REG - Tullow Oil PLC - Annual Financial Report <Origin Href="QuoteRef">TLW.L</Origin> - Part 1

Tullow OilAnnouncement

07/03/2017 14:05

RNS Number : 7546Y
Tullow Oil PLC
07 March 2017
Tuesday 7 March, 2017
Tullow Oil PLC 
Annual Report and Accounts
Tullow Oil plc ("Tullow" or the "Company")
Following the release on 8 February 2017 of the Company's preliminary full year results announcement for the year ended 31 December 2016 (the"PreliminaryAnnouncement"), the Company announces it has published its Annual Report and Accounts for this period (the "AnnualReportandAccounts"). 
Copies of the Annual Report and Accounts and the Notice of the Annual General Meeting 2016 are available to view on the Company's website: www.tullowoil.com
The Company's 2017 AGM will be held at the Company's registered address at 9Chiswick Park, 566 Chiswick High Road, London, W4 5XT on Wednesday 26 April 2017 at 12 noon. The Notice of Annual General Meeting 2017 will be sent separately to shareholders in the coming weeks, and available to view on the Company's website. A separate announcement will be made when the Notice of Annual General Meeting is available. 
In accordance with Disclosure and Transparency Rule 6.3.5(2)(b), additional information is set out in the appendices to this announcement. This information is extracted in full unedited text from the Annual Report and Accounts.
The Preliminary Announcement included a set of condensed financial statements and a fair review of the development and performance of the business and the position of the Company and its group.
In accordance with Listing Rule 9.6.1, a copy of the Annual Report and Accounts has been submitted to the Financial Conduct Authority via the National Storage Mechanism and will be available for viewing shortly at http://www.morningstar.co.uk/uk/nsm. 
This document is also being submitted to the Irish Stock Exchange and the Ghana Stock Exchange, and therefore will shortly be available for inspection at the Irish Stock Exchange (28 Anglesea Street, Dublin 2, Ireland) and will be available to shareholders located in Ghana by contacting the Company's registrar: Central Securities Depository (Ghana) Limited, 4th Floor, Cedi House, PMB CT 465 Cantonments, Accra, Ghana (Telephone: +233 (0)302 689 313 or +233 (0)302 972 312544). 
For further information, please contact:
Tullow Oil plc (London) (+44 (0) 20 3249 9000)
 Chris Perry (Investor Relations)
 Nicola Rogers (Investor Relations)
 George Cazenove (Media Relations)
Appendices
Appendix A: Directors' responsibility statement
The following directors' responsibility statement is extracted from the Annual Report and Accounts (page 108). 
Directors' responsibility statement required by DTR 4.1.12R
We confirm that to the best of our knowledge:
 the Financial Statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;
 the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and
 the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.
By order of the Board
Aidan Heavey
Chief Executive Officer
7 February 2017
Les Wood
Interim Chief Financial Officer
7 February 2017
Appendix B:  A description of the principal risks and uncertainties that the Company faces
The following description of the principal risks and uncertainties that the Company faces is extracted from the Annual Report and Accounts (pages 46 to 53).
Principal Risks
On pages 46 to 53 we have identified the principal risks that we see as most relevant to Tullow at this time. There may be other risks that could emerge in the future. If these risks are not successfully managed, our cash flow, operating results, financial position, business and reputation could be materially adversely affected.
Principal Risks
Causes
Potential Impact
Risk Mitigation and assurance
2016 outcomes and ongoing actions
STRATEGIC
1. Strategy not fully achievable in sustained low oil price environment
Executive responsibility
Aidan Heavey
Chief Executive Officer
Link to business model
Sustainable long-term value growth
 Low oil price environment due to global supply/demand balances and shift to alternative energy sources as a result of climate change
 Business not robust to oil price downside
 Inability to monetise chosen assets
 Inability to deleverage the business 
 Capital committed to sub-optimal projects 
 Overheads (i.e. G&A spend) not matched to asset base 
 Portfolio not optimised to sustain long-term strategy
 Robust planning of strategy 
 Business plan reviewed and approved annually by the Board includes options/alternatives for lower oil prices 
 Strict capital allocation process in line with business plan and gate reviews for all new investments
 Track delivery through rigorous regular performance management and reporting 
 Regular investor meetings with Executive to gain feedback and challenge
 Board Strategy Day portfolio reviews
 Improved Group capital allocation process and reporting
 Significant reduction in 2017 planned capital spend 
 Detailed portfolio review 
 Tested and retained options for increased EBITDA delivery
 Focused on deleveraging options
2. Inability to progress major portfolio options
Executive responsibility
Ian Springett 
Chief Financial Officer
Link to business model
Finance & Portfolio Management
 Reduction in market appetite for E&P assets
 Inability to monetise chosen assets and deleverage balance sheet 
 Write-downs on acquired assets
 Over investing in mature assets for low returns 
 Capital commitments requiring scarce investment best spent elsewhere in the portfolio 
 Failure to exit mature assets at appropriate time 
 Exposure to decommissioning costs
 Maintain a highly competent transaction capability 
 Regular portfolio assessments by the Board in the annual strategy review
 Meet relevant commercial and investment appraisal standards and review all major acquisition or divestment proposals
 Major decisions and new country entry follow Executive Director/Board approval process
Conduct post-transaction reviews, whether completed or aborted
 Improved portfolio analysis 
 Bi-annual portfolio reviews with Business Delivery Teams
 Portfolio review on Board agenda
 Executing current strategic portfolio plan
 Focus on securing maximum value in current operations 
 Clear identification of level of commitments in new licenses
 Successful farm down of Uganda and disposal of Norway
3. Failure to realise expected value from TEN due to ITLOS
Executive responsibility
Paul McDade 
Chief Operating Officer
Link to business model
Development & Production
 Freezing of new drilling activity in TEN as a result of ITLOS ruling 
 ITLOS rules against Ghana in border dispute with Cte d'Ivoire resulting in movement of the maritime border and TEN reserves/facilities into CDI waters and suspension of drilling activities
 Loss of some or all of TEN reserves/facilities due to ITLOS decision putting part of field in CDI waters
 Delay in resumption of development drilling plans and production ramp-up
 Regularly monitor the ITLOS case, analysing claims with expert counsel assistance
 Work closely with the Government of Ghana to understand fully the potential impact and encourage continued dialogue between both countries
 Case progressed in line with schedule defined by ITLOS 
 Scenario analysis undertaken
4. Disruption to business due to political/regulatory influence 
Executive responsibility
Paul McDade 
Chief Operating Officer
Link to business model
Responsible Operations and Shared Prosperity
 Fiscal pressures on governments as a result of reduced revenues due to low oil price and local currency exchange rate challenges 
 Uncertainty arising from changes in government leadership
 Pace of national content requirements
 Significant variance to plans due to delayed regulatory approvals/lack of support 
 Regulatory and tax changes affecting profitability and viability of projects/operations
 Non-Technical Risk Standard sets minimum requirements for stakeholder management
 Country Strategy Papers and stakeholder engagement plans, supported by experienced staff to manage developments
 Safety, Sustainability and External Affairs (SSEA) scorecard monitors effectiveness
 Fully embedded Non-Technical Risk Standard
 Mapped and set out integrated solutions for complex risks 
 Negotiated TEN gas sales /delivery agreements and delivered TEN successfully
 Negotiated settlement of tax disputes
5. Disruption to business due to community and political influence 
Executive responsibility
Paul McDade 
Chief Operating Officer
Link to business model
Responsible Operations and Shared Prosperity
 Conflicting interests between the country government and traditional leadership models 
 Government inability to deliver infrastructure on time for projects and provide security for critical infrastructure
 Inability to achieve community support for new projects due to opposition/loss of licence to operate leading to delays in project delivery
 Unplanned costs due to community unrest/opposition 
 Inability to gain land lease extensions
 Significant security risk to Tullow employees and contractors 
 Implementation of country strategies and action plans
 Group Non-Technical Risk Standard in place requiring stakeholder engagement strategy/plan and ESIA for each project
 Adequately staffed and competent SSEA staff
 Social Investments projects mapped to business development plans
 Plans to increase local content incorporated into contracting strategy
 Improved stakeholder strategy
 Developed an approach and plan to obtain agreements with communities
 Landscape level approach to development adopted
FINANCIAL
6. Insufficient liquidity and funding capability
Executive responsibility
Ian Springett 
Chief Financial Officer
Link to business model
Finance and Portfolio Management
 Lack of capital discipline and unsuccessful portfolio management 
 Reduced asset quality limiting ability to raise debt 
 Reduced bank/DCM appetite for E&P sector as a result of capital markets uncertainty 
 Significant unplanned cash outflows and elevated leverage
 Inability to finance strategic objectives 
 Liquidity headroom squeezed
 Ability to raise further debt constrained
 Inability to fund capital investment /projects 
 Prudent approach to diversified debt and equity, with a balance maintained through business planning and performance management processes
 Board-approved funding policy targets in place 
 Optimisation of debt capital structure 
 Good relationships with banks and capital markets investors
 Regular funding and liquidity projections reported to management and periodic financing strategy review carried out
 Financing standard in place to ensure optimal funding
 $300 million additional bank commitments secured in 2016
 Strength of assets retained debt capacity despite fall in oil prices
 2016 year-end facility headroom and free cash of $1 billion; net debt of $4.8 billion
 Mark-to-market value of hedging instruments $91 million at end of 2016
 2017 financing initiatives in progress
 Capital allocation process to meet funding targets
7. Failure to manage commodity price risk
Executive responsibility
Ian Springett 
Chief Financial Officer
Link to business model
Finance and Portfolio Management
 Oil price decline
 Commodity price volatility reduces cash flow and asset value
 Reduced revenues, EBITDA, debt capacity and funding to support investment programme
 Board-approved hedge programme to protect against low oil prices
 Programme monitored regularly and communicated to the Board
 Hedging programme executed and approved in accordance with the policy
 Regular review of hedge strategy, position and effectiveness
 Mark-to-market value of oil hedges at the end of 2016 was $91 million
 Approximately 60 per cent of 2017 entitlement oil production hedged at an average floor price of $60/bbl
OPERATIONAL 
8. Major process safety/
equipment/EHS failure
Executive responsibility
Paul McDade 
Chief Operating Officer
Link to business model
Development & Production
 Inadequate maintenance of safety critical equipment onboard Jubilee/TEN FPSOs Loss of wells, subsea equipment or FPSOs systems 
 Error in well design, equipment selection or programme 
 Ineffective standards and procedures or improper work practices
 Loss of rig position
 Multiple fatalities 
 Serious environmental or asset damage
 Serious reputational damage
 Significant financial consequences 
 Significant loss of production, injection or export capacity
 Independently verified safety cases to demonstrate risks reduced to ALARP and EHS management system in place and risk insurance provided
 Minimum Asset Integrity, maintenance and planning requirements mandated 
 Effective controls within Jubilee Turret Case to Operate 
 Analysis of key FPSO systems (power, gas, water etc.) to support top quartile reliability and computerised maintenance management system (CMMS) to manage asset integrity
 Standard processes in place for major topside upgrades and to manage equipment corrosion and well integrity
 Competency training assessment programmes, regular emergency response exercise and oil spill contingency plans in place
 Skilled and well trained people to ensure safe operations
 All wells designed, constructed and operated in accordance with appropriate standards and procedures
 Third party well examination, internal audit and assurance processes carried out
 Safety case verification by industry experts
 Competency gaps/losses identified
 Assurance against production operations standards
 Assurance against Production Well Integrity Procedure
 Original turret manufacturer and JV partners input to CtO, with external assurance
 Asset Integrity and Reliability Plan in place
 Well integrity Management System and FPSO Performance Standards and Assurance and verification criteria implemented
 Insurance process in place
 Frequent review of Well Engineering Management System to ensure well control risk effectively addressed
 Rig HSE Case and third-party equipment audits carried out
 Training and competency matrix and asset integrity and reliability plan in place
9. Inability to replenish exploration portfolio
Executive responsibility
Angus McCoss 
Exploration Director
Link to business model
Exploration and Appraisal
 Lack of/under investment in portfolio high grading activities 
 Lack of dedicated resources to identify new business activities 
 Failure to encourage entrepreneurial/creative exploration innovation or de-motivation of key staff
 Failure to replenish exploration acreage or fund new ventures 
 Loss of reputation and exploration value from share price
 Sustained exploration failure results
in poor or no drill-ready prospects
 New opportunities are considered against existing portfolio to maintain diversity of prospects and the exploration portfolio is reviewed annually
 An Exploration and Appraisal Values Controls Standard in place
 Exploration and Development Geosciences Executive team work across the business on portfolio planning
 A review of exploration prospect inventory and tracking of net prospective risked resources takes place twice a year
 New licence granted in Namibia
 Farm-down of licences in Pakistan, Norway, Mauritania and Uganda
 Review of New Ventures strategy
 Seismic interpretation used to decipher best prospects 
 Ongoing farm-downs to reduce Tullow equity earlier in licence cycle 
10. Major cyber or information security incident
Executive responsibility
Angus McCoss 
Exploration Director
Link to business model
Governance and Risk Management
 External cyber-attack resulting in network compromise or disruptive/destructive impact to Industrial Control Systems
 Deliberate or accidental internal theft/loss of confidential information 
 Disruption to or halt of critical business systems resulting in stopped production, explosion or loss of life
 Loss or theft of confidential information
 Loss of competitive advantage and intellectual property
 Reputational damage
 Advanced Security Operations Centre (ASOC) provides global monitoring, analysis, alerting and incident response 
 Bespoke advanced security equipment used at key operations sites 
 Active member of Cyber Information Sharing Partnership (CISP) 
 Third-party specialists analyse vulnerabilities and provide network assurance activities
 Enterprise-wide information security awareness training, aligned with Information Security Standards 
 Ongoing enterprise-wide awareness training, with additional bespoke training for higher risk areas
 Ongoing improvement of network infrastructure resilience 
 Specialist external assurance of TEN and Jubilee Industrial Control Systems
11. Failure to have a balanced, diverse workforce and attractive employee proposition
Executive responsibility
Aidan Heavey
Chief Executive Officer
Link to business model
Organisation & Culture
 Tullow culture and values not embedded 
 Staff do not support our current operating model 
 Lack of staff confidence in strategy and senior leadership 
 Diversity and localisation plans not effectively implemented
 Ineffective staff development and reward programmes 
 Loss of key personnel/lack of succession and increased staff turnover
 Lack of in-house skills and requirement to buy-in short-term contractors increases costs
 Negative relations with the government due to failure to implement localisation plans
 Reputational damage 
 Biannual performance and development cycle
 Succession planning, localisation and diversity objectives are set and key targets monitored 
 Nominations Committee focus on diversity plan
 Periodic reporting to Executives of HR data
 Staff engagement plan is agreed with HR, Communications and Executives, with key actions
 Annual Employee Engagement Survey and annual review of reward package
 Revised organisation design with clear accountabilities
 Embedded performance management framework
 Implementation of employee engagement plan
 Restructured HR delivery and reward team 
 Review and revision of reward packages
 Diversity plan defined with actions implemented for 2016
COMPLIANCE
12. Major breach of business or ethical conduct standards
Executive responsibility
Aidan Heavey
Chief Executive Officer
Link to business model
Governance and Risk Management
 Insufficient staff understanding of compliance 
 Poor leadership behaviour 
 Insufficient 'speaking up' culture 
 Lack of compliance monitoring in business units and failure to adequately respond to non-compliance
 Unethical behaviour 
 Breaches anti-corruption laws
 Investigations result in reputational damage
 Cost of investigations and fines
 Senior officers liable under
UK Bribery Act
 Oversight and leadership from the Ethics & Compliance Committee
 Implementation of the Tullow Code of Ethical Conduct, with annual certification process carried out with all staff 
 Gifts and Hospitality (G&H) Standard maintained and assured, with online G&H register available to all staff 
 Other relevant Ethics & Compliance standards, policies and procedures in place, adhered to and maintained 
 Leadership leading by example and advocating good behaviour 
 Dedicated Ethics & Compliance Advisers in key Business Units 
 Appropriate due diligence carried out in relation to service providers, contractors and other counter-parties 
 Appropriate anti-bribery and corruption provisions in agreements with service providers, contractors and other counter-parties
 Improved engagement of Ethics & Compliance in the business 
 Developed and launched E-Learning module to continue to promote the Code of Ethical Conduct 
 Consolidation of monitoring and assurance plan to be used by Business Units 
 Revised and implemented key standard to manage Expenditure relating to Public Officials
 Achieved 97 per cent completion of the self-certification of compliance with the Code of Ethical Conduct
 Received and investigated 91 speak up cases
 Continued local fraud awareness training 
Appendix C:  Related party transactions
The following related party transactions are extracted from the Annual Report and Accounts (page 149).
The Directors of Tullow Oil plc are considered to be the only key management personnel as defined by IAS 24 - Related Party Disclosures.

2016 ($m)
2015 ($m)
Short-term employee benefits
8.9
10.0
Post-employment benefits
1.0
1.1
Amounts awarded under long-term incentive schemes
3.7
4.2
Share-based payments
2.6
5.7

16.2
21.0
Short-term employee benefits
These amounts comprise fees paid to the Directors in respect of salary and benefits earned during the relevant financial year, plus bonuses awarded for the year.
Post-employment benefits
These amounts comprise amounts paid into the pension schemes of the Directors.
Amounts awarded under long-term incentive schemes
These amounts relate to the shares granted under the annual bonus scheme that is deferred for three years under the Deferred Share Bonus Plan (DSBP) and Tullow Incentive Plan (TIP).
Share-based payments
This is the cost to the Group of Directors' participation in share-based payment plans, as measured by the fair value of options and shares granted, accounted for in accordance with IFRS 2 Share-based Payments.
There are no other related party transactions. Further details regarding transactions with the Directors of Tullow Oil plc are disclosed in the Directors' Remuneration Report on pages 80 to 100.
[END] 

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