JKX Oil & Gas plc Annual Report 201137At a glance01-17Board statements18-23Operational review24-36Financial review37-47CSR review48-61Directors' reports62-83Financial statements84-136Financial reviewStrong commodity prices, particularly for Ukrainian gas and LPG sustained our profi tability in 2011 from our Ukrainian subsidiary Poltava Petroleum Company ('PPC') despite reduced production volumes.In 2011 we produced $82.1m in profit from operations compared to $95.0m (before exceptional items) in 2010. This is an extraordinary result given reduced production of 12% and the absorption of the effect of the new tax code which increased our production based taxes in Ukraine by $61.9m from $5.2m in 2010 to $67.1m in 2011. The new tax code is discussed in detail in note 25 of the financial statements. Cash flow from operations of $124.2m (2010: $146.3m) in addition to gross borrowings* of $40.5m has provided us with the required funding to complete construction of our Russian subsidiary's gas processing facility, continue investment in our Ukrainian asset complex, explore in Hungary and to maintain a year-end total cash balance of $28.9m (2010: $62.0m). Profit for the yearThe profit after tax was $59.1m for 2011 (2010: $21.2m). On a comparative basis, this was $22.2m below profit in 2010 of $81.3m Cynthia DubinFinance Director" We have had another capital intensive year funded by operating cash fl ow and new borrowings. Our profi ts and cash fl ow have been rebased by the new production tax burden in Ukraine however we expect the realisations from our oil and gas production to remain strong through 2012 to enable us to pay down our short term borrowings."* Gross Borrowings is Borrowings gross of unamortised effective interest and arrangement fees.(excluding exceptional items). This translates into basic earnings per share of 34.37 cents (2010: 47.56 cents). This is the combined result of a 23% increase in revenues to $236.9m (2010: $192.9m) due to increased oil and gas realisations, despite a 12% overall production decline, maintaining operating and administrative charges at $49.6m (2010: $51.1m) and absorbing a $61.9m additional production tax cost (2011: $67.1m versus 2010: $5.2m).The Group profit before tax of $82.1m was reduced to a $59.1m net profit by a current tax charge of $21.8m (2010: $30.3m) and deferred tax charge of $1.2m (2010: credit $30.7m).RevenueThe Group benefited from high international oil and gas prices. The Group enjoyed a 42.1% improvement in the oil price achieved moving from $69.15/bbl in 2010 to $98.27/bbl in 2011. From a total revenue perspective, the gas Total revenue($m)0708091011236.9196.5192.9207.0184.523%>

38price strengthening dwarfed the oil price increase as volumes of gas sold represent 75% (2010: 69%) of our total production volume. The Group gas price achieved rose 28.4% from $268/Mcm in 2010 to $344/Mcm in 2011. The Ukrainian gas price achieved had the biggest impact increasing from $284/Mcm at the beginning of the period to $418/Mcm at year-end, giving an absolute price increase of 47.2% during the year.The other important component to impact this year's revenue was the commissioning of the new LPG facility within the PPC operational complex in July. The Group achieved $10.9m in LPG revenue for the second half of the year as we were able to take advantage of high LPG prices in Ukraine, realising an average price of just under $1,000/tonne. These positive price movements more than offset the production decline of 12% (7% and 5% attributable to oil and gas, respectively, on a boe basis) due to reduced production from Hungary, greater than expected oil decline rates in producing wells and some disappointing well results in Ukraine. Future Ukrainian gas prices Recent press contains much speculation concerning Ukrainian gas prices and the Ukrainian push for a renegotiation of the gas supply agreement between Russia and Ukraine; this has a direct impact on the industrial tariff that applies to our Ukrainian gas sales. The two countries have yet to reach any agreement on whether this contract will or will not be adjusted and consequently, the terms of the Supply Agreement of January 2009 still prevail. This resulted in a border price of $416/Mcm during the first quarter of 2012, translating into the price of gas in the industrial market in excess of $430/Mcm. The Ukrainian Parliament recently passed the Budget Law on the assumption that the import price remains at $416/Mcm for the remainder of 2012.Operating profitThe operating profit of $82.1m was 13.6% below the same figure of $95.0m in 2010 (before exceptional item). This is a small reduction in comparison to the stark increase in production based taxes in Ukraine, increasing the Group's production based taxes by 1,363% from $1.39/boe to $20.33/boe. Our charge for production based taxes increased by 1190% from $5.2m in 2010 to $67.1m in 2011 as a direct result. Within cost of sales, underlying operating costs remained constant at $17.2m (2010: $17.9m). Despite the 12.4% fall in production, the depreciation, depletion and amortisation fell only 2.8% as the unit of production charge was increased due to higher capital costs in the year, increasing the unit of production charge from $8.82/bbl in 2010 to $9.80/bbl in 2011.Administrative expenses remained constant at $25.7m (2010: $25.3m). Taxation The total tax charge for the year was $22.9m (2010: credit $0.4m) comprising current tax of $21.8m (2010: $30.3m) and deferred tax $1.2m (2010: credit $30.7m). The fall in current tax charge reflects a combination of the lower profitability being driven down by the production based taxes noted above, in addition to a reduced rate of corporation tax applicable in Ukraine. The effective all-in total tax rate (i.e. combining production and corporation taxes) has increased despite the fall in the corporation tax charge.Revenue - Gas ($m) Gas realisations ($ per Mcf)Revenue - Oil ($m)070809101107080910110708091011143.19.7481.5112.97.5978.8118.17.1983.176.45.47121.859.43.95122.527%3%28%>>>