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Operational risks

Crown Energy’s operations are subject to all of the risks and uncertainties with which businesses focused on exploration and the acquisition, development, production, and sale of oil and gas are associated. Even with a combination of experience, knowledge, and careful appraisal, these risks cannot be completely avoided.

The operational risks listed below is from the annual report 2015.

Operational risks

Description of risks

Financial impact if risk occurs

Operational and industry related risks

>>> Revoked or suspended licences

High

Description of risk:

The Company’s exploration activities depend on concessions and/or permits granted by governments and authorities. Applications for future concessions/permits may be rejected and the current concessions/permits may be subject to restrictions or be revoked by the official body. Although concessions and permits can normally be renewed after they expire, no assurance can be given that this will happen, and if so, on what terms. If the Company fails to meet the obligations and conditions related to operations and costs that are necessary for obtaining concessions and permits, then it may result in a smaller stake in, or loss of, such permits and claims for damages, which may have a negative effect on the Company’s business, earnings, and financial position.

Risk management:

Crown Energy has a good dialogue with all of the relevant authorities. Clear communication occurs regularly through meetings with the authorities and any other licence partners.

2015 outcome / Sensitivity analysis

No licences were revoked in 2015 and Crown Energy is not in default on any licence.In February 2015, the licence period for Block 2B in South Africa was extended to May 2017. In addition, following a meeting with OMNIS, the oil and gas authority in Madagascar, an agreement was reached to extend the Manja licence in Madagascar by four years, until 15 November 2019. It is impossible to quantify the risk and thus also impossible to conduct a sensitivity test.

>>> Contractual risks/shared ownership and partnerships

Medium

Description of risk:

The Company’s operations are largely based on concession agreements, licences, and other agreements. Crown Energy is a partner in several licences with other companies. In these cases, it is difficult to influence how the licence is operated, especially in cases where Crown Energy only holds a small share and thus is unable to influence important decisions.The rights and obligations under these concessions, licences, and agreements may be subject to interpretation and disputes under Swedish or foreign law and can also be affected by circumstances beyond the Company’s control. In the event of a dispute about the interpretation of such terms, it is not certain that the Company would be able to assert its rights, which in turn could have a materially adverse effect on the Company. If the Company or any of its partners should be deemed to have not fulfilled their obligations under a concession, licence, or other agreement, it could also cause the Company’s rights under them to be fully or partially eliminated, or cause Crown Energy to incur costs or obligations to meet the other party’s obligations.

Risk management:

Crown Energy complies with the laws and regulations of the countries in which it operates and with the licence agreements into which it has entered.For licences where other partners besides Crown Energy are the operators, there are joint operation agreements containing standards and requirements for how the operator is to conduct operations and how decisions are made within the partnership (e.g. a certain percentage of votes required for a certain type of decision).In cases where Crown Energy farms out assets, the general rule is to only farm out assetsto companies that are deemed to have strong business, financial, and technical capacity.

2015 outcome / Sensitivity analysis

There are not any known uncertainties or disputes regarding licences CrownEnergy is involved in at this time.In December 2015, Crown Energy entered into a farm-out agreement for its South Africa asset with Africa Energy Corp. Africa Energy Corp also entered into agreements with theother licence holders. As a result, Africa Energy Corp will own 90% of the licence and be the operator. The joint operation agreement for the licence will thus be changed once Africa Energy has taken over its shares. Africa Energy has a good reputation in the opinion of Crown Energy.It is impossible to quantify the risk and thus also impossible to conduct a sensitivity test.

>>> Geological risks

Medium-High

Description of risk:

Any valuation of oil and gas reserves and resources contains a degree of uncertainty. Inmany cases, exploration activities never lead to development and production. Although oil companies try to minimise risks through seismic surveys, they can be very costly and require significant effort without leading to drilling. There is always a risk that the estimated volumes do not correspond to reality. The probability of discovering oil or gas at exploration wells varies. Costly investigations that do not lead to drilling could negatively affect the Company’s business and financial position.

Risk management:

Crown Energy has engagedemployees that are highly competentin geology to reduce the risk of possible miscalculations. Crown Energy's valuations ofreserves and resources are always prepared in accordance with established rules andstandards. The probability of the actual existence of the volumes is assessed and the factthat a certain percentage of wells drilled are statistically always dry is taken into account.Reserves and resources are classified differently depending on this probability, which provides a measure of the geological risk. See the Description of operations section for a more detailed description of this. Internally prepared competent persons reports (CPR) are always certified by an independent appraiser to minimise the risk of incorrect assessments.

2015 outcome / Sensitivity analysis

Exposure to this type of risk is considered comparable to other companies in the same industry. Crown Energy had an internal CPR prepared for all of the Group's assets in June 2015, which was certified by an independent appraiser. In addition, ERC Equipoise prepared a valuation report for parts of Block 2B in South Africa. It is impossible to quantify the risk and thus also impossible to conduct a sensitivity test.

>>> Oil price risk

Low-High

Description of risk:

Oil and gas prices are set on the world market and depend on several different factors outside of the control of the Group; the global economic trend, actions by governments and central banks, geopolitical turbulence, the supply of oil, investment expenses, access to alternative energy sources etc.Crown Energy does not have any production at this time, and this limits its oil price risk. However, a significant and prolonged decline in prices relative to average historical oil price levels may lead to difficulties in arranging financing for Crown Energy, and reduced interest in farm-out projects and similar arrangements.A prolonged price decline may also lead to impairment of exploration and evaluation assets. In other words, the oil price could indirectly impact Crown Energy’s financing and refinancing capabilities. See description of financial risks.

Risk management:

As the Company is not currently involved in production, no oil price hedges are taken out. However, investment calculations are reviewed on an ongoing basis in light of the current market situation to ensure that the decline in oil prices does not cause the Group’s exploration and evaluation assets to be impaired. It is common for investments to be postponed during periods of lower oil prices.

2015 outcome / Sensitivity analysis

It is difficult to analyse what impact the low oil price has had on Crown Energy. However, the current oil prices have not caused impairment of any of the Company’s exploration and evaluation assets; see the Company’s estimates in Note 5, Critical estimates and assessments for accounting purposes, in the Annual Report 2015.In December 2015, Crown Energy succeeded in farming out Block 2B in South Africa, which should be considered a favourable transaction even in the event of higher oil prices.It is impossible to quantify the risk and thus also impossible to conduct a sensitivity test.

Political and societal risks

>>> Political, social, and economic instability

Low-High

Description of risk:

Given that Crown Energy is engaged in and may expand its activities in developing countries, the Company may be affected by political, social, and economic instability, such as terrorism, military coercion, war, and general social or political unrest. This includes the occurrence of corruption. Political, social, and economic instability may thus have a very negative impact on the Company’s operations, particularly with regard to permits and partnerships.

Risk management:

In terms of new licences/ new countries, Crown Energy attempts to avoid gettinginvolved in countries whose political and security risks are too high. In terms of existinglicenses, the risks are assessed as they arise.Crown Energy uses the OECD Risk Awareness Tool for Multinational Enterprises in WeakGovernance Zones to seek guidance where needed.

2015 outcome / Sensitivity analysis

It is impossible to quantify the risk and thus also impossible to conduct a sensitivity test.In terms of the Company’s activities in Iraq in particular, Crown Energy is in ongoing discussions with the regional government in Salah ad-Din. Although the security situation has improved in 2015, Crown Energy is waiting to initiate activities in the licensed area for security reasons.

Crown Energy AB (publ)

Norrlandsgatan 18, SE-111 43 Stockholm

Phone+46 8 400 207 20

Fax+46 8 400 207 25

Emailinfo@crownenergy.se

Organisationsnummer556804-8598