RNS Number : 6114G
Timan Oil & Gas Plc
24 October 2008
Timan Oil & Gas Plc
("Timan", the "Company" or the "Group")
Final Results for the Year Ended 31 December 2007
Chairman's Statement
2007 was a challenging year for the Group. The principal objective was to drill and complete the 25 well pilot scheme on the NGPT field
and to test water injection enhanced oil production methodologies. Unfortunately, although production was achieved from the majority of the
wells, the overall results were not as good as expected. This was mainly due to technical issues encountered with well completion and
isolation. We engaged two teams of technical consultants to analyse these issues and we now believe that we have a sufficiently good
understanding of the technical challenge to allow us to complete a more successful series of pilot wells.
In the second half of the year we started the process of raising finance to fund the Group's activities in 2008 and beyond. An
investment bank was engaged to manage a high yield bond issue. Despite initially positive feedback, the issue proved unsuccessful against
the backdrop of perhaps the worst global financial market conditions in recent times. The Board subsequently decided to request suspension
of the trading of our shares on AIM pending resolution of our financial situation. Since that time, the Group has been actively pursuing a
number of financing options with a view to the lifting of the suspension of the shares and to the continuing development of the NGPT field.
I am now pleased to report that on 29 September 2008 we signed an agreement for a loan facility of up to $100 million with Kamanisk
Holdings Limited. The loan is split into two tranches of $50 million each, with the second tranche only being made available if we meet
aggressive targets for our reserves and production on NGPT and KNG over the next 18 months. However, the first tranche of $50 million should
be available to the company over the next year, subject to certain conditions being met, and should provide the company with sufficient
funding at least until the end of 2009. We very much look forward to working with Timur Kuanyshev, Kamanisk's controlling shareholder, and
his team to continue development on NGPT and to start development on KNG.
There were a number of successes related to our licences during the year. On NGPT, the Group managed successfully to validate our
licence extension through the Russian courts, following an appeal by Rosnedra to annul the extension. Further, a second court decision found
in our favour regarding the issue of NGPT's Zapadno-Vodnenskiy licence, ruling that Kominedra, Rosnedra' s territorial subdivision in the
Komi Republic, was unlawful in their failure to issue the licence. This licence will add a further 459 km2 area to the south and west of the
main NGPT field when it is issued.
On KNG, the Group drilled the shallow formation and produced sufficiently positive results for Rosnedra to issue a Certificate of
Commercial Discovery for the field. The State Reserves Committee of Russia approved oil reserves from the shallow reservoir of 88.2 million
tonnes of original oil in place and 17.6 million tonnes of category C1+C2 recoverable reserves. We aim to have KNG reserves evaluated under
SPE definitions by the first quarter of 2009. We have applied for a production licence on KNG which we hope will be issued later this year.
As regards the two Geoterm licences in the Caspian Sea, we recognise that the Group is unable to develop these assets alone. We have
however been unable thus far to find an appropriate partner. In September 2007 the State Reserves Committee of Russia approved resources for
the Izberbash N2 block of 914 million tonnes of original oil in place and 438 million tonnes of category C3 resources.
Our strategy for the coming year is firstly, to ensure that our shares can resume being traded on AIM and secondly to use the financing
received to develop our assets efficiently. The Board remains convinced that the Group has a highly prospective asset base and is intent on
delivering value to shareholders.
I would like to thank shareholders for their patience during this difficult time for the Group.
David Herbert
Chairman
Operations
NGPT Field
The NGPT Field, located in the Timan-Pechora region of Russia, consists of three reservoirs which we refer to as NGPT I, NGPT II and
NGPT A. Based on flow rates from existing wells, we believe enhanced oil recovery methodologies will be required to attain commercial
production levels for this field. The NGPT I reservoir is located at a depth of 28-150 metres and contains light sweet crude oil of low
viscosity, which is unusual for the relatively shallow depths of the reservoir. We operate the NGPT Field under a combined exploration and
production licence which is effective until April 2024. The NGPT Field has a net land position of 215 km2.
In close proximity to the NGPT Field, we hold an exploration licence for an as yet unexplored area, Timanskiy-4. The Timanskiy-4 licence
area covers a total area of 1,053 km2. The NGPT Field is located near developed transportation infrastructure, including the important
Transneft pipeline, which runs through the NGPT Field, service and communication facilities and experienced local service providers. The
NGPT Field also benefits from its relative proximity to Moscow (the field being approximately 1,200 kilometres northwest of Moscow) and
relatively favourable weather conditions (such as no permafrost) allowing for year-round crude oil production operations.
NGPT I Reservoir
The extent of the reservoir and the structural closure has been well defined by well penetrations, core data, logged well test results
and seismic data. The boundary of the reservoir has not been identified to date, however, and the field could extend beyond the licensed
area. NGPT I is unusual because it is relatively shallow, 28-150 metres in depth, but contains a low viscosity crude oil in multiple layers
with a net pay thickness averaging ten metres. Normally at these depths crude oil degrades due to oxidation and becomes thick and viscous,
but in NGPT I the crude oil has been preserved due to the presence of shales of the Domanikovsky formation above the reservoir.
As of June 26, 2006, NGPT I was estimated to contain 39.6 MMbbls of Proved Reserves and 191.3 MMbbls of Proved and Probable Reserves.
Since acquiring our licence for NGPT I in 2005, we have spent �11.3 million in capital investment. We have also invested in developing field
infrastructure, equipment and improved field accessibility by laying a network of intra-field service roads.
NGPT II and NGPT A Reservoirs
NGPT II and NGPT A contain heavier, more viscous crude oil than that found in the NGPT I reservoir and are located at a depth of
approximately 130-170 metres below the surface and therefore also being relatively shallow, these reserves contain heavy crude oil. NGPT A
extends over much of the NGPT Field, while the underlying NGPT II is more variable with more restrictive distribution.
We believe the reservoir characteristics of the NGPT II and NGPT A reservoirs are promising candidates for cyclic steam injection and
continuous steam-flooding, which will both increase recovery and make the crude oil less viscous and enhance flow into the well bores. Both
methods are common in developing heavy crude oil reservoirs and there are many fields in the region currently developed with the aid of
steam injection, including the nearby Yarega field. The application of this method is well understood and the relevant service
infrastructure for this procedure exists in this area.
NGPT Development Plan
NGPT I
The NGPT I development plan contemplates utilising water injection enhanced oil recovery methodologies to establish high density well
coverage over the field, using a ratio of three production wells to one injection well, a nine-spot pattern, on a specified well spacing,
expected to be approximately 200 metres, although this may vary depending on the results of the pilot program. The plan involves the use of
multiple rigs over a number of years so that a meaningful production rate can be achieved during the early stage of field development.
Produced water is expected to be treated and injected back into the reservoirs with the goal of reducing sourcing costs and potential
environmental liabilities.
In the first half of 2007, we commenced our pilot program targeting the NGPT I reservoir to test water injection enhanced oil production
methodologies on the field using 200 meter spacing. This program involved drilling 25 wells (21 production wells and four water injection
wells). Once we drilled and completed the wells, we placed the wells on natural depletion for an average of two and half months. We
experienced maximum daily production levels on 12 out of our 25 wells of 5 bbl/d or better during the natural depletion stage.
When we commenced the water injection process which lasted an average of approximately four months, nine out of the 21 wells experienced
maximum daily production of 5 bbl/d or better. However, on an average daily production basis, only two out of 21 wells met our expectations
of 5 bbl/d. We encountered a number of issues in well completion and isolation which prevented us from attaining our expected results.
During the completion of the wells, the perforating process is thought to have caused weakening of the cement bond between the casing and
the hole allowing water from an aquifer above the NGPT I reservoir to flow into the well bore.
We engaged the services of BLZ-Geotechnik GmbH ("BLZ"), who are experienced in the drilling and completion of shallow oil and water
wells. The agreement provides for BLZ to drill wells, provide pumping services and the lease of a drilling rig and crew. BLZ will also train
our staff so we will be in a position to use our own staff and rigs to execute our future development plans. In consultation with BLZ and
our technical consultants, G.E.O.S., we believe we now know how to solve the well completion and isolation issues.
The Board has approved an operational plan based upon the receipt of $50 million funds from the recently announced loan facility. The
Company's immediate plan is to recommence drilling operations at NGPT in the middle of November 2008. The Company intends to undertake an
extended pilot program involving the drilling of an additional 25 wells, expanding the NGPT Pilot Program Area to 50 wells in aggregate.
This is expected to be completed by the end of this year. The Company will continue its two-year cooperation with BLZ , the German drilling
contractors, utilizing new techniques approved by G.E.O.S, the German production consultants, as identified from the results of the previous
pilot scheme.
We intend to have MLL review the results of the extended pilot program and other field development work and provide an updated reserve
report in due course.
NGPT II and NGPT A
We believe the reservoir characteristics indicate that NGPT II and NGPT A are candidates for steam injection recovery methods given the
heavy, viscous nature of the crude oil found in these reservoirs. In the steam injection process, heat from the injected steam improves the
viscosity of the crude oil allowing it to flow more easily into the well bore. We have drilled two wells to test steam injection recovery
methodologies on these reservoirs. NGPT II and NGPT A are similar to other reservoirs located in surrounding fields that produce crude oil
using steam injection enhanced oil recovery.
The test wells drilled into these reservoirs will, subject to financing, undergo a series of closely monitored steam injection cycles
which will be used by us to finalise the completion methods, steam injection rates and cycle length before proceeding to full field
development. The field development plan assumes a five-spot pattern involving approximately one producing crude oil well for each injection
well.
We intend to initially focus our development activities on first developing the shallower NGPT I reservoir. We believe recently enacted
changes in the Russian mineral extraction taxation regime pertaining to fields containing crude oil of a certain viscosity and a record of
extraction will allow NGPT II and NGPT A to take advantage of zero taxation for the foreseeable future. Natural gas will be used to generate
the steam for the steam injection development wells. The natural gas will be sourced internally from NGPT I production.
KNG Field
The KNG Field is located approximately 300 kilometres from the NGPT Field and has a net land position of 180 km2 with crude oil reserves
located primarily at depths of 100-700 metres and 4,000 metres. The field is comprised of four reservoirs: three shallow reservoirs, located
at depths of between 100-700 metres and one deep reservoir located at a depth of approximately 4,000 metres.
The shallow reservoirs in the KNG Field have high gravity crude oil estimated at 13�API that is also of high viscosity. We believe that
steam injection will be required for production wells in these reservoirs. The deep reservoir contains two prospects, both of which have
been penetrated by a well. We do not believe the deep reservoir will initially require enhanced oil recovery methodologies because of its
high pressure, low expected crude oil gravity of 31�API, low expected viscosity and the high expected permeability of the formation.
KNG Field Development Plan
During 2007, we drilled two appraisal wells targeting the shallow formations of the KNG Field in compliance with the obligations under
our exploration licence. It is anticipated that a portion of the funds from the first tranche of the loan facility recently agreed will be
used to continue exploration and development on KNG in 2009 although additional funds will be required beyond that. Further details will be
provided in due course.
The KNG exploration licence does not allow for commercial production and expired in March 2008. KNG applied on February 6, 2008 to the
appropriate authorities in order to ultimately obtain a production licence. The issue of the Certificate of Commercial Discovery by Rosnedra
in March 2008 was an important step in receiving approval of the production licence which we expect to be issued towards the end of 2008.
Geoterm Blocks
Through our 80% ownership interest in Docom, we hold an indirect interest in its subsidiary, Geoterm. Our principal Geoterm assets are
the Sulak and Izberbash block exploration and production licences located in two shallow areas in the Middle Caspian Sea Basin with a net
land position of 1,280 km2. The Ministry of Natural Resources has estimated that the Izberbash and Sulak blocks contain Russian C3 resources
of approximately three billion barrels of crude oil. Initial reserves estimates for Sulak should be completed during 2009 following our
review of relevant seismic data. No wells have been drilled on either licensed area to date.
The Geoterm blocks are also favourably positioned to distribution access points, with the Azerbaijan-Northern Caucasian-Novorossiysk
branch of the Transneft pipeline only ten kilometres away and in close proximity to the Caspian oil terminal in Makhachkala. Geoterm's
blocks are adjacent to crude oil and natural gas fields which are already in production. A new Baku to Ceyhan pipeline has been constructed
which has the capacity to transport one million barrels per day. The Western Caspian region is well connected to the Russian pipeline
network, with key pipelines to Novorossiysk in Russia and export terminals and refineries on the Black Sea. Additionally, rail transport is
also well developed in the region and is an established method of shipping crude oil products.
Geoterm Exploration Programme
During 2007, the Group continued to acquire and interpret seismic data on the licences. From the results of the work on the Izberbash
block, the Group indentified six prospective targets or future drilling, the largest of which has been estimated to contain Category C3
resources (Russian reserves classification) of approximately 1.6 billion barrels of oil.
We have been evaluating our exploration options including seeking an experienced farm-in partner for these licences which would reduce
our exploration risk.
Apart from these assets, Geoterm also operates a relatively small scale geothermal heat and hot water supply business to local
municipalities and organisations in Dagestan. These activities constituted a significant amount of our revenue for 2006 and 2007. However,
in the future, once NGPT begins producing, we do not anticipate that these activities will generate a significant proportion of our
revenue.
Our Co-operation Agreement with Zapsibgazprom OAO, a Gazprom subsidiary
In October 2007, we signed a non-binding memorandum of cooperation with Zapsibgazprom OAO, a subsidiary of Gazprom OAO. This agreement
sets out certain principles of potential strategic cooperation between us and Zapsibgazprom regarding the development of our current and
future assets. The main principles for future discussion include participation by Zapsibgazprom in the exploration of our crude oil and
natural gas portfolio, commercial production and development of our NGPT, KNG and Geoterm assets and, cooperation for equipment procurement,
staff training and technical and operational support needed in drilling and building necessary infrastructure for exploiting our NGPT, KNG
and Geoterm assets. Subject to a definitive binding agreement, Zapsibgazprom may elect in the future to invest in our share capital. In
December 2007, we established a working group which includes members of our management team and Zapsibgazprom that is tasked with
negotiating a potential agreement.
Negotiations with Azerbaijan's State Oil Company (SOCAR) regarding our lease of a jack-up rig
In October 2007, we completed preliminary negotiations with SOCAR over the provision of a jack-up drilling rig and related offshore
drilling facilities. SOCAR has confirmed a decision in principle to provide our subsidiary Geoterm with an exploration option on the jack-up
rig "Khazar". Subject to contract, this should allow us to proceed with exploration drilling on the block held under the Izberbash licence.
We view it as strategically important to secure a drilling rig in the Caspian Sea, particularly at a time when these rigs can be very
difficult to procure due to high demand.
Financial Review
Results for the year
The Group recorded a loss of �11.2 million for the year ended 31 December 2007 (2006: �12.1 million). No dividends have been paid or
proposed for the period ended 31 December 2007 (2006: �nil).
Key performance indicators
2007 2006 Change
Revenue (�m) 0.6 0.3 Up 128%
Operating loss (�m) (1) (12.0) (8.3) Up 45%
Net assets (�m) (2) 23.5 28.3 Down 17%
Net cash / (debt)* (�m) (2) 1.7 16.4 Down 89%
* being cash and cash equivalents less loans and overdrafts.
(1) The operating loss has increased due to the vesting of options to Directors and employees that were granted in 2006.
This non-cash charge amounted to �4.1 million in 2007 (2006: �0.6 million).
(2) Net assets and net cash have decreased in 2007 following �18.3 million being raised at the end of 2006 at Admission compared to
only �2.1 million being raised in 2007 through the exercise of warrants and an over-allotment option connected to Admission.
Financing
Financing for the year ended 31 December 2007 was primarily sourced from the placement of new Ordinary Shares at the time of admission
to trading on the London Stock Exchange's Alternative Investment Market (AIM) on 28 December 2006. This raised �18.3 million before
expenses.
During 2007, we raised additional funds from an over-allotment option granted at the time of the initial placement and from the exercise
of warrants by financial institutions. The over-allotment option resulted in the Company, on 16 January 2007, allotting and issuing 251,667
new Ordinary Shares of 0.1 pence each at the placing price of 76p per share for the benefit of the Company. These new Ordinary Shares were
admitted to trading on AIM on 22 January 2007.
There was a further �1.9 million raised from the exercise of 4,093,000 warrants that were converted into 4,093,000 new Ordinary Shares
in the last quarter of 2007.
Warrants converted to equity during 2007
Date Shares issued Exercise Price Exercise value
Warrants exercised 01/10/2007 154,000 �0.47 � 0.1 million
Warrants exercised 28/11/2007 500,000 �0.47 � 0.2 million
Warrants exercised 19/12/2007 1,564,000 �0.47 � 0.7 million
Warrants exercised 24/12/2007 1,875,000 �0.47 � 0.9 million
4,093,000 � 1.9 million
The issued share capital as at 31 December 2007 following the exercise of these warrants and the issue of the over allotment shares was
166,130,518 ordinary shares.
On 28 December 2007, Mainstream Invest Corp. B.V. notified the Group that they were exercising their 2,012,000 warrants, however the
funds of �0.9 million was only received in 2008 and therefore the shares were only issued to Mainstream in 2008. As at 7 October 2008 there
were 168,142,518 shares in issue.
On 31 December 2007, 834,500 warrants to acquire new ordinary shares in Timan expired.
2008 Financing
During the second half of 2007, the Company initiated negotiations with various banks regarding obtaining financing to meet the Group's
development requirements for 2008 and beyond. In the third quarter of 2007 the Group engaged an investment bank to manage the placement of
high yield debt. Unfortunately, global capital market conditions made it impossible to complete the transaction.
Since the beginning of 2008, the Group's operations were scaled back to conserve cash and once it became apparent that the bond issue
was unlikely to be successful, alternative sources of finance were sought. On 27 March 2008 the Board requested the suspension of the
Company's shares on AIM pending resolution of the financial situation.
Since that time the Board has been actively pursuing all available financing options and, despite the current liquidity issues on the
global financial markets, have secured a five year loan facility of up to $100 million with Kamanisk Holdings Limited ("Kamanisk"), of which
$50 million is available following the company granting various levels of security over the subsidiaries and the second $50 million
available subject to the company meeting various production and reserve targets within 18 months.
Operating loss
The operating loss for the period was �12.0 million (2006: �8.3 million). During the year, the Group incurred approximately �12.1
million in administrative expenses, of which �4.1 million was a non-cash fair value charge relating to the options granted in 2006.
Loss before tax and loss after tax and minority interest
The loss before tax of �11.2 million (2006: �12.1 million) and the loss after tax and minority interests of �11.2 million (2006: �12.1
million) included interest of �43,000 (2006: �0.9 million) arising from the Group's loans that were in place during the year, �4.1 million
(2006: �0.6 million) arising from the fair value of options granted in 2006, and �71,000 (2006: �3.5 million) arising from the fair value
of warrants granted to institutions in 2005 and 2006.
Revenue
Revenue increased to �0.6 million for the year ended 31 December 2007 (2006: �0.3 million). Crude oil revenue for 2007 amounted to
�196,000 compared to �157,000 in the corresponding period the prior year, representing an increase of 24.8%. The increase was due to a
slight increase in production achieved on the pilot wells that were drilled early in 2007. Furthermore, as a result of our acquisition of
Geoterm in September 2006, we generated �445,000 of thermal water revenue during 2007, as compared to �124,000 in the last three months of
2006.
Revenues in the interim accounts included an amount of �2.5 million from trading activity. For the year end accounts this has been
reclassified to Other Income.
Operating expenses
Operating expenses decreased to �0.6 million for the year ended 31 December 2007 from �0.9 million for the year ended 31 December 2006,
representing an decrease of approximately 40%. This was due to expenses related to the wells drilled on the NGPT Field pilot program, being
capitalised rather than expensed through the income statement. There were additional costs to operating expenses due to hiring specialist
consultants to assist in determining where the issues discovered in the pilot wells lay and to assist in refining our drilling and
completion techniques on the field for when drilling restarts.
Other administrative expenses
For the year ended 31 December 2007, we incurred approximately �7.7 million in administrative expenses (excluding Depreciation,
Depletion and Amortisation), compared to �5.2 million in the prior period. The main reason for the increase is due to increased consultancy
and adviser fees during 2007, specifically for the failed bond issue and the attempted farm-out of Geoterm.
For the year ended 31 December 2007, depreciation, depletion and amortisation amounted to �0.3 million, substantially lower than the
charge for 2006 of �1.8 million, nearly all of which represented the write down of the Geoterm assets that were included for the first time
in 2006 for consolidation.
Fair value expense of options issued
In 2007 there was a �4.1 million non-cash charge relating to the fair value of options issued to directors and employees in 2006 (2006:
�0.6 million). Under IFRS 2 the company is required to recognise a charge in the income statement based on the fair value of the option on
grant date spread over the original vesting period. The total number of options granted to directors and employees as at 31 December 2007
was 17,012,317 for which the majority vested between 6 December 2006 and 27 December 2007, with a small portion extending to 2008. The total
fair value charge to be recorded by us for these options is �5.0 million, of which �4.1 million was included in 2007 (2006: �586,000) with
the remainder due in the 2008 financial year. There are currently 14,595,507 options outstanding.
Finance Costs
For the year ended 31 December 2007, finance costs totalled �114,000 compared to �4.4 million in the prior period. The 2007 charge was
due to �43,000 relating to loans and �71,000 relating to warrants, compared to �0.9 million relating to loans and �3.5 million relating to
warrants in 2006.
In the year ended 31 December 2006, the main expense was a charge of �3.5 million for share-based payments, which were warrants granted
to the institutional investors that provided equity or debt prior to IPO. Under IFRS 2 the company must recognise a charge in the income
statement, as finance costs, based on the fair value of the warrant on grant date spread over the original vesting period. The total amount
of warrants outstanding at the end of 2007 was 21,312,272, all of which vested before 31 December 2007. The total fair value charge recorded
for these warrants was �3.6 million of which �3.5 million was included in 2006 and �0.1 million in 2007.
Cash flow
Net cash outflow from operating activities for the year ended 31 December 2007, was �10.4 million (2006: �8.7 million) which includes
�7.4 million in administrative expenses.
Net cash outflow from investing activities for the year ended 31 December 2007, was �6.3 million (2006: �3.2 million). The 2007 outflow
included �5.3 million (2006: �1.3 million) used for the purchase of property, plant and equipment. In 2006, this included �1.6 million used
in the acquisition of Geoterm, net of cash.
Net cash inflow from financing activities was �2.2 million for the fiscal year ended 31 December 2007 (2006: �28.3million). The primary
reason for the reduction was attributable to proceeds in 2006 of �18.5 million from the issuance of share capital and warrants and �11.2
million of borrowings under bank loans, principally with Credit Suisse and Standard Bank compared to �1.9 million proceeds in 2007
attributable to the exercise of warrants by various institutions and �0.2 million attributable to the over-allotment option related to the
initial public offering.
At the time of our admission to AIM, we had granted 17.0 million options and 26.2 million warrants for ordinary shares in Timan. These
options and warrants have exercise prices between �0.38 and �1.292 per share. During 2007, 4.1 million warrants were exercised from which we
raised �1.9 million, and 1.9 million warrants and options expired during that period. At 31 December 2007, 37.2 million warrants and options
were outstanding. The warrants have exercise dates over the next two years and the options have exercise dates over the next three years. If
all were exercised we would receive an additional �24.2 million in proceeds.
As of 31 December 2007, we had cash and cash equivalents balances of �2.0 million (2006: �16.5 million).
Due to insufficient funding for the majority of 2008, the Group does not expect to incur significant capital expenditures during 2008.
However following the agreement on the $100 million loan facility the Group expects to incur significant capital and operating expenditures
during the year ended 31 December 2009.
Capital expenditure
Capital expenditure for the year ended 31 December 2007 for property, plant and equipment was �6.6 million (2006: �3.8 million), of
which �6.2 million related to oil and gas properties. This is higher than 2006 due to increased expenditure on NGPT. In 2006 we acquired
Geoterm for �1.6 million, net of cash acquired.
Capital expenditure on intangible exploration and evaluation assets for 2007 was �1.2 million (2006: �1.9 million). This included �0.7
million (2006: �0.4 million) for KNG and �0.5 million (2006: �1.5 million) for Geoterm. Capital expenditure for intangible software was
�9,000 (2006: �31,000).
Share-based payments
In 2006 we granted share options and warrants to our employees and investors, and we recognise an expense for the fair value of these
instruments over their vesting period. We recognised an expense of �4.2 million and �4.1 million related to these share-based payments in
the year ended 31 December 2007 and the year ended 31 December 2006 respectively.
These expenses are shown in the income statement with �4.1 million (2006: �0.6 million) shown in Administrative Expenses (being option
related costs) and �71,000 (2006: �3.5 million) shown as Finance Costs.
The fair value amounts are based on a number of key assumptions, including expected volatility in share price, life, forfeiture rate and
dividend yield and risk-free interest rate. The assumptions used in these fair value calculations have a significant impact on the expense
recognised. These expenses are non-cash and are valued at the time of issue of the warrants and options. Even if the share price falls below
the exercise price, under IFRS 2 the options and warrants are not revalued.
Financial instruments
The financial instruments of the Group comprise cash resources and trade creditors that arise directly from its operations. The main
purpose of these financial instruments is to finance the Group's operations. The Group's policy is not to enter into transactions or
instruments which are not directly associated with the Group's underlying business.
Risks
Liquidity risk
The Group expects to fund its exploration and development program, as well as its administrative and operating expenses for the
remainder of 2008 and throughout 2009, principally using a combination of the $100 million loan facility signed on 29 September 2008 and
expected proceeds from the sale of future crude oil production.
Specifically in respect of the Group's interest in Geoterm, the Group will require additional sources of finance either by a farm-out
arrangement or through raising additional finance to develop this asset.
Foreign currency risk
The Group reports its results in Pounds Sterling. A significant share of the exploration and development costs are in US dollars and the
local operating costs are in Russian roubles. Any change in the relative exchange rates between Pounds Sterling, US dollars and the Russian
rouble could positively or negatively affect the Group's results.
Volatility of crude oil prices
A material part of the Group's revenue will be derived from the sale of oil that it expects to produce. A substantial or extended
decline in prices for crude oil and refined products could adversely affect the Group's revenues, cash flows, profitability and ability to
finance its planned capital expenditure. In addition, the Group intends to sell a portion of its crude oil in the Russian market, and
although these prices have improved recently, prices for crude oil in the Russian market have historically been lower than in the
international market.
Business in Russia
The Group also faces risks in conducting operations in Russia which include but are not limited to:
* The political situation in Russia could adversely affect the Group and its business could be harmed if governmental instability
recurs.
* Economic instability in Russia could adversely affect the Group's business.
* Fluctuations in the global or Russian economies could disrupt the Group's ability to operate its business in Russia and could
discourage foreign and local investment and spending, which could adversely affect its production.
* Russia's physical infrastructure is in poor condition, which could disrupt normal business activity.
Legal and environmental risk in Russia
The Group faces legal and environmental risks in conducting operations in Russia which include but are not limited to:
* The Russian government can mandate deliveries of oil and refined products at less than market prices, adversely affecting the
Group's revenue and relationships with other customers.
* Unlawful, selective or arbitrary government action may have an adverse effect on the Group's business and the value of an
investment in its shares.
* Russia's developing legal system creates a number of uncertainties for the Group's business.
* If the Group or a subsidiary is found not to be in compliance with applicable laws or regulations, it could be exposed to
additional costs, which might hinder the Group's ability to operate its business.
* Russia's unpredictable acknowledgement and enforcement of foreign court judgments or arbitral awards give rise to significant
uncertainties.
* Russia's unpredictable federal and local tax system gives rise to significant uncertainties and risks that complicate the Group's
tax planning and business decisions.
* Russian legislation may not adequately protect against expropriation and nationalisation.
Commodity price risk
The Group will be exposed to the future effect of fluctuations in the price of crude oil which is quoted in US dollars on the
international markets. The Group prepares annual budgets and periodic forecasts including sensitivity analyses in respect of various levels
of prices of crude oil. Given that the Group had not yet generated significant revenues by 31 December 2007, fluctuations in the price of
crude oil had not had any effect on the Group's financial performance for the 2 years ended 31 December, 2006 and 2007. The Group does not
plan in the future to hedge its exposure to the risk of fluctuations in the price of crude oil in future.
Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group.
The Group has adopted a policy of only dealing with creditworthy counterparties.
The Group's principal financial assets are cash and cash equivalents and other accounts receivables. Cash equivalents include amounts
held on deposit with financial institutions.
The credit risk on liquid funds held in current accounts and available on demand is limited because our counterparties are banks with
high credit-ratings assigned by international credit-rating agencies.
Oil and gas licences
The Group is in breach of various obligations under its licences owned by NGPT and KNG, principally in relation to the relevant
exploration schedule and certain related works. As a result of these breaches there is a risk that the relevant authorities may suspend,
restrict or terminate the respective licences. However, many of these breaches are historical and inherited from the previous licence
holders.
In practice the relevant authorities rarely suspend or restrict the licences, especially at the exploration stage, and tend to terminate
licences only in the event of continuous non-compliance and the failure of the licence holder to remedy breaches. The Group is attempting to
comply with its licence requirements and has not received any official warnings or notifications about continuous non-compliance or any risk
of suspension, restriction or termination.
Geological and development risk
Exploration and development activities are capital intensive and their successful outcome cannot be assured. The Group undertakes
exploration and development activities and incurs significant costs with no guarantee that such expenditure will result in the discovery and
subsequent producing of commercially deliverable oil.
Taxation
Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. There is a
risk that the Directors' interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by
the relevant regional and federal authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a
more assertive position in their interpretation of the legislation and assessments. As a result, significant additional taxes, penalties and
interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the
year of review. Under certain circumstances reviews may cover longer periods.
As at 31 December 2007, the Directors believe that their interpretation of the relevant legislation is appropriate and the Group's tax,
currency and customs positions will be sustained.
Going Concern
After taking into account the expected cash receipts from the $100 million loan facility recently signed with Kamanisk Holding Limited,
of which the first $50 million is expected to be received within the next twelve months, together with forecasts of production revenues for
the coming year, the Directors have a reasonable expectation that the Group has adequate resources to continue operations for the
foreseeable future.
Consolidated Income Statement
For the year ended 31 December 2007
Notes Year ended 31 December 2007 Year ended 31 December 2006
�'000 �'000
Continuing operations
Revenue 3 641 281
Operating expenses (553) (932)
Other administrative expenses (7,953) (7,036)
Fair value expense of options (4,122) (586)
issued
Total administrative expenses (12,075) (7,622)
Operating loss (11,987) (8,273)
Investment revenue 161 107
Other income, net 4 12 -
Other gains and losses 783 457
Finance costs (114) (4,419)
Impairment of goodwill (35) -
Loss before tax (11,180) (12,128)
Tax (17) (2)
Loss for the year
(11,197) (12,130)
Attributable to:
Equity holders of the parent
(11,150) (12,131)
Minority interest
(47) 1
(11,197) (12,130)
� �
Loss per ordinary share
Basic and diluted 0.07 0.11
Consolidated Balance Sheet
As at 31 December 2007
Notes 2007 2006
�'000 �'000
Non-current assets
Goodwill - 35
Other intangible assets 3,254 2,006
Property, plant and equipment 13,526 7,239
Other non-current assets 1 72
16,781 9,352
Current assets
Inventories 361
459
Trade and other receivables 5 6,315
8,395
Other current assets 277
205
Cash and cash equivalents 16,543
1,956
23,496
11,015
27,796 32,848
Total assets
Current liabilities
Trade and other payables 6 (4,052)
(3,529)
Loans and overdrafts (134)
(212)
(3,741) (4,186)
Net current assets 7,274 19,310
Non-current liabilities
Long-term loans -
-
Provisions (76)
(260)
Deferred tax liabilities (295)
(295)
(371)
(555)
Total liabilities (4,296) (4,557)
23,500 28,291
Net assets
Equity
Share capital 162
166
Share premium 38,117
40,226
Other reserves 4,670
8,863
Retained losses (14,775)
(25,828)
Total equity attributable to equity holders 23,427 28,174
of the parent
Minority interest 117
73
28,291
Total equity 23,500
These financial statements were approved by the board of directors and authorised for issue on 23 October 2008.
They were signed on its behalf by:
Approved by the Board on 23 October 2008
Dmitry Chalov
Chief Financial Officer
Consolidated Cash Flow Statement
Year ended 31 December 2007
Notes Year ended 31 Year ended 31 December
December 2006
2007 �'000
�'000
Net cash outflow from 7 (10,389) (8,689)
operating activities
Investing activities
Purchase of intangible assets (1,248) (398)
Purchase of property, plant (5,191) (1,302)
and equipment
Interest received 150 107
Acquisition of subsidiary, net - (1,646)
of cash
Net cash used in investing (6,289) (3,239)
activities
Financing activities
Proceeds from issue of share 2,113 18,524
capital and warrants
Repayment of bank loans (106) (1,210)
Drawdown of bank loans 184 11,231
Interest paid - (220)
Net cash from financing 2,191 28,325
activities
Net (decrease) / increase in (14,487) 16,397
cash and cash equivalents
Net foreign exchange (gain) / (100) 124
loss
Cash and cash equivalents at 16,543 22
beginning of period
Cash and cash equivalents at 1,956 16,543
end of period
Notes to the Financial Statements
For the Year Ended 31 December 2007
1. General information
The financial statements are prepared on a going concern basis, the validity of which is dependent on finance being available for the
continuing working capital requirements of the Group and for the development of the existing projects. Based on the assumption that the $100
million loan facility will remain available, the Directors believe that the going concern basis is appropriate for the financial statements.
Should the going concern basis not be appropriate, adjustments would have to be made to reduce the value of the Group's assets, in
particular the intangible fixed assets, to their realisable values.
2. Status of Financial Information
The audited financial information for the year end 31 December 2007 contained in this announcement does not constitute statutory
accounts as defined in the Companies Act 1985. The financial information for the year ended 31 December 2007 has been extracted from the
financial statements of Timan which will be delivered to the Registrar of Companies in due course. The auditors have issued an unqualified
opinion on the Group's statutory financial statements for the year ended 31 December 2007.
3. Revenue
Total revenue for the Group of �641,000 (2006: �281,000) was derived from the sale of crude oil of �196,000 (2006: �157,000) and the
sale of thermal water of �445,000 (2006: �124,000). In addition to this, there was also interest income of �161,000 (2006: �107,000).
4. Other income, net
2007 2006
�'000 �'000
Trading revenues 2,527 -
Trading cost of sales (2,515) -
12 -
This trading revenue related to the purchase of fuel oil for local municipal companies at the request and on behalf of the local
authorities of Ukhta. It is not anticipated that this trading revenue will be repeated in future periods.
5. Trade and other receivables
Amounts receivable within one year:
2007 2006
Group Group
�'000 �'000
Trade accounts receivable
472 220
Less provision for impairment of trade accounts receivable - -
Trade accounts receivable
472 220
Prepayments to suppliers
6,777 4,054
Taxes receivable
601 122
VAT receivable
212 970
Other receivables
333 949
Total trade and other receivables 8,395 6,315
The Directors consider that the carrying amounts of trade and other receivables approximate their fair value.
6. Trade and other payables
2007 2006
Group Group
�'000 �'000
Trade payables
2,129 2,895
Other payables
- 7
Salaries, PAYE & social security
1,120 786
VAT & other similar taxes
76 336
Accrued interest
1 9
Other accruals
203 19
3,529 4,052
The Directors consider that the carrying amount of trade and other payables approximate their fair value.
7. Cash flows used in operating activities
Group 2007 2006
�'000 �'000
Loss for the period before tax (11,180) (12,128)
Adjustments for:
Depreciation 290 1,849
Foreign exchange gains (813) (495)
Fair value charge for warrants 71 3,497
Fair value charge for options 4,122 586
Interest received (161) (107)
Interest paid 43 922
Impairment of goodwill 35 -
Other non-operating income 18 50
Operating cash flow prior to working capital (7,575) (5,826)
Increase in trade and other receivables (2,008) (4,746)
Increase in inventories (98) (121)
(Decrease) / Increase in trade payable and other (708) 2,004
payables
Net cash outflow from operations
(10,389) (8,689)
8. Subsequent Events
Director and major shareholder loans
During 2008, Alexander Kapalin (CEO) and Boris Royter (significant shareholder) made cash advances to the company of �348,000 in
aggregate in order to satisfy short term creditor payments. This was originally announced as being �398,000, however due to the arrangement
of the Kamanisk loan facility, the final �50,000 was no longer required.
9. Copies of the Report and Accounts for 2007
The Report and Financial Statements for the year ended 31 December 2007 will be posted to shareholders by Monday, 27 October 2008 and is
available to download today from the Company's website at www.timanoilandgas.plc.uk.
Enquiries:
Alexander Kapalin, CEO
David Herbert, Chairman
Moscow +7 495 223 3390
Simon Raggett/Rory Murphy
+44 (0) 20 7409 3494
Technical Review
The technical information and opinions contained in this announcement have been reviewed by Alexander Petukhov, the Company's Deputy
General Manager of LLC Neftegazopromyslovye Teckhnologii who is a qualified mining engineer and geologist and a member of the American
Association of Petroleum Geologists.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR FKQKNOBDKOKB
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