HYDROCARBONS WEEKEND RECORD: 07 to 09 SEPTEMBER 2007
Compiled by J. Brock (FINN)
International Developments:
(Kazakhstan)
Over a month has elapsed since Kazakhstan gave a foreign oil group led by Italy's Eni 60 days to agree how to compensate the government for damage caused by delays and cost overruns at the giant Kazakhstan field in the Caspian Sea. There appears to be no agreement– except that the Kazakhstan dispute is messy for all concerned. The business is understood to have consulted its US lawyers and is prepared to force the Eni group to concede more favourable terms.
Regional Developments:
(Argentina)
The Argentine government has ordered the closure of Royal Dutch Shell’s oil refinery in Buenos Aires for environmental purposes. A shrunken supply of diesel resulting in the closure means farmers not be able to efficiently sew their next year’s crops. The planned expansion of corn and soybean fields could be put on hold if there isn’t enough diesel to go around.
(Colombia)
When President Hugo Chávez began his second term as Venezuela’s president he suggested that changes to Article 303, his country’s Constitution, were intended to expand the State's control over the domestic hydrocarbons sector. Proposed changes were drafted with a view to prioritise state control over the domestic market. Under President Chávez' proposed changes to the Constitution, the State has control over the gas sector, not provided for under Article 303 of the 1999 Constitution. The article’s draft also substitutes the word "activity" with the word "exploitation," suggesting that some hydrocarbon-related activities will not be handed over to the State, as long as the “”Organic Law on Hydrocarbons and the “Organic Law on Gas Hydrocarbons” are not modified. These regulations are expected to be reformed through the President’s ‘special’ ruling powers.
Local Developments:
Desire Petroleum Plc
Transition to International Financial Reporting Standards
1. Introduction
Desire Petroleum plc today releases an update on how International Financial Reporting Standards (IFRS) are likely to affect the Group’s earnings and net assets.
The purpose of this update is to provide information for the June half-year comparative, and to document the accounting policies to be used in the current year.
As an AIM-listed company, the Group is required to adopt International Financial Reporting Standards (IFRS) with effect from 1 January 2007.
The first financial information to be reported by the Group in accordance with IFRS will be for the six months to 30 June 2007, but the requirement to present comparative information means that a balance sheet prepared in accordance with IFRS at 1 January 2006 is required.
This announcement includes the consolidated results of the Group converted from a UK Generally Accepted Accounting Principles (UK GAAP) basis to an IFRS basis for the period to 30 June 2006, the year to 31 December 2006, and balance sheets as at 31 December 2005, as at 30 June 2006 and as at 31 December 2006.
This document explains the significant accounting policy changes from the accounting policies adopted under UK GAAP for the year ended 31 December 2006.
Attached are the Group Income Statements in IFRS format for the six months ended 30 June 2006 and for the year ended 31 December 2006 (section 5), and the Group Balance Sheets in IFRS format as at 31 December 2005, as at 30 June 2006, and as at 31 December 2006 (Section 6).
2. Basis of preparation
IFRS 1 ‘First Time Adoption of International Financial Reporting Standards’ (IFRS 1) sets out the rules for an entity preparing its first IFRS financial statements. The entity is required to determine the IFRS accounting policies in accordance with the IFRS that are in place at the date of transition (1 January 2006) and, in general, apply them retrospectively. There are a number of possible exemptions from the retrospective application to assist the entity in making the transition. The Group has taken the following exemptions:
Business combinations: the Group has elected not to restate business combinations prior to the transition date (1 January 2006).
Cumulative translation differences: the Group has elected to adopt the exemption that resets all cumulative translation gains and losses for all foreign operations to zero at the transition date.
Share-based payments: the Group has elected to exclude share-based arrangements that were granted prior to 8 November 2002 or that have vested prior to the transition date
The Group has continued to apply the full cost accounting policy, explained further in the intangible asset accounting policy note in section 7, as permitted by IFRS 6 ‘Exploration for and Evaluation of Mineral Resources’ (IFRS 6)
3. Impact on Profit
There is no difference in Operating loss, Loss before tax, or Loss for the period between UK GAAP and IFRS for the period ended 30 June 2006 and for the year ended 31 December 2006. Consequently, no reconciliation between UK GAAP and IFRS is included. The presentation of the Group Income Statement under IFRS is shown in section 5.
4. Impact on Net Assets
There is no difference in net assets between UK GAAP and IFRS as at 31 December 2005, as at 30 June 2006, and as at 31 December 2006. The presentation of the Group Balance Sheet under IFRS is shown in section 6.
There are some differences within the classification of non-current assets, and with the classification of other reserves. These are explained in Appendices 1 to 3.
Accounting Policies
The accounting policies set out below are expected to be formally adopted by the Board when it prepares its first Annual Report under IFRS for the financial year ended 31 December 2007.
First time adoption of IFRS
The Group’s date of transition to IFRS is 1 January 2006. IFRS 1 ‘First Time Adoption of International Financial Reporting Standards’ generally requires companies to apply their accounting policies retrospectively. There are a number of possible exemptions from this general rule to assist companies in making the transition to reporting under IFRS. The Group has taken the following exemptions:
a. Business Combinations
The Group has elected not to restate business combinations prior to the transition date (1 January 2006).
b. Cumulative translation differences
The Group has elected to adopt the exemption that resets all cumulative translation gains and losses for foreign operations to zero at the transition date.
c. Share-based payments
The Group has elected to exclude share-based arrangements that were granted prior to 8 November 2002 or that have vested prior to the transition date.
Basis of preparation
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), and International Financial Reporting Interpretations Committee (IFRIC) interpretations as adopted by the European Union, and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historic cost convention
Basis of consolidation
The Group accounts consolidate the accounts of the Holding Company and all its subsidiary undertakings, all of which were made up to 31 December 2007.
Goodwill and intangible assets
a. Goodwill
When the fair value of the consideration for an acquired undertaking exceeds the fair value of its separable net assets, the difference is treated as purchased goodwill and is capitalised. When the fair value of the consideration for an acquired undertaking is less than the fair value of its separable net assets, the difference is taken directly to the income statement. Goodwill is not amortised but is reviewed at least annually for impairment.
b. Acquired intangibles
Intangible assets, which are capable of being recognised separately and measured reliably on acquisition of a business, are capitalised at fair value on acquisition. Where these assets have a finite life, they are amortised over the period that they are expected to generate benefits, but generally not exceeding ten years.
c. Research and development
Research expenditure is recognised as an expense as incurred. Costs incurred on development projects are recognised as intangible assets when it is probable that the project will be a technological and commercial success. Other development expenditure is recognised as an expense as incurred.
d. Computer software
Computer software costs are amortised over their expected useful lives, as follows:
Computer software 20% straight-line basis
e. Oil and gas expenditure
The Group applies the full-cost method of accounting, in accordance with IFRS 6 ‘Exploration for and Evaluation of Mineral Resources’ (IFRS 6), under which expenditure relating to the acquisition, exploration, and evaluation of oil and gas interests, including an appropriate share of directly attributable overheads and relevant financing cost, is capitalised. If no discoveries are made, the accumulated capitalised costs will be written off through the income statement. Where the facts and circumstances indicate that exploration and evaluation costs exceed their recoverable amount, the intangible costs are tested for impairment.
The cost of plant acquired to carry out exploration activities is treated as a tangible asset. The depreciation of such plant is capitalised as intangible assets.
Property, Plant and Equipment (PPE)
a. Oil and gas interests
The Group applies the full-cost method of accounting, in accordance with IFRS 6 ‘Exploration for and Evaluation of Mineral Resources’ (IFRS 6), and the Statement of Recommended Practice 'Accounting for Oil and Gas Exploration, Development, Production and Decommissioning Activities', under which expenditure relating to the development of oil and gas interests, including an appropriate share of directly attributable overheads and relevant financing cost, is capitalised in cost pools on the basis of income generating units.
Capitalised costs are amortised on a unit of production basis, over proven and probable reserves, taking account of estimates of future costs of development relating to those reserves.
Depreciation of plant acquired to carry out exploration activities is capitalised as intangible assets.
b. Other
Tangible fixed assets are stated at cost or valuation less depreciation. Depreciation is provided at rates calculated to write off the cost or valuation, less estimated residual value of each asset, over its expected useful life, as follows:
Equipment and fixtures 20% straight-line basis
Consortia and farm out agreements
In addition to holding licences on its own account, the Group is a member of consortia. The Group's proportionate share of the consortia costs are included in intangible assets or PPE, as appropriate. During the year, the Group continued with a farm out agreement with a third party in respect of certain licences. The Group’s proportionate share of the costs is included in intangible assets.
Investments
Investments in subsidiary undertakings are shown at cost less provision for estimated impairments in value.
Foreign currencies
a. Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Sterling, which is the company’s functional and presentation currency.
b. Transactions and balances
Transactions denominated in foreign currencies are translated into the functional currency at the exchange rate prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates ruling at the year-end.
Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying investment hedges.
Exchange differences arising from the translation of the balance sheets and income statements of foreign operations into Sterling are recognised as a separate component of equity on consolidation. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.
Taxation
a. Current income tax
Current tax, including UK corporation tax, is provided on amounts expected to be paid or recovered using the tax rates and laws that have been enacted or substantially enacted by the balance sheet date.
b. Deferred income tax
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates and laws that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary differences are controlled by the Group, and it is probable that the temporary differences will not reverse in the foreseeable future.
Financial instruments
The Group uses certain financial instruments in its operating and investing activities that are appropriate to its strategy and circumstances.
Financial instruments currently comprise cash and short-term debtors and creditors. The Group regularly reviews the funding opportunities available to it in order to finance its operations, including considering the use of borrowings, as well as equity, to fund short-term cash requirements.
The main risks arising from the Group's present use of financial instruments are currently exchange rate risk relating to the Group's non-Sterling cash resources. The addition of any borrowings to the Group's portfolio of financial instruments would introduce interest rate risk.
Share-based compensation
The Group operates equity-settled, share-based compensation plans. The economic cost of awarding shares and share options is recognised as an expense in the income statement equivalent to the fair value of the benefit awarded. The fair value is determined by reference to option pricing models. The charge is recognised in the income statement over the vesting period of the award.
Source: London Stock Exchange
Analysis:
Speculation that OPEC will do as promised and keep a lid on production has helped the price of Light Sweet Crude to increase over the weekend. Brent Crude dropped by 17Cents.
Locally the news that Desire Petroleum had a lower pre tax loss than last year is taken in our stride with expectation high that there could be a rig in the area by early next year.
Markets:
The markets have lost significantly last week with drops in share prices blamed on higher than usual or expected unemployment data in the United States.
Relevant Share Prices:
Share prices have eased over the past few days with insignificant losses on share prices after huge jumps last week. Some shares still continue to grow and are expected to remain steady at least during the next week.
