CHAIRMAN'S STATEMENT

 

Introduction

Despite the on-going impact of the war in Ukraine, which has made export sales uneconomic and operating far more difficult, the Group continues to prosper.

 

In the year under review we

·      reported record sales at $42.9 million, record gross profit of $32.3 million and record profit before tax of $12.3 million

·      produced 792,284 barrels of oil, an increase of 48% on 2021

·      took an option to acquire Block 8, a Contract Area with similar promise to the BNG Contract Area

·      converted $6.2 million debt to equity

·      cancelled the share premium and deferred shares enabling the payment of dividends

·      made the first of a series of dividend declarations

 

To date in 2023

·      we announced Deep Well 802 flowed at the rate of 700- 900 bopd whilst we were still working to complete the well

·      we signed the first drilling contract for the Caspian Explorer

·      we announced the conditional sale of 50% of the Caspian Explorer for $22.5 million, an estimated profit of $20 million

·      production is currently approximately 2,000 bopd

 

Ukraine war

The two principal consequences of the Ukraine war have been to make international sales uneconomic and make operating far more difficult.

 

Urals oil discount

Despite the UK and the EU specifically exempting oil produced in Kazakhstan and transported through the Russian pipeline network from sanctions the large discounts for oil using the Russian pipeline network and emerging as Urals Oil at the start of the war continue with no signs of lessening.

 

We have explored various alternatives to transport our oil but have yet to find a solution that would allow us to sell at or close to international prices. We are therefore selling all our oil on the domestic market and at domestic prices.

 

Selling to the domestic market and to domestic mini refineries does have advantages, such as speed of payment and the absence of significant deductions for tax, oil treatment and transportation. Nevertheless, we estimate the loss of revenue to be running at an annualised rate of approximately $18 million based on recent production volumes.

 

For much of the period under review and subsequently our inability to sell on the international markets also led to missed profits. However, the recent fall in international oil prices means we are currently achieving broadly the same net outcome by selling to local mini refineries where the deductions to the headline price are much lower.

 

Operations

Before the Ukraine war the majority of international supplies and consumables were sourced via Russia.  Now they typically come from China, a vast country whose border with Kazakhstan is some 3,000 kilometers from the BNG Contract Area and where originating destination is usually far further. The extra distance involved and the complexities of this new supply route with long delays at the border has typically resulted in much greater lead times for key supplies and consumables resulting in some significant operational delays. It has also required a much greater investment in working capital as the supplies and consumables have to be paid for many months earlier than previously.

 

Drilling at certain key wells was paused waiting for key parts and supplies with crews shifting from project to project. The overall impact is that, while progress has been made across a number of wells, it has not been possible to complete the work at any to increase production to the levels expected. Further, had we not decided several years ago to purchase our own rigs these operational delays would have been much greater still.

 

 

 

BNG

 

Our approach to BNG

At BNG we have two proven and commercially viable shallow structures, MJF and South Yelemes, and two deep structures, Airshagyl and Yelemes Deep, with huge potential but to date with no production.

 

We continue to believe that the geological conditions at the super giant fields of Kashagan and Tengiz extend to the BNG Contract Area and then through to Block 8.

 

If this is the case the potential volume of oil in these deep structures could be vast and the implications on the Company's fortunes of one or more commercially successful deep wells could be transformational. We remain committed to bringing as many as possible of these deep wells into production.

 

Progress in the period under review and subsequently

Our focus at BNG for much of the year under review was on the deep structures. This was in part because of the dramatic upside when a deep well flows at commercial levels but also to comply with our original deep well work programme obligations.

 

Since the period end we have focused more on developing the production capacity at the MJF structure by working to bring back into production previously successful wells, although more recently have returned to our deep well priorities, most notably Deep Well 802.

 

Deep structures

 

Deep Well A8

Having extended the well from approximately 4,500 meters to approximately 5,400 meters in 2021 we attempted to produce from three of the potential oil-bearing intervals identified.  However, after some initial success, we concluded that Deep Well A8 would not produce at commercial quantities and accordingly the well has been abandoned.

 

Deep Well 802

In June 2022 we spudded Deep Well 802 on the Yelemes Deep structure. This was the sixth and final deep well required under the original BNG work programme.

 

The well had a planned Total Depth of 5,200 meters targeting oil in the easier to drill Sandstone rather than Carboniferous rock, with an initial target at 4,300 meters. The well was drilled close to the site of a Soviet era blowout and our advisers provided us with the highest estimate of success for any of our BNG deep wells drilled to date.

 

Oil was encountered sooner than expected at a depth of approximately 3,900 meters and before the well had been completed, leading to a decision to drill a new side-track from a depth of 2,416 meters to approximately 4,100 meters, targeting the oil at the higher level previously encountered.

 

With approximately 100 meters still to be drilled the well flowed over a period of 3 days at rates fluctuating between 700 and 900 bopd.

 

Work at Deep Well 802 was suspended waiting on additional equipment. Accordingly, the crew at Deep Well 802 was moved to work on Shallow Well 142.  The crew has now returned to Deep Well 802 and we expect to complete our work at Deep Well 802 in Q3 2023.

 

Other deep wells

Little was attempted in the period under review or subsequently at the other deep wells already drilled, A5, A6, A7 and 801. However, as rigs and crews become available, we intend to continue work to bring each of them into production starting with Deep Well A5.

 

 

 

 

Shallow structures

 

MJF

Almost all the oil produced in the period under review and subsequently came from the MJF structure. However, for most of the year and to date in the current financial year key wells were out of production either being worked over with the use of horizontal drilling techniques or looking to eliminate water.

 

South Yelemes

The structure has four operational wells drilled in the Soviet era, Wells 54, 805, 806 & 807 from which approximately 22,500 barrels were produced representing approximately just 3% of total production. The focus at South Yelemes has been preparation for a horizontal well targeting the shallow dolomite intervals.

 

Further details of the BNG wells are set out in the section entitled Our Oil & Gas Assets.

 

Horizontal drilling

Horizontal drilling continues to be used in all recent shallow well workovers and we are preparing to introduce it to the deep wells at BNG. As crews and rigs become available we plan to continue to increase production from these shallow structures with workovers and new drilling.

 

Shallow structure production

Average production in 2022 was 2,171 bopd compared to 1,462 bopd in 2021. Recently production from the shallow structures has been approximately 2,000 bopd. However, once Wells 141 and 142 are brought back into production this is expected to rise significantly.

 

Own equipment

Our decision to own the drilling rigs and much of the other equipment previously rented has proved to be correct. It has significantly improved operational efficiency and reduced operating costs. More importantly, it has allowed us to continue to operate, which would not have been possible to the same extent had we relied on rigs and other equipment being supplied from China. We are in negotiations to acquire a more powerful G70 rig, which is expected to make drilling deeper wells faster and easier.

 

Block 8

In September 2022 we announced the intention to acquire Block 8, a producing Contract Area located approximately 160 km from BNG, for a maximum consideration of $60 million, payable in cash from the future production from Block 8 at the rate of $5 per barrel of oil produced.

 

Background

The Block 8 Contract Area is 2,823 sq km with three identified structures and production from two existing wells.  The Block 8 Contract Area is owned by a member of the Oraziman family, which holds approximately 48.4% of the shares in Caspian Sunrise, and as such it would constitute a related party transaction.

 

Caspian Sunrise has an option to acquire the UAE registered holding company of EPC Munai LLP, which is the Kazakh registered holder of the licence for the Block 8 Contract Area, conditional upon inter alia satisfactory due diligence, including a review by an independent expert; the renewal of the existing licence; Independent Director and Nominated Adviser approval; and the consents of the regulatory authorities in Kazakhstan the UAE and the UK.

 

The Company and the Oraziman family have entered into a loan agreement under which the Company has agreed to advance cash and equipment of up to $5 million to Altynbek Boltazhan the owner of EPC Munai LLP, and a member of the Oraziman family, to complete the work programme commitments under the existing licence.  In the period under review approximately $1.5 million of the loan was drawn. The loan is interest bearing at the rate of 7% and, in the event the acquisition of Block 8 does not complete, would be repayable by the Oraziman family initially from future dividend payments.

 

The Block 8 licence was previously owned by LG International the Korean conglomerate, who in 2006 started to acquire 3D seismic data over approximately 456 sq km. In recent years two deep wells have been drilled to depths of 4,203 meters and 3,449 maters respectively, from which oil has flowed at rates of up to 800 bopd.

 

 

 

 

 

Current production from Block 8 is approximately 110 bopd, with oil transported to the same treatment and pumping station used by BNG. The acquisition of Block 8 would bring a second flagship asset into the Caspian Sunrise Group together with BNG with both having the ability to transform the value of the Group in the event of successful deep drilling. CTS LLP, the Group's drilling company is currently working under contract on two wells at Block 8.

 

Acquisition process

In the event the Independent Directors exercise the option, it is expected that the acquisition would take up to a further six months to complete, with much of that time spent on securing the required regulatory approvals.

 

As the acquisition terms do not involve the issue of additional shares and the consideration is expected to be payable solely from production from Block 8, exercise of the option is not expected to result in material dilution for existing shareholders.

  

Related Party transaction

The Loan Agreement was considered a Related Party Transaction pursuant to the AIM Rules for Companies.

 

The Independent Directors considered, having consulted with WH Ireland, that the terms of the proposed Loan Agreement were fair and reasonable in so far as shareholders of Caspian Sunrise and the Company are concerned.

 

Should the option to acquire Block 8 be exercised by the Independent Directors a further formal assessment by WH Ireland, the Company's Nominated Adviser,  would be required at that time. 

 

3A Best

There was little progress at 3A Best in the period under review or subsequently. The farm-out announced in June 2021 was conditional on the renewal of the 3A Best licence. We continue to work with the Kazakh authorities to renew the licence, following which we will assess its place within the Group. In the meantime, our investment in 3A Best has been fully provided for.

 

Loan conversion

In March 2022 independent Caspian Sunrise shareholders voted to convert approximately $6.2 million of debt due to the Oraziman family into 139,729,446 new Ordinary shares at a price of 3.2p per share, increasing the Oraziman family's aggregate shareholding from 45.0% to 48.4%.

 

Cancelation of share premium

In April 2022 shareholders voted to cancel the share premium account and the deferred shares in Caspian Sunrise Plc paving the way for the future declaration of dividends. In June 2022 the UK High Court confirmed the cancellations, which took effect in the period under review.

 

Dividends

We commenced monthly dividends in November 2022 making four separate payments of $1.25 million (£1 million). In March 2023 we announced we would look to move to quarterly dividend declarations with the next quarter to be announced with these Financial Statements. 

 

With no signs of an end to the adverse impact of the Ukraine war we need to base our dividend policy on what the Group can reasonably afford to pay without materially detracting from our principal purpose of increasing shareholder value by the continued development of our oil & gas assets.

 

Therefore, until either we increase production with MJF shallow wells 141 & 142 resuming production or Deep Well 802 commencing production, or until the proceeds from the conditional sale of 50% of the Caspian Explorer are received, the board has reluctantly decided to suspend dividends payments for the remainder of the year.

 

 

 

Kazakhstan

In recent times Kazakhstan has been out of favour with international investors. It is nevertheless home to vast oil & gas and mineral reserves.

 

The lack of international competition for assets has provided opportunities outside our narrow focus of exploring and producing onshore oil & gas. A prime example being the Caspian Explorer, which 100% was acquired for less than $3.7 million and for which we have agreed to sell 50% for $22.5 million, representing a $20 million gross profit while we still own the remaining 50%.

 

Board changes

After 13 years as the senior independent non-executive director Edmund Limerick will on 07 July 2023 step down from the board.

 

Edmund's knowledge and advice has been invaluable in the development of the Group and he will be missed.  The Company will in due course appoint additional non-executive directors, following which the composition of the various committees of the board will be reviewed.

 

Outlook

Despite the impact of sanctions, the Group continues to prosper.  Our focus remains maximising short-term production and getting as many of the BNG deep wells drilled to date into commercial production. 

 

 

Clive Carver

Chairman

6 July 2023

 

FINANCIAL REVIEW OF THE 12 MONTHS ENDED 31 DECEMBER 2022

 

Revenue

Revenue in 2022 increased by approximately 72 per cent to $42.9 million (2021: $25.0 million).

 

Oil prices

International prices rose from approximately $79 per barrel at the start of 2022 to a maximum of approximately $123 per barrel in March 2022 and then fell steadily from June 2022 over the rest of the year to approximately $75 per barrel by the year end. Over the same period domestic prices rose from approximately $25 per barrel to approximately $32 per barrel.

 

In a new development, sales to domestic mini refineries became possible with prices of approximately $38 per barrel for most of the period under review and subsequently.

 

Production volumes

Production volume in 2022 at 792,284 barrels was some 48 % higher than in 2021 (533,857 barrels).

 

International vs Domestic sales

The continuing large discount for Kazakh oil sold from the Russian pipeline network despite there being no EU sanctions together with the Kazakh authorities assessing export taxes at the full Brent related price rather than the actual price achieved made international sales uneconomic for the majority of the period under review and subsequently.

 

In the period before sanctions 237,144 barrels were sold on the international market at an average price of approximately $85 per barrel. After the start of international sanctions, most sales were either at domestic prices or to domestic mini refineries.

 

CTS

CTS LLP is the Group's wholly owned drilling company, which in 2020, 2021 and 2022 undertook work at Block 8, the Contract Area, which is owned by the Oraziman family and therefore a related party and over which the Group has an option to acquire.

 

The work undertaken at Block 8 in these periods was approximately $5 million and at 31 December 2022 has either been paid or is covered by advances. In 2022 approximately $3.7 million is included in 2022 income as more fully described in notes 4 & 25.

 

Gross profit

Gross profit increased by approximately 66 per cent to approximately $32.3 million (2021: $19.4 million), from a combination of the increase in production volumes and the impact of the sales possible at international prices before the impact of sanctions.

 

Selling expenses

Selling expenses increased by approximately 29% to $9.8 million (2021: $7.6 million) and are mainly export and customs duties, which are typically based on achieved oil prices.

 

Other administrative expenses

General and Administrative expenses were $9.8 million (2021: $3.3 million). The main reason for the increase was additional staff costs in Kazakhstan of around $4.9 million.

 

Operating profit

The operating profit was $12.8 million (2021: loss of $4.0 million).

 

Profit / (Loss) for the year before tax

Profit before tax was $12.3 million (2021: loss of $4.8 million).

 

Tax charge

The tax charge was $2.4 million (2021: $0.7 million). The tax is payable in Kazakhstan where historic losses have been fully utilised.

 

 

 

 

Profit / (Loss) for the year after tax and before dividends

The profit for the year after tax but before dividends was $9.9 million (2021: loss of $5.5 million).

 

Dividends

Dividends of approximately $2.4 million were declared in the year (2021: nil).

 

Oil and gas assets

 

Unproven oil & gas assets

The carrying value of unproven oil and gas assets fell by approximately $2.3 million to approximately $43.8 million (2021: $46.1 million) largely as the result of the transfer of the shallow Yelemes South structure to proven oil & gas assets, which was shown previously within property, plant and equipment.

 

Plant, property and equipment

The value of plant property and equipment increased by approximately $3.7 million to approximately $60.7 million (2021: $57.1 million), again principally as the result of the reclassification of the South Yelemes structure.

 

Other receivables

Other receivables due within 12 months increased from approximately $5.0 million to approximately $5.2 million, in part as the result of the approximately $1.5 million drawn down from the $5 million loan in respect of the proposed acquisition of Block 8.

 

Cash position

At the year-end we had cash balances of approximately $3.7 million (2021: $0.4 million).

 

Liabilities

 

Trade and other payables under 12 months

Trade and other payables increased to approximately $15.9 million (2021: $13.2 million). Short term borrowings provided by the Oraziman family fell to $0.4 million following the debt conversion approved by independent shareholders in March 2022 (2021: $6.4 million).

 

The provisions for payments in less than 12 months were approximately $6.0 million (2021: $5.5 million).

 

BNG historic costs

We have continued to pay down the historic costs assessed against BNG. At 31 December 2022, of the original $32 million levied in 2019 approximately $19 million remains to be paid over the next seven years, of which approximately $3.2 million is to be paid within 12 months.

 

Cashflows

During the period under review approximately $45.9 million was received from customers and approximately $27.5 million paid out to suppliers, creditors and staff with a further $11.5 million spent on unproven oil and gas assets and $0.5 million spent on property plant and equipment. A further $2.3 million was paid to related parties including $1.5 million relating to the Block 8 loan, and approximately $1.1 million was paid in dividends, resulting in cash balances at the year-end increasing from $0.4 million to $3.7 million.

 

Going Concern

 

With net current liabilities of approximately $16.0 million as at 31 December 2022, the assessment of going concern needs careful consideration. The Board has assessed cash flow forecasts prepared for a period of at least 12 months from the approval of the financial statements and assessed the risks and uncertainties associated with the operations and funding position, including the potential acquisition of Block 8. These cash flows are dependent on a number of key factors including:

 

·      The Group's cashflow is sensitive to oil price and volume sold. Given the large discounts encountered since the start of the war in Ukraine we have assumed all sales will be either domestic sales or sales to the domestic mini refineries. If sales to the new local mini refineries did not continue as expected and in the continuing absence of any international sales additional funding would be required.

 

·      The Group continues to forward sell its domestic production and receives advances from oil traders with $2.2 million advanced at the reporting date the continued availability of such arrangements is important to working capital. Whilst the Board anticipate such facilities remaining available given its trader relationships, should they be withdrawn or reduced more quickly than forecast cash flows allow then additional funding would be required.

 

·      The Group has $5.9 million of liabilities due on demand under social development programmes and $3.2 million of BNG licence payments due within the forecast period to the Kazakh government. Whilst the Board has forecasted the payment of BNG licence payments, there are no payments planned for social development programmes within the forecast period as the Board expects additional payment deferrals to be approved. Should the deferrals not occur additional funding would be required.

 

These circumstances continue to indicate the existence of a material uncertainty which may cast significant doubt about the Group and the Company's ability to continue as a going concern and it therefore may be unable to realise its assets and discharge its liabilities in the normal course of business. The financial statements do not include the adjustments that would result if the Group and the Company was unable to continue as a going concern.

 

While none of the following can be relied upon until cash is received there are a number of expected events, which could provide significant additional working capital in the short term:

 

·      The Group is due to receive $22.5 million relating to the conditional sale of a 50% interest in the holding company for the Caspian Explorer;

·      A Kazakh bank's credit committee has approved a $5 million loan, which has yet to be drawn;

·      A Kazakh oil trader has offered an additional $3 million advance, which is yet to be accepted.

 

Should it be necessary, the Board has the following actions to mitigate any short-term funding issues

 

·      To seek additional funding from advance oil sales

·      To slow down the pace at which BNG is further developed

·      To defer the exercise of the option to acquire Block 8, as this would defer development expenditure

·      To sell all or part of one or more of the Group's assets

·      To defer further dividend payments

·      To seek additional equity capital

·      Cease or reduce the amount of discretionary dividend payments (payment of which is subject to the cash inflows outlined above).

 

Notwithstanding the material uncertainty described above, after making enquiries and assessing the progress against the forecast, projections and the status of the mitigating actions referred to above, the Directors have a reasonable expectation that the Group and the Company will continue in operation and meet its commitments as they fall due over the going concern period. Accordingly, the Directors continue to adopt the going concern basis in preparing the financial statements.

 

 

 

 

 

Clive Carver

Chairman

6 July 2023

 

 

OUR OIL & GAS ASSETS

 

BNG CONTRACT AREA

 

Introduction

The Group's principal asset is its 99% interest in the BNG Contract Area. We first took a stake in the BNG Contract Area in 2008, as part of the acquisition of 58.41% of a portfolio of assets owned by Eragon Petroleum Limited.

 

In 2017, we increased our stake to 99% upon the completion of the merger with Baverstock GmbH. Since 2008, more than $100 million has been spent at BNG.

 

The BNG Contract Area is located in the west of Kazakhstan 40 kilometers southeast of Tengiz on the edge of the Mangistau Oblast, covering an area of 1,561 square kilometers of which 1,376 square kilometers has 3D seismic coverage acquired in 2009 and 2010. We became operators at BNG in 2011, since when we have identified and developed both shallow and deep structures.

 

Shallow structures

There are two confirmed and producing shallow structures at BNG.

 

MJF structure

The first wells were drilled on the MJF structure in 2016, since when it has produced in aggregate approximately 2.8 million barrels. We have embarked on a programme of redrilling the older wells using horizontal drilling techniques to increase production. At the date of this report work at three of the older wells has been completed.

 

The productive Jurassic aged reservoir consists of stacked pay intervals with most ranging in thickness from two meters to 17 meters. The current mapped lateral extent of the MJF field is now approximately 13 km2. The producing wells range in depth from 2,192 meters to 2,450 meters.

 

In December 2018, we applied to move the MJF structure, which was part of the overall BNG licence, from an appraisal licence to a full production licence, under which the majority of the oil produced from the MJF wells may be sold by reference to world rather than domestic Kazakh prices. The full production licence became effective in July 2019, with the first revenues based on international prices received in August 2019.

 

Following the award of the MJF export licence the Kazakh regulatory authorities assessed historic costs of $32 million against the MJF structure, repayable quarterly over a 10-year period, of which approximately $20 million remained payable at 31 December 2022.

 

Recently we have been working to bring wells 141 and 142 back into production.

 

In 2022 we produced 792,284 barrels of oil at an average of 2,171 bopd (2021: 533,857  barrels at an average of 1,462 bopd).  At the date of this report production is approximately 2,000 bopd.

 

South Yelemes structure

The first wells were drilled on the South Yelemes structure during the Soviet era, with test production commencing in 1994.

 

Well 54 was intermittently active between periods of being shut in to allow pressure to be restored. There are three other wells at South Yelemes (805, 806 & 807). Since 2010 the South Yelemes shallow structure has produced approximately 375,000 barrels, including approximately 25,000 barrels in 2022.

 

Following an upgrade in the South Yelemes licence we are now allowed to sell most of the oil produced from the South Yelemes structure by reference to international rather than domestic prices. However, as set out elsewhere in these financial statements, we currently choose not to do so.

 

 

We believe the structure may have untapped quantities of oil at higher levels than previously explored, which we intend to explore with horizontal drilling targeting a Dolomite reservoir when crews become available.

 

Deep structures

We have identified two deep structures at the BNG Contract Area. The first is the Airshagyl structure, which extends to 58 km2. The second is the Yelemes Deep structure, which extends over an area of 36 km2.

 

Airshagyl structure

Four deep wells have been drilled on the Airshagyl structure.

 

A5

Well A5 was spudded in July 2013 and drilled to a total depth of 4,442 meters with casing set to a depth of 4,077 meters to allow open-hole testing. Core sampling revealed the existence of a gross oil-bearing interval of at least 105 meters from 4,332 meters to at least 4,437 meters. For 15 days the well produced at the rate of approximately 3,000 bopd before production fell to approximately 1,000 bopd, leading to the well being shut in for remedial treatment.

 

Limited rig availability resulted in little work on this well in 2021 or subsequently. We remain believers in the well and intend to drill a new side-track from a depth of 4,500 meters when a rig becomes available.

 

A6

Deep Well A6 was spudded in 2015 and drilled to a depth of 4,528 meters. Initially problems in perforating the well prevented it being put on test. Latterly the issue has been blockages from unrecovered drilling fluid. During the year under review there was no significant progress with the well. Further development work will depend on rig availability and a decision on which acid formulation to use.

 

A7

Deep Well A7 was spudded in December 2021, with a planned Total Depth of 5,300 meters but primarily targeting an interval at a depth of 4,000 meters. In March 2022 drilling at A7 was paused at a depth of 2,150 meters to allow the rig to be used to drill a horizontal well on the shallow South Yelemes structure. Drilling is planned to continue when a rig becomes available.

 

A8

Deep Well A8 was spudded in 2018 with a planned Total Depth of 5,300 meters, initially targeting the same pre-salt carbonates that were successfully identified in Deep Well A5 at depths of 4,342 meters but with a prime target being the deeper carbonate of the Devonian to Mississippian ages towards the planned Total Depth of 5,300 meters.

 

During 2021 we decided to resume drilling towards the original objective in the Devonian. Drilling reached a final depth of 5,400 meters in early December. Neither of the two intervals of interest perforated resulted in commercial quantities of oil with pressures below the levels expected. Accordingly, the well has been abandoned.

 

Yelemes Deep structure

Deep Well 801 was drilled in 2014 / 2015 to a depth of 5,050 meters. During the year under review there was no progress with the well. As with Deep Well A6 on the Airshagyl structure further development work will depend on rig availability.

 

Deep Well 802 was spudded in June 2022, with a planned Total Depth of 5,300 meters. This is the final deep well required under the BNG work programme. Work at Deep Well 802 was put on hold pending the arrival of specialist equipment. In the meantime, the rig and crew were switched to bring Well 142 back into production. Once finished at Well 142 the rig and crew will return to work on Well 802.

 

One further deep well, Deep Well 803, is required to be drilled this year under our new work programme obligations. Our intention is to spud this well in Q3 2023 and complete the drilling by the end of the year.

 

Deep well drilling issues

Sub-surface conditions at the two discovered deep structures at BNG present significant technical challenges in drilling and completing the wells. These are the extreme high temperature and pressure that exist below the salt layer. At the Airshagyl structure the salt layer is typically found at depths between 3,700 and 4,000 meters whereas at the Yelemes Deep structure the salt layer is typically found at depths between 3,000 and 3,500 meters.

 

 

The extreme pressure below the salt layer requires the use of high-density drilling fluid to maintain control of the well during drilling. The high-density drilling fluid's principal role is to help prevent dangerous blow-outs. The attributes of the high-density barite weighted drilling fluid, which allow the wells to be controlled during the drilling phase, act against us when we attempt to clear the well for production.

 

To the extent that drilling fluids, which include solid particles added to increase density, are not fully recovered they can form a barrier between the wellbore and the reservoir impeding the flow of hydrocarbons into the well.

 

3A BEST

In January 2019, we acquired 100% of the 3A Best Group JSC, a Kazakh corporation owning an existing Contract Area of some 1,347 sq. km located near the Caspian port city of Aktau.

 

The Contract Area, which has been designated by the Kazakh authorities as a strategic national asset, surrounds and goes below the established shallow field at Dunga, which we believe to be producing at the rate of approximately 15,000 bopd.

 

In June 2021, we announced a farm out of 15% of the 3A Best Contract Area in return for our new partners assuming responsibility for the current 3A Best work programme commitments. However, the farm out was conditional on the deferral of obligations under the licence and the extension of the license which are yet to be granted. We also granted our new partners an option to acquire the remaining 85%, exercisable after completion of the current work programme commitments, at a price to be determined by an independent expert.

 

We continue to work with the Kazakh authorities to renew the 3A Best licence. Until we are successful on this the farm-out will not proceed. Our investment in 3A Best has been fully provided for.

 

 

 

 

LICENCES & WORK PROGRAMMES AND RESERVES

 

LICENCES & WORK PROGRAMMES

 

BNG

BNG LLP Ltd holds three contracts for subsoil use. The first is the appraisal contract, covering the full extent of the BNG Contract Area (except the MJF and South Yelemes structures), originally issued in 2007 and successively extended until 2024.

 

The second is the export contract covering just the MJF structure, which runs to 2043 and the third is the export contract covering the South Yelemes structure, which runs to 2046. Under the MJF and South Yelemes licences the majority of oil produced may be sold by reference to international rather than domestic prices.

 

Well 802 was the final deep well required under the original BNG work programme commitments.

 

The current work programme requires a further deep well, Well 803 to be drilled before the end of the year. The well is expected to be spudded in Q3 2023.

 

Additionally, a further 10 shallow wells are to be drilled on the MJF structure, including a number of horizontal wells, by the end of 2026, with one being Well 155 to be drilled this year.

 

3A Best

The licence renewal at 3A Best was delayed as the result of outstanding social payments due from the assets previous owners. We continue to work with the Kazakh authorities to renew the 3A Best licence.

 

RESERVES

 

BNG

In 2011 Gaffney Cline & Associates ("GCA") undertook a technical audit of the BNG licence area and subsequently Petroleum Geology Services ("PGS") undertook depth migration work, based on the 3D seismic work carried out in 2009 and 2010.

 

The work of GCA resulted in confirming total unrisked resources of 900 million barrels from 37 prospects and leads mapped from the 3D seismic work undertaken in 2009 and 2010. The report of GCA also confirmed risked resources of 202 million barrels as well as Most-Likely Contingent Resources of 13 million barrels on South Yelemes.

 

In September 2016 GCA assessed the reserves attributable to the BNG shallow structures (MJF & South Yelemes). Between then and the end of 2022, approximately 3.8 mmbls of oil were produced, which under financial reporting rules are deducted from the assessment of reserves as at 31 December 2022.

 

BNG	As at 31 December 2022	As at 31 December 2021
	mmbls	mmbls
Shallow P1	14.3	15.1
Shallow P2	25.5	26.3

 

Despite the last external review of the Group's reserves being in 2016, the Board considers their assessment as set out in the above table to be valid.

 

 

CASPIAN EXPLORER

 

Introduction

The Caspian Explorer is a drilling vessel designed specifically for use in the shallow northern Caspian Sea where traditional deep water rigs cannot be used.

 

The principal ways of exploring in such shallow waters are either from a land base or using a specialist shallow drilling vessel such as the Caspian Explorer, which we believe to be the only one of its class operational in the Caspian Sea.

 

Land based options typically involve either the creation of man-made islands from which to drill as if onshore or less commonly drilling out from an onshore location. Both are expensive compared to the use of a specialist drilling platform such as the Caspian Explorer.

 

The Caspian Explorer was conceived of by a consortium of leading Korean companies including KNOC, Samsung and Daewoo Shipbuilding.  The vessel was assembled in the Ersay shipyard in Kazakhstan between 2010 and 2011 for a construction cost believed to be approximately $170 million. The total costs after fit-out are believed to have been approximately $200 million. We understand a replacement would today cost in excess of $300 million and take several years to become operational.

 

The Caspian Explorer became operational in 2012 at a time of relatively low oil prices and reduced exploration activity in the northern Caspian Sea.

 

Operational characteristics

The Caspian Explorer:

·      operates principally between May and November as the Northern Caspian Sea is subject to winter ice

·      operates in depths between 2.5 meters and 7.5 meters

·      can drill to depths of 6,000 meters

·      typically has a crew to operate the drilling vessel of 20

·      has accommodation for approximately 100

·      costs approximately $100,000 per month while moored in port 

·      is generally able to pass on other costs incurred while operational to the clients hiring the vessel

 

Safety contract

In June 2021 we announced the first charter for the Caspian Explorer since it has been a part of the Group. The charter was with the North Caspian Operating Company ("NCOC"), which is the principal operator in the region, comprising the Republic of Kazakhstan working through KazMunaiGas (KMG), and international oil companies including Shell, ExxonMobil, ENI, Total and CNPC, the consortium operating the Kashagan field. The charter has been completed and payment received.

 

Daily rates for safety related work are much lower than for drilling contracts but the income from the charter covered the Caspian Explorer's costs for the year.

 

Drilling contract

In March 2023 we announced that the first drilling contract for the Caspian Explorer under the Group's ownership had been signed.

 

An offshore well is scheduled to be drilled in the summer of 2024 to a planned depth of 2,500 meters. It will be drilled for the Isatay Operating Company LLP ("IOC"), a Kazakh registered explorer, in which Italy's ENI is a leading participant. The work is expected to take approximately two months.

 

Daily rates have been agreed for both drilling days and days when no drilling occurs.  On the basis of these rates and the Group's assessment of the likely total number of days required to complete the assignment the Group expects net income after costs of approximately $15 million.

 

The contract also provides for a second well in the event the first is deemed successful.  That second well would most likely be drilled in 2025 on terms similar to the first assignment and is again expected to produce net income after costs of $15 million.

 

 

Other charters

Discussions continue with a number of parties interested in chartering the Caspian Explorer, either on normal commercial terms or where the involvement of the Caspian Explorer allows Caspian Sunrise to take an interest in the project.

 

Conditional sale

In June 2023 we announced the conditional sale of 50% of Prosperity Petroleum, the UAE registered holding company for the Caspian Explorer for $22.5 million.

 

Summary

The Caspian Explorer has been written down in previous financial statements so that its carrying value at 31 December 2022 is $1.7 million.  We believe the drilling contract announced in March 2023 will be the first of a number as exploration of the shallow northern Caspian Sea increases.

 

 

 

 

QUALIFIED PERSON & GLOSSARY

 

Qualified Person

Mr. Assylbek Umbetov, a member Association of Petroleum Engineers, has reviewed and approved the technical disclosures in these financial statements.

 

Glossary

SPE - the Society of Petroleum Engineers

Bopd - barrels of oil per day mmbls - million barrels.

 

Proven reserves

Proven reserves (P1) are those quantities of petroleum which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods, and government regulations.

 

If deterministic methods are used, the term reasonable certainty is intended to express a high degree of confidence that the quantities will be recovered.

 

If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate.

 

Probable reserves

Probable reserves are those additional reserves which analysis of geosciences and engineering data indicate are less likely to be recovered than proved reserves but more certain to be recovered than possible reserves. It is equally likely that actual remaining quantities recovered will be greater than or less than the sum of the estimated proved plus probable reserves (2P).

 

In this context, when probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the 2P estimate.

 

Possible reserves

Possible reserves are those additional reserves which analysis of geosciences and engineering data indicate are less likely to be recovered than probable reserves.

 

The total quantities ultimately recovered from the project have a low probability to exceed the sum of proved plus probable plus possible (3P), which is equivalent to the high estimate scenario. In this context, when probabilistic methods are used, there should be at least a 10% probability that the actual quantities recovered will equal or exceed the 3P estimate.

 

Contingent resources

Contingent resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations, but the applied project(s) are not yet considered mature enough for commercial development due to one or more contingencies.

 

Contingent resources may include, for example, projects for which there are currently no viable markets, or where commercial recovery is dependent on technology under development, or where evaluation of the accumulation is insufficient to clearly assess commerciality.

 

Contingent resources are further categorised in accordance with the level of certainty associated with the estimates and may be sub-classified based on project maturity and/or characterized by their economic status.

 

Prospective resources

Prospective resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations.

 

Potential accumulations are evaluated according to their chance of discovery and, assuming a discovery, the estimated quantities that would be recoverable under defined development projects.

 

THE KAZAKH OIL AND GAS LICENCING AND TAXATION ENVIRONMENT

 

Introduction

Oil & gas is a heavily regulated industry throughout the world, with strict rules on licencing and taxation. Set out below is a summary of the position in Kazakhstan.

 

Licensing

 

Exploration licences

The initial licence to develop a field is typically an exploration licence where the focus is on completing agreed work programmes. Exploration licences are typically two years in duration and it is usual for there to be several consecutive two-year exploration licence extensions agreed during the exploration phase.

 

Appraisal licences

In the event the project appears commercial, the exploration licence is usually upgraded to an appraisal licence.

 

Under an appraisal licence, oil produced incidentally while exploring and assessing may be sold but only at domestic prices. Taxation under an appraisal licence is limited with only modest deductions. Changes to the legislation in the last few years has reduced the length of appraisal licences from six to five years, with a concession of reduced social obligation payments.

 

Full production licences

To sell oil by reference to world prices requires either the Contract Area as a whole or a particular structure has to be upgraded to a full production licence. Under a full production licence there is only limited scope to develop areas not already drilled. Additionally, a significant minority portion of production typically remains at domestic prices although the majority is sold by reference to world prices.

 

Taxes

There are five different taxes that apply to Kazakh oil & gas producers. Each has its own basis of calculation with some being related to profits, others by reference to world oil prices and yet others by reference to the volume of oil sold. The overall impact is that as world prices increase so typically does the percentage taken by the Kazakh state.

 

Despite in practice oil sold on the international market being subject to a hefty Ural Oil discount of approximately $30 - $35 per barrel or more taxes on any international sales are still levied according to the international Brent price.

 

 

 

 

STRATEGIC REPORT

 

Introduction

This strategic report comprises: the Group's objectives; the strategy; the business model; and a review of the Group's business using key performance indicators. The Chairman's statement, which also forms the main part of the strategic review, contains a review of the development and performance of the Group's business during the financial year, and the position of the Group's business at the end of that year. Additionally, a summary of the principal risks and uncertainties facing the business is set out immediately after the Directors' report.

 

Objectives

The Group's objective is to create shareholder value from the development of oil and gas projects and associated activities. We are now also considering mineral opportunities in Kazakhstan.

 

The Group has a number of secondary objectives, including promoting the highest level of health and safety standards, developing our staff to their highest potential and being a good corporate citizen in our chosen countries of operations.

 

Strategy

The Group's long-term strategy is to build an attractive portfolio of oil and gas exploration and production assets initially in Central Asia, and in particular Kazakhstan where the board has the greatest experience. Additionally, the Group will consider other opportunities, including now mineral opportunities, where the board believes it can add significant value and contribute towards the success of the Group as a whole.

 

The Group's principal asset is its 99 per cent interest in BNG. Additionally, the Group owns a 100 per cent interest in the 3A Best Contract Area, which is subject to licence renewal. The Group also owns a 100% interest in the Caspian Explorer, a shallow water drilling vessel designed for the northern parts of the Caspian Sea. In June 2023 it was announced that the Group had conditionally agreed to sell 50% of the Caspian Explorer's holding company for a cash consideration of $22.5 million.

 

In September 2022 the Group took an option to acquire the Block 8 Contract Area for a maximum consideration of $60 million.

 

Business model

The business model is straightforward. To take assets at any stage of the development cycle and to improve them to the point they contribute to the Group's profitability or that they may be sold on at a profit to provide funding for additional development.

 

Our main asset BNG has been developed over the past 15 years with more than $100 million spent and is set to be a very substantial asset for many years to come.

 

While we seek to grow our asset portfolio with appropriately timed acquisitions we are also prepared and able to sell assets when their value to others exceeds the value we can see. This was the case in 2015, when, in poor market conditions, we sold our then second asset Galaz for a headline price of $100 million, which represented a profit of $15 million on our interest in the asset, and which provided $33 million to re-invest into BNG.  It was also the case when we recently announced the conditional sale of 50% of the Caspian Explorer for $22.5 million.

 

Further growth by acquisition

When appropriate the Group will consider acquiring additional assets or related businesses where the Board believes they would increase shareholder value, including by providing funding or infrastructure to develop the Group's other assets.

 

The Directors believe the Group is exceptionally well placed through its strong local Kazakh presence to identify and buy undervalued oil & gas assets and other assets on an opportunistic basis.

 

Climate Change

The Group's purpose is to supply energy in an environmentally conscious manner to the benefit of all stakeholders. As an exploration and production company, we recognise our environmental responsibilities to all our stakeholders and in particular to the local communities in which we operate.

 

However, other than a general move away from fossil fuels, the Board is not aware of any indications that the impact of climate change is likely to have a material impact on the Group's business over the short and medium terms.  We believe the current need for oil will continue for at least the next decade.

 

Key performance indicators

 

The Non-Financial Key Performance Indicators are:

·      Operational (wells drilled and not abandoned at end of year) 2022: 20 (2021: 18)

·      Aggregate production for 2022 was barrels 792,284 (2021: 533,857) an increase of approximately 48%

·      Reserves at 31 December 2022 P1 14.3 mmbls & P2 25.5 mmbls (2021: P1 15.1 mmbls & P2 26.3 mmbls)

 

The Financial Key Performance Indicators are:

·      Revenue: up 72% at $42.9 million (2021: $25.0 million)

·      Operating profit 12.8 million (2021: loss of $4.0 million)

·      Profit after tax for the year $9.9 million (2021: loss $5.5 million)

·      Dividends $2.4 million (2021: nil)

·      Cash at bank: $3.7 million (2021: $0.4 million)

·      Total assets: $117 million (2021: $114 million)

·      Exploration assets $43.8 million (2021: $46.1 million)

·      Plant, property & equipment $60.7 million (2021: $57.1 million)

 

Current production

·      Approximately 2,000 bopd (2021: 1,462 bopd)

 

Assets & Reserves

Details of the Group's assets and reserves are set out in the Chairman's statement.

 

Financial

At current domestic and domestic mini refinery prices and with current levels of production the income from current production is sufficient to cover day-to-day Group operations and G&A costs.

 

In addition, the Group expects to receive the $22.5 million proceeds due from the sale of 50% of the Caspian Explorer and its 50% share of net income of approximately $15 million in respect of the drilling contract scheduled for 2024 which was signed in March 2023.

 

In the event the option to acquire Block 8 is exercised, the income from the oil being produced there now and in the future is expected to cover the repayment of the $5 million loan and Block 8 drilling costs.

 

In the event any of the deep wells drilled start to produce oil in commercial quantities the associated revenues should transform the Group's cash flows.

 

Drilling wells at a rate faster than could be funded from oil sales, would require additional funding, as would any acquisitions to be funded by cash. Potential sources of such funding would include: further advances from local oil traders for the sale of oil yet to be produced; industry funding in the form of partnerships with larger industry players; further support from existing shareholders; and equity funding from financial institutions. Additionally, funding may be available from selected asset sales.

 

Dividends

For some years it has been the policy of the Board to work towards a position where meaningful dividends can be paid. This required not only consistently profitable trading but also a corporate reorganisation to create distributable reserves. New corporate subsidiaries have been incorporated in the UAE, with a view to improving and simplifying the Group structure thus easing the future payment of dividends. The final step was the approval of shareholders and the UK Court of a Capital Reduction. Shareholders approved the Capital Reduction in April 2022, which was approved by the UK High Court in June 2022.  

 

The Company's first dividend was declared in November 2022 and was followed by 3 further monthly dividends. In March 2023 the Company announced that future dividends would be declared on a quarterly rather than monthly basis.

 

 

 

 

 

However, as set out above in the Chairman's Statement, with no signs of an end to the adverse impact of the Ukraine war we need to base our dividend policy on what the Group can reasonably afford to pay without materially detracting from our principal purpose of increasing shareholder value by the continued development of our oil & gas assets.

 

Therefore, until either we increase production with MJF shallow wells 141 & 142 resuming production or Deep Well 802 commencing production, or until the proceeds from the conditional sale of 50% of the Caspian Explorer are received, the board has reluctantly decided to suspend dividend payments for the remainder of the year.

 

S. 172 Statement

 

The Board is mindful of the duties of directors under S.172 of the Companies Act 2006.

 

Directors act in a way they consider, in good faith, to be most likely to promote the success of the Company for the benefit of its members. In doing so, they each have regard to a range of matters when making decisions for the long term success of the Company.

 

Our culture is that of treating everyone fairly and with respect and this extends to all our principal stakeholders. Through engaging formally and informally with our key stakeholders, we have been able to develop an understanding of their needs, assess their perspectives and monitor their impact on our strategic ambition.

 

As part of the Board's decision-making process, the Board and its Committees consider the potential impact of decisions on relevant stakeholders whilst also having regard to a number of broader factors, including the impact of the Company's operations on the community and environment, responsible business practices and the likely consequences of decisions on the long term.

 

Our objective is to act in a way that meets the long term needs of all our main stakeholder groups. However, in so doing we pay particular regard to the longer term needs of shareholders.

 

We engage with investors on our financial performance, strategy and business model. Our Annual General Meeting provides an opportunity for investors to meet and engage with members of the Board.

 

The Board continues to encourage senior management to engage with staff, suppliers, customers and the community in order to assist the Board in discharging its obligations.

 

Further details of how the Directors have had regard to the issues, factors and stakeholders considered relevant in complying with S 172 (1) (a)-(f), the methods used to engage with stakeholders and the effect on the Group's decisions during the year can be found throughout this report and in particular at page 4 (in relation to decision-making), page 20 (where the Group's strategy, objectives and business model are addressed), page 23 (in relation to employees) the ESG report on page 29 (in relation to social and environmental matters).

 

We seek to attract and retain staff by acting as a responsible employer. The health and safety of our employees is important to the Company and an area we have to regularly report on to the Kazakh regulatory authorities.

 

We continue to provide support to communities and governments through the provision of employment, the payment of taxes and supporting social and economic development in the surrounding areas, both through social investment and local procurement. We have contributed to a range of social programmes for well over a decade.

 

We have established long-term partnerships that complement our in-house expertise and have built a network of specialised partners within the industry and beyond.

 

 

Clive Carver

Chairman

6 July 2023

 

 

DIRECTORS REPORT

 

The Directors present their annual report on the operations of the Company and the Group, together with the audited financial statements for the year ended 31 December 2022.

 

The Strategic report forms part of the business review for this year.

 

Principal activity

The principal activity of the Group is oil and gas exploration and production. The Group also owns and operates the Caspian Explorer, a drilling vessel specifically designed for operation in the shallow northern Caspian Sea. The Group also has its own drilling company, which on occasion works on projects not owned by the Group.

 

Results and dividends

The consolidated statement of profit or loss is set out on page 49 and shows a $9.9 million profit for the year after tax (2021: loss US$5.5 million).

 

The Company declared its first monthly dividend of £1 million in November 2022 and has subsequently declared a further 3 monthly dividends. In March 2023 the Company announced it was moving to quarterly dividends but in these financial statements has announced a suspension of dividend payments for the remainder of the financial year, or until production from wells 141, 142 or 802 allow payments or upon the receipt of the $22.5 million consideration expected from the sale of the Caspian Explorer.

 

Review of the year

The review of the year and the Directors' strategy are set out in the Chairman's Statement and the Strategic Report.

 

Events after the reporting period

Other than the operational and financial matters set out in these financial statements there have been no material events between 31 December 2022, and the date of this report, which are required to be brought to the attention of shareholders. Please refer to note 27 of these financial statements for further details.

 

Board changes

After 13 years as the senior independent non-executive director Edmund Limerick will on 7 July 2023 step down from the board.

 

Edmund's knowledge and advice has been invaluable in the development of the Group and he will be missed.  The Company will in due course appoint additional non-executive directors, following which the composition of the various committees of the board will be reviewed.

 

Employees

Staff employed by the Group are based primarily in Kazakhstan.

 

The recruitment and retention of staff, especially at management level, is increasingly important as the Group continues to build its portfolio of oil and gas assets. As well as providing employees with appropriate remuneration and other benefits together with a safe and enjoyable working environment, the Board recognises the importance of communicating with employees to motivate them and involve them fully in the business.

 

For the most part, this communication takes place at a local level and staff are kept informed of major developments through email updates. They also have access to the Group's website.

 

The Group has taken out full indemnity insurance on behalf of the Directors and officers.

 

Health, safety and environment

It is the Group's policy and practice to comply with health, safety and environmental regulations and the requirements of the countries in which it operates, to protect its employees, assets and the environment.

 

Charitable and Political donations

During the year the Group made no charitable or political donations.

 

Directors and Directors' interests

The Directors of the Group and the Company who held office during the period under review and up to the date of the Annual Report are as follows:

 

Directors' interests

 

Director	Number of Ordinary Shares
	As at 31 December 2022	As at 31 December 2021
Clive Carver	2,245,000	2,245,000
Kuat Oraziman*	nil	nil
Edmund Limerick	7,911,583	7,911,583
Aibek Oraziman*	946,887,599	592,857,583
Seokwoo Shin	nil	nil

 

* taken together on 31 December 2022 the Oraziman Family, comprising Kuat Oraziman, Aibek Oraziman, Aidana Urazimanova,  Altynbek Boltazhan and Boltazhan Kerimbayev held 1,089,544,792 shares representing approximately 48% of the issued share capital.

 

Biographical details of the Directors are set out on the Company's website www.caspiansunrise.com.

 

Details of the Directors' individual remuneration, service contracts and interests in share options are shown in the Remuneration Committee Report.

 

Other shareholders over 3% at the date of this report

 

Shareholder	Shares held	%
Dae Han New Pharm Co Limited	224,830,964	9.99
Al Marri Family	221,625,001	9.85
Abai Kalmyrzayev	79,058,642	3.51

 

Financial instruments

Details of the use of financial instruments by the Group and its subsidiary undertakings are contained in note 24 of the financial statements.

 

Statement of disclosure of information to auditor

The Directors have taken all the steps that they ought to have taken to make themselves aware of any information needed by the Group's auditor for the purposes of their audit and to establish that the auditors are aware of that information.

 

The Directors are not aware of any relevant audit information of which the auditor is unaware.

 

Auditor BDO LLP have indicated their willingness to continue in office and a resolution concerning their reappointment will be proposed at the next Annual General Meeting.

 

Directors' responsibilities

The Directors are responsible for preparing the annual 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 elected to prepare the Group and Company financial statements in accordance with UK adopted international accounting standards.  

 

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 Company and of the profit or loss of the Group for that period.

 

The Directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the London Stock Exchange AIM Market.

 

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 they have been prepared in accordance with UK adopted international accounting standards subject to any material departures disclosed and explained in the financial statements; and

·    prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's and the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006.

 

They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

Website publication

The maintenance and integrity of the Group's website is the responsibility of the Directors.

 

The Directors are responsible for ensuring the annual report and the financial statements are made available on a website.  www.caspiansunrise.com/investors/reports

 

Financial statements are published on the Group's website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions.

 

The Directors' responsibility also extends to the ongoing integrity of the financial statements contained therein.

 

Responsibility statement

The Directors confirm that to the best of their knowledge

·     the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole

·   the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties

·    the Annual Report and the financial statements taken as a whole, are fair balanced and understandable and provide the information necessary for shareholders to assess the Company's position, performance, business model and strategy.

 

 

Clive Carver

Chairman

6 July 2023

 

 

 

PRINCIPAL AND OTHER RISKS AND UNCERTAINTIES FACING THE BUSINESS

 

Introduction

Risk assessment and evaluation is an essential part of the Group's planning and an important aspect of the Group's internal control system.

 

Oil & gas exploration and production is a dangerous activity and as such is necessarily subject to an extremely rigorous health and safety regime. The Board aims to identify and evaluate the risks the Group faces or is likely to face in future both from its immediate activities and from the wider environment. This helps to inform and shape the Group's strategy and to quantify its tolerance to risk.

 

Operational success generally helps to mitigate financial risks. Increases in production as new wells come on stream generates cash and improves the Group's financial position, which can then lead to further operational success.

 

As the Group develops, its approach to risk management and mitigation will be refined. In due course we plan to include a formal risk register including all the principal operational and non-operational risks to the business.  Such a risk register would be reviewed and assessed at least once a year.

 

The Group is subject to various risks relating to political, economic, legal, social, industry, business and financial conditions. The following risk factors, which are not exhaustive, are particularly relevant to the Group's business activities and are listed in the Board assessment in the order of greatest potential impact.

 

Risk	Description	Mitigation
Operating risk	Oil & gas exploration and production is a dangerous activity. The Group is exposed to risks such as well blowouts, fire, pollution, bad weather and equipment failure.	The Group seeks to adopt best in class industry operating standards and complies with rigorous health & safety regulations.   The Group also seeks to work with contractors who can demonstrate similar high standards of safety.
Exploration risk	Despite the success of the BNG shallow structures, there can be no assurance the Group's exploration activities in the BNG deep structures or anywhere else will be successful.	The Group seeks to reduce this risk by acquiring and evaluating 3D seismic information before committing to drill exploration and appraisal wells.   The Group also seeks to engage suitably skilled personnel either as employees or contractors to undertake detailed assessments of the areas under exploration.
Political Risk	Political division which leads to civil disorder is likely to have an adverse impact on the Group's operations.	Widespread disorder in Kazakhstan had been absent since the Group's formation until the beginning of 2022, when the Group together with other operators was forced to suspend operations due to civil unrest.   The importance of the oil & gas industry to the Kazakh economy makes a prolonged suspension of operations unlikely, as was the case in 2022.
Russian sanctions	The sanctions imposed on Russia may affect both the Group's ability to transport its oil and the price at which the oil may be sold.   It may also affect the Group's ability to source equipment and other consumables required to produce oil.	Like most oil produced in Kazakhstan for the international market the Company's oil is transported to international buyers via the Russian oil pipeline network.   The decision by the Kazakh authorities to re designate oil produced in Kazakhstan as Kazakhstan Export Blend Crude Oil ("KEBCO") seems to have had little impact and we still suffer large discounts for what many still refer to as "Urals Oil."   This is despite confirmation from the UK and the European Union that oil produced in Kazakhstan and transported via the Russian pipeline network is not subject to sanctions.   With the Urals Oil discounts and export taxes still levied based on the full international price selling on the international market is not commercially viable.   We therefore currently sell all our oil either on the traditional domestic market or the relatively new domestic mini refinery market where taxes and other deductions are much lower.   Equipment and consumables previously sourced from Russia are now found elsewhere, typically China, adding  time and expense.
Permitting risks	Every stage of the Group's operations requires the approval of the industry regulators.   While the Group enjoys good working relationships with the Kazakh regulatory authorities there can be no assurances that the laws and regulations and their reinterpretation will not change in future periods and that, as a result, the Group's activities would be affected.	Regulatory delays are inevitable and common place.   Our experienced Kazakh workforce has both a thorough knowledge of the complex rules and a detailed practical understanding of the workings of each of the regulatory bodies with whom we need to deal. Accordingly, we believe we are well placed to minimise the financial impact of regulatory delays.
Pricing risk	We operate in an industry where the international price is set by world markets and the domestic price is set by the Kazakh regulatory authorities.	We have no influence on the price at which we can sell our oil.   Greater storage and or financial hedging would provide some protection against adverse price movements but would be expensive and short lived.   It would only be with international oil prices below $50 per barrel for a prolonged period that we would need to consider cost cutting to match income and expenditures.
Environmental risk	There would be serious consequences in the event of a polluting event.	The Group seeks to maintain compliance with all applicable regulatory standards and practices.   Further information is set out in the Environmental, Social and Governance Report.
Climate change	That climate change might impact the prospects for the Group	The board does not believe in the short to medium term climate change will have a material impact on the Group's revenues or operations. In particular the board believes the demand for oil will continue for at least the next decade and that climate change is unlikely to materially impact the Group's ability to produce that oil.
Exchange rate risk	Movements in exchange rates may result in actual losses or in the results reported in the Group financial statements.	The Group's income is denominated in US$ and Kazakh Tenge its expenditure is denominated principally in US$, Kazakh Tenge and UK £.   In the year under review the Tenge broadly maintained its exchange rate against the US$. Since the year end the Kazakh Tenge has fallen by approximately 7.2% against the US $.   Any decline in the Kazakh Tenge against the US$ affects the US$ reported income for domestic sales which transacted in Tenge. However, in such circumstances the Group generally benefits as international income is unaffected but approximately 50% of the Group's costs are  incurred in Tenge reducing the US$ reported operating costs.   Given the relative strengths of the US$ and the Kazakh Tenge, the Group has decided not to seek to hedge this foreign currency exposure.
Loss of major shareholder support	In previous periods the Group has relied on the financial support of the Oraziman family, which holds 48% of the Company's shares.	The Group is now producing significant volumes of oil and is financially a self-supporting enterprise.   However, in the event further support was required it would clearly be in the interests of the Oraziman family as the major shareholding  group to provide it.
Supplier risk	Continued operations depend on regular deliveries to site of consumables, such as water, food, heating oil and replacement parts for our drilling equipment. Delays in such deliveries to site could impact production volumes.   Recently the war in Ukraine has resulted in supplies no longer being sourced from Russia.  Replacement supplies from China are taking much longer to arrive.	We have been operating the BNG Contract Area for more than a decade during which we have encountered numerous supply issues, all of which have been overcome.   Managing supplies has become one of the most important aspects of the business.   With the majority of supplies now coming from China, whose border is approximately 3,000 kilometers from the BNG Contract Area lead times are now much greater. In addition, the working capital investment is also much greater as supplies need to be paid for much earlier than before.

 

 

 

 

 

 

 

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) REPORT

 

This report covers our ESG approach and performance for the year ended 31 December 2022.

 

ENVIRONMENTAL

 

Introduction

Oil and gas exploration and production is a long-term activity requiring effective environmental stewardship. We have operated in Kazakhstan now for more than 16 years and have only been able to do so by complying with applicable environmental standards.

 

We recognise that society is transitioning towards a low-carbon future, and we support this goal. However, we believe that oil will continue to play an important role in the global economy for many years to come, and new sources of oil supply will be required for a sustainable energy transition.

 

Climate change

 

Assessing the risks

We look to the Kazakh regulatory authorities to set the standards to which we work.

 

Compliance with the standards

We seek to comply with all relevant Kazakh environmental requirements, including environmental laws & regulations and industry guidelines.

 

Specific initiatives

·    We seek to recycle gas produced as a by-product at BNG to power the Contract Area's day-to-day operations.

·     We seek wherever possible to avoid flaring, which in any event is a regulated activity.

·    Our workers at the BNG Contract Area are drawn from the local community, lessening the transportation carbon footprint.

·      We make extensive use of existing oil pipelines to move our oil.

 

Health and safety

Our daily operations prioritise health and safety and protecting the environment and we seek to comply with all applicable health and safety related regulations.

 

SOCIAL

 

Since the Group's formation in 2006, the social obligations payments made principally to the authorities in the regions in which the group operates have funded a range of projects for the benefit of the local communities concerned.

 

GOVERNANCE

 

Introduction

Overall responsibility over the Group's corporate governance, risk management, market disclosure and related obligations rests with the Board.

 

The Governance & Risk Committee comprises Clive Carver, Edmund Limerick and Aibek Oraziman with Clive Carver acting as chairman. The committee typically meets at least once a year to review the Group's governance procedures compared to accepted industry best practice.

 

At the appropriate time the Board plans to include a formal risk register including all the principal operational and non-operational risks to the business to be considered by the Governance & Risk Committee.

 

Following the AGM, we intend to re-constitute the various Board committees.

 

Share dealing policy

The Group has adopted and operates a share dealing code for Directors and employees in accordance with the AIM Rules.

 

 

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) REPORT

 

GOVERNANCE

 

Internal controls

The Board acknowledges responsibility for maintaining appropriate internal control systems and procedures to safeguard the shareholders' investments and the assets, employees and the business of the Group. The Board also intends to periodically review the Group's financial controls and operating procedures.

 

Internal audit

The Board does not consider it appropriate for the current size of the Group to establish an internal audit function. However, this will be kept under review.

 

Bribery and corruption

The UK Bribery Act 2010 came into force on 1 July 2011.

 

The Company is committed to acting ethically, fairly and with integrity in all its endeavours and compliance with legislation is monitored. The principal terms of the UK Bribery Act have been translated into Russian and circulated to our Kazakh based staff. Consideration of the UK Bribery Act is a standing item at board meetings.

 

The Company's culture

Our culture might best be described as one where we strive for commercial success while treating others fairly and with respect. The Board firmly believes that sustained success will best be achieved by following this simple philosophy. Accordingly, in dealing with each of the Groups principal stakeholders, we encourage our staff to operate in an honest and respectful manner. We also believe in getting proper value for money spent and believe this goes hand in hand with being a low-cost operator.

 

Kazakhstan plays an important part in the Group's culture. It is where we operate; where almost all staff are based; it is the nationality of most staff and of the majority of shareholders.

 

The Group is committed to promoting a culture based on ethical values and behaviours across the business. Policies are in place covering key matters such as equality, protection of sensitive information, conflicts of interest, whistleblowing and health and safety as well as environmental concerns.

 

QCA Code

Caspian Sunrise, in line with most AIM companies, elected to apply the rules of the Quoted Companies Alliance (QCA) Corporate Governance Code ("QCA Code"), which is based around 10 broad principles.

 

Principle 1   Establish a strategy and business model which promotes long term value for shareholders	Objective Caspian Sunrise's objective is to create shareholder value from the development of oil and gas projects and associated activities.   The Group has a number of secondary objectives, including promoting the highest level of health and safety standards, developing our staff to their highest potential and being a good corporate citizen in our chosen countries of operations.   Strategy The Group's long-term strategy is to build an attractive portfolio of oil and gas exploration and production assets in Central Asia, in particular Kazakhstan where the board has the greatest experience. Additionally, the Group will seek to exploit associated opportunities where the board believes it can add significant value and contribute towards the success of the Group as a whole.   Our business model Our business model is to invest in and develop promising oil & gas and other projects.   Growth in long term value will be measured by a sustainable appreciation in the Company's share price.   Principal assets The Group's principal asset is its 99% interest in the BNG Contract Area, which is in the west of Kazakhstan, 40 kilometres southeast of Tengiz on the edge of the Mangistau Oblast.   The Group also has a 100% interest in the 3A Best Contract Area and a 100% interest in the Caspian Explorer drilling vessel, although recently the Group has conditionally agreed to sell 50% of its interest in the Caspian Explorer for $22.5 million.   The Group has an option to acquire the Block 8 Contract Area for a maximum consideration of $60 million to be paid from production from Block 8 at the rate of $5 per barrel.   Further acquisitions are expected.
Principle 2   Seek to understand and meet shareholder needs and expectations	Shareholder communications   The Company communicates with its shareholders via RNS announcements, its website, formal company meetings and periodic investor presentations.   The need to avoid selectively releasing price sensitive information often limits our ability to provide the answers many investors seek.   The Company's management meets prospective institutional investors from to time to time to assess the availability of large-scale institutional funding to advance the company's plans.   Our shareholders A large proportion of the Company's shares are held by a relatively small group, namely: The Oraziman family (48%); other Kazakh shareholders (5%); Korean shareholders (10%); shareholders in the UAE (10)%; with the remaining (27)% being  principally UK based investors.   There is a contact form available for investors to use on the website: https://www.caspiansunrise.com/contact/contact-form/
Principle 3   Take into account wider stakeholder and social responsibilities and their implications for long term success	Our stakeholders   In addition to our shareholders the Company regards its employees and their families, local and national government, suppliers and customers to be the core of the wider stakeholder group.   Employees Almost all staff employed by the Group are based in Kazakhstan. The Group draws most of its field workers from the Mangistau region where alternative employment opportunities are limited. At our head office in Almaty we employ further staff, some of whom hold highly skilled positions.   As well as providing employees with appropriate remuneration and other benefits together with a safe and enjoyable working environment, the Board recognises the importance of communication with employees to motivate them and involve them fully in the business. For the most part, this communication takes place at a local level, but staff are kept informed of major developments through email updates and staff meetings.   Local communities The Group has provided significant financial support to the Mangistau region for over a decade by way of social payments sometimes delivered in the form of medical or educational facilities for the local population.    Part of our work programme obligations are paid in the form of contributions to local social programmes. We are pleased to have assisted in the development of these projects and look forward to contributing to others in the coming years.   Kazakh Government agencies and regulators The Kazakh authorities are responsible for granting licences to explore for and produce oil. Licences are awarded subject to agreed work programmes being adhered to over the period of each licence renewal. This includes compliance with rules designed to preserve the environment.   Caspian Sunrise has an extremely high proportion of Kazakh nationals in our workforce and among our core shareholder group. The Board believes that this helps create a positive relationship with the Kazakh authorities and has assisted in the Group's day-to-day dealings with the regulators.   External stakeholders Many additional jobs have been funded in the Company's suppliers, partners and professional advisers.   Feedback The Company considers feedback from its stakeholders in its decisions and actions.
Principle 4   Embed effective risk management, considering both opportunities and threats, throughout the organisation	Risk assessment   Oil & gas exploration and production is a dangerous activity and as such is necessarily subject to an extreme health and safety regime.  Risk assessment and evaluation is an essential part of the Company's planning and an important aspect of the Company's internal control system.   It is planned to introduce a formal risk register, including all the principal operational and non-operational risks to the business. Such a risk register would be reviewed and assessed at least once a year by the Audit Committee.   A summary of the principal risks facing the Group are set out in the Principal Risks section on page 26 of these Financial Statements.
Principle 5   Maintain the board as a well-functioning, balanced team led by the chair	Board composition   The board comprises three executive directors and two non-executive directors.   Executive directors At the executive level Kuat Oraziman, Chief Executive Officer, and Seokwoo Shin Chief Operating Officer run the Company's operations in Kazakhstan with Clive Carver, Executive Chairman, taking the lead on non-operational matters including financial matters and all aspects related to the listing of the Company's shares on AIM, Corporate Governance compliance and Investor Relations.   Kuat Oraziman is a trained geologist and member of the Academy of Sciences. He has more than 28 years oil and gas experience in Kazakhstan.   Seokwoo Shin worked for the Korean National Oil Corporation from 1987 until 2018 with spells in Korea, the United Kingdom, Russia and most recently Kazakhstan, where he was responsible for KNOC's Kazakh oil fields. He joined Caspian Sunrise in 2018.   Clive Carver is a fellow of the Institute of Chartered Accountants in England and Wales (FCA) and a fellow of the Association of Corporate Treasurers (FCT). While working in the UK broking industry Clive gained more than 15 years' experience as a Qualified Executive under the AIM Rules having led the Corporate Finance departments of several of the larger and more active Nominated Adviser firms.   Non-executive directors Edmund Limerick, Senior Independent Non-executive director is a Russian speaking former lawyer and investment banker who ran an institutional investment fund focused on Central Asia.   Aibek Oraziman, is the Company's largest shareholder with 46.7% of the Company's shares. He has more than 13 years oil and gas experience in Kazakhstan, including 3 years in the field at Aktobe working for a local oil company.   The board believes it possesses the skills required to build a successful and durable oil and gas business focused on Kazakhstan.   The board meets a minimum of four times each year supported by periodic telephone meetings. At such meetings the board receives a report from Kuat Oraziman on all matters operational and from Clive Carver on non-operational matters.   The board also has a list of standing items, including compliance with the UK Bribery Act, litigation and existence of open and closed periods for director dealings, which are considered at each meeting.   The number of board meetings attended each year by the directors is set out in the Directors' report which forms part of the Annual Report and Financial Statements.   Departures from the Code   Executive Chairman The principal reason advanced by proponents of the Code that the Chairman be non-executive is to split the roles of Chairman and Chief Executive Officer as combining them puts too much control in one pair of hands. This is not the case with our Company where the Chief Executive Officer's family is the largest shareholder, with some 48%.   Clive Carver was appointed Non-Executive Chairman of the Company in 2006 in the lead-up to the IPO the following year. In 2012 he was appointed Executive Chairman at the same time as Kuat Oraziman moved from Non-Executive Director to Chief Executive Officer.   In the past decade, Clive Carver has served as non-executive chairman of eight AIM listed companies. In addition, his 15 years as a Qualified Executive and head of active corporate finance departments make him a very suitable candidate to be Chairman, notwithstanding his executive status.   Non-Executive Directors' participation in Option Schemes In common with many AIM listed companies we actively encourage non-executive directors to participate in the Company's option schemes. Proponents of the Code believe this affects the independence of the non-executive directors concerned.   We believe that independence is a matter of independence of mind, judgement and integrity. We consider our non-executives' ability to act independently to be unaffected by the level of participation in the Company's option scheme.   Size of the board - requiring the involvement of Executive Directors in the various board committees With only two non-executive directors it is inevitable that the board committees will comprise executive and non-executive directors. The Company accepts this is not a long-term solution and at the appropriate time will look to appoint an additional non-executive director.
Principle 6   Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities	Experience   The experience of the directors and the operational board is set out in the response to Principle 5 above and in the Annual Report and Financial Statements.   Operational skills are maintained through an active day to day interaction with leading international consultancies and contractors engaged to assist in the development of the Company's assets.   Non-operational skills are maintained principally via the Company's interaction with its professional advisers plus the experience gained from sitting on the boards of other commercial enterprises.   As the Company develops and moves from predominantly an oil exploration company to a balanced production and exploration company, the board will periodically re-assess the adequacy of the skills on both the main board and the operational board. Where gaps are found, new appointments will be made.
Principle 7   Evaluate board performance based on clear and relevant objectives, seeking continuous improvement	Performance   The Company currently does not evaluate board performance on a formal basis. However, it will in the near term seek to formalise the assessment of both executive and non-executive board members.   The Company is aware of its need to facilitate succession planning and the board evaluation process will form part of this going forward.
Principle 8   Promote a corporate culture that is based on ethical values and behaviours	Culture   Our culture can best be described as one where we strive for commercial success while treating others fairly and with respect. The board firmly believes that sustained success will best be achieved by following this simple philosophy.   Accordingly, in dealing with each of the Company's principal stakeholders, we encourage our staff to operate in an honest and respectful manner.   Operating with integrity is clearly good business and forms an important part of the annual assessment of staff and in setting their pay for future periods.
Principle 9   Maintain governance structures and processes that are fit for purpose and support good decision-making by the board	Governance   The Company believes that its governance structures and processes are consistent with its current size and complexity. The Board is aware that it must continue to review its practices as the Company evolves and grows.   The executive members of the Board have overall responsibility for managing the day-to-day operations of the Company and the Board as a whole is responsible for implementing the Company's strategy.   The Audit Committee typically meets before each set of results (interim and final) are published  and the Remuneration Committee typically meets at least once a year, when the Financial Statements for the Full year results are approved. All Committee members attend these meetings.   Our Report and Accounts contain reports from the Chairman of the Remuneration. and the Audit Committee.   The appropriateness of the Company's governance structures will be reviewed annually in light of further developments of accepted best practice and the development of the Company.
Principle 10   Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders	Communications   The Company reports formally to its shareholders and the market twice each year with the release of its interim and full year results.   The Annual Report and Financial Statements set out how the corporate governance of the Company has been applied in the period under review including the work undertaken by the Audit Committee and the Remuneration Committee.   The Annual Report and Financial Statements contain full details of the principal events of the relevant period together with an assessment of current trading and prospects. They are sent to shareholders and made available on the Company's website to anyone who wishes to review them.   The Board already discloses the result of general meetings by way of RNS announcements, disclosing the voting numbers.   The Company's website also contains all the information prescribed for an AIM Company under Rule 26.   Further details of the Company's dialogue with its shareholders are set out under Principle 2 above.   Employee stakeholders are regularly updated with the development of the Company and its performance.   We are in almost constant communication with our Governmental and regulatory stakeholders via their involvement in our day-to-day operational activities.

 

 

Board composition, skills and capabilities

From 1 January 2022 the Board comprised three executive directors and two non-executive directors:

 

Clive Carver, Executive Chairman

Clive is a fellow of the Institute of Chartered Accountants in England and Wales (FCA) and a fellow of the Association of Corporate Treasurers (FCT). He is an experienced public company director having been chairman of a number of AIM companies in recent years.

 

Kuat Oraziman, Chief Executive Officer

Kuat Oraziman runs the Company's operations in Kazakhstan. Kuat Oraziman is a trained geologist and member of the Academy of Sciences. He has more than 28 years oil and gas experience in Kazakhstan.

 

Seokwoo Shin, Chief Operating Officer

Seokwoo Shin was educated at Sungkyunkwan University in Korea.  He worked for the Korean National Oil Corporation from 1987 until 2019 with spells in Korea, the United Kingdom, Russia and most recently Kazakhstan, where he was responsible for KNOC's Kazakh oil fields. He joined Caspian Sunrise in 2018 and on 4 March 2021 was appointed the board as Chief Operating Officer.

 

Edmund Limerick, Senior Non-Executive Director

Edmund is a Russian speaking former lawyer and investment banker who ran an institutional investment fund focused on Central Asia. Edmund was called to the Bar in 1987 and served as an officer in the Foreign & Commonwealth Office until 1992 with postings in Paris, Dakar and Amman. He was an international corporate lawyer at Clifford Chance, Freshfields and Milbank Tweed (where he headed the Moscow Office) before joining Deutsche Bank as a director in Moscow, London and Dubai. In 2006, he joined Altima Partners where he managed the Altima Central Asia Fund, focusing on Kazakhstan. Edmund has served as a director of Caspian Sunrise plc since 2010 and chairs the Audit and Remuneration Committees.

 

Aibek Oraziman, Non-executive director

Aibek Oraziman was educated in Kazakhstan and in the United Kingdom. He has more than 13 years oil and gas experience in Kazakhstan, including 3 years in the field at Aktobe working for a local oil company. He was appointed to the Caspian Sunrise board on 21 August 2020.

 

The Board believes it possesses the skills required to build a successful and durable oil and gas business focused on Kazakhstan.

 

Board and committee meetings

Attendances of Directors at board and committee meetings convened in the year, and which they were eligible to attend in person or by telephone, are set out below:

 

Director	Board meetings attended	Remuneration Committees attended	Audit Committee attended
Clive Carver	7 of 7	2 of 2	2 of 2
Kuat Oraziman	7 of 7	N/A	N/A
Edmund Limerick	7 of 7	2 of 2	2 of 2
Seokwoo Shin	7 of 7	N/A	N/A
Aibek Oraziman	7 of 7	2 of 2	2 of 2

 

The Board has established the following committees:

 

Audit Committee

The Audit Committee which comprises Edmund Limerick, Aibek Oraziman and Clive Carver, with Edmund Limerick acting as Chairman, determines and examines any matters relating to the financial affairs of the Group including the terms of engagement of the Group's auditors and, in consultation with the auditor, the scope of the audit.

 

The Audit Committee receives and reviews reports from the management and the external auditor of the Group relating to the annual and interim amounts and the accounting and internal control systems of the Group. In addition, it considers the financial performance, position and prospects of the Group and the Company and ensures they are properly monitored and reported on.

 

Remuneration Committee

The Remuneration Committee, which comprises Edmund Limerick Aibek Oraziman and Clive Carver, with Edmund Limerick acting as Chairman, reviews the performance of the senior management, sets and reviews their remuneration and the terms of their service contracts and considers the Group's bonus and option schemes.

 

 

Board committee membership in 2022

 

Director	Audit Committee		Remuneration Committee		Corporate Governance Committee
	Served from	Served to	Served from	Served to	Served from	Served to
Clive Carver	1 January	31 December	1 January	31 December	1 January	31 December
Kuat Oraziman	N/A	N/A	N/A	N/A	N/A	N/A
Edmund Limerick	1 January	31 December	1 January	31 December	1 January	31 December
Seokwoo Shin	N/A	N/A	N/A	N/A	N/A	N/A
Aibek Oraziman	1 January	31 December	1 January	31 December	1 January	31 December

 

 

Clive Carver

6 July 2023

 

 

REMUNERATION COMMITTEE REPORT

 

Remuneration Committee

The Remuneration Committee comprises Edmund Limerick, Aibek Oraziman and Clive Carver and is chaired by Edmund Limerick.

 

Remuneration policy

The Group's and the Company's policy is to provide remuneration packages that will attract, retain and motivate its executive Directors and senior management. This consists of a basic salary, ancillary benefits and other performance-related remuneration appropriate to their individual responsibilities and having regard to the remuneration levels of comparable posts. However, the Covid-19 impact on the Group's finance required the Directors to accept very significant reductions in the amounts received which continued throughout 2021, 2022 and to date in 2023.

 

The Remuneration Committee determines the contract term, basic salary, and other remuneration for the members of the Board and the senior management team.

 

Service contracts

Details of the current Directors' service contracts are as follows:

 

Executive		Date of service agreement / appointment letter	Date of last renewal of appointment
Clive Carver		20 March 2019	30 June 2022
Kuat Oraziman		6 December 2019	22 July 2021
Edmund Limerick		25 January 2019	26 June 2020
Aibek Oraziman		21 August 2020	N/A
Seokwoo Shin		4 March 2021	N/A

 

Notwithstanding their service agreements or letters of appointment the directors who served throughout the period under review have agreed until further notice to restrict their remuneration to approximately 25% of previous amounts without any accrual for the 75% sacrificed.

 

Basic salary and benefits

The basic salaries of the Directors who served during the financial year are established by reference to their responsibilities and individual performance.

 

Directors	Role	2022 Salary / fees US$	2022 Share options US$	2022 Total US$	2021 Total US$
Clive Carver	Chairman	152,698	-	152,698	120,000
Kuat Oraziman	CEO	156,753	-	156,753	142,055
Seokwoo Shin	COO	54,000	-	54,000	54,025
Edmund Limerick	Non-executive	16,319	-	16,319	15,600
Aibek Oraziman	Non-executive	-	-	-	-
Total		379,770	-	379,770	331,680

 

Share option amounts refer to the IFRS 2 accounting charge.

There were no company pension contributions in respect of any director.

 

Bonus schemes

All Executive Directors are eligible for consideration of participation in the Company bonus scheme.  However, as in previous years no bonuses are payable in respect of the year ended 31 December 2022 (2021: nil).

 

 

Long term incentives

 

Share options

The current interests as at approval of accounts of the current Directors in share options agreements are as follows:

 

Directors	Granted	Exercise price	Expiry Date
Clive Carver	2,400,000	4p	14 December 2023
Clive Carver	3,000,000	20p	21 August 2024
Kuat Oraziman	3,000,000	20p	21 August 2024
Edmund Limerick	750,000	20p	21 August 2024
Edmund Limerick	1,000,000	20p	5 June 2029
Edmund Limerick	1,000,000	5.5p	9 January 2032
Seokwoo Shin	2,500,000	5.5p	9 January 2032

 

There were no options exercised in 2022.

 

Cash based incentives

In May 2019, we introduced cash based long term incentive arrangements for the senior management team since 2012, Kuat Oraziman and Clive Carver.

 

Under these arrangements, provided the share price growth exceeds pre-set targets starting at 17.23p, then for every $500 million increase in the Group's market capitalisation above $300 million, as adjusted to take account of dividends paid, both Kuat Oraziman and Clive Carver, would receive payments of $3 million each.

 

The principal hurdles under these arrangements are set out in the table below.

 

Market cap threshold	Share price target	Pay-out rate (each)	Pay-out amount (each)
$' billion	Pence per share	%	$' million
0.8	17.23	0.6	3.0
1.3	20.67	0.6	3.0
1.8	24.81	0.6	3.0
2.3	29.77	0.6	3.0
2.8	35.72	0.6	3.0

 

The scheme continues beyond the numbers in the table such that with the threshold for market capitalisation increasing at the rate of $0.5 billion and the corresponding share price threshold increasing from the earlier threshold by a constant factor of 1.2.

 

Each threshold must be sustained for at least 30 consecutive days for the awards to be triggered. There may be only one pay-out for each market capitalisation threshold crossed no matter how many times it is crossed.

 

Whilst the Incentive Scheme is in place neither of the recipients will be granted any further options.

 

On behalf of the Directors of Caspian Sunrise plc

 

 

Edmund Limerick

Chairman of Remuneration Committee

6 July 2023

AUDIT COMMITTEE REPORT

 

The Audit Committee

The Audit Committee, which comprises Edmund Limerick, Clive Carver and Aibek Oraziman, with Edmund Limerick acting as Chairman, determines and examines any matters relating to the financial affairs of the Group including the terms of engagement of the Group's auditors and, in consultation with the auditor, the scope of the audit.

 

Role and responsibilities

The Audit Committee is responsible for monitoring the integrity of the Company's financial statements, reviewing significant financial reporting issues, reviewing the effectiveness of the Group's internal control and risk management systems.

 

In addition, it considers the financial performance, position and prospects of the Group and the Company and ensures they are properly monitored and reported on. It oversees the relationship with the Auditor (including advising on their appointment, agreeing the scope of the audit and reviewing the audit findings).

 

Meetings

The committee met on two occasions during the year under review.

 

Internal audit

The Board and the Audit Committee do not consider it appropriate for the current size of the Group to establish an internal audit function. However, this will be kept under review.

 

Attendance at Audit Committee meetings

Please see the table in the preceding Corporate Governance Report for attendance by the members of the Audit Committee.

 

On behalf of the Directors of Caspian Sunrise plc

 

 

Edmund Limerick

Chairman of Audit Committee

6 July 2023

 

 

 

 

 

 

 

 

 

 

Independent auditor's report to the members of Caspian Sunrise plc

 

Qualified opinion on the Group financial statements and unmodified opinion on the Parent Company financial statements

 

In our opinion, except for the possible effects on the Group financial statements of the matter described in the Basis for qualified opinion on the Group financial statements and unmodified opinion on the Parent Company financial statements section of our report:

 

•     the financial statements give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31 December 2022 and of the Group's profit for the year then ended;

•     the Group financial statements have been properly prepared in accordance with UK adopted international accounting standards;

•     the Parent Company financial statements have been properly prepared in accordance with UK adopted international accounting standards and as applied in accordance with the provisions of the Companies Act 2006; and

•     the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

 

We have audited the financial statements of Caspian Sunrise plc (the 'Parent Company') and its subsidiaries (the 'Group') for the year ended 31 December 2022 which comprise the Consolidated Statement of Profit or Loss, the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Changes in Equity, the Parent Company Statement of Changes in Equity, the Consolidated Statement of Financial Position, the Parent Company Statement of Financial Position, the Consolidated and Parent Company Statements of Cash Flows and the notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and UK adopted international accounting standards and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

 

Basis for qualified opinion on the Group financial statements and unmodified opinion on the Parent Company financial statements

 

In 2022 and 2021 the Group's subsidiary, CTS LLP, provided drilling services to both an external related party, EPC Munai LLP, and within the Group to BNG Ltd.

 

For drilling services provided to external entities, costs should be recognised in cost of sales, which impacts the amount of revenue recognised under the input method as detailed in note 1.19. Drilling costs provided to other entities in the Group may be capitalised, subject to compliance with relevant accounting standards as detailed in note 1.8.

 

In 2021, no amounts were recognised in the income statement in respect of drilling costs provided by the Group's subsidiary CTS LLP to its customer, the external related party, EPC Munai LLP. As a result of this an amount of $2.2m was reversed from property, plant and equipment to cost of sales and an amount of $4.8m was reversed from property, plant and equipment to unproven oil and gas assets in the current year.

 

In 2022, CTS LLP has applied the input method of revenue recognition in accounting for revenue on its drilling contracts to EPC Munai LLP. 

 

As a result, in 2022, included in the Group revenue and cost of sales is $3.7m (2021: nil) of drilling revenue to EPC Munai LLP and $4.1m (2021: nil) of related cost of sales. As at 31 December 2022 the Group has reported advances received from EPC Munai LLP of $0.7m  (2021: $2.1m) and drilling costs capitalised of $11m (2021: $7.1m) as  part of the Group's proven and unproven oil and gas assets. These amounts are reported within balances included in notes 4, 12, 13, 16 and 19.

 

As disclosed in note 2.2.3 to the financial statements, the Directors have been unable to obtain reliable information for CTS LLP in respect of the timing of the costs being incurred, their allocation between different contracts with EPC Munai LLP, or whether the costs should have been allocated to cost of sales (which impacts external revenue recognised), or capitalised in the Group's Property Plant and Equipment or Unproven oil and gas assets. In addition, the Directors have been unable to provide updated budgets for estimated costs to complete. This information is necessary to determine revenue, costs of sales, advances received/ receivables, provisions for losses on contracts, property, plant and equipment, unproven oil and gas assets, related tax balances and related party disclosures and as a result these balances may be materially higher or lower than the current recorded values.

 

Consequently, we were unable to obtain sufficient appropriate audit evidence over the valuation of the Group's external drilling revenues or the completeness and validity of its cost of sales allocation, nor were we able to determine whether any adjustments to the advances received/receivables, provisions for losses on contracts, unproven oil and gas assets, property, plant and equipment, related tax balances or related party disclosures at the current and prior year ends were necessary as a result.

 

Were any adjustment to the related accounts and disclosures as set out in the financial statements to be required as a result of the above, the Directors' report and the Strategic report would also need to be amended.

 

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion on the Group financial statements and our unmodified opinion on the Parent Company financial statements.

 

Independence

 

We remain independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

 

Material uncertainty in relation to going concern

 

We draw attention to note 1.1 in the financial statements concerning the Group and the Parent Company's ability to continue as a going concern. Note 1.1 highlights that the Group and Parent Company's ability to meet its liabilities and commitments as they fall due, without additional funding being obtained, is sensitive to the oil volumes sold and prices realised, deferral of financial obligations and the continued availability of oil trader advances. As stated in note 1.1, these events or conditions, along with other matters as set out in Note 1.1, indicate that a material uncertainty exists that may cast significant doubt on the Group and the Parent Company's ability to continue as a going concern. Our opinion is not modified in respect of this matter.

 

In auditing the financial statements, we have concluded that the Directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate. We consider going concern to be a Key Audit Matter based on our assessment of the risk and the effect on our audit.

 

Our evaluation of the Directors' assessment of the Group and the Parent Company's ability to continue to adopt the going concern basis of accounting, and our response to this key audit matter included: 

 

·     We obtained the Directors' base case cash flow forecast, and a reasonable plausible downside cash flow forecast and critically assessed the key inputs. In doing so, we compared oil prices to market data, production levels to recent performance trends and operating costs to historical data.

·     We discussed the impact of sanctions against Russia on the Group's operations with the Directors and the Audit Committee including their assessment of risks and uncertainties associated with areas such as production disruption, commodity price volatility and the impact on the availability of funding. This included considering the Group's ability to sell oil to the domestic mini refineries, and the continuing absence of any international sales. 

·    We formed our own assessment of risks and uncertainties based on our understanding of the business and oil sector.

·    We evaluated the completeness of forecast licence related expenditure against the licence work programs and payments due under the 3A Best licence. We held discussions with the Directors and the Audit Committee regarding the status of such applications. 

·   We compared the forecast cash payments in respect of the BNG production licence award against the $32m assessment received from the Government payable in instalments over 10 years.  We ensured that the relevant instalments are included in the forecast.

·      We considered the appropriateness of management's judgment that the exploration licence would be capable of being extended beyond 2024 including assessment of the legislative process, the forecast economic value of the assets beyond the expiry date and risks and uncertainties within the operating environments.

·    We considered the appropriateness of the Board's judgement regarding the availability of sufficient oil trader funding through the forecast period.  In doing so, we considered factors such as the production profile, oil price trends and the history of transactions with the oil traders.

·      We assessed the validity of any mitigating actions identified by the Directors.

·     We reviewed the adequacy and completeness of the disclosure included within the financial statements in respect of going concern against the requirement of the accounting standards and the results of our audit testing.

 

Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of this report.

 

Overview

 

Coverage	89% (FY21: 83%) of Group profit/(loss) before tax, 100% (FY21:100%) of Group revenue and 97% (FY20: 96%) of Group total assets.
Key audit matters	2022 2021 Carrying value of unproven oil and gas assets ☑ ☑ Carrying value of proven oil and gas assets - ☑ BNG production licence payment obligations - ☑ Going concern ☑ ☑ CTS drilling services * ☑ - *Refer to the Basis for qualified opinion on the Group financial statements and unmodified opinion on the Parent Company financial statements section of our report   Carrying value of proven oil and gas assets is no longer considered to be a key audit matter given the Cash generating unit has significant headroom.   The BNG production licence payment obligations is no longer considered to be a key audit matter because the Group stopped contesting the amount levied by the authorities and the amount of the obligation became enforceable by law and has been classified as payables.
Materiality	Group financial statements as a whole US$1.7m (2021: US$1.9m) based on 1.5% (2021: 1.7%) of total assets

 

An overview of the scope of our audit

Our Group audit was scoped by obtaining an understanding of the Group and its environment, including the Group's system of internal control, and assessing the risks of material misstatement in the financial statements.  We also addressed the risk of management override of internal controls, including assessing whether there was evidence of bias by the Directors that may have represented a risk of material misstatement.

The Group's operations principally comprise oil and gas exploration and production in Kazakhstan. We assessed there to be four significant components comprising BNG, 3A Best, Caspian Explorer and the Parent Company. These components, which were subject to full scope audit procedures, represent the principal business units.

 

Non-BDO member firms performed a full scope audit of BNG, 3A Best and Caspian Explorer in Kazakhstan, under our direction and supervision as Group auditors. The audit of the Parent Company and the Group consolidation were performed in the United Kingdom by the Group audit team.

 

The remaining components of the Group were considered non-significant and these components were principally subject to analytical review procedures by the Group audit team. Specific audit procedures were performed on the non-significant component, CTS LLP, by the Group audit team, including testing revenue from drilling services. The Group audit team performed additional procedures in respect of certain significant risk areas that represented Key Audit Matters.

 

 

Our involvement with component auditors

 

For the work performed by component auditors, we determined the level of involvement needed in order to be able to conclude whether sufficient appropriate audit evidence has been obtained as a basis for our opinion on the Group financial statements as a whole. Our involvement with component auditors included the following:

 

·      Detailed Group reporting instructions were sent to the component auditors, which included the significant areas to be covered by the audit.

·    We reviewed the component auditor's work papers in Kazakhstan, reviewed Group reporting submissions received and held regular calls with the component audit teams during the planning and completion phases of their audit to discuss significant findings from their audit.

·     We held calls and meetings with members of Group and component management to discuss accounting and audit matters arising.

·      The Group audit team was actively involved in the direction of the audits performed by the component auditors, along with the consideration of findings and determination of conclusions drawn. We performed additional procedures in respect of the significant risk areas where considered necessary.

 

Key audit matters

 

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit, and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, we do not provide a separate opinion on these matters. In addition to going concern, described in the Material uncertainty related to going concern section above and the matter disclosed in the Basis for qualified opinion on the Group financial statements and unmodified opinion on the Parent Company financial statements section above, we determined the matter described below to be the key audit matter to be communicated in our report.

 

Key audit matter		How the scope of our audit addressed the key audit matter
Carrying value of unproven oil and gas assets   As at 31 December 2022, the Group's unproven oil and gas assets related to the BNG exploration licence were carried at US$43.9m as shown in notes 12.	At each reporting period end, management  are required to assess the exploration and evaluation assets for indicators of impairment and, where such indicators exist, perform an impairment test.   In performing the impairment indicator review for the unproven oil and gas assets in the exploration phase, management  are required to make a number of judgements as detailed in notes 1.8 and 2.1, including the likelihood of the exploration licence being renewed or converted to a production licence following its expiry in 2024.   Given the judgment required by management, we considered this area to be a key focus for our audit and hence a key audit matter.	We inspected the licences to confirm the validity of title and assessed the compliance with the licence conditions through review of correspondence with the authorities and inquiries of management.   We considered the appropriateness of management's judgment that the exploration licence would be capable of being extended beyond 2024 including assessment of the legislative process, the forecast economic value of the assets beyond the expiry date and risks and uncertainties within the operating environments.   We inspected budgets and work programs submitted to the Kazakh authorities to confirm that further drilling and exploration is planned for the licence.  We considered the results of exploration activity in the period for indications that the licences would be abandoned or that the recoverable value would be below cost.   Key observations: We found management's judgements that support the carrying value of the unproven oil and gas assets to be appropriate.

 

Our application of materiality

 

We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements.

 

In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole.

 

Based on our professional judgement, we determined materiality for the financial statements as a whole and performance materiality as follows:

 

	Group financial statements		Parent company financial statements
	2022 US$	2021 US$	2022 US$	2021 US$
Materiality	1,700,000	1,900,000	1,200,000	1,300,000
Basis for determining materiality	1.5% of total assets	1.7% of total assets	70% of Group materiality	70% of Group materiality
Rationale for the benchmark applied	We have determined an asset-based measure is appropriate as the Group continues to focus on developing its oil and gas projects that requires significant capital expenditure.		The Company is a holding company therefore materiality was set at 70% of Group materiality given the assessment of aggregation risk.
Performance materiality	1,100,000	1,200,000	800,000	800,000
Basis for determining performance materiality	65% of Group Materiality considering the nature of activities and historic audit adjustments.		65% of Parent Company Materiality considering the nature of activities and historic audit adjustments.

 

Component materiality

 

We set materiality for each significant component of the Group based on a percentage of between 24% and 65% (2021: between 26% and 68%) of Group materiality dependent on the size and our assessment of the risk of material misstatement of that component.  Component materiality ranged from US$400,000 to US$1,100,000 (2021: from US$500,000 to US$1,300,000). In the audit of each component, we further applied performance materiality levels of 65% (2021: 65%) of the component materiality to our testing to ensure that the risk of errors exceeding component materiality was appropriately mitigated.

 

Reporting threshold 

 

We agreed with the Audit Committee that we would report to them all individual audit differences in excess of US$34,000 (2021: US$38,000). We also agreed to report differences below this threshold that, in our view, warranted reporting on qualitative grounds.

 

Other information

 

The directors are responsible for the other information. The other information comprises the information included in the Annual Report and Financial Statements other than the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

 

As described in the basis for qualified opinion section of our report, we were unable to satisfy ourselves concerning the valuation of the Group's external drilling revenues or the completeness and validity of its cost of sales allocation in 2022 and 2021 and we were unable to determine whether any adjustments to the advances received/receivables, provisions for losses on contracts, unproven oil and gas assets, property, plant and equipment,  related tax balances and related party disclosures at the current and prior year ends were necessary as a result of this. We have concluded that where the other information refers to these balances it may be materially misstated for the same reason.

 

Other Companies Act 2006 reporting

 

Based on the responsibilities described below and our work performed during the course of the audit, we are required by the Companies Act 2006 and ISAs (UK) to report on certain opinions and matters as described below. 

 

Strategic report and Directors' report

Except for the possible effects on the Group financial statements of the matter described in the Basis for qualified opinion on the Group financial statements and unmodified opinion on the Parent Company financial statements section of our report, in our opinion, based on the work undertaken in the course of the audit: ·      the information given in the Strategic report and the Directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and ·      the Strategic report and the Directors' report have been prepared in accordance with applicable legal requirements.   Except for the possible effects on the Group financial statements of the matter described in the Basis for qualified opinion on the Group financial statements and unmodified opinion on the Parent Company financial statements section of our report, in the light of the knowledge and understanding of the Group and Parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the Directors' report.

Matters on which we are required to report by exception

Arising solely from the limitation on our work on the Group financial statements  relating to external drilling services in CTS LLP described above: ·      We have not obtained all the information and explanations that we considered necessary for the purpose of our audit; and ·      We were unable to determine whether adequate accounting records have been kept by the Parent Company. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: ·       Returns adequate for our audit have not been received from branches not visited by us; or ·       The Parent Company financial statements are not in agreement with the accounting records and returns; or ·     Certain disclosures of Directors' remuneration specified by law are not made.

 

Responsibilities of Directors

 

As explained more fully in the Directors' responsibilities statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

 

In preparing the financial statements, the Directors are responsible for assessing the Group's and the Parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.

 

 

Auditor's responsibilities for the audit of the financial statements

 

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

 

Extent to which the audit was capable of detecting irregularities, including fraud

 

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below:

 

Non-compliance with laws and regulations

 

Based on:

·      Our understanding of the Group and the industry in which it operates;

·      Discussion with management, the Audit Committee and those responsible for legal and compliance procedures of how the Group is complying with those legal and regulatory frameworks;

·      Obtaining and understanding of the Group's policies and procedures regarding compliance with laws and regulations; and

·      Our understanding of the legal and regulatory frameworks that are applicable to the Group and the Parent company,

we considered the significant laws and regulations to be the financial reporting framework (UK adopted international accounting standards, the Companies Act 2006, the AIM rules and the QCA Corporate Governance Code), the oil and gas laws and regulations of Kazakhstan, local taxation legislation and environmental regulations, and the terms and requirements included in the Group's production and exploration licences.

 

The Group is also subject to laws and regulations where the consequence of non-compliance could have a material effect on the amount or disclosures in the financial statements, for example through the imposition of fines or litigations. We identified such laws and regulations to be the health and safety legislation, licensing and environmental regulations.

 

Our procedures in respect of the above included:

·      Review of minutes of meeting of those charged with governance for any instances of non-compliance with laws and regulations;

·      Directing the auditors of the significant components to ensure an assessment was performed on the extent of the component's compliance with the relevant local and regulatory framework and a review of correspondence with regulatory and tax authorities was performed for any instances of non-compliance with laws and regulations;

·      Reviewing the licences to assess the extent to which the Group was in compliance with the conditions of the licence and considering management's assessment of the impact of instances of non-compliance where applicable;

·      Review of financial statement disclosures and agreeing to supporting documentation to assess compliance with relevant laws and regulations noted above; and

·      Review of legal expenditure accounts to understand the nature of expenditure incurred.

 

Fraud

 

We assessed the susceptibility of the financial statements to material misstatement, including fraud. Our risk assessment procedures included:

·      Enquiry with management and the Audit Committee regarding any known or suspected instances of fraud;

·      Obtaining an understanding of the Group's policies and procedures relating to:

o  Detecting and responding to the risks of fraud; and

o  Internal controls established to mitigate risks related to fraud.

·      Review of minutes of meeting of those charged with governance for any known or suspected instances of fraud;

·      Discussion amongst the engagement team as to how and where fraud might occur in the financial statements;

·      Performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud; and

·      Considering remuneration incentive schemes and performance targets and the related financial statement areas impacted by these.

 

Based on our risk assessment, we considered the areas most susceptible to fraud to be completeness of related party disclosures, management override of controls and revenue recognition.

 

Our procedures in respect of the above included:

·      Testing a sample of journal entries made throughout the year, which met a defined risk criteria to detect possible irregularities and fraud, by agreeing to supporting documentation;

·      Performing a detailed review of the Group's year end adjusting entries and investigating any that appear unusual as to nature or amount and agreeing to supporting documentation;

·      For significant and unusual transactions, particularly those occurring at or near year-end, obtaining evidence for the rationale of these transactions and the sources of financial resources supporting the transactions;

·      Involvement of forensic specialists to test the completeness of the related party disclosures by testing the Group and director's relationship with a sample of targeted suppliers and customers;

·      Testing a sample of revenue transactions to supporting documentation, including testing a sample of revenue transactions in the period proceeding and preceding year end to check that revenue was recognised in the correct period. In addition, we obtained a sample of significant sales agreements, evaluated key terms and assessed the appropriateness of revenue recognition policies against the relevant accounting standards; and

·      Assessing significant judgements and estimates made by management for bias and challenging management on the appropriateness of these judgements and estimates (refer to key audit matters above).

 

We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including component engagement teams who were all deemed to have appropriate competence and capabilities and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit. For component engagement teams, we also reviewed the results of their work performed in this regard.

 

Our audit procedures were designed to respond to risks of material misstatement in the financial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through collusion. There are inherent limitations in the audit procedures performed and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we are to become aware of it. In addition, the extent to which the audit was capable of detecting irregularities, including fraud was limited by the matter described in the Basis for qualified opinion on the Group financial statements and unmodified opinion on the Parent Company financial statements section of our report.

 

A further description of our responsibilities is available on the Financial Reporting Council's website at: www.frc.org.uk/auditorsresponsibilities.  This description forms part of our auditor's report.

 

Use of our report

 

This report is made solely to the Parent Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.  Our audit work has been undertaken so that we might state to the Parent Company's members those matters we are required to state to them in an auditor's report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

 

 

 

 

Peter Acloque (Senior Statutory Auditor)

For and on behalf of BDO LLP, Statutory Auditor

London, 

United Kingdom 

 

6 July 2023

 

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

 

 

Consolidated Statement of Profit or Loss
	Notes	Year to 31 December 2022	Year to 31 December 2021
		US$'000	US$'000
Revenue	4	42,949	24,996
Cost of sales		(10,637)	(5,624)
Gross profit		32,312	19,372
Selling expense		(9,751)	(7,578)
Impairment of unproven oil and gas assets	12	-	(12,464)
Other administrative costs		(9,767)	(3,332)
Operating income / (loss)	5	12,794	(4,002)
Finance cost	8	(585)	(859)
Finance income	9	59	24
Profit / (loss) before taxation		12,268	(4,837)
Tax charge	10	(2,371)	(709)
Profit / (loss) after taxation from continuing operations		9,897	(5,546)
Income / (loss) for the year		9,897	(5,546)
Income / (loss) attributable to owners of the parent		9,763	(5,554)
Income attributable to non-controlling interest		134	8
Income / (loss) for the year		9,897	(5,546)
Basic and diluted profit/(loss) per ordinary share (US cents)	11	0.44	(0.26)

 

 

 

 

 

 

Consolidated Statement of Comprehensive Income

 

 

	Year ended 31 December 2022	Year ended 31 December 2021
	US$000	US$000
Profit / (loss) after taxation	9,897	(5,546)
Other comprehensive income/(loss):
Exchange differences on translating foreign operations	(4,418)	(6,863)
Total comprehensive profit /(loss) for the year	5,479	(12,409)
Total comprehensive profit/(loss) attributable to:
Owners of parent	5,345	(12,417)
Non-controlling interest	134	8

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Changes in Equity

 

	Share capital US$'000	Share premium US$'000	Deferred shares   US$'000	Cumulative translation reserve US$'000	Other reserves US$'000	Merger reserve US$'000	Retained profit / (deficit) US$'000		Total attributable to the owner of the Parent                 US$'000		Non-controlling interests US$'000		Total equity US$'000
Total equity as at 1 January 2022	31,118	164,817	64,702	(62,103)	(2,362)	11,511	(156,239)		51,444		(5,801)		45,643
Income after taxation	-	-	-		-	-	9,763		9,763		134		9,897
Exchange differences on translating foreign operations and recycling of exchange differences on disposal of subsidiaries	-	-	-	(4,418)	-	-	-		(4,418)		-		(4,418)
Total comprehensive income/(loss) for the year	-	-	-	(4,418)	-	-	9,763		5,345		134		5,479
Shares issue (note 18)	1,942	4,273	-	-	-	-	-		6,215		-		6,215
Cancellation of share premium and deferred shares *	-	(169,090)	(64,702)	-	-	-	233,792		-		-		-
Dividends declared **	-	-	-	-	-	-	(2,444)		(2,444)		-		(2,444)
Total equity as at 31 December 2022	33,060	-	-	(66,521)	(2,362)	11,511	84,872		60,560		(5,667)		54,893

 

	Share capital US$'000	Share premium US$'000	Deferred shares   US$'000	Cumulative translation reserve US$'000	Other reserves US$'000	Merger reserve US$'000	Retained profit / (deficit)   US$'000		Total attributable to the owner of the Parent                 US$'000		Non-controlling interests US$'000		Total equity US$'000
Total equity as at 1 January 2021	30,804	164,313	64,702	(55,240)	(2,362)	11,454	(150,685)		62,986		(5,809)		57,177
Loss after taxation	-	-	-	-	-	-	(5,554)		(5,554)		8		(5,546)
Exchange differences on translating foreign operations and recycling of exchange differences on disposal of subsidiaries	-	-	-	(6,863)	-	-	-		(6,863)		-		(6,863)
Total comprehensive income/(loss) for the year	-	-	-	(6,863)	-	-	(5,554)		(12,417)		8		(12,409)
Shares issue (note 18)	264	486	-	-	-	-	-		750		-		750
Shares issued to employees and consultants (note 18)	50	18	-	-	-	57	-		125		-		125
Total equity as at 31 December 2021	31,118	164,817	64,702	(62,103)	(2,362)	11,511	(156,239)		51,444		(5,801)		45,643

*in 2022 the Company preformed a capital reduction (note 3).

**During 2022 the Company declared its first dividends in November and December 2022 in aggregate US$2,444,000 (note 18).

 

 

Equity                                                  Description and purpose

Share capital                                         The nominal value of shares issued

Share premium                                     Amount subscribed for share capital in excess of the nominal value

Deferred shares                                    The nominal value of the deferred shares issued

Cumulative translation reserve             Gains/losses arising on retranslating the net assets of overseas operations into US Dollars, less amounts recycled on disposal of subsidiaries and joint ventures

Other reserves                                      Fair value of warrants issued and capital contribution arising on discounted loans

Merger reserves                                          The excess of the fair value of the issues share capital over the nominal value of these shares issued for acquisition of at least 90 percent equity holding in subsidiaries

Retained profit/(deficit)                            Cumulative losses recognised in the consolidated statement of profit or loss, adjustments on the acquisition of non-controlling interests and transfers in respect of share based payments

Non-controlling interest                       The interest of non-controlling parties in the net assets of the subsidiaries

 

 

 

 

 

Parent Company Statement of Changes in Equity

 

	Share  capital US$'000		Share premium US$'000	Deferred shares US$'000			Merger reserve US$'000		Retained profit / (deficit)   US$'000			Total attributable to the owner of the Parent US$'000
Total equity as at 1 January 2022	31,118		164,817	64,702			11,511		(171,203)			100,945
Total comprehensive loss for the year	-		-	-			-		(1,133)			(1,133)
Shares issued in connection with the completed debt conversion (note 18)	1,942		4,273	-			-		-			6,215
Cancellation share of premium and deferred shares *	-		(169,090)	(64,702)			-		233,792			-
Dividends declared **	-		-	-			-		(2,444)			(2,444)
Total equity as at 31 December 2022	33,060		-	-		11,511				59,012			103,583

 

 

	Share  capital US$'000		Share premium US$'000	Deferred shares US$'000			Merger reserve US$'000		Retained profit / (deficit)   US$'000			Total attributable to the owner of the Parent US$'000
Total equity as at 1 January 2021	30,804		164,313	64,702			11,454		(169,398)			101,875
Total comprehensive loss for the year	-		-	-			-		(1,805)			(1,805)
Shares issue (note 18)	264		486	-			-		-			750
Shares issued to employees and consultants (note 18)	50		18	-			57		-			125
Arising on employee share options	-		-	-			-		-			-
Total equity as at 31 December 2021	31,118		164,817	64,702		11,511				(171,203)			100,945

 

*in 2022 the Company performed a capital reduction (note 3)

**During 2022 the Company declared its first dividends in November and December 2022 in aggregate US$2,444,000 (note 18).

 

Equity                                                  Description and purpose

Share capital                                         The nominal value of shares issued

Share premium                                     Amount subscribed for share capital in excess of nominal value

Deferred shares                                    The nominal value of deferred shares issued

Other reserves                                      Capital contribution arising on discounted loans

Merger reserves                                          The excess of the fair value of the issues share capital over the nominal value of these shares issued for acquisition of at least 90 percent equity holding in subsidiaries

Retained profit/(deficit)                        Cumulative losses recognised in the profit or loss