REG - Tullow Oil PLC Tullow Oil PLC - FP Tullow Oil PLC - NP - Annual Financial Report

Tullow OilAnnouncement

07/03/2019 12:00

RNS Number : 1983S
Tullow Oil PLC
07 March 2019
 


7 March 2019
Tullow Oil PLC

Annual Report and Accounts 
Tullow Oil plc ("Tullow" or the "Company")
Following the release on 13 February 2019 of the Company's preliminary full year results announcement for the year ended 31 December 2018 (the "Preliminary Announcement"), the Company announces it has published its Annual Report and Accounts for this period (the "Annual Report and Accounts").
The Company's 2019 Annual General Meeting ("AGM") will be held at the Company's registered address at 9 Chiswick Park, 566 Chiswick High Road, London, W4 5XT on Thursday 25 April 2019 at 12 noon. 
A copy of the Annual Report and Accounts and the Notice of 2019 AGM are available to view on the Company's website: www.tullowoil.com
In accordance with Disclosure Guidance 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 each of the Annual Report and Accounts, the Notice of 2019 AGM and the Form of Proxy in relation to the 2019 AGM have 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.
In addition, all of the above documents have been 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 position and performance, business model and strategy.
By order of the Board 



Paul McDade
Chief Executive Officer
12 February 2019


Les Wood
Chief Financial Officer
12 February 2019



 
 
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 54 to 57).
Principal Risks
 
The enterprise risks that the Board considered to have a significant enough impact during our planning horizon have
been identified and categorised under one of the seven principal risk categories. We provide a summary of those risks below, but we are aware that other risks could emerge in the future and if these risks are not successfully managed our cash flow, operating results, financial position, business strategy and reputation could be materially adversely affected.  However, we do have a robust risk management process in place to ensure such risks are identified and dealt with effectively
 



Strategy risk                                                            Link to KPI/scorecard - business development and growth




Risk of lack of balance between short and long-term investments, insufficient diversification of assets, the inability to manage the portfolio or grow the business during significant changes to market and industry conditions including evolving regulation and taxes related to climate change or caused by shift in oil demand resulting from substitution of hydrocarbons with renewable energy sources.




1.  Risk of inability to make new significant oil discoveries

and replenish exploration and subsurface portfolio                                                       Executive owner: Ian Cloke




Tullow has exciting high-impact exploration prospects and keeps refreshing and replenishing its exploration portfolio in Africa and South America. These opportunities may not be successful due to a lack of maturity of oil industries in new countries we enter or due to less well developed relationships with key stakeholders. Also, due to the nature of the exploration risk, Tullow's exploration programme may not make the next significant oil discovery, inhibiting its growth and resulting in exploration write-offs. By taking this risk Tullow expects that over time the exploration programme should result in a significant success, which would be rewarding to shareholders.




Potential causes


Potential impact


Risk mitigation

and assurance


2018 outcomes and

ongoing actions




-   Exploration drilling is based on seismic data, which can only approximate geological structures and their characteristics.
-   Oil industry may lack maturity in new countries where Tullow invests, or relationships with key stakeholders may be less well developed.


-   Failure to access new acreage.
-   Unsuccessful exploration.
-   Inability to grow the business.
-   Capital write-offs.


-   High-grading of exploration portfolio.
-   Disciplined capital allocation model.
-   Risk-sharing with Joint Venture Partners.


-   The Cormorant-1 wildcat in Namibia was unsuccessful. The cost was mitigated by a farmout and excellent execution.
-   Geophysical Operations were conducted safely and to budget in Africa and South America.
-   Risk sharing was actioned in Suriname, Côte d'Ivoire and Jamaica.
-   New acreage was added in Côte d'Ivoire, Suriname and the Comoros.




2.  Risk of failure to deliver commercially attractive

and timely Kenya development                                                                      Executive owner: Mark MacFarlane




Tullow has progressed the Project past the select/define stage that precedes the Final Investment Decision (FID). The Early Oil Pilot Scheme and the appraisal programme have significantly reduced the risk to the Project in subsurface and non-technical areas. However, several uncertainties still remain which, if not addressed, may result in the Project being less economically attractive in a sustained low oil price market.




Potential causes


Potential impact


Risk mitigation

and assurance


2018 outcomes and

ongoing actions




-   Oil price may be lower than required for FID.
-   Reservoir complexity may impact planned production volumes.
-   Access to land and delivery of infrastructure may be delayed due to lack of national or community support.
-   Changes to legislation and regulations leading to commercial uncertainties.


-   Development of the Project may get delayed.
-   Capex/Opex may be higher than anticipated.
-   EHS/security risks.
-   Unplanned shut-downs of operations.
-   Erosion of value.
-   National and international reputational harm.
 


-   Fully operational Early Oil Pilot Scheme has sufficiently defined reservoir performance and effectiveness of operations.
-   Stage gate reviews and capital discipline.
-   Focused and significant community, National and County Government engagement.
-   Environmental and Social Impact Assessments completed.


-   Phase 1 of upstream and midstream FEEDs completed, with Phase 2 FEEDs due in 2019.
-   ESIAs to be submitted to the Government.
-   Plan agreed with Government of Kenya for their delivery of commercial framework agreements, upstream and midstream land titles and water supply.
 




3.  Risk of failure to deliver commercially attractive

and timely Uganda Development                                                                   Executive owner: Mark MacFarlane




Tullow has reached an agreement with JV Partners to farm down its interest in Uganda and the transaction is pending Government of Uganda approval and agreement on tax treatment of the transaction. The Uganda Project provides an opportunity to contribute significant cash flow to Tullow; however, prolonged discussions between JV Partners, Government of Uganda and other key stakeholders may cause the transaction to be further delayed and the Project to stall reducing the anticipated value and cash contribution of the Project.




Potential causes


Potential impact


Risk mitigation

and assurance


2018 outcomes and

ongoing actions




-   Misaligned expectations between Tullow, Government and key stakeholders.
-   Lack of funding for infrastructure development.
-   Community unrest and asset security.
 


-   Completion of the farm-down transaction and development of the Project may get delayed.
-   Capex may be higher than planned.
-   National and international reputational harm.
-   Loss of licence to operate.


-   Ongoing engagements with the Government to reach alignment on Capital Gains Tax.
-   Project being driven by a Supermajor, for which Uganda is a priority project.
-   JV Partner collaboration to define appropriate upstream and midstream commercial structure.
-   Regular joint project reviews to monitor project progress.


-   Partner workshops to reach alignment on key FID milestones and prerequisites.
-   Defined transition plan in place to re-align roles of JV Partners after farm-down.
-   FID Management Committee to be established comprising Government of Uganda and Joint Venture personnel, to oversee pathway to FID.




Stakeholder risk                  Link to KPI/scorecard - safe, sustainable and efficient operations,

                                                                                business development and growth




Risk of loss or damage to relationships with host governments, JV Partners, investors or other stakeholders, jeopardising our ability to conduct business.




4.  Risk of disruption to business due to

political/regulatory influence in Ghana                                                                          Executive owner: Gary Thompson




Tullow invested material amounts of capital in Jubilee and TEN assets in Ghana and continues to invest in the ongoing operations and new growth. The value of those investments may be eroded by the fiscal interventions by the Government or changes in regulatory environment.




Potential causes


Potential impact


Risk mitigation

and assurance


2018 outcomes and

ongoing actions




-   Increase in fiscal asks by the Government amidst reduced contribution

of oil revenue.
-   Not meeting expectations of national content/localisation

by the Government.
-   Changes to Ghana's legislation and oil and gas regulation post

award of Petroleum Agreements.


-   Regulatory and tax change affect profitability and lead

to value erosion.
-   Significant fines and penalties leading to reputational harm.
-   Disputes with Government of Ghana leading to civil or criminal prosecution.


-   Stabilisation clauses in all Petroleum Agreements.
-   Non-technical risk standard sets minimum stakeholder management requirements.
-   Engagement with Petroleum Commission

to align on localisation and local content expectations.


-   Proactive stakeholder engagement and management.
-   Joint working group established with key stakeholders.
-   Regular engagement with Government on new oil industry legislation.




5. Risk of disruption to business due to community

and political influence in Kenya                                                                      Executive owner: Mark MacFarlane




Kenya development, as an onshore project, attracts greater economic and social interest from local communities and county governments. Expectations from stakeholders may continue to grow, which may lead to development delays or operational disruption if expectations are not met.




Potential causes


Potential impact


Risk mitigation

and assurance


2018 outcomes and

ongoing actions




-   Increasing activism due to lack of community understanding of the project's social and economic impact.
-   Misalignment between Government and counties.
-   Legacy community marginalisation issues.


-   Key development decisions delayed.
-   Operational disruption and unplanned costs.
-   Reputational harm.
-   Loss of licence to operate.


-   Community Outreach Programme in place.
-   Local Content and Capacity Building Framework issued.
-   Turkana Grievance Management Committee and Inter-Ministerial Management Committee established and operational.
-   Focused communications strategy operational to ensure stakeholders are informed about the project and its benefits.


-   Completion of IFC compliant ESIA(s) and implementation of Environmental and Social Management Systems controls.
-   Lessons from Early Oil Pilot Scheme incorporated into full field development risk analysis.
-   Agreement on strategic partnerships and shared infrastructure.
-   Dedicated team to ensure the Tullow Value of Shared Prosperity is fully integrated across the business.




EHS or security risk                                  Link to KPI/scorecard - safe, sustainable and efficient operations




Risk of any incident resulting in fatalities and/or extensive damage to facilities, the environment, or communities in which Tullow operates. 




6. Risk of major process safety or EHS failure in Ghana                                     Executive owner: Gary Thompson




Given Tullow's offshore Jubilee and TEN operatorship, this risk, due to its nature, cannot be entirely eliminated or transferred. However, its likelihood has been reduced to as low as reasonably possible (ALARP) and major steps are undertaken to ensure Tullow maintains an excellent EHS track record.




Potential causes


Potential impact


Risk mitigation

and assurance


2018 outcomes and

ongoing actions




-   Inadequate maintenance of safety-critical equipment on board Jubilee/TEN FPSOs.
-   Ineffective EHS procedures, competence of personnel or lack

of training.
-   Inadequate contractor selection and quality assurance.


-   Fatalities, serious environmental or

asset damage.
-   Significant financial loss, operational disruption and reputational harm.


-   Independently verified safety cases to demonstrate risks reduced to ALARP.
-   Asset and well integrity maintenance with regular assurance over FPSO systems and asset integrity.
-   Comprehensive all-risk insurance.


-   Jubilee Safety Case reissued.
-   Jubilee FPSO shut down

for maintenance and inspections.
-   Planning for TEN FPSO 2019 shut down for maintenance and inspections.
-   Comprehensive assurance over Computerised Maintenance Management System.
-   Jubilee commenced a

10-month Asset Integrity Programme.
-   Re-aligned responsibilities and accountabilities over FPSO operatorship with MODEC.




Cyber risk                                                             Link to KPI/scorecard - safe, sustainable and efficient operations




Risk of a serious cyber-attack, which could involve the loss of confidentiality, integrity and/or availability of business information and/or disruption to our operations and industrial control systems.




7. Risk of major cyber or information security incident                                       Executive owner: Angus McCoss




External cyber-attacks resulting in network compromise, network or Industrial Control System disruption and/or internal theft/loss of confidential information is an ongoing risk and continuously evolving. Tullow takes a range of layered steps to keep ahead of the threat, centralising its security operations through an Advanced Security Operations Centre, delivery of an ongoing security programme and by working with specialist consultancies and government.




Potential causes


Potential impact


Risk mitigation

and assurance


2018 outcomes and

ongoing actions




-   External cyber-attack resulting in network compromise or disruptive impact to Industrial Control Systems.
-   Deliberate or accidental theft or loss of confidential information.
 


-   Disruption to business.
-   Loss of intellectual property and competitiveness.
-   Reputation damage to JV or Government relationship.
 


-   Advanced Security Operations Centre in place and live threat monitoring.
-   Advanced network security detection and data encryption.
-   Security awareness programme.
-   Assurance programme using specialist third-party providers.


-   Joint Tullow/MODEC Offshore Control Systems Cyber Security Steerco established.
-   Operational and offshore Cyber Security Standard approved by Tullow and MODEC.
-   Tullow staff susceptibility to phishing regularly tested.




Financial risk                                                                                             Link to KPI/scorecard - strategic financing




Risk of erosion of financial strength and value, through revenue deterioration and inadequate liquidity/funding due to adverse oil price movements, poor capital and cost discipline and poor balance sheet management.  




8. Insufficient liquidity and funding capacity                                                                        Executive owner: Les Wood




Tullow has reset its operations to be viable in a low oil price environment and currently operates at sufficient levels of liquidity and capital to fund its operations and budgeted growth plans. However, the Company is still exposed to erosion

of its balance sheet and revenues due to the oil price volatility and may be exposed to unexpected costs resulting from operational incidents.




Potential causes


Potential impact


Risk mitigation

and assurance


2018 outcomes and

ongoing actions




-   Oil price volatility due to global supply/demand imbalances reducing revenues and value of underlying assets.
-   Unplanned outages in hydrocarbon production.
-   Significant damage or loss of asset beyond ordinary wear and tear.


-   Reduced revenue, cash flows, EBITDA, asset value and debt capacity.
-   Insufficient funds to support investment programme.


-   Multi-year oil hedge programme with access to upside, approved by the Board annually.
-   Comprehensive insurance package including property damage, business interruption and well control incident risk.


-   2018 year-end facility headroom and free cash of $1 billion; net debt of $3.1 billion; net debt/EBITDAX 1.9x.
-   Approx. 60 per cent of 2019 oil entitlement hedged at an average floor price of $56.24/bbl at YE2018.




Organisation risk                                                                                                Link to KPI/scorecard - organisation




Risk of poor business performance or failing to deliver the Tullow long-term vision and strategy resulting in an unsustainable workforce lacking diversity and balance, ineffective operating structure, and/or fragmented organisational culture.




9.  Risk of failure to have a sustainable, balanced, diverse workforce

and attractive employee proposition                                                                              Executive owner: Claire Hawkings




Tullow's success depends on the quality of talent it can attract and retain, a strong ethically minded and performance-focused culture and clear organisation model, which enables the delivery of Tullow's strategy. Tullow may be unable to maintain or improve operational performance and pursue growth if the Company is unable to maintain, evolve and sustain its organisational capabilities.




Potential causes


Potential impact


Risk mitigation

and assurance


2018 outcomes and

ongoing actions




-   Tullow culture and Values not embedded in the organisation.
-   Diversity and localisation plans not effectively implemented.
-   Ineffective career development.
-   Ineffective total reward.


-   Increased staff turnover.
-   Loss of core skills and capabilities.
-   Failure to deliver localisation and succession plans.
-   Reputational harm.


-   Succession planning, localisation and diversity objectives set and monitored.
-   Regular engagement surveys.
-   Regular review of talent and people development opportunities.


-   Enhanced career and personal development planning.
-   Smart and flexible working arrangements.
-   Diversity targets approved, to be introduced in 2019.
-   Salary review considering gender and equal pay.




Conduct risk                                                                                                             Link to KPI/scorecard - organisation




Risk of a major breach of Tullow Values, Tullow Code of Ethical Conduct, petroleum agreements or major laws and regulations with a potential to seriously damage Tullow's reputation or result in criminal prosecution, severe fines or material unexpected costs.




10.   Risk of major breach of business conduct standards or non-compliance

with major contracts or legal/regulatory obligations                                                   Executive owner: Les Wood




Tullow operates in high-risk geographies on the Transparency International Corruption Index map. Tullow maintains high ethical standards across our business, without which the Company could be exposed to increased risk of non-compliance with bribery and corruption legislation and associated prosecutions and fines. Tullow, due to the nature of its activities, is also exposed, albeit to a much lesser extent, to other compliance risks.




Potential causes


Potential impact


Risk mitigation

and assurance


2018 outcomes and

ongoing actions




-   Poor leadership behaviour and lack of understanding of ethics and compliance risks in key business areas.
-   Organisation culture may not support 'speaking up'.
-   Failure to adequately respond to non-compliance allegations.


-   Unethical behaviours or breach of anti-corruption laws leading to prosecutions and fines.
-   Breach of a major contract with a host government and JV Partners leading to disputes, claims and unplanned costs.
-   Reputational harm.


-   Code of Ethical Conduct and adequate procedures in place.
-   Third-party due diligence procedures.
-   Annual certification by all staff of compliance with the Code of Ethical Conduct.
-   Confidential speak up line available to all staff.


-   Code of Ethical Conduct updated for anti-tax evasion.
-   Tullow Values actively rolled out by the Executive Team.
-   Recorded and investigated 66 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 151).
The Directors of Tullow Oil plc are considered to be the only key management personnel as defined by IAS 24 - Related Party Disclosures.







2018 ($m)


2017 ($m)




Short-term employee benefits


5.7


6.7




Post-employment benefits


0.5


0.8




Amounts awarded under long-term incentive schemes


3.0


2.6




Share-based payments


2.2


2.5








11.4


12.6



 
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 Remuneration Report on pages 83 to 101.
 
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