Annual Review and Accounts for YE 30 Sept 20

UK Oil & Gas Plc

("UKOG" or the "Company")

 

Annual Review and Accounts for the year ended 30 September 2020

 

UK Oil & Gas Plc (AIM: UKOG), a UK and internationally focused energy company, is pleased to announce its full year results for the full year ended 30 September 2020. A copy of the full annual report and details of the Company's annual general meeting will be posted to shareholders in due course. A copy of the full annual report will also be made available on the Company's website: www.ukogplc.com

 

Qualified Person's Statement

Matt Cartwright, UKOG's Commercial Director, who has 38 years of relevant experience in the global oil industry, has approved the information contained in this announcement. Mr Cartwright is a Chartered Engineer and member of the Society of Petroleum Engineers.

 

STRATEGIC REPORT FOR THE YEAR ENDED 30 September 2020

 

OUR BUSINESS

 

UK Oil & Gas Plc ("UKOG" or the "Company") is an energy company currently primarily focused upon oil & gas exploration and production. We specialise in creating new geological ideas, concepts and methodologies to find and produce oil & gas from previously unexplored or overlooked rock formations within established petroleum producing provinces.

 

Our current operational focus is on the UK and Turkey onshore sectors, where we aim to build a sustainable oil & gas production base that can act as a springboard to further worldwide opportunities. UKOG has operated safely and environmentally responsibly in the UK since 2013.

 

Our current UK onshore portfolio consists of direct and indirect interests in six oil & gas exploration, appraisal, development and production assets, all situated within the Weald and Purbeck-Wight Basins of southern England. We are the largest acreage holder in the south of England, with assets covering 689 gross km².

 

We hold majority interests in four UK onshore oil & gas discoveries, the most notable being at Horse Hill and Loxley in Surrey, together with a significant position in the Kimmeridge Limestone (KL) oil deposit or "play". UKOG holds the largest acreage position within the play's most prospective area or "sweet spot", covering 489 gross km².

 

Our UK oil & gas portfolio contains a good balance of low-risk production, appraisal and development assets as well as upside exploration assets within both the Kimmeridge Limestone and Portland conventional plays.

 

Our expanding portfolio in Turkey consists of a 50% non-operated working interest in the 305 km² Resan licence in south east Turkey, containing the potentially significant undeveloped Basur-Resan oil discovery plus further exploration prospects. This project is assessed to contain significantly greater discovered oil volumes than any of our UK projects and, if successful, offers potentially transformational growth for the Company.

 

A joint application with our Turkish partner for four further blocks offsetting the Resan licence, all of which contain undrilled geological lookalikes to the Basur-Resan discovery, has also been submitted to the Turkish regulatory authorities. 

 

In order to move our business forwards, we maintain a high level of operational activity, conducting near-continuous drilling and flow testing operations since May 2017.

 

Our portfolio, notably Basur-Resan in Turkey and Loxley in the UK, has the potential to generate significant returns for the Company and its shareholders.

 

As a diversification, we are increasingly active in the newly emerging geothermal energy field, where we possess the key subsurface and engineering skills necessary to make such projects work. As well as new standalone geothermal projects, we are currently investigating the viability of hybrid energy sites envisaged to derive power from both petroleum and geothermal. We are a founder member of the newly formed Geothermal Energy Advancement Association.

 

We are actively investigating hybrid geothermal projects at two of our UK sites and will review geothermal opportunities onshore Turkey.

 

OUR STRATEGY

 

UKOG aims to build a diverse, sustainable and self-funding energy business which has the following strategic objectives:

 

Oil & Gas:

 

1.    Find and Develop Low-Cost and Long-life Assets 

-       Continuing to invest in our potential near-term production assets is a key priority.

-       Once in production, the revenues from these assets will provide free cash flow to re-invest and deliver shareholder returns.

 

2.    Resource and Reserve Growth 

-       Building our recoverable resources, reserves and future production through targeted and disciplined high-impact exploration, appraisal projects and acquisitions.

 

Geothermal and Renewables:

 

1.    UK Energy Diversification - Reduce Carbon Footprint of Company's Existing Petroleum Producing Sites

-       Where viable, implement geothermal and/or solar energy cogeneration plus battery storage from existing wells/sites.

-       Where viable, add new standalone geothermal and battery storage for grid/heat export.

 

2.    Find and Develop New Stand-alone Geothermal Projects

-       Ground floor entry, either operated or as joint venture partner.

-       UK initial focus, international expansion if successful or commercially viable opportunities arise.

 

Targeted Portfolio Management:

 

Continuously review and high-grade our portfolio to either acquire or divest further stakes in existing assets. We also look to acquire assets at any stage in the life cycle and are not limited by geography, where we can create significant value for shareholders.

 

UKOG shares this vision and strategy through internal dialogue with employees and externally with shareholders and stakeholders via public announcements and dissemination of information through our website and the Annual Report and Accounts.

 

STATEMENT FROM THE CHAIRMAN

 

The worldwide Covid-19 pandemic has dominated our thoughts and our industry for the reporting period, yet I salute the Chief Executive and his team for thinking one step ahead and looking to broaden horizons internationally.

 

This has been my third year as Chairman of UKOG and I take this opportunity to repeat my applause for the volume of work undertaken by a small team of professionals. The core of that team, with the invaluable assistance from experts, has managed to overcome a series of hurdles and has taken the Company towards fresh fields and fresh opportunities that have the capability, if successful, to provide a step change in recoverable reserves and revenues.

 

Signing the Resan participation agreement with Aladdin Middle East Ltd in Turkey and applying for three further exploration licences exhibit our determination to achieve one of our strategic objectives of growing our reserves and resource. Along with a growing portfolio in Turkey, our Loxley, Arreton and Horse Hill assets will remain a significant part of UKOG's plans and thoughts in the coming year.

 

Over the past 18 months the team expended much effort in positioning our excellent Loxley asset ready for action in 2021. Consequently, we were all disappointed by November's rerun of Surrey County Council's planning consent meeting and the same 6 votes to 5 rejection as the original legally unsound June meeting. The UKOG team went to great lengths to answer all the questions raised in June, provide significant additional mitigations and to propose strong arguments about how development of hydrogen from the gas field would play a key part in the UK's net zero ambitions.

 

However, some of the committee appeared not to listen to the objective evidence presented to them and stuck rigidly to a narrow agenda which went against the conclusions and recommendations of the council's planning and highways officers. They preferred to focus on subjective local issues and failed to see the many positives at local, regional and national levels. So be it. Now UKOG has taken its case to a higher authority, who will hopefully decide upon facts not perceived fiction. The Loxley appeal will occupy much of this year with a decision expected by year end.

 

On the Isle of Wight, due to pandemic related delays, we now understand that our Arreton project's planning application should likely be determined in late second quarter, which, if granted, will allow us to schedule site construction and drilling once the pandemic situation stabilises.

 

Horse Hill has also proved to be another challenge, including the unlawful activities of climate change activists who have twice occupied the site in contravention of the UKOG injunction. The oil field has behaved like a talented but troublesome teenager: plenty of promise but with the expected problems too. In addition to the constant and mounting regulatory workload, the oil field's geology has proved unexpectedly complex. The team is determined to find technical solutions to make it the economic success story we want it to be.

 

From my base in Houston, Texas, I am in constant communication with Stephen Sanderson and his team. In addition, I monitor various chatrooms and blog sites and I read some of the frustration about the falling share values. Oil exploration is a complicated and time-consuming business. There are no guarantees of success and the regulatory procedure in the UK is clearly far lengthier and more intricate than we experience here in the States. It also has a habit of absorbing considerable time and money.

 

UKOG has no control over the day-to-day share price, it has no control over the price of Brent Crude and no control over the UK's complex attitude towards the oil & gas industry. Until our growing portfolio of appraisal projects produces reserves and positive cash flows, raising funds to keep developing, appraising and exploring in the interests of investors can only realistically be achieved via equity funding, but it will only be used when necessary.

 

We now look forward to a continued rise in Brent values and for a worldwide picture which offers stability and more reasons for optimism.

 

Allen D Howard

 

CHIEF EXECUTIVE'S STATEMENT

 

This has been a uniquely challenging year for the nation and our industry as we have wrestled with the dual shock of Covid-19 and the subsequent collapse of Brent Crude prices. I have experienced many oil price downturns in my career, but none have been as unexpected or severe as 2020. Fortunately, the Company and industry have been resilient enough to survive and adapt and to witness the hoped for bounce back in oil price. We all hope this will be long lived. 

 

During these uncertain times at UK Oil & Gas Plc we have deliberately adopted a positive half-glass-full mindset, prudently reducing our costs where possible and making positive steps by acquiring new, highly material opportunities at a time when entry prices were low.

 

Despite the pandemic I am delighted to report that the addition of the Turkey Basur-Resan discovery into our portfolio plus Loxley's significant gas volumes has seen our total net discovered resources increase significantly to 37.48 mmboe, the highest level in the Company's short history. This represents a highly material increase of 129% compared to last year and, similarly, our reserves also increased by 13% compared to the last reporting period. Our plan remains to convert as much of our discovered resources into reserves and production as we can in 2021 via our appraisal drilling programme.

 

Although we significantly increased our recoverable reserve and resource base, the challenging price environment over the past year, coupled with the less than hoped for results at Horse Hill, has had an inevitable effect on the value of some of our assets. Consequently, in line with many other oil & gas companies, including many of our peers in the onshore UK, this year we have written down some £17.25 million of our historic investments, primarily at Horse Hill and the newly relinquished PEDL143 licence. The write down this year will therefore not impact upon any future success or revenues from our Turkish assets.

 

I would also like to stress, that in the current pricing environment, the significant cost reductions achieved at Horse Hill over the year and the forecast reduction in water handling costs via the conversion of HH-2z into a water injector means that, going forwards, Horse Hill production is forecast to be profitable. The planned HH-3 and HH-4 infill wells are also designed to boost production as we move forward in developing our asset. Horndean, which continues to produce very steadily, also remains profitable with current rates and prices.

 

As it had long been my vision to transform UKOG into an international organisation that could operate in areas that offer greater upside, lower costs and more rapid payback than the UK, these unprecedented times also provided the catalyst for action and a move to expand into pastures new.

 

Hence, in July 2020, we signed an agreement with Aladdin Middle East Ltd ("AME"), to take a 50% non-operated working interest in the Resan licence in Turkey, containing the material undeveloped Basur-Resan oil discovery, together with a subsequent application for four further exploration blocks containing similar potential to Resan. AME have operated successfully in Turkey for 60 years and we are fortunate to have them as our new partner.

 

I see this move into Turkey as crucial to the Company's continued success and prosperity. Our Weald Basin assets, although some of the best in the UK onshore, particularly Loxley and the Kimmeridge, simply do not offer the same step-change growth potential we aspire to and, due to the increasing regulatory burden, take far too long to monetise. In the Company's view, and as supported by published reserve metrics, the petroleum system and potential resource size in South East Turkey is simply in a different league from the Weald Basin and the UK onshore.

 

The Resan licence offers the rare opportunity to appraise a discovered oil accumulation with recoverable volumes greater than all of the Weald Basin's historic oil production and reserves combined. The new blocks, if awarded to us, each have the potential to add additional significant recoverable oil volumes to Basur-Resan.

 

What further drives our enthusiasm for Turkey is the low-cost environment and the ability to rapidly monetise any success in under a year, compared to 3-5 years in the UK. This has been ably demonstrated by our partner AME's success at their East Sadak field, the closest producing look alike field to Basur-Resan. Unlike the UK, Turkish Petroleum Law supports explorers and producers, as indigenous oil is given strategic importance by the government. If only that were the case in the UK.

 

Adding Basur-Resan into the portfolio was thus fully compliant with our stated growth strategy. It added a potentially long-life asset which can operate at a lower cost base than the UK and which significantly boosted our overall net attributable resources. The addition of Prospect A within the licence also more than compensated the loss of the volumes attached to the relinquishment of the PEDL143 A24 prospect.

 

Entry into the project also exemplifies our ongoing strategy of active portfolio management, in which we continually high grade our portfolio, both adding new higher potential value assets and divesting lower ranking assets as and when opportunities present themselves. In this way we can harness each asset's organic growth through the project execution stage.

 

This past year in the UK, we also submitted new planning applications for Arreton oil appraisal on the Isle of Wight and Loxley gas appraisal in Surrey, the latter of which is now the subject of a formal Appeal to the Planning Inspectorate to be heard via public inquiry in July 2021. We remain confident that the Appeal will be successful and that the Loxley project, one of the UK onshore's largest ever gas discoveries, can take its place as a source of feedstock for reformation into hydrogen, a key new sector to help the UK meet net zero.

 

We have also spent significant time looking at the feasibility of enhancing our UK sites to include renewable energy. Our vision is that our UK sites could become integrated hybrid energy hubs, encompassing solar, closed loop geothermal, petroleum and battery storage. We have also been evaluating stand-alone closed-loop geothermal activities as an addition to our traditional UK business. Whilst this sector is still in its infancy in the UK, we believe we have the key technical and project management skills necessary to make such projects work.

 

In order to further our geothermal projects and credentials we became a founder member of a new geothermal stakeholder organisation, the Geothermal Energy Advancement Association.

 

Further prudent financial decisions were also made during the reporting period, which, in response to rapidly falling oil prices included a 55% reduction in overall Administration expenses, representing a £2.18 million saving from the last reporting year. The saving included management and staff electing to take an effective 20% temporary reduction in salary.

 

In an ongoing series of cost cutting measures, the Company also significantly reduced the Horse Hill oil field's operating costs. From January 2020, operating costs were reduced by a substantial 66% overall, even though water handling costs increased substantially. The savings place Horse Hill in a good position to take advantage of the strengthening Brent crude prices seen post reporting period.

 

Horse Hill was also granted full long-term production consent by the Oil and Gas Authority ("OGA") in March 2020, which thus moved the status of HH-1 production into the proven developed producing ("PDP") reserves category, a pre-requisite for any future potential debt-based funding to help finance further Portland and Kimmeridge infill wells.

 

Market Place

From September 2019 until the impact of the pandemic was felt, oil prices remained remarkably stable, with Brent hovering around the low $60s per barrel ("bbl."). However, this was not to last, as the value of Brent crude reached an unprecedented low on 21 April 2020 in direct response to a worldwide pandemic-induced slump in demand. An American analyst described that day as "crazy" and "a moment we never ever expected to see". The crazy day saw Brent plummet to $15.98 per bbl as unimaginable negative values were experienced in US benchmark prices.

 

A month after the beginning of the UK's initial lockdown, the Covid-19 pandemic created a 30 per cent collapse in the global demand for oil, with the dramatic cut in air travel having a huge impact. In 2020, total demand for primary oils in the UK dropped 19 per cent compared to 2019 with refinery production following suit and dropping to its lowest ever level.

 

In the UK transport demand, which usually accounts for almost 70% of domestic oil consumption, dropped 28 per cent compared to 2019, led by a fall in aviation demand, which itself fell 60 per cent compared to pre-pandemic levels. Similarly, UK diesel demand fell by 17 per cent and petrol demand dropped 21 per cent in 2020.

 

Whilst petrol and diesel have shown a recovery, jet fuel consumption remains in the doldrums due to the international travel ban. All this took the use of oil & gas in UK transport down to levels last seen in the mid-1980s.

 

Following the pandemic's first wave, the OPEC cartel, plus Russia and other significant producers, agreed to cut supplies by 10 per cent to lessen the burden on over-flowing oil storage facilities. This, combined with a slowing of infection rates in developed countries corresponding with summer in the northern hemisphere, saw prices recover to around $40 per bbl. by June 2020 and stay at the same level through summer and autumn. Developing countries who rely heavily on their oil exports, including Algeria, Iran, Iraq and Libya, were particularly adversely affected. Even the global majors, BP, Shell and Exxon Mobil, suffered multi-billion-pound losses.

 

Post the reporting period, in response to successful Covid-19 vaccine trials announced in November 2020, the global picture improved, with prices rising consistently, now reaching over $60 per bbl. from end February 2021, recently briefly exceeding pre-Covid levels. A far cry from the values of $140 in the early noughties, but still a healthy bounce back. The vaccination programme worldwide has had a positive impact on the financial mood of the markets, although the position remains volatile.

 

Interestingly in Q4 2020 indigenous UK production of primary oils was down 9.5 per cent compared to Q4 2019, following delayed maintenance and lack of investment, both direct results of the pandemic. Going forward it therefore remains a possibility that a similar lack of investment in oil supply within the global sector over the past year, notably in US shale and non-core Opec production, could limit supply levels to below pre-pandemic levels even with a return to pre-pandemic demand once vaccinations are fully rolled out and wider global travel resumes.

 

Such a potential global supply shortfall could also potentially be exacerbated by the prospect of the marginal cost of US oil being raised via President Biden's possible 'carbon taxes' on the 3 MMMBop of oil from federal lands. This 'tax' could see US marginal shale and conventional projects remain shut in. A wider post-Covid economic surge could further exacerbate any upwards price pressure due solely to supply limitations. Consequently, there is room for cautious optimism for future oil prices. 

 

Those projects with low operating costs and set within fiscal and operating regimes that allow rapid monetisation and payback could therefore stand to benefit more from any price increase cycle. Such projects will also likely be able to better compete for capital as they offer greater returns. The Company's exposure to operations in Turkey is therefore well positioned to take advantage of this scenario should it materialise.

 

As per oil demand, UK gas demand in 2020 fell by 6.2 per cent compared to 2019, resulting in a weakening of prices. Partly due to a colder than expected winter, prices recovered this year. Whilst UK imports dropped to around 59% of demand, the make-up of imports appears to have changed significantly, seeing a 12% reduction in gas imported via pipeline and a 4.8 per cent increase in Liquefied Natural Gas ("LNG") compared to 2019. The willingness of continental Europe to pay more for gas during the pandemic resulted in a significant shortfall of pipeline supply from Norway, mostly taken up by cheaper opportunistic LNG supply from Trump's USA.

 

Overall, LNG made up 42 per cent of all gas imports, up from 39 per cent in 2019. Imports of LNG were particularly high in the first half of 2020, reaching 62 per cent of total imports in Q2. Qatar, which has shareholding influence in the UK's National Grid, remains the dominant import source of LNG, contributing 48 per cent of total LNG in 2020, stable on 2019 levels. As new projects have come on stream, the number of LNG import sources has increased in recent years. Notably in 2020, imports from the US increased by 72 per cent on 2019. Ironically much of the US LNG derives from tight or fracked gas projects which would currently not be possible in the UK due to the moratorium relating to induced seismicity concerns.

 

As LNG has 3-4 times the carbon footprint of indigenous UK gas, such as UKOG's Loxley, any longer term UK import increase in LNG is potentially problematic with respect to reaching UK net zero targets. Given the UK Government's backing for low carbon (blue) hydrogen and BP's recently announced large scale Teesside blue hydrogen plant (which will reformulate natural gas into clean burning hydrogen) it would be ironic if the blue hydrogen were to rely upon high carbon footprint imports at the expense of lower footprint indigenous gas like Loxley.

 

Consequently, in order to meet UK net zero targets and to generate inward UK investment, the Company envisages that conventional indigenous gas such as Loxley will continue to play an important role in supplying the lowest carbon footprint gas for reformation into hydrogen through the projected 15-20 year life of the project. Additionally, if the government were committed to a level carbon footprint playing field, it is also conceivable that any future carbon taxes might 'protect' low footprint indigenous gas, further enhancing the viability of projects like Loxley.

 

Financials

I acknowledge the concerns of private investors about 'dilution' of shares in the Company. However, it is our view that until such time as the Company has sufficient positive cash flow and or significant proven and probable reserves upon which to secure debt funding, raising funds from equity remains the most sensible and realistic way to fund projects for forward growth.

 

All oil and gas companies, from majors to relative minnows, must find ways to survive and flourish and our liquidity in the market is a valuable tool when there are no other funding options available.

 

That said, we believe that success in Turkey could dramatically improve the Company's financial strength in the near term due to the sheer magnitude of the potential prize and the ability to rapidly monetise a successful well.

 

Just before the first Covid-19 lockdown in March 2020, the Company paid the final £1 million to complete the acquisition of Magellan Petroleum (UK) Investment Holdings Limited. This was the deferred consideration element to Tellurian Investments LLC, the former owner. Via this payment, UKOG now holds irrevocable ownership of Magellan, renamed UKOG (137/246) Ltd, which owns a direct 35% interest in the Horse Hill oil field and the surrounding highly prospective PEDL137 and PEDL246 licences. As a result, UKOG holds a controlling 85.635% in the field and surrounding licences.

 

In June 2020, the Company fully repaid its convertible loan with Riverfort Global Opportunities PCC Limited and YA II PN Ltd. The repayment of the outstanding balance of £1.825 million eliminated the uncertainty attached to loan note conversion timings and pricing, something the Company believed was having a negative influence on UKOG's share price.

 

During the reporting period we raised £2.0 million in December 2019 from a single institutional investor, partly to accelerate long-lead time surface facilities and other related works necessary to bring the field into stable long-term oil production. An additional £1.275 million was raised in April 2020 to implement a series of cost reduction measures and we then added a further £4.2 million in June 2020 to fund full repayment of the convertible loan, as detailed above, and for the purchase of key surface facilities at Horse Hill. Post period in October 2020 we raised a further £2.2 million to fund our share of initial costs in Turkey.

 

Operations

UKOG's UK operational activities concentrated upon the Horse Hill oil field, located near Gatwick Airport, plus we also pushed ahead with our other Weald Basin licences at Loxley in Surrey and Arreton on the Isle of Wight.

 

By end February 2021, post period, the Horse Hill field had produced and exported over 137,000 bbl of Brent quality crude from its Kimmeridge and Portland oil pools, providing the Company with a solid revenue base.

 

Activity at the Horse Hill field centred around reducing operating costs and a series of interventions on Horse Hill-1 ("HH-1"), designed to optimise pumping efficiency and minimise the expected water cut i.e., standard conventional oil field routine. The final intervention cycle finished in November 2020, seeing the safe reperforation of the full Portland oil producing section, insertion of a new simplified production tubing string and the downhole pump set at a deeper level to increase Portland pumping efficiency.

 

A further series of multi-week production optimisation trials to achieve the best balance between oil revenues and water handling and other operational costs were also undertaken, achieving stable water influx levels by the end of 2020. Work is also in hand, subject to regulatory permissions, to convert HH-2z into a water injector which should significantly reduce current water handling costs and help maximise oil recovery by supporting reservoir pressure.

 

It is expected that the further HH-3 Portland and HH-4 Kimmeridge infill wells will be planned in detail and drilled at Horse Hill following the completion of the Company's potentially transformational initial Turkey Basur-Resan appraisal drilling campaign.

 

As part of our UK energy diversification strategy, at Horse Hill we are actively evaluating the addition of 250 kW of photovoltaic solar power and 100 kW of battery storage to reduce site energy consumption, CO₂ emissions and operating costs, further underpinning long term site economic value and reducing greenhouse gas emissions. Alongside this we have also invested in a scoping study aimed at cogeneration and standalone geothermal energy at Horse Hill.

 

As operator of PEDL143, and as part of our portfolio management strategy, we carried out a detailed study examining the viability of drilling the A24 (formerly Holmwood) Portland and Kimmeridge prospect from selected sites outside the Surrey Hills Area of Outstanding Natural Beauty. We concluded this was not economically feasible and as a result UKOG and its partners relinquished their interests in the licence. It remains a source of irritation and regret that the prior operator did not drill this handsome prospect when it had planning permission to do so.

 

It should be noted, however, that the additional exploration potential of our Resan licence, namely the drill ready Prospect A, resulted in a net 13% gain to the Company's prospective resources, more than compensating for the relinquishment of PEDL143.

 

Turkey

In July 2020 and after much prior consideration, we decided to broaden our horizons with an agreement to take a 50% non-operated working interest in the 305 km² Resan oil appraisal and exploration licence in south east Turkey. Applications for three further follow-on exploration licences, comprising four 150 km² blocks, were also submitted to the Turkish regulatory authorities, again with 50% non-operated working interests.

 

UKOG's board views the forthcoming 2021 Basur-Resan appraisal drilling programme, aimed initially at proving the commerciality of the Basur-Resan oil discovery, to present a compelling and potentially transformational growth opportunity. If awarded the additional licences could each add similar oil resource potential as Basur-Resan to the Company's portfolio.

 

Post period, we received formal government consent for the Resan acquisition and subsequently completed the transaction with AME.

 

Having recently begun construction of the Basur-3 drilling pad, both the Company and AME will now work towards finalising the design and delivery of a successful first appraisal well, aimed at establishing the commerciality of the aerially extensive and as yet undeveloped Basur-Resan oil discovery. Work is also ongoing to design and shoot a c. 120 km 2D seismic programme this year and a further Resan-6 appraisal well.

 

The Basur-Resan oil discovery was assessed by Xodus Group Ltd to contain an estimated mean case discovered recoverable oil volume of approximately 34 million bbl gross, potentially delivering to UKOG approximately 17 mmbbl for its net 50% interest. The high case target offers approximately 67 mmbbl gross and 33.5 mmbbl net UKOG. Rapid monetisation of the discovery's success case is possible within a year in Turkey, plus drilling and operating costs are significantly lower than the UK. 

 

Basur-Resan, therefore, has the potential to significantly surpass the recoverable oil & gas volumes currently assigned by Xodus to both our Loxley and Arreton appraisal projects and the entire aggregate sum of the Company's UK portfolio. As previously mentioned, to add a comparative scale, Resan's mean case gross discovered recoverable oil volume of approximately 34 million bbl exceeds the 32 million bbl of the total historic production and current remaining reserves of all the Weald Basin's historic 13 producing fields.

 

We also look forward to hearing the outcome of our application with AME for three further exploration licences in south east Turkey, lying to the south and south east of our Basur-Resan Licence. The most northerly block, M47-b3, is interpreted to contain a potentially significant extension of Basur-Resan and the most south easterly block, M48-d1, an extension of the recent Bukat-1 discovery well.

 

Covid-19

The Covid-19 emergency has provided us all with extraordinary new challenges. In early March 2020 we implemented a wide series of Covid-19 procedures and practices that protect the health and safety of our staff, consultants and stakeholders.

 

The policy adopts the Government's medical guidance at all times, including social distancing, and ensures appropriate levels of manpower and resources are maintained to ensure the safety of our operations as well as the health and safety of our team. At Horse Hill, we have adopted the policy of deploying essential staff only, all of whom are designated as "key workers" under the Government's emergency legislation.

 

Strict hygiene and distancing practices are in place to ensure that production continues at Horse Hill whilst protecting our team's health. As the plan minimises external contractor visits to those essential for safety, regulation and crude export, the planned series of further well interventions have been put on temporary hold until the current emergency passes.

 

Our Guildford office staff have also been adhering to best advice and practices, by working from home and communicating remotely using video conferencing technology which, fortunately, had been in active use within UKOG prior to the emergency.

 

Loxley

Following a post period rerun of the June 2020 Loxley planning committee meeting in November 2020, brought about by the Company's legal challenge to the lawfulness of the original meeting's conduct, Surrey County Council ("SCC") repeated their June performance, with the members voting 6 to 5 to narrowly refuse planning permission for appraisal drilling and testing at the Loxley gas exploration site near Dunsfold in Surrey.

 

This disappointing decision was, for the second time, contrary to the recommendation of the Council officers' report which recommended approval, all issues concerning planning, environmental and highways having been resolved to their professional satisfaction.

 

Crucially, the decision also ignored the key role domestic natural gas plays in the government's stated future low-carbon hydrogen policy in which natural gas is reformed into clean burning hydrogen. This new sector is an integral element of UK infrastructure strategy designed to help achieve net zero and underpin the UK's recovery from record Covid-19 induced debt levels.

 

Post period, on 8^th February 2021, an appeal against SCC's refusal was lodged with the Planning Inspectorate, with a public inquiry lasting up to nine days now scheduled to commence on 27^th July. We expect that a decision should be handed down some time in Autumn 2021.

 

Leading Counsel continues to advise that there are strong grounds to expect a positive appeal outcome, as the cited grounds for refusal are in direct conflict with the advice of its professional Planning and Highway Officers and their respective recommendations for approval. 

 

High Court Injunction

During the 14 months prior to the writing of this report UKOG's Horse Hill oil field was the subject of some 6 short-lived unlawful incidents by a small group of protesters carrying out their actions under the name of Extinction Rebellion ("XR"). These actions were dealt with successfully by the police and on-site personnel and were of a temporary nature.

 

Whilst the Company has never sought to obstruct any peaceful protest or curb the right to freedom of expression, solely to restrain unlawful activities that impede its staff's right to go about their lawful business, it sought additional protection from the High Court via an interim injunction defining those behaviours considered beyond the limits of reasonable peaceful protest.

 

In the light of the pandemic and Surrey Police's increased efficacy in dealing with slow walks on the public highway, the Company recently sought to invite the High Court to revise the scope of the injunction to focus upon Horse Hill and to retain protection solely from trespass into the site and obstruction of the site's entrance.

 

At the post period High Court Hearing of 9^th February 2021, Mrs. Justice Falk DBE, found that "there was a sufficiently real and imminent risk to justify the continuance of the interim injunction order and its revised scope, which prohibits trespass to the site's land, obstruction of the main entrance and lorry surfing. The injunction is a reasonable and proportionate restriction on protesters' activities. The order does not prevent slow walking or simply standing outside the site (to protest), provided that this does not physically obstruct anybody entering or leaving the site."

 

The judge also found that the Injunction should be extended to include six named protesters associated with XR. In addition, two named XR protesters, who trespassed into the site on 10^th October 2020, offered undertakings to the court to abide by the terms of the injunction in return for UKOG not seeking to pursue committal for a breach of the injunction.

 

The injunction now remains in force until a final two-day trial, to be heard on 28^th June 2021. We trust that protesters will take heed of the Judge's ruling.

 

Horse Hill Judicial Review

During the reporting period we learnt that opponents of Horse Hill had, at a third attempt, obtained consent for a judicial review ("JR") of SCC's September 2019 planning consent for long-term oil production at the site. As an interested party to SCC's defence against the claim, UKOG 's counsel, David Elvin QC actively participated in the post period High Court hearing on 17-18^th November 2020.

 

Just before Christmas 2020, we were delighted to announce that, following the JR hearing, the Hon Mr. Justice Holgate comprehensively dismissed the challenge to the lawfulness of SCC's planning consent. The written judgement rejected the challenge's three grounds.  

 

This was a victory for planning law and common sense, although one can only wonder why a comprehensively unsound claim with a clear political agenda was permitted so many bites at the same legal cherry, it having been rejected for JR twice before. Justice Holgate made it abundantly clear in his judgement that the courts are not responsible for making political, social, or economic choices.

 

Disappointingly, we have also just learnt that subsequent to the JR, the claimant (Finch) has been granted leave to appeal Mr Justice Holgate's decision. We remain confident that based upon planning regulations and law, the Court of Appeal will arrive at the same conclusion as Justice Holgate. Interestingly, leave to appeal was granted by Mr Justice Lewison, the same judge who granted the JR to the claimant at the third attempt.

 

The Company's production planning consent currently remains in full force.

 

Energy White Paper

To our opponents, many of whom fail to see the irony of burning oil to drive to oil & gas sites to protest, or to disregard the safety and health of others by violating the prevailing Covid-19 gathering and social distancing regulations, I bring to their attention 2020's Energy White Paper and the Climate Change Committee's carbon budget, in which indigenous oil & gas remains a part of the UK's energy transition to net zero and beyond.

 

This is because we not only need to keep the lights on while other energy sources transition to fill demand but will also continue to need non-combusted industrial petroleum feedstocks to manufacture key 21^st century materials. Without ready access to such materials there will be no electric vehicles, green aviation or wind turbine blades.

 

On a simpler level we might also consider that the humble PPE the country continues to depend upon to combat the pandemic are also primarily derived from such non-combusted petroleum feedstocks. Where would we be without face masks and visors, gloves, protective gowns, aprons, syringes, sterile tubes and pipes in intubators and ventilators, catheters, let alone vital function computers and screens and much more?

 

It must surely be preferable that such transitional fuel and vital feedstocks should come from domestic sources rather than those beyond the UK's control and regulation. We have already seen during last year's scramble for PPE what can happen if sectors are offshored.

 

Our future energy and materials needs are a complex problem requiring complex solutions, not a simple yes or no approach.

 

We also welcome the White Paper's aim to "…provide opportunities for oil and gas companies to repurpose their operations away from unabated fossil fuels to abatement technologies such as carbon capture, utilisation and storage (CCUS) or clean energy production such as renewables and hydrogen." At UKOG we plan to be part of today's and tomorrow's energy solution by diversifying our UK business to provide both energy and feedstocks from hydrocarbons, energy from gas reformed into clean hydrogen and via new geothermal and renewable energy opportunities.

 

Finally, with the prospect of stable profitable production from Horse Hill, exciting new drilling in Turkey and a return to pre-Covid oil price levels, I now look forward with confidence to a more settled financial picture for the Company as we do everything in our control to bring more value to our shareholders. Our planned activities as well as our continued search for further 'quality' international production opportunities

 

Stephen Sanderson

Chief Executive

For further information, please contact:

 

UK Oil & Gas Plc
Stephen Sanderson / Kiran Morzaria	Tel: 01483 941493
WH Ireland Ltd (Nominated Adviser and Broker)
James Joyce / James Sinclair-Ford	Tel: 020 7220 1666
Communications
Brian Alexander	Tel: 01483 941493

 

The information contained within this announcement is deemed by the Company to constitute inside information under the Market Abuse Regulation (EU) No. 596/2014.

PRINCIPAL RISKS AND UNCERTAINTIES

 

UKOG continuously monitors its risk exposures and reports its review to the board of directors ("The Board"). The Board reviews these risks and focuses on ensuring effective systems of internal financial and non-financial controls are in place and maintained.

 

Key Risk Areas

The high-risk areas surrounding our existing business is tabulated below; the key areas are Strategic, Operational and Financial.

Risk	Mitigation	Magnitude and likelihood
Strategic risks
Exposure to political risk, we operate and may seek new opportunities in countries, regions and cities where political, economic and social transition may take place. Political instability, changes to the regulatory environment or taxation, international trade disputes and barriers to free trade, international sanctions, expropriation or nationalisation of property, civil strife, strikes, insurrections, acts of terrorism, acts of war and public health situations (including the continued impact of the COVID-19 pandemic or any future epidemic or pandemic) may disrupt or curtail our operations or development activities and could affect the ability of UKOG to deliver to its Strategy	Through industry associations and direct contact, the Company engages with Government and other appropriate organisations to ensure the Company is kept abreast of expected potential changes and takes an active role in making appropriate representations.	Magnitude- High Likelihood - Medium
Operational risks
Permitting risk, planning, environmental, licensing and other permitting risks associated with our operations particularly with exploration drilling operations.	During the period the Company faced several challenges in obtianing all the required permits. This is despite UKOG's compliance with regulations, proactive engagement with regulators, communities and the expertise and experience of the management teams. We believe this is because of changing priorities within the United Kingdom and the Company has sought to further diversify this risk by seeking investments outside the United Kingdom	Magnitude- High Likelihood - High
Exploration risk, the Company fails to locate and explore hydrocarbon-bearing prospects that have the potential to deliver commercially, e.g. key wells are dry or less successful than anticipated	Analysis of available technical information to determine the work programme. Risk-sharing arrangements entered to reduce downside risk	Magnitude- High Likelihood - High
Oil production, oil is not produced in the anticipated quantities from the Group's assets, or it cannot be produced economically	Analysis of available technical information to improve our understanding of the reservoir and continue to review cost structure to target low production costs	Magnitude- High Likelihood - Medium

 

Operational risks (continued)
Price and markets, our financial performance is impacted by fluctuating prices of oil, gas and refined products. Oil, gas and product prices are subject to international supply and demand and margins can be volatile. Political developments, increased supply from new oil and gas or alternative low carbon energy sources, technological change, global economic conditions, public health situations (including the continued impact of the COVID-19 pandemic or any future epidemic or pandemic.	During the reporting period the Group entered into production at the Horse Hill assets. The Group determined that given its stage of development the costs of hedging would be prohibitive. The Group will keep this under review. At this point the Group continues to review costs where appropriate.	Magnitude- High Likelihood - High
Loss of key staff	Provide and maintain competitive remuneration packages to attract the right calibre of staff. Build a strong and unified team	Magnitude- High Likelihood - Low
Financial risks
Liquidity risk, exposure through its operations to liquidity risks.	The Board regularly reviews UKOG's cash flow forecast and the availability or adequacy of its current facilities to meet UKOG's cash flow requirements	Magnitude- High Likelihood - Medium

 

OPERATIONAL REVIEW

 

Whilst UKOG's operational activities were concentrated on the Horse Hill oil field, located near Gatwick Airport, the Company has also pushed ahead with its other Weald Basin licences at Loxley and Arreton. In addition, we have significantly enhanced our business with the acquisition of a 50% non-operated working interest in the 305 km² Resan licence in south east Turkey, containing the undeveloped Basur-Resan oil discovery. Applications for three further exploration licences containing geological lookalikes to Basur-Resan have also been submitted to the Turkish regulatory authorities, again with 50% non-operated working interests.

 

Horse Hill Oil Field, PEDL137 and PEDL246 (UKOG 85.64%)

The field and surrounding licence is operated by UKOG's subsidiary company Horse Hill Developments Ltd ("HHDL") in which UKOG has 77.9% ownership. The Licensees are HHDL (65% interest) and UKOG (137/246) Ltd (35% interest).

 

The reporting period has seen an unprecedented level of operational activity at Horse Hill including drilling, continuous test production and several well intervention operations, including during the Covid-19 restrictions. It is testament to the team that these operational activities have been planned and executed successfully on budget and without compromises in terms of health, safety, environmental impact and quality ("HSEQ"). In addition to these operational activities, key regulatory approvals have been obtained for long term production.

 

At the beginning of the reporting period, drilling operations for the new Horse Hill-2/2z ("HH-2/2z") Portland well commenced with the British Drilling & Freezing 28 drilling rig spudding HH-2 on 29^th September 2019. HH-2/2z, in the field's Portland oil pool, was designed to take Portland core and then be retained as a future horizontal production well. Planning consent for long term oil production over 25 years was granted by Surrey County Council on 27^th September 2019.

 

We continued with a significant amount of activity leading up to Christmas 2019. October 2019 saw simultaneous drilling and test production operations at Horse Hill with continuous Kimmeridge oil production from HH-1 maintained during the HH-2/2z horizontal drilling campaign.

 

In order to optimise the placement of the HH-2z horizontal section, the near vertical HH-2 borehole successfully acquired 241ft of Portland core and electric logs. Following completion of HH-2 operations the well was successfully sidetracked and a 2,433ft long 6" horizontal section was drilled within the Portland reservoir.

The horizontal drilling of the Portland HH-2z was completed in November 2019, with the length of the horizontal curtailed by the intersection with natural fractures in the reservoir and the onset of drilling mud losses at the toe of the well. All technical well construction, operational and HSEQ objectives of the HH2/2z drilling campaign were successfully achieved.

 

Clean up and flow testing of HH-2z was conducted from December 2019 through to October 2020. Initial flow tests were encouraging with established rates up to 1087 bpd and oil cuts up to 60%. Unfortunately, as the test progressed the formation water cut significantly increased to over 70% rendering production of the well technically and commercially challenging. A decision was made to undertake a water shut-off at the toe of the horizontal section.

 

In early March, following the identification of the water ingress source via production logging, a plug was set over a zone of open natural fractures clustered at the deepest part or "toe" of the wellbore. Initial testing of HH-2z demonstrated a continuous flow of dry oil to surface, confirming that the plug had eliminated underlying formation water ingress into HH-2z. Testing continued but over time HH-2z oil production rates continued to be lower than expectations coinciding with rapidly increasing water cuts, thought to be from natural fractures along the wellbore.

 

UKOG has now determined that the most commercial future usage for HH-2z is to utilise it as a water injector in the field rather than as a producer. This will both remove the need for expensive off-site water disposal via tanker and also help maximise oil reserves recovery by supporting reservoir pressure 

 

Operations continued at Horse Hill under Covid-19 restrictions with essential personnel only. No cases of Covid-19 have been reported within the company's operations.

 

Also in March, the Oil and Gas Authority ("OGA") approved the revised Horse Hill Field Development Plan and consented to the start of long-term production from the field, a significant milestone for Horse Hill. An addendum to the Field Development Plan for the conversion of HH-2z to a water injector has been submitted. Other regulatory consents for water injection are underway, with permissions currently forecast for some time in Q2 2021, subject to any pandemic related delays.

 

In July, agreement was reached to purchase key surface facilities deployed at the Horse Hill site from facility owner PW Well Test. This acquisition allowed the rental contract to be terminated and operating costs per barrel to be significantly reduced by up to $4/bbl. Whilst some further facility addition and automation will be required over a period of time for long term production in line with Control Of Major Accident Hazards regulations, the acquisition allows Horse Hill to control this process, own and operate its equipment, manage maintenance and procedures and direct hire field personnel. In addition, the acquisition provides production continuity and negates having to shut down the field for an extended period to design, build and commission new facilities.

 

At the end of the accounting period, further well intervention operations on HH-1 were safely completed, optimising oil flow by isolating the Kimmeridge perforations, by reperforating the full Portland oil producing section, by insertion of a new simplified production tubing string and by setting the downhole pump at a deeper level to increase pumping efficiency. These improvements set HH-1 up for long term continuous and optimised oil production from the Portland. Water injection plus further infill development of both Portland (HH-3 well) and Kimmeridge (HH-4 well) offer upside for the Horse Hill field.

 

Post-period the intervention was immediately followed by an ongoing series of multi-week production optimisation trials to achieve an optimum balance between oil revenues and water handling and other operational costs. Trials include well-cycling (i.e., shutting in the well for a set period each day to reduce water inflow) and pump fill optimisation. The trials continued for several months. Early results are encouraging, with stable oil and water influx levels achieved by early 2021. 

 

As of end-February, over 137,000 bbl of Brent quality crude had been produced and exported from the Kimmeridge and Portland pools.

 

In line with the challenging oil price environment, significant further efforts have also been made in managing and reducing operational costs. From January 2020 to January 2021 our total operating costs have reduced by 66%. The savings will help place Horse Hill in a good position to take advantage of the strengthening Brent crude prices seen in the past month.

 

It is expected that further HH-3 Portland and HH-4 Kimmeridge infill wells will be planned in detail and drilled at Horse Hill.

 

Loxley, Broadford Bridge, PEDL234 (UKOG (234) 100%)

OGA approved an amendment to the PEDL234 Retention Area work programme, wherein Loxley-1 is to be drilled by December 2021.

 

Following SCC's initial 29^th June 2020 planning committee meeting, in which the members voted by 6 to 5 against SCC's planning officer's recommendation to approve UKOG's Loxley planning application, the Company sent SCC a formal legal letter of complaint outlining a series of procedural and other legal issues that potentially affected the lawfulness of decisions made during the meeting. SCC also acknowledged that they received in excess of 100 similar complaints alleging that there were procedural irregularities that invalidated the result.

 

SCC decided that the Loxley Gas project should be redetermined post period on 27^th November. However, again contrary to the recommendation of its own planning team, SCC refused Loxley planning consent. In February UKOG filed an appeal to the Planning Inspectorate, with our leading legal counsel advising that there are strong grounds to expect a positive appeal outcome. The appeal is to be heard via a public inquiry commencing on 27^th July 2021.

 

For the Loxley Portland gas discovery, Xodus Group provided an updated volumetric report which calculates the discovery contains a significant mean case gross gas initially in place ("GIIP"), i.e., gas in the ground before any future production) of 49 billion cubic feet ("bcf"). The portion of GIIP estimated to be recoverable to surface via any future production, the mean gross recoverable resource, is cited as 34 bcf, representing an estimated recovery factor of approximately 70%.

 

In June 2020 the Environment Agency ("EA") issued UKOG with the necessary permit to drill and test Loxley, covering all environmental aspects of the proposed scheme of works including a Loxley-1z sidetrack well.

 

West Sussex County Council's ("WSCC") Planning Committee approved, by a significant 10-1 majority vote, a 2-year planning permission extension to its Broadford Bridge-1/1z Kimmeridge oil discovery, located in licence PEDL234 (UKOG 100%). The planning extension, which was recommended by WSCC's planning officer, will expire on 31^st March 2022.

 

Arreton, Isle of Wight, PEDL331 (UKOG 95%)

UKOG filed a planning application with the Isle of Wight Council for the appraisal drilling and flow testing of the Arreton oil discovery. The Company has spent considerable time and undertaken much research to minimise the potential noise and visual impact of the site, which will be largely screened from public view.

The Company has chosen a site adjacent to land which already supports non-agricultural commercial uses. The land immediately to the east supports the Wight Farm Anaerobic Digestion Energy Power Station and to the west supports the Blackwater Quarry and ancillary operations connected to the working of aggregates. Post period UKOG also filed a permit application with EA.

 

Turkey, Resan Licence (UKOG 50%)

Post period, in October 2020, UKOG completed a Participation Agreement and Joint Operating Agreement with Aladdin Middle East Ltd ("AME"), an independent oil company with 60 years of operational experience in Turkey, to take a 50% non-operated working interest in the 305 km² Resan Licence. UKOG will take an active technical role in a 4-well oil appraisal and step-out exploration drilling programme designed primarily to assess the commercial viability of the significant Basur-Resan oil discovery. The transaction was approved by the Turkish government and completed in January.

 

The Resan Licence lies within the SE Anatolian basin, a geological continuation of the prolific Zagros "fold-belt" petroleum system within the foothills of the Taurus-Zagros mountains in Iraq, Iran and Turkey, one of the Middle East's major oil producing areas. Multiple producing oil fields lie to the immediate west and south east of the Licence, containing significant proven recoverable reserves.

 

In November 2020 UKOG quickly built on this exciting entry into Turkey by submitting an application for three further exploration licences covering four blocks, again with a 50% interest and AME as operator. The four blocks contain identified undrilled geological lookalikes to Basur-Resan. UKOG is awaiting the Turkish government's decision on our application.

 

Other Assets

As operator of PEDL143 (UKOG 67.5%), UKOG carried out a detailed study examining the viability of drilling the A24 (formerly Holmwood) Portland prospect from selected sites outside the Surrey Hills Area of Outstanding Natural Beauty, each over 3 km from the target. UKOG concluded that the required long-reach/shallow target-depth wells were neither technically viable nor economically feasible. Consequently, UKOG and its partners have relinquished their interests in the licence. The associated investment into the licence has been written down.

Stable oil production with low water cut continues from the Horndean oil field in Hampshire (UKOG 10%).

UKOG completed the restoration and replanting of the Markwells Wood well site. UKOG also relinquished the related PEDL126 licence.

 

Kris Bone                                                                                               Matt Cartwright

Operations Director                                                                            Commercial Director

 

FINANCIAL REVIEW

 

Income Statement

During the period long term oil production commenced at Horse Hill via HH-1, which along with the oil production from Horndean, generated revenues of £0.91 million (2019: £0.21 million). However, as interventions and optimisation work were required at HH-1 to achieve stable Portland production, overall costs for the year were necessarily higher than would be normally expected under any future stable production scenario (as is currently the case). These pre-stable production period costs thus resulted in a gross loss for the period of £1.63 million inclusive of Depletion, Depreciation and Amortisation costs of £1.37 million (2019 gross profit £0.12 million).

 

The reporting period saw a significant reduction in Administration expenses from £3.94 million during the period ending 30 September 2019 to £1.76 million during the period ending September 2020.

 

As Horse Hill was granted regulatory permissions to commence long-term oil production via HH-1, the investment in HH-1 was transferred from an exploration and evaluation asset to tangible assets. This was initially transferred at the carrying value and subsequently impaired.  Based on a net present value calculation of HH-1, £4.783 million was capitalised as a tangible asset. The carrying value of our investments in HH-1 was higher than £5.03 million and therefore the variance was impaired and expensed during the year. The lower net present value assessment was primarily due to a combination of lower than expected flow rates resulting from earlier than expected water ingress and slightly lower than expected Brent crude oil prices.

 

Therefore, alongside our relinquishment of the PEDL143 licence there has been an Impairment expenses of £14.195 million (2019: £0.02 million).

 

In addition, at Horse Hill the investment in HH-2/2z of £5.79 million was written down due to the sub-economic flow rates, again resulting from early and significant water ingress. Going forwards, and as detailed above, HH-2z is now scheduled to be utilised as a water injector to support reservoir pressure for HH-1.

 

The net effect of the above was to increase the retained losses for the year (i.e. the total over the Company's history) to £19.04 million compared to £5.39 million in the previous financial year.

 

Balance Sheet

 

During 2020, as a result of the effects of the impairments and write downs to our exploration and oil & gas assets, non-current assets decreased to £37.78 million (2019: £46.65 million). These were charged to the income statement as highlighted above. Total current assets decreased from £8.07 million at 30 September 2019 to £2.38 million at 30 September 2020. The main reduction in current assets being in our cash position which reduced from £6.89 million at 30 September 2019 to £1.63 million at 30 September 2020.

 

Our total liabilities decreased to £5.07 million (2019: £13.50 million) which was as a result of repaying our convertible loan note in its entirety and reducing our trade and other payables.

 

Cash Flow and Financing

 

During the reporting period net cash outflow from operating activities prior to cash outflows in relation to investing activities was £2.77 million (2019: cash outflow of £5.73 million). The reduced outflow is primarily attributable to lower administration costs.

 

UKOG raised £7.73 million during the reporting period via the issue of equity, which along with the cash and cash equivalents at the beginning of the period of £6.89 million was used primarily to fund our investing activities (£7.74 million). In addition, the funds raised were used to fully repay the outstanding balance of our convertible loan notes and associated fees (£1.83 million).

 

As a result, UKOG had a £5.23 million net decrease in cash, and £1.63 million in cash and cash equivalents at the end of the period.

 

Kiran Morzaria

Finance Director

 

KEY PERFORMANCE INDICATORS

 

UKOG has adopted both financial and non-financial key performance indicators (KPI's) to measure progress against our strategy. These KPI's will develop and new ones added as we progress our strategy.

 

Financial KPI's
	Production (bopd)	Operating costs (£/bbl)*	Operating Cashflow £m
	Year 2020 2019 (bopd) 128 137   HH-1 entered into production during March and are included in the current year rates. The rates are reported on a gross basis	Year 2020 2019 (£/bbl) 28 18   During March 2020 HH-1 entered into production, however, due to optimisations and interventions which were carried out during the period costs were elevated and have reduced since stable production was reached.	Year 2020 2019 £m (2.77) (5.74)   Operating cash outflows reduced during the reporting period as a result of lower administrative expenses.
Reason for choice	The Company production will provide operating cashflow to fund our investments and deliver shareholder value. At this point in time we receive production from our ownership in the Horndean oil field which is not under our control and the Horse Hill oil field of which we own 85.635%	Operating costs per bbl will be a key focus for our operations and the focus for the Company will be to keep these costs low so as to improve the cash we can generate from our producing assets. Currently the operating costs are in relation to our ownership of the Horndean oil field (10% ownership), which is not under our control and the Horse Hill oil field of which we own 85.635%	Our cashflow is key to providing funding investing in the business and pursue our strategy. This has to date predominantly been via equity and debt funding
How we measure	Daily and weekly production is monitored for all producing assets and reported to senior management. Production forecasts are prepared during the year to measure progress against the production target.	Operating costs will be monitored closely, to ensure that budget targets are being met.	Cashflow forecasts are reported to the Board on a regular basis, to ensure our progress is within our budget. Long-term forecasts are also provided to ensure that the strategy of the business can be adequately funded

 

* Operating costs exclude depreciation of the oil asset and indirect management charges from UKOG

 

Non-Financial KPI's
	Lost time injuries (LTI & LTI Frequency)
	2020 - 0, LTI Frequency 0; 2019 - 0, LTI Frequency 0
Reason for choice	Health & safety is our highest priority and we look to provide the highest level of protection to all our stakeholders
How we measure	We track HSE lagging indicators during the year, which are reported to the Board. We aim to have zero LTI's. If we have an LTI it is investigated and a clear remedial action is identified and implemented

 

RESERVES AND RESOURCES

 

The reporting period saw significant material growth across all net attributable reserve and resource categories, with mid or P50 case contingent resources more than doubling in 2020 (see Table 1, below).

 

Total aggregate net discovered 2C (mid case) contingent resources and 2P (mid case) reserves now stand at 37.48 mmboe, the largest in the Company's history.

 

Table 1: Significant growth in UKOG net attributable reserves & resources during the reporting period

 

Period	UKOG 2P Reserves (producing, mmbbl)	UKOG 2C Resources (discovered, mmboe)	UKOG P50 Prospective Resources (undiscovered, mmbbl)
2019-20	0.13	37.35	13.38
2018-19	0.11	16.30	10.00
Increase (%)	13%	129%	34%

 

Contingent resources (i.e., recoverable resources discovered by drilling, see Table 3, below) increased significantly, with net 2C (mid or P50 case) resources increasing by 129% compared to the last reporting period.  The increase was primarily via the acquisition of the Basur-Resan discovery in Turkey (net UKOG 2C 15.3 mmbbl) and by the addition of recoverable Loxley gas volumes from Xodus' September 2020 competent person's ("CP") volumetric study (net UKOG 5.5 mmboe or 32 bcf). 

 

The Company's net attributable reserves increased by 13% versus last year due to better than predicted performance at the Horndean field, where the past year's production history demonstrated a lower than expected field decline rate.

 

At Horse Hill, the start of long term Portland production from HH-1 has clearly added proven producing, probable and possible reserves. However, following October 2020's intervention and subsequent production optimisation trials, which concluded in January 2021, there has only been a few months 'stable' producing conditions to assess well declines upon which to base reserves. 

 

Consequently, as CP's generally require around a minimum of one year's stable production history to adequately capture and predict the longer term decline performance of a well (Horndean's performance, as above, demonstrates the importance of a year-long decline period), it was decided that the best practice was to assess reserves only when a more robust and fully representative decline curve analysis could be undertaken. The Company will thus wait until the next reporting period to calculate the field's reserves following the first full year of stable production.

 

For guidance purposes only, the Company's qualified persons ("QP") consider that the 1C value of 0.6 mmbbl carried for Horse Hill in Table 3, below, provides a reasonably representative view of HH-1's likely technical recoverable Portland reserves at the end of 2020. UKOG's QP's also currently expect that much of Horse Hill's Portland contingent resources, less produced volumes, will likely transfer into reserves following a future external CP review.

 

Discovered prospective resources (i.e., undiscovered but drill ready within identified exploration prospects) also significantly increased, with the best case (mid or P50 case) rising by 34% from last year. This is primarily due to the addition of Prospect A in the Turkey Resan M47-b1,b2 licence, which more than offsets the relinquishment of the A24 prospect in PEDL143.

 

Should the Company's joint application with AME for four further exploration blocks to the south and southwest of the Resan licence, prove successful, it is likely that net attributable contingent and prospective resources could both increase by a further significant amount. The identified extensions to oil discoveries and undrilled leads and prospects within these four blocks are currently estimated to be of similar size to the Company's Basur-Resan discovery.

 

Table 2: Recoverable Reserves mmbbl: Producing Fields, Gross and Net (as of 31 December 2020)

 

Asset	UKOG % Interest	Gross mmbbl			Net Attributable mmbbl			Operator
		1P	2P	3P	1P	2P	3P
Horndean 1	10	1.12	1.26	1.41	0.11	0.13	0.14	IGas
TOTAL (mmbbl)² ³					0.11	0.13	0.14

 

Notes: 

1. DeGolyer and MacNaughton ("D&M") for IGas Feb 2021, 2. Horse Hill reserve volumes await external CP verification following 12 months of stable production history, see text above, 3. Avington is temporarily shut-in, consequently no reserves are attributable, recoverable resources shown in Table 3 below.

 

Table 3: Contingent Resources mmbbl/mmboe (i.e., discovered and drill ready recoverable volumes)

Asset	Licence	UKOG %	Gross mmbbl/mmboe				Net Attributable mmbbl/mmboe				Operator
			1C	2C	3C	mean	1C	2C	3C	mean
Turkey,  Basur-Resan 4	M47 b1, b2	50	14.9	30.5	67.0	37.2	7.5	15.3	33.5	18.6	AME
Horse-Hill Portland 1	PEDL137	85.64	0.6	1.5	3.6	1.9	0.5	1.3	3.1	1.6	HHDL
Horse-Hill Kimmeridge 6	PEDL137	85.64	0.4	1.6	6.1	2.7	0.3	1.4	5.2	2.3	HHDL
Loxley Gas 3 ,5	PEDL234	100	3.1	5.5	9.3	5.9	3.1	5.5	9.3	5.9	UKOG
Arreton Portland 1	PEDL331	95	1.4	3.7	10.3	5.1	1.3	3.5	9.8	4.9	UKOG
Arreton Oolite 1	PEDL331	95	6.2	10.8	17.6	11.5	5.9	10.3	16.7	11.0	UKOG
Avington 2	PEDL070	5	0.5	0.7	1.0	0.7	0.03	0.04	0.05	0.04	IGas
Horndean 2	PL211	10	0.3	0.8	1.3	0.8	0.03	0.08	0.13	0.08	IGas
TOTAL mmboe							18.6	37.3	77.8	44.4

 

Notes:

1. Xodus June 2018, estimates for Horse Hill are deterministic based upon per well recoveries, 2. D&M for IGas Feb 2021, estimates for Horndean and Avington are deterministic, not probabilistic, 3. Xodus September 2020, probabilistic based upon range of recovery factors, 4. Xodus June 2020, probabilistic based upon range of recovery factors, 5. 1 million bbl oil equivalent (mmboe) = 5.8 bcf, 6. RPS Jun 2019.

 

Table 4: Prospective Resources (i.e., exploration, drill ready but as yet undiscovered recoverable volumes)

 

Asset	Licence	UKOG %	Gross mmbbl					Net Attributable mmbbl
			Low	Best	High	Mean	Low	Best	High	Mean
Turkey, Prospect A 2	M47 b1,b2	50	4.0	8.7	17.0	9.9	2.0	4.4	8.5	5.0
Godshill Portland 1	PEDL331	95	1.7	6.8	17.4	8.6	1.6	6.5	16.5	8.2
Arreton North 1	PEDL331	95	0.5	2.7	7.6	3.6	0.5	2.6	7.2	3.4
TOTAL							4.1	13.4	32.3	16.6

 

Notes:

1. Xodus June 2018, Godshill possesses the same underlying Lower Oolite potential as Arreton but this target was not reviewed by Xodus in 2018, to be included in any subsequent external CP review, 2. Xodus June 2020

 

HEALTH, SAFETY AND THE ENVIRONMENT

 

UKOG is committed to providing, so far as is reasonably practicable, a quality working environment that is safe and one that poses no risks to the health and safety of our employees, contractors, the local community and stakeholders. 

 

The health & safety of employees and the public, and the protection of the environment are core business objectives of UKOG. They rank equally with the company's other business objectives.

 

Health, safety and environmental (HSE) risks associated with the business practices of UKOG are addressed through the effective implementation of our HSE Policy, which is designed to ensure that every person who works for UKOG is responsible for ensuring that health and safety is managed in all aspects of our business.

 

The Company's HSE aspirations are: "get it right, first time, every time with no accidents, no harm to people, the ecology and the environment".

 

To achieve the identified objectives, we will ensure that all necessary and reasonable resources are made available. We will confirm that objectives are being met by reviewing and reporting on performance and auditing the implementation and operation of UKOG's HSE Management System.

 

Our full HSE framework is available on our website: http://www.ukogplc.com/page.php?pID=101

 

Health & Safety Review

 

UKOG has completed drilling and testing operations and initiated production activities at Horse Hill. In addition, the Markwells Wood well site was restored and re-planted.

 

There were no lost time injuries on any of UKOG's sites during the reporting period or post period. The lost time injury frequency was also zero. Two minor injuries occurred during Horse Hill-2z drilling operations. There was also a minor fire in the engine housing of the BDF28 drilling rig. The fire was quickly extinguished by site operatives, without injury.

 

The Environment Agency (EA) and Health and Safety Executive made a number of site visits, linked to Horse Hill well operations and production equipment.

 

The Competent Authority (CA) under Regulation 6 of the Control of Major Accident Hazards Regulations (2015) ("COMAH") was notified of the intention of the Horse Hill site to operate as a COMAH facility. UKOG is engaged with the CA to define a scope for Horse Hill to operate within COMAH regulations following its transition from well test to long-term production.

 

UKOG continues to keep good housekeeping standards on its sites. The Company continuously monitors all its live operations for noise, ensuring noise from its sites is kept to a minimum and is compliant with the levels set by the relevant site planning approval. UKOG only utilises service companies that can demonstrate commitment to our HSE standards.

 

Any complaints received are reviewed and responded to. Communication links have been established with the residents close to our sites, who can call UKOG at any time.

 

At Horse Hill, the Company successfully operated an enclosed flare for the well testing programme and in production operations. The flare, commonly used at landfill sites, is clean burning, without odour and produces low emissions. It was the first such clean-burn, fully enclosed flare employed in the UK onshore oil & gas industry.

 

Community Engagement

Our plans to be as open as possible on our dealings with local residents, particularly at Horse Hill, were hampered by illegal activities by Extinction Rebellion. On one occasion, we invited dozens of our neighbours to visit the site, but were forced to cancel at short notice because the date and time of the visit was leaked to activists who had threatened to disrupt the meeting.

 

Because of our strict Covid-19 policy to ensure the safety of our staff and visitors, we kept visits to Horse Hill to a minimum.

 

Ahead of submitting a planning application to the Isle of Wight Council, UKOG held a Community Engagement Day for Arreton residents in mid-December 2019. The seven-hour exhibition was attended by an estimated 150 neighbours and interested parties, including local politicians and councillors.

 

The Company meets and communicates regularly with local police to give operational updates.

 

Route to Development

 

UKOG operates within a highly regulated industry, led by the Oil and Gas Authority, a Government agency reporting to the Department for Business, Energy & Industrial Strategy, who among other things are responsible for checking a company's financial and operational competency before issuing a Petroleum Exploration and Development Licence ("PEDL") and other regulatory approvals.

 

Once a potential site has been identified, UKOG must secure landowner consent and a land lease to operate on the land, before EA assess any risk to water and air quality, as well as the arrangements for waste management.

 

In parallel with seeking EA permits, discussions with local planning authorities begin. They in turn seek the views of the local community and statutory consultees. The Health and Safety Executive also regulates and monitors all onshore oil & gas exploration and production activities.

 

DIRECTORS' SECTION 172 STATEMENT

 

The following disclosure describes how the Directors have had regard to the matters set out in section 172(1)(a) to (f) and forms the Directors' statement required under section 414CZA of The Companies Act 2006. This new reporting requirement is made in accordance with the new corporate governance requirements identified in The Companies (Miscellaneous Reporting) Regulations 2018, which apply to company reporting on financial years starting on or after 1 January 2019.

 

The matters set out in section 172(1) (a) to (f) are that a Director must act in the way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:

 

•    the likely consequences of any decisions in the long term;

•    the interests of the company's employees;

•    the need to foster the company's business relationships with suppliers/customers and others;

•    the impact of the company's operations on the community and environment;

•    the company's reputation for high standards of business conduct; and

•    the need to act fairly between members of the company.

 

As set out above in the Strategic Report the Board remains focused on providing for shareholders through the long term success of the Company. The means by which this is achieved is set out further below.

 

Likely Consequences of any Decisions in the Long Term

The Chairman's Statement, the Chief Executive Officer's Commentary and the Strategic Review set out the Company's strategy. In applying this strategy, particularly in seeking new projects and developing current ones to deliver reserves and resource growth. The Board assesses the long term future of our projects and investments with a view to shareholder return. The approach to general strategy and risk management strategy of the group is set out in the Statement of Compliance with the QCA Code of Practice (Principles 1 and 4).

 

Interest of Employees

The Group has a very limited number of employees and all have direct access to the Executive Directors on a daily basis and to the Chairman, if necessary. The Group has a formal Employees' Policy manual which includes processes for confidential report and whistleblowing.

 

Need to Foster the Company's Business Relationships with Suppliers/Customers and Others

The Group continuously interacts with a variety of suppliers and customers important to its success. The Group strives to strike the right balance between engagement and communication. Furthermore, the Company works within the limitations of what can be disclosed to the various stakeholders with regards to maintaining confidentiality of market and/or commercially sensitive information. Our suppliers are fundamental to ensuring that the Group can execute its development and production strategy on time and on budget. Using quality suppliers ensures that as a business we meet the high standards of performance that we expect of ourselves and vendor partners. Our management team work closely with our suppliers, via one on one meetings and where possible supplier site visits and facility reviews to ensure our suppliers are able to meet our requirements.

 

Impact of the Company's Operations on the Community and Environment

The Group takes its responsibility within the community and wider environment seriously. Its approach to its social responsibilities is set out in the Statement of Compliance with the QCA Code of Practice (Principle 3).

 

The Desirability of the Company Maintaining a Reputation for High Standards of Business Conduct

The Directors are committed to high standards of business conduct and governance and have adopted the QCA Code of Practice. Where there is a need to seek advice on particular issues, the Board will consult with its lawyers and nominated advisers to ensure that its reputation for good business conduct is maintained.

 

The Need to Act Fairly Between Members of the Company

The Board's approach to shareholder communication is set out in the Statement of Compliance with the QCA Code of Practice (Principle 2). The Company aims to keep shareholders fully informed of significant developments in the Group's progress. Information is disseminated through Stock Exchange announcements, website updates and, where appropriate, video-casts.

 

During 2020 the Company issued numerous stock exchange announcements on operational issues. All information is made available to all shareholders at the same time and no individual shareholder, or group of shareholders, is given preferential treatment.

 

CORPORATE GOVERNANCE

 

Introduction to Governance

The Directors recognise that good corporate governance is a key foundation for the long-term success of the Company. As the Company is listed on the AIM market of the London Stock Exchange and is subject to the continuing requirements of the AIM Rules. The Board has therefore adopted the principles set out in the Corporate Governance Code for small and midsized companies published by the Quoted Companies Alliance ("QCA Code"). The principles are listed below with an explanation of how the Company applies each principle, and the reasons for any aspect of non-compliance.

 

1. Establish a strategy and business model which promote long- term value for shareholders

 

 

UK Oil & Gas Plc provides shareholders with a full discussion of corporate strategy within our Annual Report. A dedicated section explains how we will establish long term shareholder value.

 

The Company is focused around 3 key strategic goals: Increase production and recovery from its existing asset portfolio, grow the asset portfolio through select onshore development and appraisal projects, actively manage costs and risks through operational and management control of the entire process of exploring, appraising and developing its assets.

 

The Management team actively evaluates projects that simultaneously de-risk the current portfolio and create long-term shareholder value. Projects are evaluated based on many characteristics to mitigate risk to our current activities they include but are not limited to alignment with the Company's core competencies, geography, time horizon and value creation. Further, a core component of the Company's activities includes an active dialogue with our legal and legislative advisors to ensure the Company remains up to date on current legislation, policy and compliance issues.

 

Key business challenges and how they may be mitigated are detailed in the Strategic Report.

 

2. Seek to understand and meet shareholder needs and expectations

 

 

UKOG encourages two-way communication with institutional and private investors. The Company's major shareholders maintain an active dialogue to and ensure that their views are communicated fully to the Board. Where voting decisions are not in line with the company's expectations the Board will engage with those shareholders to understand and address any issues. The Company Secretary is the main point of contact for such matters.

 

The Company seeks out appropriate platforms to communicate to a broad audience its current activities, strategic goals and broad view of the sector and other related issues. This includes but is not limited to media interviews, website videos in -person investor presentations and written content.

 

Communication to all stakeholders is the direct responsibility of the Senior Management team. Managers work directly with professionals to ensure all inquiries (through established channels for this specific purpose such as email or phone) are addressed in a timely matter. And that the Company communicates with clarity on its proprietary internet platforms. Senior management routinely provides interviews to local media, and business reporters in support of the company's activities. The Board routinely reviews the Company communication policy and programmes to ensure the quality communication with all stakeholders.

 

3. Take into account wider stakeholder and social responsibilities and their implications for long-term success

 

In all endeavours, the Company gives due consideration to the impact on its neighbours. The Company seeks out methodologies, processes and expertise in order to address the concerns of the non-investment community. As such, it actively identifies the bespoke needs of local communities and their respective planners.

 

For example, the company provides for local hotlines and establishes community liaison groups to address local questions and concerns.

 

UKOG seeks to maintain positive relationships within the communities we operate. As such, UKOG is dedicated to ensuring:

 

 

• Open and honest dialogue;

• Engagement with stakeholders at all stages of development;

• Proactively address local concerns;

• Actively minimise impact on our neighbours; and

• Adherence to a strict health and safety code of conduct

 

As a responsible OGA approved and EA permitted UK operator, UKOG is committed to utilising industry best practices and achieving the highest standards of environmental management and safety.

 

Our operations:

 

• Continuously assess and monitor environmental impact;

• Promote internally and across our industry best practices for environmental management and safety; and

• Constant attention to maintaining our exemplary track record of safe oil & gas production.

 

For more information please refer to the Annual Report as well as the Community section within the Company's corporate website.

 

4. Embed effective risk management, considering both opportunities and threats, throughout the organization

 

 

Risk Management in the Annual Report details risks to the business, how these are mitigated and the change in the identified risk over the last reporting period.

 

The Board considers risk to the business at every Board meeting (at least 4 meetings are held each year) and the risk register is updated at each meeting. The Company formally reviews and documents the principal risks to the business at least annually.

 

Both the Board and senior managers are responsible for reviewing and evaluating risk and the Executive Directors meet at least monthly to review ongoing trading performance, discuss budgets and forecasts and new risks associated with ongoing trading.

 

5. Maintain the Board as a well-functioning, balanced team led by the chair

 

 

Oversight of UKOG is performed by the Company's Board of Directors. Allen Howard, the Non-Executive Chairman, is responsible for the running of the Board and Stephen Sanderson, the Chief Executive, has executive responsibility for running the Company's business and implementing Company strategy. All Directors receive regular and timely information regarding the Company's operational and financial performance.

 

Relevant information is circulated to the Directors in advance of meetings. In addition, minutes of the meetings of the Directors of the UK subsidiaries are circulated to the Board. All Directors have direct access to the advice and services of the Company Secretary and are able to take independent professional advice in the furtherance of the duties, if necessary, at the company's expense.

 

The Board comprises two Executive Directors and two Non-Executive Directors with a mix of significant industry and business experience within public companies. The Board considers that all Non-Executive Directors bring an independent judgement to bear. All Directors must commit the required time and attention to thoroughly fulfil their duties.

 

The Board has a formal schedule of matters reserved to it and is supported by the Audit, Remuneration, Nomination and AIM Rules compliance committee. The Schedule of Matters Reserved and Committee Terms of Reference are available on the Company's website and can be accessed on the Corporate Governance page of the website.

 

6. Ensure that between them the Directors have the necessary up-to-date experience, skills and capabilities

 

 

The Nomination Committee will determine the composition of the Board of the Company and appointment of senior employees. It will develop succession plans as necessary and report to the Directors. Where new Board appointments are considered the search for candidates is conducted, and appointments are made, on merit, against objective criteria and with due regard for the benefits of diversity on the Board, including gender.

 

The Company Secretary supports the Chairman in addressing the training and development needs of Directors.

 

As a small company, all members of the Board share responsibility for all Board functions. As such the Board will from time to time engage outside consultants to provide an independent assessment.

 

7. Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement

 

 

The Board intends to carry out an internal evaluation on individual Directors on an ad-hoc basis in the form of peer reviews and appraisals. The individual reviews and appraisals are used to identify group and individual targets which are reviewed and assessed at the end of the financial year.

 

8. Promote a corporate culture that is based on ethical values and behaviours

 

 

The Company is committed to maintaining and promoting high standards of business integrity. Company values, which incorporate the principles of corporate social responsibilities (CSR) and sustainability, guide the Company's relationships with clients, employees and the communities and environment in which we operate. The Company's approach to sustainability addresses both our environmental and social impacts, supporting the Company's vision to remain an employer of choice, while meeting client demands for socially responsible partners.

 

Company policy strictly adheres to local laws and customs while complying with international laws and regulations. These policies have been integral in the way group companies have done business in the past and will continue to play a central role in influencing the Group's practice in the future.

 

The ethical values of UKOG including health, safety, environmental, social and community and relationships, are set out in the Annual Report.

 

9. Maintain governance structures and processes that are fit for purpose and support good decision-making by the Board

 

The Company has adopted a model code for directors' dealings and persons discharging managerial responsibilities appropriate for an AIM company, considering the requirements of the Market Abuse Regulations "MAR"), and take reasonable steps to ensure compliance is also applicable to the Company's employees (AIM Rule 21 in relation to directors' dealings).

 

The Corporate Governance Statement details the company's governance structures, the role and responsibilities of each director. Details and members of the Audit Committee, Remuneration Committee, Nomination Committee and AIM Rules compliance committee can be found in the Annual Report.

 

10. Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders

 

 

The Company encourages two- way communication with both its institutional and private investors and responds quickly to all queries received. The Chief Executive talks regularly with the Company's major shareholders and ensures that their views are communicated fully to the Board.

 

The Board recognises the AGM as an important opportunity to meet private shareholders. The Directors are available to listen to the views of shareholders informally immediately following the AGM.

 

To the extent that voting decisions are not in line with expectations, the Board will engage with shareholders to understand and address any issues.

 

In addition to the investor relations activities carried out by the Company as set out above, and other relevant disclosures included on this Investor Relations section of the Company's website, reports on the activities of each of the Committees during the year will be set out in the Annual Report.

 

While building a strong governance framework we also try to ensure that we take a proportionate approach and that our processes remain fit for purpose as well as embedded within the culture of our organisation. We continue to evolve our approach and make ongoing improvements as part of building a successful and sustainable company.

 

Board of Directors

 

The Board consists of a team of experienced multidisciplinary members who are committed to delivering shareholder value.

 

Allen D Howard, Non-Executive Chairman

 

Allen Howard was Senior Vice President of Houston-based Premier Oilfield Laboratories, having been Chief Operating Officer of well analysis experts Nutech. Allen also held senior positions with Schlumberger. He holds a degree in Chemical Engineering from Texas Tech University and an MBA from Mays Business School in Texas.

 

Stephen Sanderson, Chief Executive

 

Stephen Sanderson joined UK Oil & Gas Plc in September 2014 was appointed Executive Chairman and Chief Executive in July 2015 and in August 2018 ceded his role as Executive Chairmen to Allen D Howard as part of UKOG improvements in corporate governance. A highly experienced petroleum geologist, oil industry veteran and upstream energy business leader, with over 30 years operating experience, Stephen is a proven oil finder and has been instrumental in the discovery of more than 12 commercial conventional fields, including the Norwegian Smorbuk-Midgaard field complex.

 

Stephen held a variety of senior management roles for ARCO (which was acquired by BP in 2000), Wintershall AG (a subsidiary of German chemical giant BASF) and three junior start-ups. He created and ran successful new exploration businesses in Africa, Europe and South America. He has significant technical and commercial expertise in the petroleum systems of Africa, the North Sea, Norway, onshore UK & Europe, South America, the South Atlantic, Middle East, Asia, India, Australia and the USA. He is a graduate and Associate of the Royal School of Mines, Imperial College, London, a Fellow of the Geological Society of London and a member of the American Association of Petroleum Geologists.

 

Kiran Morzaria, Finance Director

 

Kiran Morzaria holds a Bachelor of Engineering (Industrial Geology) from the Camborne School of Mines and an MBA (Finance) from CASS Business School. He has extensive experience in the mineral resource industry working in both operational and management roles. Mr Morzaria spent the first four years of his career in exploration, mining and civil engineering.  He then obtained his MBA and became the Finance Director of Vatukoula Gold Mines Plc for seven years. He has served as a director of a number of public companies in both an executive and non-executive capacity; he is a non-executive director of European Metals Holdings Ltd and the Chief Executive Officer for Cadence Minerals Plc.

 

Nicholas Mardon Taylor, Non-Executive Director

 

Nicholas Mardon Taylor served as the Chief Financial Officer of Hurricane Energy PLC from May 2012 until January 2016. He has worked in the oil industry for over 35 years, his first involvement in the North Sea being in the early licensing rounds. He was with Hurricane from 2005 to January 2016 when he was the Company's first CFO and was subsequently responsible for the Company's Environmental Management System.

 

Board and Committee Membership

 

Member	Board Title	Audit Committee Title	Remuneration Committee Title
Allen D Howard	Non-Executive Chairman	Member	Member
Stephen Sanderson	Chief Executive
Kiran Morzaria	Finance Director
Nicholas Mardon Taylor	Non-Executive Director	Chairman	Chairman

 

The Board and its Committees

 

 

The Board of the Company consists of two Executive Directors and two Non-Executive Directors. The Non-Executive Directors are not considered independent under the FRC Code as they hold options in the Company. However, the Board considers that the Non-Executive Directors are independent of management under all other measures and is able to exercise independence of judgement.

 

The Board is responsible for formulating, reviewing and approving the Company's strategy, financial activities and operating performance. Day-to-day management is devolved to the executive directors, who are charged with consulting the Board on all significant financial and operational matters. The Board retains ultimate accountability for governance and is responsible for monitoring the activities of the executive team.

 

The roles of Chairman and Chief Executive are split in accordance with best practice. The Chairman has the responsibility of ensuring that the Board discharges its responsibilities. The Chairman is also responsible for the leadership and effective working of the Board, for setting the Board agenda, and ensuring that Directors receive accurate, timely and clear information. No one individual has unfettered powers of decision.

 

The two Executive Directors are the Chief Executive and Finance Director. The Chief Executive has the overall responsibility for creating, planning, implementing, and integrating the strategic direction of the Company. This includes responsibility for all components and departments of the business. The Chief Executive ensures that the organisation's leadership maintains constant awareness of both the external and internal competitive landscape, opportunities for expansion, customer base, markets, new industry developments and standards.

 

The Finance Director works alongside the Chief Executive and has overall control and responsibility for all financial aspects of company strategy. The Finance Director takes overall responsibility of the Company's accounting function and ensures that Company's financial systems are robust, compliant and support current activities and future growth. The Finance Director will coordinate corporate finance and manage company policies regarding capital requirements, debt, taxation, equity and acquisitions as appropriate.

 

The Board met regularly during the year. Tubulated below is the attendance of Board Members during the reporting period. The majority if the meetings held during the year were in relation to the issue of equity associated with a convertible loan note, given that this was largely procedural it was not deemed necessary for the non-executive board members to attend these meetings.

 

Board Member	Meetings attended (out of a total possible)
Allen D Howard	9/20
Stephen Sanderson	20/20
Kiran Morzaria	20/20
Nicholas Mardon Taylor	9/20

 

Audit Committee

 

 

The audit committee consists of Nicholas Mardon Taylor (Chairman) and Allen D Howard. Prior to 1 August the audit committee consisted of Allen D Howard (Chairman) and Kiran Morzaria. As part of The Company's adoption of the QCA Code on 1 August 2019 it was resolved that the Audit Committee will consist of two Non-Executive Members of the Board. The Audit Committee met once during the year.

 

Board member	Meetings attended (out of a total possible)
Allen D Howard	1/1
Nicholas Mardon Taylor (Appointed as Chairman 1 August 2019)	1/1

 

The principal duties and responsibilities of the Audit Committee include:

 

·      Overseeing the Company's financial reporting disclosure process; this includes the choice of appropriate accounting policies

·      Monitoring the Company's internal financial controls and assess their adequacy

·      Reviewing key estimates, judgements and assumptions applied by management in preparing published financial statements

·      Annually assessing the auditor's independence and objectivity

·      Making recommendations in relation to the appointment, re-appointment and removal of the company's external auditor

 

Remuneration Committee

 

 

The Remuneration Committee consists of Nicholas Mardon Taylor (Chairman) and Allen D Howard. Prior to 1 August the Remuneration Committee consisted of Allen D Howard (Chairman) and Kiran Morzaria. As part of The Company's adoption of the QCA Code on 1 August it was resolved that the Remuneration Committee will consist of two Non-Executive Members of the Board. The Remuneration Committee did not meet during the year.

 

The principal duties and responsibilities of the Remuneration Committee include:

 

·      Setting the remuneration policy for all Executive Directors

·      Recommending and monitoring the level and structure of remuneration for senior management

·      Approving the design of, and determining targets for, performance related pay schemes operated by the company and approve the total annual payments made under such schemes

·      Reviewing the design of all share incentive plans for approval by the board and shareholders

 

None of the Committee members have any personal financial interest (other than as shareholders and option holders), conflicts of interest arising from cross-directorships or day-to-day involvement in the running of the business. No director plays a part in any financial decision about his or her own remuneration.

 

Internal Controls

 

The Board is responsible for establishing and maintaining the Company's system of internal controls and reviewing its effectiveness. The procedures that include financial, operational, health and safety, compliance matters and risk management (as detailed in the Strategic Report) are reviewed on an ongoing basis.

The Company's internal control procedures include the following:

 

 

• Board approval for all significant projects, including corporate transactions and major capital projects;

• The Board receives and reviews regular reports covering both the technical progress of projects and the Company's financial affairs to facilitate its control;

• There is a comprehensive budgeting and planning system for all items of expenditure with an annual budget approved by the Board;

• The Company has in place internal control and risk management systems in relation to the Company's financial reporting process and the Company's process for preparing consolidated accounts. These systems include policies and procedures to ensure that adequate accounting records are maintained, and transactions are recorded accurately and fairly to permit the preparation of consolidated financial statements in accordance with IFRS; and

• The Audit Committee reviews draft annual and interim reports before recommending their publication to the Board. The Audit Committee discusses with the Finance Director, Financial Controller and external auditors the significant accounting policies, estimates and judgements applied in preparing these reports.

 

The internal control system can only provide reasonable and not absolute assurance against material misstatement or loss. The Board has considered the need for a separate internal audit function but, bearing in mind the present size and composition of the Company, does not consider it necessary at the current time.

 

UK Bribery Act

 

UKOG has reviewed the appropriate policies and procedures to ensure compliance with the UK Bribery Act. The Company continues actively to promote good practice throughout the Company and has initiated a rolling programme of anti-bribery and corruption training for all relevant employees.

 

Relations with Shareholders

 

Communications with shareholders are considered important by the Directors. The primary contact with shareholders, investors and analysts is the Chief Executive. Other senior management, however, regularly speak to investors and analysts during the year.

 

Company circulars and press releases have also been issued throughout the year for the purpose of keeping investors informed about the Company's progress and in accordance with AIM regulations.

 

The Company also maintains a website (www.ukogplc.com) that is regularly updated and contains a wide range of information about the Company.

 

DIRECTORS' REMUNERATION REPORT

 

This report explains our remuneration policy for Directors and sets out how decisions regarding Directors' pay for the period under review have been taken.

 

Directors' Remuneration Policy

 

The Company's policy is to maintain levels of remuneration sufficient to attract, motivate and retain senior executives.

 

Executive Director remuneration currently consists of basic salary, pensions, annual bonus (based on annually set targets) and long-term incentives (to reward long term performance).

 

The Company seeks to strike an appropriate balance between fixed and performance-related reward so that the total remuneration package is structured to align a significant proportion to the achievement of performance targets, reinforcing a clear link between pay and performance. The performance targets for staff, senior executives and the Executive Director are each aligned to the key drivers of the business strategy, thereby creating a strong alignment of interest between staff, Executive Directors and shareholders.

 

The Remuneration Committee will continue to review the Company's remuneration policy and make amendments, as and when necessary, to ensure it remains fit for purpose and continues to drive high levels of executive performance and remains both affordable and competitive in the market.

 

Annual Statement

 

During the year no annual cash bonus scheme was adopted, as the current remuneration was viewed as sufficient to attract, motivate and retain senior executives. At the end of July the Directors agreed to an interim salary cut of between 20% and 50% of their monthly salary; this was agreed due to the impact COVID-19 had on the Group's revenues due to a significant reduction in the price of oil.

 

During the year and as required under the Pensions Act of 2008 the Company implemented an automatic enrolment pension scheme and contributed up to 3% of executive directors qualifying earnings. During a review of option awards in September 2020 the Remuneration Committee approved the issue of options to Directors. Further details can be found below.

 

Remit of the Remuneration Committee

 

The remit of the Remuneration Committee is provided in the Corporate Governance section.

 

Share Price Movements During the Year

 

The Company's share price as at 30 September 2020 was £0.0016 per share. The share price range during the year was £0.0016 to £0.0115 (2019 - £0.0082 to £0.0208).

 

Current Arrangement in Financial Year (Audited)

 

 

Executive Directors are employed under rolling contracts with notice periods of 12 months or less from the Company. The Non-Directors are employed under rolling contracts with notice period of three months, under which they are not entitled to any pension, benefits or bonuses.

 

The Directors' emoluments for the year were as follows:

 

		Year ended 30 September 2020
		Salary	Bonus	Pension	Share Based Payments	Total
Director	Board Title	£'000	£'000	£'000	£'000	£'000
Allen D Howard	Non-Executive Chairman	54	-	-	-	54
Stephen Sanderson	Chief Executive	297	-	1	-	298
Kiran Morzaria	Finance Director	115	-	-	-	115
Nicholas Mardon Taylor	Non-Executive Director	49	-	-	-	49
Total Directors		515	-	1	-	516

 

		Year ended 30 September 2019
		Salary	Bonus	Pension	Share Based Payments	Total
Director	Board Title	£'000	£'000	£'000	£'000	£'000
Allen D Howard	Non-Executive Chairman	60	-	-	29	89
Stephen Sanderson	Chief Executive	314	310	1	142	766
Kiran Morzaria	Finance Director	116	-	-	37	153
Nicholas Mardon Taylor	Non-Executive Director	55	-	-	23	78
Total Directors		545	310	1	231	1,086

 

As at 30 September 2020, the outstanding long-term incentives, in the form of options, held by the Directors who served during the period are set out in the table below.

 

	At 1 October 2019	Issued during the year	lapsed / exercised during the year	At 30 September 2020	Exercise price	Date from which exercisable	Expiry date
Share options	No.	No.	No.	No.	£
	million	million	million	million
Stephen Sanderson	25	-	(25)	-	0.0040	21/01/2015	31/12/2019
Stephen Sanderson	25	-		25	0.0115	25/05/2017	24/05/2022
Stephen Sanderson	25	-		25	0.0130	27/09/2020	25/09/2024
Total	75	-		50

 

	At 1 October 2019	Issued during the year	lapsed / exercised during the year	At 30 September 2020	Exercise price	Date from which exercisable	Expiry date
Share options	No.	No.	No.	No.	£
	million	million	million	million
Kiran Morzaria	20.0			20.0	0.0115	25/05/2017	24/05/2022
Kiran Morzaria	6.5			6.5	0.0130	27/09/2020	25/09/2024
Total	26.5			26.5

 

	At 1 October 2019	Issued during the year	lapsed / exercised during the year	At 30 September 2020	Exercise price	Date from which exercisable	Expiry date
Share options	No.	No.	No.	No.	£
	Million	million	million	million
Allen Howard	10			10	0.0115	25/05/2017	24/05/2022
Allen Howard	5			5	0.0130	27/09/2020	25/09/2024
Total	15			15

 

	At 1 October 2019	Issued during the year	lapsed / exercised during the year	At 30 September 2020	Exercise price	Date from which exercisable	Expiry date
Share options	No.	No.	No.	No.	£
	million	million	million	million
Nicholas Mardon Taylor	4			4	0.0130	27/09/2020	25/09/2024
Total	4			4

 

REPORT OF THE DIRECTORS

 

The Directors present their annual report together with the audited consolidated financial statements of the Group for the Year Ended 30 September 2020.

 

Business Review and Future Developments

 

A review of the business and future developments are outlined in the Strategic Report.

 

Principal Activity and Business Review

 

The principal activity of the Group is exploring for, appraising and developing oil & gas assets.

 

Results and Dividends

 

Loss on ordinary activities of the Group after taxation amounted to £18,957,000 (2019: Loss £5,394,000).  The Directors do not recommend the payment of a dividend (2019: £nil). The Company has no plans to adopt a dividend policy in the immediate future.

 

Principal Risks and Uncertainties

 

Information of the principal risks and uncertainties facing the Group is included in the Principal Risks and Uncertainties section of the Strategic Report.

 

Financial Risk Management Objectives and Policies

 

The Group's principal financial instruments are trade receivables, trade payables and cash at bank, and borrowings.  The main purpose of these financial instruments is to fund the Group's operations.

 

It is, and has been throughout the period under review, the Group's policy that no trading in financial instruments shall be undertaken. The main risk arising from the Group's financial instruments is liquidity risk.  The Board reviews and agrees policies for managing this risk and this is summarised below.

 

Liquidity Risk

 

The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of equity and its cash resources. Further details of this are provided in the principal accounting policies, headed 'going concern'.

 

Key Performance Indicators

 

During the reporting period the Group readmitted as an operating company and adopted Key Performance Indicators, which are detailed in the Key Performance Indicator section of the Strategic Report.

 

Going Concern

 

The Directors note the substantial losses that the Group has made for the year ended 30 September 2020. The Directors have prepared cash flow forecasts for the period ending 31 December 2022, which takes into account anticipated costs savings, the current forward curve of Brent crude oil and external funding. In addition, within the forecasts, the Group has delayed its capital expenditure programme across its assets as the effects of Covid-19 have significantly constrained the supply of specialist oil sector services, equipment and civil engineering activities.

 

The cost structure of the Group comprises a high proportion of discretionary spend and therefore in the event that cash flows become constrained, costs can be quickly reduced to enable the Group to operate within its available funding.

 

The oil price assumptions within the cash flow forecasts are based on forward rates. However, given the current effects of Covid-19 and recent "OPEC+" meetings there is a high degree of uncertainty around these forward rates.

 

These forecasts demonstrate that the Group has sufficient cash funds available to allow it to continue in business for a period of at least twelve months from the date of approval of these financial statements.  Accordingly, the financial statements have been prepared on a going concern basis.

 

Events After the Reporting Period

 

Events after the Reporting Period are outlined in Note 26 to the Financial Statements.

 

Corporate Governance

 

Information in relation to the Corporate Governance of the Group is contained within the Corporate Governance Section of the Strategic Report.

 

Suppliers' Payment Policy

 

The Group's policy is to agree terms and conditions with suppliers in advance; payment is then made in accordance with the agreement provided the supplier has met the terms and conditions. Suppliers are typically paid within 30 days of issue of invoice.

 

Charitable Contributions

 

 

During the year the Group made charitable donations amounting to £Nil (2019 - £Nil).

 

Substantial Shareholdings

 

 

As at 17 March 2021, the Company had been notified of the following substantial shareholdings in the ordinary share capital:

 

Shareholder	Number of Ordinary Shares	Holding %
Hargreaves Lansdown (Nominees) Limited	1,614,977,774	12.47%
Interactive Investor Services Nominees Limited	1,341,630,240	10.36%
Hargreaves Lansdown (Nominees) Limited	1,227,889,628	9.48%
HSDL Nominees Limited	975,377,241	7.53%
Barclays Direct Investing Nominees Limited	897,198,462	6.93%
Hargreaves Lansdown (Nominees) Limited	819,468,309	6.33%
Interactive Investor Services Nominees Limited	761,268,945	5.88%
HSDL Nominees Limited	617,244,442	4.76%
HSBC Client Holdings Nominee (Uk) Limited	474,611,762	3.66%
Pershing Nominees Limited	407,951,557	3.15%

 

Current Board & Directors Interests

 

 

Allen D Howard	Non-Executive Chairman
Stephen Sanderson	Chief Executive Officer
Kiran Morzaria	Finance Director
Nicholas Mardon Taylor	Non-Executive Director

 

The directors hold options to purchase new ordinary shares in the Company, details of which are specified in the Renumeration Report. In addition, Kiran Morzaria holds 4,508,178 ordinary shares in the Company.

 

Auditor

 

A resolution to reappoint PKF Littlejohn LLP as auditor will be proposed at the forthcoming Annual General Meeting ("AGM").

 

Annual General Meeting

 

 

Notice of the forthcoming Annual General Meeting has been enclosed separately.

 

Statement of Directors' Responsibilities

 

 

The Directors are responsible for preparing the annual report and financial statements in accordance with applicable law and regulations.

 

Company law requires the directors to prepare consolidated financial statements for each financial year.  The Directors have prepared the consolidated accounts in accordance with International Financial Reporting Standards as adopted by the EU ("adopted IFRS").  The consolidated financial statements are required by law to give a true and fair view of the state of affairs of the Group and Company and of the profit or loss for that period. In preparing these financial statements, the Directors are required to:

 

·      Select suitable accounting policies and then apply them consistently;

·      Make judgements and estimates that are reasonable and prudent;

·      State whether applicable IFRS's have been followed, subject to any material departures disclosed and explained in the financial statements; and

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

 

The Directors are responsible for keeping adequate accounting records, which disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the consolidated financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. The Company's website is maintained in accordance with AIM Rule 26.

 

Legislation in the United Kingdom governing the preparation and dissemination of consolidated financial statements may differ from legislation in other jurisdictions.

 

Statement as to Disclosure of Information to the Auditor

 

 

As at the date of this report the serving directors confirm that:

 

·      So far as each Director is aware, there is no relevant audit information of which the Group's auditors are unaware, and

·      They have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the Group's auditor are aware of that information.

 

ON BEHALF OF THE BOARD

 

Stephen Sanderson

Director

 

REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF UK OIL & GAS PLC

 

OPINION

 

We have audited the financial statements of UK Oil & Gas plc (the 'parent company') and its subsidiaries (the 'group') for the year ended 30 September 2020 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated and Parent Company Statements   of Financial Position, the Consolidated and Parent Company Statements of Changes in Equity, the Consolidated and Parent Company Statements of Cash Flow and 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 international accounting  standards in conformity with the requirements of the Companies Act 2006   and as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

 

In our opinion:

 

•      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 30 September 2020 and of the group's and parent company's loss for the year then ended;

•      the group financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006;

•      the parent company financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 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.

 

BASIS FOR OPINION

 

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 are independent of the group and 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. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

CONCLUSIONS RELATING TO GOING CONCERN

 

We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:

 

•      the directors' use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or

•      the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the company's ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.

 

OUR APPLICATION OF MATERIALITY

 

For the purposes of determining whether the financial statements are free from material misstatement, we define materiality as a magnitude of misstatement that makes it probably that the economic decisions of a reasonable knowledgeable person, relying on the financial statements, would be changed or influenced. We also determine a level of performance materiality which we use to assess the extent of testing needed to reduce an appropriately low level in the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.

 

Materiality for the group financial statements was set at £788,000. This was calculated based in 1.5% of net assets for the year. Net assets was used as the benchmark for the basis of materiality being the key area of relevance to stakeholders in assessing the financial performance of the group in its early years of production. The same basis for the calculation of materiality for the parent company financial statements was used, however restricted to £787,999, to ensure a level below that of group materiality as required by ISA (UK) 600.

 

We also determine a level of performance materiality which we use to assess the extent of testing needed to reduce to an appropriately low level probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. Performance materiality for the group and part company was set at £472,800 and £472,799 respectively, being 60% of materiality for the financial statements as a whole.

 

We agreed to report to those charged with governance all corrected and uncorrected misstatements we identified through our audit with a value in excess of £39,400 for both the group and parent company. We also agreed to report any other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds.

 

AN OVERVIEW OF THE SCOPE OF OUR AUDIT

 

The scope of our audit was influenced by our application of materiality. The quantitative and qualitative thresholds for materiality determine the scope of our audit and the nature, timing and extent of our audit procedures.

 

As part of our planning, we assessed all components of the group for their significance under ISA (UK) 600 in order to determine the scope of the work to be performed. Those entities of the group which were considered to be significant components, being UK Oil & Gas plc, Horse Hill Developments Limited and UKOG (137/246) Holdings Limited, were subject to full scope audit procedures, and those considered to be material, being UKOG (234) Limited and UKOG (37/246) Limited were subject to audit procedures on significant and identified risk areas only, in accordance with ISA (UK) 600 for group reporting purposes. Procedures were then performed to address the risks identified and for the most significant assessed risks of material misstatement, the procedures are outlined below in the key audit matters section of this report. The remaining components were subject to analytical review procedures.

 

We did not rely on the work of any component auditors.

 

KEY AUDIT MATTERS

 

Key audit matters are those matters that, in our professional judgment, 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) 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, and we do not provide a separate opinion on these matters.

 

Key Audit Matter	How the scope of our audit responded to the key audit matter
Carrying value and classification of exploration and evaluation assets (Note 11)   There is a risk that the assets are incorrectly valued or need to be impaired. As Horse Hill entered the production stage this year, there is also a risk that assets are incorrectly included as intangibles when they should be reclassified to Property Plant and Equipment ("PPE").	Our work in this area included: § Reviewing the impairment workings prepared by management, and reconciling the key inputs into the calculation to supporting documentation and ensuring the carrying value of the assets is not impaired; § Vouching a sample of additions in the period to supporting documentation and ensuring they have been capitalised in line with the relevant IFRSs; § Reviewing the effect of COVID-19 on the group and the potential profitability of said assets; and § Vouching a sample of assets at the year end to the licences in place and ensure they are valid.
Carrying value and classification of producing assets (Note 12)   There is a risk of material misstatement around the carrying value of PPE, whether any impairment is required and if the correct assets have been included within PPE as opposed to Exploration and Evaluation Assets.	Our work in this area included: § Reviewing managements valuation workings, and reconciling the key inputs into the calculation to supporting documentation and ensuring the carrying value of the assets is fairly stated; § Reviewing the effect of COVID-19 on the group and the potential profitability of said assets; § Reviewing of the unit of production method of depletion and performing a recalculation thereto and ensuring the value is fairly stated; § Verifying the mathematical accuracy of the calculations prepared by management; § Reviewing the key inputs used within the calculations and challenging all estimates used and obtaining the relevant support; and § Testing a sample of assets to support to ensure existence and correct classification.

 

OTHER INFORMATION

 

The other information comprises the information included in the annual report, other than the financial statements and our auditor's report thereon. The directors are responsible for the other information. Our opinion on the group and parent company 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. In connection with our audit of the financial statements, 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 audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. 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.

 

We have nothing to report in this regard.

 

OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006

 

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.

 

MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION

 

In the light of the knowledge and understanding of the Group and the 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.

 

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:

 

•      adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or

•      the Parent Company financial statements are not in agreement with the accounting records and returns; or

•      certain disclosures of Directors' remuneration specified by law are not made; or

•      we have not received all the information and explanations we require for our audit.

 

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.

 

A further description of our responsibilities for the audit of the financial statements is located 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 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 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 Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

 

Alistair Dominic Roberts (Senior Statutory Auditor)                                                                                                     15 Westferry Circus

For and on behalf of PKF Littlejohn LLP                                                                                                                            Canary Wharf

Statutory Auditor                                                                                                                                                                   London E14 4HD

 

FINANCIAL STATEMENTS

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR YEAR ENDED 30 September 2020

 

	Notes	30 Sep 2020	30 Sep 2019
		£'000	£'000
Revenue		908	213
Cost of sales
Depletion, Depreciation and Amortisation		(1,367)	(225)
Other Cost of Sales		(1,171)	(97)
Gross (loss)/profit)		(1,630)	109
Operating expenses
Administrative expenses		(1,755)	(3,939)
Impairment expense	11	(10,652)	(2)
Foreign exchange gains/(losses)		(16)	(45)
Share based payments expense	22	0	(693)
Operating (loss)	6	(14,053)	(4,788)
Gain on settlements of financial instruments
Finance Income		0	1
Finance Cost	8	(286)	(607)
Share of associate loss	14	-	-
Decommissioning Expense	20	-	-
Exploration Write-off	11	(6,598)	-
(Loss) before taxation		(20,937)	(5,394)
Taxation	9		-
Retained (Loss) for the year		(20,937)	(5,394)
Retained (loss) attributable to;
Equity holders of the Parent		(20,937)	(5,394)
Non-Controlling Interests		-	-
		(20,937)	(5,394)

There are no other comprehensive income or expenses during the two reported periods to disclose.

 

Earnings per share		Pence	Pence
Basic and diluted	10	(0.24)	(0.09)

 

The accompanying accounting policies and notes form an integral part of these financial statements