JKX Oil & Gas plc Annual Report 201171At a glance01-17Board statements18-23Operational review24-36Financial review37-47CSR review48-61Directors' reports62-83Financial statements84-136business and financial risk areas to supplement the Company's own risk analysis. Following the growth in the size of the Group's operations during 2011 the Audit Committee has recommended that a group internal audit function is implemented during 2012 and this process is already underway.The key procedures, which the Directors have established with a view to providing effective internal control, are described below. In addition, the Company's independent auditors present reports to the Audit Committee, which include any significant internal control matters that they have identified as part of their normal audit work.Business riskA process is in place to enable the Board to identify the major business, operational, financial and compliance risks faced by the Company and to determine the appropriate course of action to manage and monitor these risks. This process is regularly reviewed by the Audit Committee and reported to the Board as appropriate.The Company identifies and distinguishes 'High Profile Events', i.e. those risks that could have material effect on the Company's financial position or reputation, from other business risks that it assesses and considers to be acceptable for the Company to bear taking into account the industry and the markets in which it operates.The Audit Committee reviews annually the Company's subsidiaries and investments from a business, operational and financial risk perspective to ensure that the system of internal control and accountability is embedded in the operations of the Group. Members of the Audit Committee visit subsidiaries and operations on a regular basis.The Audit Committee considers that managers are conscious of the need to identify and assess risks in their operations and the effect of changes in the business environment, to respond quickly and appropriately and to report immediately any significant control failings and weaknesses that are identified, together with details of corrective action.Management structureThe Board has overall responsibility for the Group and there is a formal schedule of matters specifically reserved for decision by the Board. Each Executive has been given responsibility and is accountable for specific aspects of the Group's affairs. Financial reportingIn light of the recent challenging economic times our continued focus on good corporate governance helps us to identify and resolve any issues before they become major problems.The Company maintains an effective and reliable accounting and management information system. The Board receives a monthly report that monitors: actual performance against budget and forecast for oil and gas production; sales and costs; and provides the Board with information on issues including debtors, Board Audit Remuneration NominationNumber of meetings9423AttendanceSir Ian Prosser 8/8 - 1/12/2Lord Fraser 0/1 - - 3/3Lord Oxford8/9 - 2/2 2/2Nigel Moore 9/9 4/4 2/2 -Michel-Marc Delcommune7/9 2/4 1/2-Dipesh Shah OBE 8/9 4/4 2/2 -Dr Paul Davies 9/9 - - -Bruce Burrows6/6---Martin Miller 9/9 - - -Peter Dixon 9/9---Cynthia Dubin 1/1---Alastair Ferguson 1/11/1--

72the cash position, cash flow forecasting and the financial implications of key sensitivities including changes in commodity prices, production and exchange rates.Budgetary processEach year the Board approves the Group's annual budget with key risk areas identified. The preparation of the annual Group budget is a multi-stage comprehensive process led by the Finance Director assisted by the group financial controller who works closely with local finance directors for operating subsidiaries in Russia and Ukraine and other senior management with specific responsibilities for our Hungarian, Slovakian and other operations.Performance is monitored through the monthly reporting to the Board of variances from the budget. Relevant action is taken by the Board throughout the year based on updated forecasts which are prepared using current information on the key risk areas and sensitivities.Corporate accounting and procedures manualResponsibility levels are communicated throughout the Group as part of the corporate accounting and procedures manual. This sets out, inter alia, the general ethos of the Group, delegation of authority and authorisation levels, segregation of duties and control procedures together with accounting policies and procedures. The manual, which includes policies common to all Group companies along with company specific procedures and controls is reviewed regularly and updated as required.The application of internal financial control and operational procedures in our overseas operations are reviewed regularly and updated as necessary during frequent visits to the overseas offices by Head Office staff.Quality and integrity of personnelThe integrity and competence of personnel is ensured through high recruitment standards and subsequent training courses. High quality personnel are seen as an essential part of the Group's control environment. The ethical standards expected of staff are communicated through the corporate accounting and procedures manual.Investment appraisalFor each capital intensive project there is a rigorous project analysis and risk and return appraisal completed using technical, financial, commercial, and operational specialists across the Group. During 2011 we recruited a sub-surface technical team into our London Head Office to monitor, assess, appraise and oversee all on-going Group projects and potential opportunities. This has improved our ability to identify the potential risks, rewards and value in new capital intensive opportunities and to efficiently utilise the available resources to maximise returns from our existing portfolio of oil and gas assets. Capital investment is regulated by the budgetary process and pre-defined authorisation levels. For expenditure beyond specified levels, detailed written proposals are required to be submitted to the Board. Capital expenditures are reviewed with major overruns in terms of cost and time being investigated. The authority of the Directors is required for key treasury matters including changes to equity and loan financing, interest rate and foreign currency policy including foreign currency hedging, oil price hedging, cheque signatories and opening of bank accounts.The internal financial control situation is reported to the Audit Committee, which has reviewed the effectiveness of the system of internal financial controls as it operated during the year and reported its conclusions to the Board.Communication with shareholdersThe Board places considerable importance on communication with shareholders and is proactive in obtaining an understanding of shareholder preferences. A number of formal communication channels are used to account to shareholders for the performance of the Group, which include the Annual Report and Accounts, AGMs and periodic reports to the London Stock Exchange. Presentations given by Executive Directors at appropriate intervals to representatives of the investor community and major shareholders and are available to all shareholders to download from the Group's website (www.jkx.co.uk). Extensive information about the Group's activities is provided in the Annual Report and Accounts and the Half-yearly Report which are sent to shareholders. Enquiries from individuals on matters relating to their shareholding and the business of the Group are welcomed and are dealt with in an informative and timely manner. Shareholders are encouraged to attend the Annual General Meeting to discuss the progress of the Group.Conflicts of interestThe Company complies with the provisions on conflicts of interest in the Companies Act 2006. The Company has in place procedures for the disclosure and review of any conflicts, or potential conflicts, of interest which the Directors may have and for the authorisation of such conflicting matters by the Board. In deciding whether to authorise a conflict or potential conflict the Directors must have regard to their general duties under the Companies Act 2006. The procedure operates to ensure the disclosure of conflicts, and for the consideration and if appropriate, the authorisation of them by non-conflicted Directors. The authorisation of a conflict matter, and the terms of authorisation, may be reviewed at any time by the Corporate governance continued