JKX Oil & Gas plc Annual Report 201145At a glance01-17Board statements18-23Operational review24-36Financial review37-47CSR review48-61Directors' reports62-83Financial statements84-136What's the risk?How we manage itcreated to oversee planning and implementation. These teams report regularly to the Board. Recent examples of such teams include those established for the Rudenkovskoye development in Ukraine, and at the Koshekhablskoye workover programme and gas processing facility construction in Russia.We look to engage only those suppliers that have the expertise and proven capability to deliver the required service or equipment at market prices and regularly monitor costs against the agreed budgets as the project progresses. Following the completion of our capital-intensive construction programme in Russia during the year, our capital expenditure risk has reduced.We operate policies, procedures and controls intended to regularise procurement within strict levels of delegated authority.All significant purchases are tendered. Each operating entity manages a schedule of approved suppliers. All contracts are constructed in accordance with templates, targeted at the jurisdictions of supply and delivery, taking account of reviews of both internal lawyers and, where dictated by procedure, by third party legal advisers.Capital expenditure continuedfunding challenges and to projects which may havediminished in value or could result in a negative economic return. Such deviations can result from anumber of causes including general economic andindustry specific cost inflation, variations in foreignexchange rates, deficient project planning and control of project spend.KPI affected Capital expenditureProcurement and contract management An inability to negotiate, monitor and control purchases and contracts can increase costs to the Group and/or cause delays to project completions and operations, negatively impacting production, cash flow and value generation.KPI affected Production costsReturn on average capital employedLOWMED-Financial risks continuedManagement monitors rolling forecasts of the Group's liquidity on the basis of expected cash flow to ensure any remedial action can be taken with as much lead time as possible. The Group finances current exploration and development activities using a combination of cash on hand, operating cash flow generated from the sale of gas, condensate, LPG and crude oil production, borrowings under its net $10m credit facility with Crédit Agricole (the 'Credit Facility') and the proceeds from the $50m pre-paid swap with Credit Suisse International. The timing and nature of some of the Group's exploration and development activities are discretionary and therefore the Group prioritises these activities according to the available finance.The Board carefully manages the timing of the Group's discretionary spend to enable the pay down of the short term debt and to improve future liquidity.Liquidity Reduction in liquidity and working capital could result indelay or cancellation of capital projects. In extreme circumstances, this could impact day to day operations and the Group's ability to continue as a going concern.Future capital requirements for exploration, appraisaland development activities can be difficult to predict as they are driven by the results of the Group's ongoing exploration and development programmes, in particular the cash requirements of the Russian project.The continued increase in the cash requirements of ourRussian project during 2011 due to the schedule delays and the short-term finance from Credit Suisse that wasused to meet the unplanned costs will continue to affectthe Group's liquidity.KPI affected Return on average capital employedLOWHIGH>ProbabilityPotential impactChange from 2010

46The Board and management recognise the constant need for expert advice to ensure full compliance with local and international regulations and laws. Our strategy is to employ skilled local staff in the countries of operation and provide them with on-going training opportunities. In addition to such specialist staff employed in the Group's operating entities, the Company has established legal, tax and accounting advisors. This is aimed at ensuring that the Company complies with applicable statutory, employment and environmental regulation and laws and that its tax and duty obligations are properly assessed and paid when due.We ensure that good relationships are maintained with all key stakeholders in our significant assets through regular dialogue and on-going communications.The Board regularly reviews announcements by national and local governments in Ukraine and Russia on their future plans with regard to certain economic factors, in particular those that impact future oil and gas prices and related costs and taxes.Country exposureWe operate in a variety of emerging markets. Most ofour operations and assets are located in Ukraine and Russia which display emerging market characteristicswhich means that the legislation and businesspractices regarding banking operations, foreigncurrency transactions and taxation are constantlyevolving as those governments attempt to manage theeconomies.Other risks inherent in conducting business in anemerging market economy include, but are not limited to, volatility in the financial markets and the generaleconomy. Over 90% of our oil and gas assets are basedin Ukraine and Russia.The Group's operations and financial position may be affected by these uncertainties.KPI affected Return on average capital employedMEDMED--In Ukraine, PPC has at times since 1994 sought clarification of their status regarding a number of production related taxes and has been subject to anumber of such taxes. PPC continues to seek clarification from professional advisors and the tax authorities concerning rules of calculation and payment of various production related taxes to 31 December 2010. A new tax code became effective in Ukraine on 1 January 2011 replacing most of the previous tax laws. The new tax code has removed uncertainty over the applicability of rental fee payment by PPC from 2011 and accordingly PPC has been liable to and is paying such fees. We continue to assess the impact on PPC of the new tax code and seek professional advice on its interpretation where this is unclear.Tax legislationGovernments are increasingly concerned about theamount of speculation and volatility in many basiccommodities, particularly energy and regulators areplaying an increasingly active role in the oil and gas industry in various forms, including regulation,protectionism and increased taxation.Emerging markets sometimes bring in new laws which are subject to varying interpretations and changes which may be applied retrospectively. This can result inthe Group being subject to uncertainties relating to thedetermination of its tax as well as other liabilities.Management's interpretation of tax legislation may at times not coincide with that of the tax authorities.As a result, the tax authorities in the countries ofoperation may challenge transactions which couldresult in additional taxes, penalties and fines whichcould have a material adverse effect on the Group's financial position and results of operations.KPI affected Production costsReturn on average capital employedMEDHIGHWhat's the risk?How we manage itExternal risksProbabilityPotential impactChange from 2010