JKX Oil & Gas plc Annual Report 201147At a glance01-17Board statements18-23Operational review24-36Financial review37-47CSR review48-61Directors' reports62-83Financial statements84-136Most of our gas sold in Ukraine and its share of Hungarian gas sales is through market related contracts to significant and creditworthy customers. This minimises exposure to abrupt price movements, ensuring sales are as closely matched as possible, in terms of timing and volume, to production. The balance of oil and gas production in Ukraine is sold by way of auctions, conducted with a frequency aimed to achieve as close as practicable the aforementioned matching principle. On 14 June 2011 the Group hedged 540,000 barrels of oil over the period September 2011 to November 2012 (36,000 bbl per month), as part of a $50m pre-payment. The hedge was set at $94 Urals with a cap of $130 Urals. The Urals Med index was used for the hedge as this is the closest international benchmark for the range of oil and gas produced by JKX and delivered in local markets. The volume allocated to the hedge represented approximately 10% of the Group's current daily production on a barrel of oil equivalent basis.In Russia the Group has secured a gas sales contract in advance of first gas production. The sales price was negotiated using current and expected future oil and gas prices and production volumes and to maximise returns from production.Commodity pricesWe are exposed to international oil and gas pricemovements and political developments in Russia andUkraine. Previous oil and gas price increases have resulted inincreased taxes in the industry, cost inflation and more onerous terms for access and produce resources. As a result, increased oil and gas prices may not improvethe Group results. A prolonged period of low oil andgas prices would lead to further reviews forimpairment of the Group's oil and gas assets and may impact the Group's ability to support its long-term capital investment programme and reduce shareholderreturns including dividends and share price.The Group is a price taker and does not usually enterinto hedge agreements unless required for borrowingpurposes as may occur from time to time.KPI affected Ukrainian gas realisationsForeign exchange risk arises in the Group fromcommercial transactions, financing arrangements and assets and liabilities denominated in foreign currencies and net investments in foreign operations. We attempt to match, as far as practicable, receipts and payments in the same currency and also follows a range of commercial policies to minimise exposures to foreign exchange gains and losses. These include minimising exposure to the Hryvna denominated sales, which continues to account for more than 90% of Group revenues, and Rouble-based construction costs which have made up a significant portion of the Group's asset additions in respect of the gas processing facility construction in Russia. The Group's normal policy is not to hedge foreign exchange risk but to continually monitor internal and external guidance on expected future currency exchange movements and manage the currency of the Group's major cash flows and holdings to minimise our potential exposure.Foreign exchange exposureThe Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to Ukrainian Hryvnaand the Russian Rouble.The US dollar is the currency which influences the majority of the Group's revenues.Although a portion of costs are incurred in US dollars,most are influenced by the local currencies of thecountries where the Group operates, principallyUkrainian Hryvna, Russian Rouble and Euro.Appreciation of the Ukrainian Hryvnia or depreciation of the Russian Rouble against the US dollar orprolonged periods of exchange rate volatility mayadversely affect the Group's business results.KPI affected Return on average capital employedMEDLOWMEDMED--What's the risk?How we manage itExternal risks continuedProbabilityPotential impactChange from 2010

48Corporate Social Responsibility reviewCorporate Social Responsibility (CSR) is a never-ending journey, not a destination Our greatest assets are our people, the environment and the communities where we operate, which are the keys to our business. We manage our business with due regard to our stakeholders' best interests, and are committed to being recognised as a good corporate citizen and neighbour. We support our people at work as well as in their broader lives and also to minimise our impact on the environment. We are committed to ensure local communities can participate in the benefi ts of our success.Setting good corporate governance procedures in place across all our international operations enhances our reputation and builds integrity, making it more attractive to customers and investors.ISO 90003 Quality Management accreditation Commenced the assessment process for ISO 9000 Quality Management accreditation >p52Russian HSEC approval Final approval of the Health, Safety, Environment and Community (HSEC) Management System at our gas processing plant in Koshekhablskoye, Russia >p52Zero accidents Completion of LPG plant in Ukraine with zero accidents and no harm to people or the environment >p52Employee engagementEmployed an internal communication specialist in Maikop, Russia, to assist with communications throughout our rapidly growing organisation in this region >p56 Maintaining our ISO 140014 Environmental accreditation >p54Maintaining our OHSAS 180015 Health and Safety accreditation >p52Health & Safety accreditationEnvironmental accreditationOur CSR achievements in 2011Notes1. All Injury Frequency Rate represents the health and safety incidents per 200,000 man-hours.2. Lost Time Injuries (LTI) is classified as three or more days lost due to a work related injury or illness.3. ISO 9000 standard relates to quality management systems and is designed to ensure that organisations meet the needs of customers and other stakeholders.4. ISO14001 focuses on accrediting systems that minimise the impact on the environment and to ensure compliance with applicable laws, regulations, and other environmentally oriented requirements in addition to continually improving in these areas.5. OHSAS18001 is an international occupational health and safety management system to control occupational health and safety risks.A decrease in the All Injury Frequency Rate1 (AIFR) to 0.17 (2010: 0.62) >p51No Lost Time Injuries2 (LTI) across the Group in more than 2.3m man-hours worked in safety exposure >p52Zero Lost Time InjuriesDecrease in the AIFR to 0.17