ShaMaran Petroleum Corp. - Management Reports 2021

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Management’s Discussion and Analysis For the year ended December 31, 2020

INTRODUCTION ......................................................................................................................................................................... 3 2020 HIGHLIGHTS and 2021 Guidance ......................................................................................................................................... 4 Operational .................................................................................................................................................................................................... 4 Financial .......................................................................................................................................................................................................... 4 Guidance......................................................................................................................................................................................................... 4 OPERATIONS REVIEW ................................................................................................................................................................. 5 Business Overview ......................................................................................................................................................................................... 5 Operations Overview ..................................................................................................................................................................................... 6 FINANCIAL REVIEW .................................................................................................................................................................... 8 Financial results ............................................................................................................................................................................................. 8 Capital Expenditure ..................................................................................................................................................................................... 14 Financial position and Liquidity .................................................................................................................................................................. 15 Off Balance Sheet Arrangements ............................................................................................................................................................... 17 Transactions with Related Parties .............................................................................................................................................................. 17 Outstanding Share Data and Stock Options............................................................................................................................................... 18 Contractual Obligations and Commitments .............................................................................................................................................. 19 Critical Accounting Policies and Estimates................................................................................................................................................. 19 RESERVES AND RESOURCES ESTIMATES ...................................................................................................................................... 21 FINANCIAL INSTRUMENTS ......................................................................................................................................................... 22 RISKS AND UNCERTAINTIES ....................................................................................................................................................... 24 CONTROLS OVER FINANCIAL REPORTING .................................................................................................................................... 28 FORWARD LOOKING INFORMATION ........................................................................................................................................... 29 RESERVES AND RESOURCES ADVISORY ....................................................................................................................................... 29 ADDITIONAL INFORMATION ...................................................................................................................................................... 29 SUPPLEMENTARY INFORMATION ............................................................................................................................................... 30

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

INTRODUCTION

Management’s discussion and analysis (“MD&A”) of the financial and operating results of ShaMaran Petroleum Corp. (together with its subsidiaries, “ShaMaran” or the “Company”) is prepared with an effective date of March 3, 2021 and is intended to provide an overview of the Company’s operations, financial performance and current and future business opportunities. The MD&A should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2020, together with the accompanying notes (“Financial Statements”).

Company Overview

ShaMaran is in the business of developing and producing oil and gas. The Company has a 27.6% ownership interest in the Atrush Block, Kurdistan Region of Iraq through its wholly owned subsidiary General Exploration Partners, Inc. (“GEP”).

The Company’s common shares are listed on the TSX Venture Exchange in Canada and the NASDAQ First North Growth Market in Sweden. The Company is incorporated and domiciled in British Columbia, Canada under the Business Corporations Act. The address of its registered office is 25th Floor 666 Burrard Street Vancouver, BC Canada V6C 2X8 and its business address is Suite 2000, 885 West Georgia Street, Vancouver, BC Canada V6C 3E8.

Basis of Preparation

The MD&A and the Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

Unless otherwise stated herein all currency amounts indicated as “$” in this MD&A are expressed in thousands of United States dollars (“USD”).

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Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

2020 HIGHLIGHTS

2020 has been a challenging year, due to the global coronavirus pandemic (“COVID-19”)[1] and the collapse of crude oil prices. Despite the turmoil Atrush has continued to meet production targets while reducing lifting costs and has also been able to sustain replaced produced volumes in the Atrush block despite the significantly reduced 2020 development program. The Company also during the year successfully completed measures that resolved the liquidity shortfall and strengthened the Company’s financial position enabling it to meet its bond interest obligations.

2020 Operational Highlights

2020 oil production increase of 39% (2020 vs 2019);
Cumulative production of 40 million barrels achieved on January 4, 2021 despite a significantly reduced 2020 development program due to the global pandemic and the first quarter 2020 collapse of crude oil prices;
Average production of approximately 40,800 barrels of oil per day (“bopd”) for the fourth quarter of 2020; lower than the year’s average due deferral of capital development wells, and operational interventions aggregated in this quarter;
Full year 2020 average production of approximately 45,100 bopd in line with 2020 guidance;
Full year 2020 lifting costs per barrel of $5.08 in line with 2020 guidance and a 31% decrease vs. 2019 lifting costs;
Full year 2020 capital expenditure of $34 million ($9.4 million net to ShaMaran) in line with the capex program as revised in April 2020 in response to the global pandemic and collapse of oil prices;
Progression of Atrush subsurface de-risking continued in 2020 with latest revisions of static and dynamic modelling resulting in joint venture alignment to progress an Atrush “integrated oil column” development approach;
Atrush Property gross 2P reserves[2] increased to 109.9 MMbbls as at December 31, 2020 from 108.5 in 2019 being a 108% reserves replacement and Company’s gross 2P reserves from 29.9 MMbbls to 30.3 MMbbls;

2020 Financial Highlights

USD Thousands	Three months ended Dec 31 Year ended Dec 31
	2020 2019 2020 2019
Revenue Gross margin on oil sales Net result Cash flow from operations EBITDA	14,081 24,345 56,673 70,291 10,253 10,274 7,106 20,032 (1,785) 1,586 (144,425) (13,397) 5,350 1,882 12,860 14,629 6,614 14,833 20,052 36,378

Liquidity shortfall successfully resolved and strengthened Company financial position;
Consistent oil sales and entitlement payments from the KRG for the months March to December 2020;
Full year 2020 operating cash flow of $12.9 million and $5.4 million for the fourth quarter 2020; and
Full year 2020 net result of ($144 million) and ($2 million) for the fourth quarter 2020 including a non-cash impairment charge of $116 million made to oil and gas assets in the first quarter of 2020.

2021 Guidance

Resumption of suspended 2020 capital program including drilling and completion of one highly deviated production well;
2021 average net production guidance of 39,000 to 44,000 bopd;
2021 lifting costs guidance per barrel at $4.70 to $5.70;
Full year 2021 Atrush capital expenditure budget of $53.2 million ($14.7 million net to ShaMaran), an increase of 55% vs. 2020; and
Full year 2021 corporate budget of $5.6 million, a reduction of 30% over 2020, including staff reductions and a continuation of prudent corporate management.

1In March 2020 the World Health Organization declared a global pandemic following the emergence and rapid spread of a novel strain of COVID-19. The outbreak and subsequent measures intended to limit the pandemic contributed to significant declines and volatility in financial markets. The pandemic adversely impacted global commercial activity, including significantly reducing worldwide demand for crude oil.

The full extent of the impact of COVID-19 on the Company’s operations and future financial performance is currently unknown. It will depend on future developments that are uncertain and unpredictable, including the duration and spread of COVID-19, its continued impact on capital and financial markets on a macro-scale and any new information that may emerge concerning the severity of the virus. These uncertainties may persist beyond when it is determined how to contain the virus or treat its impact. The outbreak presents uncertainty and risk with respect to the Company, its performance, and estimates and assumptions used by management in the preparation of its financial results.

2Reserves estimates, contingent resource estimates and estimates of future net revenue in respect of ShaMaran’s oil and gas assets in the Atrush Block are effective as at December 31, 2020, and are included in the report prepared by McDaniel & Associates Consultants Ltd. (McDaniel), an independent qualified reserves evaluator, in accordance with National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (NI 51-101) and the Canadian Oil and Gas Evaluation Handbook (the COGE Handbook) and using McDaniel's January 1, 2021 price forecasts. Certain abbreviations and technical terms used in this MD&A are defined or described under the heading “Other Supplementary Information”.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

OPERATIONS REVIEW

Business Overview

2020 was a challenging year for the oil industry in Kurdistan and other parts of the world due to the collapse in world oil prices in the early part of the year which was then compounded by the COVID-19 global pandemic and its adverse effect on world demand for oil. However, ShaMaran together with its partner in the Atrush Block was able to weather those challenges by drastically reducing expenditures with a deferral of scheduled capital expenditure projects until such time as oil prices rebound. As the early days of 2021 have seen a rebound in world oil prices and with an increase in the roll-out globally of vaccinations against the COVID-19 virus, ShaMaran is cautiously optimistic that worldwide demand for oil will continue to grow so that capital expenditures can be revived in Atrush Block.

The Company sees sustainable 2021 production in the Atrush field and progressing plans which meet the Company’s commitment towards the environment. As cited in the Company’s guidance for 2021, provided in its news release of February 15, 2021, the Company expects 2021 will again be a year of cash flow harvest and measured capital deployment to continue to give shareholders a clear and socially responsible path to sustained production and reserves maturation.

However, the timing and execution of the Atrush capital expenditure program may also be affected by the availability of third party contractor services in Kurdistan should there be a continuation of COVID-19 related travel, quarantine and other related restrictions.

Since first oil occurred in July 2017, Atrush oil production has been consistently delivered to the KRG at the Atrush Block boundary and transported by pipeline for the KRG’s onward sale in the international market from Ceyhan, Turkey. ShaMaran is not aware of the official allocation to the KRG of export pipeline capacity to Ceyhan but management expects no change in 2021 on the KRG’s ability to access of export pipeline capacity in Turkey. However, due to possible unforeseen political developments in Iraq, Turkey and/or Kurdistan arrangements currently in place to export oil produced from the Atrush Block may not continue to be in effect. Also, there remains an on-going risk that any renewed tensions in the regional political and security situation could have a material adverse effect on the financial performance of ShaMaran.

ShaMaran in 2020 faced a liquidity problem but management successfully negotiated terms with our bondholders that have resulted in a stronger financial position for the Company. ShaMaran will continue to implement prudent management of its cashflow in 2021 with an annual corporate budget of $5.6 million, a 30% reduction in spending over 2020.

Following the amendment of the ShaMaran bond terms in January 2021 the Company intends to use its free cash flow to buy its bonds should commercially attractive rates be available in the market and as a result will be reducing its debt burden over the coming year, the Company will update the market of such activity on a quarterly basis.

With the appointment in January 2021 of a new Minister for the Ministry of Natural Resources (“MNR”) of the KRG there are expectations for the coming year for continued stewardship of the Kurdistan oil industry by the MNR and continued collegiality with the MNR to address industry issues as they may arise.

With the exception of the items set forth above together with the risks disclosed in the Company’s Annual Information Form dated March 3, 2021, management has not identified other trends or events that are expected to have a material adverse effect on the financial performance of the Company.

For additional background and history on the Company’s Atrush ownership, please refer to the Company’s Annual Information Form for the year ended December 31, 2020 , which is available for viewing both on the Company’s website at www.shamaranpetroleum.com and on SEDAR at www.sedar.com, under the Company’s profile.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Operations Overview

COVID-19 Response

With the objectives of ensuring operations personnel safety and wellbeing as well as assuring business continuity, a COVID-19 action plan was implemented in February 2020. These policies and procedures initially looked to reduce exposure potential through;

Minimization and deferment of non-critical field activities to reduce exposure potential;
Reduction to minimum staff levels with demobilization of non production-critical staff; and
Extension of rotations due to curfews, closure of airports and governments-imposed quarantines.

These initial actions enabled a secure foundation for ramping up field operations during Q3 and Q4 of 2020 with a view towards returning to normal operational levels during 2021 with the resumption of the deferred capital programs through;

Quarantine procedures and testing implementation for all rotating staff, local nationals and expats;
Special measures taken to ensure staff wellbeing during extended rotations;
Field activities prepared with the consideration and minimization of exposure points as a primary concern; and
Preparation of a COVID-19 compliant 2021 Work Plan & Budget (“WP&B”).

Reserves and Resources

Subsequent to year end, on February 15, 2021, the Company reported estimated reserves and contingent resources for the Atrush field as at December 31, 2020, as reported by the Company’s independent reserves and resources evaluator, McDaniel.

Total field proven plus probable (“2P”) reserves on a Company gross basis for Atrush increased from 29.9 million barrels reported as at December 31, 2019, to 30.3 million barrels as at December 31, 2020.

Total field unrisked best estimate contingent oil resources (“2C”)[3] on a Company gross basis for Atrush decreased from the 2019 estimate of 67.2 million barrels to 60.6 million barrels as at December 31, 2020.

Total discovered oil in place in the Atrush block is a low estimate of 1.7 billion barrels, a best estimate of 2.0 billion barrels and a high estimate of 2.3 billion barrels.

For more information on reserves and resources, please reference our Form 51-101 F1 Statement of Reserves Data and Other Oil and Gas Information as at December 31, 2020 and available in the Company’s profile on SEDAR at www.sedar.com.

Production

Production
	Three months ended Dec 31 Year ended Dec 31
	2020 2019 2020 2019
Atrush average daily oil production – gross 100% field (Mbopd) Atrush oil sales – gross 100% field (Mbbl) ShaMaran’s entitlement in Atrush oil sales (Mbbl)	40.8 41.7 45.1 32.4 3,752 3,832 16,508 11,823 498 508 2,158 1,450

Atrush production for the year was up 39% over 2019 due to:

Additional production from new wells Chiya Khere-6, Chiya Khere-10, Chiya Khere-11, Chiya Khere-12, Chiya Khere-13 and Chiya Khere-15;
Debottlenecking of the Atrush production facility; and
Expansion of the Early Production Facility (“EPF”).

Due to the suspension of most of the capital programs in 2020, Atrush was unable to maintain the quarter-on-quarter growth in production volumes achieved since field startup in 2017. Therefore, the Atrush production remained relatively flat Q4 2020 compared to Q4 2019.

ShaMaran’s entitlement in oil sales, year on year, was up 49% from 2019 to 2020, due to the increased production capacity, mentioned above and also the larger Atrush interest (27.6% vs 20.1%) from June 2019 onwards.

3 This estimate of remaining recoverable resources (unrisked) includes contingent resources that have not been adjusted for risk based on the chance of development. It is not an estimate of volumes that may be recovered.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Field Development Planning

Progression of Atrush subsurface de-risking continued in 2020 with latest revisions of static and dynamic modelling resulting in joint venture alignment to progress an Atrush “integrated oil column” development approach. This approach anticipates full recovery of the 2P oil volumes, full recovery of the 2C medium oil volumes as well as a significant recovery of the 2C heavy oil volumes through a continuation of the current conventional field development program. Complete recovery of the 2C heavy oil volumes would likely be associated with an Enhanced Oil Recovery (“EOR”) project, which will require future de-risking to define the oil price environment at which an EOR project becomes commercially viable in Atrush Block.

Due to the unprecedented volatility in oil prices during 2020, the planned amendment to the Atrush Field Development Plan (“FDP”) has been deferred in order to allow oil prices to stabilize and to ensure all elements of the plan amendment that will be proposed will be operationally and commercially optimized.

Operational Outlook

With improving oil prices in 2021 the Company anticipate a continuation of strong operating cash flow that will be supported with prudent capital deployment in the coming year. The Company reiterates the guidance for 2021 provided in its news release of February 15, 2021, as follows:

Resumption of suspended 2020 capital program with Atrush capital expenditures for 2021 planned at $53.2 million ($14.7 million net to ShaMaran). This capital program includes:
Drilling and completion of one highly deviated production well (P-117) with targeted offtake rates of over 4,000 bopd. The P-117 well will be drilled West-South-West from the Chamanke A pad and is expected to recover over 9MM stb from the upper Jurassic reservoir; and
initiation of the gas solution project which will significantly reduce emissions by using existing infrastructure to generate electrical power from produced gas. As the Atrush field is currently dependant on rented diesel-fuelled generators for all electrical power, this project will also therefore greatly enhance operating costs.
Resumption of deferred drilling and completion spending in 2021 is expected to generate quarter-on-quarter production growth and Atrush field gross average daily production is therefore expected to range from 39,000 barrels of oil per day ("bopd") to 44,000 bopd;
Atrush operating expenditure is forecast to be $80 million ($22 million net to ShaMaran) for 2021, in line with 2020 actual operating costs; and
Atrush average lifting costs per barrel are estimated to range from $4.70 to $5.70. Atrush lifting costs are mainly fixed costs and dollar-per-barrel estimates should decrease with increasing levels of production and operational efficiencies.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

FINANCIAL REVIEW

Financial Results

Selected Quarterly Financial Information

The following is a summary of selected quarterly financial information for the Company:

USD Thousands
(except per share data)	Q4	Q3	Q2	Q1	Q4	Q3	Q2	Q1
	2020	2020	2020	2020	2019	2019	2019	2019
Continuing operations:
Revenue	14,081	15,358	7,393	19,841	24,345	18,804	15,071	12,071
Cost of goods sold	(3,828)	(11,406)	(13,562)	(20,771)	(14,071)	(13,648)	(12,233)	(10,307)
General and admin expense	(2,115)	(1,678)	(2,512)	(1,876)	(2,975)	(1,881)	(1,996)	(1,580)
Share based payments	(258)	(283)	(406)	(716)	(205)	(339)	(400)	-
Depreciation and amortization	(54)	(52)	(50)	(49)	(46)	(52)	(3)	(2)
Impairment loss	-	-	-	(116,164)	-	-	-	-
Impairment loss – Trade receivables	(3,201)	-	-	-	-	-	-	-
Finance cost	(6,441)	(4,654)	(5,469)	(5,479)	(5,507)	(5,402)	(5,449)	(9,067)
Finance income	2	-	1	34	71	112	235	408
Net gain on Atrush acquisition	-	-	-	-	-	-	750	-
Income tax expense	29	(18)	(26)	(31)	(26)	(14)	(43)	(18)
Net (loss)/Income	(1,785)	(2,733)	(14,631)	(125,211)	1,586	(2,420)	(4,068)	(8,495)
EBITDAX	6,614	8,707	(1,882)	6,613	14,833	9,424	6,536	5,585
Basic and diluted net inc /
(loss)in$ per share	(0.001)	(0.001)	(0.007)	(0.058)	0.001	(0.001)	(0.002)	(0.004)

Earnings before interest, tax, depreciation, amortisation, and exploration expense (“EBITDAX”)[4] is calculated as the net result before financial items, taxes, depletion of oil and gas properties, impairment costs, depreciation and exploration expenses and adjusted for nonrecurring profit/loss on sale of assets and other income. Explanations of the significant variances between periods are provided in the following sections.

Summary of Principal Changes in the Fourth Quarter Financial Information

The $1.8 million net loss in Q4 2020 was primarily driven by the $3.2 million provision made against the long-term receivables and financing costs of $6.4 million which relate mainly to the Company’s bonds. These costs were partly offset by a positive adjustment made to the cumulative depletion costs in the quarter, due to the new reserves report figures.

The Company generated a strong $6.6 million of EBITDAX in the quarter, as explained in the following section, underlining the capacity of the Company to generate positive operational cash in a lower oil price environment.

The income and expenses in the fourth quarter are explained in more detail along with the annual financial information in the following sections.

4 Non-IFRS measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other public companies. Non-IFRS measures should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS. The Corporation uses non-IFRS measures to provide investors with supplemental measures

Management’s Discussion and Analysis

For the three months ended and year ended December 31, 2020

Selected Annual Financial Information

The following is a summary of selected annual financial information for the Company:

USD Thousands (except per share data)	For the year ended December 31,
	2020 2019 2018

Revenues	56,673 70,291 69,600 (49,567) (50,259) (42,072) (8,181) (8,432) (4,564) (1,663) (944) - (205) (103) (8) (116,164) - - (3,201) - - 5 790 2,091 (22,076) (25,389) (23,114) - 750 - (46) (101) (64)
Cost of goods sold
General and administrative expense
Share based payments expense
Depreciation and amortisation expense
Impairment
Impairment loss – Trade receivables
Finance income
Finance cost
Net gain on Atrush acquisition
Income tax expense
(Loss) / income for theyear	(144,425) (13,397) 1,869
	(0.07) (0.01) -
Basic and diluted loss in$ per share:
Financial position – net book value of principal items Property plant & equipment Loans and receivables Exploration and evaluation assets Cash and other assets Right of use asset	As at December 31, 2020 2019 2018 146,046 207,903 195,908 68,069 77,317 61,283 70 67,649 67,829 28,989 15,837 94,756 199 309 -
Total assets Borrowings Other liabilities	243,373 369,015 419,776 (188,416) (189,546) (236,717) (51,290) (37,333) (28,860)
Shareholders’ equity	3,667 142,136 154,199
Common shares outstanding (x 1,000)	2,173,365 2,160,632 2,158,632

Summary of Principal Changes in Annual Financial Information

The net loss in 2020 of $144.4 million is attributable to a number of key drivers, several of which are no longer relevant going forward. Oil sales at a significantly lower average annual oil price tightened the gross margin. An adjustment to the cumulative depletion costs, due to the new reserves report figures, helped offset this negative. Significant higher management and consulting fees were incurred in 2020 related to the Company reviewing strategic and financial options to address the liquidity risk at the start of the year. An impairment was made to oil and gas assets in the first quarter of 2020 due to the significant decline in world oil prices. At the end of 2020 a provision was made against long-term receivables in line with IFRS accounting, however, the full amount is expected to be recovered.

The income and expenses detail and the principal changes in annual financial information are further explained in the sections below.

Management’s Discussion and Analysis

For the three months ended and year ended December 31, 2020

EBITDAX - Non-IFRS Measures

*EBITDAX - Non-IFRS Measures*
USD Thousands	Three months ended Dec 31 Year ended Dec 31
	2020 2019 2020 2019
Revenues Lifting costs Other costs of production General and administrative expense Share basedpayments	14,081 24,345 56,673 70,291 (5,279) (5,624) (23,154) (21,640) 185 (708) (3,623) (2,897) (2,115) (2,975) (8,181) (8,432) (258) (205) (1,663) (944)
EBITDAX	6,614 14,833 20,052 36,378

Gross margin on oil sales

USD Thousands	Three months ended Dec 31 Year ended Dec 31 2020 2019 2020 2019
Revenue from Atrush oil sales	14,081 24,345 56,673 70,291
Lifting costs Other costs of production Depletion costs	(5,279) (5,624) (23,154) (21,640) 185 (708) (3,623) (2,897) 1,266 (7,739) (22,790) (25,722)
Cost ofgoods sold	(3,828) (14,071) (49,567) (50,259)
Gross margin on oil sales	10,253 10,274 7,106 20,032

Revenue from Atrush oil sales relates to the Company’s entitlement share of oil sales from the Atrush Block. The decrease in revenues between the years 2020 and 2019 were driven by lower average net oil prices but were somewhat offset by higher average daily production (45.1 Mbopd vs 32.4 Mbopd). 2020 production was sold at an average net oil price of $26.26 per barrel after deducting $15.78 per barrel average discount for oil quality and transportation costs which compares, respectively, to $48.48 and $15.43 for oil sales made in the year of 2019. The higher Atrush production resulted in increased revenues of $34.3 million (39%) which was offset by $47.9 million of negative impact on revenues due to sales of oil at a lower average price by $22.22 per barrel. The significant decrease between the Q4 revenues was mainly due to the lower average net oil price by $19.65 per barrel, resulting in $9.8 million of the decrease.

Lifting costs are comprised of the Company’s share of expenses related to the production of oil from the Atrush Block including operation and maintenance of wells and production facilities, insurance, and the Operator’s related support costs. The average lifting cost per barrel of Atrush oil produced was $5.10 per barrel in Q4 2020 (Q4 2019: $5.32 per barrel). The decrease per barrel related to lower total lifting costs which in Q4 2019 included additional costs to manage salt issues, water handling and well workovers.

For the year 2020 there was an 7% increase in total lifting costs over 2019 relating mainly to a full year at the higher working interest, partially offset by reductions in production costs which were as a result of revised 2020 spending and less well workover costs in 2020. Lifting costs averaged $5.08 per barrel over the year 2020 compared to $7.33 per barrel in the year 2019 and were within the 2020 updated guidance range which was $4.50 per barrel to $5.10 per barrel.

Other costs of production include the Company’s share of production bonuses paid to the KRG and other costs prescribed under the Atrush PSC. Other costs of production in the year 2020 included $3.7 million due to the KRG for the Company’s share of the production bonus related to cumulative oil production from Atrush of 25 million barrels which was reached in February 2020. 2019 other costs of production mostly consisted of costs related to heavy oil extended well testing.

Depletion costs per entitlement barrel in Q4 2020 was negative $2.54 (Q4 2019: $15.23). The credit in the quarter is due to an increase in reserves determined in the 2020 year-end reserves report which spread depletion cost over more barrels and adjusted the cumulative depletion cost.

Over the year 2020 the depletion cost per entitlement barrel averaged $10.56 per barrel compared to $17.74 per barrel in the year 2019. The decrease is mainly due to the increase in reserves and the decrease of the asset base due to the quarter one impairment.

Gross margin on oil sales was similar in Q4 both years, however in Q4 2020 the lower revenues related to lower oil prices was offset by the lower depletion costs due to the reserves adjustment mentioned above.

The gross margin was lower in 2020 by $12.9 million mainly because of the lower revenue driven by lower average net oil prices, offset to an extent by the higher production in the year.

Management’s Discussion and Analysis

For the three months ended and year ended December 31, 2020

General and administrative expense

USD Thousands	Three months ended Dec 31 Year ended Dec 31
	2020 2019 2020 2019
Salaries and benefits Management and consulting fees Legal, accounting and audit fees General and other office expenses Listing costs and investor relations Travel expenses	1,266 1,645 3,671 4,244 449 684 2,700 2,269 177 216 894 793 128 172 463 441 89 43 341 277 6 215 112 408
General and administrative expense	2,115 2,975 8,181 8,432

The lower general and administrative expense incurred in the quarter and the year 2020 compared to the same period of 2019 was principally due to reduced costs for personnel, salaries and benefits, and low travel costs due to COVID-19. During the year 2020 the Company incurred significant one-off legal and consulting fees related to the Company reviewing strategic and financial options to address the liquidity risk.

Share based payments expense

USD Thousands	Three months ended Dec 31 Year ended Dec 31
	2020 2019 2020 2019
Option expense RSU expense DSU expense/ (recovery)	199 141 1,269 653 132 61 347 92 (73) 3 47 199
Total share-basedpayments	258 205 1,663 944

The share-based payments expense relates to the vesting of stock options, granted deferred share units (“DSUs”) and restricted share units (“RSUs”). At December 31, 2020 there was in total 60,610,000 outstanding stock options (December 31, 2019: 47,070,000), 28,693,333 RSUs (December 31, 2019: 11,660,000) granted to certain senior officers and other eligible persons of the Company and 7,346,877 DSUs (December 31, 2019: 2,880,212) granted to ShaMaran’s non-executive directors. Also refer to the discussion under the “Outstanding share data, share units and stock options” section below.

Depreciation and amortization expense

USD Thousands	Three months ended Dec 31 Year ended Dec 31
	2020 2019 2020 2019
Depreciation and amortization expense	54 46 205 103

Depreciation and amortization expense correspond to cost of use of the office, furniture and IT equipment at the Company’s technical and administrative offices located in Switzerland and Kurdistan. The increase from 2019 to 2020 in the year is due to the purchase of new furniture and IT equipment in the newly leased Geneva office, during the second half of 2019, and the treatment of the Swiss office lease under the new 2019 accounting standard IFRS 16 Leases. A right-of-use asset for the lease has been recognized on the balance sheet and is depreciated over the term of the lease.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Impairment loss

USD Thousands	Three months ended Dec 31 Year ended Dec 31
	2020 2019 2020 2019
Impairment loss	- - 116,164 -

Due to the significant decline in world oil prices at the end of the first quarter of 2020 IFRS required that the Company undertake an impairment assessment of the recoverability of the net book value of its oil and gas assets. Accordingly, in the first quarter the Company recorded a $48.5 million impairment loss on the book value of PP&E relating to the Company’s Atrush 2P reserves base and a $67.6 million impairment loss on the book value of intangible exploration and evaluation costs relate to the Company’s Atrush 2C resource base. Refer to the “Capital Expenditures on Property, Plant & Equipment” and “Capital Expenditures on Intangible Assets” sections below for additional information.

Impairment loss on trade receivables

USD Thousands	Three months ended Dec 31 Year ended Dec 31
	2020 2019 2020 2019
Impairment loss on trade receivables	3,201 - 3,201 -

At the end of 2020 a provision of $3.2 million was made against the long-term receivables that represent the $41.7 million owed to the Company by the KRG for $34 million of deliveries from November 2019 to February 2020 and an additional $7.7 million of Atrush Exploration Costs receivable invoiced over the same period. The provision reflects counterparty discounting and credit risk in order for the receivables to be a reasonable approximation of their fair value in line with IFRS accounting, however the full amount is expected to be recovered.

Finance income

USD Thousands	Three months ended Dec 31 Year ended Dec 31
	2020 2019 2020 2019
Interest on deposits Interest on Atrush Feeder Pipeline Cost Loan Interest on Atrush Development Cost Loan	2 66 5 375 - 4 - 173 - 1 - 242
Total finance income	2 71 5 790

Both the Atrush Development Cost Loan and the Atrush Feeder Pipeline Cost Loan were fully repaid in 2019.

Interest on deposits represents bank interest earned on cash, investments and restricted cash held in interest bearing funds. The decrease in interest income reported to date in 2020 relative to the amount reported in 2019 is due to a higher level of interest-bearing funds held in 2019.

Management’s Discussion and Analysis

For the three months ended and year ended December 31, 2020

Finance cost

USD Thousands	Three months ended Dec 31 Year ended Dec 31
	2020 2019 2020 2019
Interest charges on bonds at coupon rate Amortization of the related party loan Amortization of bond transaction costs Bond remeasurement	5,763 5,764 22,800 23,417 590 - 1,132 - 159 33 375 848 - - (1,505) 2,131
Total borrowing costs Foreign exchange loss Lease – interest expense Unwindingdiscount on decommissioning provision	6,512 5,797 22,802 26,396 106 91 171 55 4 1 12 2 (4) (15) (1) (14)
Total finance costs before borrowing costs capitalized Borrowingcosts capitalized	6,618 5,874 22,984 26,439 (177) (367) (908) (1,050)
Finance cost	6,441 5,507 22,076 25,389

Borrowing costs are capitalized where they are directly attributable to the acquisition of, and preparation for their intended use, Atrush development assets. The significant decrease in capitalized borrowing costs in 2020, compared to 2019, is due to a significant number of development projects having been completed for their intended use. All other borrowing costs are recognized in profit or loss in the period in which they are incurred. For further information on the Company’s borrowings refer to the discussions in the section below entitled “Borrowings” and “Loan from related party”.

Income tax expense

USD Thousands	Three months ended Dec 31 Year ended Dec 31
	2020 2019 2020 2019
Income tax expense	(29) 26 46 101

Income tax expense relates to provisions for income taxes on service income generated in Switzerland which is based on costs incurred in procuring the services. The decrease in tax expense reported 2020 compared to 2019 is primarily due to a reduction in the effective tax rate in the Switzerland jurisdiction from 24% in 2019 to 13.7% in 2020. This correction was made in Q4 of 2020.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Capital Expenditure

Capital Expenditures on Property, Plant & Equipment (“PP&E”)

The net book value of PP&E is principally comprised of development costs related to the Company’s share of Atrush PSC proved and probable reserves as estimated by McDaniel. The movements in PP&E are explained as follows:

USD Thousands	Year ended December 31,2020 Oil and gas assets Office equipment Total	Year ended December 31,2019
		Oil and gas assets Office equipment Total
Opening net book value Additions Atrush acquisition Depletion and depreciation expense Impairment	207,695 208 207,903 9,520 2 9,522 - - - (22,790) (39) (22,829) (48,550) - (48,550)	195,897 11 195,908 25,971 224 26,195 11,549 - 11,549 (25,722) (27) (25,749) - - -
Net book value	145,875 171 146,046	207,695 208 207,903

During the 12 months of 2020 movements in PP&E were comprised of Atrush block development cost additions of $9.5 million (2019: $37.7 million), which included capitalized borrowing costs of $908 thousand (2019: $1.0 million), net of depletion of $22.8 million (2019: $25.7 million) and an impairment of $48.6 million (2019: $nil) which resulted in a net decrease to PP&E assets of $61.9 million.

Due to a significant decline in world oil prices in the first quarter of 2020 the Company conducted an impairment test as at March 31, 2020 to assess if the net book value of its oil and gas assets was fully recoverable. This led to a non-cash impairment charge of $48.6 million which is included in the statement of comprehensive income for the year ended December 31, 2020.

Capital Expenditures on Intangible Assets

The net book value of intangible assets at December 31, 2020 relates to computer software. The net book value at December 31, 2019 was principally comprised of exploration and evaluation (“E&E”) assets which represented the Atrush Block exploration and appraisal costs related to the Company’s share of Atrush Block contingent resources as estimated by McDaniel. The movements in Intangible assets are explained as follows:

USD Thousands	Year ended December 31,2020 E&E assets Software & Licences Total	Year ended December 31,2019
		E&E assets Software & Licences Total
Opening net book value Addition / (reversal) Amortization expense Impairment loss	67,616 33 67,649 - 51 51 - (14) (14) (67,616) - (67,616)	67,825 4 67,829 (209) 39 (170) - (10) (10) - - -
Net book value	- 70 70	67,616 33 67,649

During the year 2020 movements in E&E assets related to an impairment loss.

Due to a significant decline in world oil prices in the first quarter of 2020 the Company conducted an impairment test as at March 31, 2020 to assess if the net book value of its E&E assets was recoverable. This led to a non-cash impairment charge of $67.6 million which is included in the statement of comprehensive income for the year ended December 31, 2020.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Financial Position and Liquidity

Loans and receivables

In November 2016 the Company entered into certain agreements with the KRG and other Atrush contractors for the reimbursement by the KRG to the Non-Government Contractors of certain costs incurred by KRG in the years 2013 through 2017 which were funded by the Atrush Non-Government Contractors. The Atrush Exploration Costs receivable, which relates to a share of the KRG’s development costs paid for on behalf of the KRG by ShaMaran prior to the year 2016 which, for the purposes of repayment, are governed under the Atrush PSC and the related Facilitation Agreement and deemed to be Exploration Costs repaid through an accelerated petroleum cost recovery arrangement based on an agreed amount of the KRG’s share of oil sales for each month’s deliveries.

At December 31, 2020, the Company had loans and receivables outstanding as follows:

USD Thousands	For theyear ended December 31
	2020 2019
Accounts receivable on Atrush oil sales Atrush Exploration Costs receivable Provision for impairment	38,584 35,535 32,686 41,782 (3,201) -
Total loans and receivables	68,069 77,317

In the period from the balance sheet date up to the date of this MD&A the Company received $6.5 million in total payments for receivables balances outstanding at December 31, 2020, comprised of $5.4 million in total payments for its entitlement share of oil sales for the month of December 31, 2020 and $1.1 million in reimbursements of the Atrush Exploration Costs receivable.

The KRG has committed to a repayment mechanism for the $41.7 million owed to the Company for $34 million of deliveries from November 2019 to February 2020 and an additional $7.7 million of Atrush Exploration Costs receivable invoiced over the same period. The Company remains actively engaged with the KRG to improve the terms of the repayment mechanism. However, since definitive repayment terms have not yet been established, and the amount is dependent on the Brent oil price, this amount is presented net of a provision of $3.2 million to reflect discounting and credit risk and is a reasonable approximation of their fair value in line with IFRS accounting, however the full amount is expected to be recovered.

Borrowings

The ShaMaran bonds have one amortization and carry 12% fixed semi-annual coupon and mature on July 5, 2023. At December 31, 2020 there were $190 million of ShaMaran bonds outstanding.

On July 5, 2020, the Company and the Bond Trustee on behalf of the Bondholders executed an amendment and restatement agreement as well as related supporting documentation which provided for principal changes to previously agreed bond terms as follows:

Full and final discharge of the liquidity guarantee given by Nemesia S.à.r.l. (“Nemesia”), a company controlled by a trust settled by the estate of the late Adolf H. Lundin, agreed in favour of the Bond Trustee (for the benefit of the Bondholders) in consideration for Nemesia making a payment of $22.8 million to the Company's Debt Service Retention Account ("DSRA");
$11.4 million of the amounts credited to the DSRA were used by the Company to pay the interest on the Bonds due on the interest payment date in July 2020, the residual $11.4 million will remain in the DSRA as restricted cash to provide credit support for any future payment obligations of the Company under the Bond Terms. These funds were used to pay coupon interest due on January 5, 2021;
The Company's obligations to make the $15 million amortization payment due on July 5, 2020 has been deferred until December 5, 2021, and substituted with a cash sweep mechanism whereby the Company, on each interest payment date, will use any amount exceeding a free cash amount of $15 million in repayment of the Bonds, and any amount of free cash so used to redeem Bonds will correspondingly reduce the deferred amortization payment amount;
Temporary waiver until July 5, 2021 granted with respect to the existing breach of the financial covenant relating to the equity ratio; and
In conjunction with the temporary waivers of the amortization payment requirement and financial covenant breach, the Bond Terms were amended to provide for a put option in favour of the Bondholders to require that the Company purchase the Bonds (at par plus accrued interest and the existing call premium) at any time on ten (10) business days' notice subject to the affirmative vote by holders of 50.01% of the Bonds.

The amendments to the ShaMaran bonds agreement in July 2020, most notably the deferral of the $15 million amortization payment, has resulted in changes to expected future cashflows related to the bonds and requires the Company, in accordance with IFRS 9 Financial Instruments, to re-measure the carrying value of the bond debt. The value of the ShaMaran bonds has been determined based on the net present value of future cash flows, discounted at the original effective interest rate resulting in a gain of $1.5 million which has been included as an offset to finance cost in the statement of comprehensive income in 2020. As the put option is outside of management’s control all of the borrowings have been classified as current.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

The movements in borrowings are explained as follows:

The movements in borrowings are explained as follows:
	For the year ended December 31,
	2020	2019
Opening balance	200,693		250,797
Interest charges at coupon rate	22,800		23,417
Amortization of bond transaction costs	375		848
Bond transaction costs	-		(150)
Bonds retired	-		(50,000)
Bond remeasurement	(1,505)		2,131
Payments to Bondholders – interest and callpremiums	(22,802)		(26,350)
Ending balance	199,561		200,693
Current portion: borrowings	188,416		15,000
Current portion: accrued bond interest expense	11,145		11,147
Non-current portion: borrowings	-		174,546

Loan from related party

On July 2, 2020 the Company announced full drawdown of the $22.8 million of funds from Nemesia for a full and final discharge of the liquidity guarantee provided to the Bond Trustee on behalf of the bondholders by Nemesia on behalf of the Company to secure the Company’s obligations under the ShaMaran bond agreement. On July 5, 2020. $11.4 million of the funds were used to pay the July 2020 bond coupon interest payment of the same amount with the remaining $11.4 million deposited in the DSRA as restricted cash. These funds were then used to pay bond coupon interest due on January 5, 2021. In exchange for the drawdown of funds the Company has agreed with Nemesia to repay the drawdown amount by July 2023, plus 5% interest and to issue common shares of the Company which has resulted in a non-current liability at the balance sheet date measured in accordance with IFRS as explained hereafter.

The Company is required to issue to Nemesia 50,000 shares of ShaMaran for each $500 thousand drawn down per month until the drawn amount is repaid (the “Loan Shares”). At the current full $22.8 million level of draw down the Company is required to issue to Nemesia 2,280,000 ShaMaran shares per month. In addition, the Company is required to accrue interest on the amount due to Nemesia at an annual rate of 5%. Repayment of the accrued interest and principal by the Company to Nemesia is payable on or before July 5, 2023 and such claim for repayment is subordinated to all obligations under the Company's bond agreement.

In accordance with IFRS 9 Financial Instruments the liquidity guarantee is a compound financial instrument which has two parts: a liability component and an equity component. IAS 32 Financial Instruments Presentation requires that the component parts be accounted for and presented separately. The split is made at issuance and will not be revised for subsequent changes in market interest rates or share prices. The fair value of the liability component of $18.1 million at initial drawdown has been determined based on the net present value of future cash flows, is amortized over the three-year term using the effective interest rate of 13.19% and is presented on the balance sheet as “loan from related party”. The fair value of the equity component at initial drawdown of $4.7 million is presented on the balance sheet as “loan share reserve”. As Nemesia are issued the Company shares each month the Loan Share reserve value is transferred into share capital on a straight-line basis. During 2020 $655 thousand has been transferred into share capital.

The 2020 movements in the liquidity guarantee loan balance are explained as follows:

USD Thousands	For the year ended December 31, 2020
Opening balance	-
Cash received: full amount of the liquidity guarantee	22,800,000
FV of the equity component	(4,717,855)
Amortization of the liabilitycomponent	1,132,450
Ending balance	19,214,595
Non-current liability: loan from related party	19,214,595

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Liquidity and Capital Resources

USD Thousands	For theyear ended December 31
	2020 2019
Selected liquidity indicators Cash flow from operations Cash in bank Positive working capital	12,860 14,629 28,418 15,530 17,254 36,822

Cash flow from operations of $12.9 million for the year ended December 31, 2020 is down by $1.8 million from $14.6 million reported in the year 2019 principally due to $47.9 million relating to reduced margins on significantly lower oil prices (average netback price per entitlement barrel $26.27 v $48.48) which has more than offset the $34.3 million of positive cash flow effects relating to higher production (average daily production 45.1 Mbopd v 32.4 Mbopd).

Working capital at December 31, 2020 was positive $17.3 million compared to positive $36.8 at December 31, 2019. The decrease in working capital since December 31, 2019 is principally due to the delay in payments for November 2019 through February 2020 oil sales.

The overall cash position of the Company increased by $12.9 million during the twelve months of 2020, compared with a decrease of $76.9 million during the same period of 2019. The decrease in 2019 is principally due to the repayment of $50 million of ShaMaran Bonds in February 2019 and the total cash out of $27.2 million on the acquisition of an additional interest in Atrush completed in May 2019. The main components of the movement in funds in 2020 were as follows:

The operating activities of the Company in 2020 resulted in an increase of $12.9 million in the cash position (2019: increase of $14.6 million). The change in cash from operations is explained by the net loss of $144.4 million less $157.3 million of net positive cash adjustments from working capital items, net borrowing costs and non-cash expenses including the $116 million net loss on the asset impairment and the $3.2 million net loss in the trade receivables impairment.
Net cash inflows to investing activities in 2020 were $0.2 million (2019: outflows of $15.1 million). Cash outflows from investing activities in the year 2020 were comprised of $8.9 million for the investments in the Atrush Block development work program net of cash inflows of $9.1 million in payments by the KRG of Atrush loans and receivables.
Net cash outflows from financing activities in the year were $0.1 million (2019: cash outflows of $76.4 million) and comprised of the $22.8 million of cash inflows of the Nemesia guarantee drawdown, offset by $22.9 million of cash outflows, mainly the semi-annual interest payments to ShaMaran bondholders in January 2020 and July 2020.

The consolidated financial statements were prepared on the going concern basis which assumes that the Company will be able to realize into the foreseeable future its assets and liabilities in the normal course of business as they come due. Refer also to the discussion in the section below on “Risks and Uncertainties”.

Off Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Transactions with Related Parties

Nemesia, a company controlled by a trust settled by the estate of the late Adolf H. Lundin and a shareholder of the Company, funded its $22.8 million liquidity guarantee on behalf of the Company in July 2020 and monthly thereafter receives 2,280,000 common shares of the Company until such loan is repaid in full with 5% interest in July 2023.

Namdo Management Services Ltd., a private corporation affiliated with a shareholder of the Company, has charged the Company $46 thousand in 2020 for corporate administrative support and investor relations services.

All transactions with related parties are in the normal course of business and are made on the same terms and conditions as with parties at arm’s length.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Outstanding Share Data, Share Units and Stock options

Common shares

The Company had 2,175,868,201 outstanding shares at December 31, 2020, 2,272,518,411 outstanding shares after dilution and 2,182,708,201 outstanding shares at the date of this MD&A.

Details of share issuance in 2020 and since December 31, 2020 are as follows:

11,400,000 common shares were issued in 2020 to Nemesia [in accordance with the loan repayment terms between the Company and Nemesia]. The carrying value of the shares has been determined based on the total loan share reserve value and is amortized over the three-year life of the loan. See “loan from related party”;
On August 12, 2020, 3,836,667 Restricted Share Units (“RSUs”) vested in accordance with the Company’s Share Unit Plan and were issued to grantees of the 2019 RSU grant on September 25, 2020 (the “RSU Shares”). The carrying value of the RSU Shares has been determined based on the Company’s average closing share price over the 5-day period prior to the vesting date; and
6,840,000 common shares have been issued in quarter one 2021 to Nemesia.

Share units and Stock options

The Company has established share unit plan and a stock option plan whereby a committee of the Company’s Board may, from time to time, grant up to a total of 10% of the issued share capital to directors, officers, employees or consultants. Under the share unit plan the Company may grant performance share units (“PSU”), and restricted share units (“RSU”). As at December 31, 2020 and the date of this MD&A there are no PSUs outstanding. A deferred share unit (“DSU”) plan exists for non-executive directors of the Company.

On March 3, 2020, the Company granted

(i) 21,250,000 RSUs to certain senior officers and other eligible persons of the Company at a grant date share price of CAD 0.06. In 2020 a total of 380,000 RSU’s were cancelled due to the end of service of a plan participant, a total of 3,836,667 RSUs vested and the same quantity of shares were issued to plan participants. The Statement of Comprehensive Income includes RSU related charges of $347 thousand (2019: $92 thousand) for the year 2020 relating to 2020 and 2019 RSU grants;
(ii) 4,466,665 of DSUs to non-executive directors. In 2019 a total of 3,600,265 DSUs were granted. The total DSU grants resulted in charges to the Statement of Comprehensive Income of $47 thousand for the year 2020 (2019: $199 thousand). The carrying amount of the DSU liability at December 31, 2020 is $202 thousand.
(iii) 35,840,000 stock options to certain senior officers and other eligible persons of the Company. In 2020 a total of 22,000,000 stock options expired and 300,00 were cancelled due to the end of service of a grantee.

At December 31, 2020 there were 60,610,000 stock options outstanding under the Company’s employee incentive stock option plan. No stock options were exercised in 2020 (year 2019: nil).

The Company has no warrants outstanding.

Movements in the Company’s outstanding options and share units in the year are explained as follows:

	Number of	Number of	Number of
	share options	RSUs	DSUs
	outstanding	outstanding	outstanding
At December 31, 2019	47,070,000	11,660,000	2,880,212
Granted in the period	35,840,000	21,250,000	4,466,665
Expired/cancelled in the period	(22,300,000)	(380,000)	-
RSU Shares issued in theperiod	-	(3,836,667)	-
At December 31, 2020	60,610,000	28,693,333	7,346,877
Quantities vested and unexercised:
At December 31, 2019	30,356,662	-	2,880,212
At December 31,2020	28,950,000	-	7,346,877

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Contractual Obligations and Commitments

Atrush Block Production Sharing Contract

The Company is responsible for its pro-rata share of the costs incurred in executing the development work program on the Atrush Block which commenced on October 1, 2013.

As at December 31, 2020, the outstanding commitments of the Company were as follows:

USD Thousands	For theyear ended December 31, 2021 2022 2023 Thereafter Total
Atrush Block development Corporate office and other	36,793 166 166 1,490 38,615 146 57 - - 203
Total commitments	36,939 223 166 1,490 38,818

Amounts relating to Atrush Block development represent the Company’s unfunded paying interest share of the approved 2021 work program and other obligations under the Atrush PSC.

Under the terms of the Atrush PSC the Company will owe a share of production bonuses payable to the KRG when cumulative oil production from Atrush reaches production milestones defined in the Atrush PSC. The remaining production bonus payable is $23.3 million at the 50 million barrel milestone (ShaMaran share: $6.43 million) and will not be cash settled but is to be treated as an offset against amounts owed to ShaMaran currently by the KRG under the proposed repayment mechanism. This final production milestone is expected to be achieved during the second half of 2021.

Critical Accounting Policies and Estimates

The consolidated financial statements of the Company have been prepared by management using IFRS. In preparing financial statements, management makes informed judgments and estimates that affect the reported amounts of assets and liabilities as at the date of the financial statements and affect the reported amounts of revenues and expenses during the period. Specifically, estimates are utilized in calculating depletion, asset retirement obligations, fair values of assets on acquisition of control, share-based payments, amortization and impairment write-downs as required. Actual results could differ from these estimates and differences could be material.

Significant Accounting Policies

There are no IFRS or interpretations that have been issued effective for financial years beginning on or after January 1, 2020 that would have a material impact on the Company’s consolidated financial statements.

New Accounting Standards Issued but not yet applied

There are no new accounting standards which will come into effect for annual periods beginning on or after January 1, 2021, that would be expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions.

Accounting for Oil and Gas Operations

The Company follows the successful efforts method of accounting for its oil and gas operations. Under this method acquisition costs of oil and gas properties, costs to drill and equip exploratory and appraisal wells that are likely to result in proved reserves and costs of drilling and equipping development wells are capitalized and subject to annual impairment assessment.

Exploration well costs are initially capitalized and, if subsequently determined to have not found sufficient reserves to justify commercial production, are charged to exploration expense. Exploration well costs that have found sufficient reserves to justify commercial production, but whose reserves cannot be classified as proved, continue to be capitalized if sufficient progress is being made to assess the reserves and economic viability of the well or related project.

Capitalized costs of proved oil and gas properties are depleted using the unit of production method based on estimated gross proved and probable reserves of petroleum and natural gas as determined by independent engineers. Successful exploratory wells and development costs and acquired resource properties are depleted over proved and probable reserves. Acquisition costs of unproved reserves are not depleted or amortized while under active evaluation for commercial reserves. Costs associated with significant development projects are depleted once commercial production commences. A revision to the estimate of proved and probable reserves can have a significant impact on earnings as they are a key component in the calculation of depreciation, depletion and accretion.

Producing properties and significant unproved properties are assessed annually, or more frequently as economic events dictate, for potential indicators of impairment. Economic events which would indicate impairment include:

The period for which the Company has the right to explore in the specific area has expired during the period or will expire in the near future and is not expected to be renewed;
Substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned;

Management’s Discussion and Analysis

For the three months ended and year ended December 31, 2020

Sufficient data exists to indicate that, although a development in the specific area is likely to proceed, the carrying amounts of E&E and oil and gas assets is unlikely to be recovered in full from successful development or by sale;
Extended decreases in prices or margins for oil and gas commodities or products; and
A significant downwards revision in estimated volumes or an upward revision in future development costs.

For impairment testing the assets are aggregated into cash generating unit (“CGU”) cost pools based on their ability to generate largely independent cash flows. The recoverable amount of a CGU is the greater of its fair value less costs to sell and its value in use. Fair value is determined to be the amount for which the asset could be sold in an arm’s length transaction. Value in use is determined by estimating the present value of the future net cash flows expected to be derived from the continued use of the asset or CGU.

Where conditions giving rise to the impairment subsequently reverse the effect of the impairment charge is also reversed as a credit to the statement of comprehensive income net of any depreciation that would have been charged since the impairment.

In 2020, all of the Company’s development activities are conducted jointly with others.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

RESERVES AND RESOURCE ESTIMATES

The Company engaged McDaniel to evaluate 100% of the Company’s reserves and resource data as at December 31, 2020. The conclusions of this evaluation have been presented in a Detailed Property Report which has been prepared in accordance with standards set out in the Canadian National Instrument NI 51-101 and COGEH.

The Company’s crude oil reserves as at December 31, 2020 were, based on the Company’s working interest of 27.6 % in the Atrush Block, estimated to be as follows:

Company estimated reserves (diluted) As at December 31, 2020

Light/Medium Oil (Mbbl)(1) Gross(2) Net(3) Heavy Oil (Mbbl)(1) Gross(2) Net(3)	Proved Developed Proved Undeveloped Total Proved Probable Total Proved & Probable Possible Total Proved, Probable & Possible
	9,254 4,929 14,184 9,982 24,165 10,142 34,307 5,089 2,654 7,743 5,341 13,084 4,819 17,904 1,823 957 2,780 3,382 6,162 3,253 9,416 1,003 515 1,518 1,819 3,337 1,577 4,914

Notes:

(1) The Atrush Field contains crude oil of variable density. Fluid type is classified according to COGEH: Light/Medium Oil is based on density less than 920 kg/m3 and Heavy Oil is between 920 and 1000 kg/m3.

(2) Company gross reserves are based on the Company’s 27.6 % working interest share of the property gross reserves.

(3) Company net reserves are based on Company share of total Cost and Profit Revenues. Note, as the government pays income taxes on behalf of the Company out of the government's profit oil share, the net reserves were based on the effective pre-tax profit revenues by adjusting for the tax rate.

The Company’s crude oil and natural gas contingent resources as at December 31, 2020, were estimated to be as follows:

Company estimated contingent resources (diluted)[(1) (2)(4)(5)]

As at December 31, 2020

t December 31, 2020
Light/Medium Oil (Mbbl)(3) Gross (Development On Hold) Gross (Development Not Viable) Heavy Oil (Mbbl)(3) Gross (Development On Hold) Gross (Development Not Viable) Gross Total Natural Gas (MMcf) Gross	Low Estimate (1C) Best Estimate (2C) High Estimate (3C) Risked Best Estimate
	3,407 8,300 11,559 5,810 0 0 0 0 5,965 11,510 27,282 21,822 40,832 46,994 27,787 52,342 74,276 12,140 5,393 10,127 14,393 506

Notes:

(1) Company gross interest resources are based on a 27.6 % working interest share of the property gross resources.

(2) There is no certainty that it will be commercially viable to produce any portion of the contingent resources.

(3) The Atrush Field contains crude oil of variable density. Fluid type is classified according to COGEH: Light/Medium Oil is based on a density less than 920 kg/m3 and Heavy Oil is between 920 and 1000 kg/m3.

(4) The “Risked Best Estimate” contingent resources account for the chance of development, which is defined as the probability of a project being commercially viable. Quantifying the chance of development requires consideration of both economic contingencies and other contingencies, such as legal, regulatory, market access, political, social license, internal and external approvals and commitment to project finance and development timing. As many of these factors are extremely difficult to quantify, the chance of development is uncertain and must be used with caution. The chance of development was estimated to be 70 % for the Light/Medium and Heavy Crude Oil Development On Hold contingent resources, 10 % for the Heavy Oil Crude Oil Development Not Viable contingent resources and 5 % for the Natural Gas.

(5) The contingent resources are sub-classified as “development unclarified” with an “undetermined” economic status.

The contingent resources represent the likely recoverable volumes associated with further phases of development during Phase 1 (“Development On Hold”) which differ from reserves mainly due to the uncertainty over the future development plan which will be associated with an increase in the oil price from 2020 levels (“Development Not Viable”).

Prospective resources have not been re-evaluated since December 31, 2013.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Risks in estimating resources

There are uncertainties inherent in estimating the quantities of reserves and resources including factors which are beyond the control of the Company. Estimating reserves and resources is a subjective process and the results of drilling, testing, production and other new data after the date of an estimate may result in revisions to original estimates.

Reservoir parameters may vary within reservoir sections. The degree of uncertainty in reservoir parameters used to estimate the volume of hydrocarbons, such as porosity, net pay and water saturation, may vary. The type of formation within a reservoir section, including rock type and proportion of matrix or fracture porosity, may vary laterally and the degree of reliability of these parameters as representative of the whole reservoir may be proportional to the overall number of data points (wells) and the quality of the data collected. Reservoir parameters such as permeability and effectiveness of pressure support may affect the recovery process. Recovery of reserves and resources may also be affected by the availability and quality of water, fuel gas, technical services and support, local operating conditions, security, performance of the operating company and the continued operation of well and plant equipment.

Additional risks associated with estimates of reserves and resources include risks associated with the oil and gas industry in general which include normal operational risks during drilling activity, development and production; delays or changes in plans for development projects or capital expenditures; the uncertainty of estimates and projections related to production, costs and expenses; health, safety, security and environmental risks; drilling equipment availability and efficiency; the ability to attract and retain key personnel; the risk of commodity price and foreign exchange rate fluctuations; the uncertainty associated with dealing with governments and obtaining regulatory approvals; performance and conduct of the Operator; and risks associated with international operations.

The Company’s project is in the early production stage and, as such, additional information must be obtained by further drilling and testing to ultimately determine the economic viability of developing any of the contingent or prospective resources. There is no certainty that the Company will be able to commercially produce any portion of its contingent or prospective resources. Any significant change, in particular, if the volumetric resource estimates were to be materially revised downwards in the future, could negatively impact investor confidence and ultimately impact the Company’s performance, share price and total market capitalization.

The Company has engaged professional geologists and engineers to evaluate reservoir and development plans; however, process implementation risk remains. The Company’s reserves and resource estimations are based on data obtained by the Company which has been independently evaluated by McDaniel.

FINANCIAL INSTRUMENTS

The Company’s financial instruments currently consist of cash, cash equivalents, advances to joint operations, other receivables, borrowings, related party loan, accounts payable and accrued expenses, accrued interest on bonds, provisions for decommissioning costs, and current tax liabilities. The Company classifies its financial assets and liabilities at initial recognition in the following categories:

Financial Assets at Amortized Cost – Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest. This includes the Company’s loans and receivables which consist of fixed or determined cash flows related solely to principal and interest amounts or contractual sales of oil. The Company’s intent is to hold these receivables until cash flows are collected. Financial assets at amortized cost are recognized initially at fair value, net of any transaction costs incurred and subsequently measured at amortized cost using the effective interest method. The Company recognizes a loss allowance for any expected credit losses on a financial asset that is measured at amortized cost.
Financial Assets at Fair Value through Profit or Loss (“FVTPL”) – Financial assets measured at FVTPL are assets which do not qualify as financial assets at amortized cost or at fair value through other comprehensive income. The Company does not currently have any financial assets measured at FVTPL.
Financial Liabilities at Amortized Cost – Financial liabilities are measured at amortized cost using the effective interest method, unless they are required to be measured at FVTPL, or the Company has opted to measure them at FVTPL. Borrowings and accounts payable are recognized initially at fair value, net of any transaction costs incurred, and subsequently at amortized cost using the effective interest method.
Financial Liabilities at FVTPL – Financial liabilities measured at FVTPL are liabilities which include embedded derivatives and cannot be classified as amortized cost. The Company does not currently have any financial liabilities measured at FVTPL.

With the exception of borrowings, accrued interest on bonds and provisions for decommissioning costs, which have fair value measurements based on valuation models and techniques where the significant inputs are derived from quoted prices or indices, the fair values of the Company’s other financial instruments did not require valuation techniques to establish fair values as the instrument was either cash and cash equivalents or, due to the short term nature, readily convertible to or settled with cash and cash equivalents.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

The Company is exposed in varying degrees to a variety of financial instrument related risks which are discussed in the following sections:

Financial Risk Management Objectives

The Company’s management monitors and manages the Company’s exposure to financial risks facing the operations. These financial risks include market risk (including commodity price, foreign currency and interest rate risks), credit risk and liquidity risk.

The Company does not presently hedge against these risks as the benefits of entering into such agreements is not considered to be significant enough as to outweigh the significant cost and administrative burden associated with such hedging contracts.

Commodity price risk is a risk as the prices that the Company receives for its oil and gas production may have a significant impact on the Company’s revenues and cash flows provided by operations. World prices for oil and gas are characterized by significant fluctuations that are determined by the global balance of supply and demand and worldwide political developments and in particular the price received for the Company’s oil and gas production in Kurdistan is dependent upon the Kurdistan government and its ability to export production outside of Iraq. A decline in the price of Dated Brent Crude oil, a reference in determining the price at which the Company can sell future oil production, could adversely affect the amount of funds available for capital reinvestment purposes as well as the Company’s value in use calculations for impairment test purposes.

The Company does not hedge against commodity price risk.

Foreign currency risk is a risk due to the substantial portion of the Company’s operations require purchases denominated in USD, which is the functional and reporting currency of the Company and the currency in which the Company maintains the substantial portion of its cash and cash equivalents. Certain of its operations require the Company to make purchases denominated in foreign currencies, which are currencies other than USD and correspond to the various countries in which the Company conducts its business, most notably, Swiss Francs (“CHF”) and Canadian dollars (“CAD”). As a result, the Company holds some cash and cash equivalents in foreign currencies and is therefore exposed to foreign currency risk due to exchange rate fluctuations between the foreign currencies and the USD. The Company considers its foreign currency risk is limited because it holds relatively insignificant amounts of foreign currencies at any point in time and since its volume of transactions in foreign currencies is currently relatively low. The Company has elected not to hedge its exposure to the risk of changes in foreign currency exchange rates.

Interest rate risk is a risk due to a fluctuation in short-term interest rates as the Company earns interest income at variable rates on its cash and cash equivalents.

The Company’s policy on interest rate management is to maintain a certain amount of funds in the form of cash and cash equivalents for short-term liabilities and to have the remainder held on relatively short-term deposits.

ShaMaran is leveraged through bond financing at the corporate level. However, the Company is not exposed to interest rate risks associated with its bonds as the interest rate is fixed until July 2023.

Credit risk is a risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company is primarily exposed to credit risk on its cash and cash equivalents, loans and receivables.

The Company manages credit risk by monitoring counterparty ratings and credit limits and by maintaining excess cash and cash equivalents on account in instruments having a minimum credit rating of R-1 (mid) or better (as measured by Dominion Bond Rate Services) or the equivalent thereof according to a recognized bond rating service.

The carrying amounts of the Company’s financial assets recorded in the consolidated financial statements represent the Company’s maximum exposure to credit risk.

Liquidity risk is a risk that the Company will have difficulties meeting its financial obligations as they become due. In common with many oil and gas companies, the Company raises financing for its development activities in discrete tranches to finance its activities for limited periods. The Company seeks to acquire additional funding as and when required. The Company anticipates making substantial capital expenditures in the future for the development and production of oil and gas reserves and as the Company’s project moves further into the development stage, specific financing, including the possibility of additional debt, may be required to enable future development to take place. The financial results of the Company will impact its access to the capital markets necessary to undertake or complete future drilling and development programs. There can be no assurance that debt or equity financing, or future cash generated by operations, would be available or sufficient to meet these requirements or, if debt or equity financing is available, that it will be on terms acceptable to the Company.

The Company manages liquidity risk by maintaining adequate cash reserves and by continuously monitoring forecast and actual cash flows. Annual capital expenditure budgets are prepared, which are regularly monitored and updated as considered necessary. In addition, the Company requires authorizations for expenditure on both operating and non-operating projects to further manage capital expenditures.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

RISK AND UNCERTAINTIES

ShaMaran is engaged in the development and production of crude oil and natural gas and its operations are subject to various risks and uncertainties which include but are not limited to those listed below. Additional risks and uncertainties not presently known to the management of the Company or that management of the Company presently deem to be immaterial may also impair the business and operations of the Company and cause the price of the shares in the Company to decline. If any of the risks described below materialize the effect on the Company’s business, financial condition or operating results could be materially adverse.

For more information on risk factors which may affect the Company’s business refer also to the discussion of risks under the “Reserves and Resources”, “Financial Instruments” and “Cautionary Statement Regarding Forward-Looking Information” sections of this MD&A, as well as to the “Risk Factors” section of the Company’s Annual Information Form, which is available for viewing both on the Company’s web-site at www.shamaranpetroleum.com and on SEDAR at www.sedar.com under the Company’s profile.

Impact of COVID-19

The Covid-19 virus and the restrictions and disruptions related to it have had a drastic adverse effect on the world demand for, and prices of, oil and gas as well as the market price of the shares of oil and gas companies generally, including ShaMaran’s common shares. There can be no assurance that these adverse effects will not continue or that commodity prices will not decrease or remain volatile in the future. These factors are beyond the control of the Company and it is difficult to assess how these, and other factors, will continue to affect ShaMaran and the market price of ShaMaran’s common shares. In light of the current situation, as at the date of this MD&A, the Company continues to review and assess its business plans and assumptions regarding the business environment, as well as its estimates of future production, cash flows, operating costs and capital expenditures.

The current and any future Covid-19 outbreaks may increase ShaMaran’s exposure to, and magnitude of, each of the risks and uncertainties identified below that result from a reduction in demand for oil and gas consumption and/or lower commodity prices and/or reliance on third parties. The extent to which Covid-19 impacts ShaMaran’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the current and any future Covid-19 outbreaks, their severity, the actions taken to contain such outbreaks or treat their impact, and how quickly and to what extent normal economic and operating conditions resume and their impacts to ShaMaran’s business, results of operations and financial condition which could be more significant in upcoming periods as compared with previous periods. Even after the Covid-19 outbreaks have subsided, ShaMaran may continue to experience materially adverse impacts to its’ business as a result of the global economic impact.

As a result of these developments ShaMaran announced revised 2020 Atrush spending plans in April 2020 and actual 2020 spending was in line with the revised plans. ShaMaran will continue to monitor this situation and work to adapt its business to further developments as determined necessary or appropriate.

Political and Regional Risks

International operations of oil and gas companies in emerging countries are subject to significant political, social and economic uncertainties which are beyond ShaMaran’s control. Uncertainties include, but are not limited to, the risk of war, terrorism, criminal activity, expropriation, nationalization, renegotiation or nullification of existing or future contracts, the imposition of international sanctions, a change in crude oil or natural gas pricing policies, a change in taxation policies, a limitation on the KRG’s ability to export oil, and the imposition of currency controls. The materialization of these uncertainties could adversely affect the Company’s business including, but not limited to, increased costs associated with planned projects, impairment or termination of future revenue generating activities, impairment of the value of the Company’s assets and or its ability to meet its contractual commitments as they become due.

Political uncertainty in Kurdistan and Iraq where ShaMaran’s assets and operations are located. While Kurdistan is a federally recognized semi-autonomous political region in Iraq, ShaMaran’s business in Kurdistan may be influenced by political developments between Kurdistan and the Iraq Federal Government, as well as political developments of neighbouring states within the MENA region, Turkey, and surrounding areas. Kurdistan and Iraq have a history of political and social instability. As a result, the Company is subject to political, economic and other uncertainties that are not within its control. These uncertainties include, but are not limited to, changes in government policies and legislation, adverse legislation or determinations or rulings by governmental authorities and disputes between the Iraq federal government and Kurdistan.

There is a risk that levels of authority of the KRG, and corresponding systems in place, could be transferred to the Iraq Federal Government. Changes to the incumbent political regime could result in delays in operations and additional costs which could materially adversely impact the operations and future prospects of the Company and could have a material adverse effect on the Company's business and financial condition. Refer also to the discussion in the section below under “Risks associated with petroleum contracts in Kurdistan.”

International boundary disputes involving Kurdistan even though it is recognized by the Iraq constitution as a semi-autonomous region, its geographical extent is neither defined in the Iraq constitution nor agreed in practice between the Iraq Federal Government and the KRG. There have been unresolved differences between the KRG and the Iraq Federal Government regarding certain areas which are commonly known as “disputed territories”. The Company believes that its current area of operation is not within the “disputed territories”.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Industry and Market Risks

Exploration, development and production risks are inherent in ShaMaran’s business and also the marketing of oil and natural gas, many of which cannot be overcome even with a combination of experience, knowledge and careful evaluation. The risks and hazards typically associated with oil and gas operations include drilling of unsuccessful wells, fire, explosion, blow-outs, sour gas releases, pipeline ruptures and oil spills, each of which could result in substantial damage to oil and natural gas wells, production facilities, other property or the environment, or in personal injury. The Company is not fully insured against all of these risks, nor are all such risks insurable and, as a result, these risks could still result in adverse effects to the Company’s business not fully mitigated by insurance coverage including, but not limited to, increased costs or losses due to events arising from accidents or other unforeseen outcomes including clean-up, repair, containment and or evacuation activities, settlement of claims associated with injury to personnel or property, and or loss of revenue as a result of downtime due to accident.

General market conditions in ShaMaran’s business and operations depend upon conditions prevailing in the oil and gas industry including the current and anticipated prices of oil and gas and the global economic activity. A reduction of the oil price, a general economic downturn, or a recession could result in adverse effects to the Company’s business including, but not limited to, reduced cash flows associated with the Company’s future oil and gas sales. Worldwide crude oil commodity prices are expected to remain volatile in the near future as a result of COVID-19’s adverse effect on global supply and demand balances, actions taken (or not taken) by the Organization of the Petroleum Exporting Countries Plus, and ongoing global credit and liquidity concerns. This volatility may affect the Company's ability to obtain equity or debt financing on acceptable terms.

Competition in the petroleum industry is intense in all aspects including the acquisition of oil and gas interests, the marketing of oil and natural gas, and acquiring or gaining access to necessary drilling and other equipment and supplies. ShaMaran competes with numerous other companies in the search for and acquisition of such prospects and in attracting skilled personnel. ShaMaran’s competitors include oil companies which have greater financial resources, staff and facilities than those of the Company. ShaMaran’s ability to increase reserves in the future will depend on its ability to develop its present property and to respond in a cost-effective manner to economic and competitive factors that affect the distribution and marketing of oil and natural gas.

Reliance on key personnel to continue ShaMaran’s success depends in large measure on certain key personnel, officers and directors. The loss of the services of such key personnel could negatively affect ShaMaran’s ability to deliver projects according to plan and result in increased costs and delays. ShaMaran has not obtained key person insurance in respect of the lives of any key personnel. In addition, competition for qualified personnel in the oil and gas industry is intense and there can be no assurance that ShaMaran will be able to attract and retain the skilled personnel necessary for its business.

Business Risks

Risks associated with petroleum contracts in Kurdistan stem from the Iraq oil ministry’s historical disputes over the validity of the KRG’s production sharing contracts and, as a result indirectly, the Company’s right and title to its oil and gas asset. The KRG has consistently disputed such claims and has maintained that the Kurdistan PSCs are compliant with the Iraq constitution. There is currently no assurance that production sharing contracts agreed with the KRG are enforceable or binding in accordance with ShaMaran’s interpretation of their terms or that, if breached, the Company would have enforceable remedies. The Company believes that it has valid title to its oil and gas asset in Kurdistan and the right to develop and produce oil and gas from such asset under the Atrush PSC. However, should the Iraq Federal Government pursue and be successful in a claim that the production sharing contracts agreed with the KRG are invalid, or should any unfavourable changes develop which impact on the economic and operating terms of the Atrush PSC, it could result in adverse effects to the Company’s business including, but not limited to, impairing the Company’s claim and title to the asset held, and or increasing the obligations required, under the Atrush PSC.

Government regulations, licenses and permits may affect the Company by changes in taxes, regulations and other laws or policies affecting the oil and gas industry generally as well as changes in taxes, regulations and other laws or policies applicable to oil and gas exploration and development in Kurdistan specifically. The Company’s ability to execute its projects may be hindered if it cannot secure the necessary approvals or the discretion is exercised in a manner adverse to the Company. The taxation system applicable to the operating activities of the Company in Kurdistan is pursuant to the Oil and Gas Law governed by general Kurdistan tax law and the terms of its production sharing contracts. However, it is possible that the arrangements under the production sharing contracts may be overridden or negatively affected by the enactment of any future oil and gas or tax law in Iraq or Kurdistan which could result in adverse effects to the Company’s business including, but not limited to, increasing the Company’s expected future tax obligations associated with its activities in Kurdistan. However, the Company has no reason to believe at this time that the fiscal stability clause set forth in Article 42 of the Atrush PSC would not be honored by the KRG in the future.

Marketing, markets and transportation for the export of oil and gas deliveries from Kurdistan remains subject to uncertainties which could negatively impact on ShaMaran’s ability to deliver Atrush oil for export by the KRG and to receive payments from the KRG relating to such deliveries for export. Potential government regulation relating to price, quotas and other aspects of the oil and gas business could result in adverse effects to the Company’s business including, but not limited to, impairing the Company’s ability to sell Atrush oil and receive full payment for all deliveries of Atrush oil.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Payments to IOCs for oil deliveries to the KRG for export have since 2Q 2020 and beyond been consistent. Nevertheless, there remains a risk that the Company may face significant delays in the receipt of cash for its entitlement share of future oil exports.

KRG paying interest in Atrush Block commenced with the exercise by the KRG of its back-in right under the terms of the Atrush PSC. The KRG has, since the commencement of oil production exports from Atrush Block, paid for its share of project development costs in connection with the payment cycle for oil deliveries except for the four-month period of November 2019 to February 2020. While a mechanism exists for the recovery of such unpaid cash calls, expected to be satisfied in April 2021, there is a risk that the Non-Government Contractors in Atrush may again be exposed to funding the KRG 25% share of future Atrush costs.

Default under the Atrush PSC and Atrush JOA if the Company fails to meet its obligations under the Atrush PSC and/or Atrush Block joint operating agreement (“Atrush JOA”) which could result in adverse effects to the Company’s business including, but not limited to, a loss of the Company’s rights and interests in Atrush Block, the termination of future revenue generating activities of the Company and impairment of the Company’s ability to meet its contractual commitments as they become due.

Kurdistan’s legal system is a less developed legal system than that found in many more established oil producing areas in the world. This could result in risks associated with predicting how existing laws, regulations and contractual obligations will be interpreted, applied or enforced. In addition, it could make it more difficult for the Company to obtain effective legal redress in courts in case of breach of law, regulation or contract and to secure the enforcement of arbitration awards and may give rise to inconsistencies or conflicts among various laws, regulations, decrees or judgments. The Company’s recourse may be limited in the event of a breach by a Kurdistan government authority of an agreement in which ShaMaran holds an interest.

Enforcement of judgments in foreign jurisdictions since the Company is party to contracts with counterparties located in a number of countries, most notably Kurdistan. Certain of its contracts are subject to English law with legal proceedings to be conducted in England. However, the enforcement of any judgments thereunder against a losing counterparty will be a matter of the laws of the jurisdictions where such losing counterparty is domiciled.

Change of control in respect of the Atrush PSC includes if a change of voting majority in the Contractor, or in a parent company occurs, provided the value of the interest in the Atrush Block represents more than 50% of the market value of assets in the party. Due to the limited amount of other assets held by the Company this will apply to a change of control in GEP or to ShaMaran as its sole parent company. A Change of control requires the consent of the KRG or it will trigger a default under the Atrush PSC and potential termination of GEP’s interest in Atrush PSC if not remedied in the cure period of time specified.

Project and Operational Risks

Shared ownership and dependency on partners as ShaMaran’s operations are conducted together with the Atrush Operator and the KRG in accordance with the terms of the Atrush PSC, Atrush JOA and the Atrush Facilitation Agreement (entered into in November 2016). As a result, ShaMaran has limited ability to exercise a veto over most Atrush operations or their associated costs and this could adversely affect ShaMaran’s financial performance. If the Atrush Operator or the KRG fail to perform, ShaMaran may, among other things, risk losing rights or revenues or incur additional obligations or costs to itself perform in place of its partners. If a dispute would arise with the Atrush Operator or the KRG such dispute may have significant negative effects on the Company’s financial performance.

Security risks in Kurdistan and other parts of Iraq have a history of political and social instability which have culminated in security problems which may put at risk the safety of the Company’s personnel, interfere with the efficient and effective execution of the Atrush operations and ultimately result in significant losses to the Company. In 2020 there have been no significant security incidents in the Atrush Block.

Risks relating to infrastructure may occur as the Company is dependent on access to available and functioning infrastructure (including third party services in Kurdistan) relating to the Atrush Block, such as roads, power and water supplies, pipelines and gathering systems. If any infrastructure or systems failures occur or access is not possible or does not meet the requirements of the Atrush joint venture, the Atrush operations may be significantly hampered which could result in lower production and sales and or higher costs.

Environmental regulation and liabilities regarding drilling for and producing, handling, transporting and disposing of oil and gas and petroleum by-products are activities that are subject to extensive regulation under national and local environmental laws, including in Kurdistan. During the times the Company had exploration operations it implemented health, safety and environment policies since its incorporation, complied with industry environmental practices and guidelines for its operations wherever located and, to its knowledge and belief, the Atrush operations in Kurdistan is currently in compliance with these obligations in all material aspects. Environmental protection requirements have not, to date, had a significant effect on the capital expenditures and competitive position of ShaMaran. Future changes in environmental or health and safety laws, regulations or community expectations governing the Company’s operations could result in adverse effects to the Company’s business including, but not limited to, increased monitoring, compliance and remediation costs and or costs associated with penalties or other sanctions imposed on the Company for non-compliance or breach of environmental regulations.

Risk relating to community relations / labor disruptions as the Company’s operations may be in or near communities that may regard operations as detrimental to their environmental, economic or social circumstances. Negative community reactions and any related labor disruptions or disputes could increase operational costs and result in delays in the execution of projects.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Petroleum Costs and cost recovery are defined under the terms of the Atrush PSC which provide the KRG the right to conduct an audit to verify the validity of incurred petroleum costs which the Atrush Operator has reported to the KRG and is therefore entitled under the terms of the Atrush PSC to recover through cash payments from future petroleum production. No such audit has yet taken place regarding the Atrush Petroleum Costs. Should any future audits result in negative findings concerning the validity of reported incurred petroleum costs the Company’s petroleum cost recovery entitlement could ultimately be reduced.

Legal claims and disputes may cause the Company to suffer unexpected costs or other losses if a counterparty to any contractual arrangement entered into by the Company does not meet its obligations under such agreements.

Uninsured losses and liabilities may occur even though the Company maintains insurance in accordance with industry standards to address risks relating to its operations, the insurance coverage may under certain circumstances not protect it from all potential losses and liabilities that could result from its operations.

Availability of equipment and third party services are crucial for progressing Atrush development activities, such as drilling and related equipment and qualified staff in the areas where such activities are or will be conducted. Shortages of such equipment or staff may affect the availability of such equipment for Atrush operations and may delay and or increase the cost of the Atrush development activities.

Financial and Other Risks

Financial statements prepared on a going concern basis under which an entity is able to realize its assets and satisfy its liabilities in the ordinary course of business. Management has made assumptions regarding projected oil sale volumes and pricing, and the timing and extent of capital, operating, and general and administrative expenditures. Should production be materially less than anticipated or in case there are extended delays to the forecasted receipt of cash from the sale of oil exports or in the magnitude of those cash receipts, which are under the control of the KRG, and the Company was unable to defer certain planned cost activities, the Company could require additional liquidity to fund the forecasted Atrush operating and development costs and its commitments under the bond agreement in the next 12 months. The Company’s future operations may be dependent upon certain factors such as the identification and successful completion of additional equity or debt financing or the re-financing or restructuring of the Company’s current debt and the continued achievement of profitable operations. There can be no assurances that the Company will be successful in completing additional debt or equity financing or re-financing or achieving continued profitability. The consolidated financial statements do not give effect to any adjustments relating to the carrying values and classification of assets and liabilities that would be necessary should ShaMaran be unable to continue as a going concern.

Substantial capital requirements in the future for the development and production of oil and gas in Atrush Block. ShaMaran’s results could impact its access to the capital necessary to participate in future drilling and development programs. To meet its operating costs and planned capital expenditures, ShaMaran may require financing from external sources, including from the sale of equity and debt securities. There can be no assurance that such financing will be available to the Company or, if available, that it will be offered on terms acceptable to ShaMaran.

Dilution may occur if the Company makes future acquisitions or enters into financings or other transactions involving the issuance of additional securities of the Company. If additional financing is raised through the issuance of equity or convertible debt securities, control of the Company may change and the interests of shareholders in the net assets of ShaMaran may be diluted.

Changes in tax legislation or tax practices applicable to the Company due to its entities incorporated and resident for tax purposes in Canada, the Cayman Islands, the Kurdistan Region of Iraq, Switzerland and the United States of America may increase the Company’s expected future tax obligations associated with its activities in such jurisdictions.

Capital and lending markets as a result of general economic uncertainties and, in particular, the potential lack of risk capital available to the junior resource sector, the Company, along with other junior resource entities, may have reduced access to bank debt and to equity. As future capital expenditures will be financed out of funds generated from operations, bank borrowings if available, and possible issuances of debt or equity securities, the Company’s ability to do so is dependent on, among other factors, the overall state of lending and capital markets and investor and lender appetite for investments in the energy industry generally, and the Company’s securities in particular. To the extent that external sources of capital become limited or unavailable or available only on onerous terms, the Company’s ability to invest and to maintain its existing business may be impaired, and its assets, liabilities, business, financial condition and results of operations may be materially and adversely affected as a result.

Uncertainty in financial markets may impact the Company’s future ability to secure financing to grow its business. The uncertainty which periodically affects financial markets and the possibility that financial institutions may consolidate or go bankrupt has reduced levels of activity in the credit markets which could diminish the amount of financing available to companies. The Company’s liquidity and its ability to access the credit or capital markets may also be adversely affected by changes in the financial markets and the global economy.

Conflict of interests may result ascertain directors of ShaMaran are also directors or officers of other companies, including oil and gas companies, the interests of which may, in certain circumstances, come into conflict with those of ShaMaran. If a conflict arises with respect to a particular transaction, the affected directors must disclose the conflict and abstain from voting with respect to matters relating thereto.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Risks Related to the Company’s Bonds

Possible termination of Atrush PSC / bond agreements in event of default scenario should ShaMaran default its obligations under the bond agreement ShaMaran may also not be able to fulfil its obligations under the Atrush PSC and/or Atrush JOA, with the effect that these contracts may be terminated or the prescribed benefits to ShaMaran limited. In addition, should ShaMaran default its obligations under the Atrush PSC and/or Atrush JOA, with the effect that the rights of ShaMaran under these contracts may be terminated or limited, ShaMaran may also default in respect of its obligations under the bond agreement. Either default scenario could result in the cessation of the Company’s future revenue generating activities and impair the Company’s ability to meet its contractual commitments as they become due.

Ability to service bond indebtedness or to refinance its obligations under the bond agreement will depend on ShaMaran’s financial and operating performance which, in turn, will be subject to prevailing economic and competitive conditions beyond ShaMaran’s control. It is possible that ShaMaran’s activities will not generate sufficient funds to make the required interest payments which could, among other things, result in an event of default under the bond agreement.

Significant operating and financial restrictions are set out in the terms and conditions of the bond agreement regarding ShaMaran’s and the Guarantors’ activities which restrictions may prevent ShaMaran and the Guarantors from taking actions that it believes would be in the best interest of ShaMaran’s business and may make it difficult for ShaMaran to execute its business strategy successfully or compete effectively with companies that are not similarly restricted. No assurance can be given that it will be granted the necessary waivers or amendments if for any reason ShaMaran is unable to comply with the terms of the bond agreement. A breach of any of the covenants and restrictions could result in an event of default under the bond agreement.

Mandatory prepayment events are set out in the terms of the bond agreements on the occurrence of certain specified events, including if (i) the ownership in the Atrush Block is reduced to below 27.6% or (ii) an event of default occurs under the bond agreement or (iii) the affirmative vote of 50.1% of the bondholders exercise the put option. Following an early redemption after the occurrence of a mandatory prepayment event, it is possible that ShaMaran will not have sufficient funds to make the required redemption of the bonds which could, among other things, result in an event of default under the bond agreement.

DISCLOSURE CONTROLS AND INTERNAL CONTROL OVER FINANCIAL REPORTING

Disclosure controls and procedures have been designed to provide reasonable assurance that information required to be disclosed by the Corporation in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in the securities legislation. Management, under the supervision of the Chief Executive Officer and the Chief Financial Officer, is responsible for the design and operation of disclosure controls and procedures.

Design of internal controls over financial reporting is the responsibility of Management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. However, due to inherent limitations, internal control over financial reporting may not prevent or detect all misstatements and fraud. There have been no material changes to the Company’s internal control over financial reporting during the three and twelve month periods ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFOMATION

This report contains statements and information about expected or anticipated future events and financial results that are forwardlooking in nature and, as a result, are subject to certain risks and uncertainties, such as legal and political risk, civil unrest, general economic, market and business conditions, the regulatory process and actions, technical issues, new legislation, competitive and general economic factors and conditions, the uncertainties resulting from potential delays or changes in plans, the occurrence of unexpected events and management’s capacity to execute and implement its future plans.

The Covid-19 virus and the restrictions and disruptions related to it have had a drastic adverse effect on the world demand for, and prices of, oil and gas as well as the market price of the shares of oil and gas companies generally, including the Company’s common shares. There can be no assurance that these adverse effects will not continue or that commodity prices will not decrease or remain volatile in the future. These factors are beyond the control of ShaMaran and it is difficult to assess how these, and other factors, will continue to affect the Company and the market price of ShaMaran’s common shares. In light of the current situation, as at the date of this news release, the Company continues to review and assess its business plans and assumptions regarding the business environment, as well as its estimates of future production, cash flows, operating costs and capital expenditures .

Any statements that are contained in this report that are not statements of historical fact may be deemed to be forward-looking information. Forward- looking information typically contains statements with words such as "may", "will", "should", "expect", "intend", "plan", "anticipate", "believe", "estimate", "projects", "potential", "scheduled", "forecast", "outlook", "budget" or the negative of those terms or similar words suggesting future outcomes. The Company cautions readers regarding the reliance placed by them on forwardlooking information as by its nature, it is based on current expectations regarding future events that involve a number of assumptions, inherent risks and uncertainties, which could cause actual results to differ materially from those anticipated by the Company.

Actual results may differ materially from those projected by management. Further, any forward-looking information is made only as of a certain date and the Company undertakes no obligation to update any forward-looking information or statements to reflect events or circumstances after the date on which such statement is made or reflect the occurrence of unanticipated events, except as may be required by applicable securities laws. New factors emerge from time to time, and it is not possible for management of the Company to predict all of these factors and to assess in advance the impact of each such factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking information.

RESERVES AND RESOURCE ADVISORY

ShaMaran's reserve and contingent resource estimates are as at December 31, 2020 and have been prepared and audited in accordance with National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities ("NI 51-101") and the COGE Handbook. Unless otherwise stated, all reserves estimates contained herein are the aggregate of "proved reserves" and "probable reserves", together also known as "2P reserves". Possible reserves are those additional reserves that are less certain to be recovered than probable reserves. There is a 10% probability that the quantities actually recovered will equal or exceed the sum of proved plus probable plus possible reserves.

Contingent resources are those quantities of petroleum estimated, as at a given date, to be potentially recoverable from known accumulations using established technology or technology under development but are not currently considered to be commercially recoverable due to one or more contingencies. Contingencies may include factors such as economic, legal, environmental, political and regulatory matters or a lack of markets. There is no certainty that it will be commercially viable for the Company to produce any portion of the contingent resources.

BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf per 1 Bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

ADDITIONAL INFORMATION

Additional information related to the Company, including its Annual Information Form, is available on SEDAR at www.sedar.com and on the Company’s web-site at www.shamaranpetroleum.com.

The Company plans to publish on May 6, 2021 its financial statements for the three months ended March 31, 2021.

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

OTHER SUPPLEMENTARY INFORMATION

Abbreviations

CAD Canadian dollar CHF Swiss Franc EUR Euro USD US dollar

Oil related terms and measurements

bbl	Barrel (1 barrel = 159 litres)
boe	Barrels of oil equivalents
boepd	Barrels of oil equivalents per day
bopd	Barrels of oil per day
Mbbl	Thousand barrels
MMbbl	Million barrels
Mboe	Thousand barrels of oil equivalents
Mboepd	Thousand barrels of oil equivalents per day
Mbopd	Thousand barrels of oil per day
MMboe	Million barrels of oil equivalents

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

DIRECTORS

Dr. Adel Chaouch Director, President and Chief Executive Officer

Chris Bruijnzeels Director, Chairman

Keith C. Hill Director

Terry L. Allen Director

Michael Ebsary Director

William A.W Lundin Director

OFFICERS

CORPORATE OFFICE

Suite 2000 – 885 West Georgia Street Vancouver British Columbia V6C 3E8 Canada Telephone: +1 604 689 7842 Facsimile: +1 604 689 4250 Website: www.shamaranpetroleum.com

OPERATIONS and ADMINISTRATIVE OFFICE

63 Route de Thonon 1222 Vésenaz Switzerland Telephone: +41 22 560 8600

REGISTERED AND RECORDS OFFICE

25[th] Floor - 666 Burrard Street Vancouver, British Columbia V6C 2X8 Canada

Dr. Adel Chaouch Director, President and Chief Executive Officer

INDEPENDENT AUDITORS

Brenden Johnstone Chief Financial Officer

PricewaterhouseCoopers SA, Geneva, Switzerland

Alex Lengyel Chief Commercial Officer and Corporate Secretary

Suzanne Ferguson Assistant Corporate Secretary

TRANSFER AGENT

Computershare Trust Company of Canada Vancouver, Canada

CORPORATE DEVELOPMENT

Sophia Shane

INVESTOR RELATIONS

STOCK EXCHANGE LISTINGS

TSX Venture Exchange and NASDAQ First North Growth Market Trading Symbol: SNM

Robert Eriksson

Follow us on Social Media:

Instagram: @shamaranpetroleumcorp Twitter: @shamaran_corp Facebook: @shamaranpetroleumcorp

ShaMaran Petroleum Corp.

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ShaMaran Petroleum Corp. — Management Reports 2021

43651_rns_2021-03-03_46bdab1c-70ae-451d-8f40-1af1ffb0ce09.pdf

Table of Contents

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

INTRODUCTION

Company Overview

Basis of Preparation

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

2020 HIGHLIGHTS

2020 Operational Highlights

2020 Financial Highlights

2021 Guidance

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

OPERATIONS REVIEW

Business Overview

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Operations Overview

COVID-19 Response

Reserves and Resources

Production

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Field Development Planning

Operational Outlook

FINANCIAL REVIEW

Financial Results

Selected Quarterly Financial Information

Summary of Principal Changes in the Fourth Quarter Financial Information

Management’s Discussion and Analysis

For the three months ended and year ended December 31, 2020

Selected Annual Financial Information

Summary of Principal Changes in Annual Financial Information

Management’s Discussion and Analysis

For the three months ended and year ended December 31, 2020

EBITDAX - Non-IFRS Measures

Gross margin on oil sales

Management’s Discussion and Analysis

For the three months ended and year ended December 31, 2020

General and administrative expense

Share based payments expense

Depreciation and amortization expense

Impairment loss

Impairment loss on trade receivables

Finance income

Management’s Discussion and Analysis

For the three months ended and year ended December 31, 2020

Finance cost

Income tax expense

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Capital Expenditure

Capital Expenditures on Property, Plant & Equipment (“PP&E”)

Capital Expenditures on Intangible Assets

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Financial Position and Liquidity

Loans and receivables

Borrowings

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Loan from related party

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Liquidity and Capital Resources

Off Balance Sheet Arrangements

Transactions with Related Parties

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Outstanding Share Data, Share Units and Stock options

Common shares

Share units and Stock options

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

Contractual Obligations and Commitments

Atrush Block Production Sharing Contract

Critical Accounting Policies and Estimates

Significant Accounting Policies

New Accounting Standards Issued but not yet applied

Accounting for Oil and Gas Operations

Management’s Discussion and Analysis

For the three months ended and year ended December 31, 2020

Management’s Discussion and Analysis For the three months ended and year ended December 31, 2020

RESERVES AND RESOURCE ESTIMATES

Company estimated reserves (diluted) As at December 31, 2020

Notes:

Company estimated contingent resources (diluted)[(1) (2)(4)(5)]

ShaMaran Petroleum Corp. Management Reports 2021