Sound Energy : Annual financial and audit reports

SOUND ENERGY PLC
ANNUAL REPORT & ACCOUNTS
FOR THE YEAR ENDED 31 DECEMBER 2023
Company Number 05344804
Table of Contents	Page
STRATEGIC REPORT	2
Chairman's Statement	2
Our Marketplace	5
Our Strategic Partnerships	7
Business Model	9
Reserves and Resources	12
Our Strategy	15
Portfolio Review	16
Micro LNG Project Review	21
Financial Review	23
S172 statement	25
Sustainable and Responsible Business	27
Principal Risks and Uncertainties	31
CORPORATE GOVERNANCE	35
Chairman's Corporate Governance Statement	35
QCA Code Principles	36
Board Overview	38
Board of Directors	39
Board Activities	41
Health, Safety, Security & Environment Committee	43
Audit Committee Report	45
Nominations and Remuneration Committee Report	47
Directors' Remuneration Report	48
Directors' Report	53
Statement of Directors' Responsibilities	55
Independent Auditor's Report	56
FINANCIAL STATEMENTS	61
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2023	61
CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2023	62
COMPANY BALANCE SHEET AS AT 31 DECEMBER 2023	63
GROUP AND COMPANY STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2023	64
GROUP STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2023	66
COMPANY STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2023	67
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023	68
LIST OF PERMITS AND INTERESTS	96
SHAREHOLDER INFORMATION	97

STRATEGIC REPORT FOR THE YEAR ENDED 31 DECEMBER 2023

Chairman's Statement

Introduction

2023 was a year of continued progress, advancing the Tendrara concession development on all fronts: the Phase 1 Micro LNG (mLNG) development, the Phase 2 Pipeline development and funding, and the announcement of our potential asset partner, in Eastern Morocco.

Phase 1 of the development, the mLNG project, progressed with equipment fabrication, site preparation and construction works undertaken. Materials were purchased, contracts awarded and the two well recompletion preparation work commenced.

Fabrication of equipment and site preparation for the Phase 1 mLNG facility proceeded, delivery and installation work slowed in the second half of 2023 due to the main contractor (Italfluid Geoenergy S.r.l ("Italfluid")) experiencing cost increases and supply chain issues. Italfluid took steps to mitigate its financing obligations and phase its expenditures. The updated schedule shows that the LNG storage tank erection work remains on the critical path and that mechanical completion and commissioning of the processing equipment should occur in 2024 and LNG sales thereafter. Sound Energy is evaluating temporary LNG storage facilities to facilitate LNG sales.

The Phase 2 pipeline gas project requires financing to be arranged and finalised prior to taking a Final Investment Decision (FID). In October 2023, the Company announced an extension to its approximately $235 million debt funding term sheet with Attijariwafa bank, Morocco's largest bank, subject to certain key conditions being concluded. At year end whilst project debt financing, a gas sales agreement and an equity partner had been identified and matured, the associated legal documentation and/or conditions precedent had not been completed or satisfied. 2024 requires that these key agreements are finalised and are unconditional such that financing of the pipeline project can be concluded. During 2024, the Company also plans to refresh the FEED (front end engineering design) that was completed in 2019 before tendering for Phase 2 engineering, procurement and construction (EPC) services in readiness for FID. The Company also announced an extension to the conditional gas sale and purchase agreement with ONEE (Office National de l'Electricité et de l'Eau potable).

As part of our wider efforts to bring funding into our plans for Phase 2, it was announced in June, that the Company had identified Calvalley as a partner for the Tendrara Production Concession and the surrounding Grand Tendrara exploration permits. As at year end, the definitive contractual documentation with Calvalley had not concluded although the process was advancing. The transaction would see Calvalley enter the Concession and Grand Tendrara exploration permits in exchange for development and exploration financing. Returning to exploration offers the near-term opportunity to expand the Company's resource base and unlock its significant basin potential.

It was agreed with ONHYM that all exploration permits were either extended or advanced into the first Complementary Period (at year end we are awaiting the various Authorities final approval of the agreed licences amendments).

We were pleased that the long-running dispute with the Moroccan authorities over tax was settled mid-year, with modest payments phased over a six-year period. The removal of this tax overhang helped unlock financing and partnering opportunities at Tendrara, smoothing the pathway towards Phase 2 FID and, hopefully, further exploration success.

Corporate

In June, we successfully raised £2.5 million through a convertible equity issue, which was priced at 2.25 pence per share (a premium to the prevailing share price at the time), with the funds earmarked for pre-FIDactivities on Phase 2, new ventures activities and corporate G&A. In line with the terms of debt issue, the

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Company issued shares following the conversion of £2.25 million into shares during the second half of the year. In December, the Company successfully gained noteholders' support to modify the Euro bond amortisation obligation (in respect of its Company's Luxembourg listed EUR 28.8m 5.0% senior secured notes), such that the bond will now not be fully redeemed until December 2027 rather than partially from December 2023. This, in turn, improved the Company's working capital position as it moves towards first gas and first revenue, on its Phase 1 project.

Preparing key elements for Phase 2 documentation for the Final Investment Decision, has taken longer than expected, but we anticipate the final stages to be completed in 2024. We have appreciated the ongoing support of our stakeholders and investors throughout the process.

ESG and keeping our people safe sits at the heart of our business and, as operations continued, we have actively monitored and taken timely action on safety or environmental issues, reports or alerts, as they have arisen. The Company has a robust health and safety management system in place and works hand in hand with our contractors and under the umbrella of our corporate environmental and safety standards. Thanks to strong monitoring and constant improvement of working practices, we have had no serious accidents over the year. Any environmental issues are also recorded and monitored. Finally, we engage proactively with our local communities and have taken steps not only to employ locals where we can, but to keep relevant stakeholders and communities in Morocco informed about our activities. Good corporate governance is maintained at all levels in particular, we note the new amendments to the QCA governance code and will implement these in due course.

The Company continues to manage its financial resources prudently whilst making significant capital investments in pursuing its strategy. The bridge to fund the company until first revenues from Phase 1 is always under review and a variety of working capital sources evaluated.

Board

During 2023, the Board continued to meet regularly and oversee effective implementation of the Company's strategy. A review of the Board's effectiveness was conducted in 2022. Scope for improvement was identified, and with many resultant initiatives implemented in the Board's 2023 activities. For example, the Board undertook a focused strategy review session during 2023 reviewing all aspects of the Company business, reflecting on its position in the market, risk profile, asset opportunity, structuring, and scenario planning.

We welcomed Simon Ashby-Rudd as new independent director as Marco Fumagalli stepped down. Simon brings a wealth of knowledge, financial skills and deal-making experience to the Company. We thank Marco for his 9 years of valued service, advice, and support to the Company.

Summary

Whilst substantial progress had been made in advancing mLNG and the financial foundations for Phase 2, execution and closing of documentation experienced delays. However, timely conclusion of the proposed partnering arrangement and bank debt financing in 2024 will facilitate progress on the pipeline development at Tendrara, as well as funding for further exploration on Grand Tendrara.

The micro-LNG development at Tendrara construction has suffered from supplier delays and is now expected to be ready to receive gas into the plant by the end of 2024 with LNG sales thereafter. The Company continues to uphold strong ESG values and deliver our work in a manner commensurate with our principles. We are pleased to have settled our outstanding tax matters such that we can optimise our resources on field development.

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We have enjoyed a supportive working relationship with ONHYM, the Ministry and our various contractors in Morocco, and, most importantly, we continue to benefit from the hard work and dedication of our own staff. We will continue to work diligently to deliver value and progress for all our stakeholders during 2024 and beyond, as we focus on delivering material developments in transition energy.

Graham Lyon

Executive Chairman

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STRATEGIC REPORT FOR THE YEAR ENDED 31 DECEMBER 2023

Our Marketplace

Gas and the Energy Transition

The market opportunity

As the global community progresses the deployment of capital and technology to deliver the energy transition, the two weeks at the United Nations COP28 concluded with a consensus to accelerate climate action. The urgency the world faces in securing fewer carbon-intensive fuels as part of the energy mix and transitioning away from all fossil fuels in energy systems in "a just, orderly and equitable manner" has genuine international momentum. Gas is firmly seen as bridge to a future lower carbon energy mix.

Coupled with that, Sound Energy's combined position of having the largest discovered onshore gas resource in Morocco and extensive unrisked muti-TCF exploration potential across Eastern Morocco and Sidi Moktar, positions us favourably to capture a significant foothold in the Moroccan gas market - a market that is both short on discovered indigenous gas resources and that offers significant growth potential across its industrial sector, its gas-to-power sector and, potentially, the European gas market via the Gazudoc-Maghreb Europe (GME) gas pipeline.

Gas and the opportunity for Sound Energy

Transitioning away from carbon-intensive energy supply requires the replacement of high carbon density fuel stocks such as coal to fuels with relatively lower carbon emissions such as Liquified Natural Gas (LNG) or piped gas. This is the opportunity for Sound Energy to connect industrial and power users to gas resources previously seen as isolated from gas market supply or reliant on foreign imports. The gas market that Sound Energy seeks to service and develop throws up considerable opportunity:

• Spanish natural gas consumption in 2022 was 31.5 BCM (1.1 Tcf)1, more than 30 times larger than Morocco's. In 2022, over 99% of Spanish gas demand1 is met by imports, from countries including USA, Algeria, Nigeria, Russia France, Qatar and Egypt
• Following the cessation of gas exports to Morocco from Algeria in November 2021, the case for enhanced supply security and indigenous gas production has become even greater. Our proposed Phase 2 gas development to produce for the gas-to-power market is a key element of Morocco's energy strategy. Clearly, with the significant exploration potential within Sound Energy's portfolio, we are very well-positioned to meet Morocco's heightened and growing need for gas should the company discover further gas resources.
• In the Moroccan National Energy Strategy, Sound Energy has been referred to as important in plugging the supply demand imbalance for gas as it becomes the replacement fuel for coal in Morocco.
• As Morocco continues to grow both industrially and domestically, and as other fuel sources become more scarce in-country, there is a further opportunity to supply more of the energy mix.
• Morocco's imports of natural gas from Spain through the GME pipeline rose by a 403% during 2023. In 2022 Spain exported only about 1,881 GWh (0.16 BCM, 5.8 Bcf) of natural gas to Morocco, 2023 exports climbed to about 9,472 GWh (0.82 BCM, 29 Bcf)2.
• Moroccan LPG market demand ranks top globally and is equivalent to 3.3 BCM (116 bcf) p.a. of natural gas. Commencing in April 2024, the Moroccan Government intends to reduce subsidies on LPG to ease the financial burden on the State, which provided in excess of US$ 2 Billion of LPG subsidies in 20223.

Our Phase 1 mLNG project is the means to for the Company to generate strong and stable revenue in the short term. There is strong and growing demand for our LNG within Morocco. For shareholders this is a key

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phase for the business and will allow us to be less reliant on external sources of funding, through long term revenue generation in a low (hydrocarbon) taxation country.

Building on Phase 1, the Phase 2 pipeline gas project will allow the company to layer on growth, generate increased revenues whilst servicing the burgeoning gas market.

1. https://www.cores.es/en/estadisticas(Natural gas consumption data)
2. https://www.cores.es/en/estadisticas(Corporación de Reservas Estratégicas de Productos Petrolíferos data 2023)
3. OPIS, a Dow Jones Company, 19 December 2023 Interview with Mohammed Rachid Idrissi Kaitouni, President of the Energy Federation in Morocco

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Our Strategic Partnerships

Our key partners allow Sound Energy to achieve more than we could do alone. Our partners support us from investment funding to project execution and delivery.

Afriquia Gaz

Phase 1

Funding/offtaker/investor

The partnership commits SEMEL (Sound Energy Morocco East Ltd) on behalf of the Concession Joint Venture, under a binding Gas Sales Agreement (GSA) to produce, process, liquefy and sell, to Afriquia Gaz, an annual contractual quantity of not less than 171,000 cubic metres of LNG per year (approximately 100 million cubic metres a year of gas) for 10 years from first gas. SEMEL commits to providing Afriquia a daily quantity of between 475 and 546 cubic metres of LNG, and Afriquia will commit to an annual minimum "Take or Pay" quantity of 475 cubic metres per day of LNG for 360 days of each year over the term of the GSA. Afriquia Gaz underpinned its partnership with Sound Energy plc by acquiring a 9.8% shareholding through a £2 million placing in 2021 and entered into a $18 million loan note agreement with the Company, also in 2021, which meets the capital funding requirements of Sound Energy's Joint Venture Concession participants to bring the Phase 1 project onstream. As at 31 December 2023, Afriquia Gaz had an interest in, approximately, 8.996% of Sound Energy's current issued share capital.

Italfluid Geoenergy S.r.l

Phase 1

Design/construct/commission/operate/maintain and fund

In 2022, Sound Energy Morocco East Limited (SEMEL) entered into a binding contract with Italfluid S.R.L. in which Italfluid will design, construct, install, commission, operate, maintain and lease to SEMEL, a gas processing and liquefaction plant over a 10-year period.

Italfluid is an international integrated service Company, which provides certain upstream petroleum services, including the design, construction, commissioning and maintenance of process plants and hydrocarbon processing, including gas liquefaction to produce liquified natural gas. It has been operating in the oil and gas industry for over 30 years. Its previous clients include Total, Edison, British Gas and Eni.

Italfluid, through a vendor financing financial structure with Sound Energy, is aligned with delivering plant operation and maintenance services to the Phase 1 mLNG Project, such that LNG deliveries are guaranteed to market as required Take or Pay, and Send or Pay, contractual obligations.

Micro LNG Plant is to be designed, constructed, commissioned, operated and maintained by Italfluid with contractual obligations for plant operability and performance.

Oil and Gas Investment fund

Investment

In January 2017, Sound Energy acquired the Eastern Morocco portfolio of Oil and Gas Investment Fund ("OGIF"), and introduced OGIF as a second cornerstone investor:

• Consolidated interest in Eastern Morocco's prospective acreage.
• Strengthened Sound Energy's position in Morocco: OGIF is a Moroccan fund, owned by the seven largest Moroccan financial institutions.
• As at 31 December 2023, OGIF had an interest in, approximately, 13.52% of Sound Energy's current issued share capital.

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National Office of Hydrocarbons and Mines

Permits/funding

• The National Office of Hydrocarbons and Mines ("ONHYM") is another key partner for Sound Energy. The department was established in August 2005 by the merger of the Bureau of Research and Mining Participations ("BRPM") and the National Office for Research and Petroleum Explorations ("ONAREP").
• ONHYM is a public institution with legal personality and financial autonomy under state supervision and is responsible for the monitoring of permits for exploration and for funding the development jointly with private partners in Morocco.
• Sound Energy has a good relationship with ONHYM through 4 Joint Ventures with ONHYM formalised through the 4 Petroleum Agreements (PA) below:
• 1. Tendrara-LakbirPA which rules Tendrara Concession JV
  2. Grand Tendrara PA which rules the exploration work over Grand Tendrara exploration permits area
  3. Anoual which rules the exploration work over Anoual exploration permits area
  4. Sidi Mokhtar which rules the exploration work over Sidi Mokhtar exploration permits area

Office National de l'Electricité et de l'Eau Potable (ONEE)

Phase 2

Offtaker

The Company is maturing the second phase of pipeline led development of the Tendrara Production Concession (Phase 2 development).

The joint venture partners entered into a binding GSA in respect of the Phase 2 development with Morocco's state-owned power Company ONEE for the sale of natural gas from the Tendrara Production Concession over a 10-year period. Under the GSA, the joint venture partners conditionally committed to producing, processing and delivering gas from the Tendrara Production Concession, in accordance with required ONEE gas specifications, to the GME Pipeline, for an annual contractual volume up to 350 million cubic meters of natural gas per year for a period of 10 years, with an annual take or pay volume of 300 million cubic meters at a fixed sales price.

As part of Phase 2 development financing the joint venture partners are re-negotiating the GSA with ONEE under the auspices of the Ministry of Energy.

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STRATEGIC REPORT FOR THE YEAR ENDED 31 DECEMBER 2023

Business Model

Delivering sustainable value through the energy transition.

Fuelling the energy transition

As the world continues its ambitious journey towards lower carbon, sustainable energy solutions and a greener planet, Sound Energy is committed to delivering its part in this journey. Access to energy improves lives and stimulates growth in society. Sound Energy is committed to this aspiration and has a strategy focused on developing a portfolio of opportunities to deliver business growth whilst serving consumer needs.

Relationships and partnering

Strategic relationships

Sound Energy recognises that it can achieve more than we can alone by developing high-impact and sustainable strategic industry relationships. These relationships allow us to leverage technical, financial, and commercial expertise to enhance our business and deliver on our objectives, whilst de-risking our opportunities and accessing capital to fund our operations. We believe the creation of mutually beneficial partnerships allows us and our partners to enhance, and deliver, our business strategies.

Governmental relationships

Having strong and well-developed relationships with host governmental bodies is key to delivering Sound Energy's aspirations. The Company invests time, expertise, and resources to engage with governmental agencies to build trust and understanding around its strategy and operations.

Investors

The support of Sound Energy's investors, lenders and shareholders provides us with a firm financial foundation to deliver our strategy. We regularly engage with our shareholders, and we collaborate with our investors who bring insight, knowledge and business skills, which offers an additional layer of value to help us achieve success within the business. The Company's growth focused strategy is centred on:

Short-term Organic growth

• Tendrara Phase 2 gas development
• Tendrara Phase 1 and Phase 2 expansions, more LNG and 2C resources gas sold
• Commercialising known discoveries (e.g. SBK-1,TE-4 Horst)
• Exploration potential surrounding the developments

Medium and Long-term Inorganic growth

• −Renewables
• • Solar
    Wind (own use in Eastern Morocco, expansion for grid)
• Gas storage

• Corporate actions where accretive• Opportunistic asset acquisitions

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STRATEGIC REPORT FOR THE YEAR ENDED 31 DECEMBER 2023

A sustainable business model with ESG at its core

EVALUATE

• Evaluate our existing portfolio focusing on value extraction via a variety of sustainable energy transition strategies, including partnerships, farm outs and revenue producing opportunities
• Screen and assess opportunities for revenue generation

PRODUCE

• Natural gas production via Micro LNG or larger projects at advantaged pricing to generate cash and value for shareholders

GOVERNANCE AND ETHICS

• Committed to strong corporate governance to strengthen our business and serve our stakeholders
• LSE growth market listed entity observing the QCA code

SOCIAL RESPONSIBILITY

• Creating local employment in developing countries

Partnering through the Value Chain Phase 1

DEVELOP

• Advance development strategies with efficient use of financial resources
• Move discoveries through the development phase at pace
• Innovative relationships with strategic partners which can deploy capital and/or technical solutions

RECYCLE AND GROW

• Recycle cash and leverage portfolio to fuel growth
• Leverage technical, financial and commercial skill sets to build the portfolio

PEOPLE

• Keeping our people safe
• Developing our people
• Promoting positive behaviours
• Training of Moroccan nationals

ENVIRONMENT

• LNG and piped gas development displacing coal and LPG to lower Morocco's carbon footprint and increase security of supply
• Respecting our environment and upholding high environmental standards

Micro liquified natural gas development plan for the TE-5 Horst Development

Micro LNG Value	Sound Energy	Italfluid	Afriquia Gaz
Chain
Production	Production	•	Design
•	Commission
	Development drilling
	•	Operate and maintain
Small-scale LNG	Small-scale LNG production	•	Design
•	Commission
production
	•	Operate and maintain
Transport via				Transport via truck
truck
Local storage &				Local storage&
regasification				regasification
Distribution				Distribution
Marketing &				Marketing & sales

sales

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