Davies Bruce Burrows Peter Dixon Martin Miller
Chief Executive Finance Director Commercial Director Technical Director
387 266 206 206
375 258 200 200
Table 5: Summary of Annual Bonus Scheme (2010)

Element Weighting Performance measures for 2010 Performance targets
Financial objectives
40%
Pre-Tax Profit* Return on Average Capital Employed*
Targets established against each measure with a sliding scale between threshold and maximum Based on quantifiable figures to limit subjectivity as far as possible
Strategic objectives
30%
Includes increases in production, booking of new reserves from existing an new licences, and acquisition of new exploration licences Average TSR and spot TSR at start and end of the year measured relative to both the FTSE 250 and the FTSE All-Share Oil & Gas Producers indices
Relative TSR
20%
No payment below a threshold of performance in line with index TSR Maximum bonus under this element is earned if the TSR outperformance is 10% above index. Bonus earned increases on a straight-line basis between threshold and maximum LTIF=0.5; AIFR=1.5
HSE
10%
Lost Time Injury Frequency Rate (LTIF), and All Injury Frequency Rate (AIFR)
* Pre-exceptional items
The average salary increase for all other employees was 3%. 2010 and 2011 salaries for Executive Directors are listed in Table 4 above. Details of the Executive Directors basic salary and benefits in 2010 are shown on page 67. Annual Bonus Scheme The Annual Bonus Scheme, which is based on the achievement of relevant and stretching performance conditions determined by the Committee, was introduced in 2001 for Executive Directors and certain senior management including senior staff in Poltava Petroleum Company (PPC) and Yuzhgazenergie (YGE). The application of the scheme in any given year is discretionary and annual awards are not pensionable. For the year ending 31st December 2010, maximum bonus opportunities were 100% of salary for the Chief Executive, 85% for the Finance Director, and 75% for the Technical and Commercial Directors. Other senior managers could earn an annual bonus payment of up to a maximum of between 30% and 60% of their basic salary.
The Committee establishes the performance conditions that must be met for each financial year. They are derived from the Companys Annual Budget and Strategic Plan approved by the Board and, for the year ending 31st December 2010, were divided into four segments as shown in Table 5 above. To earn the maximum level of bonus requires the maximum to be met or exceeded for each performance measure and all of the strategic objectives to be met. Bonus outcomes are determined on a formulaic basis. For 2010, the weighting applied to each performance condition was identical for each Executive Director and for senior management. In 2010, the performance conditions established and the actual achievements for the financial and share price segments were as shown in Table 6 opposite. Bonuses paid based on the 2010 results above and individual achievement against strategic objectives resulted in bonus payments of between 30% and 40% of Basic Salary for Executive Directors. Other senior management received bonus payments of between 12% and 24% of Basic Salary.
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Table 6: Actual achievement of 2010 Annual Bonus Scheme performance conditions

Achievement % of bonus earned for this element (% opportunity) for this element
Financial Pre-Tax Profit* ROCE* Between threshold and target Between threshold and target 6% Strategic objectives Production Reserves and resources Below threshold Exceeded two targets; missed two targets 15% Relative TSR vs. FTSE 250 Index vs, FTSE All-Share Oil & Gas Producers Index Below threshold Between threshold and target 9% HSE LTIFR AIFR Targets achieved Targets achieved 10% 40%
* Pre-exceptional items
(40%)
(30%)
(20%)
(10%) (100%)
Annual Bonus Scheme for 2011 For 2011 the Annual Bonus Scheme will operate on a similar basis to 2010. The Committee has set stretching financial, strategic and HSE objectives and relative TSR targets. The relative weightings of each element of the annual bonus are fixed for each of the Executive Directors, in the interests of simplicity and to encourage executive management to operate as a team. The relative weightings for 2011, as in 2010, will be as follows: Financial objectives: 40% Strategic objectives: 30% 1-year relative TSR: 20% HSE: 10% Long-term incentive arrangements The Company currently operates two long-term incentive plans, the 2010 Discretionary Share Option Scheme and the 2010 Performance Share Plan. The Committee feels that a balance of nil cost and market value options provides the most appropriate mix of pay for the most senior executives. The maximum market
value of shares that may be granted in any financial year under the DSOS and under the JKX Oil & Gas 2010 Performance Share Plan shall not exceed three times basic salary for any executive. JKX Oil & Gas plc 2010 Discretionary Share Option Scheme (DSOS) The normal maximum grant of Options in any financial year under the DSOS is 100% of basic salary. In exceptional circumstances the Committee has the discretion to grant options with a face value of up to 200% of basic salary. Maximum award opportunities in 2011 under the DSOS will be 100% of base salary for the CEO and FD and 80% of base salary for the Technical and Commercial Directors. Options vest at the end of a 3-year performance period, subject to achievement of 3-year Earnings per Share (EPS) growth targets. The Committee considers EPS to be an appropriate measure, since it is the primary internal benchmark of long-term financial performance and promotes alignment between management and the Companys shareholders.
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Figure 7: Vesting schedule for the DSOS 100% % of options vesting
Figure 8: Vesting schedule for the PSP
100% % of shares vesting
25% 0% Threshold 3 year EPS growth p.a. Maximum
25% 0% Index JKXs 3 year TSR vs. Index

50% based on FTSE 250 Index and 50% based on FTSE All-Share Oil & Gas Producers Index
Index +10% p.a.
The performance targets for the 2010 and 2011 cycles require 3-year nominal EPS growth of 22.5% p.a. for maximum vesting with threshold vesting (25% of an award) at 7.5% p.a. (and on a straight-line basis in between these points). The performance targets are reviewed on an annual basis at the start of each 3-year performance cycle to ensure their continued appropriateness. JKX Oil & Gas plc 2010 Performance Share Plan (PSP) The normal maximum award of Nil-cost Options in any financial year under the PSP is 100% of a participants basic salary. In exceptional circumstances the Committee has the discretion to make awards of up to 200% of a participants basic salary. Maximum award opportunities in 2011 will be 100% of salary for the CEO and FD and 80% of salary for the Technical and Commercial Directors. PSP awards vest based on 3-year TSR performance relative to the FTSE 250 and FTSE All-Share Oil & Gas Producers indices (with half of the award being assessed against each index). Each part of the award will be based on performance relative to the relevant index, with 25% vesting for performance in line with the index. Vesting would increase on a straight-line basis between 25% and 100% for index out-performance of up to 10% p.a. Historically this has been broadly equivalent to upper quartile performance. In addition, the Committee must be satisfied that the recorded TSR is a genuine reflection of the underlying performance of the Company over the performance period. The Committee considers the use of TSR to be appropriate since it is dependent on the Companys relative long-term share price performance and therefore provides strong alignment with the interests of the Companys shareholders. TSR performance is measured using percentage out-performance rather
than a ranking approach since it is less sensitive to the TSR of individual comparators, and uses a 12-month averaging period due to the volatility of the Companys share price and the long-term nature of the Companys investments. Whilst noting market practice is typically to use a shorter averaging period, the Committee feel that 12-month averaging would give a fairer result for both management and shareholders. There is no re-testing of performance targets. Legacy Share Option Schemes At the time of implementation in 2001, the HM Revenue & Customs (HMRC) Approved JKX Oil & Gas plc Discretionary Share Option Scheme 2001 (Approved Scheme) and the Unapproved JKX Oil & Gas Discretionary Share Option Scheme 2001 (Unapproved Scheme) (together, the 2001 Share Option Schemes) reflected the best practice aspects recommended by the ABI Guidelines at that time. Following the introduction of new plans in 2010, no further awards will be made under the 2001 Share Option Schemes. The Committee has discretion as to the application of the Rules of the Share Option Schemes, and in the event of a change of control, the Committee retains discretion to determine the treatment of unvested options. Options vest based on 3-year share price performance both in absolute terms and relative to external benchmarks. The Committee considers that comparison against the FTSE Index in which the Company is a constituent at the time of the grant and against the FTSE All-Share Oil & Gas Producers Index is the most appropriate external benchmark. For options granted between 2006 and 2009, the number of options that vest and therefore can be subsequently exercised is determined by two factors: (1) the actual increase in the Companys share price; and (2) a comparison of the actual increase in the Companys
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Table 9: Summary of Share Option Scheme performance conditions (grants made 2006 to 2009) Absolute share price performance At exercise price or below Between exercise price and 150% of exercise price In excess of 150% and up to 200% of exercise price In excess of 200% of exercise price Relative share price performance In the lower quartile of the % growth in the FTSE Index In the second quartile of the % growth in the FTSE Index In the third quartile of the % growth in the FTSE Index In the top quartile of the % growth in the FTSE Index
Share price factor
0 Up to 0.5 0.66 1
FTSE 250/Oil & Gas Producers Index factor
0.25 0.5 0.75 1
share price to the higher of the change in the FTSE 250 and the FTSE All-Share Oil & Gas Producers Index. The performance conditions are summarised in Table 9 above. The Companys share price and FTSE Index factors are multiplied together and the resultant figure is applied to the number of options granted to an individual to determine the number of options that vest. The structure was designed to introduce a sliding scale as distinct from a specific individual benchmark. It requires the Companys share price to double and for this increase to be in the top quartile of the growth in the higher of the FTSE 250 and FTSE All-Share Oil & Gas Producers Index for all of the options to vest. To encourage the retention of key staff, the Committee has determined that an option holder will be able to exercise up to 50% of vested options immediately following vesting and the remaining vested options only after a period of 12 months from vesting, unless otherwise determined by the Committee. 100% of all share options awards made in 2006, 2007 and 2008 lapsed in 2009, 2010, and 2011 respectively due to the failure to meet the above vesting conditions. Dilution In any ten year period, the number of Shares which may be placed under Option, or issued under any discretionary employees share scheme adopted by the Company, may not exceed five per cent; and under any other employees share scheme adopted by the Company, may not exceed ten per cent of the Companys ordinary share capital in issue immediately prior to that date. Share ownership guideline In 2010, the Committee introduced executive share ownership guidelines of 1 times salary for Executive
Directors. Details of the directors personal shareholdings are shown on page 53. Historical TSR performance Figure 10 overleaf shows the Total Shareholder Return for a holding in the Companys shares for the period from 31st December 2005 to 31st December 2010 relative to a holding of shares representing each of the FTSE 250 and FTSE All-Share Oil & Gas Producers indices, and was prepared by Kepler. The calculation of the return assumes dividends are reinvested to purchase additional equity. An investment of 100 in the Company on 31st December 2005 was worth 135.63 at 31st December 2010. Pension arrangements The Company makes a contribution equivalent to 15% of basic salary to the pension scheme of the Directors choice. All Executive Directors choose to participate in the Companys defined contribution scheme. Directors contracts It is the Groups policy that service contracts for the Executive Directors be unlimited in term and capable in normal circumstances of termination on 12 months notice. In the event of early termination, the Directors contracts provide for compensation up to a maximum level of basic salary for the notice period. The Directors contracts of service that include details of remuneration will be available for inspection at the Annual General Meeting. Executive Directors are entitled to accept appointments outside the Company providing that the Chairmans permission is sought and granted. External board appointments The Committee considers that external directorships provide the Companys senior executives with valuable
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experience that is of benefit to the Company, and believes that it is reasonable for the individual executive director to retain any fees received from external appointments given the additional personal responsibility that this entails. Non-Executive Directors All Non-Executive Directors have specific terms of engagement and their remuneration is determined by the Board within the limits set by the Articles of Association and based on independent surveys of fees
paid to Non-Executive Directors of similar companies. The setting of the Chairmans remuneration is the responsibility of the Board and not the Committee, as recommended by Section B.2.2 of the Combined Code. The Board believes this is appropriate given the Board size. These service contracts are for an indefinite term, not a finite term as recommended by Section A.7.2 of the Combined Code, subject to re-election on an as required basis. The Board continues to believe these terms are appropriate given the Company size, the Non-Executive
Figure 10: JKX 5-year TSR performance vs. FTSE 250 and FTSE All-Share Oil & Gas Producers indices
200 JKX Oil & Gas plc FTSE 250 Return Index (Re-based) 150 FTSE All-Share Oil & Gas Producers Index
100
50
31 Dec 2005
31 Dec 2006
31 Dec 2007
31 Dec 2008
31 Dec 2009
31 Dec 2010
Table 11: Summary of Executive Directors service contracts

Name Date Notice period
Paul Davies Bruce Burrows Martin Miller Peter Dixon
1st January 2007 1st January 2007 1st July 2007 1st July 2007
12 months from Company or Director 12 months from Company or Director 12 months from Company or Director 12 months from Company or Director
Table 12: Summary of Non-Executive Directors service contracts

Name Date
a
Notice period
Lord Fraser Lord Oxford
1st January 2002 1st January 2002 12th July 2007 1st June 2008 1st June 2008 1st March 2011
3 months from Company or Director 3 months from Company or Director 3 months from Company or Director 3 months from Company or Director 3 months from Company or Director 3 months from Company or Director
Mr Nigel Moore Mr Dipesh Shah Mr Michel-Marc Delcommune Sir Ian Prosser

b
(a) Lord Fraser retired from the Board on 31st March 2011 (b) Sir Ian Prosser was appointed to the Board on 1st March 2011
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skill set, and the continuing evaluation of performance and independence. In the event of early termination, the Non-Executive Directors contracts provide for compensation of three months base fee. The Non-Executive Directors contracts specify the powers and duties of the Non-Executive Directors, the time commitments anticipated and remuneration arrangements. The Non-Executive Directors are paid a base fee for carrying out their duties and responsibilities as Directors, and fees for membership and, where applicable, chairmanship of each of the remuneration and audit committees. The base fee is based on a per annum rate (in Sterling) that is compared to published material concerning Non-Executive Director fees in similar size companies and comparable companies in the sector. Audited information
In 2010, the total fees paid to each Non-Executive Director in the year are shown below. The fees include compensation for performing the additional roles in respect of the Audit and Remuneration Committees. Non-Executive Directors cannot participate in any of the Companys share schemes and are not eligible to join the Companys pension scheme. Sir Ian Prosser succeeded Lord Fraser as Chairman in March 2011. His fees for 2011 are set at 150,000 p.a.
Aggregate directors remuneration The total amounts for directors remuneration were as follows:
2010 000 2009 000 2010 $000 2009 $000
Emoluments Gains on exercise of share options Pension contributions
1,676 508 155 2,339
1,756 148 1,904
2,611 799 239 3,649
2,788 229 3,017
The remuneration of the directors of JKX Oil & Gas plc

Salary and fees $000 Benefits $000 Annual bonus $000 Total 2010 $000 Total 2009 $000 Total 2010 000 Total 2009 000 Pension 2010 $000 Pension 2009 $000
Executive directors Dr P Davies B J Burrows M Miller P Dixon Non-executive directors Lord Fraser Lord Oxford D Shah MM Delcommune N Moore 124 93 70 62 78 2,026 18 567 124 93 70 62 78 2,611 124 93 70 62 78 2,788 80 60 45 40 50 1,676 80 60 45 40 50 1,756 239 229 580 399 310 310 8 4 2 4 238 139 95 95 826 542 407 409 954 569 415 423 529 348 261 263 596 357 262 266 87 60 46 46 84 57 44 44
Annual bonus payments are in respect of the 2010 Annual Bonus Awards paid in January 2011. Benefits include health cover.
* These totals are shown in Sterling for information purposes only. Sterling is the currency in which remuneration payments are made to the Directors. The average exchange rate used was 1/$1.5595 (2009: 1/$1.5943).
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Directors share options

Number of options at 1st January Date of grant 2010 Options granted during period Options Options exercised surrendered during during period period Number of options at 31st December 2010 Exercise price Date from Market price which of shares at exercisable exercise date Date of exercise Expiry date
B J Burrows (a) 18-Mar-04 (b) 17-Mar-05 (c) 20-Mar-07 (d) 19-Mar-08 (e) 27-Mar-09 (f) 29-Jun-10 (g) 29-Jun-10
237,500 - 237,500 106,500 71,000 57,500 132,500 107,000 107,000 605,000 214,000 237,500
71,000 71,000
106,500 57,500 132,500 107,000 107,000 510,500
0.6800 1.5150 2.9800 4.5400 2.3075 2.4100 0.0000
18.03.07 17.03.08 20.03.10 19.03.11 27.03.12 29.06.13 29.06.13
2.8200 31.03.10 18.03.14 n/a n/a 17.03.15 n/a n/a 20.03.17 n/a n/a 19.03.18 n/a n/a 27.03.19 n/a n/a 29.06.20 n/a n/a 29.06.20
Dr P Davies (b) 17-Mar-05 (c) 20-Mar-07 (d) 19-Mar-08 (e) 27-Mar-09 (f) 29-Jun-10 (g) 29-Jun-10
90,000 105,000 85,000 194,500 155,500 155,500 474,500 311,000
105,000 105,000
90,000 85,000 194,500 155,500 155,500 680,500
1.5150 2.9800 4.5400 2.3075 2.4100 0.0000
17.03.08 20.03.10 19.03.11 27.03.12 29.06.13 29.06.13
n/a n/a n/a n/a n/a n/a
17.03.15 20.03.17 19.03.18 27.03.19 29.06.20 29.06.20
P Dixon (b) 17-Mar-05 (c) 20-Mar-07 (d) 19-Mar-08 (e) 27-Mar-09 (f) 29-Jun-10 (g) 29-Jun-10
16,750 24,500 35,000 82,000
66,500 66,500
24,500 24,500
16,750 35,000 82,000 66,500 66,500 266,750
1.5150 2.9800 4.5400 2.3075 2.4100 0.0000
17.03.08 20.03.10 19.03.11 27.03.12 29.06.13 29.06.13
17.03.15 20.03.17 19.03.18 27.03.19 29.06.20 29.06.20
158,250 133,000 M Miller (a) 18-Mar-04 (b) 17-Mar-05 (c) 20-Mar-07 (d) 19-Mar-08 (e) 27-Mar-09 (f) 29-Jun-10 (g) 29-Jun-10
82,500 33,500 24,500 35,000 82,000
66,500 66,500
24,500 24,500
82,500 33,500 35,000 82,000 66,500 66,500 366,000
0.6800 1.5150 2.9800 4.5400 2.3075 2.4100 0.0000
18.03.07 17.03.08 20.03.10 19.03.11 27.03.12 29.06.13 29.06.13
n/a n/a n/a n/a n/a n/a n/a
n/a n/a n/a n/a n/a n/a n/a
18.03.14 17.03.15 20.03.17 19.03.18 27.03.19 29.06.20 29.06.20
257,500 133,000
(a) 2001 Share Option Scheme in respect of 2004 (b) 2001 Share Option Scheme in respect of 2005 (c) 2001 Share Option Scheme in respect of 2007 (d) 2001 Share Option Scheme in respect of 2008 (e) 2001 Share Option Scheme in respect of 2009 (f) 2010 Share Option Scheme in respect of 2010 (g) 2010 Performance Share Plan.
The market price of a JKX share at 31st December 2010 was 314.8p, and the range during the year was 223.2p to 327.3p. This report was approved by the Board of Directors on 19th April 2011 and signed on its behalf by
Dipesh J Shah OBE; FRSA Chairman of the Remuneration Committee 19th April 2011
69
70 Directors responsibilities statement 71 Independent Auditors Report
GROUP ACCOUNTS
72 72 73 74 75 76 Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated cash flow statement Notes to the accounts
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Directors responsibilities statement

The directors are responsible for preparing the Annual Report and the group financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and of the profit or loss of the group for that period. In preparing these financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the companys transactions and disclose with reasonable accuracy at any time the financial position of the group and enable them to ensure that the group financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the companys website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Each of the directors, whose names and functions are listed in the Directors Report confirm that, to the best of their knowledge: the group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the group; and the directors report contained in the Annual Report includes a fair review of the development and performance of the business and the position of the group, together with a description of the principal risks and uncertainties that it faces. The directors in office at the date of this report have each confirmed that: so far as he is aware, there is no relevant audit information of which the companys auditors are unaware; and he has taken all the steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the companys auditors are aware of that information.
By order of the board B J Burrows Company Secretary 19th April 2011
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Independent Auditors Report to the members of JKX Oil & Gas plc
We have audited the group financial statements of JKX Oil & Gas plc for the year ended 31st December 2010 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors Report for the financial year for which the group financial statements are prepared is consistent with the group financial statements.
Matters on which we are required to report by exception

Under the Companies Act 2006 we are required to report to you if, in our opinion: certain disclosures of directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit; Under the Listing Rules we are required to review: the directors statement, set out on page 59, in relation to going concern;
We have nothing to report in respect of the following:
Respective responsibilities of directors and auditors
As explained more fully in the Directors Responsibilities Statement set out on page 70, the directors are responsible for the preparation of the group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Boards Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the companys members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
the part of the Corporate Governance Statement relating to the companys compliance with the nine provisions of the June 2008 Combined Code specified for our review; and certain elements of the report to shareholders by the Board on directors remuneration.
Other matter
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the groups circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.
We have reported separately on the parent company financial statements of JKX Oil & Gas plc for the year ended 31st December 2010 and on the information in the Directors Remuneration Report that is described as having been audited.
Mark King (Senior Statutory Auditor)

for and on behalf of
PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors London 19th April 2011.

Notes: (a) The maintenance and integrity of the JKX Oil & Gas plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. (b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Opinion on financial statements
In our opinion the group financial statements: give a true and fair view of the state of the groups affairs as at 31st December 2010 and of its profit and cash flows for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.
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Group accounts
Consolidated income statement

for the year ended 31st December
2010 $000 2009 $000 Note
Revenue Cost of sales Operating costs excluding exceptional item and impairment/write off of exploration costs Provision for impairment of fixed assets/write off of exploration costs Exceptional item impairment of Russian assets Total cost of sales Gross profit Administrative expenses Loss on foreign exchange Profit on sale of assets Operating profit before exceptional item Operating profit after exceptional item Finance income Finance costs Profit before tax Taxation current Taxation deferred before the exceptional item on the exceptional item Total deferred taxation Total taxation Profit for the year
192,879 (56,292)
196,508 (57,411) (5,039) (62,450) 134,058 (14,667) (2,286) 2,486 119,591 119,591 878 (1,142) 119,327 (34,863) 865 865 (33,998) 85,329
16 5(e),5(f) 16
(13,676) (74,600) (144,568) 48,311 (25,300) (2,644) 94,967 20,367
14 15
868 (443) 20,792 (30,288) 16,152 14,500 30,652
21
364 21,156
Basic earnings per 10p ordinary share (in cents) before exceptional item after exceptional item Diluted earnings per 10p ordinary share (in cents) before exceptional item after exceptional item 47.33 12.32 54.05 54.05
23
47.56 12.38
54.23 54.23
Consolidated statement of comprehensive income

2010 $000 2009 $000
Profit for the year Currency translation differences Total comprehensive income attributable to: Equity shareholders
21,156 (2,790)
85,329 (3,671)
18,366
81,658
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Consolidated balance sheet

as at 31st December
2010 $000 2009 $000 Note
ASSETS Non-current assets Property, plant and equipment Goodwill Other intangible assets Long term receivable Deferred tax assets
5(a) 5(f) 5(c) 6 21
403,342 23,371 20,485 13,583 460,781
344,166 2,101 27,134 2,531 375,932 2,203 31,817 74,368 108,388 484,320
Current assets Inventories finished goods Trade and other receivables Cash and cash equivalents
9 10
2,343 24,396 62,018 88,757
Total assets LIABILITIES Current liabilities Current tax liabilities Trade and other payables
12
549,538
(3,630) (58,332) (61,962)
(1,293) (44,008) (45,301)
Non-current liabilities Provisions Long term payable Deferred tax liabilities

22 13
(3,274) (3,595) (12,041) (18,910)
(2,818) (2,531) (29,346) (34,695) (79,996) 404,324
Total liabilities Net assets EQUITY Share capital Share premium Merger reserve Other reserves: Capital redemption reserve Equity share options Equity foreign currency translation Retained earnings Total shareholders equity
11
(80,872) 468,666
26,649 97,363 30,680 587 3,914 (28,096) 337,569 468,666
24,335 41,317 30,680 587 3,139 (25,306) 329,572 404,324
The notes on pages 76 to 106 are an integral part to these financial statements. These financial statements were approved by the Board of Directors on 19th April 2011 and signed on its behalf by: Dr Paul Davies Director B J Burrows Director
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Group accounts
Consolidated statement of changes in equity

Share capital $000 Capital Merger redemption reserve reserve $000 $000 Equity Foreign Share currency options translation reserve reserve $000 $000 Share premium $000 Retained earnings $000 Total $000
Notes
At 1st January 2009 Comprehensive income Profit for the year attributable to owners of the parent Other comprehensive income Exchange differences arising on translation of overseas operations Total other comprehensive income Total comprehensive income Transactions with owners Issue of employee share options IFRS 2 Share option Dividends paid Total transactions with owners At 31st December 2009 At 1st January 2010 Comprehensive income Profit for the year attributable to owners of the parent Other comprehensive income Exchange differences arising on translation of overseas operations Total other comprehensive income Total comprehensive income Transactions with owners Issue of employee share options Issue of ordinary shares Transaction cost for issue of ordinary shares IFRS 2 Share option Dividends paid Total transactions with owners At 31st December 2010
20 11 11 11 20
24,256
30,680
587
2,719
(21,635)
41,015
256,535
334,157
85,329
85,329
79 79 24,335 24,335
30,680 30,680
587 587
420 420 3,139 3,139
(3,671) (3,671) (3,671) (25,306) (25,306)
302 302 41,317 41,317
85,329 (12,292) (12,292) 329,572 329,572
(3,671) (3,671) 81,658 381 420 (12,292) (11,491) 404,324 404,324
21,156
21,156
37 2,277 2,314 26,649
30,680
587
775 775 3,914
(2,790) (2,790) (2,790) (28,096)
230 58,064 (2,248) 56,046
21,156 (13,159) (13,159)
(2,790) (2,790) 18,366 267 60,341 (2,248) 775 (13,159) 45,976
97,363 337,569 468,666
The notes on pages 76 to 106 are an integral part to these financial statements.
Merger reserve On 30th May 1995 JKX Oil & Gas plc acquired the issued share capital of JP Kenny Exploration & Production Limited for the issue of ordinary shares. At that date the share premium reserve of JP Kenny Exploration & Production Limited was the equivalent of $30.7m. Capital redemption reserve The balance held in the capital redemption reserve relates to the buy back of shares in 2002, there have been no additional share buy-backs since this time. Equity share options reserves The balance held in the share options reserve relates to the fair value of the share options that have been expensed through the income statement since adoption of IFRS. Foreign currency translation reserve The foreign currency reserve includes movements that relate to the retranslation of the subsidiaries whose functional currencies are not the US Dollar. Share premium On 26th January 2010 the Company completed a placing of 14,257,270 new ordinary shares in the Company with institutions at a price of 265 pence per placing share. The placing raised $60.3m. Charges to share premium in 2010 include underwriting fees and other fees for the placing.
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Consolidated cash ow statement

Re-presented* 2009 $000 2010 $000
Note
Cash flows from operating activities Cash generated from operations Interest paid Income tax paid Net cash from operating activities Cash flows from investing activities Deferred payment on Russian acquisition Proceeds from sale of property, plant and equipment Short term loan repaid Interest received Purchase of property, plant and equipment, intangible assets and joint venture interests Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Dividends paid to shareholders Net cash from/(used in) financing activities (Decrease)/increase in cash and cash equivalents in the year Effect of exchange rates on cash and cash equivalents Cash and cash equivalents at 1st January Cash and cash equivalents at 31st December 58,359 (13,159) 45,200 (12,182) (168) 74,368 62,018 381 (12,292) (11,911) 17,945 (8,382) 64,805 74,368
12 25
146,271 (32) (28,526) 117,713
159,976 (369) (33,065) 126,542
(3,000) 749 (172,844) (175,095)
11,726 10 296 (108,718) (96,686)
* The prior year comparatives have been re-presented to conform with the current year presentation. Interest received is now shown within cash flows from investing activities instead of cash flows from operating activities.
The notes on pages 76 to 106 are an integral part to these financial statements.
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Group accounts
Notes to the accounts

1. Authorisation of financial statements, statement of compliance with IFRS and basis of preparation
The following new and amended standards, and interpretations are mandatory for the first time for the financial year beginning 1st January 2010 but not currently relevant to the Group. IAS 1 (amendment), Presentation of financial statements IFRS 3 (revised), Business combinations, and consequential amendments to IAS 27 and IAS 38, Consolidated and separate financial statements IFRS 5 (amendment), Non-current assets held for sale and discontinued operations IAS 17 (amendment), Leases IAS 39 (amendment), Financial instruments: recognition and measurement IFRS 1 (amendment), Additional exemptions for first-time adopters IFRS 2 (amendment), Group cash-settled sharebased payment transaction IFRS 6, Exploration for and evaluation of mineral resources IFRS 8 (amendment), Operating segments IFRIC 9, Reassessment of embedded derivatives IFRIC 16, Hedges of a net investment in a foreign operation IFRIC 17, Distributions of non-cash assets to owners IFRIC 18, Transfers of assets from customers Eligible Hedged Items (an amendment to IAS 39 Financial Instruments: Recognition and Measurement) The following new standards, amendments and interpretations are issued but not effective for the financial year beginning 1st January 2010 and the Group has not early adopted them. IFRS 9, Financial instruments IAS 24 (revised), Related party disclosures IAS 32 (amendment), Classification of rights issues IFRIC 14 (amendment), Prepayments of a minimum funding requirement IFRIC 19, Extinguishing financial liabilities with equity instruments IFRS 1 (amendment), First-time adoption of international financial reporting standards Improvements to International Financial Reporting Standards 2010 were issued in July 2010 and January 2011. The effective dates vary standard by standard but most are effective 1st January 2011
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. The registered office is 6 Cavendish Square, London, W1G 0PD and the principal place of business is disclosed in the introduction to the Annual Report. The principal activities of the Company and its subsidiaries, (the Group), are the exploration for, appraisal and development of oil and gas reserves. The registered number of the Company is 03050645. The Groups financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, International Financial Reporting Interpretations Committee (IFRIC) interpretations and the Companies Act 2006 applicable for Companies reporting under IFRS. The principal accounting policies adopted by the Group are set out below. The disclosed policies have been applied consistently by the Group for both the current and previous financial year with the exception of the new standards adopted. The financial information has been prepared on a going concern basis following review by the directors of forecast cash flows for the next 12 months, including consideration of the ability of the Group to change the timing and scale of capital expenditure, if required. The going concern base case adopted by the Directors assumes first production in Russia in autumn 2011. In making their assessment the Directors have considered sensitivities to their forecast cash flows including reducing forecast oil and gas realizations, increasing costs and deferring the date of first production in Russia to early 2012.
2. Adoption of new and revised International Financial Reporting Standards
The following new standards and amendments to standards are mandatory for the first time for the financial year beginning 1st January 2010 and have been adopted by the Group: IAS 7 (amendment), Statement of cash flows. The amendment clarifies that only expenditures that result in the recognition of an asset can be classified as a cash flow from investing activities. IAS 36 (amendment), Impairment of assets, effective 1st January 2010. The amendment clarifies that the largest cash-generating unit (or group of units) to which goodwill should be allocated for the purposes of impairment testing is an operating segment, as defined by paragraph 5 of IFRS 8, Operating segments (that is, before the aggregation of segments with similar economic characteristics).
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The Group is evaluating the impact of the above pronouncements. The above changes are not expected to be material to the Groups earnings or to shareholders funds.
such transactions and from translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. On consolidation of subsidiaries and JCEs with a non US Dollar presentation currency, balance sheets are translated into US Dollar at the closing rate and income and expenses at the average monthly rate. All resulting exchange differences arising in the period are recognised in other comprehensive income, and cumulatively in the Groups translation reserve. Such translation differences are reclassified to profit or loss in the period in which any such foreign operation is disposed of. Subsidiaries within the Group hold monetary intercompany balances for which settlement is neither planned nor likely to occur in the foreseeable future and thus this is considered to be part of the Groups net investment in the relevant subsidiary. An exchange difference arises on translation in the company income statement which on consolidation is recognised in equity, only being recognised in the income statement on the disposal of the net investment. The major exchange rates used for the revaluation of the closing balance sheet at 31st December 2010 were 1$/0.6 (2009: 1$/0.6), $1/UAH 8.1 (2009: $1/UAH 8.0), $1/RUB 31.2 (2009: $1/RUB 30.2), $1/HUF 204.8 (2009: 1$/HUF 179.6), 1$/BGN 1.4 (2009: 1$/BGN 1.3). Goodwill and fair value adjustments arising on acquisition are treated as assets/liabilities of the foreign entity and translated at the closing rate.
3. Significant accounting policies Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31st December each year. All intragroup balances, transactions, income and expenses and profits or losses, including unrealised profits arising from intragroup transactions, have been eliminated on consolidation. Subsidiaries are entities over which the Group has the power to govern the financial and operating policies in order to obtain benefits from their activities. Control is presumed to exist where the Group owns more than one half of the voting rights (which does not always equate to percentage ownership) unless it can be demonstrated that ownership does not constitute control. Control does not exist where other parties hold veto rights over significant operating and financial decisions. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The consolidated financial statements include all the assets, liabilities, revenues, expenses and cash flows of the Companies and their subsidiaries after eliminating intragroup transactions as noted above. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are deconsolidated from the date that control ceases. Uniform accounting policies are applied across the group. Jointly controlled entities (JCEs) are a joint venture that involves the establishment of a corporation, partnership or other entity in which each venturer has a long term interest. JCEs are accounted for using the proportional consolidation method. The Group combines its share of the joint ventures individual income and expenses, assets and liabilities and cash flows on a line-by-line basis with similar items in the Groups financial statements.
Property, plant and equipment
Property plant and equipment comprises the Groups tangible oil and gas assets together with computer equipment, motor vehicles and other equipment and are carried at cost, less any accumulated depreciation and accumulated impairment losses. Cost includes purchase price and construction costs for qualifying assets, together with borrowing costs where applicable, in accordance with the Groups accounting policy. Depreciation of these assets commences when the assets are ready for their intended use.
Foreign currencies
The presentation currency of the Group is the US Dollar based on the fact that the Groups primary transactions originate in, or are dictated by, the US Dollar, these being amongst others oil sales and procurement of rigs and drilling services. Each entity in the group is measured using the currency of the primary economic environment in which the entity operates (the functional currency). Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of
Oil and gas assets
Exploration, appraisal and development expenditure is accounted for under the successful efforts method. The successful efforts method means that only costs which relate directly to the discovery and development of specific oil and gas reserves are capitalised. Exploration and evaluation costs are capitalised within intangible assets. Development expenditure on producing assets is accounted for in accordance with IAS 16, Property, plant and equipment. Costs incurred prior to obtaining legal rights to explore are expensed immediately to the income statement.
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Group accounts
Notes to the accounts continued
All lease and licence acquisition costs, geological and geophysical costs and other direct costs of exploration, evaluation and development are capitalised as intangible assets or property plant and equipment according to their nature. Intangible assets comprise costs relating to the exploration and evaluation of properties which the directors consider to be unevaluated until reserves are appraised as commercial, at which time they are transferred to property plant and equipment following an impairment review and depreciated accordingly. Where properties are appraised to have no commercial value, the associated costs are treated as an impairment loss in the period in which the determination is made. Costs are depreciated on a field by field unit of production method based on commercial proved plus probable reserves of the production licence, with the exception of compressors, which are depreciated on a straight-line basis over their anticipated useful life of 10 years. The calculation of the unit of production depreciation takes account of estimated future development costs and is based on current period end unescalated price levels. Changes in reserves and cost estimates are recognised prospectively.
net fair value of the acquirees identifiable assets, liabilities and contingent liabilities. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually. Impairment losses on goodwill are not reversed. On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of unamortised goodwill, which has not been subject to impairment, is included in the determination of the profit or loss on disposal.
Impairment of intangible assets and property, plant and equipment
At each balance sheet date, the Group reviews the carrying amounts of its property, plant and equipment and intangible assets, excluding goodwill, to determine whether there is any indication that those assets have suffered an impairment loss. Individual assets are grouped together as a cash-generating unit for impairment assessment purposes at the lowest level at which their identifiable cash flows, that are largely independent of the cash flows of the other groups assets, can be determined. If any such indication of impairment exists the Group makes an estimate of its recoverable amount. The recoverable amount is the higher of fair value less costs to sell and value in use. Where the carrying amount of an individual asset or a cash-generating unit exceeds its recoverable amount, the asset/cashgenerating unit is considered impaired and is written down to its recoverable amount. Fair value less costs to sell is determined by discounting the post tax cash flows expected to be generated by the cash generating unit, net of associated selling costs, and takes into account assumptions, market participants would use in estimating fair value. In assessing the value in use, the estimated future cash flows are adjusted for the risks specific to the asset/cash generating unit and are discounted to their present value that reflects the current market indicators. Excluding goodwill, where an impairment loss subsequently reverses, the carrying amount of the asset/cash-generating unit is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately.
Other assets
Depreciation is charged so as to write off the cost, less estimated residual value, over their estimated useful lives, using the straight-line method, for the following classes of assets; Motor vehicles Computer equipment Other equipment 4 years 3 years 5 to 10 years
The estimated useful lives of property plant and equipment and their residual values are reviewed on an annual basis and, if necessary, changes in useful lives are accounted for prospectively. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement for the relevant period.
Business combinations and goodwill
Business combinations are accounted for using the purchase method. Acquisition cost is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Acquisition costs are expensed. Goodwill is recognised as an asset and is initially measured at cost being the excess of the cost of the business combination over the Groups share in the
Financial instruments
The Group may use derivative financial instruments (primarily foreign currency forward contracts) to hedge its risks associated with foreign currency
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fluctuations relating to certain firm commitments and forecasted transactions. Any such derivatives are initially recorded at fair value on the date at which the contract is entered into and subsequently remeasured at fair value on subsequent reporting dates. A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires.
Trade payables
Trade payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method if the time value of money is significant.
Taxation
Inventories
Income tax expense represents the sum of the current tax payable and deferred tax. The current tax payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Groups liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Any such reduction shall be reversed to the extent that it becomes probable that sufficient taxable profit will be available. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised based on tax rates and laws substantively enacted by the balance sheet date. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.
Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs plus attributable overheads based on a normal level of activity and other costs associated in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution and any provisions for obsolescence.
Trade and other receivables
Trade receivables are recognised initially at fair value and are subsequently measured at amortised cost, reduced by any provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due. Indicators of impairment would include financial difficulties of the debtor, likelihood of the debtors insolvency, default in payment or a significant deterioration in credit worthiness. Any impairment is recognised in the income statement within net operating costs.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and current balances with banks and similar institutions, which are readily convertible to known amounts of cash. Cash equivalents are short-term with an original maturity of less than 3 months, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
Treasury shares
JKX Oil & Gas plc treasury shares held by the Company are classified in shareholders equity. The consideration paid, including any directly attributable incremental costs is deducted from equity attributable to the Companys equity holders until the shares are cancelled or reissued. Where such shares are subsequently sold or reissued, any consideration received, net of transaction costs, is included in equity attributable to the Companys equity holders. No gain or loss is recognised in the financial statements on the purchase, sale, issue or cancellation of treasury shares.
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Group accounts
Deferred tax assets and liabilities are offset when there exists a legal and enforceable right to offset and they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.
Bonus scheme
Non-current assets (or disposal groups) held- for-sale
Non-current assets (or disposal groups) are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell if their carrying amount is to be recovered principally through a sale transaction rather than through continuing use.
The Group operates a bonus scheme for its Directors and employees. The scheme has four performance conditions: 1. financial objectives; 2. increase in share price; 3. key strategic objectives and 4. safety performance conditions. The bonus payments are made annually, normally in January of each year and the costs are accrued in the period to which they relate.
Pension costs
Segmental reporting
The Group contributes to the individual pension scheme of the qualifying employees choice. Contributions are charged to the income statement as they become payable. The Group has no further payment obligations once the contributions have been paid.
Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision-Maker. The Chief Operating Decision-Maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the executive directors of the Group that make the strategic decisions.
Provisions
Share options
Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the Directors best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material.
The Group issues equity-settled share-based payments to the directors and senior management. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value of the employee services received in exchange for the grant of options is expensed on a straight-line basis over the vesting period, based on the Groups estimate of shares that will eventually vest. At each subsequent balance sheet date the Group calculates the estimated cumulative charge for each award having regard to any change in the number of options that are expected to vest and the expired portion of the vesting period. The change in this cumulative charge since the last balance sheet date is expensed. Once an option vests, no further adjustment is made to the aggregate amount expensed. The expected life of the options depends on the behaviour of the option holders, which is incorporated into the option model consistent with historic data. The fair values calculated are inherently subjective and uncertain due to the assumptions made and the limitations of the model used. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value of 10p per share) and share premium when the options are exercised. The rules regarding the scheme are described in the Directors Remuneration Report on pages 63 to 66 and in note 20 on share-based payments.
Decommissioning
Provision is made for the cost of decommissioning assets at the time when the obligation to decommission arises. Such provision represents the estimated discounted liability (the discount rate used currently being at 10%, (2009: 10%)) for costs which are expected to be incurred in removing production facilities and site restoration at the end of the producing life of each field. A corresponding item of property plant and equipment is also created at an amount equal to the provision. This is subsequently depreciated as part of the capital costs of the production facilities. Any change in the present value of the estimated expenditure attributable to changes in the estimates of the cash flow or the current estimate of the discount rate used are reflected as an adjustment to the provision and the property plant and equipment. The unwinding of the discount is recognised as a finance cost.
Revenue recognition
Sales of oil and gas products are recognised when the significant risks and rewards of ownership have passed to the buyer and it can be reliably measured. Other services are recognised when the services have been performed. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, value added tax (VAT) and other sales taxes or duty.
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Interest income is recognised as the interest accrues, by reference to the net carrying amount at the effective interest rate applicable.
Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from share premium, net of any tax effects. When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from share premium. Repurchased shares are classified as treasury shares and are presented in the reserve for own shares. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and the resulting surplus or deficit on the transaction is presented in share premium.
of events giving rise to the disclosure of material items of income and expense as exceptional items include, but are not limited to, impairment events, disposals of operations or individual assets, litigation claims by or against the Group and the restructuring of components of the Groups operations. See note 5(e) for further details.
Critical accounting estimates and assumptions
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
(a) Recoverability of tangible and intangible oil and gas costs
Leasing
Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease. The group has no finance leases.
Dividends
Interim dividends are recognised when they are paid to the Companys shareholders. Final dividends are recognised when they are approved by shareholders.
Costs capitalised as tangible and intangible assets are assessed for impairment when circumstances suggest that the carrying value may exceed its recoverable value. This assessment involves judgement as to (i) the likely commerciality of the asset, (ii) future revenues and costs pertaining to the asset, (iii) the discount rate to be applied for the purposes of deriving a recoverable value and (iv) the value ascribed to contingent resources associated with the asset. Further disclosure is included in note 5.
Interests in joint venture agreements
(b) Decommissioning
The Group is party to a number of joint venture contractual arrangements with other parties (venturers) which govern the operation of associated jointly controlled assets. A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control. Joint control exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the venturers. Where a group company undertakes its activities under joint venture arrangements, the Groups share of any assets and liabilities incurred jointly with other ventures are recognised and classified according to their nature. Income from the sale or use of the Groups share of the output of jointly controlled assets, and its share of joint venture expenses, are included in the consolidated financial statements in proportion to the Groups interest.
The Group has decommissioning obligations in respect of its producing interests. The full extent to which the provision is required depends on the legal requirements at the time of decommissioning, the costs and timing of any decommissioning works and the discount rate applied to such costs.
(c) Depreciation of oil and gas assets
Oil and gas assets held in property, plant and equipment are mainly depreciated on a unit of production basis at a rate calculated by reference to proved plus probable reserves and incorporating the estimated future cost of developing and extracting those reserves. Future development costs are estimated using assumptions as to the numbers of wells required to produce those reserves, the cost of the wells, future production facilities and operating costs; together with assumptions on oil and gas realisations.
(d) Taxation
Exceptional item
Exceptional items comprise items of income and expense, including tax items, that are material in amount and unlikely to recur and which merit separate disclosure in order to provide an understanding of the Groups underlying financial performance. Examples
Tax provisions are recognised when it is considered probable that there will be a future outflow of funds to the tax authorities. In this case, provision is made for the amount that is expected to be settled. This requires judgements to be made on the outcome, which can change over time depending on facts and circumstances. A change in estimate of the likelihood
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Group accounts
of a future outflow and/or in the expected amount to be settled would result in a charge or credit to income in the period in which the change occurs. Deferred tax assets are recognised only to the extent it is considered probable that those assets will be recoverable. This involves an assessment of when those deferred tax assets are likely to reverse, and a judgement as to whether or not there will be sufficient taxable profits available to offset the tax assets when they do reverse. This requires assumptions regarding future profitability and is therefore inherently uncertain. To the extent assumptions regarding future profitability change, there can be an increase or decrease in the level of deferred tax assets recognised that can result in a charge or credit in the period in which the change occurs. Tax provisions are based on enacted or substantively enacted laws. To the extent that these change there would be a charge or credit to income both in the period of charge, which would include any impact on cumulative provisions, and in future periods. Further disclosure is included in note 22.
4. Segmental analysis Segmental information

Reportable operating segments are based on the internal reports provided to the Chief Operating Decision Maker (CODM) to evaluate segment performance, decide how to allocate resources and make other operating decisions. The Group has one single class of business, being the exploration for, development and production of oil and gas reserves. Accordingly the reportable operating segments are determined by the geographical location of the asset. There are five reportable operating segments. The Ukraine and Hungary are involved with production and exploration; Russia and the Rest of World are involved in exploration and development and the UK is the home of the head office and purchases material capital assets and services on behalf of other segments. The Rest of the World segment comprises operations in Bulgaria, Georgia and Slovakia. Transfer prices between segments are set on an arms length basis in a manner similar to transactions with third parties. 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.
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2010 External revenue Revenue by location of asset: Oil Gas Management services/other
UK $000
Ukraine $000
Russia $000
Hungary Rest of world $000 $000
Sub Total $000
Eliminations $000
Total $000
77,092 100,007 1,167 178,266
1,723 12,890 14,613
78,815 112,897 1,167 192,879
78,815 112,897 1,167 192,879
Inter segment revenue: Management services/other Equipment 28,623 17,439 46,062 Total revenue: Oil Gas Management services/other Equipment 28,623 17,439 46,062 Profit before tax Operating profit/(loss) before exceptional item Exceptional item impairment of Russian assets Operating profit/(loss) after exceptional item Finance income Finance cost (8,514) (8,514) 110,243 110,243 (4,335) (74,600) (78,935) 2,509 2,509 (1,265) (1,265) 98,638 (74,600) 24,038 868 (443) 24,463 Assets Segment assets Long term receivable Deferred tax Cash and cash equivalents Total assets Non cash expense (other than depreciation and impairment) Impairment of fixed assets /write off of exploration costs Exceptional item impairment of Russian assets Increase in property, plant and equipment and intangible assets Depreciation, depletion and amortisation 1,859 5,737 30,605 38,201 226,563 19,444 246,007 162,296 20,485 7,846 7,413 198,040 42,474 972 43,446 20,260 3,584 23,844 453,452 20,485 13,583 62,018 549,538 453,452 20,485 13,583 62,018 549,538 (3,671) (3,671) (3,671) 94,967 (74,600) 20,367 868 (443) 20,792 77,092 100,007 1,167 178,266 1,723 12,890 14,613 34,242 34,242 78,815 112,897 29,790 51,681 273,183 (28,623) (51,681) (80,304) 78,815 112,897 1,167 192,879 34,242 34,242 28,623 51,681 80,304 (28,623) (51,681) (80,304)
3,211 744 561
458 7,253 56,867 29,858
2,883 74,600 107,997 83
471 1,855 9,873 4,885
38 1,685 3,063 2
4,178 13,676 74,600 178,544 35,389
4,178 13,676 74,600 178,544 35,389
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2009 External revenue Revenue by location of asset: Oil Gas Management services/other
UK $000
Ukraine $000
Russia $000
Sub Total $000
Eliminations $000
Total $000
75,816 112,976 1,946 190,738
607 5,155 5,762
8 8
76,423 118,139 1,946 196,508
76,423 118,139 1,946 196,508
Inter segment revenue: Management services/other Equipment 12,661 19,034 31,695 Total revenue: Oil Gas Management services/other Equipment 12,661 19,034 31,695 Profit before tax Operating profit/(loss) Finance income Finance cost (5,814) 125,176 (1,432) 1,161 2,680 121,771 878 (1,142) 121,507 Assets Segment assets Goodwill Long term receivable Cash and cash equivalents Total assets Non cash expense (other than depreciation and impairment) Impairment Increase in property, plant and equipment and intangible assets Depreciation, depletion and amortisation 3,539 47,650 51,189 206,298 19,377 225,675 140,391 2,101 2,531 3,463 148,486 44,008 1,192 45,200 11,084 2,686 13,770 405,320 2,101 2,531 74,368 484,320 405,320 2,101 2,531 74,368 484,320 (2,180) (2,180) 119,591 878 (1,142) 119,327 75,816 112,976 1,946 190,738 607 5,155 5,762 8 71 79 76,423 118,139 14,607 19,105 228,274 (12,661) (19,105) (31,766) 76,423 118,139 1,946 196,508 71 71 12,661 19,105 31,766 (12,661) (19,105) (31,766)
541
3,845
1,088
106
541 5,039
541 5,039
377 450
45,164 33,097
41,863 66
18,613 1,739
1,583
107,600 35,352
107,600 35,352
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2010 Revenue by location of customer External revenue: Oil Gas Management services/other
Ukraine $000
Total $000
77,092 100,007 1,167 178,266
1,723 12,890 14,613
78,815 112,897 1,167 192,879
2009 Revenue by location of customer External revenue: Oil Gas Management services/other
Ukraine $000
Total $000
75,816 112,976 1,946 190,738
607 5,155 5,762
8 8
2010 $000
76,423 118,139 1,946 196,508
Major customers 1 Ukraine 2 Ukraine
2009 $000
64,244 39,485
64,690 21,203
There are 2 (2009: 2) customers in the Ukraine that exceed 10% of the Groups total revenues.
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Group accounts
5.(a) Property, plant and equipment

2010
Oil and gas fields Ukraine $000 Gas field Russia $000 Gas field Hungary $000 Other fixed assets $000 Total $000
GROUP Cost At 1st January Additions during the year Foreign exchange equity adjustment Disposal of property, plant and equipment Reclassification At 31st December Accumulated depreciation, depletion and amortisation and provision for impairment At 1st January Depreciation on disposals of property, plant and equipment Exceptional item impairment of Russian assets Impairment of property, plant and equipment Foreign exchange equity adjustment Depreciation charge for the year At 31st December Carrying amount At 31st December 214,301 161,542 23,064 4,435 403,342 174,000 28,353 202,353 72,568 2,882 75,450 1,739 4,885 6,624 10,742 (204) (1) 2,151 12,688 186,481 (204) 72,568 2,882 (1) 35,389 297,115 361,786 54,864 4 416,654 130,609 107,822 (1,439) 236,992 22,481 5,833 1,374 29,688 15,771 1,680 (1) (323) (4) 17,123 530,647 170,199 (1,440) (323) 1,374 700,457
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2009
Oil and gas fields Ukraine $000
Gas field Russia $000
Gas field Hungary $000
Other fixed assets $000
Total $000
GROUP Cost At 1st January Additions during the year Foreign exchange equity adjustment Reclassification Disposals of property, plant and equipment At 31st December Accumulated depreciation, depletion and amortisation At 1st January Depreciation on disposals of property, plant and equipment Foreign exchange equity adjustment Depreciation charge for the year At 31st December Carrying amount At 31st December 187,786 130,609 20,742 5,029 344,166 142,908 31,092 174,000 1,739 1,739 8,358 (137) 14 2,507 10,742 151,266 (137) 14 35,338 186,481 319,725 42,061 361,786 83,993 41,885 4,975 22 (266) 130,609 11,593 9,285 1,603 22,481 14,857 1,061 20 (22) (145) 15,771 430,168 94,292 4,995 1,603 (411) 530,647
Oil and gas fields in Ukraine and Russia includes $42.4m and $161.5m respectively in respect of items still under construction (2009: $21.4m and $83.7m).
5.(b) Exploration for and evaluation of oil and natural gas resources
The following amounts relating to exploration activities are included in cost of sales or capitalised within intangible assets (refer to note (5c)).
Exploration and evaluation costs Provision for impairment/write off of exploration costs Expense for the year Intangible assets Net assets Capital expenditure for the year Net cash used during the year in investing activities
2010 $000 2009 $000
10,794 10,794 23,371 23,371 8,345 8,345
5,039 5,039 27,134 27,134 13,308 13,308
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5.(c) Intangible assets: exploration and appraisal expenditure

2010 Cost At 1st January Additions during the year Write off of unsuccessful exploration costs Effect of exchange rates on intangible assets Reclassification to tangible assets At 31st December Provision against oil and gas assets At 1st January and 31st December Carrying amount At 1st January At 31st December 9,456 3,448 8,239 9,049 9,439 10,874 27,134 23,371 1,308 6,355 7,663 10,764 1,245 (7,253) 4,756 8,239 4,039 (1,855) (1,374) 9,049 15,794 3,061 (1,686) 60 17,229 34,797 8,345 (10,794) 60 (1,374) 31,034
Ukraine $000 USA $000 Hungary Rest of world $000 $000 Total $000
The write off of exploration costs of $10.8m relates to Ukrainian assets; Zaplavskoye 3 Well ($6.2m) which was dry and the licence cost for Chervonoyarske ($1.0m), additionally costs were written off in Hungary for Well Gy3 ($1.9m) and Bulgarian wells, Staro Oryahovo ($1.1m) and Well Shkorpilovtci ($0.6m). Reclassifications of $1.4m relates to Hungarian assets being reclassified to property, plant and equipment.
2009 Cost At 1st January Additions during the year Write off of unsuccessful exploration costs Reduction in interest in Bulgaria Reclassification to tangible assets Reclassification to assets held for sale At 31st December 12,224 2,385 (3,845) 10,764 290 (290) 1,603 9,327 (1,088) (1,603) 8,239 16,195 1,306 (106) (1,601) 15,794 30,022 13,308 (5,039) (1,601) (1,603) (290) 34,797
Ukraine $000 USA $000 Hungary Rest of world $000 $000 Total $000
Provision against oil and gas assets/release of costs against test revenue At 1st January At 31st December Carrying amount At 1st January At 31st December 10,916 9,456 1,603 8,239 9,840 9,439 22,359 27,134 1,308 1,308 6,355 6,355 7,663 7,663
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5.(d) Impairment test for property, plant and equipment and goodwill
A review was undertaken at the balance sheet date of the carrying amounts of property, plant and equipment and goodwill to determine whether there was any indication of triggers that may have led to these assets suffering an impairment loss. Following this review impairment triggers were noted in relation to Yuzhgazenergie (YGE) in Russia and Poltava Petroleum Company (PPC) in Ukraine. See note 5(e) and 5(f) for the results of the YGE test.
Ukraine
Following the implementation of a new Tax Code in Ukraine effective 1st January 2011, which has resulted in rental charges being levied on oil and gas production effective from 1st January 2011 (see note 21), the Group determined that this represented an impairment trigger for its Novo-Nikolaevskoye Complex. The NovoNikolaevskoye Complex consists of four production licences, Ignatovskoye, Molchanovskoye, Novo-Nikolaevskoye and Rudenkovskoye. An impairment test was therefore undertaken. The test compared the recoverable amount of the Cash Generating Unit (CGU), being the Novo-Nikolaevskoye Complex for the purpose of the review, to the carrying value of the CGU. The estimate of recoverable amount was based on fair value less costs to sell, derived by estimating discounted after tax cash flows for the CGU based on estimates that a typical market participant would use in valuing such assets. The impairment review has been undertaken in US Dollars. The key assumptions used in the impairment tests were: Production profiles: these were based on the latest available 2P reserves (39.1 MMboe), provided by independent reserve engineers. Gas prices: these were based on current prices being achieved, escalated for the remainder of 2011 only, in line with public statements made by Ukrainian Government officials. The gas price is assumed to increase in line with US Dollar inflation after 2011. Capital and operating costs: based on development programmes and previous experience. Post tax nominal discount rate: 12.2%. Accordingly the impairment test is dependent upon judgment used in determining such assumptions. Having undertaken the review it was concluded that the Novo-Nikolaevskoye Complex was not impaired.
5.(e) Exceptional item impairment of Russian assets Russia

Following the 2007 acquisition of YGE in Russia, a technical and environmental re-evaluation of YGEs Koshekhablskoye gas field re-development was undertaken by the Group. The re-evaluation resulted in a revised development plan and production profile. The development plan and production profile have continued to be refined since that time. The anticipated cost of the development plan has further increased and first gas sales from the project are now expected in Autumn 2011, three years later than originally planned. Anticipated convergence of Adygean gas prices to net back European levels is now later than previously expected. The current level of gas prices in Russia is lower than those anticipated in March 2010 when an impairment review was last undertaken for YGE. The Company considers the reduced gas price and uncertainty about the future rates of increase as constituting an impairment trigger in accordance with IAS 36 and accordingly an impairment test was therefore undertaken. The test compared the recoverable amount of the Cash Generating Unit (CGU), being YGE for the purpose of the review, to the carrying value of the CGU including goodwill. The estimate of recoverable amount was based on fair value less costs to sell, derived by estimating discounted after tax cash flows for the CGU based on estimates that a typical market participant would use in valuing such assets. In accordance with IAS 36, the impairment review has been undertaken in Russian Roubles. The key assumptions used in the impairment testing were: Production profiles: these were based on the latest available information provided by independent reserve engineers, such information including 2P reserves (44.8 MMboe), 3P and contingent resources. Economic life of field: it is assumed YGE will be successful in extending the licence term beyond its current 2026 expiration to the economic life of the field (expected to be around 2032). Gas prices: these were based on the Russian governments intention to achieve net-back convergence with the European gas markets, which the Group has assumed as occurring in 2017 (2009: 2015), which is consistent with
90
Group accounts
views expressed by many market commentators. The gas price is assumed to increase in line with US Dollar inflation after 2017 (2009: 2015). Capital and operating costs: these were based on project estimates provided by third parties. Post tax nominal Rouble discount rate of 13.5% (2009: 15.9%). This was based on a Capital Asset Pricing Model analysis consistent with that used in previous impairment reviews. No value was attributed to 3P and contingent resources. Accordingly the impairment test is dependent upon judgment used in determining such assumptions. The changes in the key assumptions used from previous periods has resulted in the asset being impaired by $74.6m consisting of goodwill of $2.0m and property, plant and equipment of $72.6m. The main driver of the impairment has been the lower sales prices anticipated in the early years together with a longer period before net back European gas price parity is achieved. The Group has recognised the impairment charge as an exceptional charge within the accounts. The associated tax effect on the exceptional charge is a deferred tax credit to the income statement of $14.5m. The impact on the impairment calculation of applying different assumptions to production, gas prices, capital expenditure and post-tax discount rates based on 2P reserves, would be as set out below. No value was attributed to 3P and contingent resources.
Increase/(Decrease) to impairment loss for Yuzhgazenergie CGU $m
Impact if production: Impact if gas price: Impact if capital expenditure Impact if post-tax discount rate
Increased by 1% Decreased by 1% Increased by 1% Decreased by 1% Increased by 1% Decreased by 1% Increased by 1% Decreased by 1%
(4) 4 (4) 4 1 (1) 17 (19)
5.(f) Goodwill
Goodwill was recognised in 2007 in relation to the Groups acquisition of Yuzhgazenergie LLC (YGE). The goodwill arose after the application of IAS 12 Income Taxes, and was attributable principally to expanded growth opportunities in Russia. In accordance with IAS 36 Impairment of Assets, and following the Groups decision that an indication of potential impairment arose in relation to the property, plant and equipment (for reasons more fully disclosed in 5(e)) a review for impairment of the related goodwill was undertaken. The carrying amount of the goodwill was allocated to the YGE Cash Generating Unit (CGU) as described above. The test compared the recoverable amount of the CGU, being YGE for the purpose of the review, to the carrying value of the CGU including goodwill. The calculations use the same assumptions as used for property, plant and equipment as more fully described in 5(e).
2010 $000 2009 $000
At 1st January Impairment of goodwill (refer to 5(e)) Foreign exchange equity adjustment At 31st December
2,101 (2,032) (69)
2,165 (64) 2,101
6. Long term receivables
Long term receivables consist of VAT recoverable on expenditures incurred in Russia. The receivables will be recovered against input VAT on future gas sales.
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7. Investments
The net book value of unlisted fixed asset investments comprise:

Other investments Cost At 1st January Additions At 31st December Accumulated impairment At 1st January Additions At 31st December Carrying amount At 31st December 2009 and 2010 5,617 5,617 5,617 5,617 5,617 5,617 5,617 5,617
2010 $000 2009 $000
A provision was made in 2007 against other investments which comprises an investment in a Ukrainian oil and gas company. At the end of 2007 there were no clear development plans relating to the investment and this continues to be the position at 31st December 2010. The investment reflects a 10% holding of the Companys ordinary share capital.
8. Financial instruments
An outline of the financial instrument risk management objectives, policies and strategies pursued by the Group in relation to financial instruments is set out in the Financial Review on pages 37 to 41, together with the discussion of financial risk factors required by IFRS 7, Financial Instruments: Disclosures, and these are incorporated into the financial statements by reference.
Group Interest rate risk profile of financial assets and liabilities
The interest rate profile of the financial assets and liabilities of the Group as at 31st December is as follows (excluding short-term assets and liabilities, non-interest bearing):
Group Year ended 31st December 2010

Floating rate Short term deposits (note 10) Other receivables (note 9) Other payables (note 12)
Within 1 Year $000 Total $000
57,051 5,156 (5,797)
57,051 5,156 (5,788)
Group Year ended 31st December 2009

Floating rate Short term deposits (note 10) Other receivables (note 9) Other payables (note 12)
Within 1 Year $000 Total $000
73,632 9,120 (9,489)
73,632 9,120 (9,489)
Floating rate financial assets comprise cash deposits placed on money markets at call, seven day and monthly rates.
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Group accounts
Fair values of financial assets and financial liabilities
Set out below is a comparison by category of carrying amounts and fair values of the Groups financial instruments. Fair value is the amount at which a financial instrument could be exchanged in an arms length transaction. Where available, market values have been used (this excludes short term assets and liabilities). There is no difference between the carrying value of cash and cash equivalents and their fair value.
Book value Fair value 2009 $000 2010 $000 2009 $000
Financial assets Cash and cash equivalents (note 10)
2010 $000
62,018
74,368
62,018
74,368
Currency exposures
The table below shows the extent to which the Group has monetary assets and liabilities in currencies other than the functional currency of the operating company involved. These exposures give rise to the net currency gains and losses recognised in the income statement. As at 31st December the asset/(liability) foreign currency exposures were:
2010 $000 2009 $000
US Dollar Sterling Euros Hungarian Forints Ukrainian Hryvnia Bulgarian Leva Russian Roubles Total net
7,185 21,912 (8,059) 109 9,970 (51) 366 31,432
(1) (410) 7,001 165 (3,104) 2,669 129 6,449
Credit risk
The Group has policies in place to ensure that sales of products are made to customers with appropriate credit worthiness. Where appropriate, the use of prepayment for product sales limits the exposure to credit risk. Further information is contained within the Financial Review on pages 38 to 41, and are incorporated into the financial statements by reference.
Borrowing facilities
The Group has no borrowing facilities at 31st December 2010 (2009: Nil). Further information on Capital Management is contained within the Financial Review on pages 38 to 41 and are incorporated into the financial statements by reference.
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9. Trade and other receivables

2010 $000 2009 $000
Trade receivables Other receivables VAT receivable Prepayments
8,024 8,035 6,849 1,488 24,396
5,794 10,181 12,467 3,375 31,817
As of 31st December 2010, there were no trade receivables which were impaired (2009: nil). At this date there were no trade receivables past due (2009: nil). Included within other receivables is an amount of $5.2m (2009: $9.1m) relating to the Groups share of a receivable of HHE North Kft (HHN) that is unsecured, bears interest based on LIBOR plus a mark up and is expected to be repaid within 12 months of the balance sheet date. There is no difference between the carrying value of trade and other receivables and their fair value. The carrying amounts of the Groups trade and other receivables are denominated in the following currencies:
2010 $000 2009 $000
US Dollar Sterling Euros Hungarian Forints Ukrainian Hryvnia Russian Roubles
4,427 758 12,821 2,521 3,374 495 24,396
9,134 2,658 5,234 2,295 3,333 9,163 31,817
10. Cash and cash equivalents

2010 $000 2009 $000
Cash Short term deposits Cash and cash equivalents
4,967 57,051 62,018
736 73,632 74,368
Short term deposits comprise amounts which are held on deposit, but are readily convertible to cash. At 31st December 2010 $0.5m (2009: $1.1m) of the cash held in Hungary at K & H Bank Zrt was restricted. The Hungarian Mining Act provides that a guarantee is held to cover compensation for any mine damages and the costs of recultivation, including environmental damage of the waste management facilities.
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Group accounts
11. Share capital
Equity share capital, denominated in Sterling, was as follows:

2010 Number 2010 000 2010 $000 2009 Number 2009 000 2009 $000
Authorised Ordinary shares of 10p each Allotted, called up and fully paid Opening balance of 1st January Placement of ordinary shares Exercise of share options Closing balance at 31st December Of which the following are shares held in treasury: Treasury shares held at 1st January and 31st December 402,771 40 77 402,771 40 77 157,513,880 14,257,270 249,327 172,020,477 15,751 1,426 25 17,202 24,335 2,277 37 26,649 156,974,380 539,500 157,513,880 15,697 54 15,751 24,256 79 24,335 250,000,000 25,000 38,729 250,000,000 25,000 40,368
The Company did not purchase any treasury shares during 2010 (2009: none). There were no treasury shares used in 2010 (2009: none) to settle share options. There are no shares reserved for issue under options or contracts. As at 31st December 2010 the market value of the treasury shares held was $2.0m (2009: $1.8m).
12. Trade and other payables

2010 $000 2009 $000
Trade payables Other payables Other taxes and social security costs VAT payable Deferred consideration relating to the acquisition of Yuzhgazenergie LLC (note below) Accruals and deferred income
19,684 12,455 968 3,973 2,000 19,252 58,332
11,151 13,181 862 2,123 5,000 11,691 44,008
There is no difference between the carrying value of trade and other payables and their fair value. During the year $3.0m (2009: $nil) was paid to Mostotal as part of the deferred consideration for the acquisition of the Groups Russian asset, Yuzhgazenergie LLC. At 31st December 2010 the remaining deferred consideration was $2.0m (2009: $5.0m) which was paid in January 2011. Included within other payables is an amount of $5.8m (2009: $9.5m) relating to the Groups share of a payable of HHE North Kft (HHN) and Horizon Nyirseg Kft that is unsecured, bears interest based on LIBOR plus a mark up and is expected to be repaid within 12 months of the balance sheet date.
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13. Provisions
2010 $000 2009 $000
Provision for site restoration Other provisions
3,274 3,274
Ukraine Russia 2009 $000 2010 $000 2009 $000 2010 $000 Hungary 2009 $000 2010 $000 Total
2,810 8 2,818
Provision for site restoration At 1st January Revision to estimate Foreign exchange adjustment Provision for additional wells drilled Unwinding of discount (note 15) At 31st December
2010 $000
2009 $000
1,367 23 84 1,474
1,058 83 48 178 1,367
1,215 79 1 33 52 1,380
1,322 (247) 140 1,215
228 (30) 222 420
228 228
2,810 79 (29) 278 136 3,274
2,380 83 (247) 276 318 2,810
The increase in the Ukraine provision reflects an increase in the number of wells that are required to be decommissioned as a result of recent drilling programmes. The Russia provision results from the decommissioning of 12 wells and removal of plant as required by the licence obligation. Decommissioning is due to take place from 2014 to 2051.
14. Finance income

2010 $000 2009 $000
Interest income on deposits Other
854 14 868
876 2 878
15. Finance costs

2010 $000 2009 $000
Other interest Unwinding of discount on deferred consideration Unwinding of discount on site restoration (note 13)
307 136 443
369 455 318 1,142
Interest capitalised on qualifying assets during 2010 was $nil (2009: $nil).
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Group accounts
16. Cost of sales

2010 $000 2009 $000
Operating costs Depreciation, depletion and amortisation Production based taxes
17,835 33,238 5,219 56,292
20,599 32,831 3,981 57,411 5,039 62,450
Provision for impairment/write off of exploration costs Exceptional item impairment of Russian assets (note 5(e) and (f))
13,676 74,600 144,568
The 2010 provision for impairment of fixed assets/write off of exploration costs of $13.7m (2009: $5.0m) includes Ukrainian assets, Zaplavskoye 3 Well ($6.2m) which was dry and licence cost for Chervonoyarske ($1.0m), additionally costs were written off in Hungary for Well Gy3 ($1.9m) and Bulgarian wells, Staro Oryahovo ($1.1m) and Well Shkorpilovtci ($0.6m). A provision of $2.9m was also made against an asset held for Russia. The exceptional item consists of impairment of Russian assets, refer to note 5(e) for further details. The cost of inventories (calculated by reference to production costs) expensed in cost of sales in 2010 was $56.2m (2009: $57.0m).
17. Operating profit analysis of costs by nature
Operating profit derives solely from continuing operations and is stated after charging the following:
2010 $000 2009 $000
Depreciation other assets (note 5(a)) Depreciation, depletion and amortisation oil and gas assets (note 5(a)) Staff costs Foreign exchange loss Minimum operating lease payments for land and buildings: land and buildings
2,151 33,238 17,813 2,644 1,311
2,521 32,831 15,397 2,286 1,117
During the year the Group (including its overseas subsidiaries) obtained the following services from the Groups auditors as detailed below:
Auditors remuneration Fees payable to company auditors for the audit of the parent company and consolidated accounts Fees payable to company auditors and its associates for other services: The audit of the Companys subsidiaries pursuant to such legislation Tax services 278 599 1,271 222 556 1,098
2010 $000 2009 $000
394
320
97
18. Obligations under leases
At the balance sheet date, the Group has outstanding future minimum commitments under non-cancellable operating leases, which fall due as follows:
Land and buildings 2010 $000 2009 $000
Within one year In the second to fifth years inclusive After five years
1,302 1,775 486 3,563
1,291 1,698 585 3,574
Operating lease payments represent rentals payable by the Group for its office premises and staff accommodation.
19. Staff costs

2010 $000 2009 $000
Wages and salaries UK social security costs Pension contributions Share-based payments (equity-settled) (note 20)
16,256 607 2,786 775 20,424
14,091 626 2,042 420 17,179
Staff costs are shown gross and include $2.6m (2009: $1.8m) of capitalised costs, representing time spent on exploration and development activities. During the year, the average monthly number of employees was:
2010 2009
Management/operational Administration support
655 45 700
598 44 642
Included within management/operational are 4 Directors on service contracts. Further details of the Directors and their remuneration is included on pages 60 to 68 which form part of these financial statements.
98
Group accounts
20. Share-based payments Share options

Share options are granted to Executive Directors and Senior Management based on performance criteria. The scheme rules are described in the Directors Remuneration Report and repeated below. All share-based payments are equity settled. At 31st December 2010, there were outstanding options under various employee share option schemes, exercisable during the years 2011 to 2020 (2009: 2010 to 2019), to acquire 2,593,724 (2009: 2,099,551) shares of the Company at prices ranging from 0.00 to 4.54 per share (2009: 0.68 to 4.54). The vesting period of the options is 3 years, with an exercise period of 7 years, making a 10 year maximum term. The following table illustrates the number and weighted average prices (WAEP) of, and movements in, share options during the year.
2010 No 2010 WAEP 2009 No 2009 WAEP
Outstanding as at 1st January Granted during the year Surrendered during the year Exercised during the year
1
2,099,551 1,071,000 (327,500) (249,327) 2,593,724 347,924
238.93p 152p 298p 71.96p 211.63p 131.7p
2,022,251 864,800 (248,000) (539,500) 2,099,551 581,538
205.75p 230.75p 331.18p 48.22p 238.93p 105.55p
Outstanding at 31st December Exercisable at 31st December

1
Weighted average market price at exercise 402.7p (2009: 204.92p)
For the share options outstanding as at 31st December 2010, the weighted average remaining contractual life is 2.8 years (2009: 1.75 years). During the year share options were granted in accordance with the new share option schemes, the Discretionary Share Option Scheme (DSOS) and the Performance Share Plan (PSP), which were introduced in 2010. They reflect the best practice aspects recommended by the Association of British Insurers following the publication of their guidelines in March 2001 (the ABI Guidelines).
2010 Share Option Schemes DSOS

The DSOS is made up of two parts. Options to acquire ordinary shares in the Company granted under Part A are Approved Options and options to acquire Shares granted under Part B of the DSOS are Unapproved Options. No consideration shall be payable for the grant of an Option. 675,500 options were granted under DSOS in 2010. The exercise price of options granted under DSOS is 241p. For these options to vest there has to be an increase in the Groups Earnings Per Share (EPS) growth over the performance period measured over the 3 consecutive calendar years commencing 1st January 2010. The weighted average fair value of options granted during the year under the DSOS was 119.3p per option.
PSP
PSP are granted solely to Executive Directors. Subject to shareholder approval at the 2010 AGM, Executive Directors will receive awards under the 2010 Performance Share Plan in the form of nil cost options. No consideration is required to be paid for the grant or exercise of an Option. 395,500 options were granted under PSP. The PSP options provide a conditional right to acquire shares at nil cost subject to the satisfaction of the performance conditions and continued employment with the Group. For these options to vest a comparison is performed between the Groups TSR against the FTSE 250 index (half the options) and the All-Share Oil & Gas Producers index (other half of options). The weighted average fair value of options granted during the year under the PSP was 130.9p per option.
99
Pre 2010 Share Option Schemes
In 2009, share options were granted in accordance with The New Approved Share Option Scheme and the New Unapproved Share Option Scheme (collectively the 2001 Share Option Schemes) that were introduced in 2001. They reflect the best practice aspects recommended by the Association of British Insurers following the publication of their guidelines in March 2001 (the ABI Guidelines). The weighted average fair value of options granted in 2009 under the New Approved Share Option Scheme and the New Unapproved Share Option Scheme was 56.90p per option.
Fair value of share options granted
The fair value of options granted under the DSOS is estimated as at the date of grant using a variance of the Binomial model, taking into account terms and conditions upon which the options are granted, which includes the performance condition related to the Companys earnings per share directly. No dividends are paid on shares under the scheme prior to exercise. The fair value of options granted under the PSP is estimated as at the date of grant using a variant of the Monte Carlo model, taking into account the terms and conditions upon which the options are granted, which includes the performance condition related to the TSR directly. No dividends are paid on shares under the scheme prior to exercise. The fair value of share options previously granted under the 2001 Share Option Schemes is estimated as at the date of grant using a variant of the standard binomial model, taking into account the terms and conditions upon which the options are granted, which includes the performance condition related to the Companys share price directly. The performance condition based on performance relative to other companies is modeled with a Monte Carlo model. The following table lists the inputs to the model used for the years ended 31st December 2010 and 31st December 2009. The expected future volatility has been determined by reference to the historical volatility.
2010 DSOS 2010 PSP 2009 2001 Share Option Schemes
Dividend yield (%) Expected share price volatility (%) Risk free interest rate (%) Exercise price (pence) Expected life of option (years) Weighted average share price (pence)
2.10 66.0 1.70 241.00p 3.40 288.30p
2.10 66.00 1.50 0.00p 3.00 288.30p
2.10 58.50 2.45 230.75p 4.75 238.93p
Bonus scheme
The performance criteria of the Directors and senior employees bonus payments includes a component that relates directly to JKXs share performance over the vesting period and a component which relates to the performance of JKX share price in relation to the FTSE Oil & Gas Producers Index. The full details of the bonus performance criteria are explained in the Directors Remuneration Report on pages 62 to 63. The bonus accrued for 2010 was $0.9m (2009: $1.4m) and was paid in January 2011.
100
Group accounts
21. Taxation
Taxes charged on the production of hydrocarbons are included in cost of sales (note 16).
Analysis of tax on profit on ordinary activities Current tax UK current tax UK prior tax Overseas current year Current tax total Deferred tax UK Overseas current year Overseas prior year Deferred tax total (5,737) (24,915) (30,652) (364) (865) (865) 33,998 30,288 30,288 34,863 34,863
2010 $000 2009 $000
Factors that affect the total tax charge
The total tax (credit)/charge for the year of $(0.4)m (2009:$34.0m) is lower than the average rate of UK corporation tax of 28% (2009:28%). The differences are explained below:
Total tax reconciliation Profit on ordinary activities before tax Tax calculated at 28% (2009: 28%) Other fixed asset differences Net change in unrecognised losses carried forward Other temporary differences Permanent foreign exchange differences Effect of tax rates in foreign jurisdictions Withholding tax suffered Foreign exchange movement on tax balances Other non-deductible expenses Recognition of prior period losses Total excluding impact of change in tax rates, tax losses of prior year not previously recognised and impairment and write down of fixed assets Effect of changes in tax rates Impairment of fixed assets/write off of exploration costs Total tax (credit)/charge
2010 $000 2010 % 2009 $000 2009 %
20,792 5,822 68 (2,295) 1,135 141 2,618 2,775 (7,549) 2,714 (4,945) 1,867 (364)
28.0% 0.3% (11.0%) 5.4% 0.7% 12.6% 0.0% 0.0% 13.3% (36.3%) 13.0% (23.8%) 9.0% (1.8%)
119,327 33,412 13 286 (743) (3,818) 89 464 4,265 (10) 33,958 40 33,998
28.0% 0.0% 0.2% (0.6%) 0.0% (3.2%) 0.1% 0.4% 3.6% 0.0% 28.5% 0.0% 0.0% 28.5%
101
Factors that may affect future tax charges
A significant proportion of the Groups 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.
Taxation in Ukraine
The Group is subject to uncertainties relating to the determination of its tax liabilities. Ukrainian tax legislation and practice are in a state of continuous development, with new laws coming into effect at times which can conflict with others and, therefore, are subject to varying interpretations and changes which may be applied retrospectively. Managements interpretation of tax legislation as applied to the transactions and activities of the Group may at times not coincide with that of the tax authorities. As a result, the tax authorities may challenge transactions and the Group may be assessed for additional taxes, penalties and fines which could have a material adverse effect on the Groups financial position and results of operations. Since PPCs inception in 1994 the Company has operated in a regime where conflicting laws have often existed, including in relation to effective taxes on oil and gas production. Various laws and regulations have existed and have implied a number of variable rates. PPC has at times since 1994 sought clarification of their status regarding a number of production related taxes, and has been subject to a number of such taxes, at various rates, which have been paid and accounted for within Operating Costs within the Group Income Statement. In late 2009, coinciding with the lead up to the recent Presidential election in Ukraine, PPC was subjected to increased operational pressures in several areas, including broader taxation. Specifically, application of production related tax pre 2009 has attracted scrutiny. On 1st January 2010 yet another law came into force in Ukraine in the area of production related tax, the Law of Ukraine on On Rent Charges for Oil, Natural Gas and Gas Condensate which had been suspended since 2004. During 2010 conflicting laws (most particularly the Law of Ukraine on Amending Certain Legislative Acts of Ukraine) which may be a basis for the Ukrainian Tax Authorities to assert that further production related taxes are due from various oil and gas companies, including PPC for periods through to 31st December 2010. PPC will continue to seek clarification from advisors and the tax authorities concerning rules of calculation and payment of various production related taxes for periods through to 31st December 2010. The statutory period of limitation in Ukraine for such matters is three years. If PPC was subject to maximum production related taxes over the three year period to 31st December 2010, increased production related taxes could have been an amount equivalent to approximately twenty percent of Ukraine gross revenues (net of corporate tax savings). In particular, the Group considers that the likelihood of additional production related taxes for the period from January 2008 to December 2008 is remote on the basis of tax audits completed, and the related legal position. The Group also believes the possibility of any penalties or interest for any period, to be remote. The Group would exhaustively challenge the payment of any further production related taxes (over and above those it has already paid) for the period through 31st December 2010. Given the lack of clarity over the legal position, in conjunction with the arguments the Group has to defend its position, the Group considers that no payments are likely to be made in the next 12 months. Further, the Group has flexibility in relation to capital and other expenditure to mitigate impact of any future additional production related payments on the Groups financial position. A new tax code became effective in Ukraine on 1st January 2011 replacing most of the previous tax laws. The new tax code has removed uncertainty over the applicability of rental fee payment by PPC from 2011 and accordingly PPC has been liable to and is paying such fees. The fees are levied on production volumes in accordance with a rates schedule which may change from time to time. Such payments will be recorded as a cost of sale and therefore be accounted for after revenue and before operating profit.
22. Deferred tax
A deferred tax liability of $11.5m (2009: $18.4m) arises in respect of PPCs activities, $nil (2009:$9.6m) in respect of Yuzhgaznergie LLCs activities and $0.5m (2009: $1.4m) in respect of Hungarian activities. A deferred tax asset of $5.7m (2009: $nil) has been recognised in respect of brought forward UK losses, $7.9m (2009: $nil) in respect of Yuzhgaznergie LLC comprising losses and temporary differences. No other deferred tax has been recognised.
102
Group accounts
Assets
Liabilities 2009 $000 2010 $000 2009 $000 2010 $000
Net 2009 $000
Provided deferred taxation Fixed asset differences Other temporary differences Tax losses Net deferred tax (assets)/liability recognised Unprovided deferred taxation Tax losses Fixed asset differences Other temporary differences
2010 $000
(7,967) (10,624)
(3,277) (2,491)
17,049
35,064
17,049 (7,967) (10,624) (1,542)
35,064 (3,227) (2,491) 29,346
(4,023) (2,008) (187) (6,218)
(12,587) (2,032) (59) (14,678)
$3,164,284 (2009:$2,881,403) of the tax losses will expire principally between 2017 and 2019 (2009: 2017 and 2029). There is no expiry date on the remaining losses. The deductible temporary differences do not expire under current tax legislation. Deferred tax assets have not been recognised in respect of the unprovided deferred taxation items because it is not probable that future taxable profit will be available to utilise these deductible temporary differences. In March 2011, a reduction in the rate of UK corporation tax was announced in the UK Budget. The main rate of corporation tax effective from 1st April 2011 will be reduced from 27% to 26%. The impact of the rate reduction is not expected to have a material impact on provided and unprovided UK deferred taxation. In December 2010 a new Ukrainian tax rate was introduced. New tax rates in the Ukraine will be as follows: from 1st January 2011 to 31st March 2011 25%; from 1st April 2011 to 31st December 2011 23%; in 2012 21%; in 2013 19%; after 31st December 2013 16%. The deferred tax asset has therefore been recognised with due consideration of the tax rate effective on the expected unwinding of those temporary differences.
23. Earnings per share
The calculation of the basic and diluted earnings per share attributable to the ordinary equity holders is based on the following data:
Earnings Earnings for the purpose of basic and diluted earnings per share (profit for the year attributable to equity holders): Before exceptional item After exceptional item Number of shares Basic weighted average number of shares Dilutive potential ordinary shares: Share options Weighted average number of shares for diluted earnings per share 815,147 171,680,730 533,071 157,874,862 81,256 21,156
2010 2010 $000 2009 $000
85,329 85,329
2009
170,865,583
157,341,791
Earnings before exceptional item of $81,256,000 is calculated from the 2010 earnings of $21,156,000 and adding back the exceptional item of $74,600,000 less the related deferred tax on the exceptional item of $14,500,000. There were 2,593,724 (2009: 2,099,551) outstanding share options at 31st December 2010, of which 744,988 (2009: 360,969) have a dilutive effect.
103
24. Dividends
On 11th June 2010, a dividend of 2.7 pence per share (2009: 2.6 pence per share) was paid to shareholders and on 15th October 2010, an interim dividend for 2010 of 2.4 pence per share (2009: 2.3 pence per share) was also paid to shareholders. Total dividends paid during the year were 5.1 pence per share (2009: 4.9 pence per share). Total dividends paid during the year amounted to $13.2m (2009: $12.3m). In respect of the full year 2010, the directors propose that a final dividend of 2.6 pence per share (2009: 2.7 pence per share) be paid to shareholders on 24th June 2011. The total estimated dividend to be paid is $7.2m (2009: $7.1m). This dividend is subject to approval by the shareholders at the Annual General Meeting.
25. Reconciliation of operating profit to net cash inflow from operations

2010 $000 2009 $000
Operating profit Depreciation, depletion and amortisation Impairment of property, plant and equipment/intangible assets Gain on disposal of subsidiary/asset disposal Share-based payment costs Cash generated from operations before changes in working capital Increase in operating trade and other receivables* Increase in operating trade and other payables* Increase in inventories Cash generated from operations
20,367 35,388 88,276 775 144,806 (12,954) 14,559 (140) 146,271
119,591 35,351 4,821 (2,486) 420 157,697 (19,240) 21,963 (444) 159,976
* Foreign exchange differences, which were separately disclosed in the 2009 Annual Report, have been included in increase in operating trade and other receivables and increase in operating trade and other payables.
26. Capital commitments
Under the programmes for the development and production of oil and gas reserves in Ukraine and Russia, the Group had committed $3.8m to future capital expenditure on drilling rigs and facilities at 31st December 2010 (2009: $3.3m).
27. Related party transactions
The group has taken the exemption under IAS 24 to not disclose related party transactions between wholly owned entities of the group. Compensation of key management personnel. Key management are considered to comprise only the Directors. The remuneration of directors during the year was as follows:
2010 $000 2009 $000
Short-term benefits Post-employment benefits Share-based payments, equity settled
2,611 239 527 3,377
2,788 229 260 3,277
Share-based payments represent the IFRS 2 charge for the period.
104
Group accounts
Subsidiary undertakings and jointly controlled entities
At 31st December 2010, the principal subsidiary undertakings and jointly controlled entities of the ultimate parent (JKX Oil & Gas plc (PLC)) were:
Name Business Parent % held Country of (ordinary incorporation and shares) area of operation
Adygea Gas B.V. (ADY) Baltic Catering Services Baltic Energy Trading Ltd (BET) Eastern Ukrainian Pipeline Ltd (EUP) EuroDril Limited HHE North Kft (HHN) Horizon Nyirseg Kft (HNY) JKX Bulgaria Ltd (BUL) JKX Bulkan BG EAD JKX Carpathian BV JKX Georgia Ltd (GEO) JKX Hungary BV (JHU) JKX (Navtobi) Limited JKX (Nederland) B.V. (NED) JKX Ondava BV JKX Services Limited JKX Slovakia BV JKX Turkey Ltd JKX Ukraine BV (UKB) JKX Ukraine Ltd (UKR) JP Kenny Exploration & Production Limited (JPK) Kharkiv Investment Company (KIC) Mid Asian Gas Ltd (MID) PAGE Gas Ltd (PAG) Poltava Gas B.V. Poltava Petroleum Company Shevchenko Farm Trans-European Energy Services Limited (TES) Yuzhgazenergie LLC
Holding Oil & gas services Oil & gas exploration and production Oil & gas services Oil & gas exploration, production and services Oil & gas exploration and production Oil & gas exploration and production Oil & gas exploration and production Oil & gas exploration and production Oil & gas exploration and production Oil & gas exploration and production Oil & gas exploration and production Oil & gas exploration and production Finance and Holding Oil & gas exploration and production Services Oil & gas exploration and production Oil & gas exploration and production Oil & gas exploration and production Oil & gas exploration and production Finance and Holding Holding Oil & gas exploration and production Oil & gas exploration and production Holding Oil & gas exploration and production Land lease Oil & gas exploration, production and services Oil & gas exploration, production and services
PAG EUP/KIC PLC BET/UKR TES JHU JHU PLC BUL NED PLC NED NED JPK NED PLC NED PLC NED PLC PLC BET/GEO PLC PLC NED POG KIC PLC ADY/UKB
100.00 100.00 100.00 100.00 100.00 50.00 50.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 62.00 100.00 100.00
Netherlands Ukraine UK Ukraine UK Hungary Hungary UK Bulgaria Netherlands UK Netherlands Cyprus Netherlands Netherlands UK Netherlands UK Netherlands UK UK Ukraine UK UK Netherlands Ukraine Ukraine UK Russia
HHN and HNY are the only proportionally consolidated entities, refer to note 28 for further details.
105
28. Joint ventures
In 2010, the Group acquired 50% of the share capital of Horizon Nyirseg Kft (HNY), a Hungarian registered company set up for the purpose of holding the Nyirseg licence. JKX had previously funded the exploration and appraisal of its 33.3% license interest through its contribution to joint venture assets since farming into the licence in 2008. During 2010 the Group increased its effective interest from 33.3% to 50%. With the formation of the new joint venture entity in 2010, the Groups accounting treatment changed from a jointly controlled asset to a jointly controlled entity. The results of HNY have been proportionally consolidated. On 20th January 2009, the Group acquired 50% of the share capital of HHE North Kft (HHN), a Hungarian registered company set up for the purpose of holding the Hernad I and Hernad II licences. JKX had previously funded the exploration and appraisal of its 50% interest through their contribution to joint venture assets since farming into the licences in December 2007. With the formation of the new joint venture entity and JKXs formal registration of shares in HHN in January 2009, the Groups accounting treatment changed from a jointly controlled asset to a jointly controlled entity. The results of HHN have been proportionally consolidated. The following amounts represent the Groups 50 percent share of the revenue and expenses and assets and liabilities of HNY and HHN for the years ended 31st December 2009 and 2010.
2010 $000 2009 $000
Revenue Expenses Profit after tax Non-current assets Property, plant and equipment Current assets Cash and cash equivalents Other current assets
14,613 10,351 4,262
5,762 4,709 1,053
18,941 617 5,108 5,725
19,280 1,156 5,899 7,054
Current liabilities Trade and other payables Short term loan (4,560) (10,953) (15,513) Non-current liabilities Other non-current liabilities (265) (72) (3,855) (18,609) (22,464)
106
Group accounts
29. Ukrainian and Russian business environment
Ukraine and Russia display emerging market characteristics, and the legislation and business practices regarding banking operations, foreign currency transactions and taxation are constantly evolving as the governments attempt to manage the economies. Risks inherent in conducting business in an emerging market economy include, but are not limited to, volatility in the financial markets and the general economy. Uncertainties over the development of the tax and legal environment, as well as difficulties associated with the consistent interpretation and application of current laws and regulations, have continued. As at 31st December 2010, oil and gas assets based in Ukraine and Russia represent approximately 45% (2009: 54%) and 49% (2009: 36%) respectively of the Groups oil and gas assets. The Groups operations and financial position may be affected by these uncertainties. The Groups financial statements do not include any adjustments to reflect the possible future effects on the recoverability, and classification of assets or the amounts or classifications of liabilities that may result from these uncertainties.
30. Post balance sheet events
On 31st March 2011, PPC entered into a reducing credit facility agreement with Credit Agricule CIB (France) secured by indemnity provided by the parent company, JKX Oil & Gas plc. The credit facility is for a maximum of Ukrainian Hryvnia equivalent of USD15.0m, reducing to USD5.0m which will be available until 31st December 2011. All provisions contained in the credit facility documentation have been negotiated on normal commercial and customary terms for such finance arrangements. When drawn, interest will be calculated at prevailing Credit Agricule CIB (France) bank rate plus a margin.
107
108 Directors responsibilities statement 109 Independent Auditors Report
COMPANY ACCOUNTS
110 Company balance sheet 111 Notes to the Company accounts
108
Directors responsibilities statement

The directors are responsible for preparing the Annual Report, the Directors Remuneration Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company and for that period. In preparing these financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the companys transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements and the Directors Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the companys website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The directors in office at the date of this report have each confirmed that: so far as he is aware, there is no relevant audit information of which the companys auditors are unaware; and he has taken all the steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the companys auditors are aware of that information.
By order of the board B J Burrows Company Secretary 19th April 2011
109
Independent Auditors Report to the members of JKX Oil & Gas plc
We have audited the parent company financial statements of JKX Oil & Gas plc for the year ended 31st December 2010 which comprise Company balance sheet and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
Opinion on other matters prescribed by the Companies Act 2006

In our opinion: the part of the Directors Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and the information given in the Directors Report for the financial year for which the parent company financial statements are prepared is consistent with the parent company financial statements.
Respective responsibilities of directors and auditors
As explained more fully in the Directors Responsibilities Statement set out on page 108, the directors are responsible for the preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Boards Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the companys members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements and the part of the Directors Remuneration Report to be audited are not in agreement with the accounting records and returns; or certain disclosures of directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit.
Scope of the audit of the financial statements
Other matter
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the parent companys circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.
We have reported separately on the group financial statements of JKX Oil & Gas plc for the year ended 31st December 2010.
Mark King (Senior Statutory Auditor)

for and on behalf of
PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors London 19th April 2011.

Notes: (a) The maintenance and integrity of the JKX Oil & Gas plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. (b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Opinion on financial statements
In our opinion the parent company financial statements: give a true and fair view of the state of the companys affairs as at 31st December 2010; have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and have been prepared in accordance with the requirements of the Companies Act 2006.
110
Company accounts
Company balance sheet UK GAAP

As at 31st December
2010 $000 2009 $000 Note
FIXED ASSETS Tangible assets Investments

B
42 6,769 6,811
71 6,771 6,842
CURRENT ASSETS Debtors amounts falling due within one year Debtors Amounts owed by group undertakings Cash at bank and in hand
C C
402 5,157 24,246 29,805
2,246 54,540 36,428 93,214 174,026 174,026 (57,104) (1,074) (58,178) 209,062 215,904 (375) 215,529
Debtors amounts falling due after more than one year Amounts owed by group undertakings Deferred tax assets
C D
350,249 5,737 355,986
Creditors amounts falling due within one year Amounts owed to group undertakings Other creditors
E E
(72,132) (736) (72,868)
Net current assets Total assets less current liabilities Creditors amounts falling due after more than one year Amounts owed to group undertakings Net assets CAPITAL AND RESERVES Called up share capital Share premium account Other reserves: Capital redemption reserve Equity share options Equity foreign currency translation Profit and loss account Total shareholders funds
F F F F F F F E
312,923 319,734 319,734
26,649 97,363 587 2,448 (1,090) 193,777 319,734
24,335 41,317 587 1,673 (1,090) 148,707 215,529
The notes on pages 111 to 116 are an integral part to these financial statements. These financial statements were approved by the Board of Directors on 19th April 2011 and signed on its behalf by:
Dr Paul Davies Director
B J Burrows Director
111
Notes to the Company accounts

A. Presentation of the financial statements Basis of preparation
The financial statements have been prepared in accordance with applicable UK accounting standards and the UK Companies Act 2006. The Directors have reviewed the Companys existing accounting policies and consider that they are consistent with the requirements of Financial Reporting Standard (FRS) 18 Accounting Policies. The Companys accounting policies are consistent with last year. The financial statements have been prepared on a going concern basis following a review by the directors of forecast cash flows for the next 12 months from the date of approval of the financial statements. In making their assessment the directors have considered sensitivities to their forecast cash flows from investments, including reducing forecast oil and gas realisations, increasing costs and deferring the date of first production in Russia. Company calculates the estimated cumulative charge for each award having regard to any change in the number of options that are expected to vest and the expired portion of the vesting period. The movement in cumulative expense since the previous balance sheet date relating to awards for services to subsidiaries is expensed in the income statement of those subsidiaries. Once an option vests, no further adjustment is made to the aggregate amount expensed. The corresponding entry is shown in equity in the Company. The fair value which is calculated using the binomial model takes into account two performance criteria, being the actual increase in the Companys share price and a comparison of the actual increase in the share price to the change in FTSE FI until the end of June 2004, the FTSE SI until the end of February 2006 and the higher of the FTSE 250I and the FTSE Oil & Gas Producers Index subsequent to that. The expected life of the options depends on the behaviour of the option holders, which is incorporated into the option model consistent with historic data.
Foreign currencies
Dividends
Transactions in foreign currencies are initially recorded at the exchange rate ruling at the date of the transaction. Exchange differences arising on the translation of monetary items are taken to the profit and loss account. Non-monetary items are measured in terms of historical cost in foreign currency and are translated using the exchange rates of the original transaction. The presentation and functional currency of the Company is the US Dollar.
Interim dividends are recognised when they are paid to the Companys shareholders. Final dividends are recognised when they are approved by shareholders.
Treasury shares
The consideration paid for shares repurchased by the Company and held as treasury shares is recognised as a reduction in shareholders funds through the profit and loss account reserve. No gain or loss is recognised in the profit and loss account.
Investments
Related parties
Investments are initially measured at historic cost, including transaction costs, and stated at cost less impairment losses. The Company assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. If any such indication of impairment exists, the Company makes an estimate of its recoverable amount. Where the carrying amount of an investment exceeds its recoverable amount, the investment is considered impaired and is written down to its recoverable amount.
The Company is exempt under the terms of Financial Reporting Standard 8, Related Party Transactions, from disclosing related party transactions with wholly owned entities of the JKX Group.
Cash flow statement
The Company accounts are included within the publicly available consolidated financial statements of the Group. Consequently, the Company has not prepared a cash flow statement under the terms of the Financial Reporting Standard 1 (revised 1996).
Debtors
Share-based payments
The Group issues equity-settled share-based payments to the Directors and senior management. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value in the Group is determined at the grant date of the equitysettled share-based payments and is expensed on a straight-line basis over the vesting period, based on the Groups estimate of shares that will eventually vest. At each subsequent balance sheet date the
Amounts receivable from subsidiary undertakings are recognised initially at fair value plus transaction costs and are subsequently measured at amortised cost using the effective interest method. The Company assesses at the end of each reporting period whether there is objective evidence that the loans and receivables are impaired. Any impairment is recognised in the income statement.
112
Company accounts
Notes to the Company accounts continued
Creditors
Amounts due to subsidiary undertakings are recognised initially at fair value net of transaction costs and are subsequently measured at amortised cost using the effective interest method.
113
B. Fixed asset investments
The net book value of unlisted fixed asset investments comprise:

2010 $000 2009 $000
Cost At 1st January Disposal At 31st December Amounts provided At 1st January At 31st December Net book amount At 31st December 6,769 6,771 6,771 (2) 6,769 6,771 6,771
The Companys principal subsidiary undertakings are listed in note 27 to the Groups financial statements. The directors believe that the carrying value of the investments is supported by their underlying net assets.
C. Debtors
2010 $000 2009 $000
Amounts falling due within one year Other debtors Amounts owed by group undertakings VAT receivable Prepayments 6 5,157 360 36 5,559 Amounts falling due after more than one year Amounts owed by group undertakings 350,249 355,808 174,026 230,812 1 54,540 254 1,991 56,786
$351.0m (2009: $214.1m) receivable from subsidiary undertakings bears interest based on LIBOR plus a mark up and is not secured. Amounts owed by group undertakings falling due within one year includes a provision for impairment of $7.4m (2009: nil). The amounts determined as individually impaired were balances due from group subsidiary undertakings where the future cash flows from these companies were determined to be unlikely to be sufficient to repay the amounts owed.
D. Deferred tax assets
A deferred tax asset of $5.7m (2009: $nil) was recognised, it is expected that future profits will enable these to be utilised.
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Company accounts
E. Creditors
2010 $000 2009 $000
Amounts falling due within one year Amounts owed to group undertakings Other creditors Accruals 72,132 662 74 72,868 Amounts falling due after more than one year Amounts owed to group undertakings 72,868 375 58,553 57,104 441 633 58,178
F. Called up share capital and movements in total shareholders funds

Share capital, denominated in Sterling, was as follows:
2010 Number 2010 000 2010 $000 2009 Number 2009 000 2009 $000
Authorised Ordinary shares of 10p each Allotted, called up and fully paid Opening balance at 1st January Placement of ordinary shares Exercise of share options Closing balance at 31st December 157,513,880 14,257,270 249,327 172,020,477 15,751 1,426 25 17,202 24,335 2,277 37 26,649 539,500 157,513,880 54 15,751 79 24,335 156,974,380 15,697 24,256 250,000,000 25,000 38,729 250,000,000 25,000 40,368
Of which the following are shares held in treasury: Treasury shares held at 1st January and 31st December 402,771 40 77 402,771 40 77
The Company did not purchase any treasury shares during 2010 (2009: none). There were no treasury shares used in 2010 (2009: none) to settle share options. There are no shares reserved for issue under options or contracts. As at 31st December 2010 the market value of the treasury shares held was $1.27m (2009: $1.14m).
115
Movements in the shareholders funds during the period were as follows:

Capital redemption reserve $000 Equity share options reserve $000 Foreign currency translation reserve $000 Share premium $000 Profit and loss account $000
Share capital $000
Total $000
At 1st January 2009 Issue of employee share options Share option charge Profit for the financial year Dividend At 31st December 2009
24,256 79 24,335
587 587
1,253 420 1,673
(1,090) (1,090)
41,015 302 41,317
13,662 147,337 (12,292) 148,707
79,683 381 420 147,337 (12,292) 215,529
At 1st January 2010 Issue of employee share options Issue of ordinary shares Transaction cost for issue of ordinary shares Share option charge Profit for the financial year Dividend At 31st December 2010
24,335 37 2,277 26,649
587 587
1,673 775 2,448
(1,090) (1,090)
41,317 230 58,064 (2,248) 97,363
148,707 58,229 (13,159) 193,777
215,529 267 60,341 (2,248) 775 58,229 (13,159) 319,734
Capital redemption reserve
The balance held in the capital redemption reserve relates to the buy back of shares in 2002, there have been no additional share buy-backs since this time.
Equity share options reserve
The balance held in the share options reserve relates to the fair value of the share options that have been expensed through the income statement.
Foreign currency translation reserve
The foreign currency translation reserve includes prior year movements that relate to the retranslation of the Companys balance sheet whose functional currency was sterling prior to 1st January 2007.
Share premium
On 26th January 2010 the Company completed a placing of 14,257,270 new ordinary shares in the Company with institutions at a price of 265 pence per placing share. The placing raised $60.3m. Charges to share premium in 2010 include underwriting fees and other fees for the placing.
G. Profit and loss
The Company has elected to take the exemption under section 408 of the Companies Act 2006, to not present the parent company profit and loss account. The net profit for the parent company was $58.2m prior to the payment of dividends (2009: $147.3m prior to payment of dividends).
116
Company accounts
H. Operating profit
The operating profit derives solely from continuing operations and is stated after charging the following:
Auditors remuneration Audit services Fees payable to company auditors for the audit of the parent company Non-audit services Other services pursuant to legislation 45 45 45 45
2010 $000 2009 $000
The audit fees for the Company are paid by one of the Group subsidiaries.
I. Directors remuneration
The remuneration of the Directors is disclosed in the audited section of the Directors Remuneration report on page 67, which form part of these financial statements.
J. Dividends
On 11th June 2010, a dividend of 2.7 pence per share (2009: 2.6 pence per share) was paid to shareholders and on 15th October 2010, an interim dividend for 2010 of 2.4 pence per share (2009: 2.3 pence per share) was also paid to shareholders. Total dividends paid during the year were 5.1 pence per share (2009: 4.9 pence per share). Total dividends paid during the year amounted to $13.2m (2009: $12.3m). In respect of the full year 2010, the Directors propose that a final dividend of 2.6 pence per share (2009: 2.7 pence per share) be paid to shareholders on 24th June 2011. This dividend is subject to approval by the shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The proposed dividend is payable to all shareholders on the Register of Members on 6th May 2011. The total estimated dividend to be paid is $7.2m (2009: $7.1m).
K. Related party transactions
The Company is exempt under the terms of Financial Reporting Standard 8, Related Party Transactions, from disclosing related party transactions with wholly owned entities of the JKX Group. The company has made no related party transactions with companies other than wholly owned subsidiaries. Key management are considered to comprise only the Directors. The remuneration of directors during the year was as follows:
2010 $000 2009 $000
Short-term benefits Post-employment benefits Share-based payments, equity settled
2,611 239 527 3,377
2,788 229 260 3,277
Share-based payments represent the IFRS 2 charge for the period. Detailed disclosure on share based payments has not been provided on the basis of materiality.
117
Five year nancial record

Year ended 31st December
2010 $m 2009 $m 2008 $m 2007 $m 2006 $m
Revenue Oil Gas Management services/other Total Cost of sales Impairment reversal Provision for impairment/write off of exploration costs Exceptional item impairment of Russian assets Total cost of sales Gross profit Administrative expenses (Loss)/gain on foreign exchange Gain on disposal/impairment of investment Operating profit before exceptional item Operating profit after exceptional item Other income and interest Profit before tax Taxation on profit on ordinary activities Profit for the year (Profit)/Loss attributable to non-controlling interest Profit attributable to owners of the parent Ordinary dividends on equity shares Earnings per share before exceptional item (cents) Earnings per share after exceptional item (cents) Group operating margin (%) Employment of group capital Non-current assets Net current assets Non-current liabilities 460.8 26.8 (18.9) 468.7 Group capital employed Capital and reserves 468.7 468.7 Net funds Cash and cash equivalents 62.0 62.0 Net gearing (%) N/A 74.4 74.4 N/A 64.8 64.8 N/A 68.1 68.1 N/A 81.1 81.1 N/A 404.3 404.3 334.2 334.2 286.2 286.2 218.6 218.6 375.9 63.1 (34.7) 404.3 303.4 62.3 (31.5) 334.2 253.4 58.0 (25.2) 286.2 147.9 77.5 (6.8) 218.6 78.8 112.9 1.2 192.9 (56.3) (13.7) (74.6) (144.6) 48.3 (25.3) (2.6) 95.0 20.4 0.4 20.8 0.4 21.2 21.2 (13.2) 47.56 12.38 10.6 76.4 118.1 2.0 196.5 (57.5) (5.0) (62.5) 134.0 (14.6) (2.3) 2.5 119.6 119.6 (0.3) 119.3 (34.0) 85.3 85.3 (12.3) 54.23 54.23 60.9 121.8 83.1 2.1 207.0 (55.1) (6.9) (62.0) 145.0 (12.7) (6.9) 125.4 125.4 2.2 127.6 (49.4) 78.2 78.2 (13.6) 49.85 49.85 60.6 122.5 59.4 2.6 184.5 (40.8) (17.7) (58.5) 126.0 (12.2) (0.2) (5.0) 108.6 108.6 4.7 113.3 (38.9) 74.4 74.4 (10.0) 47.97 47.97 58.9 92.8 37.7 1.2 131.7 (32.6) 15.2 (1.8) (19.2) 112.5 (10.6) 3.9 105.8 105.8 3.4 109.2 (31.4) 77.8 77.8 (4.5) 50.89 50.89 80.3
118
Notice of Annual General Meeting

Notice is given that the Annual General Meeting of JKX Oil & Gas plc (the Company) will be held at the Institute of Directors, 116-123 Pall Mall, London SW1Y 5ED on 7th June 2011 at 11.00am for the following purposes:
As special business
To consider and, if thought fit, pass the following resolutions, which will be proposed as special resolutions: 11. That the Company be and is hereby generally authorised pursuant to Section 701 of the Act to make market purchases (within the meaning of Section 693(4) of the Act) of fully paid ordinary shares in the capital of the Company upon and subject to the following conditions but otherwise unconditionally: (a) the maximum aggregate number of ordinary shares hereby authorised to be purchased is 17,207,047; (b) the maximum price (exclusive of expenses) which may be paid for each such ordinary share is an amount equal to 105 per cent of the average of the middle market quotations for an ordinary share (as derived from the London Stock Exchange's Daily Official List) for the five business days immediately preceding the day on which such ordinary share is contracted to be purchased and the minimum price (exclusive of expenses) which may be paid for such ordinary share is the nominal value of such ordinary share at the time of such purchase; and (c) unless previously varied, revoked or renewed, the authority conferred by this resolution shall expire on the earlier of the date falling 15 months after the passing of this resolution and at the conclusion of the next annual general meeting of the Company after the date on which this resolution is passed, provided that the Company may, before the expiry of the authority granted by this resolution, enter into a contract to purchase ordinary shares under this authority which will or may be completed or executed wholly or partly after the expiry of such authority and may make a purchase of ordinary shares in pursuance of such contract. 12. That the directors be and they are hereby empowered pursuant to Section 570 of the Act to allot equity securities (within the meaning of Section 560 of the Act) for cash pursuant to the authority to allot such securities passed at the last annual general meeting or by way of a sale of treasury shares as if Section 561(1) of the Act did not apply to any such allotment, provided that this power shall be limited to: (a) the allotment of equity securities in connection with a rights issue or offering in favour of ordinary shareholders where the equity securities respectively attributable to the interests of all ordinary shareholders are proportionate (as nearly as may be practicable) to the respective numbers of ordinary shares
As ordinary business
To consider and, if thought fit, pass the following resolutions, which will be proposed as ordinary resolutions: 1. To receive the accounts of the Company, the Directors Report and the Auditors Report thereon for the year ended 31st December 2010. 2. To approve the Directors Remuneration Report for the year ended 31st December 2010. 3. To re-appoint Sir Ian Prosser, who has been appointed since the last annual general meeting of the Company and whose biographical details are included at page 50 of the 2010 Annual Report and Accounts, as a director of the Company. 4. To re-elect Lord Oxford (formally known as Viscount Asquith), who has served on the board of directors of the Company for more than nine years and whose biographical details are included at page 51 of the 2010 Annual Report and Accounts, as a director of the Company. 5. To re-elect Nigel Moore, who retires by rotation and whose biographical details are included at page 51 of the 2010 Annual Report and Accounts, as a director of the Company. 6. To re-elect Martin Miller, who retires by rotation and whose biographical details are included at page 50 of the 2010 Annual Report and Accounts, as a director of the Company. 7. To re-elect Peter Dixon, who retires by rotation and whose biographical details are included at page 51 of the 2010 Annual Report and Accounts, as a director of the Company. 8. To re-appoint PricewaterhouseCoopers LLP as auditors of the Company to hold office from the conclusion of this meeting until the conclusion of the next general meeting of the Company at which accounts of the Company are laid before the members. 9. To authorise the directors to determine the remuneration of the auditors. 10. To declare the dividend recommended by the directors of the Company.
119
held by them, subject to such exclusions or other arrangements as the directors may consider necessary or expedient to deal with treasury shares, fractional entitlements, record dates, statutory restrictions, legal or practical problems under or resulting from the application of the laws of any territory or the requirements of any recognised regulatory body or stock exchange in any territory; and (b) the allotment (otherwise than pursuant to subparagraph (a) above) of equity securities up to an aggregate nominal value of 860,352; and shall expire (unless previously renewed, varied or revoked by the Company in general meeting) on the earlier of the date falling 15 months after the passing of this resolution and at the conclusion of the Companys next annual general meeting after the passing of this resolution save that the Company may, before the expiry of this power, make an offer or agreement which would or might require equity securities to be allotted after such expiry and the directors may allot equity securities in pursuance of such an offer or agreement as if the power conferred hereby had not expired. This power applies in relation to a sale of shares which is an allotment of equity securities by virtue of Section 560(2) of the Act as if in the first paragraph of this resolution the words pursuant to the authority to allot such securities passed at the last annual general meeting were omitted. 13. That a general meeting, other than an annual general meeting, may be called on not less than 14 clear days notice.
Notes 1. Only those members registered on the Companys register of members at: (a) 11.00 am on 5th June 2011; or, (b) if this meeting is adjourned, at 11.00 am on the day two days prior to the adjourned meeting, shall be entitled to attend and vote at the meeting. 2. Information regarding the meeting, including the information required by section 311A of the Act, is available from www.jkx.co.uk. If you wish to attend the meeting in person, it will be held at the Institute of Directors, 116123 Pall Mall, London SW1Y 5ED on 7th June 2011 at 11.00 am. Registration will open at 10.30 am. Please bring your admission card, enclosed with this AGM notice, with you and on arrival hand it to one of the Companys officials.
3.
4. If you are a member of the Company at the time set out in note 1 above, you are entitled to appoint a proxy to exercise all or any of your rights to attend, speak and vote at the meeting and you should have received a Form of Proxy with this notice of meeting. You can only appoint a proxy using the procedures set out in these notes and the notes to the Form of Proxy. 5. If you are not a member of the Company but you have been nominated by a member of the Company to enjoy information rights, you do not have a right to appoint any proxies under the procedures set out in these notes and the notes to the Form of Proxy. Please read the section relating to Nominated Persons below. A proxy does not need to be a member of the Company but must attend the meeting to represent you. Details of how to appoint the Chairman of the meeting or another person as your proxy using the Form of Proxy are set out in the notes to the Form of Proxy. If you wish your proxy to speak on your behalf at the meeting you will need to appoint your own choice of proxy (not the Chairman) and give your instructions directly to them. The notes to the Form of Proxy explain how to direct your proxy how to vote on each resolution or withhold their vote. To be valid, the instrument appointing a proxy, together with the power of attorney or other authority, if any, under which it is signed (or a notarially certified copy of such power of authority) must be deposited with the Companys Registrars, Equiniti, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6ZL not less than 48 hours before the time fixed for the meeting. Completion and return of the form of proxy will not preclude shareholders from attending or voting at the meeting if they wish. 8. As an alternative to completing a hardcopy Form of Proxy, you can appoint (a) proxy(ies) electronically by visiting www. sharevote.co.uk. You will need your Voting ID, Task ID and Shareholder Reference Number (as printed on your Form of Proxy). Alternatively, if you have already registered with Equinitis online portfolio service, Shareview, you can submit your Form of Proxy at www.shareview.co.uk. Full instructions are given on both websites. To be valid your proxy appointment(s) and instructions should reach Equiniti no later than 11.00 am on 5th June 2011.
6.
7.
By order of the Board B J Burrows Company Secretary JKX Oil & Gas plc 6 Cavendish Square, London W1G 0PD Dated: 19th April 2011
120
9.
As at 2.00pm on 19th April 2011, the Companys issued share capital comprised 172,070,477 ordinary shares of 10p each. Each ordinary share carries the right to one vote at a general meeting of the Company and, therefore, excluding 402,771 ordinary shares held in Treasury, the total number of voting rights in the Company as at 2.00pm on 19th April 2011 is 171,667,706. The website referred to in note 2 will include information on the number of shares and voting rights.
inspection at the registered office of the Company during normal business hours on each business day until the conclusion of the AGM and will also be available at the place of the AGM for at least 15 minutes prior to the meeting until its conclusion. 13. In accordance with section 311A of the Act, the contents of this notice of meeting, details of the total number of shares in respect of which members are entitled to exercise voting rights at the AGM and, if applicable, any members' statements, members' resolutions or members' matters of business received by the Company after the date of this notice will be available on the Company's website www.jkx.co.uk. 14. You may not use any electronic address provided either in this notice of meeting or any related documents (including the Form of Proxy) to communicate with the Company for any purposes other than those expressly stated.
10. Under section 319A of the Act, the Company must answer any question you ask relating to the business being dealt with at the meeting unless: (a) answering the question would interfere unduly with the preparation for the meeting or involve the disclosure of confidential information; (b) the answer has already been given on a website in the form of an answer to a question; or (c) it is undesirable in the interests of the Company or the good order of the meeting that the question be answered. 11. If you are a person who has been nominated under section 146 of the Act to enjoy information rights (Nominated Person): (a) You may have a right under an agreement between you and the member of the Company who has nominated you to have information rights (Relevant Member) to be appointed or to have someone else appointed as a proxy for the meeting. (b) If you either do not have such a right or if you have such a right but do not wish to exercise it, you may have a right under an agreement between you and the Relevant Member to give instructions to the Relevant Member as to the exercise of voting rights. (c) Your main point of contact in terms of your investment in the Company remains the Relevant Member (or, perhaps, your custodian or broker) and you should continue to contact them (and not the Company) regarding any changes or queries relating to your personal details and your interest in the Company (including any administrative matters). The only exception to this is where the Company expressly requests a response from you. 12. Copies of the directors service contracts and the terms of engagement for Non-Executive directors, together with the register of directors share interests, are available for
Advisors
Secretary
Glossary of terms
2P reserves Proved plus probable Mcf Bcf cfpd MMcfd Mbbl MMbbl bcpd bpd bopd boe Mboe MMboe boepd sq.km $ LIBOR US Hryvna Roubles Thousand cubic feet Billion cubic feet Cubic feet per day Million cubic feet per day Thousand barrels Million barrels Barrel of condensate per day Barrel per day Barrel of oil per day Barrel of oil equivalent Thousand barrels of oil equivalent Million barrels of oil equivalent Barrel of oil equivalent per day Square kilometre United States Dollars London InterBank Offered Rate United States The lawful currency of Ukraine The lawful currency of Russia
B J Burrows
Registered office
6 Cavendish Square London W1G 0PD Registered in England Number: 3050645

Auditors
PricewaterhouseCoopers LLP, 1 Embankment Place London WC2N 6RH

Registrars
Equiniti Aspect Hose Spencer Road Lancing West Sussex BN99 6DA
Principal bankers Bank of Scotland plc The Mound Edinburgh EH1 1YZ Stockbrokers Brewin Dolphin Investment Banking, 48 St Vincent Street Glasgow G2 5TS Oriel Securities Limited 125 Wood Street London EC2V 7AN Financial advisors Hawkpoint Partners Limited 41 Lothbury London EC2R 7AE Solicitors Herbert Smith LLP Exchange House Primrose Street London EC2A 2HS SNR Denton UK LLP One Fleet Place London EC4M 7WS This is an important document, if you are in any doubt as to what action to take you should consult an appropriate independent advisor such as an accountant or a lawyer.
Conversion factors 6,000 standard cubic feet of gas = 1 boe
We welcome visits to our website www.jkx.co.uk

Designed and produced by db&co www.dbandco.co.uk, in association with Robson Dowry and RPD Consulting. Board photography by Peter Thompson Satellite images by Planetery Visions Ltd Printed in the UK by The Midas Press Ltd The report is printed on Amadeus 50 Recycled Silk which is produced with 50% recycled bre from both pre and post-consumer sources, together with 50% virgin bre from sustainable forests independently certied according to the rules of the Forest Stewardship Council. All pulps used are Elemental Chlorine Free (ECF) and the manufacturing mill is accredited with ISO 14001 standard for environmental management.
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JKX Report 12m2010 (2011-05-16)

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JKX Report 12m2010 (2011-05-16)

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JKX Oil & Gas plc Report & Accounts 2010

At a glance What we do / Highlights

125.4 105.8 108.6

Operating profit before exceptional item ($m)

Development and exploration

Capital expenditure ($m)

81.1 68.1 64.8

Net cash ($m)

At a glance Our regions

* Final Turkeve area subject to drilling results

Reserves proved and probable MMboe/depth as at 31st December 2010

1,000m 2,000m 3,000m 4,000m 5,000m 6,000m

...with a particular focus on Ukraine and Russia

Group reserves as at 31st December 2010

EB COATED (SWOP2) UKRAINE en should be Oil MMbbl

At a glance Our marketplace

ng ary :0 rai ne: 0.02 00. Rus 40 sia: 60.0 0

Production (000 bpd)

Consumption (000 bpd)

5,000 2,740 2,500

Production (Bcf per annum)

Consumption (Bcf per annum)

2,000 1,560 1,500

1,000 715 500

Source: USA Energy Information Administration

At a glance Our strategy and progress

This is the strategy via which we aim to seize that opportunity

Maintenance of efficient cost base.

HSEC & Sustainability

Deliver long-term shareholder value

the progress we are making and the performance measures we use.

Production volumes (boepd)

Capital expenditure ($m)

Production costs ($ per boe)

Ukrainian gas realisations ($ per Mcf)

All Injury Frequency Rate

Return on average capital employed (%)

17.1 23.1 25.2

Reserves at the end of the period (MMboe)

At a glance Our resources

This is how we organise our people and resources

and the investment we make to ensure we deliver our objectives

Ratio Male | Female

2010 training investment

Ratio Male | Female

2010 training investment

Ratio Male | Female

2010 training investment

At a glance Our performance

and this is our performance during 2010, from a nancial perspective.

Second half 2010 $m

First half 2010 $m

Second half 2010

First half 2010

(13.9) 171 26.84 (8.34) (12.4)

35.1 170 20.72 20.72 68.2

85.3 157 54.23 54.23 154.9

REALISATIONS Oil (per bbl) Gas (per Mcf) $69.15 $7.59

$3.36 $8.92 $1.61

$5.81 $8.74 $1.21

$4.85 $7.71 $0.93

Sir Ian Prosser Chairman