Roxi Petroleum: 2014 Results and Strategic Review

The Directors present their strategic report on the Group for the year ended 31 December 2014.

Introduction

The requirement for a strategic report was introduced for all accounting periods ending on or after 30 September 2013 and therefore this is the second Roxi annual report to comply with the requirement.

The strategic report comprises five sections, namely; the Group’s objectives; the Group’s strategy; the Group’s business model; a review of the Group’s business using key performance indicators; and the principal risks and uncertainties facing the business.

In earlier periods the last two of these sections were included in the Directors’ report.

The Chairman’s statement contains review of and a comprehensive analysis of the development and performance of the company’s business during the financial year, and the position of the company’s business at the end of that year and forms part of the Strategic Report

Objectives

The Group’s objective is to create shareholder value from the development of oil and gas projects.

The Group has a number of secondary objectives, including promoting the highest level of heath & safety standards, developing our staff to their highest potential and being a good corporate citizen in our chosen countries of operations.

Strategy

The Group’s long term strategy is to build an attractive portfolio of oil and gas exploration and production assets in Central Asia, and in particular Kazakhstan where the board have the greatest experience.

In the short term the Group will seek to maximise the value of the Company’s flagship asset BNG.

Business model

The Board plans to develop the BNG Contract Area such that by summer 2018, the likely date when a full production licence will be applied for, the BNG Contract Area has been drilled to identify the greatest level of reserves and production consistent without unduly diluting Roxi’s shareholders interest in the asset.

Over the medium term the Group will consider acquiring additional assets where the board believes an acquisition would increase shareholder value. The Directors believe the Group is exceptionally well placed through its local presence to increase shareholder value by opportunistic acquisitions of undervalued oil and gas assets.

Additionally, the Board believes there is a significant opportunity to assist much larger companies seeking to enter the vast Kazakhstan’s oil and gas market where they wish to have a well placed local partner.

The Company’s shares were admitted to trading on AIM in May 2007, when the Company raised $78 million by way of an equity placing.

In 2008, the Company acquired a controlling 59 percent interest in Eragon Petroleum PLC (“Eragon”), which owned interests in the BNG, Galaz and Munaily Contract Areas. Under the terms of the Eragon acquisition Roxi was responsible for the first $100 million to be spent on the Eragon assets. Thereafter funding for the Eragon assets will be shared on a pro rata basis between Roxi (59%) and Baverstock (41%).

The $100 million benchmark was reached in January 2015. Accordingly since that time the responsibility for funding the Eragon assets no longer rest solely with Roxi.

Since 2008, Roxi has undertaken extensive preparatory and development work at these Contract Areas, acquiring and evaluating seismic data over in excess of fourteen hundred square kilometers. Based on the outcome of the seismic evaluations numerous wells have been drilled across the Group’s assets.

This work has been funded in part by the original equity investment and in part from the proceeds of a number of farm-ins to the Company’s assets. In early 2013 the Company secured a $40 million equity commitment from Kairat Satylganov who subsequently became Roxi’s Chief Financial Officer. To date $29.2 million of the facility has been drawn.

By 22 June 2015 the Group had received $10.4 million of the $23 million attributable for the sale of its debt and equity interests in Galaz.

Review of the Group’s business using key performance indicators

The Key Performance Indicators are:

Financial

· Funds available to meet work programme commitments and to meet the General and Administrative costs of the Group

With the expected proceeds from the sale of Galaz and income from oil sales we expect to be fully funded for the 2015 drilling programme at BNG and beyond

Operational

· Production of oil per well and field measured in barrels of oil per day equivalents (bopd)


· In May 2015 BNG produced 225 bopd (133 bopd net to Roxi)

· Reserves measured by the Kazakh authorities and adjusted after review by international experts to those classifications used by the Society of Petroleum Engineers

We intend to engage independent experts to update these towards the end of 2015, following completion of the 2015 deep drilling programme at BNG, for publication in H1 2016.

The principal and other risks and uncertainties facing the business

The Company and the Group is subject to various risks relating to political, economic, legal, social, industry, business and financial conditions. The following risk factors, which are not exhaustive, are particularly relevant to the Company and the Group’s business activities:

Financing risks

The Group continually monitors the financing arrangements to ensure the continuation of the operational activities. Following the expected completion of the sale of Roxi’s interest in the Galaz Contract Area the Group will have secured sufficient financing for its planned operational activities for the next 12 months.

Exploration risk

There is no assurance that the Group’s exploration activities will be successful. Accordingly, the Group seeks to reduce this risk by acquiring and evaluating 3D seismic information before committing to drill exploration and appraisal wells. The Company also seeks to engage suitably skilled personnel either as employees or contractors to undertake detailed assessments of the areas under exploration.

Environmental and other regulatory requirements

Existing and possible future environmental legislation, regulations and actions could cause additional expense, capital expenditures, restrictions and delays in the activities of the Group, the extent of which cannot be predicted.

Before exploration and production can commence the Group must obtain regulatory approval and there is no assurance that such approvals will be obtained. No assurance can be given that new rules and regulations will not be enacted or existing legislations will not be applied in a manner, which could limit or curtail the Group’s activities.

The Group employs staff experienced in the requirements of the Kazakh environmental authorities and seeks through their experience to mitigate the risk of non-compliance with accepted best practice.

Operational risks

It is the nature of oil and gas operations that each project is long term. It may be many years before the exploration and evaluation expenditures incurred are proven to be viable and progress to reach commercial production.

To control these risks the Board arranges for the provision of technical support, directly or through appointed agents and also commissions technical research and feasibility studies both prior to entering into these commitments and subsequently in the life of these projects.

In addition, operational risks include equipment failure, well blowouts, pollution, fire and the consequences of bad weather. Where the Group is project operator, it takes an increased responsibility for ensuring that the Company is compliant with all relevant legislation.

The Group has hired competent people with appropriate skills to manage such risks at the appropriate levels within the Group structure.

Political risk

The Group currently operates primarily in Kazakhstan. The nature of the Group’s investments requires the commitment of significant funding to facilitate exploration and evaluation expenditure in Kazakhstan.

While the Company enjoys very good working relationships with the Kazakh regulatory authorities there can be no assurances that the laws and regulations and their interpretation will not change in future periods and that as a result the Company activities would be affected.

However, the Directors believe with the exceptionally high content of Kazakh nationals in key positions and Roxi’s prolonged experience of operating in Kazakhstan it is as well placed as any internationally listed company operating in Kazakhstan to avoid inadvertently falling foul of local regulations or customs.

Pricing risk

As the Group increases production during the exploration and estimation phases of its licences its financial performance could be adversely affected by falls in the price of oil

Production to date has been limited and the sharp fall in oil prices has only recently begun to affect the Company as. until we operate under full production licences, any oil sold is at Kazakh domestic prices rather than international prices. While in the short term the impact of such falls can be mitigated by hedging strategies over the medium and longer terms the Company will inevitably be impacted by movements in the price of oil. Production levels to date have not warranted active hedging and no oil price hedging is anticipated in the coming year.

Exchange rate risk

The Company’s income is denominated in US$ and its expenditure is denominated in US$ and Kazakh Tenge. In the event the Kazakh Tenge is devalued against the US$ the Company benefits as income is unaffected but Tenge denominated costs fall when reported in US$.

The Company’s functional currency for Group reporting is the US$.

In February 2014, the Kazakh Tenge depreciated by 20% against the US$. Given the relative strengths of the US$ and the Kazakh Tenge the Company has decided not to seek to hedge this foreign currency exposure.

Chairman’s Statement

Business performance overview

In 2014 we:

· Decided, based on drilling results, to focus on BNG, and in particular the deep prospects
· Proved to management’s satisfaction following drilling at Deep Well A5 and the shallow wells that BNG contains substantial quantities of oil at both the shallow and deep horizons
· Confirmed that the oil recovered from the deeper prospects is of high quality
· Set in motion the disposal of Galaz to fund the further development of BNG without recourse to Roxi shareholders or external dilution

Renewal of principal licences

It is Roxi’s experience that licence extensions occur after the previous licence has expired. In this context Roxi expects in the near future to receive a three-year extension to the BNG licence, which expired on 6 June 2015. During this three-year period a full estimation of the reserves across the BNG Contract Area will be undertaken.

In July 2014 the licence at the Galaz Contract Area was extended for a further two-year period to 14 May 2016. The licence has been extended on the current pilot production basis, although at the request of Galaz LLP may be converted to a full production licence.

The license at Munaily is a full production license, with an expiry term of 10 years where production can be sold at export prices. However, the relatively low production volumes means that the advance oil sales at Munaily to date have been conducted nearer domestic prices with the proceeds used to fund the drilling of two additional wells required under the agreed work programme.

Note: By 22 June 2015 Roxi had received $10.4 million of the $23 million attributable for the sale of its debt and equity interests in the Galaz Contract Area

Reserves and Resources

Set out below are the Group’s historic reserves, which have not been updated for several years. Roxi intends to update these numbers following completion of the 2015 drilling programme.

BNG

Background

The BNG Contract Area is located in the west of Kazakhstan 40 kilometers southeast of Tengiz on the edge of the Mangistau Oblast, covering an area of 1,561 square kilometers of which 1,376 square kilometers has 3D seismic coverage acquired in 2009 and 2010. Roxi resumed full control of BNG Ltd LLP in the second quarter of 2011 after the announcement of Canamens’s withdrawal from the contract.

Our development approach

The BNG Contract Area has both shallow and deep prospects, which Roxi is keen to develop. Following receipt of the expected proceeds from the sale of the Group’s interest in Galaz, we are funded for both shallow and deep drilling.

Geology

In January 2011, BNG engaged Gaffney Cline & Associates (“GCA”) to undertake a technical audit of the BNG license area and subsequently Petroleum Geology Services (“PGS”) to undertake depth migration work, based on the 3D seismic work carried out in 2009 and 2010.

The work of GCA resulted in confirming total unrisked resources of 900 million barrels from 37 prospects and leads mapped from the 3D seismic work undertaken in 2009 and 2010. The report of GCA also confirmed risked resources of 202 million barrels as well as Most-Likely Contingent Resources of 13 million barrels on South Yelemes.

The depth migration work that was carried out by PGS enabled BNG to gain a greater understanding of some of the deeper prospects yet to be explored. Roxi believes the greater potential exists in the pre salt prospects and has plans to drill further wells to validate this belief.

Deep Wells

Deep Well A5

The well was spudded in July 2013 and drilled to a total depth of 4,442 meters with casing set to a depth of 4,077 meters to allow open hole testing. Core sampling revealed the existence of a gross oil-bearing interval of at least 105 meters from 4,332 meters to at least 4,437 meters.

The well was difficult to drill with a salt layer of approximately 130 meters and high temperatures and pressures at the lower depths. The extremely high-pressure in the well (7,000 psi at surface) required the use of drilling fluids with a high density (2.16 g/cm3). Removing this high density drilling fluid to allow testing was problematic.

Some of the excess drilling fluids were ejected due to the high well pressures, but by November 2014 it became clear that intervention would be required to complete the operation. We decided the best way to clean-up the well for testing would be by using coil tubing equipment. However, in December 2014, due to the high pressure in the well, the coil tubing equipment used became stuck at a depth of 2,996 meters. The coil tubing was cut at a depth of 30 meters below the wellhead.

In February 2015, we announced that the major part of coil tubing had been removed from the well. The 50 meters of coil tubing remaining in the well, which still contained drilling fluids, were trapped at a depth of 2,996 meters together with a metallic object believed dropped during the clean-up works.

The blockage at Deep Well A5 was finally cleared in May 2015. Pressure in the well has returned to levels encountered when it was originally drilled and the 30-day well test is set to commence in due course following the delivery on site of additional pipes.

In December 2014, in addition to the blockage in the well referred to above we announced that a pipe was also stuck at the bottom of the well. After completion of the planned 30-day testing we will pause the development of the well to seek to remove this pipe. In the event it is not possible we would, as a last resort, seek to sidetrack the well from a depth of 4,320 meters running a 4.5 inch liner to the bottom of the well and then continue to test on a conventional basis. We expect this would to take up to a further 3 months to complete following the 30-day well test.

Deep Well 801

Deep Well 801 was spudded on 15 December 2014 with a planned Total Depth of 4,950 meters. At the date of this report the drilling has reached a depth of 4,790 meters without incident. The well is located approximately 8 kilometers from Deep Well A5 and was planned to target the same structure as Deep Well A5 in the Middle and Lower Carboniferous. The well is being drilled by Sinopec, the Chinese multinational, at a fixed cost of $11 million.

Core samples and logging reveal a potentially oil bearing interval starting from 4,536 meters and extending 100 meters. The pressure and temperatures encountered indicate this well is unlikely to be connected to the reservoir targeted by Deep Well A5. Therefore should Deep Well 801 prove commercially viable it would be a separate discovery to the potential discovery previously announced in connection with Deep Well A5.

After running casing string to the current 4,790 depth we now plan to continue drilling to a new Total Depth of 5,100 meters targeting Lower Permian and Middle & Lower Carboniferous oil bearing reservoirs. A liner will be run from 4,790 meters to the new 5,100 Total Depth.

Shallow wells

BNG’s shallow wells are located in the Yelemes portion of the BNG block. They extend over an area of 800 sq. km. and are focused on proving the extent of a number of promising horizons. In particular our belief has been for some time that the shallow horizon produced from by wells 54,805, 806, & 807 extend significantly further than the relatively small area in which they were drilled. Well 143 is 3,000 meters distant from these other wells and first indications from this well are that the shallow horizon does indeed extend over a significant area.

Well 805

Well 805, which was drilled in 2010 to a total depth of 2,505 meters tested two hydrocarbon-bearing zones between 1,965 meters and 2,230 meters at the rate of 150 bopd and 226 bopd with sucker-rod pump respectively. In April 2013, further testing took place at Well 805 at gross rates of 120 bopd. In June 2014 we announced the interval between 1,960 and 1972 meters had been perforated and tested with a flow rate of 90 bopd using a 2mm choke.

Well 54

Well 54 was drilled in Soviet times to a depth of 3,000 meters and re-tested in 2010. It is currently producing at the rate of 110 bopd (64 bopd net to Roxi)

Well 806

Well 806 was also drilled in 2010 to a total depth of 2,557 meters. In November 2013 this well was tested at intervals at 1,985, 1,998 and 2,022 meters. In June 2014 we announced the interval between 2,022 and 2,032 meters had been perforated and has tested with a flow rate of 90 bopd using a 2mm choke.

Well 807

Well 807 was drilled between September 2013 and November 2013 to a depth of 2,500 meters and is targeting Cretaceous Limestone and Jurassic Sandstone. Under testing the well is producing at the rate of 40 bopd using a 2mm choke from the Valanginian horizon in the interval between 1,966 meters and 1,979 meters.

Well 143

Well 143, which was the first of the shallow wells for 2013, was spudded on 1 April 2013, on the MJ-F structure located towards the North of South Yelemes field at BNG. The total depth of the well was planned to be 2,500 meters. 
This exploration initially targeted Jurassic Callovian sands at a depth of 2,170 meters with a secondary objective in the Cretaceous Valanginian limestone at a depth of 1,935 meters.

As the middle Jurassic section is also expected to be within 4-way dip closure in the MJ-F structure as well as the top Jurassic section, Roxi decided to drill continuously to 2,750 meters, 250 meters deeper than the original planned depth. The well reached the total depth of 2,750 meters in June 2013, and at that time wireline logging was run. Interpretation of these results has been encouraging with three main intervals of interest were identified, at 2,193, 2,216 and 2,692 meters. Additionally, a fourth interval of interest at 2,088 meters has been identified from the core samples and will now be tested.

Operator status

BNG Ltd LLP, of which Roxi owns 58.41%,has been the operator at BNG since 2011.

Work programme

In the remainder of 2015 Roxi plans to drill a further 2 deep wells at BNG between Deep Wells A5 and 801 and 2 further shallow wells.

Sale of Galaz

In February 2015 we announced the conditional sale of our interests in the Galaz Contract Area to a consortium led by Xinjiang Zhundong Petroleum Technology Co., a Company listed on the Shenzhen Stock Exchange in China, for an aggregate consideration of between $90 million and $100 million, depending on the price of Brent crude oil. Following a rise in the price of Brent Crude the aggregate consideration will be $100 million and the amount attributable to Roxi’s has increased to $23 million, of which $10.4 million has been received by 22 June 2015.

Under the agreement $2 million of the aggregate purchase consideration will be retained by the purchaser for a period of 12 months to cover warranty claims individually greater than $50,000. Of the $2 million retention $0.68 million relates to Roxi.

Impact on Roxi

Roxi plans to use the funds from the sale of the Galaz Contract Area (the “Galaz Disposal”) to fund all of the planned development in 2015 at the Company’s flagship asset BNG.

Additionally, as previously announced, under the terms of the 2008 acquisition of 59% of Eragon Petroleum PLC (“Eragon”) from Baverstock, Roxi had an obligation to carry Baverstock for the first $100 million of costs on the Eragon assets (BNG, Galaz & Munaily). This obligation has now been fulfilled and the responsibility for further development funding for the Eragon (principally BNG) assets will be in the ratio 59:41 between Roxi and Baverstock. .

With the declining costs of drilling following the recent fall in the price of oil once received in full the amount attributable from the sale of Roxi’s interests in Galaz is expected to be sufficient to fund all of the 2015 development costs at the deep and shallow regions of the BNG asset and in particular cover the costs of three further deep wells (801, A6 & A7) to the Deep Well A5 drilled in 2014.

The expected accounting profit after tax on the disposal of Galaz to be included in the 2015 Roxi financial statements is some $15 million.

Other assets

Munaily

The Munaily field is located in the Atyrau Oblast approximately 70 kilometres southeast of the town of Kulsary. The field was discovered in the 1940s and produced from 12 reservoirs in the Cretaceous through to the Triassic. Roxi acquired 58.41 per cent interest of the 0.67 square kilometres rehabilitation block in 2008 and funded two wells and one well re-entry.

The field is capable of producing at the rate of 150 bopd (88 bopd net to Roxi).

It remains Roxi’s intention to sell this asset when circumstances permit.

Beibars

Roxi acquired a 50 per cent interest in Beibars Munai LLP in 2007, which operates the 167 square kilometer Beibars Contract Area on the Caspian shoreline south of the city of Aktau. While acquiring 3D seismic in 2008, the license was put under Force Majeure when the acreage was allocated as a military exercise area (Polygon), by the Ministry of Defence. Since then no operations have been carried out, and Roxi operates a care and maintenance administrative budget on the project.

The Company expects to resolve the access issue with the army in due course and then seek farm-in partners to explore the Beibars Contract Area.

Finance

Funding

In January 2013, Roxi concluded a US$40 million equity facility with Mr. Kairat Satylganov, the proceeds of which have been targeted at the development of our flagship asset BNG. Under the arrangements negotiated with Mr. Satylganov, who has subsequently joined the board in an executive capacity as Group Chief Financial Officer, Roxi can call for funding in exchange for the issue of new Roxi shares at 7.41p per share.

To date we have called and received US$ 29.2 million, including $3.7 million in 2014, which has provided the bulk of the funding to date for the 2013 and 2014 drilling campaigns at BNG.

The expected proceeds from the sale of Galaz attributable to Roxi are $23 million.

Baverstock, which owns 41% of BNG and has to date been carried by Roxi on all Eragon assets, is now responsible for funding 41% of all future BNG development costs. The proceeds attributable to Baverstock from the sale of its interest in Galaz are $11 million.

In April 2015, Roxi announced the agreement to issue new shares at an effective price of 18p per shares to BOCO, a large Chinese conglomerate, to raise $20 million. However, following the completion of the sale of Galaz, and difficulties in receiving timely payment Roxi has decided not to continue with this subscription.

Once received in full the proceeds from the sale of Galaz alone will be sufficient to fund the entire 2015 deep and shallow drilling programme at BNG plus the costs of an independent assessment of the reserves at BNG now expected to be released in Q1 2016. By not taking in the additional $20 million subscription now we avoid unnecessary shareholder dilution before publishing the reserves update in H1 2016.

Dividends

There is no current intention to pay a dividend. Revenue from production is being used to fund further development.

Financial statements

The profit before taxation for 2014 was some $20 million (2013: $9 million loss). The principal reason for the profit in 2014 was the release of a $25 million impairment provision taken in previous periods against our flagship BNG asset.

Between its acquisition in March 2008 and 31 December 2013 provisions totaling approximately $75 million were made in respect of our flagship BNG asset.

The basis for these provisions were the valuations of BNG implied from time to time by the various BNG farm-out arrangements during that period. These have all fallen away and Roxi is now interested in 58.41% of the BNG Contract Area and has resumed its position as operator.

In the interim results covering the six months ended 30 June 2014 and published in September 2014, we decided to release $25 million of the accumulated provisions. This was in recognition of the improved ownership terms referred to above but also in recognition of the drilling results of Deep Well A5 and the shallow wells, which in the opinion of the directors move the status of the asset beyond that of pure exploration.

Having considered the matter again at the full year stage we do not believe any further releases in the provision would be appropriate. However, this will be kept under review for future accounting periods based on future drilling results

Going Concern

The Directors are confident, on the basis of the current financial projections and the funding that will be available, principally from the sale of Roxi’s interest in the Galaz Contract Area and the contributions from Baverstock to future BNG costs, that the Group will have sufficient resources for its operational needs over the relevant period, being until June 2016. Accordingly, the Directors continue to adopt the going concern basis.

Board responsibilities

During the period under review there were no changes to the board or individual board members responsibilities.

The senior management team comprises Kuat Oraziman, CEO, who has overall responsibility for managing the Company’s affairs in Kazakhstan; Kairat Satylganov, CFO, with responsibility for the Company’s finances in Kazakhstan, and Clive Carver, Executive Chairman, who is responsible for the Company’s overall finances and its activities in the UK, including the activities arising from Roxi being a publicly listed company.

Edmund Limerick is the Company’s senior non-executive director, and chairman of the audit and remuneration committees. On 1 January 2014, Hyunsik Jang, previously COO with responsibility for technical and geological matters in Kazakhstan, became a non-executive director.

Mr Jang has informed the Company of his wish to retire from the Board at the conclusion of the 2015 AGM. The Board of Roxi would like to place on record its appreciation for his contribution to Roxi initially as Chief Operating Officer and latterly as a non executive director.

Staffing

We have 133 employees based in Kazakhstan, all of whom are Kazakh nationals. As in previous years I would like to thank our employees for their sustained hard work and commitment.

Shareholders

I would also like to take this opportunity to thank shareholders for their regular comments and suggestions, mostly supportive. Your continued interest in Roxi is very much appreciated. Please understand though that it is often not possible to respond to specific information requests on drilling activities as all relevant information needs to be announced to the market generally rather than selectively to interested shareholders.

To improve the flow of information as the pace of development at BNG picks up we plan to continue to make operational updates at the end of each month.

Social Programmes

Under Kazakh regulations part of our obligations under various work programmes on the assets in which we have an interest are paid in the form of contributions to local social programmes.

In 2014 Roxi, made significant contributions to:

· The Mangistau regional social obligation fund $ 376,000 (BNG & Munaily)
· The Kyzylorda region social fund $251,000 (Galaz).

These contributions help secure the good standing of the Company with the local regional authorities and with centrally based regulators. Roxi is pleased to have assisted in the developments of these projects.

Environmental

No significant environmental issues have arisen at any of the properties acquired to date.

Current trading

The fall in the world price for most of the period under review had little impact on Roxi as production levels were low. Under the terms of the BNG licence, any production from testing is required to be sold at domestic prices rather than on the world market and until relatively recently the domestic price did not suffer the same decrease as the international price. Domestic prices in Kazakhstan have now fallen from approximately $45 per barrel to approximately $10 per barrel.

One benefit from the fall in the world oil price has been the accompanying reduction in the charges for drilling rigs. Although no contracts have yet been signed for wells A6, A7 and A8, Roxi management expects significant reductions to the prices negotiated on Deep Wells A5 & 801.

Separately, in February 2014, the Kazakh Tenge was devalued by 20% against the US$. As Roxi’s income is collected and denominated in US$ and many local costs are recognised and paid in Tenge this resulted in a real benefit to the Company by reducing many costs by 20%, even though for accounting purposes the value of the Company’s assets were required to be written down. Roxi would similarly benefit in the event of any further devaluations of the Tenge against the US$.

Prospects

Provided our Deep Wells at BNG start producing consistently and despite the fall in the oil price Roxi management expect income to rise during 2015, as oil is produced during the testing phase of the deep wells at BNG. General and Administrative costs are not expect to materially change in 2015 and as noted above the costs of drilling has already fallen.

Also as noted above Baverstock is now responsible for 41% of the development costs at BNG rather than in the period under review and previously when Roxi funded 100% of these costs.

Crucially for smaller exploration companies development costs for 2015 at BNG will be covered from the proceeds of the sale of Roxi’s and Baverstock interests in Galaz. Roxi’s management therefore expects, provided the deep wells at BNG come in, the Company will be in materially stronger position at the end of 2015.

Key Objectives

Our sole objective for 2014 was to achieve production from our existing assets at the rate of 2,300 bopd. The delays at Deep Well A5 resulted in us missing this objective and in 2014 our peak production rate was 1,500 bopd.

As previously reported, for a short time Deep Well A5 flowed at the rate of 2,000 bopd. If following the remedial work on this well this remains the case then the target for drilling in 2014 (although late) would have been met.

For 2015 our sole objective is to achieve production from BNG at the rate of 4,000 bopd.

The Strategic Report was approved and authorised by the Board for issue on 22 June 2015 and signed on its behalf by

Clive Carver

Chairman

22 June 2015

Qualified Person

Mr.Nurlybek Ospanov, Roxi’s senior geologist who is a member of the Society of Petroleum Engineers (“SPE”), has reviewed and approved the technical disclosures in this announcement.

Glossary

SPE- The Society of Petroleum Engineers

Proven Reserves

Proved Reserves are those quantities of petroleum which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods, and government regulations. If deterministic methods are used, the term reasonable certainty is intended to express a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate.

Probable Reserves

Probable Reserves are those additional Reserves which analysis of geosciences and engineering data indicate are less likely to be recovered than Proved Reserves but more certain to be recovered than Possible Reserves. It is equally likely that actual remaining quantities recovered will be greater than or less than the sum of the estimated Proved plus Probable Reserves (2P). In this context, when probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the 2P estimate.

Possible reserves

Possible reserves are those additional Reserves which analysis of geosciences and engineering data indicate are less likely to be recovered than Probable Reserves. The total quantities ultimately recovered from the project have a low probability to exceed the sum of Proved plus Probable plus Possible (3P), which is equivalent to the high estimate scenario. In this context, when probabilistic methods are used, there should be at least a 10% probability that the actual quantities recovered will equal or exceed the 3P estimate.

Contingent Resources

Contingent Resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations, but the applied project(s) are not yet considered mature enough for commercial development due to one or more contingencies. Contingent Resources may include, for example, projects for which there are currently no viable markets, or where commercial recovery is dependent on technology under development, or where evaluation of the accumulation is insufficient to clearly assess commerciality. Contingent Resources are further categorized in accordance with the level of certainty associated with the estimates and may be sub-classified based on project maturity and/or characterized by their economic status.

Prospective resources

Prospective Resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations. Potential accumulations are evaluated according to their chance of discovery and, assuming a discovery, the estimated quantities that would be recoverable under defined development projects.

Directors’ report

The Directors present their annual report on the operations of the Company and the Group, together with the audited financial statements for the year ended 31 December 2014. The Strategic Report forms part of the business review for this year.

Results and dividends

The consolidated statement of profit or loss is set out on page 20 and shows the profit for the year. The Directors do not recommend the payment of a dividend (2013: US$ nil). The position and performance of the Group is discussed below and further details are given in the business review.

Events after the reporting period

Other than as disclosed in this annual report, including note 30 to the financial statements, there have been no material events between 31 December 2014 and the date of this report, which are required to be brought to the attention of shareholders.

Employees

Staff employed by the Group are based primarily in Kazakhstan. The recruitment and retention of staff, especially at management level, is increasingly important as the Group continues to build its portfolio of oil and gas assets.

As well as providing employees with appropriate remuneration and other benefits together with a safe and enjoyable working environment, the Board recognises the importance of communicating with employees to motivate them and involve them fully in the business. For the most part, this communication takes place at a local level but staff are kept informed of major developments through e-mail updates and access to the Company’s website.

The Company has taken out full indemnity insurance on behalf of the Directors and officers.

Health, safety and environment

It is the Group’s policy and practice to comply with health, safety and environmental regulations and the requirements of the countries in which it operates, to protect its employees, assets and environment.

Charitable and Political donations

During the year the Group made no charitable or political donations. The Group did however, as required by the terms of the Group’s work programmes, make extensive social contributions to projects in Kazakhstan as set out in more detail in the Strategic Report.

Directors and Directors’ interests

The Directors of the Company who served during the year were:

Clive Carver
Executive Chairman from 11 February 2013

Kuat Oraziman

Kairat Satylganov

Chief Executive Officer from 1 June 2012

Appointed Chief Financial Officer from 11 February 2013

Hyunsik Jang
Non-Executive Director from 1 January 2014

Edmund Limerick

Non-Executive Director from 1 February 2010

Biographical details of the current Directors are set out on the Company’s website www.roxipetroleum.com.

Details of the Directors’ individual remuneration, service contracts and interests in share options are shown in the Remuneration Committee Report.

Financial instruments

Details of the use of financial instruments by the Group and its subsidiary undertakings are contained in note 27 of the financial statements.

Statement of disclosure of information to auditors

All of the current Directors have taken all the steps that they ought to have taken to make themselves aware of any information needed by the Group’s auditors for the purposes of their audit and to establish that the auditors are aware of that information. The Directors are not aware of any relevant audit information of which the auditors are unaware.

Auditors

The Company’s auditors, Grant Thornton UK LLP, have indicated their willingness to continue in office and a resolution concerning their reappointment will be proposed at the next Annual General Meeting.

Directors’ responsibilities

The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the Group’s and Company’s financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under Company’s law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group and Company for that period. The Directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the London Stock Exchange AIM Market.

In preparing these financial statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and accounting estimates that are reasonable and prudent;

· state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements;

· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Website publication

The Directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial statements are published on the Company’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the on-going integrity of the financial statements contained therein.