DANA PETROLEUM IS A FTSE 250 INDEPENDENT OIL & GAS EXPLORATION AND PRODUCTION COMPANY.
WE AIM TO DELIVER GROWTH FOR Annual Report and Accounts 2007 SHAREHOLDERS THROUGH THE CREATION AND EXECUTION OF HIGH Tel +44 (0) 1224 652 400 Fax +44 (0) 1224 652 401 IMPACT OPPORTUNITIES IN THE www.dana-petroleum.com NORTH SEA AND EGYPT. EXPANDING HORIZONS Dana Petroleum plc Annual Report and Accounts 2007 designed & produced by Communiqué Associates Limited, Edinburgh and Aberdeen and Edinburgh Limited, Associates Communiqué by produced & designed DANA PETROLEUM IS A FTSE 250 INDEPENDENT OIL & GAS EXPLORATION AND PRODUCTION COMPANY.
WE AIM TO DELIVER GROWTH FOR Annual Report and Accounts 2007 SHAREHOLDERS THROUGH THE CREATION AND EXECUTION OF HIGH Tel +44 (0) 1224 652 400 Fax +44 (0) 1224 652 401 IMPACT OPPORTUNITIES IN THE www.dana-petroleum.com NORTH SEA AND EGYPT. EXPANDING HORIZONS Dana Petroleum plc Annual Report and Accounts 2007 designed & produced by Communiqué Associates Limited, Edinburgh and Aberdeen and Edinburgh Limited, Associates Communiqué by produced & designed SUCCESSFUL ISSUE OF £141.5M 17 CONVERTIBLE exploration wells BOND & NEW planned in 2008 $400M DEBT FACILITY
VALUABLE NEW UK OIL FIELDS +30% DISCOVERED AT growth predicted WEST AND EAST in Group production RINNES for 2008
PROVEN & PROBABLE 30 RESERVES producing fields in INCREASED TO UK, Egypt, Norway 165.8 MMBOE & Netherlands (2006 130.6)
SIGNIFICANT NEW GAS DISCOVERY AT WEST EL BURULLUS +3 new field 1st developments already sanctioned WELL IN EGYPT in 2008 SUCCESSFUL ISSUE OF £141.5M 17 CONVERTIBLE exploration wells BOND & NEW planned in 2008 $400M DEBT FACILITY
VALUABLE NEW UK OIL FIELDS +30% DISCOVERED AT growth predicted WEST AND EAST in Group production RINNES for 2008
PROVEN & PROBABLE 30 RESERVES producing fields in INCREASED TO UK, Egypt, Norway 165.8 MMBOE & Netherlands (2006 130.6)
SIGNIFICANT NEW GAS DISCOVERY AT WEST EL BURULLUS +3 new field 1st developments already sanctioned WELL IN EGYPT in 2008 CONTENTS Chairman & Chief Executive’s Review 2 Operational Highlights 7 Corporate & Social Responsibility 18 Business Review 20 Financial Review 28 Directors & Officers 34 Directors’ Report and Accounts 36 Proven and Probable Reserves and Resources 105 Exploration and Production GROWTH Interests as at 31 March 2008 106
2007 has been a year of exceptional growth for Dana; our expert teams creating opportunities, developing projects and discovering oil & gas.
+316% +37% +44% reserves replacement increase in increase in cashflow production from operations 30,514 boepd to £201.8m (2006: 22,285) (2006: £139.9m)
+2 +48% significant increase in pre tax acquisitions: profit £143.3m Devon Energy, Egypt, (2006: £97.1m) Ener Petroleum, Norway
Dana Petroleum plc Annual Report 2007 1 CHAIRMAN AND CHIEF EXECUTIVE’S REVIEW “Dana delivered record production in 2007 and is on target for significant further growth in 2008”
2 Dana Petroleum plc Annual Report 2007 + + + + +
INTRODUCTION Alongside production growth, Dana has RESULTS We are delighted to report on another year pursued an ambitious exploration and With 2007 average daily oil and gas of record operating performance with new appraisal programme. Significant effort production growing by 37% to 30,514 boepd highs established for reserves, production, was expended on securing drilling rigs in (2006: 22,285 boepd) and an increased revenue, cashflow and profit. Dana’s what continues to be an extremely tight average realised price of $56.03 per boe management team has also delivered a market for all oilfield equipment. Rigs during 2007 (2006: $48.78 per boe), revenue significant geographic expansion of the were, however, secured for prospects in the for the year increased by 45% to £311.5 Company’s business activities. UK, Norway and Egypt. The 2007 drilling million (2006: £215.3 million). campaign delivered a number of successes Following the successful acquisitions of such as finding gas in the Dutch sector at Profit before tax grew by some 48% to independent oil company Ener Petroleum E18, testing oil at high rates in the Grouse £143.3 million (2006: £97.1 million). Profit in Norway and the substantial Egyptian well in the UK, and discovering oil in two after tax increased by 49% to £61.8 million upstream business of Devon Energy, Dana reservoirs at Storskrymten in Norway, which (2006: £41.6 million), resulting in a 50% has established full operating capability and was the Company’s first well following improvement in earnings per share to 72.17p numerous new business opportunities in two its entry into the Norwegian sector. Good (2006: 48.24p). further proven hydrocarbon provinces. The progress was also made in building Dana’s Cash generated from Group operations Group’s enhanced portfolio now comprises a portfolio of future exploration drilling grew 44% to £201.8 million (2006: £139.9 strong and balanced asset base. It combines opportunities. The Company achieved million). This was supplemented by the a robust production portfolio delivering excellent results in its bids in the UKCS proceeds from a convertible bond issue cashflow from 30 fields, a wide range of 24th Licensing Round, being awarded 16 and a new bank debt facility both of which field development projects and an exciting new blocks, and also secured seven were completed on terms that were very exploration and appraisal drilling programme blocks offshore Norway in the 2007 APA attractive to the Company. Together these with the potential to deliver major upside Licensing Round. facilitated the record £351.3 million net cash over the next two years. Looking ahead, 2008 has started brightly investment made during 2007 on existing During 2007, Dana’s active development and production is expected again to projects and the acquisitions in Egypt and programme and astute commercial deals grow by more than 30%, with output for Norway. The Group closed the year with allowed the Company to continue its the year expected to be in the range of net debt of £71.3 million, equivalent to a delivery of year-on-year production growth. 40,000-45,000 boepd. Seventeen exploration gearing level of just 17%. In particular, the Enoch oil field and the and appraisal wells are planned for 2008, Having completed two significant strategic Cavendish gas field developments both with rigs already secured for 14 of these, acquisitions, and launched the most active achieved first production and have continued representing the most intense year for exploration programme in the Company’s to produce in line with expectations. This exploration in Dana’s history. This forward history, the Directors do not recommend new production was augmented by further programme will target potential reserves of payment of a dividend at this time. This will successful infill drilling within already around 1.4 billion barrels net to Dana over be reviewed once the upside opportunities producing fields. the next two years. within the acquired assets are assessed and the results of the ongoing exploration drilling are known.
Dana Petroleum plc Annual Report 2007 3 Chairman & Chief Executive’s Review continued
2007 was also a very successful year for BUSINESS DEVELOPMENT BOARD AND CORPORATE Dana in terms of oil and gas reserves Business development continues to play GOVERNANCE additions, with a substantial increase in a significant role in delivering Dana’s As planned, Angus Pelham Burn will retire proven and probable reserves to a new growth, and over the past few years, as a non-executive director following the record level for the Group at year end. Dana has consistently undertaken a high completion of the next AGM in July 2008. Increases in reserves arose in three areas. level of commercial activity averaging Angus has been a key member of the Firstly, there were upward revisions in a around 10 commercial transactions per Dana Board and always shown great skill, number of producing fields which have year, ranging from exploration farm-ins, intelligence and integrity during more than 8 outperformed earlier forecasts. Secondly, to individual asset deals, to full blown years of service to the Company. We would there were acquisition-related additions in corporate portfolio acquisitions. Typically like to record our thanks and appreciation to Egypt and Norway and at the Cavendish gas this activity is targeted at the strategy of Angus for his significant contribution during field in the UK. Thirdly, reserves were added adding value through front-end exploration the development of the Group and we wish through the new exploration discoveries. work and accelerating cash flow through him a long and happy retirement. Further reserves growth is being sought development and asset trading. 2007 was Following the forthcoming AGM, Ian in 2008, with Dana’s 17 exploration well no exception, with the most significant Rawlinson will assume the role of drilling programme targeting a range of transactions being the acquisition of Devon Chairman of the Remuneration Committee, prospects. Energy Corporation’s Egyptian assets, relinquishing the role of Chairman of the completed in October, and the acquisition of Overall, some 46.3 mmboe of proven and Audit Committee, which will in turn be the Norwegian oil company Ener Petroleum probable reserves were added during assumed by Philip Dayer from the same ASA (now Dana Petroleum Norway AS) in 2007 due to the net effect of discoveries, date. Brian Johnston was appointed July. These transactions have significantly acquisitions, disposals and field revisions. as a non-executive director on 24 April expanded the Company’s horizons and This increase replaced Group production 2008. Brian enjoyed a highly successful delivered a larger, better balanced portfolio of 11.1 mmboe more than three-fold. 34 year career with Bank of Scotland/ of opportunities that the Company will seek Overall, net additions replaced 316% of HBOS, and was latterly Head of Corporate, to exploit over the coming years. Full details production over the calendar year. Group Scotland, for the Bank managing a team of these two major transactions and the proven and probable oil and gas reserves of 600 colleagues in 45 locations. He has Company’s other commercial activity during at 31 December 2007 reached a new high extensive experience across all areas 2007 are detailed in the Business Review on of 165.8 mmboe, of which 81.5% are now of corporate and acquisition financing, pages 26 and 27. held in Europe. Dana’s end 2007 contingent including UK and international energy sector resources (technically recoverable transactions, and he has worked with a hydrocarbons not yet determined to be number of Scotland’s top entrepreneurs. commercial) was a further 114.2 mmboe. Brian has joined Ian, Philip and Angus all Therefore the total recoverable hydrocarbon serving as independent directors on the resources available to the Group at the Audit, Remuneration and Nominations end of 2007 were 280.1 mmboe, of which Committees. We look forward to working 59% are currently classed as proven and with him as the Company continues to grow probable reserves. over the coming years.
4 Dana Petroleum plc Annual Report 2007 + + + + +
“2008 will be the most active year of exploration in Dana’s history. A total of 17 wells are planned, focused on the UK, Norway and Egypt” Chairman & Chief Executive’s Review continued
DANA PERFORMANCE OVER THE LAST FIVE YEARS
1,400 1,400
1,200 1,200
1,000 1,000
800 800 (p) (£m) 600 600
400 400
200 200
0 0 Market cap Share price 2003 2004 20052006 2007
source: Datastream Note: Data is taken from 31/12 for each period
OUTLOOK Over recent years, Dana has built a During 2008, Dana expects to invest some Dana’s management team is proud of the substantial and balanced portfolio of oil £200 million within its existing fields and Group’s good working relationships with and gas assets. As a result of exploration exploration licences. Approximately £70 its co-venturers, which includes major oil success and a series of commercial million will be spent on production and and gas companies and host governments. transactions, the Company now has development activity and £130 million on Such cooperation is valuable and leads a stream of drilling and development exploration and appraisal. This capital to accelerated progress across different opportunities which will ensure its expenditure programme can be funded from areas of the business. It also contributes growth continues. existing cash resources and projected cash to successful licensing and unlocking new The Group has already drilled six wells flow through 2008. deal opportunities. Across its operating in 2008 and is currently drilling a further bases in Europe and Africa, Dana continues Over the last year Dana has again well offshore Gulf of Suez in Egypt. This to build its team of talented and motivated demonstrated an ability to generate and is the first phase of a programme of some professionals, all focused on delivering complete asset deals in a tight market. 17 wells scheduled in 2008. These are increasing asset value per share. On behalf This commercial activity optimises the targeting a broad portfolio of opportunities, of the directors and staff we would like to exploration programme, through farm-outs, across a range of geological settings, in thank Dana shareholders for their ongoing provides new opportunities and delivers Dana’s three key countries, namely the support and interest in the Company as Company transforming deals, such as those UK, Norway and Egypt. The Company will we look forward together to an exciting in Egypt and Norway. continue to develop its balanced exploration period ahead. portfolio through licence round applications focused on the North Sea and North Africa and through commercial transactions. In addition to exploration drilling, Dana is progressing numerous developments plus 12 infill wells in Egypt and in-field work on many of its other existing fields. Ongoing activity will grow the production capacity Colin Goodall Tom Cross of the Company beyond the record levels Chairman Chief Executive achieved in 2007. 6 June 2008
6 Dana Petroleum plc Annual Report 2007 Europe + Africa – Egypt Rest of Africa + + + + OPERATIONAL HIGHLIGHTS NORWAY + acquisition of Ener Petroleum ASA + Storskrymten discovery well + 7 new blocks in APA round
UNITED KINGDOM 2 new producing fields brought onstream: + Enoch oil field + Cavendish gas field
EXPLORATION + Successful UK exploration wells at Grouse & Kerloch + 16 new blocks awarded 24th round + Gas discovery E18-7, Dutch Sector OTTER KERLOCH HUDSON RINNES MELVILLE JOTUN EITRI ENOCH CLAYMORE CALEDONIA STORSKRYMTEN BARBARA GOOSANDER KITTIWAKE GROUSE MALLARD BANFF GADWALL CAVENDISH MONKWELL Production JOHNSTON Development BABBAGE ANGLIA F16-E EUROPE Exploration VICTOR E18
PRODUCTION & DEVELOPMENT
During 2007, the Enoch oil field (Dana 8.8%) new well accesses a previously undrained study work. Discussions are well advanced and the Cavendish gas field, where Dana area of the field and significantly increases with infrastructure hosts and to align the increased its interest to 50% prior to first gas production capacity. Modifications on five Barbara equity owners for a combined gas, were both brought on stream. With the the Ravenspurn host platform should also development with the neighbouring Phyllis addition of properties in Egypt and Norway, facilitate increased output from the existing gas field. Johnston wells. the Company ended the year producing from Dana’s significant stakes in Barbara and a total of 30 oil and gas fields. Average Work is also advancing at pace on the Babbage represent two of the key growth Group production in 2007 was 30,514 boepd Babbage field development (Dana 40%), areas for the Company in the coming years of which approximately 89% emanated from with drilling expected to commence in late and mean that the Group is participating the North Sea. As a result of adding new 2008 and first gas targeted for early 2010. in two of the more substantial remaining fields and significant enhancement work in This project will be very significant for Dana gas developments in the UK North Sea. In existing fields, Group production capacity and will strengthen the Company’s position addition, project sanction has been achieved increased strongly during 2007. The year in the UK Southern North Sea. for the E18 gas development (Dana 5%) in end exit rate of approximately 45,000 boepd the Netherlands following further successful Good progress is being made at the Barbara significantly exceeded the Company’s two- drilling in 2007. E18 gas will flow across the gas field in the Central North Sea. Dana, year target set at the end of 2005. existing F16-E field in which Dana also has as operator, has undertaken comprehensive an equity interest. Dana continued a high level of activity in subsurface geoscience and surface facilities its existing fields. The Greater Kittiwake Area (“GKA”) (Dana 50%) was successfully tied-back via a new pipeline to the Forties Pipeline System in November, replacing the previous tanker loading system. Accordingly, The North Sea provided 89% uptime from the GKA has considerably improved. The new pipeline will also of Group production in 2007. underpin future development decisions with a pipeline of further and improve the economic return for new project tie-backs in the area, including the development projects being Grouse oil field where development is now being progressed rapidly following the very actively worked, the North Sea successful well drilled in 2007. continues to provide future The Johnston J5 well came on stream just before the year end (Dana 49.89%). This growth opportunities.
Dana Petroleum plc Annual Report 2007 9 Operational Highlights Europe
EUROPE continued
EXPLORATION & APPRAISAL
During 2007, the Company had some The crude oil was of good quality, with a including three operated blocks in the 2007 notable successes with the drillbit. gravity around 32 degrees API and a gas/ APA Rounds. During 2008, Dana expects oil ratio in line with other discoveries in to build its exploration portfolio further In the Dutch North Sea, the E18-7 the area. The Kerloch well was suspended through applying for licences in the UK exploration well was successfully drilled to allow potential re-entry and future use. Government's 25th Offshore Licensing and flow tested at a rate of approximately Dana holds a 50% stake in the Kerloch oil Round, the Norwegian 20th Round and the 36 million standard cubic feet of gas discovery and throughout Block 211/22a 2008 APA Round. per day, leading to sanction of the E18 NW, which also contains an earlier oil development. Faroe Petroleum plc (“FP”) has also been discovery. highly successful in licensing rounds, with The Grouse appraisal well in the GKA in the In February 2007, Dana was awarded 16 the award of five licences in the UK 24th UK Central North Sea tested at stabilised offshore blocks in the UK Government's 24th Round, six licence interests in the APA 2006 flow rates in excess of the pre-drill Offshore Licensing Round, predominantly Round offshore Norway and a further five expectations. The well flowed at rates of in the prospective West of Shetland region licence interests in the APA 2007 awards. over 10,600 boepd, through a 32/64” choke, and in the GKA. In February 2008, Dana In November 2007, FP announced a series with a tubing head pressure of around 2,700 pre-qualified as an operator in Norway and of further commercial transactions building psi, but this flow rate was limited by the was awarded interests in seven blocks, throughput capacity of the test equipment. The well was suspended for use as a future producer and Grouse will be developed as a subsea tieback to the Kittiwake platform utilising the Goosander production riser which was installed in 2006. A fast track development is now underway with first oil expected early in 2009. Dana’s first well in Norway was 15/12-18A targeting the Storskrymten prospect (Dana 25%), in the neighbourhood of the Sleipner field. The well discovered an oil column in the Palaeocene Ty formation and following sidetracking of the original well, it found further oil bearing sands in the Heimdal formation. The operator estimates recoverable volumes of between 9 and 44 million barrels of oil and the co-venturers are considering a further well in the area before progressing with a development. The Dana operated Kerloch well, 211/22a-10 in the UK Northern North Sea, was drilled to a total depth of 12,282 feet and encountered a full Brent reservoir sequence, as predicted prior to drilling. The well intersected an oil column of some 116 feet in the Ness Formation.
10 Dana Petroleum plc Annual Report 2007 + + + + +
upon its exploration, development and was drilled to a total measured depth of a full Brent reservoir sequence. The production asset base. Dana supported 6,470 feet (5,870 true vertical depth subsea) well found excellent quality sands in the FP’s share placing in December 2007 and and encountered a full Brent reservoir Lower Brent reservoir sequence with the maintained the Group’s position as the sequence with excellent quality sands Upper Brent less well developed. Given largest shareholder in FP at just over 17%. throughout. The Company successfully the similarity in reservoir quality and oil During the first quarter of 2008, Dana completed a drill-stem test of West Rinnes, characteristics to West Rinnes, the well further increased its interest in FP to 27.5% which flowed at rates of up to 7,800 barrels was not drill stem tested as the Company by acquiring shares on the open market. of oil per day with the flowrate being had already gathered sufficient data to The Company views its position in FP as a restricted by the test equipment on the fully evaluate the discovery. Following strategic holding in a smaller independent drilling rig. The fluid produced was 100% completion of the drilling at East Rinnes, company with a complementary strategy clean oil of good quality with a gravity of Dana has commenced a complete review and geographic spread. approximately 32 degrees API. The Rinnes of the data gathered, and will re-interpret oil is of very similar quality to that being the seismic data utilizing the new well In March and April 2008, Dana drilled the produced by Dana at the nearby Hudson information and remap the two structures West and East Rinnes prospects located field. The East Rinnes well, 210/24a-11z, and examine the additional prospects for five miles from the Dana operated Hudson was drilled as a sidetrack into a separate further drilling. Development studies for the oil field (Dana 47.5%) in the UK Northern fault block adjacent to West Rinnes, to a Rinnes discoveries and the nearby Melville North Sea targeting two separate Brent total measured depth of 6,935 feet (6,144 oil field will also be initiated. reservoir fault blocks. The first well, true vertical depth subsea) and encountered 210/24a-11, into the West Rinnes structure Devon Energy acquisition + 4 producing fields, 1 operated + 4 operated exploration concessions
Positioned in 3 major hydrocarbon basins + Nile Delta + Gulf of Suez + Western Desert
+10 exploration wells planned in Egypt for 2008 TANGER LARACHE GULF OF SUEZ: NW SAFI WEST EL BURULLUS MOROCCO BOUANANE RAS ABU DARAG WEST ABU GHARADIG SOUTH OCTOBER NORTH GHARA NORTH QARUN QARUN EAST ZEIT EAST BENI SUEF SOUTH FEIRAN EGYPT NORTH ZEIT BAY BLOCK 8 BLOCK 7 MAURITANIA BLOCK 2 BLOCK 1 ST LOUIS SENEGAL
KENYA Production AFRICA – EGYPT Exploration
PRODUCTION & DEVELOPMENT
Dana has worked hard over the last nine Each of the permits in the Western field exploration, are planned, The first of months to consolidate, optimise and fully Desert, namely Qarun, East Beni Suef and these, the SWQ-12 well has recently been resource its new Egyptian operations. The West Abu Gharadig, have seen active successfully completed. Company is now well positioned to deliver development work in 2007 which is planned On East Beni Suef (Dana 50%), also an extensive E&P work programme in Egypt to continue through 2008. operated by Apache, and which consists of during 2008. In the Qarun concession, (Dana 25%) five fields (namely Yusif, Beni Suef, Lahun, The producing assets acquired by Dana which is operated by Apache Corporation Azhar and Gharibon), a number of frac jobs from Devon are located in four concessions, and consists of six fields (namely Qarun, and ESP workovers were undertaken. At three onshore and one offshore, which North Qarun, South-West Qarun, Sakr, the end of 2007, gross field production together cover 14 development leases. The North Harun and Wadi El Rayan) an from East Beni Suef was c.2,200 bopd. Two Egyptian oil fields have performed strongly ongoing programme of electric submersible development wells are planned in 2008. since completion of their acquisition in pump (“ESP”) replacements, frac jobs, The four wells brought onstream at the October 2007, with investment ongoing pump upgrades and general repairs end of 2006 in the West Abu Gharadig in each of the producing fields. Compared resulted in total production at the end of concession (Dana 30%) and which consists with the North Sea, incremental work 2007 exceeding 7,000 bopd. A detailed of the Raml and Raml SW fields, have onshore is relatively low cost and hence subsurface study on Wadi El Rayan has maintained gross production at close to the opportunities to undertake continued also identified further drilling targets. In record levels of around 6,500 bopd. work in the field is greater. In total Dana 2008, five wells, which are effectively near plans to spend in excess of £25 million on development opportunities in Egypt in 2008. In the East Zeit field (Dana 100%), offshore Gulf of Suez, the focus has Dana’s newly acquired been on finalising the workover and infill drilling programme for 2008, to improve operating capability in Egypt on the closing production level for 2007 of approximately 4300 bopd. Dana will be also allows the acceleration targeting at least one new well and two of exploration work sidetracks using the IO3 drilling rig. The Company also recognises significant further programmeS and the delivery potential in this field which it is progressing with its subsurface technical team in Cairo. of new business opportunities
Dana Petroleum plc Annual Report 2007 13 Operational Highlights Africa
AFRICA – EGYPT continued
Exploration & Appraisal
The Group now holds exploration assets the deeper pre-Miocene potential in year will drill its first well in South October, in three key petroleum areas across Egypt, which BP in particular, have recently been a well in SE July and two onshore wells in namely offshore Nile Delta, the Gulf of extremely successful on neighbouring North Zeit Bay. Suez and the Western Desert. This spread acreage. In the Western Desert, Dana works of assets provides Dana with a broad In contrast to the Nile Delta, the Gulf closely with Apache in the East Beni Suef portfolio of opportunities, onshore and of Suez is a relatively mature basin, concession. In addition to containing five offshore, both oil and gas prone, with some where new technology, principally ocean development leases, the concession also relatively under-explored potential. Dana’s bottom cable 3D seismic, is creating new has considerable exploration potential newly acquired operating capability in Egypt opportunties. Dana has a very strong particularly to the east of the River Nile also allows the acceleration of exploration position in the Gulf of Suez with interests where the Gharibon field is the only current work programmes and the delivery of new currently in five offshore exploration field in production. Up to four exploration business opportunities, such as the recently concessions (namely Ras Abu Gharadig wells are planned in the East Beni Suef announced acquisition of an interest in the (Dana 100%), South October (Dana 65%), Extension area in the coming year. In the South East July concession in May 2008. South Feiran (Dana 20%) and North Ghara North Qarun concession (Dana 50%), to the The offshore Nile Delta has recently (Dana 25%)) and one onshore concession west of Cairo, Dana as operator plans to developed as a world class gas province (North Zeit Bay (Dana 100%)). The Company drill one onshore well during 2008. with a range of major companies actively has also recently added to this portfolio by The Company also expects to actively exploring. Dana acquired a 50% interest in acquiring an interest in the South-East July participate in each of the three proposed the extremely attractive West El Burullus concession from Santos, (Dana 40%) subject Egyptian licensing rounds scheduled for block as part of a wider transaction with to normal regulatory approvals. Dana is 2008, and to continue to build on the Gaz de France in 2005/6. Having acquired currently drilling the West Gihan prospect in current business platform. and interpreted seismic through 2007, the South Feiran concession, and later this the first well, WEB-1X, has recently been successfully drilled. The well was drilled to 2403 metres true vertical depth, targeting a Pliocene prospect consisting of a turbidite sandstone channel system. The well encountered good quality gas bearing sands and an extensive set of wireline logs were run to maximise the reservoir data acquired. The partners also successfully completed a comprehensive multi-flowrate drill-stem test of the reservoir sequence, which flowed at rates of up to approximately 27 million standard cubic feet of gas per day. The well flowed very strongly with high downhole pressures. The acquired data will now be analysed and an appraisal program defined. Follow up potential in the block, includes further post-Miocene exploration in the shallow water in the area surrounding WEB-1X, similar geological plays in the deeper water further offshore and exploring
14 Dana Petroleum plc Annual Report 2007 + + + + + rest of africa
Exploration & Appraisal
In Morocco, Dana is operating the onshore decided to enter the next phase of the its equity in Block 2 to 10.73%, following Bouanane licence (Dana 50%), close to the Production Sharing Contract, including the withdrawal of Woodside Petroleum, and Algerian border. Study work has progressed the commitment to a further well by the Dana is now working with the new operator well and the co-ventureres are currently in middle of 2010. Dana, as operator, is Tullow, to develop the forward programme. negotiations to secure a drilling rig for its currently reprocessing 3D seismic data In Kenya, following the disappointment of first well in this area. This well will target in the concession to better define the the results of the Pomboo well completed the large Tafejjart gas prospect. Offshore, optimal drilling target. The Company is also early in 2007, on Block L5 (Dana 27%), on the Tanger Larache licence (Dana 15%), currently actively pursuing deep water rig the Company remains focused on realising interpretation of existing 3D seismic has options for an anticipated 2009/10 drilling value from the two well farm-out previously identified a number of gas prospects close programme. In Block 1 Mauritania (Dana agreed with Woodside in 2003. to shore. One such prospect Anchois, is 36%) and the adjacent St Louis concession expected to be drilled late 2008/early 2009. in Senegal (Dana 30%), a new 3D seismic survey is currently being acquired. This Progress has also been made on a number survey will allow optimisation of future of fronts in Mauritania. In Block 7 (Dana drilling targets. The Company also increased 36%), northern Mauritania, the co-venturers Operational Highlights continued
HEALTH, SAFETY AND ENVIRONMENTAL PERFORMANCE
Health, Safety and Environmental (HS&E) CONTINUAL IMPROVEMENT 2007 HS&E PERFORMANCE management is a key priority for Dana Continual improvement in HS&E Although Dana’s 2007 HS&E goals were particularly as the Company grows, performance is sought throughout the largely overtaken by the significant increases its staff and takes on more organisation by setting and monitoring organisational changes in business, operating responsibilities. Commitment to objectives, implementing the Dana HS&E following the acquisitions in Egypt and HS&E is driven from the Board to Directors, Management System and pursuing the Norway, all original goals were achieved. with the Technical & Commercial Director following policy aims: During 2007 there were no Loss Time having responsibility for HS&E across the Injuries to any Dana personnel or contractors + Provision of adequate resources to organisation. HS&E matters are managed working for Dana. The Company also met all facilitate successful HS&E management; alongside other critical business functions legal requirements in relation to HS&E in all by the senior management team in the + Ensuring employees and contractors are the countries in which it worked. Company. suitably competent and able to perform Highlights of the 2007 HS&E performance assigned tasks; At the Corporate 2007 HS&E Management included: Review, six HS&E principles were set and + Identification and review of operational + Review of previous HS&E Management communicated to establish ideals which risk and environmental impacts, system and development of a revised Dana will strive to achieve across all its mitigating risk where possible and Group Umbrella Management System business activities: communicating as appropriate; which governs all Dana activities world + No harm to people; + Ensuring relevant regulatory, legal and wide, allowing for the HS&E integration + No undesirable environmental release other requirements are met and applying of country office operations in UK, Egypt or emissions; Dana standards where regional laws do and Norway; not exist; + No damage to property; + Approval of the HS&E Management + Communicating regularly with external System by Norwegian Safety Authority + HS&E matters managed as any other parties to allow Dana where practicable (PSA) as an integral element of Operator critical business activity; to implement ‘best practice’ in managing pre-qualification in Norway (granted + Promoting a positive safety culture; HS&E risks; January 2008); + Activities undertaken with HS&E + Active promotion of Dana HS&E + Implementation of Operations Integrity compliance. standards with suppliers, contractors and Management System and Oil Spill companies operating on Dana’s behalf; Contingency Plan for operated East Zeit Field, offshore Gulf of Suez, Egypt; + Ensuring suitable and sufficient arrangements are in place to manage and respond to emergency situations; + Encouraging a culture whereby employees, contractors and other stakeholders may contribute to the implementation of this policy and the Dana HS&E Management System. Annual HS&E goals are set at a corporate level, with objectives and targets then set by country offices to support the corporate goals. The Company sets targets against leading indicators and monitors its performance against industry standard lagging HS&E indicators, including Accident Incidence Rates.
16 Dana Petroleum plc Annual Report 2007 + + + + +
+ Continued alignment with ISO: 14001 + All formal submissions for drilling, exercise to test its effectiveness. Dana Environmental Management Standard, well and pipeline activities were was commended for its ‘best practice’ building on successful compliance, duly approved; approach to specific areas of the as externally verified to OSPAR response plan during this exercise; + Dana has continued work with the Recommendation 3/2005 in 2006; Mauritanian authorities to develop an + Dana’s operated producing interests + Dana participated in the industry appropriate Environmental Statement are now subject to permit regimes Produced Water Trading Scheme to framework for the country; and every effort is made to ensure satisfy the UK OSPAR requirements that the specified permit levels are + Dana’s UK Oil Spill Contingency Plan in respect of its operated Hudson field. duly complied with. Opportunities for was successfully tested with the Deputy Dana has been proactive in significantly improving the environmental impact of Secretary of State and approved by reducing its oil in produced water Dana’s operations are considered on an the Department of Trade and Industry discharges since acquiring the ongoing basis. in June 2007, following a practical Hudson asset;
+ + + + CORPORATE & SOCIAL + RESPONSIBILITY
In 2008, the Company will participate in the annual Carbon Disclosure Project for “Dana aims to ASSIST the first time. The Company recognises the increased awareness and importance organisations focused on of issues related to carbon emissions and providing high quality support considers participation in this survey as an appropriate step for a Company of Dana’s to local communities in our scale. As Dana is generally a non-operator of the assets in which it holds interests, key regions of operation” the carbon emissions over which Dana has direct control are relatively low. However, efficiency gains are sought wherever recognition from Scottish and Westminster CARE Egypt to fund educational, agricultural possible and the use of tele- and video- governments. The Foyer focuses on issues and sanitary projects. The projects focus conferencing is encouraged to reduce the in relation to homelessness, drugs and on promoting basic education, especially number of flights undertaken. As examples, getting people into steady and worthwhile for girls in Upper Egypt, promoting the most of the inter-company communication employment. Specific examples of participation of women and youth in local between Aberdeen, Oslo and Cairo is programmes are flats provided to homeless governance, and combating violence against undertaken using email, tele- or video- young people, ‘Foyer Drive’ which is a women. CARE had originally intended to conferencing with business travel kept to unique scheme for providing disadvantaged support just two projects, but because a minimum. young people with affordable means of of the level of support from Dana and obtaining the driving licence that will help other organisations, three very important As the Company expands and enters towards employment, and a range of social programme initiatives were supported. new countries, there is recognition of enterprises. Again, Dana’s financial contribution and the social responsibility to be directly support directly helps individuals and assist In Egypt, the Company is involved in a involved in supporting local communities. poor and marginalised people in Egypt to number of charitable organisations, which In the last year, in parallel with acquiring overcome poverty and to live with dignity demonstrates its commitment to the local new businesses in Egypt and Norway, and hope. the Company has implemented support community. During 2008, Dana will seek to expand its for a number of organisations which are On a monthly basis, Dana donates food charitable giving in Egypt, and is currently considered to be particularly focused on parcels to the value of $500 to a local looking at relevant organisations with which providing high quality support to the local orphanage. These donations directly help to work. communities. some of the most vulnerable and needy In the Aberdeen area, the Company has children in Cairo on an ongoing basis and The Company also supports its employees recently made a significant donation to the are particularly vital given the current who are directly involved with charitable Aberdeen Foyer. The Aberdeen Foyer was inflation rates, and hence rising food prices, and community activities. established in 1995 to prevent and alleviate being experienced in Egypt. homelessness and unemployment amongst A number of Dana Egypt employees vulnerable 16-25 year olds living in North participated in the 2007 BG Challenge East Scotland. The charity has grown rapidly event held in Sinai in December. As part of and through pragmatic and innovative this event the Company donated $8,000 to routes, has delivered real results and
Dana Petroleum plc Annual Report 2007 19 BUSINESS REVIEW
THE MACRO ENVIRONMENT/ of approximately 38p per therm. This available also ensure the debt markets BUSINESS BACKGROUND upward momentum has continued strongly remain open to the sector despite the in 2008 with the summer gas price reaching current tightness in the credit markets, Over the course of 2007 there was a huge a new high in excess of 60p per therm, although this factor will likely impact the change in sentiment. Oil prices dropped while winter gas is being purchased for competition from private equity and junior sharply in the first couple of months of the around 85p per therm. In future gas prices independents who may well have their year breaking below $50 per barrel, but are increasingly expected to track the oil financing ambitions curtailed by the current rallied strongly over the course of year, price trend. conditions in the banking markets. particularly in the final quarter, when $100 per barrel was exceeded for the first Costs all the way through the value chain PRINCIPAL BUSINESS RISKS time. Continuing strong demand from the remain under pressure with increasing burgeoning economies of China and India investment activity levels in the industry FACING THE COMPANY allied to ongoing geo-political tension in being spurred by the strength of commodity As a participant in the Upstream Oil & Iran, Nigeria and South America were key prices, creating significant competition Gas industry, Dana encounters, to varying causal factors. A further contributory factor for the resources necessary to support degrees, the macro risk factors noted to the strength of the oil price increase upstream activity, particularly with above. In addition, the Board conducts an over the final quarter of 2007 and to date in reference to people, drilling rigs and annual review of the Company’s system of 2008 is the effect of speculative investment equipment. Demand for oil field services risk assessment at the micro level for the in oil as a commodity to hedge against the and experienced resources is expected to specific risks faced by the Company. concurrent weakening US dollar. Overall remain high. These risks are considered typical for an the average Brent oil price for 2007 was The competitive landscape for new upstream company of Dana’s size, as can approximately $72 per barrel, compared opportunities in the upstream acquisition be illustrated from the following extract to approximately $65 per barrel in 2006. and divestment market also remains strong, from the most recent Board review in Since the year end, prices have continued driven by the strong free cash flows being December 2007. to surge with a year to date average at generated by the industry. The returns the time of writing of over $100 per barrel, with the Brent benchmark price having peaked at over $130 per barrel. There is therefore substantive evidence from Loss of key employees Material fall in oil and gas price the past two years that there has been Delays in implementing work programmes a sea change in energy markets with the supply-demand tensions creating a higher Taxation – legislation changes
price environment although there remains HIGH IMPACT considerable uncertainty as to the predicted future trading range. UK gas prices followed a similar trend with Significant cost over-runs or delays on major Exploration well failure prices depressed and typically below 20p development projects per therm for the first half of 2007 as a result of the mild winter weather creating Lack of operational resources unseasonably low demand. However, Commercial misalignment with co-venturers the UK, now being a net importer of gas, increasingly saw gas supply and LNG Unfulfilled PSC work obligations
deliveries constrained or diverted to Europe MEDIUM IMPACT Poor reservoir performance and elsewhere, for higher prices. Allied to the strengthening oil price, these factors dragged the gas price curve up substantially in the second half of the year to an average MEDIUM PROBABILITY HIGH PROBABILITY
20 Dana Petroleum plc Annual Report 2007 + + + + +
Dana focuses on a 1 BALANCING INVESTMENT four pronged strategic Balancing investment between exploration, development and production opportunities, and between North-West Europe and international investment. Traditionally Dana has focused approach to its less on the development stage of the lifecycle. However, as the company grows this stage business and the risks will become an increasingly important element for building value, as demonstrated with the Enoch and Cavendish developments in 2007, and recent project sanctions of Babbage, facing the Company. Grouse and E18-A.
2 MAXIMISING THE PROBABILITY OF SUCCESS Maximising the probability of success by spreading the exploration portfolio between North- West Europe and international spend, and by drilling a range of prospects with different risk profiles and varying geology. The Company strongly believes that exploration success should be driven by the highest standards of technical analysis and by taking a portfolio approach. To that end, Dana is planning 17 exploration and appraisal wells during 2008.
3 USING EXPLORATION AS LEVERAGE Using exploration as leverage to accelerate growth by trading exploration positions for production and development opportunities and by trading between geographical areas. This strategy accelerates cash flow, reduces the requirement for large capital expenditure in the development phase and delivers assets in the core focus areas.
4 OPERATING A SOUND FINANCIAL FRAMEWORK The Company is in a strong financial position, with good cash flow generation from the existing production portfolio and will seek to maintain this platform so that it can leverage future growth opportunities with confidence. Over recent years, this approach has allowed the Company to remain unhedged with respect to commodity prices, thereby providing full exposure to the strong commodity price environment.
Dana Petroleum plc Annual Report 2007 21 Business Review continued
DANA’S STRATEGY IN ACTION
BALANCING OUR INVESTMENT
Norway Focusing on the North Sea UK Exploration portfolio and Production & Development active investment driving Exploration & Appraisal production growth
Netherlands
Focusing on Africa Morocco Stable production and portfolio of exploration Egypt opportunities
Mauritania
Senegal
Diversifying Our Exploration Portfolio Kenya
Geography
West of Shetland 25% Northern North Sea 22% Central North Sea 17% Southern NorthSea 15% Norway 12% Holland 9%
Environment Equity
Deep water 40% <33% Shallowwater 30% 33-66% Onshore 30% >66%
22 Dana Petroleum plc Annual Report 2007 + + + + +
BALANCING RISK WITH LEVERAGING EXPLORATION TO RIGOROUS PORTFOLIO ACCELERATE GROWTH MANAGEMENT
+ Active deal making Generate cashflow with sale of non-core assets + High risk drilling largely free carried + Causeway: $40m cash from sale + Focused new country entries + Low cost entry where possible, Accelerate timescale to value creation active in licence rounds
+ Babbage: approval of well 2006 project sanction 2008 2007 prospects first gas 2009 2005 prospects + Grouse: appraisal drilling 2007 project sanction 2008 first oil 2009
volume Swap appraisal for production
+ Mauritania: lucrative asset swap with Gaz de France
high risk lowrisk
OPERATING A SOUND FINANCIAL FRAMEWORK
250,000
+ Growing cashflow from operations 200,000
+ Manageable debt, low gearing 150,000 + Facilitating unhedged position 100,000 50,000 GBP £000's 0 2003 2004 2005 2006 2007 -50,000
-100,000 Cashflow from Operations Net Cash/(Debt)
Dana Petroleum plc Annual Report 2007 23 Business Review continued
2007 BUSINESS PRIORITIES In the Northern North Sea and Norway, producing field in GKA. From a production The following indicators were considered production growth was attributable to the performance point of view, GKA was key to assessing the Company’s Jotun field in Norway (Dana 45%). This adversely impacted by an incident in April performance and progress during 2007: was added to the portfolio in July 2007, as 2007, when the shuttle tanker ruptured the part of the acquisition of Ener Petroleum offtake mechanism resulting in a 28 day + Production growth; ASA and, in total for the year, the field field shutdown. This was an operational + Reserves replacement; contributed 6.3% of total Group production. issue outwith the Operator’s control, and an insurance claim for repair costs is being + Execution of the planned exploration Hudson field production (Dana 47.5%) actively progressed. During the final quarter drilling programme; was lower than anticipated for the year. The Otter field (Dana 19.5%) produced in of 2007, GKA was also successfully tied + Delivery of development projects; line with expectation for the year. Both into the Forties Pipeline System, which + Delivery and completion of new Hudson and Otter produce across Shell should considerably improve field uptime commercial transactions; operated infrastructure, which is currently in the future. Elsewhere, first production was achieved at the Enoch oil field (Dana + Health, Safety and Environmental the subject of disposal negotiations. 8.8%) in May 2007, and the field continued performance; Dana looks forward to working with the to perform well throughout the remainder new infrastructure owners to exploit the + Financial performance. of the year, in line with expectations. The remaining potential in these areas, as Banff, Claymore and Caledonia fields all A review of each of these areas now follows. evidenced by the recent discoveries at East performed in line with original expectations and West Rinnes to the South West of for the year. Overall, in this area, production PRODUCTION GROWTH Hudson. increased 16% over 2006. 2007 was another year of record oil and In the Central North Sea, the Greater In the Southern North Sea and The gas production. Annualised average Kittiwake Area (GKA) (Dana 50%) continues Netherlands, production was enhanced production for the year was 30,514 boepd to be a key focus of investment and during the second half of the year by new (2006: 22,285 boepd), with 89% delivered return for Dana. The area highlight of the from Europe (2006: 93%). Oil accounted for production from two wells in the newly year was the successful appraisal of the 80% of production. developed Cavendish gas field (Dana 50%). Grouse field, which has now progressed Whilst this field has since performed A regional analysis of the source of production to the development phase for first oil extremely well, first production was is provided in the following graphic. production early 2009. This will be the fifth somewhat later than originally anticipated at the start of 2007. The other key activity in this sector was the drilling of the J5 well Dana Group Production by Geographic Area on the Johnston gas field (Dana 49.89%). 35,000 This was a successful well, but delays with the operational tie-back, meant there was 30,000 little positive impact on 2007 production. As a result, this was unable to mitigate 25,000 the effects of nearly four months of field shutdowns, as a result of drilling, problems 20,000 Egypt – Western Desert with the host facilities on Ravenspurn North Egypt – Gulf of Suez and a subsea leak in the hydraulic system. 15,000 Nonetheless, total production from this Russia
Production (boepd) 10,000 geographic area increased by approximately Europe – SNS & Netherlands 86% over 2006. 5,000 Europe – CNS
0 Europe – NNS & Norway 20062007
24 Dana Petroleum plc Annual Report 2007
+ + + + +
In common with the difficulties encountered in the Western Desert, namely East Beni project sanction decision. These were by other upstream international ventures Suef (Dana 50%), West Abu Gharadig (Dana however offset by the change in the status in Russia, Dana experienced challenges 30%) and Qarun (Dana 25%) which together of the Russian asset where, following the to its rights to continue to operate and include 13 fields. Both areas contributed decision to change to a service contract manage the South Vat-Yoganskoye field equally to group production during the final arrangement, reserves are no longer in Siberia. This culminated in a series of quarter of 2007, and together for the year, recognised by the Group. Secondly, there court actions brought by field licence holder Egypt accounted for 7.3% of total Group were acquisition related additions in and minority shareholder OOO LUKoil-West production. These fields contain a number Egypt and Norway, at the Cavendish gas Siberia (“Lukoil”) seeking termination of of further identified growth opportunities field in the UK, and the completion of the the commercial contract pursuant to which that the Group is seeking to exploit during acquisition of the Bligh discovery. The Dana’s subsidiary, Yoganoil managed 2008, when Egypt, on a full year basis, acquisitions in total added 53.3mmboe. and operated the South Vat-Yoganskoye is expected to contribute 20-25% of The acquisitions were partly offset by the field (the “General Contract”). Yoganoil Group production. divestment of the Causeway discovery. successfully defended legal proceedings on Thirdly, reserves were added through the three separate occasions; however a further RESERVES REPLACEMENT new exploration discoveries at E18-7 in action initiated by Lukoil was decided 2007 was a very successful year for Dana The Netherlands and an upgrade following in Lukoil’s favour in September 2007. in terms of oil and gas reserves additions, testing of the Grouse discovery. Further Accordingly, Dana ceased to recognise with a substantial increase in proven and reserves growth is being sought in 2008, production from South Vat-Yoganskoye from probable reserves to a new record level of with Dana’s 17 exploration well drilling this date. 165.8 mmboe for the Group at the year end. programme targeting a range of prospects. The loss of production in Russia was Increases in reserves arose in three areas. Overall, some 46.3 mmboe of proven and however, more than replaced by the Firstly, there were upward revisions in probable reserves were added during completion in October 2007, of the Devon a number of producing fields, which 2007 due to the net effect of discoveries, Energy Egyptian acquisition. This added four have outperformed earlier forecasts, and acquisitions, disposals and field revisions. new producing concessions to the Dana developments, principally in the Babbage This increase replaced Group production portfolio, the operated East Zeit field (Dana discovery where extensive subsurface work of 11.1 mmboe more than three-fold. 100%), offshore Gulf of Suez, and interests has taken place leading up to the recent Overall, net additions replaced 316% of in three non-operated concessions onshore production over the calendar year. Group Business Review continued
proven and probable oil and gas reserves 2007 Reserves Movements – Commercial & Potentially Commercial at 31 December 2007 reached a new high of 165.8 mmboe, of which 81.5% are now 180 held in Europe. Dana’s end 2007 contingent resources (technically recoverable 170 hydrocarbons not yet determined to be commercial) were a further 114.2 mmboe, 160 an increase of 12.5 mmboe, due principally
to the discovery at Storskrymten in Norway. 150 Therefore the total recoverable hydrocarbon
resources available to the Group at the Net Reserves (mmboe) 140 end of 2007 were 280.1 mmboe, of which 59% are currently classed as proven and 130 probable reserves.
120 End 2006 Production Discoveries & AcquisitionDisposalRevisions End 2007 EXECUTION OF THE PLANNED Extensions EXPLORATION DRILLING PROGRAMME As planned, Dana participated in six The range of exploration opportunities has undertaken comprehensive subsurface wells in 2007, five in Europe and one being drilled, and the proximity of a geoscience and surface facilities study internationally, with three further wells significant proportion of these to existing work, with project sanction expected early delayed into the early part of 2008. infrastructure, should result in a significant Successful wells were drilled at Grouse in 2009. Sanction of the Monkwell project increase to Dana’s reserve base by the end in the UK, E18-7 in The Netherlands and in the UK Southern North Sea is dependant of 2008 through organic growth. Storskrymten in Norway. At the Pomboo on appraisal drilling planned for third well, offshore Kenya, although the quarter 2008. DELIVERY OF presence of significant reservoir sands was DEVELOPMENT PROJECTS The addition of these fields, along with encouraging, no hydrocarbons were found. active infill drilling and other projects in Building on the performance of 2006 when Also the Cygnus well in the Norwegian Sea existing fields, will provide the basis for and the Watling well in the UK Southern the Goosander field was brought on stream, increasing production in coming years. North Sea failed to encounter hydrocarbons. two further fields, namely Cavendish and Enoch were successfully brought on stream 2008 will see a significant increase in in 2007. Together with the addition of fields DELIVERY AND COMPLETION activity with 17 wells scheduled, focused in Norway and Egypt this means that Dana OF NEW COMMERCIAL on the three core areas of the UK, Norway now has interests in 30 producing fields. TRANSACTIONS and Egypt. By the end of May 2008, six wells had already been drilled, with four In 2008, the Company has already Dana continues a high level of commercial significant successes at Kerloch, West and sanctioned the E18-A gas development in activity in line with its strategy of adding East Rinnes in the UK, and West El Burullus The Netherlands, the Babbage gas field value through its front-end exploration work in Egypt, with one further well in progress. in the UK Southern North Sea and the and then accelerating cash flow wherever Rigs have been secured for the majority of Grouse oil field in the UK Central North possible. The Company also undertakes the remaining wells planned in 2008 and Sea. Good progress is being made at the carefully selected asset and corporate the Company is in advanced negotiations Barbara/Phyllis joint gas development in acquisitions. The two most significant regarding the outstanding operated rig slots. the Central North Sea. Dana, as operator, transactions in 2007 were the acquisition
26 Dana Petroleum plc Annual Report 2007 + + + + +
of Devon Energy Corporation’s Egyptian In addition, during 2007 the Company Dana completed the divestment of its 14% assets, completed in October, and the continued to develop both the quality and interest in Blocks 211/22a SE and 211/23d, acquisition of the Norwegian oil company extent of its asset portfolio through a series including the Causeway discovery. This Ener Petroleum ASA (now Dana Petroleum of commercial deals. equity was considered to be non-material Norway AS) in July. and the consideration of $40 million was Dana increased its interest to 64.85% significantly in excess of Dana’s carrying The Devon acquisition is Dana’s largest and operatorship in Block 210/24a in the value for the block, generating a pre-tax single transaction to date. The assets Northern North Sea. The Company has gain on disposal of nearly £17 million. acquired include eight concessions in Egypt, since made the West and East Rinnes including 14 producing fields, one of which oil discoveries in this Block, which also Finally, the Company farmed down its is operated, and four operated exploration contains the Melville oil discovery and interest in the Monkwell discovery in concessions. There are active work further exploration potential. the UK Southern North Sea for a carry of programmes in each of the concessions certain costs through the appraisal well, Dana equalised its equities across Blocks with drilling or seismic planned in 2008. The scheduled for third quarter of 2008, and any 211/8a and 211/13a in the Northern North deal added approximately 10,000-12,000 subsequent development. Sea. Subsurface study work is ongoing to bopd to the Group, with very significant identify drilling targets in these blocks. Each of these deals adds value to the infill drilling and exploration upside. Since Group by building on core areas, adding closing the deal, Dana has benefited from The Group consolidated its position in additional activity or optimising the capital higher commodity prices, access to new the GKA by acquiring an additional 9.8% expenditure programme. opportunities and the value of having a equity in Block 21/20a, including the Bligh team on the ground in country. Egypt now discovery, where Dana now holds a 30.5% HEALTH, SAFETY & represents a significant proportion of the interest. Bligh was discovered in 1995 by Group’s activities and capital investment the 21/20a-5 well where a drill stem test ENVIRONMENTAL programme and will be a growth area for flowed at 2,750 bopd of 45.6 degrees API PERFORMANCE (H,S&E) Dana going forward. condensate and 15.4 million cubic feet of A review of the Company’s H,S&E gas per day. Recent detailed technical work performance is provided in the Operations In Norway, Dana has a strong team focused has increased the expected recoverable Highlights on pages 16 and 17. on identifying new opportunities through volumes to around 30 million boe gross. licence rounds, business development and Planning is underway to develop the field as FINANCIAL PERFORMANCE investigating further development activity a tie-back over the Kittiwake platform. The in the Jotun area. Dana has participated A review and commentary of the Company’s development of Bligh will extend the life in two wells in Norway, including the financial performance during the year is of the platform by several years and create Storskrymten discovery, acquired interests provided in the Financial Review on pages additional value for Dana as a joint owner in seven additional blocks in the APA 2007 28 to 32. of the infrastructure. Round, and been approved as an operator since the completion of the Ener acquisition. Norway will be an exploration focus area for Dana in the coming years.
Dana Petroleum plc Annual Report 2007 27 FINANCIAL REVIEW
Dana delivered another year of record financial performance in 2007, through a combination of strong production growth and a 44% improvement in cash generated from operations, facilitated by the Group’s continued unhedged exposure to the strong commodity price environment.
In addition, the group delivered a reserves replacement ratio of 316%; successfully completed two major acquisitions and finalised two financings thereby significantly enhancing the Company’s financial capability. Overall, 2007 proved an extremely rewarding year, which delivered a robust set of financial results.
28 Dana Petroleum plc Annual Report 2007 + + + + +
REVENUE Annualised average, working interest production for the year was 30,514 boepd (2006: 22,285 boepd), with 89% delivered from Europe (2006: 93%). The Norwegian and Egyptian acquisitions contributed only for the second half and final quarter of the year respectively, so based on the full year Norway delivered 6.3% and Egypt 7.3% of total production. Liquids accounted for 80% of total production (2006: 84%) with 20% from gas. The Group realised the following average prices per working interest barrel of oil equivalent for hydrocarbon sales during the year:
2007 2007 2007 2007 2006* UK Norway Egypt Total Total Realised price per crude barrel sold $70.88 $80.77 $81.98 $72.40 $61.48 Brent average during ownership period $72.45 $81.24 $88.44 –– Realised gas price per therm 35.5p 25.3p – 35.2p 24.3p NBP average price per therm during ownership period 29.3p 38.3p ––– Revenue per boe $56.99 $95.53 $38.05 $56.03 $48.78
* 2006 UKCS sales prices only
Differences from the average Brent price represent the timings of actual liftings and the premia or discount to Brent at which our equity crude is sold. Realised gas prices represent a blended average of gas sold under long-term contract from the Group's older established gas fields, and uncontracted gas from the new Cavendish field, which came onstream in the second half of 2007 and where gas is sold on a "day-ahead" basis. The UK and Norway revenue per boe metrics reflect the composite effect of the above sales, adjusted for crude inventory movements, associated gas production and tariff and other income received. In Egypt, the revenue per boe reflects the Group's entitlement under the production sharing concession regime. Consequently, the combination of increased production and higher overall realisations per barrel led to revenue increasing to a record level of £311.5 million (2006: £215.3 million), an increase of 45%.
Dana Petroleum plc Annual Report 2007 29 Financial Review continued
GROSS PROFIT There were also a number of one-off items BALANCE SHEET Overall, there was a 37% improvement in relating to Exploration and Evaluation assets The acquisition of Ener Petroleum ASA gross profit to £156.6 million (2006: £114.4 during 2007 which impacted the results was completed in July 2007 and the Devon million). Cost of sales, excluding the effect for the year. During 2007, Dana completed Energy Egypt purchase, comprising eight of the movement in production inventories the divestment of its interest in the separate legal entities, was completed in and the impairment of the Russian asset, Causeway discovery in the Northern North October 2007. was £14.15 per barrel (2006: £12.41 per Sea, generating a pre-tax gain on disposal The results of each acquisition have barrel). Opex and cash related costs out- of £17.0 million. This gain substantially been consolidated from these respective turned as expected at £9.30 per barrel mitigated the effect of Exploration and dates and both transactions have been reflecting the effect of the higher cost Evaluation activity expensed during the accounted for by the purchase method of Jotun field in Norway, which impacted the year, including the costs of wells and accounting with fair values attributed to second half of the year. DD&A however, licences that are now considered unlikely to identifiable assets and liabilities, with at £4.85 per barrel was well within the deliver future commercial reserves. consideration paid in excess of fair value revised guidance of £5.40 provided at the Taken in conjunction with an exchange loss recorded as Goodwill. Deferred tax has interim stage due to lower than anticipated of £2.9 million for the year (2006: loss £9.7 also been recognized in respect of the fair level of production achieved from recently million), the overall impact of these one-off developed fields during the year. items on pre-tax profits was neutral. As previously reported, in Russia the Net financing costs at £4.3 million Yoganoil company changed its mode (2006: income £0.9 million) were in line of operating the South Vat-Yoganskoye with expectations reflecting the market field during 2007 to a service agreement equivalent interest rate cost of the with Lukoil. Whilst Dana is a major Convertible Bond issue together with the shareholder in Yoganoil, after 10 years of cost of the new bank debt drawn to fund Yoganoil successfully operating the field the Egyptian acquisition. in partnership with Lukoil, the investment proposition of Russian domestic oil As a result, overall pre-tax profit increased by price return no longer competes with 48% to £143.3 million (2006: £97.1 million). the opportunities afforded elsewhere The effective tax rate for the period was in the Dana portfolio. As a result of the 56.8% (2006: 57.2%) but was inflated as a implementation of the service agreement, result of the Russian impairment of £13.8 Yoganoil will no longer be required to invest million which attracted no tax relief. Absent capital in the field and therefore Dana has this one-off adjustment, the effective written-down the relevant reserves and tax rate would have been 52% for 2007. taken an impairment charge in the 2007 Looking forward, the Group’s effective tax Accounts to accurately reflect the change of rate will be a blend of the underlying tax circumstances. rates in the UK, Norway and Egypt and is expected to be in the range of 54-56% PROFIT FOR THE YEAR given the portfolio mix. Administrative expenses at £0.76 per barrel The resultant reported profit for the year were broadly in line with expectations after was therefore £61.8 million (2006: £41.6 allowing for the strengthening Norwegian million) with earnings per share of 72.17p Kroner in the second half of 2007 (2006: (2006: 48.24p), increases of 48.6% and £1.02 per barrel). 49.6% respectively.
30 Dana Petroleum plc Annual Report 2007 + + + + +
value exercise with the effect grossed-up to the acquisitions, the remaining Goodwill and incorporated into the calculation of adjustments totalled £61.9 million. Total Goodwill. The Group used a $60 per barrel Goodwill is reported within Intangible oil price projection as the basis for the assets. Deferred tax provisions on the producing asset fair values, in line with its fair value adjustments are provided at the corporate planning assumption for calendar underlying rate of tax, 78% for Norway and year 2007. 41% for Egypt. Overall, a total consideration of £47.1 In accordance with IFRS 3 – Business million was paid for Ener Petroleum ASA Combinations, the Group has 12 months and £168.6 million for the Devon Energy from the completion dates of these two Egypt acquisition. Net of the cash already acquisitions to review the Goodwill and in the underlying entities, this represented asset fair value allocations, and to process a total net outlay on the two acquisitions such further adjustments as may be of £161.1 million. After incorporating £83.9 considered appropriate. For example, if the million of deferred tax provisions relating oil price assumptions used in connection Financial Review continued
with the fair value exercise are increased A total of £351.3 million cash was expended The Group closed 2007 with cash and cash (the Group is currently using $60 per barrel), on net capital investment (2006: £108.5 equivalents of £116 million and reported this would result in a decrease in Goodwill million) and net cash generated from debt of £187.3 million. The resulting net and an increase in the fair value of the operations was supplemented by two major debt position in the balance sheet at the assets acquired. financings completed during 2007. end of 2007 of £71.3 million reflects a gearing ratio of just 17%. Net capital expenditure during the year In July 2007, the Group issued £141.5 was £191.8 million (2006: £106.0 million) million of Guaranteed Convertible Bonds Since the year end a further $50 million of with £125.3 million invested on production due 2014. The Bonds have a conversion bank debt has been repaid, reducing gearing and development projects, primarily on the premium of 50% representing a conversion still further. Cavendish and Enoch developments, and price of £16.45 per Dana share, with a £66.5 million on the 2007 exploration and coupon of 2.9%. The Bonds have a seven RISK MANAGEMENT appraisal programme. year term and include an investor put on the Dana was unhedged throughout 2007. Given fifth anniversary of the issue date. Dana invested £7.7 million in Faroe the growing strength of the Company’s Petroleum plc (“FP”), via its successful The Convertible Bond issue allowed the production profile, its manageable debt institutional share placing in December Group to re-size the bank debt facility commitments and the continued high 2007. Dana remained the largest required for completion of the Egyptian commodity prices, no future oil and gas shareholder in FP at that time with just over acquisition and ongoing working capital price hedging has been committed to at this a 17% stake. During the first quarter of purposes. In September 2007, the Group time, thus ensuring that Dana continues 2008 the Group increased its shareholding finalised a $400 million debt facility with to enjoy the full benefits of the current in FP to 27.5% via a series of market ABN Amro Bank. $225 million was drawn in strength of international oil and gas prices. purchases. As a result, from 2008 Dana will October 2007 to complete the acquisition, The Board will however, continue to review equity account for its investment in FP. but by the year end $75 million had been its approach to commodity price, interest re-paid. At this level of borrowing the rate and currency fluctuations, in light of By the 2007 year end, net assets had grown Group pays a margin of just 80 basis points the Company’s future capital commitments by approximately 34% to £417.5 million above US$ LIBOR. Both the Bond and debt and ongoing obligations. (2006: £312 million). facilities taken together currently provide the Group with an extremely low cost of CASH FLOW funds. In total £212.5 million of net cash Cash generated from Group operations in flow was sourced from financing activities 2007 rose by 44% to £201.8 million (2006: during 2007. £139.9 million). David MacFarlane Tax payments increased significantly to Finance Director £58.5 million, but this included a £34.8 million Norwegian tax liability assumed 6 June 2008 and accounted for as part of the Norwegian acquisition. Net interest income was £3.5 million and partially reflects the benefit of depositing the Convertible Bond proceeds at interest rates well ahead of the 2.9% cost of the Convertible coupon.
32 Dana Petroleum plc Annual Report 2007 “In the East Zeit Field, Gulf of Suez, Dana will be targeting at least one new well and two sidetracks in 2008 using the iO3 drilling rig” DIRECTORS & OFFICERS
COLIN R GOODALL‡ Chairman & Non-Executive Director Colin Goodall joined the Dana Board in 2002 following a successful 24 year upstream oil career with the BP group. A Chartered Accountant, Mr Goodall worked in Africa for a number of companies, including Anglo American Corporation, and became a partner at Touche Ross. He joined the finance team at BP in 1975, later becoming the first Chief of Staff within the BP group. From 1995 to 1999 he served as Chief Financial Officer of BP Europe and then as BP’s senior representative in Russia. Mr Goodall has been a lecturer and examiner for London University in the areas of management and finance. Mr Goodall is a Non-Executive Director of a number of other companies. In January 2005, he was appointed Chairman of the Dana Group.
THOMAS P CROSS‡ Chief Executive Officer Tom Cross co-founded Dana Petroleum in 1994. Mr Cross is a Chartered Director and Petroleum Engineer. After graduating with a First Class Honours Degree in Engineering he went on to hold senior positions with Conoco, Thomson North Sea and Louisiana Land and Exploration. From 1990 to 1993 he was Director of Engineering at the UK’s Petroleum Science and Technology Institute. Mr Cross is a Fellow of the Institute of Directors, a former Chairman of the Society of Petroleum Engineers and an advisor to BBC Radio on oil affairs. In 2005 he was elected as Chairman of BRINDEX, the Association of British Independent Oil Companies. He is also non- executive Chairman of AUPEC, a global advisory group on energy policy and economics.
DAVID A MACFARLANE Finance Director David MacFarlane, an economics graduate and Chartered Accountant, joined Dana in 2002. He has more than 20 years experience in financial control and management in the upstream oil and gas business. Between 1985 and 1993 he was Finance Director of the MOM Group, later becoming Finance Director for two key subsidiaries of the John Wood Group plc. He joined Dana from Amerada Hess where during the previous six years he headed finance for its fast growing international exploration and production group and latterly for its substantial N.W. Europe production business.
STUART M PATON Technical & Commercial Director Dr Stuart Paton was appointed to the Dana Board as Technical & Commercial Director in 2006, having joined the Company’s senior executive team in 2003 to lead Dana’s Business Development and Commercial activities. Dr Paton is a graduate of Cambridge University, where he gained a First Class Honours Degree in Natural Sciences (specialising in Earth Sciences), followed by a Phd in Geology. At Shell International, in the Hague, he worked on the quantitative assessment of exploration and development opportunities world-wide. Later at Shell in the UK, he held senior technical and commercial roles as well as being on the commercial leadership team of Shell UK, before joining Dana.
JOHN J ARNTON Company Secretary & Group Legal Manager John Arnton joined Dana in 2000 as Group Legal Manager and was appointed Company Secretary in the same year. He began his legal career in private practice and moved to Total Oil Marine as a staff lawyer in 1985. Mr Arnton joined Occidental Petroleum in 1987 as Legal Counsel, and continued with the Elf Group following its acquisition of Occidental’s UK assets in 1991. He was appointed Legal Manager of Elf Exploration UK in 1996 and became Company Secretary of the Elf Group’s UK upstream companies. Mr Arnton is a qualified solicitor and Notary Public. He also holds a postgraduate Diploma in Petroleum Law.
34 Dana Petroleum plc Annual Report 2007 + + + + +
ANGUS M PELHAM BURN*‡ Non-Executive Director (and Senior Independent Director) Angus Pelham Burn was appointed to the Dana Board in 1999, bringing a wealth of experience in international business development and financing, as well as institutional fund management. Mr Pelham Burn served as a main board Director of the Bank of Scotland from 1977 to 2000. From 1975 to 1998 he was a Director of The Scottish Provident Institution, holding the offices of Deputy Chairman and Chairman between 1991 and 1998. Mr Pelham Burn also held the post of Chairman of Aberdeen Asset Management plc between 1992 and 1999. He chairs Dana’s Remuneration and Nominations Committees.
D IAN RAWLINSON*‡ Non-Executive Director Ian Rawlinson joined Dana in 2005, bringing some 20 years’ experience in corporate finance and investment, gained with Lazard Brothers and Robert Fleming & Co. Ian read law at Cambridge University and was called to the Bar in 1981. From 1995 he was based in Johannesburg and became responsible for managing Fleming’s Southern African corporate finance business advising on numerous major transactions including the London listings of Billiton and South African Breweries. In 2000 he became Chief Operating Officer of Fleming Family & Partners and was later appointed Chief Executive of The Highland Star Group, a business representing the members of the Fleming family and investing principally in the resources sector. Mr Rawlinson is a director of a number of private companies, and is Chairman of the Tusk Trust, a charity focused on conservation in Africa. He chairs Dana’s Audit Committee.
PHILIP J DAYER*‡ Non-Executive Director Philip Dayer joined Dana in 2006, bringing 20 years of public market and corporate finance experience gained with a number of prominent city institutions during which he has advised a wide range of public companies across a variety of sectors including UK and International groups active in the oil and gas sector. After graduating in Law from King’s College, London, Mr Dayer qualified as a Chartered Accountant and went on to develop widespread experience as Director or Head of Corporate Finance with Barclays De Zoete Wedd, Citigoup Scrimgeour Vickers, ANZ Grindlays and Societe Generale. Latterly whilst focusing on the energy sector, Mr Dayer was Director of Corporate Finance at Old Mutual Securities and Executive Director at Hoare Govett Limited.
BRIAN JOHNSTON*‡ Non-Executive Director Brian Johnston joined Dana in April 2008, following a highly successful 34 year career with Bank of Scotland/ HBOS. Until January 2007, Mr. Johnston was Head of Corporate, Scotland, for Bank of Scotland/HBOS (the ‘Bank’) where he led the Relationship Banking Operation managing a team of 600 colleagues in 45 locations. He also had responsibility for five other niche business units within the Bank. Mr. Johnston has wide-ranging experience across all areas of corporate and acquisition financing, and has worked with a number of Scotland’s top entrepreneurs. Between 1990 and 1999 he expanded the Bank’s Structured Finance team in Aberdeen from UK domestic MBO/ MBI/Acquisitions to major international deals for energy sector companies working in the USA, Canada, South America and the Far East. Mr Johnston is a Non-Executive Director of a number of other companies. He is a Fellow of the Institute of Bankers in Scotland and holds a MBA from Strathclyde University.
* Independent Director and member of the Audit and Remuneration Committees ‡ Member of the Nominations Committee
Dana Petroleum plc Annual Report 2007 35 DIRECTORS’ REPORT AND ACCOUNTS 2007
36 Dana Petroleum plc Annual Report 2007 + + + + +
CONTENTS Report of the Directors 38 Report on Directors’ Remuneration 44 Group Report of the Auditors 57 Group Income Statement 58 Group Balance Sheet 59 Group Statement of Changes in Equity 60 Group Cash Flow Statement 61 Notes to the Group Financial Statements 62 Dana Petroleum plc Company Accounts 95 Report of the Directors
The Directors submit their report The Company is not aware of any agreements between shareholders that may result in together with the audited Group and restrictions on the transfer of securities or of Company financial statements for the voting rights. year ended 31 December 2007. Ordinary shares On a show of hands at a general meeting of Business Review and Statement by the the Company every holder of ordinary shares Future Activities Directors on Compliance present in person and entitled to vote shall have one vote and on a poll, every member The principal activities of the Group are with the Provisions of present in person or by proxy and entitled to oil and gas exploration and production. the Combined Code vote shall have one vote for every ordinary The Company is a public limited company, The Company has been in compliance with share held. The notice of general meeting incorporated in England and Wales, and its the provisions set out in Section 1 of the specifies deadlines for exercising voting securities are quoted on the London Stock Combined Code throughout the year save rights either by proxy or in person in relation Exchange, under the designation DNX. The as with respect to Combined Code Provision to resolutions to be passed at the general Chairman and Chief Executive’s Review and B1.6. Provision B1.6 recommends that the meeting. All proxy votes are counted and the the Business Review describe the significant contractual notice provision available to numbers for, against or withheld in relation to developments in the business of the Group Directors should be no greater than 12 each resolution are announced at the annual during 2007 and its future prospects. months. Following approval of the new general meeting and in accordance with the remuneration policy at the Extraordinary Results, Dividends and current requirements of the Combined Code, General Meeting of 26 September 2006, will be published on the Company’s website Retentions it was agreed that the contractual notice after the meeting. The Group profit for the year after taxation provision for Mr T P Cross would be reduced and before minority interests amounted to 12 months. This has now been effected There are no restrictions on the transfer of to £61,840,000 (2006: £41,597,000). The with the implementation of Deferred Share ordinary shares in the Company other than: Directors do not recommend the payment of Payment A. • certain restrictions may from time to time a dividend. The Board will continue to review and report be imposed by laws and regulations (for on the effectiveness of the Group’s system example, insider trading laws and market Events Since the Balance of internal controls as detailed on pages 40 requirements relating to close periods); Sheet Date to 42 and the Audit Committee will review • pursuant to the Listing Rules of the During the first quarter of 2008, through a annually the need for an internal audit Financial Services Authority whereby series of market purchases, the Company function. certain employees of the Company require acquired a further 10,908,483 shares in the approval of the Company to deal in the Faroe Petroleum plc at a cost of £15,943,000, Additional information Company’s securities. increasing the Group’s shareholding in that for shareholders • pursuant to the Company’s various share company to 27.5%. The following provides additional information scheme arrangements required for shareholders as a result of the Corporate Governance implementation of the Takeovers Directive The Company is committed to high standards into UK Law. of corporate governance and the Board is At 31 December 2007, the Company’s issued accountable to the Company’s shareholders share capital comprised: for good corporate governance. This statement describes how the principles of % of total corporate governance are applied to the ‘000’ £’000 Share capital Company and the Company’s compliance with Ordinary shares of 15 pence each 86,048 12,908 100 the 2006 Combined Code (“Combined Code”), which was adopted by the Financial Services Authority for reporting periods commencing on or after 1 November 2006. The Company will continue the ongoing development of its corporate governance practices to ensure high standards are maintained.
38 Dana Petroleum plc Annual Report 2007 The Company’s articles of association may Change of control Directors receive appropriate training as only be amended by a special resolution Other than as described above in relation necessary. The appointment and removal of at a general meeting of the shareholders. to the Convertible Bonds, and as further the Company Secretary is a matter for the Directors are reappointed by ordinary described below, the Company is not party to Board as a whole. resolution at a general meeting of the any significant agreements which take effect, The Board has a formal schedule of matters shareholders. The Board can appoint a alter or terminate upon a change of control of specifically referred to it for decision. In director but anyone so appointed must be the Company following a takeover bid. addition to those formal matters required by elected by an ordinary resolution at the next the Companies Act to be set before a board general meeting. At each annual general The Group’s $US400 million debt facility with of directors, the Board will also consider meeting one-third of the directors who are ABN AMRO Bank N.V. is terminable by the business strategy and policy, business subject to retirement by rotation retire from bank upon a change of control event and plans, acquisition and divestment proposals, office. Any director who has held office provision of 30 days notice; and any letters of approval of major capital investment plans, for more than three years since their last credit outstanding under the Company’s letter risk management policy, significant financing appointment will also offer themselves of credit facility with the Bank of Scotland are matters and statutory shareholder reporting. up for re-election at the annual general also similarly repayable to the bank but upon meeting in accordance with Combined Code provision of 45 days notice by the bank. There To comply with the provisions of the requirements. are no agreements between the Company Combined Code and in an effort to strive for and its employees providing for compensation continual improvement in the effectiveness Authority is sought at the annual general for loss of office or employment (whether of the Board, its committees, and the meeting for the Company to buy back up through resignation, purported redundancy or individual Board members, the Company to approximately 10% of its issued share otherwise) that occurs because of a takeover operates an evaluation process. capital. bid, other than the agreements between the Company and the Executive Directors The Board meets regularly during the Convertible Bonds as detailed on page 50 of the Report on year with additional meetings as dictated Convertible Bonds were issued during the Directors’ Remuneration. by matters arising. In addition, there is year and are described in notes 21 and 25 of frequent dialogue between meetings to the Group Financial Statements. The Workings of the progress the Group’s business. The Board met formally four times during 2007, with Pending conversion, the Convertible Bonds Board and its Committees 100% attendance from the Board members carry no votes at meetings of the Company. The Board in office at the time of the Board meeting. In Ordinary shares in the Company issued on addition, all Directors attended the Annual conversion will rank pari passu with the The membership of the Board is set out on General Meeting in July. To enable the Board Company’s existing issued share capital. page 108. to discharge its duties, all Directors receive The Board is responsible to shareholders On a change of control of the Company, appropriate and timely information and the for the proper management of the Group. bondholders have an entitlement to exercise Chairman ensures that the Directors take The Board comprises the Non-Executive their conversion rights. independent professional advice as required. Chairman, the Chief Executive, the Finance The Non-Executive Directors have a particular Director, the Technical & Commercial Significant interests responsibility to ensure that the strategies Director and four further Non-Executive Directors’ interests in the share capital of proposed by the Executive Directors are fully Directors. Brief biographies appear on the Company are shown in the table on page considered. Statements of the Directors’ pages 34 and 35. These demonstrate a 41. Major interests (ie, those >3%) of which responsibilities in respect of the accounts are range of experience and sufficient calibre the Company has been notified are shown on set out on pages 42 and 43 and a statement to bring independent judgements on issues page 40. on going concern is given on page 42. of strategy, performance, resources and Company share schemes standards of conduct, which are vital to the Where matters arose during the year The Dana Petroleum plc Share Incentive Plan, continuing success of the Group. All Directors which required the attention of the Audit, holds 14,799 shares of the Company in trust have access to the advice and services of the Remuneration or Nominations Committees, for the benefit of employees of the Group. Company Secretary who is responsible to a separate meeting of the relevant This includes 11,931 unreleased ‘matching’ the Board for ensuring that Board procedures committee was convened with full and ‘free’ shares. The voting rights in relation are followed and that applicable rules and attendance by its members. These to these unreleased shares are exercisable by regulations are complied with. In addition, committees deal with the following the trustees. the Company Secretary will ensure that the specific aspects of the Group’s affairs.
Dana Petroleum plc Annual Report 2007 39 Report of the Directors continued
Audit Committee Substantial Shareholdings The Audit Committee, which was chaired The Company has been notified of the following shareholdings of 3% or more in the issued by Mr D I Rawlinson, comprises all the share capital of the Company as at 3 June 2008: Non-Executive Directors other than the Chairman, and meets not less than twice No. of % of issued annually. This requirement was satisfied in shares share capital 2007 and both meetings were attended by all Schroder Investment Management 10,203,847 11.80 members. The Committee provides a forum AXA S.A. 4,846,438 5.60 for reporting by the Group’s external auditors. Legal & General Investment Management 4,680,360 5.41 If required, meetings are also attended by the BlackRock MLIM 4,410,978 5.10 Chairman and appropriate members of senior management at the specific request of the RCM/Allianz Global Investors 4,301,602 4.97 Committee. Aegon Asset Management 2,863,078 3.31 The Audit Committee is responsible for Barclays Global Investors 2,745,980 3.17 reviewing a wide range of matters including the Interim Report and the Annual Report replacement. The Nominations Committee participation. The Board aims to ensure that and Accounts before their respective considers that the current composition of the the Chairmen of the Audit, Remuneration and submission to the Board and the monitoring Board is satisfactory to provide the proper Nominations Committees are available at the of the controls that are in force to ensure the governance, administration and business Annual General Meeting to answer questions integrity of the information reported to the counsel in respect of the Company’s affairs. It and explain details of the resolutions to be shareholders. The Audit Committee advises will continue to monitor the situation in 2008. proposed at the Annual General Meeting. the Board on the appointment of external Notice of the Annual General Meeting and auditors and on their remuneration both for Remuneration Committee the related papers are sent to shareholders at audit and non-audit work, and discusses the Full details of the Remuneration Committee, least 20 business days before the meeting in nature, scope and results of the audit with the Company’s policies on remuneration, accordance with the Combined Code. the external auditors. The Audit Committee service contracts and compensation keeps under review the cost effectiveness, payments are given in the Report on Internal Control independence and objectivity of the external Directors’ Remuneration on pages 44 to 56. auditors. In line with the Combined Code, The Board confirms that during 2007 and up the Audit Committee is also responsible for to the date of approval of the Annual Report RELATIONS WITH and Accounts it has maintained and updated reviewing annually the requirement for an SHAREHOLDERS internal audit function. the procedures necessary to implement the Communications with shareholders are ‘Internal Control: Guidance for Directors The ongoing members of the Audit given high priority. Extensive information on the Combined Code’ and that these Committee all have recent and relevant about the Group’s activities is provided in procedures are still in place. financial experience as detailed in their the Annual Report and the Interim Report The Board is responsible for establishing biographies on page 35. which are sent to all shareholders. From 2008 and maintaining the Group’s system of onwards, the Group will also issue Interim Nominations Committee internal control. Internal control systems are Management Statements on a quarterly designed to meet the particular needs of the The Nominations Committee is responsible basis. There is regular dialogue with major organisation concerned and manage the risks for appointments or re-appointments to institutional shareholders and meetings are to which it is exposed. With the acquisition the Board. This committee comprises the offered following the Group’s preliminary during 2007 of new organisational units Non-Executive Directors and Mr T P Cross announcement of the year end results and in Egypt and Norway, a new delegation of and is chaired by Mr A M Pelham Burn. It at the half year. The Company has its own authority structure has now been put in place. generally meets not less than once annually, web-site (www.dana-petroleum.com) for the By their nature such systems can provide and in 2007 the meeting held was attended purpose of improving information flow to reasonable assurance and not absolute by all Committee members. The Nominations shareholders as well as potential investors. assurance against material misstatement Committee is charged with ensuring the Enquiries from individual shareholders on or loss. There is a continuous process for necessary balance of skills, knowledge and matters relating to their shareholdings and identifying, evaluating and managing the experience is maintained and represented the business of the Group are also welcomed. on the Board. Members of the Nominations risks faced by the Group. The key procedures Committee are precluded from participating The Board also uses the Annual General which the Directors have established with a in the process to nominate their own Meeting to communicate with private and view to providing effective internal control institutional investors and welcomes their are as follows:
40 Dana Petroleum plc Annual Report 2007 • Management structure This includes performing or participating • Audit Committee The Board has overall responsibility for in audits of Joint Ventures (JV) to ensure The Board has delegated periodic review the Group and there is a formal schedule JV expenditures have been committed of the system of financial internal control of matters specifically reserved for with the necessary JV approval and in to the Audit Committee which has reported decision by the Board. Each Executive accordance with JV agreements. The use its conclusions to the Board during the Director has been given responsibility for of financial instruments and the Group’s year. The Board has also consulted the specific aspects of the Group’s affairs. approach to financial risk management is Audit Committee, during the year, on The Executive Directors together with discussed in the Accounting Policies on other internal control matters. The Audit key senior executives constitute the page 65 and the Financial Review on page Committee believes that the Company’s management committee, which meets 32. The nature of financial instrument risks external auditors adopt an objective regularly, to discuss day-to-day operational faced by the Group is further detailed in and impartial approach to the audit of matters. A “Country Panel” structure has note 24 to the Group Financial Statements. the Group and that this is in no way been set up for Egypt and Norway, with influenced by the extent of non audit work • Budgetary process each panel comprising three members, undertaken by the Company’s external including two Executive Directors, and the Each year the Board approves the business auditors during the year, as disclosed in Country Manager. The panel will meet at plan and annual budget. Key risk areas note 6 to the Group Financial Statements. least quarterly, and on an ad hoc basis are identified. Performance is monitored Such work in 2007 largely related to as required, to review performance and and relevant action taken throughout the advice in connection with the corporate expenditure items beyond the delegation of year through the regular reporting to the transactions undertaken, taxation services authority of the relevant Country Manager. Board of changes to the business plan and and the Group’s financing activities variances from the budget and updated during 2007. The Board will continue to • Quality and integrity of personnel forecasts for the year together with carefully consider how such advice is The integrity and competence of personnel information on the key risk areas. sourced in future. The Audit Committee is ensured through high recruitment has considered the need for an internal • Investment appraisal standards and subsequent training courses. audit function but has decided that, given Capital expenditure is regulated by a High quality personnel are seen as an the size of the Group and the system of budgetary process and authorisation levels. essential part of the control environment. controls in place, it is not required at For expenditure beyond specified levels, present. The Audit Committee will continue • Identification of business risks detailed proposals have to be submitted to to review this decision annually particularly the Board or Country Panel. Due diligence The Board is responsible for identifying in light of the Group’s expansion into work is carried out if a business or the major business risks faced by the Norway and Egypt. Group and for determining the appropriate significant assets are to be acquired. course of action to manage those risks.
Directors’ Interest in Share Capital The beneficial interests of the current Directors and their families in the share capital of the Company were as follows: Ordinary Shares Ordinary Shares Ordinary Shares at 03.06.08 at 31.12.07 at 31.12.06 15p shares 15p shares 15p shares C R Goodall 70,103 66,933 57,933 T P Cross 1,001,085* 701,360 586,312 D A MacFarlane 91,236** 73,036 68,232 S M Paton 23,032** 7,032 278 A M Pelham Burn 30,118 47,665 47,665 D I Rawlinson 38,440 38,440 38,440 P J Dayer 3,600 2,000 2,000 B Johnston (appointed 24 April 2008) – n/a n/a * Includes 261 ‘Free Shares’ subject to a three year holding period restriction pursuant to the Dana Share Incentive Plan; 155,831 shares subject to a five year holding period restriction, or until termination of employment pursuant to Deferred Share Payment A; and 141,479 shares subject to a five year holding period restriction, or until termination of employment pursuant to Deferred Share Payment B. These Deferred Share Payments were approved by shareholders at the Company’s EGM on 26 September 2006. **Includes 261 ‘Free Shares’ and 260 ‘Matching Shares’ subject to a three year holding period restriction pursuant to the Dana Share Incentive Plan
Dana Petroleum plc Annual Report 2007 41 Report of the Directors continued
• Annual review and assessment Corporate and Social policy, are provided Statement of Directors’ The Board undertakes an annual review on pages 16 to 19. Responsibilities in of the effectiveness of the Group’s system Recognising that a significant proportion relation to the Group of internal control. This includes a review of Dana’s activities are carried out by other financial statements of the Audit Committee’s assessment of companies, Dana also actively promotes and The Directors are responsible for preparing the system of financial internal control. supports the application of equivalent HS&E the Annual Report and the Group financial A review took place in December 2007 standards by those suppliers, contractors statements in accordance with applicable and addressed internal control issues and companies who operate on Dana’s United Kingdom law and those International generally and, more specifically, financial, behalf. This is particularly true of developing Financial Reporting Standards (IFRS) as operational and compliance controls and countries, and where the Company does not adopted by the European Union. risk management. The review included operate, Dana seeks to partner with large, The Directors are required to prepare Group reports from, and interviews with, key well established upstream companies, with financial statements for each financial year operating personnel. a track record of successfully working with which present fairly the financial position of host governments, and of promoting the the Group and the financial performance and Composition of Group highest standards of Corporate, Social and cash flows of the Group for that period. In Details concerning the principal subsidiary Environmental responsibility. Full details of preparing those Group financial statements undertakings are given in note 39 to the the operators of all Dana’s licence interests the Directors are required to: Company financial statements. are on pages 106 and 107. • select suitable accounting policies in It is also the policy of the Group to consider Health, Safety, the accordance with IAS 8: Accounting the health and welfare of employees by Environment and the Policies, Changes in Accounting maintaining a safe place and system of work Estimates and Errors, and then apply Community as required by local legislation. Dana considers health, safety and them consistently; environmental management to be an integral Auditors • present information, including accounting part of its business. Dana has a formal A resolution to re-appoint Ernst & Young LLP policies, in a manner that provides Health, Safety and Environmental (HS&E) as auditors of the Company is to be proposed relevant, reliable, comparable and Policy which is brought to the attention of at the Annual General Meeting. understandable information; every employee and contractor working on • provide additional disclosures when Dana business. The policy aims to achieve Going Concern first class HS&E performance by promoting compliance with the specific requirements a culture which encourages all employees, The Board’s review of the accounts, in IFRS is insufficient to enable users contractors and other stakeholders budgets and forward plans, lead the to understand the impact of particular to contribute to its implementation. Directors to believe that the Group has transactions, other events and conditions Responsibility for HS&E management begins sufficient resources to continue in operation on the Group’s financial position and with the Board of Directors and carries for the foreseeable future. The financial financial performance; and statements are therefore prepared on a through to every employee and contractor • state that the Group has complied with going concern basis. engaged in Dana’s activities. IFRS, subject to any material departures disclosed and explained in the financial In Dana operated activities, the Group Interests in Contracts makes appropriate resources and training statements. There have been no contracts or available to reduce health and safety risks to arrangements during the financial year The Directors are responsible for keeping employees and contractors to a level which in which a Director of the Company was proper accounting records which disclose is as low as reasonably practicable and also materially interested and which were with reasonable accuracy at any time the strives for a neutral or positive impact on significant in relation to the Group’s business. financial position of the Group and enable the physical and socio-cultural environment them to ensure that the Group financial of the regions in which Dana does business. Creditors Payment Policy statements comply with the Companies Act Dana aims to meet relevant regulatory and and Article 4 of the IAS Regulation. They are The Company and Group policy is to agree legislative requirements as a minimum and also responsible for safeguarding the assets payment terms with individual suppliers and to apply Dana’s own responsible standards of the Group and hence for taking reasonable to abide by these terms. The Company does in those countries where appropriate laws steps for the prevention and detection of not have any trade creditors. and regulations are inadequate or do not fraud and other irregularities. exist. Details of Dana’s HS&E performance during 2007 and developments in the Group’s
42 Dana Petroleum plc Annual Report 2007 Statement of Directors’ Directors’ Statement Responsibilities in as to Disclosure of relation to the Parent Information to Auditors Company Financial The Directors who were members of the Statements Board at the time of approving the directors’ The Directors are responsible for preparing report are listed on page 108. Having made the Annual Report and the financial enquiries of fellow Directors and of the statements in accordance with applicable law Company’s auditors, each of these Directors and regulations. confirms that: Company law requires the Directors to • to the best of each Director’s knowledge prepare financial statements for each and belief, there is no information relevant financial year. Under that law the Directors to the preparation of their report of which have elected to prepare the financial the Company’s auditors are unaware; and statements in accordance with United • each Director has taken all the steps a Kingdom Generally Accepted Accounting Director might reasonably be expected Practice (United Kingdom Accounting to have taken to be aware of relevant audit Standards and applicable law). The financial information and to establish that statements are required by law to give a the Company’s auditors are aware of true and fair view of the state of affairs of that information. the Company and of the profit or loss of the Company for that period. In preparing Signed on behalf of the Board by: those financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; and Thomas P Cross • state whether applicable UK Accounting Chief Executive Standards have been followed, subject to any material departures disclosed and explained in the financial statements. The Directors are responsible for keeping proper accounting records that disclose with David A MacFarlane reasonable accuracy at any time the financial Finance Director position of the Company and enable them to ensure that the financial statements comply 6 June 2008 with the Companies Act. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Dana Petroleum plc Annual Report 2007 43 Report on Directors’ Remuneration
Introduction During the period under review, the • Shareholders’ interests are best served This report has been prepared in accordance Committee sought the assistance of the by remuneration packages which have with The Directors’ Remuneration Report Chairman and Chief Executive on matters a large emphasis on performance Regulations 2002, (the “Regulations”). The relating to Directors’ performance and related pay; remuneration. The Chairman and Chief report also meets the relevant requirements • emphasis on performance will encourage Executive attend meetings by invitation of the Listing Rules of the Financial Services the Executives to focus on delivering the except when their individual remuneration Authority and describes how the Board has business strategy; applied the Principles and complied with arrangements are discussed. No Director • the structure of the package will ensure the provisions of the 2006 Combined Code takes part in discussions relating to their own fair reward for performance such that (“Combined Code”) on Corporate Governance remuneration and benefits. exceptional remuneration will only relating to Directors’ remuneration. As In 2007, the Committee appointed and be justified where performance is required by the Regulations, an advisory received wholly independent advice on exceptional; resolution to approve the report will be executive compensation and associated proposed at the AGM of the Company share scheme administration from Halliwell • Executives will be encouraged to build at which the financial statements will Consulting. No other services were provided substantial personal holdings in the be approved. to the Company by Halliwell Consulting Company to further align their interests with those of shareholders. The auditors are required to report on during the year. the ‘auditable’ part of this report and to The Committee is formally constituted with Remuneration Policy state whether, in their opinion, that part of written terms of reference. 2007 & 2008 the report has been properly prepared in The Committee met three times during accordance with the Companies Act 1985 (as The Remuneration Committee reviews on 2007 with each Member attending all the amended by the Regulations). The report is an annual basis whether its remuneration meetings. therefore divided into separate sections for policy remains appropriate for the relevant audited and unaudited information. financial year. Factors taken into account by Philosophy behind the Remuneration Committee include: Remuneration Part 2 of the Regulations • market conditions affecting the Company; – Unaudited Information Committee’s Approach The macro environment, the business • the recruitment market in the Remuneration Committee background and the principal risks facing Company’s sector; The Directors who were members of the the Company are described in detail in the • changing market practice; Business Review on page 20. In particular, Remuneration Committee (the “Committee”) • changing views of institutional share- general business activity and competition during the year are shown on page 108. holders and their representative bodies. for new commercial opportunities continues The responsibility for the establishment to increase across the industry sector In line with this general review the of a remuneration policy and its cost is a exerting significant pressure on the labour Committee specifically considered how the matter for the full Board, on the advice of resource base and demand for suitably Dana Petroleum plc 2006 Long-Term Incentive the Committee. The recommendations of skilled personnel. This makes the Company’s Plan would be operated during 2008. The the Remuneration Committee have been success in 2007, in particular the completion results were: approved without amendment by the Board and integration of acquisitions in Egypt and • that the Committee after reviewing for submission to shareholders. Norway, a notable achievement and reflects the performance criteria and release creditably on the Executive and management The Committee is responsible for developing schedules which applied to 2007 talent within the Company. It is against this policy on remuneration for Executive Directors grants has determined that they remain background that the remuneration policy has and senior management and for determining appropriate to the Company’s current been applied during the year. specific remuneration packages for each circumstances and prospects and of the Executive Directors. The Committee The philosophy is designed to encourage, therefore will apply to any 2008 grants members have no personal financial interest reward and retain the Executives based on that may be made to the Executives. other than as shareholders in matters to be the following principles: decided, no potential conflicts of interests In all other respects the policy applied during arising from cross directorships and no day- 2007 will continue to apply for 2008. The to-day involvement in running the business. Remuneration Committee’s policy during the year was to set the main elements of the remuneration package at the following quartiles in comparison to the Company’s
44 Dana Petroleum plc Annual Report 2007 Comparator Group:
Base Salary Annual Bonus Pension Potential Total Short- Potential Annual Potential Total Potential Term Remuneration Share Awards Compensation Available Value Lower to Upper Upper Quartile Upper Quartile Median to Upper Upper quartile Median to Upper Quartile Quartile Quartile The Remuneration Maximum bonus The Company avoids The remuneration The remuneration package will provide Committee’s policy is payouts are considerable cost package will provide a lower quartile to median total on appointment to the only earned and administrative lower to median compensation value unless executives Board to provide a lower by executives burden by not quartile total short-term earn their bonus payouts or satisfy the quartile salary which for achieving running a corporate remuneration unless demanding performance conditions based on appropriate exceptional pension scheme. bonus payments are attached to their share incentives. levels of individual and performance. Instead it provides earned by executives. Maximum share incentive payments will corporate performance cash payments Maximum bonus only occur for upper decile performance. will be increased to the to Executives to payments will only be upper quartile position supplement their earned for exceptional with experience gained personal pension performance. over time. arrangements.
Comparator Group 2007 & 2008 The constituents of the Company’s Comparator Group (“CG”) for benchmarking remuneration during 2007 were as follows:
A P Moller-Maersk A/S Etab Maurel et Prom RWE AG BASF AG (Wintershall) Gaz de France Soco International Plc BG Group PLC Hess Corporation Statoil ASA BP PLC Lukoil Svenska Burren Energy plc Melrose Resources PLC Talisman Energy Inc. Cairn Energy Plc Nexen Inc. Total SA Canadian Natural Resources Norsk Hydro ASA* Tullow Oil plc Centrica PLC Occidental Petroleum Corp. Venture Production plc Chevron Corporation Premier Oil plc Woodside Petroleum Ltd ConocoPhillips Petro-Canada ExxonMobil Royal Dutch Shell PLC
*Norsk Hydro ASA has merged with Statoil ASA.
Factors the Remuneration Committee took Throughout this report, references to In addition, the Remuneration Committee into account when selecting the CG included: quartiles are to quartiles in the CG. It is also used the constituents of the FTSE 250 the Committee’s current intention to use as a secondary CG to provide a wider market • the UK listing environment of the the same CG to benchmark the Company’s view on remuneration levels and trends. The Company. Executive compensation in 2008 and as part FTSE 250 constituents form the remaining • the industry within which the Company of the CG for the total shareholder return part of the CG for the total shareholder return operates, specifically taking into account performance condition attached to awards (“TSR”)performance condition attached to both the international nature of the under the Dana Petroleum plc 2006 Long- awards under the LTIP. Company’s business and its competitors; Term Incentive Plan (the “LTIP”). • the market capitalisation, turnover and number of employees of the Company; and Dana Petroleum plc Annual Report 2007 45 Report on Directors’ Remuneration continued
Balance between Fixed Fixed Compensation Variable Compensation Chief Executive 26% 74% & Variable Performance Officer Based Compensation The application of the Remuneration Committee’s policy summarised on pages 44 Finance 38% 62% and 45 in relation to the balance between Director !
fixed and variable performance based Executive Director compensation for each Executive Director Technical & is shown in the chart for the year ended 31 Commercial 38% 62% Director December 2007:
Elements of Executive Directors’ Remuneration BasE Salary Policy 2007 & 2008: Lower Quartile to Upper Quartile The table below sets out the salaries for 2006 and 2007:
Name Note 2006 Salary 2007 Salary Upper Quartile Salary in CG 2007 (%age rise) T P Cross, Chief Executive Officer 1 £481,000 £588,000 18.5% D A MacFarlane, Finance Director 2 £228,000 £269,000 21.4% S M Paton, Technical & Commercial Director 3 £139,000 £220,000 17.3%
Note General The salary increases made by the Remuneration Committee in 2007 were one-off adjustments required to ensure that the Company retained its Executive team at a time of aggressive competition for talent within the Sector. The salary rises in 2008 will be more reflective of the Remuneration Committee’s ongoing policy, where, unless the market conditions dictate otherwise, the salary rises are expected to be in line with the average UK salary rise in the Group, (currently anticipated to be 8.75% for 2008). 1 The salary of the CEO reflects the Remuneration Committee’s view of the importance of this individual to the successful development of the Company and the intense competition for his services in the market. 2 The salary of the FD reflects the competitive market in the Sector for FD’s with the appropriate level of experience and the current incumbent’s increasing importance to the future of the Company. 3 The salary of the T&C Director reflects the Committee’s policy of bringing new members onto the Board at a comparative lower quartile level of salary and as experience is gained, benchmarking against the median and, subject to development and performance, the upper quartile levels of salary in the CG. The T&C Director was appointed to the Board on 29 May 2006. The 2006 salary quoted, represents the salary for the whole year.
When determining the salary of the those comparable companies within the • pay and conditions throughout the executives the Committee takes into FTSE Oil and Gas Producers sector and Company. consideration: the CG; • the levels of base salary for similar • the performance of the individual positions with comparable status, Executive Director; responsibility and skills, in organisations • the individual Executive Director’s of broadly similar size and complexity, experience and responsibilities; and in particular the levels of base salary at
46 Dana Petroleum plc Annual Report 2007 Annual Bonus POTENTIAL Policy 2007 & 2008: Upper Quartile Bonus payments are not pensionable. The following tables summarise the main features of the Company’s Executive bonus plan.
Bonus CEO FD T&C Director Company Bonus Potential 2007 (%age Salary) 150% 100% 100% 2007 Bonus Paid and as %age of Salary £882,000 £269,000 £220,000 (150%) (100%) (100%) Cash Element Paid and as %age of Salary Nil £88,010 £49,656 (33%) (23%) Share Element Paid and as %age of Salary £882,000 £180,990 £170,344 (150%) (67%) (77%) Company Bonus Potential 2008 (%age Salary) 150% 100% 100%
The structure of any bonuses paid is as Bonuses are typically paid based on the level The Remuneration Committee determined follows: of the Company’s performance against the that the maximum bonuses shown above following financial and operational factors: would be payable in respect of 2007 due, • an individual can elect for up to 100% inter alia, to the significance to the Company of any bonus paid to be paid in shares Target of the Egyptian and Norwegian transactions which have to be retained for 24 months; Production Growth in positively enhancing all the target factors subject to Reserves Replacement and broadening the scale of the business and ■ any bonus over 100% of salary must its future opportunity base. be paid in shares which have to be Execution of Planned Exploration Drilling The targets for the annual bonus plan are retained for 24 months; and Programme reviewed and agreed by the Remuneration Delivery of Development Projects ■ in all cases 75% of the bonus earned Committee each year to ensure that they will be paid in cash and 25% in Delivery and Completion of New are appropriate to the current market shares which have to be retained for Commercial Transactions conditions and position of the Company 24 months; HS&E Performance in order to ensure that they continue to remain challenging. It is the opinion of the • in determining the number of shares to Financial Performance Committee that the nature of the conditions be awarded the Remuneration Committee remain appropriate for the requirements of will have the discretion to use the the Group in 2008. average share price over a period no longer than 12 months. Non-Executive Directors do not participate in any bonus arrangements.
Dana Petroleum plc Annual Report 2007 47 Report on Directors’ Remuneration continued
Potential Annual LTIP. The Remuneration Committee believes before Executives will receive the full benefit Share Awards that share awards under the LTIP enable the of their share incentives. This structure Company to provide a competitive incentive demonstrates the Remuneration Committee’s Policy 2007 & 2008: Upper Quartile and retention tool which is also cost effective desire to correlate incentive arrangements The Remuneration Committee’s policy is to in respect of both shareholder dilution and with the achievement of substantial provide annual share grants to Executives income statement expense. Furthermore, the performance. at the upper quartile level compared to the proposed grant of awards with the attached The following table sets out the main terms Comparator Group. Ongoing share incentives, performance conditions ensure that the of the LTIP and the grants that have been excluding all employee plans, are provided Company’s comparative TSR performance made to the Executive Directors during 2007: to the Executive Directors solely through the against the CG is at least at the upper decile
Feature CEO FD T&C Note Director Maximum (subject to Executive 450% 250% 250% The rationale for the higher initial grant is set out Shares Purchased) in the Circular for the EGM in September 2006 and Maximum Annual Grant (Initial & 400% 200% 200% reflects the absence of any share incentive awards Ongoing) %age of Salary since December 2004. 2006 LTIP Grant: This LTIP grant was made on 1st February 2007. - Face Value £2,174,130 £567,079 £421,994 However this grant was made in respect of the - Face Value %age of Salary 450% 250% 250% 2006 Executive remuneration package and would - Fair Market Value* £1,174,372 £306,312 £227,943 have been made following shareholder approval - Fair Market Value %age of Salary 244% 134% 164% of the LTIP at the AGM on 26th September 2006 - Number of Executive Shares 31,439 8,200 6,103 had the Company not been in a series of close and restricted periods which prohibited the grant being made until 1st February 2007. 2007 LTIP Grant: This LTIP grant was made on 14th November 2007 - Face Value £2,351,995 £537,995 £440,000 and was part of the 2007 Executive remuneration - Face Value %age of Salary 400% 200% 200% package. - Fair Market Value* £1,315,511 £300,910 £246,099 - Fair Market Value %age of Salary 224% 112% 112% - Number of Executive Shares 27,252 6,233 5,098 Shareholding to be Built up Over 400% 200% 200% The Remuneration Committee introduced a Five Years %age of Salary (year (1,660%) (378%) (45%) Shareholding Guideline in conjunction with the new end shareholding %age of 2007 LTIP to encourage a minimum level of shareholding salary in brackets) amongst all the Executive Directors to further align their interests with those of shareholders. * It should be noted that the real value received by the Executive Directors under the share incentive arrangements will be dependent upon the degree to which the associated performance conditions have been satisfied at the end of the three year performance period and the share price of the Company. The following table sets out the level of release of LTIP awards if the Company’s performance measured as at 31 December 2007 continued until the end of the relevant performance period.
LTIP Grant ROCE Condition Company TSR Ranking Against Percentage of Award Released if CG Performance Measured as at 31 December 2007 continued to the end of the relevant Performance Period 2006 LTIP Grant Satisfied 212th out of 267 companies 0% 2007 LTIP Grant Satisfied 111th out of 275 companies 44%
48 Dana Petroleum plc Annual Report 2007 The operation of the LTIP and the main terms and conditions are set out in the following table:
Feature Terms & Conditions Maximum Global Limit p.a. Global Limit under all elements of the LTIP is 400% of salary p.a. except for the first grant, where the CEO purchased the maximum number of Executive Shares, resulting in a grant of 450% of salary. Operation of the LTIP Maximum Level 1 Grant – is 400% of salary less the Level 2 Grant proposed by the Remuneration Committee provided that to receive a Level 1 Grant an Executive must have purchased shares equivalent to 50% of the proposed award level i.e. for an Executive to qualify for a 200% of salary grant under Level 1 of the LTIP he would have to purchase shares equivalent to 100% of his net salary. Maximum Level 2 Grant – is 200% of salary. Maximum Level 3 Grant – is 100% of salary. Level 3 grants may be made to senior managers within the Group and cannot be made to Executive Directors of the Company. Performance Conditions Threshold Condition – no part of the award will be capable of release unless the Company’s average annual ROCE over the three year performance period is at or above 10% p.a. Main Performance Condition – once the Threshold Condition has been satisfied the release of the award will be subject to the Company’s comparative TSR performance compared to the CG. 30% of the award will be released for median performance, 65% (Level 3 100%) for upper quartile performance with full release only for upper decile performance. The CG for the purposes of the TSR performance condition consists of the constituents of the FTSE 250 and the members of the CG set out on page 45 and used for benchmarking remuneration.
Basis of Performance Condition assurance that the Company’s investment to whether any adjustments are required Selection & Measurement strategy will be value driven rather than to ensure consistency in accordance with ROCE was selected as one of the earnings driven. the terms of the performance conditions. Where the performance measure is TSR, performance conditions for the awards by the Comparative TSR was selected as one of the Halliwell Consulting, the Remuneration Remuneration Committee because: performance conditions for the awards by the Committee’s advisors, shall calculate the TSR Remuneration Committee as it ensures that • ROCE measures the efficiency with which in accordance with the rules of the LTIP and the Executives have outperformed their peers capital is employed by the management confirm these figures prior to the release of over the measurement period in delivering of the Company and therefore is much any award. less vulnerable to peaks and troughs in shareholder value before being entitled to revenue; receive any of their awards irrespective of general market conditions. • ROCE helps to ensure the most effective allocation of capital investment within The Remuneration Committee determines the business; and whether the performance conditions for share awards are satisfied. Where the • ROCE also helps to ensure that any performance requirements are based on investments by the Company are ROCE, the Committee will use the principles effectively incorporated and deliver the behind the audited figures disclosed in the required level of return on the capital Company’s financial statements, and may used to make them. This will provide take advice from independent advisors as
Dana Petroleum plc Annual Report 2007 49 Report on Directors’ Remuneration continued
Dilution Benefits in Kind Pension In accordance with the Association of British Policy 2007 & 2008 Policy 2007 & 2008: Upper Quartile Insurers (“ABI”) guidelines, the Company The Company provides a cash benefits The Company does not operate a pension can issue a maximum of 10% of its issued allowance in lieu of normal benefits in kind scheme for Executive Directors but does, share capital in a rolling ten year period for Executives of this level in a company of at the Directors’ option, contribute to the to employees under all its share plans. In this size and complexity (company car, private personal pension plans of each Executive addition, of this 10% the Company can health care) in addition to life assurance Director, or pays cash in lieu of such only issue 5% to satisfy awards under cover and permanent health insurance. This contributions up to 20% of salary. Directors’ discretionary or Executive plans. The cash benefit allowance is excluded from the contributions are paid in advance of the Company operates all its share plans within calculation of any other benefit provided by pension year which starts in April each year. these guidelines. the Company.
Executive Directors’ Contracts Details of the service contracts of the Executive Directors of the Company are as follows:
Name Company notice period Contract date Unexpired term of Potential termination contract payment T P Cross 12 months 1 May 1997 Rolling contract 12 months salary and benefits D A MacFarlane 6 months 1 November 2003 Rolling contract 12 months salary and benefits S M Paton 6 months 29 May 2006 Rolling contract 12 months salary and benefits
All Executive Directors’ contracts are are no special provisions in the contracts of executive duties and the potential benefit to rolling, and therefore will continue unless employment extending notice periods on the the Company, and then determine whether terminated by the written notice set out liquidation of the Company or cessation of the remuneration should be retained by the above. In the event of the termination of an employment. The maximum notice period on Executive or passed over to the Company. Executive’s contract, salary and benefits will a change of control is 12 months. Mr T P Cross received and retained fees be payable during the notice period (there of £36,000 in 2007 through his position as Executive Directors have an obligation will, however, be no automatic entitlement Non-Executive Chairman of AUPEC Limited, to inform the Board and specifically to bonus payments or share incentive grants the global advisory group on energy policy the Remuneration Committee of any during the period of notice other than where and economics, a position he has held since non-executive positions held or being normal good leaver provisions apply). The 1998. Mr T P Cross was appointed as a Non- contemplated and of the associated Remuneration Committee will ensure that Executive Director of The Parkmead Group plc remuneration package. The Remuneration there have been no unjustified payments in October 2006, for which he received and Committee will consider the merits of each for performance failure on an Executive retained fees of £35,000 in 2007. case and carefully consider the work and Director’s termination of employment. There time commitment required to fulfil the non-
50 Dana Petroleum plc Annual Report 2007 Non-Executive Directors Fee Level Policy 2007: Median The remuneration of the Non-Executive Directors is determined by the Board and is within the limits set by the Articles of Association. Assistance is also available from the Company’s remuneration advisors. The Non-Executive Director Fees are set out in the following table:
Fees Name 2006 2007 C R Goodall 75 100 A M Pelham Burn 43 50 D I Rawlinson 45 50 P J Dayer 32 (part year) 50 B Johnston (appointed 24 April 2008) n/a n/a The levels of fees for the Non-Executive Directors are set taking into account the following factors: • the role and responsibility of the Non-Executive Director; • the experience of the Non-Executive Director; • comparative levels using the same comparators as are used for setting the levels of salary for the Executive Directors. Details of the Non-Executive Directors’ appointment dates are:
Effective Date of Letter of Appointment Name or Last Renewal A M Pelham Burn 1 November 2007 C R Goodall 14 June 2007 D I Rawlinson 31 March 2008 P J Dayer 16 March 2008 B Johnston 24 April 2008 Non-Executive Directors do not participate in any bonus plan or share incentive programme operated by the Company and are not entitled to pension contributions or other benefits provided by the Company. The Non-Executive Directors do not have service contracts. Letters of Appointment provide for an initial period of one year and are renewable annually at the Company’s discretion. Mr A M Pelham Burn and Mr P J Dayer in accordance with the Combined Code and the Company’s Articles of Association formally retire by rotation, and being eligible, Mr P J Dayer offers himself for re-election. Mr A M Pelham Burn has elected to retire from the Board and will stand down following the conclusion of the Annual General Meeting. Biographical details of all Directors can be found on pages 34 and 35.
Dana Petroleum plc Annual Report 2007 51 Report on Directors’ Remuneration continued
All Employee Share Arrangements The Company operates the following employee share incentive arrangements:
Name Status Eligibility Main Features Share Operated in 2007 and All UK employees of The Plan provides employees with the opportunity of purchasing £1,500 Incentive will be operated in the Company. of partnership shares a year out of pre-tax salary and providing additional Plan 2008. matching shares with a maximum matching ratio of 2:1. These matching shares will normally be released three years after they have been awarded provided that the associated shares purchased by the employee have been retained and provided the employee is still employed by a Group company at this time. For 2007 the matching ratio was set at two matching shares for every one employee purchased share. It is the current intention that the same offer under the SIP will be made in 2008. There are currently 25 UK employees participating in the SIP. The intention is to extend this Plan to certain staff in Norway and Egypt in due course. Sharesave The Plan is in the run- All employees of the Options are granted over Company shares at a discount of up to 20% to Scheme off stage with no new Company excluding the market value on the date of grant, which subject to the satisfaction of invitations intended. the Executive conditions can be exercised after either three or five years. It is not currently Directors. intended to operate the Plan in the future.
Total Shareholder DANA 5 YEAR TSR – VS. FTSE 250 & FTSE OIL & GAS Return Performance 800 Graph The graph shows the Company’s performance, 700 measured by TSR, compared with the 600 constituents of the FTSE 250 and the FTSE All
Share Oil and Gas Producers Index over the 500 last five years. The Index is the most relevant to compare the Company’s performance 400 compared to its peers. The FTSE 250 Index 300 has been selected to provide a broader
comparator of the Company’s performance 200 and is the main Index in which the Company’s shares are included. 100
0 2002 2003 2004 2005 2006 2007 Dana FTSE 250 FTSE Oil & Gas index
52 Dana Petroleum plc Annual Report 2007 Part 3 of the Regulations – Audited Information The remuneration of each Director, excluding long-term, share-based incentive awards and pensions, during the year ended 31 December 2007 compared with 2006 is set out in the table below:
Fees/basic Bonus in Bonus in Benefits 2007 2006 salary cash shares in kind Total Total Directors Remuneration £’000 £’000 £’000 £’000 £’000 £’000 T P Cross 588 – 882 65 1,535 1,118 D A MacFarlane 269 88 181 30 568 436 S M Paton 220 50 170 24 464 221 A M Bostock – – – – – 109 1,077 138 1,233 119 2,567 1,884
Non-Executive C R Goodall 100 – – – 100 75 A M Pelham Burn 50 – – – 50 43 D I Rawlinson 50 – – – 50 45 P J Dayer (appointed 16 March 2006) 50 – – – 50 32 B Johnston (appointed 24 April 2008) – – – – – – 250 – – – 250 195
1,327 138 1,233 119 2,817 2,079
Notes 1 The Unaudited Section of the Report sets out the operation of the Bonus Plan for 2008. 2 The 2006 salaries for S M Paton and A M Bostock were the salaries from the date of appointment and to the date of resignation respectively. This is also the case in the table below in respect of pension contributions. 3 Benefits typically comprise cash allowances in lieu of company car and private health care arrangements, in addition to life assurance cover and permanent health insurance, but exclude pension benefits which are detailed below.
2007 2006 Total Total Executive Directors’ Pensions £’000 £’000 T P Cross 118 96 D A MacFarlane 54 46 S M Paton 44 19 A M Bostock – 30 216 191
Dana Petroleum plc Annual Report 2007 53 Report on Directors’ Remuneration continued
Dana Petroleum plc 2006 LTIP The LTIP was approved by shareholders on 26 September 2006. Awards under the LTIP are set out in the table below:
Number of Associated Executive LTIP Awards LTIP Awards Shares held at to 1.01.07 Granted Lapsed held at 31.12.07 31.12.07 Award Price Date of Grant ’000 ’000 ’000 ’000 ’000 (p) Date of Release T P Cross 01.02.07 – 213 – 213 31 1,020 01.02.10 14.11.07 – 185 – 185 27 1,273 14.11.10 – 398 – 398 59 D A MacFarlane 01.02.07 – 56 – 56 8 1,020 01.02.10 14.11.07 – 42 – 42 6 1,273 14.11.10 – 98 – 98 14 S M Paton 01.02.07 – 41 – 41 6 1,020 01.02.10 14.11.07 – 35 – 35 5 1,273 14.11.10 – 76 – 76 11
54 Dana Petroleum plc Annual Report 2007 Details of Directors’ interests in shares held under option The Dana Petroleum 1999 Share Option Scheme was closed to new awards in December 2004.
Options Granted to Options held at 01.01.07 Lapsed Exercised 31.12.07 Exercise price Exercisable Date of Grant ’000 ’000 ’000 ’000 (p) from Expiry Date Plan T P Cross 552 0 0 552 236.25 30.12.02 30.12.09 A 429 0 0 429 206.25 27.07.03 26.07.10 A 617 0 0 617 413.50 15.12.07 14.12.14 A 1,598 0 0 1,598 D A MacFarlane 260 260 413.50 15.12.07 14.12.14 A 260 0 0 260 S M Paton 3 0 0 3 192.00 14.01.04 01.03.09 B 2 0 0 2 334.00 20.01.05 01.03.08 B 5 0 0 5
Plan A – Dana Petroleum 1999 Share Option Scheme Plan B – Dana Petroleum Share Save Scheme 1 No options were exercised by the Directors during the year ending 31.12.07. 2 All options granted under Plan A have fully satisfied the scheme’s performance conditions. 3 At 31 December 2007, in total, the Company has outstanding options granted to Executive Directors and employees to subscribe for 2,030,252 ordinary shares, which are exercisable up to 2014, at prices between 206.25p and 413.50p. 4 At 31 December 2007, under the Share Save Scheme, the Company has outstanding options granted to employees to subscribe for 23,436 shares, which are exercisable up to 2010, at prices between 192.00p and 334.00p.
Dana Petroleum plc Annual Report 2007 55 Report on Directors’ Remuneration continued
Dana Petroleum plc Share Incentive Plan (Inland Revenue Approved) Partnership Shares are ordinary shares of the Company purchased by the Executive 2007 Number of 2007 Number of 2007 Number of Directors as set out above. Matching and Partnership Shares Matching Shares Free Shares Free Shares are ordinary shares which will Purchased 23.07.07 Awarded 23.07.07 Awarded 23.07.07 be released on the third anniversary of @ 1,147pence @ 1,147pence @ 1,147pence their date of award subject to continued T P Cross – – 261 employment and in the case of Matching D A MacFarlane 130 260 261 Shares also to the retention of the associated S M Paton 130 260 261 Partnership Shares.
Prior to his appointment to the Board, Dr S options, 40,000, has a weighted average Register of Directors’ Interests (which is also M Paton participated in the Phantom option exercise price of 645.50p, and become open to inspection) contains full details of incentive arrangements provided for senior exercisable on 1 July 2008. the Directors’ shareholdings and options to management, details of which are provided subscribe. The market price of the Company’s shares in note 26 to the Group financial statements. on 31 December 2007 was 1,392 pence per Signed on behalf of the Board by: At 1 January 2007, Dr S M Paton continued share and the high and low share prices to hold 2 awards totalling 100,000 Phantom during the year were 1,420 pence and 905 options, exercisable at a weighted average pence respectively. exercise price of 408.20p, with the first award exercisable in July 2007. At this date The agreements covering Directors’ options Angus M Pelham Burn he exercised 60,000 Phantom options at an and LTIP awards are available for inspection Chairman of the Remuneration Committee at the Company’s headquarters at 17 Carden exercise price of 250p receiving a payment 6 June 2008 of £526,800. The balance of the Phantom Place, Aberdeen, AB10 1UR. The Company’s
56 Dana Petroleum plc Annual Report 2007 Group Report of the Auditors
INDEPENDENT AUDITOR’S We report to you our opinion as to whether Basis of audit opinion REPORT TO THE MEMBERS the Group financial statements give a true We conducted our audit in accordance with OF DANA PETROLEUM PLC and fair view and whether the Group financial International Standards on Auditing (UK and statements have been properly prepared in We have audited the Group financial Ireland) issued by the Auditing Practices accordance with the Companies Act 1985 statements of Dana Petroleum plc for Board. An audit includes examination, on and Article 4 of the IAS Regulation. We the year ended 31 December 2007 which a test basis, of evidence relevant to the also report to you whether in our opinion comprise the Group Income Statement, the amounts and disclosures in the Group the information given in the Report of the Group Balance Sheet, the Group Cash Flow financial statements. It also includes Directors is consistent with the financial Statement, the Group Statement of Change an assessment of the significant estimates statements. The information given in the in Equity and the related notes 1 to 35. and judgments made by the Directors in Report of the Directors includes that specific These Group financial statements have been the preparation of the Group financial information presented in the Business prepared under the accounting policies set statements, and of whether the accounting Review and Financial Review that is cross out therein. policies are appropriate to the Group’s referred from the Business Review and circumstances, consistently applied and We have reported separately on the Future Activities section of the Report of the adequately disclosed. parent company financial statements of Directors. Dana Petroleum plc for the year ended 31 We planned and performed our audit so as to In addition we report to you if, in our opinion, December 2007 and on the information in the obtain all the information and explanations we have not received all the information Report on Directors’ Remuneration that is which we considered necessary in order and explanations we require for our described as having been audited. to provide us with sufficient evidence to audit, or if information specified by law give reasonable assurance that the Group This report is made solely to the Company’s regarding Director’s remuneration and other financial statements are free from material members, as a body, in accordance with transactions is not disclosed. misstatement, whether caused by fraud Section 235 of the Companies Act 1985. We review whether the Corporate or other irregularity or error. In forming Our audit work has been undertaken so that Governance Statement reflects the our opinion we also evaluated the overall we might state to the Company’s members Company’s compliance with the nine adequacy of the presentation of information those matters we are required to state to provisions of the 2006 Combined Code in the Group financial statements. them in an auditor’s report and for no other specified for our review by the Listing Rules purpose. To the fullest extent permitted of the Financial Services Authority, and we Opinion by law, we do not accept or assume report if it does not. We are not required to responsibility to anyone other than the In our opinion: consider whether the board’s statements on Company and the Company’s members as a ■ internal control cover all risks and controls, the Group financial statements give a body, for our audit work, for this report, or or form an opinion on the effectiveness of the true and fair view, in accordance with for the opinions we have formed. Group’s corporate governance procedures or IFRSs as adopted by the European Union, its risk and control procedures. of the state of the Group’s affairs as at 31 Respective December 2007 and of its profit for the responsibilities of We read other information contained in year then ended; the Annual Report and consider whether directors and auditors ■ it is consistent with the audited Group the Group financial statements have been The Directors’ responsibilities for preparing financial statements. The other information properly prepared in accordance with the the Annual Report and the Group financial comprises only the Report of the Directors, Companies Act 1985 and Article 4 of the statements in accordance with applicable the unaudited part of the Report on Directors’ IAS Regulation; and United Kingdom law and International Remuneration, the Chairman and Chief ■ Financial Reporting Standards (IFRSs) as the information given in the Report of the Executive’s Review, the Business Review adopted by the European Union are set out in Directors is consistent with the Group and the Financial Review. We consider the the Statement of Directors’ Responsibilities. financial statements. implications for our report if we become Our responsibility is to audit the Group aware of any apparent misstatements or financial statements in accordance with material inconsistencies with the Group Ernst & Young LLP relevant legal and regulatory requirements financial statements. Our responsibilities do Registered auditor and International Standards on Auditing (UK not extend to any other information. Aberdeen and Ireland). 6 June 2008
Dana Petroleum plc Annual Report 2007 57 Group Income Statement for the year ended 31 December 2007
Note 2007 2006 £’000 £’000 Revenue 3 311,499 215,322 Cost of Sales (154,870) (100,892) Gross Profit 156,629 114,430 Exploration & Evaluation: Gain 5 16,995 – Exploration & Evaluation: Expense 5 (14,689) (183) Administrative Expenses (8,446) (8,301) Foreign Exchange (2,918) (9,679) Profit on Ordinary Activities before Interest and Taxation 5 147,571 96,267 Interest Income 3 7,433 4,200 Finance Costs 7 (11,733) (3,340) Profit on Ordinary Activities before Taxation 143,271 97,127 Taxation 9 (81,431) (55,530) Profit for the Financial Year 61,840 41,597 Attributable to: Equity Holders of the Company 62,093 41,235 Minority Interests (253) 362 61,840 41,597 Earnings per Share – basic 10 72.17p 48.24p Earnings per Share – diluted 10 70.49p 47.59p The results above are entirely derived from continuing operations.
58 Dana Petroleum plc Annual Report 2007 Group Balance Sheet as at 31 December 2007
Note 2007 2006 £’000 £’000 Non-Current Assets Intangible Assets 11 326,654 97,082 Property, Plant and Equipment 12 445,188 236,679 Deferred PRT/NPI 9 4,298 2,525 Available-for-Sale Financial Assets 13 30,032 14,390 Derivative Financial Instruments 14 1,149 2,017 807,321 352,693 Current Assets Inventories 15 14,652 1,137 Trade and Other Receivables 16 79,293 41,224 Derivative Financial Instruments 14 1,532 2,195 Cash and Cash Equivalents 17 115,960 109,878 211,437 154,434 Total Assets 1,018,758 507,127 Current Liabilities Trade and Other Payables 18 82,371 56,112 Current Tax 19 28,091 1,797 110,462 57,909 Non-current Liabilities Trade and Other Payables 18 4,233 894 Borrowings and Financial Liabilities 20 187,257 – Provision for Deferred Taxation 9 217,094 89,535 Provision for Liabilities and Charges 22 80,912 44,415 Deferred Income 23 1,272 2,372 490,768 137,216 Net Assets 417,528 312,002 Equity Equity Attributable to Equity Holders Called-up Share Capital 25 12,908 12,901 Share Premium 79,367 79,301 Other Reserves 135,763 101,351 Cumulative Translation Reserve 7,209 (1,044) Retained Earnings 182,281 117,177 417,528 309,686 Minority Interests – 2,316 Total Equity 417,528 312,002 The financial statements were approved by the Board of Directors on 6 June 2008 and signed on its behalf by:
Thomas P Cross David A MacFarlane Director Director
Dana Petroleum plc Annual Report 2007 59 Group Statement of Changes in Equity for the year ended 31 December 2007
(All Figures are in £’000) Cumulative Share Share Other Translation Retained Minority Total Capital Premium Reserves Reserve Earnings Interests Equity
Equity at 1 January 2006 12,574 75,246 104,604 449 75,563 2,239 270,675
Currency Translation Adjustments – – – (1,493) – (285) (1,778) Derivative Financial Instruments – – (1,038) – – – (1,038) Taxation thereon – – 519 – – – 519 Fair Value Movements on Available-for-Sale Financial Assets – – (3,905) – – – (3,905) Taxation thereon – – 1,171 – – – 1,171
Total Expense Recognised Direct in Equity – – (3,253) (1,493) – (285) (5,031)
Profit for the Financial Year – – – – 41,235 362 41,597
Total Recognised Income and (Expense) for the Year – – (3,253) (1,493) 41,235 77 36,566
Employee Share Scheme Credits – – – – 192 – 192 Taxation thereon – – – – 187 – 187 New Shares Issued 327 4,055 – – – – 4,382
Equity at 31 December 2006 12,901 79,301 101,351 (1,044) 117,177 2,316 312,002
Currency Translation Adjustments – – – 8,253 – (43) 8,210 Fair Value Movements on Available- for-Sale Financial Assets – – 8,720 – – – 8,720 Taxation thereon – – (2,284) – – – (2,284) Minority Interest Released on Impairment of Underlying Asset (note 12) – – – – – (2,020) (2,020)
Total Income/(Expense) Recognised Direct in Equity – – 6,436 8,253 – (2,063) 12,626
Profit/(Loss) for the Financial Year – – – – 62,093 (253) 61,840
Total Recognised Income and (Expense) for the Year – – 6,436 8,253 62,093 (2,316) 74,466
Employee Share Scheme Credits – – – – 980 – 980 Taxation thereon – – – – 2,031 – 2,031 Equity Component of Convertible Bond Issue – – 28,613 – – – 28,613 Convertible Bond Issue Costs – – (637) – – – (637) New Shares Issued 7 66 – – – – 73
Equity at 31 December 2007 (note 27) 12,908 79,367 135,763 7,209 182,281 – 417,528 At 31 December 2007 equity attributable to equity holders of the parent company is £417,528,000 (2006: £309,686,000).
60 Dana Petroleum plc Annual Report 2007 Group Cash Flow Statement for the year ended 31 December 2007
Note 2007 2006 £’000 £’000
Operating Activities Cash Generated from Operations 28 201,758 139,920 Taxation Paid (58,527) (11,212) Interest Received 7,433 4,200 Interest Paid (3,981) (915)
Net Cash from Operating Activities 146,683 131,993
Investing Activities Expenditure on Intangible and Property, Plant & Equipment Assets (202,739) (103,190) Expenditure on Decommissioning – (101) Receipts on Sale of Intangible and Property, Plant & Equipment Assets 20,270 – Payments to Acquire Available-for-Sale Assets (7,744) (5,212) Payments to Acquire Subsidiaries (161,124) –
Net Cash Invested in Investing Activities (351,313) (108,503)
Financing Activities Issue of Ordinary Share Capital 76 4,382 Drawdown of Borrowings 110,235 – Repayment of Borrowings (36,163) (10,905) Proceeds on Issue of Convertible Bonds 138,346 –
Net Cash Flow from /(used in) Financing Activities 212,494 (6,523)
Currency Translation Differences (1,782) (10,504)
Net Increase in Cash and Cash Equivalents 6,082 6,463 Cash and Cash Equivalents at the Beginning of the Year 109,878 103,415
Cash and Cash Equivalents at the End of the Year 17 115,960 109,878
Dana Petroleum plc Annual Report 2007 61 Notes to the Group Financial Statements
1. Authorisation of ACCOUNTING ESTIMATES through unincorporated joint ventures and Financial Statements and The Group’s accounting policies make use of production sharing contracts (together “Joint Statement of Compliance estimates and judgements in the following Ventures”). The Group accounts for its share with IFRS areas; Goodwill, Impairment, Depreciation, of the results and net assets of these Joint Ventures as jointly controlled assets. In The Group’s financial statements of Dana Decommissioning, Derivative Financial addition, where Dana acts as operator to Petroleum plc for the year ended 31 Instruments and Share-based Payments. the Joint Venture, the gross liabilities and December 2007 were authorised for issue These are described in more detail in the receivables (including amounts due to or from by the Board of Directors on 6 June 2008 relevant accounting policy. non-operating partners) of the Joint Venture and the balance sheet was signed on the BASIS OF CONSOLIDATION are included in the Group balance sheet. The Board’s behalf by Thomas P Cross and David The consolidated financial statements include Group’s current Joint Venture interests are A MacFarlane. Dana Petroleum plc is a public the financial statements of the Company and detailed on pages 106 and 107. limited company incorporated in England each of its subsidiary undertakings having and Wales and domiciled in Scotland. The REVENUE eliminated all inter-company transactions company’s ordinary shares are traded on the and balances. Revenue reflects actual sales value, net of London Stock Exchange. VAT and overriding royalties, in respect of The Group’s financial statements have been Acquisitions liftings sold. Due to the fact that the Group prepared in accordance with International Business combinations are dealt with on the follows the entitlement basis, adjustments Financial Reporting Standards (IFRS) as basis of the purchase method of accounting. in respect of overlift (liftings greater than adopted by the EU as they apply to the The cost of an acquisition is measured production entitlement) and underlift financial statements of the Group for the as the fair value of the assets acquired (production entitlement greater than liftings) year ended 31 December 2007. The Group’s (or assets given up in the case of swap are recorded in/against cost of sales at financial statements are also consistent transactions), equity instruments issued market value. Where appropriate entitlement with IFRS as issued by the International and liabilities incurred or assumed at the revenue also includes an allowance for gross Accounting Standards Board. The principal date of completion of the acquisition, plus up for tax paid on the Company’s behalf by accounting policies adopted by the Group are costs directly attributable to the acquisition. host governments. set out in note 2. Identifiable assets acquired and liabilities Interest income is recognised on an accruals and contingent liabilities assumed in a basis and is disclosed separately on the face business combination are measured initially 2. Accounting Policies of the income statement. for the Group Financial at their fair values at the acquisition date Statements irrespective of the extent of any minority FOREIGN CURRENCIES interest. The excess of the cost of acquisition The following accounting policies are applied The functional currency for material over the fair value of the Group’s share of the consistently in dealing with items which are subsidiaries is either Pounds Sterling, identifiable net assets acquired is recorded considered material in relation to the Group’s Norwegian Kroner or US Dollar. as goodwill. If the cost of the acquisition is financial statements. less than the fair value of the Group’s share Transactions in foreign currencies during the BASIS OF ACCOUNTING of the net assets of the subsidiary acquired, year are recorded in the functional currency the difference is recognised directly in the at the rate of exchange ruling at the date The financial information has been prepared income statement. of the transaction. Monetary assets and using accounting policies consistent with liabilities denominated in foreign currencies IFRS and IFRIC Interpretations adopted The results of subsidiaries acquired or are translated into the functional currency at by the European Union and those parts disposed of are included/excluded in the the rates ruling at the balance sheet date. of the Companies Act 1985 applicable to consolidated income statement from the date companies reporting under IFRS. The financial on which control legally passes. Exchange differences resulting from the statements have been prepared under the translation of assets and liabilities of historical cost convention, except for certain Joint Ventures foreign currency denominated subsidiaries fair value adjustments required by those The Group is engaged in oil and gas into pounds sterling at year-end rates of accounting policies. exploration, development and production exchange, together with those differences
62 Dana Petroleum plc Annual Report 2007 resulting from the restatement of profits and Impairment Impairment losses from average to year-end rates, are If and when facts and circumstances indicate A review is performed for any indication that taken directly to the cumulative translation that the carrying value of an E&E asset may the value of the Group’s D&P assets may reserve. All other exchange differences are exceed its recoverable amount an impairment be impaired. taken to the income statement. review is performed. For D&P assets when there are such Transactions denominated in local currencies For E&E assets when there are such indications, an impairment test is carried are re-measured into the functional currency indications, an impairment test is carried out on the CGU. Each CGU is identified at the rate ruling on the date that they arose. in accordance with IAS 36. Dana’s CGU’s out by grouping the E&E assets with the are those assets which generate largely OIL AND GAS EXPENDITURE development & production assets belonging independent cash flows and are normally, to the same geographic segment to form the The Group accounts for oil and gas but not always, single development or Cash Generating Unit (“CGU”) for impairment expenditure as follows: production areas. If necessary, additional testing. The equivalent combined carrying depletion is charged through the income Intangible Assets – Exploration value of the CGU is compared against the statement if the capitalised costs of the and Evaluation Assets CGU’s recoverable amount and any resulting CGU exceed the associated estimated Capitalisation impairment loss is written off to the income future discounted cash flows of the related statement. The recoverable amount of the commercial oil and gas reserves. Certain costs (other than payments to acquire CGU is determined as the higher of its fair the legal right to explore) incurred prior to value less costs to sell and its value in use. Asset Purchases and Disposals acquiring the rights to explore are charged When a commercial transaction involves directly to the income statement. All costs Property, Plant and Equipment – the purchase of a D&P asset in exchange incurred after the rights to explore an area Development and Production Assets for an E&E asset, the transaction is have been obtained, such as geological and Capitalisation accounted for at fair value with the difference geophysical costs and other direct costs of between fair value and cost being taken to exploration (drilling, trenching, sampling and Development and production (D&P) assets the income statement. technical feasibility and commercial viability are accumulated into single field cost centres When a commercial transaction involves activities) and appraisal are accumulated and represent the cost of developing the the exchange of E&E assets of similar size and capitalised as intangible exploration and commercial reserves and bringing them evaluation (E&E) assets. and characteristics, no fair value calculation into production together with the E&E is performed. The capitalised costs of the E&E costs are not amortised prior to the expenditures incurred in finding commercial asset being sold are transferred to the asset conclusion of appraisal activities. At reserves previously transferred from E&E being acquired. However, where the size and completion of appraisal activities if technical assets as outlined in the policy above. characteristics of the E&E assets significantly feasibility is demonstrated and commercial Depreciation differ, the transaction is accounted for at reserves are discovered, then, following fair value with the difference between fair development sanction, the carrying value of Costs relating to each single field cost centre value and cost being taken to the income the relevant E&E asset will be reclassified are depleted on a unit of production method statement. as a development and production asset, based on the commercial proven and probable but only after the carrying value of the reserves for that cost centre. Development Proceeds from the entire disposal of an E&E asset are deducted from the capitalised costs relevant E&E asset has been assessed for assets are not depreciated until production of the asset with any surplus/deficit taken impairment, and where appropriate, its commences. The amortisation calculation to the income statement as a gain or loss on carrying value adjusted. If after completion takes account of the estimated future costs sale. Proceeds from a part disposal of an E&E of appraisal activities in an area, it is not of development of recognised proven and asset are deducted from the capitalised cost possible to determine technical feasibility probable reserves, based on current price of the asset with any surplus taken to the and commercial viability or if the legal right levels. Changes in reserve quantities and cost income statement as a gain on sale. to explore expires or if the Company decides estimates are recognised prospectively from not to continue exploration and evaluation the last reporting date. Proceeds from the entire disposal of a D&P activity, then the costs of such unsuccessful asset, or any part thereof, are taken to the exploration and evaluation is written off Currently there are no significant items of income statement together with the requisite to the income statement in the period the property, plant and equipment deemed to proportional net book value of the asset, or relevant events occur. have different useful lives. part thereof, being sold.
Dana Petroleum plc Annual Report 2007 63 Notes to the Group Financial Statements continued
GOODWILL FINANCE COSTS AND DEBT TRADE AND OTHER RECEIVABLES Goodwill arising on consolidation, Finance costs which are directly attributable Trade receivables are recognised and carried representing the excess of the cost of to the construction of D&P assets are at the original invoiced amount. Other acquisition over the fair value of the Group’s capitalised as part of the cost of those receivables, excluding underlifted amounts, share of the identifiable assets, liabilities assets. The commencement of capitalisation are measured at nominal value. Underlifted and contingent liabilities acquired, is begins when both finance costs and amounts are measured at market value in capitalised in the balance sheet. Following expenditures in respect of the asset are accordance with industry practice. initial recognition, goodwill is stated at cost incurred and activities that are necessary less any accumulated impairment losses. to develop an asset are in progress. TRADE AND OTHER PAYABLES Goodwill is reviewed for impairment annually Capitalisation ceases when the development Trade and other payables, excluding overlifted or more frequently if events or changes in is substantially complete. amounts, are measured at cost. Overlifted circumstances indicate the carrying value Finance costs of debt are allocated to amounts are measured at market value in may be impaired. Goodwill is allocated to periods over the term of the related debt accordance with industry practice. the appropriate cash-generating unit for the at a constant rate on the carrying amount. purpose of impairment testing. Arrangement fees and issue costs are CONVERTIBLE BONDS amortised and charged to the income The net proceeds received from the issue DECOMMISSIONING statement as finance costs over the term of of convertible bonds are split between a The Group recognises the full discounted the debt. liability element and an equity component cost of decommissioning when the obligation at the date of issue. The fair value of the to rectify environmental damage arises, AVAILABLE-FOR-SALE FINANCIAL liability component is estimated using the principally on development sanction. The ASSETS prevailing market interest rate for similar amount recognised is the present value of The Group determines the classification of its non-convertible debt. The difference between the estimated future expenditure determined available-for-sale financial assets at initial the proceeds of issue of the convertible in accordance with local conditions and recognition and re-evaluates this designation bonds and the fair value assigned to the requirements. A corresponding D&P asset of at each financial year end. When available- liability component, representing the an amount equivalent to the provision is also for-sale financial assets are recognised embedded option to convert the liability into created. This is subsequently depreciated initially, they are measured at fair value, equity of the Group, is included in equity and as part of the capital costs of the D&P being the transaction price plus directly is not remeasured. The liability component is asset. Any change in the present value of attributable transaction costs. carried at amortised cost. the estimated expenditure is reflected as Issue costs are apportioned between the an adjustment to the provision and the D&P After initial recognition available-for-sale liability and equity components of the asset. The unwinding of the discount on the financial assets are measured at fair value convertible bonds based on their relative decommissioning provision is included as a with gains or losses being recognised as carrying amounts at the date of issue. The finance cost. a separate component of equity until the investment is derecognised or until the portion relating to the equity component is PROPERTY, PLANT AND EQUIPMENT investment is determined to be impaired charged directly against equity. OTHER THAN D&P ASSETS at which time the cumulative gain or loss The interest expense on the liability Property, plant and equipment other than D&P previously reported in equity is included in component is calculated by applying the assets are stated in the balance sheet at cost the income statement. prevailing market interest rate for similar non- less accumulated depreciation. Depreciation convertible debt to the liability component of is provided at rates calculated to write off INVENTORIES the instrument. The difference between this the cost less estimated residual value of each Inventories comprise materials and amount and the interest paid is added to the asset on a straight-line basis at the following equipment, which are stated at the lower carrying amount of the convertible bonds. annual rates: of cost and net realisable value. Cost includes all costs incurred in bringing the ■ Equipment 10% – 25% materials and equipment to its present ■ Computer equipment 33% condition and location.
64 Dana Petroleum plc Annual Report 2007 SHARE ISSUE EXPENSES AND SHARE Petroleum Revenue Tax and Net Profit OPERATING LEASES PREMIUM ACCOUNT Interest Tax Rentals under operating leases are charged Costs of share issues are written off UK Petroleum Revenue Tax (PRT) and to the income statement on a straight line against the premium arising on the issue Norwegian Net Profit Interest (NPI) tax basis over the period of the lease. of share capital. are treated as income taxes and deferred PRT and deferred NPI tax is calculated and MAINTENANCE EXPENDITURE TAXATION provided for. Current UK PRT and Norwegian Expenditure on major maintenance, refits NPI tax are charged as tax expenses on Current Tax or repairs is capitalised where it enhances the chargeable field profits included in the the life or performance of an asset above its Current tax is recognised as a liability to income statement and are deductible for UK originally assessed standard of performance; the extent unpaid or if the amount paid and Norwegian corporation tax respectively. replaces an asset or part of an asset which exceeds the amount due it is recognised as was separately depreciated and which is then an asset. Current tax assets and liabilities are PENSIONS written off, or restores the economic benefits measured at the amount expected to be paid The Group contributes to the personal of an asset which has been fully depreciated. / recovered from the taxation authorities, pension arrangements of Executive Directors All other maintenance expenditure is charged using tax rates and laws that have been and employees up to a specified percentage to the income statement as incurred. enacted or substantively enacted by the of salary in lieu of a formal corporate scheme. reporting date. Contributions in lieu of pensions are charged CASH AND CASH EQUIVALENTS Deferred Tax to the income statement as incurred. Cash and cash equivalents includes cash in Deferred income tax is recognised on hand, deposits held at call with banks, other DERIVATIVE FINANCIAL INSTRUMENTS temporary differences arising between short-term highly liquid investments with AND HEDGING the tax base of assets and liabilities and original maturities of three months or less, their carrying amounts in the Group The Group uses derivative financial and bank overdrafts. Bank overdrafts are financial statements. instruments to manage its exposure to shown within borrowings in current liabilities fluctuations in foreign exchange rates, on the balance sheet. Deferred income tax is not accounted for if interest rates and movements in oil and it arises from the initial recognition of an gas prices. SHARE BASED PAYMENTS asset or liability in a transaction (other than a The Group has applied the requirements of business combination), that at the time of the Derivatives are initially recognised at fair IFRS 2 Share Based Payment to all grants of transaction affects neither, accounting nor value on the date a derivative contract is equity instruments after 7 November 2002 taxable profit or loss. entered into and are remeasured at their fair value at each subsequent reporting date. that had not vested as of 1 January 2005. Deferred income tax is determined using tax The Group issues both equity-settled and rates (and laws) that have been enacted or Derivatives embedded in other financial cash-settled share based payments as an substantially enacted by the reporting date. instruments or non-derivative host contracts are treated as separate derivatives when incentive to certain key management and Deferred income tax assets are recognised their risks and characteristics are not closely staff. Equity-settled share based payments to the extent that it is probable that future related to those host contracts and the host are measured at fair value at the date of income tax profit will be available against contracts are not carried at fair value with grant. The fair value determined at the which the temporary differences can unrealised gains or losses reported in the grant date of the equity-settled share based be utilised. income statement. payments is expensed on a straight-line basis over the vesting period, based on the Group’s Deferred income tax is provided on temporary Fair value estimation of financial instruments estimate of the number of shares that will differences arising on investments in traded in active markets (such as available- eventually vest. subsidiaries, joint ventures and associates, for-sale securities) is based on quoted market except where the timing of the reversal of prices at the reporting date. The fair value Fair value is measured by use of an actuarial the temporary difference is controlled by of foreign exchange contracts is determined binomial model. The expected life used the Group and it is probable that the using forward exchange market rates at in the model has been adjusted, based on temporary difference will not reverse in the the balance sheet date. Other financial management’s best estimate, for the effects foreseeable future. instruments are valued using standard pricing of non-transferability, exercise restrictions, models or discounted cash flow techniques. and behavioural considerations.
Dana Petroleum plc Annual Report 2007 65 Notes to the Group Financial Statements continued
For cash-settled share based payments, a liability is recognised based on the current fair value determined at each reporting date and that portion of the employees’ services to which the payment relates that has been received by the reporting date.
IMPACT OF NEW STANDARDS AND INTERPRETATIONS Adopted for 2007 In the current year, the Group has adopted IFRS 7 Financial Instruments: Disclosures which is effective for annual reporting periods beginning on or after 1 January 2007, and the related amendment to IAS 1 Presentation of Financial Statements. The impact of the adoption of IFRS 7 and the changes to IAS 1 has been to expand the disclosures provided in these financial statements regarding the Group’s financial instruments and management of capital (see note 25). No other IFRS/IFRIC effective during the year have impacted on the results or disclosures of the Group.
Not yet adopted International Accounting Standards (IAS/IFRS) Accounting Periods Commencing After IFRS 2 (Amendment) Share Based Payment – vesting conditions and cancellations 1 January 2009 IFRS 3 (Revised) Business Combinations 1 January 2009 IFRS 8 Operating Segments 1 January 2009 IAS 1 (Revised) Presentation of Financial Statements 1 January 2009 IAS 23 (Revised) Borrowing Costs 1 January 2009 IAS 27 (Amended) Consolidated and Separate Financial Statements 1 July 2009 IAS 32 Financial Instruments: Presentation 1 January 2009
International Financial Reporting Interpretations Committee (IFRIC) IFRIC 11 IFRS2 – Group and Treasury Share Transactions 1 March 2007 The Directors do not anticipate that Assets and liabilities arising from business or loss recognised in the profit and loss. The the adoption of these standards and combinations before the date of adoption by amendment has not yet been adopted by the interpretations will have a material impact the Group will not be restated and thus there EU hence the Group has not yet completed on the Group’s financial statements when will be no effect on the Group’s reported its evaluation of the effect of adopting these adopted or recognised from the accounting income or net assets on adoption. amendments. periods noted above. Upon adoption of IAS 1 (Revised) Upon adoption of IAS 32 Financial An amendment to IFRS 2 Share Based Presentation of Financial Statements, Instruments: Presentation, the Group will be Payment – vesting conditions and separate presentation of owner and non- required to classify as equity certain financial cancellations was issued in January 2008, owner changes in equity will be required instruments provided certain criteria are met. clarifying that only service conditions through the introduction of the statement of The instruments to be classified as equity and performance conditions are vesting comprehensive income. Whenever there is a are puttable financial instruments and those conditions, and other features of a share- restatement or reclassification, an additional instruments that impose an obligation on the based payment are not vesting conditions. In balance sheet, as at the beginning of the entity to deliver to another party a pro rata addition, it specifies that all cancellations, earliest period presented, will be required. share of the net assets of the entity only on whether by the entity or by other parties, The adoption of the revised standard will not liquidation. The amendment has not yet been should receive the same accounting impact on the Group’s reported income or net adopted by the EU hence the Group has not treatment. The amendment has not yet been assets. yet completed its evaluation of the effect of adopted by the EU hence the Group has not adopting these amendments. An amendment to IAS 27 Consolidated and yet completed its evaluation of the effect of Separate Financial Statements was issued in Upon adoption of IFRS 8, the Group will have adopting these amendments. January 2008. This requires the effects of all to disclose information to enable users of its Upon adoption of the revised version of transactions with non-controlling interests financial statements to evaluate the nature IFRS 3 Business Combinations, the Group to be recorded in equity if there is no change and financial effects of the different business will be required to continue applying the in control. Such transactions will no longer activities in which it engages and the purchase method of accounting to business result in goodwill gains or losses. When economic environment in which it operates. combinations, but the standard will introduce control is lost, any remaining interest in the For the Groups’ current business activities, the some changes to the existing treatment. entity is remeasured to fair value and a gain identification, aggregation and measurement
66 Dana Petroleum plc Annual Report 2007 of reportable segments under IFRS 8, would ■ Financial performance metrics, both Upon adoption of IFRIC 11, when an not result in any differences from the Groups’ Income Statement and Balance Sheet employee is granted rights to the Group’s current interpretation of IAS 14 Segment equity instruments this will be accounted ■ Inter-segment transactions Reporting, the prevailing standard that IFRS for as an equity-settled scheme, even if the 8 will replace. IFRS 8 will however, require ■ Differences in Accounting policy and Group buys the instruments from another additional disclosures for each reportable methodology between segments party, or the shareholders provide the equity segment as follows: instruments needed. The adoption of IFRIC 11 On the basis of the current borrowing will have no impact on the Group. ■ Criteria for identification facility described in note 20, and the Group’s accounting policy for finance costs and debt No other IFRIC issued during the year will ■ Nature, geographic location of business described on page 64, the adoption of IAS 23 impact on the results or disclosures of and main customers will not impact the Group. the Group.
3. Revenue Revenue disclosed in the income statement is analysed as follows:
2007 2006 £’000 £’000 Oil, gas and condensate sales 304,880 213,391 Other revenue 6,619 1,931 Revenue 311,499 215,322 Bank interest (financial assets not at fair value through profit and loss) 7,433 4,200 Total revenue 318,932 219,522 No revenue was derived from the exchange of goods and services (2006: £Nil). Included in oil, gas and condensate sales are amounts relating to deferred income (note 23) and embedded derivative income (note 14) arising on the Victor gas sales contract. These amounts are £1,100,000 (2006: £740,000) and £1,532,000 (2006: £521,000) respectively. Other revenue includes amounts receivable in respect of third party tariff income and the proceeds from a business interruption insurance claim.
Dana Petroleum plc Annual Report 2007 67 Notes to the Group Financial Statements continued
4. Segment Information For the purposes of segmental information the primary segment reporting format is determined to be the business segment. The Group has one class of business, the exploration for and production of hydrocarbon liquids and gas. No further disclosure is required in relation to primary segment reporting in this note as all the relevant disclosure is already detailed throughout the Group financial statements. Secondary segment information is reported geographically. The Group’s geographical segments are ‘Europe’, comprising the United Kingdom, Netherlands and Norway, ’Egypt’ (comprising Egypt which is a new segment in 2007 as a result of the acquisition as described in note 29b) and all other areas of activity are classified as ‘Other International’, being principally the Rest of Africa. Sales to external customers do not differ between origin and destination. The following tables present revenue, expenditure and certain asset information regarding the Group’s geographical segments for the years ended 31 December 2007 and 2006.
Segment Revenue: 2007 2006 £’000 £’000 Europe 295,143 207,136 Egypt 15,491 – Other International 865 8,186 311,499 215,322
Segment Net Assets: 2007 2006 £’000 £’000
Total Assets Europe 631,741 406,129 Egypt 166,313 1,916 Other International 71,133 96,557 Unallocated net assets 149,571 2,525 1,018,758 507,127
Total Liabilities Europe (122,568) (67,948) Egypt (4,226) – Other International (29,077) (35,845) Unallocated net liabilities (445,359) (91,332) (601,230) (195,125)
Capital Expenditure: 2007 2006 £’000 £’000 Europe 247,566 97,088 Egypt 118,930 – Other International 1,651 8,949 368,147 106,037
68 Dana Petroleum plc Annual Report 2007 5. Profit on Operating Activities before Interest and Taxation Profit on Operating Activities before Interest and Taxation is stated after charging/(crediting):
2007 2006 £’000 £’000
Depreciation (note 12) 54,319 36,502 Asset Impairment (note 12) 13,759 – Inventory Consumed 970 – Net (under) lifted production movement (16,515) (112) Insurance claim receipt (1) (866) (6,429) Net foreign exchange differences 2,918 9,679 Operating lease rentals 190 114 Exploration and Evaluation: Gain (2) (16,995) – Exploration and Evaluation: Expense - Costs of licences expired/relinquished 1,066 – - Wells declared non commercial 11,625 – - Pre licence expenditure 1,998 183 14,689 183
(1) Settlement of the Hudson business interruption insurance claim (2006: Gadwall and Mallard field physical damage and business interruption insurance claim). (2) Gain arising on the Causeway disposal.
6. Auditors’ Remuneration
2007 2006 £’000 £’000
Audit of the Group accounts 96 91 Audit of the Company’s accounts 30 27 126 118
Other fees to auditors: – Audit of Company’s subsidiaries pursuant to legislation 44 22 – Other services pursuant to legislation 24 23 – Taxation services 55 69 – Corporate finance services: transaction costs and financing costs 172 18 295 132 The corporate finance service fees in 2007 are one-off fees in relation to the acquisitions detailed in note 29 of £126,000 and in relation to the convertible bonds as detailed in note 21 of £46,000.
Dana Petroleum plc Annual Report 2007 69 Notes to the Group Financial Statements continued
7. Finance Costs
2007 2006 £’000 £’000
Bank and other loans (financial liabilities not at fair value through profit and loss) 3,981 915 Convertible bonds (note 21) 3,670 – Unwinding of decommissioning discount (note 22) 4,082 2,425 11,733 3,340
8. Employment Costs
2007 2006 £’000 £’000
Wages and salaries 8,104 6,942 Pension costs 417 269 Social security costs 1,213 3,008 9,734 10,219 Included in wages and salaries is a total expense of share based payments of £2,522,000 (2006: £3,110,000) of which £1,537,000 (2006: £192,000) arises from transactions accounted for as equity settled share-based payment transactions. The carrying amount of the liability at the end of the year for cash settled share-based payment transactions is £2,775,000 (2006: £3,217,000). The weighted average number of employees (including Executive Directors) during the year was:
2007 2006
Management 16 14 Technical and administration 51 43 67 57 Of the total number of employees, 33 (2006: 36) are employed by the Group’s subsidiary Yoganoil. Excluded from the above totals are 58 employees, being the weighted average employed by Zeitco, a Joint Venture owned by the Group and Egyptian General Petroleum Corporation, and which was acquired in October 2007. No employees other than the Directors are determined to be Key Management personnel. Details for each Director, of remuneration, pension entitlements and interests in share options and incentive arrangements are set out in the audited section of the Report on Director’s Remuneration on pages 53 to 56.
70 Dana Petroleum plc Annual Report 2007 9. Taxation
2007 2006 a) Analysis of Tax on profit on ordinary activities £’000 £’000
Current Taxation PRT/NPI 8,846 6,808 Corporation tax 29,627 1,833
Current tax charge 38,473 8,641 Amounts under provided in previous years 6,748 3,185
Total current tax charge 45,221 11,826
Deferred Taxation Deferred corporation tax 48,169 35,255 Deferred PRT/NPI (649) (1,059) Current deferred tax charge 47,520 34,196 Amounts (over)/under provided in previous years (11,310) 9,508 Total deferred tax charge 36,210 43,704
Total tax charge in the income statement 81,431 55,530
Tax on profit from operating activities may be analysed as follows: Current Tax Charge UK 38,634 11,126 Overseas 6,587 700 45,221 11,826
Deferred Tax Charge UK 30,533 43,704 Overseas 5,677 – 36,210 43,704
Total UK 69,167 54,830 Overseas 12,264 700 81,431 55,530 During 2007, the enactment of a 2% reduction in the rate of UK corporation tax on profits arising from activities outside the North Sea reduced the deferred tax charge by £300,000.
Dana Petroleum plc Annual Report 2007 71 Notes to the Group Financial Statements continued
9. Taxation (continued) Tax relating to items charged or credited to equity
2007 2006 £’000 £’000
Current tax: Current tax (credit) on share option awards (288) (3,449)
Deferred tax: Unrealised loss/(gain) on available-for-sale financial assets 2,284 (1,171) Provision for deferred tax on embedded derivative – (519) Provision for deferred tax on share option awards (1,743) 3,262
Total deferred tax charge 541 1,572
Total tax charge/(credit) in the Group Statement of Changes in Equity 253 (1,877)
b) Reconciliation of the total tax charge The tax charge for the year is higher than the weighted average rate for the year. The difference is explained below:
2007 2006 £’000 £’000 Accounting profit on ordinary activities before tax 143,271 97,127
Tax at the weighted average rate of corporation tax of 38.49% (2006: 46.40%) 55,139 45,063 Disallowed expenses and non-taxable income 19,520 (2,335) Supplementary charge differences on finance income and costs 1,803 1,118 Tax losses utilised not previously recognised (711) 14 Tax losses not utilised 9 496 PRT 8,196 5,749 Allowable deduction for PRT (4,459) (2,874) Foreign tax calculation differences (308) 33 Adjustment in respect of prior years (987) 5,577 Non qualifying depreciation 3,414 2,689 Other (185) –
Total tax expense reported in the income statement 81,431 55,530 The weighted average rate of corporation tax of 38.49% (2006: 46.40%) is calculated using the following methodology. Tax charges are calculated by applying the statutory tax rate in each tax jurisdiction to the accounting profit before tax for each entity. The sum of the tax charges for each entity is then divided by the Group accounting profit before tax to derive the weighted average rate of corporation tax for the year. The weighted average rate of corporation tax has changed from the previous accounting period due to differences in the weighted average mix of profits in each tax jurisdiction and also due to the inclusion of Norwegian and Egyptian taxable profits and the applicable tax rates.
72 Dana Petroleum plc Annual Report 2007 c) Unrecognised tax losses The Group has unrecognised tax losses which arose in Egypt (2006: UK) of £33,445,000 (2006: £2,044,000) in respect of exploration activities outside the ‘ring-fence’, that are available indefinitely for offset against future taxable profits of the companies in which the losses arose. Deferred tax assets have not been recognised as there is uncertainty whether the asset is recoverable. The asset is recoverable if there were future suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. d) Temporary differences associated with Group investments At 31 December 2007, there was no recognised deferred tax liability (2006: Nil) for taxes that would be payable on the unremitted earnings of certain of the Group’s subsidiaries as the Group has determined that undistributed profits of its subsidiaries will not be distributed in the near future. The temporary differences associated with investments in subsidiaries for which deferred tax has not been recognised aggregate to £682,000 (2006: £1,026,000). e) Deferred taxation Deferred tax included in the Group balance sheet is as follows:
2007 2006 £’000 £’000
Deferred Tax Liability Accelerated capital allowances 237,837 123,396 Revaluation of available-for-sale financial assets 3,090 698 Share based payment (4,153) (1,555) Tax on deferred PRT/NPI 2,784 1,263 Tax on provision for embedded derivative 1,340 2,106 Other temporary differences (8,183) (24,013) Tax losses (15,621) (12,360) 217,094 89,535 The deferred tax liability has increased substiantially during the year. This is mainly due to the deferred tax liability recognised on acquisition of the subsidiaries during the year (details in note 29) of £83,934,000.
Deferred Tax Asset PRT/NPI 4,298 2,525 4,298 2,525
The deferred tax included in the Group income statement is as follows: Deferred tax in the income statement Accelerated capital allowances 47,784 58,295 Share based payment (420) 80 Embedded derivative (766) 733 PRT (649) (382) Other temporary differences (8,179) (11,341) Tax losses (1,560) (3,681) Deferred tax expense 36,210 43,704
Dana Petroleum plc Annual Report 2007 73 Notes to the Group Financial Statements continued
10. Earnings per Share The basic earnings per ordinary share of 72.17p (2006: 48.24p) is calculated on the profit for the year attributable to equity holders of the parent of £62,093,000 (2006: £41,235,000) and divided by the weighted average of 86,037,154 ordinary shares (2006: 85,480,459). The diluted earnings per share of 70.49p (2006: 47.59p) is calculated on the diluted profit for the year attributable to equity holders of the parent of £64,661,000 (2006: £41,235,000) being the profit for the year of £62,093,000 (2006: £41,235,000) plus the convertible bond interest (net of tax) of £2,568,000 (2006: £Nil) divided by 91,726,521 dilutive potential ordinary shares (2006: 86,649,511), calculated as follows:
2007 2006 £’000 £’000
Basic weighted average number of shares 86,037 85,481 Dilutive potential ordinary shares: – Share Option schemes 1,754 1,169 – Convertible bonds 3,936 – 91,727 86,650 There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of these financial statements which require to be disclosed.
11. Intangible Assets The movements during the year were as follows:
Exploration and Evaluation Goodwill Assets Total £’000 £’000 £’000 Cost and Net Book Value: At 1 January 2006 – 106,797 106,797 Additions – 21,676 21,676 Transfers and reclassifications – (31,391) (31,391) At 31 December 2006 – 97,082 97,082 Arising on acquisition 145,773 20,355 166,128 Exchange adjustments 8,484 1,166 9,650 Additions – 69,760 69,760 Unsuccessful exploration and evaluation – (12,691) (12,691) Disposals – (3,275) (3,275) At 31 December 2007 154,257 172,397 326,654 Exploration and Evaluation Additions to exploration and evaluation assets represent the ongoing execution of the underlying work programmes and the fulfillment of individual licence requirements. During the year, following completion of geotechnical evaluation activity, certain licences were relinquished, and wells declared unsuccessful. Accordingly the related licence expenditures were expensed. During 2007, the principal exploration write-offs were Mauritania Block 8, Kenya L5, Clachnaben in the UK. The GAB acreage in Australia was also relinquished. Disposals represent costs incurred on Causeway licence sold during the year. The remaining net book value of exploration and evaluation assets at 31 December 2007 represents ongoing evaluation work in progress.
74 Dana Petroleum plc Annual Report 2007 Goodwill Goodwill arising on acquisition is described more fully in note 29 Acquisition of Subsidiaries, on pages 90 to 92. The Group has one class of business, the exploration for and production of hydrocarbons liquids and gas; and has determined that this primary business segment will be used, for the purpose of assessing the carrying value of goodwill arising on business combinations on an annual basis. Key assumptions used in value in use calculations The recoverable amount of the primary business segment is determined by value in use calculations which measure the net present value at the reporting date of the anticipated cash flow projections from each individual asset which comprise the portfolio underpinning the business segment. Life of field cash flow projections are used for development and producing assets, applying generally accepted market assumptions for commodity price and future inflation. The cash flows are then discounted at 8%. For exploration assets a risked valuation is used which combines an assessment of the expected chance of commercial success, and likely development cost. The calculation of value in use for the segment is most sensitive to the following assumptions:
■ Commodity price
■ Production
■ Operating costs
■ Capital costs
■ Value attributable to exploration Commodity prices reflect the Board’s estimate of the future prices. For the 2007 acquisitions, the budgeted prices were used which were $60/boe and 35p/therm for oil and gas respectively. Production profiles are estimated for each individual asset within the Group Development and Production portfolio by the technical management team. Operating Costs and Capital Costs are estimated using information from either the Operator for non-operated assets or by the technical management team for operated assets. A rate of 2.5% is used as an annual inflation factor. Value attributable to exploration from the Group’s extensive exploration portfolio, is derived from two sources; one, being the market value of existing discoveries which have established the presence of hydrocarbons, but where further appraisal activity is required, and the other, being the economic monetary value of the future drilling portfolio taking account of geological risking less the expected post-tax exploration cost; in both cases, using valuation multiples in line with precedent transactions. The Board considers the value attributable to exploration to be significantly ahead of the current carrying value but on the basis of current calculations, this does not require to be invoked for the Goodwill impairment review. Sensitivity to changes in assumptions There are possible changes to the other key assumptions above which might be considered reasonably likely and cause the carrying value of the segment to exceed its recoverable amount. These are discussed below.
■ Commodity price – the Board has considered the possibility of lower than planned oil and gas prices. A reduction in oil price to $43 per barrel would result in the value in use being reduced to a value equal to its carrying amount assuming no incremental exploration value.
■ Production – the Board recognise that production profiles may be adjusted at each future reserve estimate review. An “across-the-board” reduction of 19.53% in production accompanied by an oil price of $60 per barrel would result in value in use being reduced to a value equal to its carrying amount, again assuming no incremental exploration value. The Board considers that the market capitalisation of the Company is a good indicator of the recoverable amount of the business segment including exploration value. At 31 December 2007 the market capitalisation was £595,467,000 greater than the segment carrying amount.
Dana Petroleum plc Annual Report 2007 75 Notes to the Group Financial Statements continued
12. Property, Plant and Equipment The movements during the year were as follows:
Development and Production Assets Other Total £’000 £’000 £’000 Cost:
At 1 January 2006 266,219 1,232 267,451 Exchange adjustments (2,078) – (2,078) Additions 84,278 83 84,361 Transfers and reclassifications 31,391 – 31,391 At 31 December 2006 379,810 1,315 381,125 Arising on acquisition 141,941 2,076 144,017 Exchange adjustments 7,553 – 7,553 Additions 124,796 500 125,296 At 31 December 2007 654,100 3,891 657,991 Depletion and Depreciation: At 1 January 2006 107,736 1,034 108,770 Exchange adjustments (826) – (826) Provided in year (note 5) 36,372 130 36,502 At 31 December 2006 143,282 1,164 144,446 Exchange adjustments 244 35 279 Impairment of assets 13,759 – 13,759 Provided in year (note 5) 54,002 317 54,319 At 31 December 2007 211,287 1,516 212,803 Net Book Value At 31 December 2007 442,813 2,375 445,188 At 31 December 2006 236,528 151 236,679 At 1 January 2006 158,483 198 158,681 The Depletion and Depreciation charge for 2007, for Development and Production Assets, includes an amount of £13.8 million in respect of an impairment provision against the Group's carrying value of the Russian assets, as a consequence of legal proceedings which took place between Yoganoil as the field licence holder and the minority shareholder, Lukoil. This resulted in the implementation of a service agreement, under which Yoganoil will no longer be required to invest capital in the field, and accordingly the reserves were written down. The Net Book Value of Development and Production Assets at 31 December 2007 includes an amount of £Nil (2006: £25,964,000) in respect of assets under the course of construction.
76 Dana Petroleum plc Annual Report 2007 13. Available-for-Sale Financial Assets 2007 2006 £’000 £’000 At 1 January 14,390 13,082 Additions 7,720 5,212 Transfers and reclassifications (506) – Fair value adjustments 8,428 (3,904) At 31 December 30,032 14,390 The available-for-sale investments consist of: a) Investments in the shares of Faroe Petroleum plc These are listed on the London AIM market, and by their nature have no fixed maturity date or coupon rate. During the year, the Group participated in a fund-raising by Faroe Petroleum plc acquiring 5,251,537 shares at a cost of £7,719,759, increasing the Group's total shareholding in Faroe Petroleum plc to 17,926,166 shares, equivalent to a 17.11% shareholding, maintaining the Group's position as the largest shareholder in this company. The fair value of this holding at the end of 2007 was £30,032,000 (2006: £13,498,000). During the first quarter of 2008, through a series of market purchases, the Company acquired a further 10,908,483 shares in Faroe Petroleum plc at a cost of £15,943,000, increasing the Group's shareholding in that company to 27.5%. b) Investments in the shares of Dana Petroleum Norway AS (formerly Ener Petroleum ASA) These shares were first acquired in December 2006, as part of the Group's proposed offer to acquire Ener Petroleum ASA ('Ener'), a company listed on the Norwegian OTC market. This offer was subsequently aborted, but the Group acquired 30,000 shares at a cost of Nok 365 per share, during the offer process. The fair value of this holding at the end of 2006 was £892,000. In June 2007, the Group signed conditional subscription and acquisition agreements for shares in Ener which, following successful completion in July 2007, resulted in Ener becoming a wholly-owned subsidiary of the Group. The company was later renamed Dana Petroleum Norway AS. The available-for-sale fair value of £506,000 was realised and transferred to investments in subsidiaries.
14. Derivative Financial Instruments
Non-Current 2007 2006 £’000 £’000
Embedded derivative 1,149 2,017
Current 2007 2006 £’000 £’000
Embedded derivative 1,532 2,195 The Group has an embedded derivative within the Victor gas contract. In compliance with IAS 39 the embedded derivative has been recognised at its fair value in the financial statements from 1 January 2005. Fair value represents the discounted value of the anticipated future cash flows generated by the embedded derivative components. The discount rate applied is 8% (2006: 8%).The maturity date of the Victor gas contract is 30 September 2009.
Dana Petroleum plc Annual Report 2007 77 Notes to the Group Financial Statements continued
15. Inventories 2007 2006 £’000 £’000
Materials and equipment 14,652 1,137
16. Trade and Other Receivables 2007 2006 £’000 £’000
Trade receivables (note 24) 65,121 19,950 Other receivables and prepayments 14,172 20,500 Other related parties – 774 79,293 41,224
2007 2006 £’000 £’000
a) Ageing analysis of trade receivables - within 30 days 51,952 19,950 - 31 to 60 days 8,444 – - greater than 61 days (past due but not impaired) 4,725 – 65,121 19,950 Trade receivables within 60 days are not past due nor impaired. No bad debts exist at the year end (2006: £Nil).
17. Cash and Cash Equivalents
2007 2006 £’000 £’000
Cash at bank and in hand 32,632 59,864 Short-term deposits 83,328 50,014 115,960 109,878
Cash at bank earns interest at floating rates based on a discount to US$/GBP LIBOR. Short-term deposits are made for varying periods of between one day and three months depending on the future cash requirements of the Group, and earn interest at the respective short-term fixed deposit rates. The fair value of cash and cash equivalents is £115,960,000 (2006: £109,878,000).
78 Dana Petroleum plc Annual Report 2007 18. Trade and Other Payables a) Current Liabilities
2007 2006 £’000 £’000
Trade payables (note 24) 32,326 20,292 Accruals and other payables 50,045 35,820 82,371 56,112 Accruals and other payables includes interest payable of £2,051,000 (2006 – £Nil) in respect of convertible bonds (see note 21). b) Non-current Liabilities
2007 2006 £’000 £’000
Asset acquisition payments payable on future events 4,233 894
19. Current Tax
2007 2006 £’000 £’000
PRT/NPI 3,093 1,603 Corporation tax 24,998 194 28,091 1,797
20. Borrowings and Financial Liabilities
2007 2006 £’000 £’000
Bank loan 75,268 – Convertible bond (note 21) 111,989 – 187,257 – The maturity of the borrowing liabilities disclosed above is as follows:
2007 2006 a) Amounts falling due £’000 £’000
– in one year or less or on demand – – – in more than one year but not more than two years 75,268 – – in more than two years but not more than five years 111,989 – 187,257 – b) In September 2007 the Group finalised a new US $400 million bridge facility with Abn Amro Bank to provide finance for the Egyptian acquisition and ongoing working capital requirements over the 18 month term of the facility. This replaced all previous facilities. At 31 December 2007 US$ 150 million was drawn under the facility. Any amounts drawn under the terms of the loan will be repayable in full by 13 March 2009. The bank facility is secured by fixed and floating charges over the assets of the parent company and its principal asset owning subsidiary undertakings. Interest is currently chargeable at US$ LIBOR + 0.80%.
Dana Petroleum plc Annual Report 2007 79 Notes to the Group Financial Statements continued
21. Convertible Bonds In July 2007, the Group issued £141,500,000 of Guaranteed convertible bonds due in 2014. The bonds have a conversion premium of 50%, representing a conversion price of £16.45 per Dana share, with a coupon of 2.9% payable semi-annually. The bonds have a seven year term and include an investor put on the fifth anniversary of the issue date. At the initial conversion price of £16.45 per share, there are 8,601,824 ordinary shares of the Company underlying the bonds.
£’000
Nominal value of convertible bonds issued net of issue costs 138,346 Equity component (see Group Statement of Changes in Equity) (27,976) Liability component at date of issue 110,370 Interest charged 3,670 Interest paid – Total liability component as at 31 December 2007 114,040 Reported in: Interest payable in current liabilities 2,051 Borrowing financial liabilities – non-current liabilities 111,989 Total liability component as at 31 December 2007 114,040 The interest charged for the year is calculated by applying an effective interest rate of 6.60% to the liability component for the period since the bonds were issued. There is no material difference between the carrying amount of the liability component of the convertible bonds and their fair value. This fair value is calculated by discounting the future cash flows at the market rate.
22. Provisions for Liabilities and Charges
Decommissioning provision £’000
At 1 January 2007 44,415 New provisions and changes in estimates 31,610 Unwinding of discount (note 7) 4,082 Exchange adjustments 876 Expenditure incurred (71) At 31 December 2007 80,912 The decommissioning provision of £80,912,000 relates primarily to the Group’s production and development facilities. These costs are expected to be incurred at various intervals over the next 30 years. The provision has been estimated using existing technology at current prices, escalated at 2.5%, and discounted at 7%. The economic life and the timing of the decommissioning liabilities are dependent on Government legislation, commodity price and the future production profiles of the respective production and development facilities. In addition, the costs of decommissioning are subject to inflationary/deflationary pressures in the cost of third party service provision. The decommissioning provision has increased substantially during the year. This is mainly due to the decommissioning provision recognised for the Jotun asset of £25,001,000 as a result of the acquisition of Ener Petroleum ASA (details in note 29).
23. Deferred Income In 1999, the Group re-negotiated its gas sales contract with British Gas Trading Limited in respect of the Victor gas field which resulted in the receipt of a lump sum compensation payment to Dana. This income is released to the income statement in proportion to the amount produced annually over the field’s remaining contracted reserves, and is included in revenue.
80 Dana Petroleum plc Annual Report 2007 24. Financial Instruments An outline of the objectives, policies and strategies pursued by the Group in relation to financial instruments is set out in the Financial Review on page 32 of this report, and in note 2 on pages 64 and 65. Nature and extent of risk associated with financial instruments
Market Risk As an upstream oil & gas company, the Company is subject to many risks, at both the macro and micro level, including currency, interest and credit risk, arising in the normal course of the Group’s business. The Business Review on page 20 describes these risks in more detail, but also provides the Company’s view of the principal risks facing the Company that potentially have a medium to high impact on the Company. There are no particular risks associated with financial instruments included in the Business Review analysis. This is indicative of a Company with a geographically diverse portfolio of assets and a Company which has been unhedged over recent years with respect to commodity price, interest rates and currency fluctuations. Financial instrument risks are therefore deemed to be of low probability in nature and of low impact in quantum. It is against this backdrop and context that the following disclosure on the nature and extent of risks from financial instruments should be read.
Financial assets and liabilities: Credit risk The financial assets of the Group are subject to floating charges provided to the debt provider for the new debt facility secured during 2007 (see note 20b). As such the financial assets are subject to certain terms and conditions (further explained below) which help preserve the credit worthiness of the asset to the debt providers.
Cash and cash equivalents Unless agreed otherwise, all such balances must be maintained with institutions party to the debt facility. The Group may however, make money market deposits for up to six months duration and up to £80 million, with any institution whose senior unsecured credit and unguaranteed long term corporate debt rating is at least equivalent to Standard and Poor’s AA-.
Available-for-sale financial assets Faroe Petroleum plc is a publicly quoted upstream oil and gas company listed on the London AIM market. This is a liquid market where fluctuations in market value are easily observed and monitored on a daily basis. The Company is the largest shareholder in Faroe Petroleum plc with 17.11% held at the 2007 year end and a current shareholding at 27.5%. The Group retains the option to exercise those statutory rights to protect the underlying investment value.
Trade and other receivables The Group’s exposure to credit risk in trade receivables is minimal. The Group does not have a trading arm, but sells produced hydrocarbons only to recognised and creditworthy parties, typically the trading arm of large, international oil & gas companies. European crudes sales are primarily sold under an annual contract at agreed premia or discounts to Brent, depending upon crude quality. Sales are typically generated on a monthly entitlement basis rather than “crude liftings” to facilitate regular cashflow. Sales of gas from the Group’s older UK gas fields are sold under long-term contracts with built-in escalation mechanisms. Gas production from the newly developed Cavendish field in the UK is also sold under an annual contract at “day ahead” pricing. European credit terms normally require settlement within 15 days of invoicing and accordingly impairment exposure is minimal, a fact supported by track record. As a result of the acquisition of crude production in Egypt, the ageing profile of trade and other receivables will be extended. Egyptian crude is sold predominantly to government organisations but also to large international trading companies. Country practice is for much extended credit terms of up to 120 days, but particularly with the government organisations there is also an established practice of “offsetting” liabilities due to the counterparty, which facilitates the management of such receivables. Management of this extended credit exposure is one of the key objectives of the Egyptian business unit management team. Also in Egypt, the Group’s operations in the East Zeit field, provides infrastucture access and logistics support services to third parties operating in the same locale. These other receivables occasionally prove problematic to collect and require active pursuit by management. Past practice would indicate that any impairment exposure is not material in the context of the Egyptian business. Ageing analysis of trade receivables is disclosed in note 16 a).
Dana Petroleum plc Annual Report 2007 81 Notes to the Group Financial Statements continued
24. Financial Instruments (continued) Trade and other payables The robust prevailing economic conditions in the industry, generally means there is minimal credit risk with suppliers. As the Group's interests are predominantly non-operated in nature, payments to suppliers occur only after goods and or services have been received. For operated activity, material or long-term contracts will generally only be awarded after a tender process, where supplier creditworthiness will be evaluated. The maximum credit risk exposure relating to financial assets and liabilities is represented by the carrying value as at the balance sheet date as set out in the summary table below.
Financial assets and liabilities: Liquidity risk Cash and cash equivalents As at 31 December 2007, the Group had cash and cash equivalents of £115,960,000 (2006: £109,878,000).
Borrowings and financial liabilities During 2007, the Group secured both a new $400 million bank debt facility and issued a 7 year Guaranteed Convertible Bond. Given the deterioration in the global credit markets over the latter half of 2007 and into 2008, the timing of these fund raisings has been optimal for the Group, and should provide sufficient liquidity for the Group until normality returns to the credit markets. An analysis of the maturity profile of the Group’s borrowing financial liabilities is shown in note 20a) and details of the underlying facilities are detailed in note 20b) and note 21. The undiscounted cash flows associated with the maturity profile is noted in the table below. The Group currently has sufficient cash and cash equivalents to repay in full the amount of the bank debt currently drawn and which matures in March 2009.
2007 2006 Amounts falling due £’000 £’000
– in one year or less or on demand 6,813 – – in more than one year but not more than two years 80,049 – – in more than two years but not more than five years 153,810 – 240,672 – The Group has also recently received indicative terms for re-financing this facility for a further 3 years, despite the current credit concerns in the global economy. Whilst pricing of such debt has undoubtedly increased somewhat compared to 12 months ago, this confirms the upstream industry continues to be a sector where banks are open for business. This proposal remains under consideration but provides confidence that liquidity will not be an issue for the Group in the short-term particularly when viewed in light of the Group’s future production growth and the strengthening commodity price environment. The issue of the Guaranteed Convertible Bond has also provided the Group with a source of longer term finance, where the earliest maturity would be upon an investor put at the end of year 5 (2012).
Financial assets and liabilities: Interest rate risk Details of the Group’s interest rate risk profile on financial assets and liabilities is set out below. The fixed rate and competitive nature of the Convertible Debt coupon of 2.9% per annum, provides excellent protection against the risk of changes in market interest rates and complements the variable interest rate applicable to the Bank debt. USD LIBOR which underpins the Bank debt has also reduced significantly in the early part of 2008, and remains under downward pressure, as the US government seek to use interest rates to fight recessionary pressures. Accordingly the Group is now enjoying an extremely low cost of finance and in 2007 covered net interest charge more than 30 times.
82 Dana Petroleum plc Annual Report 2007 Financial assets
Fixed rate financial Floating rate assets financial assets < 1 year < 1 year Total £’000 £’000 £’000 2007 Cash and cash equivalents 83,329 32,631 115,960
2006 Cash and cash equivalents 50,014 59,864 109,878 Cash and cash equivalents (which are presented as a single class of asset on the balance sheet) comprise cash at bank and other short-term deposits and liquid investments that are readily convertible to a known amount of cash and which are subject to an insignificant risk of change in value. At 31 December 2007, short-term deposits and liquid investments were earning interest at a weighted average fixed deposit rate of 6.12% (2006: 5.51%). Cash at bank earns interest at floating rates based on a discount to US$/GBP LIBOR.
Financial Liabilities
Fixed rate Floating rate financial financial liabilities liabilities < 1 year < 1 year Total £’000 £’000 £’000 2007 Bank loan – 75,268 75,268 Convertible Bond 111,989 – 111,989 111,989 75,268 187,257
2006 Bank loan ––– The fixed rate liability comprises the convertible bonds issued which bear an interest coupon of 2.9% per annum until the maturity of the bonds in 2014 or on the exercise of the investor put on the fifth anniversary of the issue date (2012). The floating rate liabilities comprise the bank borrowings which bear interest based on US$ LIBOR plus 0.8%. The other financial instruments of the Group that are not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk. The Group’s earnings are sensitive to changes in interest rates on its financial liabilities. If the interest rates for the year were to have increased by 1% in 2007, with all other variables held constant, it is estimated that the Group’s profit before tax for 2007 would have decreased by £1,300,000 (2006: £Nil).
Dana Petroleum plc Annual Report 2007 83 Notes to the Group Financial Statements continued
24. Financial Instruments (continued) Financial assets and liabilities: Currency risk The predominant functional currency within the Group is sterling but due to the Groups (USD denominated) oil production, the Group does remain exposed to fluctuations in the USD currency, the primary area of currency risk. Such exposures can be hedged against using financial instruments but the Group takes the view that this would be inconsistent with the Group’s unhegded position on commodity price, given that there is a well- established inverse correlation between movements in the price of oil and movements in the USD. Whilst this approach may give rise to currency exchange gains and losses, these are in effect largely offset by corresponding gains and losses in the value of crude oil sales. The companies acquired in Egypt during the year (see note 29b), are USD reporting entities given that this is the main currency of the underlying operations, with only a relatively minor exposure to Egyptian pounds. This creates exposure to currency translation risks which is mitigated by the USD bank debt drawn by the UK subsidiary acquiring these entities. Once again this may give rise to currency gains and losses, but these will be offset by corresponding gains and losses in the underlying financial results of the Egyptian subsidiaries. Dana Petroleum Norway AS has a functional currency of NOK, the predominant source currency of the Company’s cost base. Revenues, being generated from crude sales are however, USD denominated. In cash terms the Group is short GBP and NOK, and long USD. The Group is however, able to make deposits of USD, on a dual or tri-currency basis, where in return for pre-agreed exchange rates, and interest yields significantly ahead of vanilla USD deposit rates, the Group grants the counterparty the right to return the original deposit, in the nominated currency of their choice, namely USD, GBP or NOK. Using this mechanism the Group has been able to achieve deposit yields up to 11.15%, compared to a yield of 3% on vanilla USD deposits. The following table demonstrates the sensitivity to a reasonably possible change in the US dollar exchange rate, with all other variables held constant, on the Group’s profit before tax and Group’s equity.
Effect on Increase/ profit before Effect on decrease in tax equity US Dollar rate £’000 £’000 2007 (+ or -) 5% 1,655 1,655
2006 (+ or -) 5% 168 168
84 Dana Petroleum plc Annual Report 2007 Details of the Group’s current exposure to USD in its financial assets and liabilities, is set out in the summary table below.
Fair values of financial assets and financial liabilities: Summary Set out below is a comparison by category of carrying amounts and fair values of all of the Group’s financial assets and liabilities as at 31 December.
2007 2006 2007 2006 Source Book value Book value Fair value Fair value Currency £’000 £’000 £’000 £’000 Financial assets
Cash and cash equivalents GBP/Other 82,455 3,764 82,455 3,764 USD 33,505 106,114 33,505 106,114 115,960 109,878 115,960 109,878 Available-for-sale financial assets GBP/Other 30,032 14,390 30,032 14,390 USD – – – – 30,032 14,390 30,032 14,390 Derivative financial instruments GBP/Other 2,681 4,212 2,681 4,212 USD – – – – 2,681 4,212 2,681 4,212 Trade receivables GBP/Other 12,935 9,768 12,935 9,768 USD 52,186 10,182 52,186 10,182 65,121 19,950 65,121 19,950 Financial liabilities
Trade payables GBP/Other 22,954 13,491 22,954 13,491 USD 9,372 6,801 9,372 6,801 32,326 20,292 32,326 20,292 Borrowings financial liabilities GBP/Other 111,989 – 111,989 – USD 75,268 – 75,268 – 187,257 – 187,257 – The following significant exchange rates were applied during the reporting period(s):
Average rate Year end spot rate 2007 2006 2007 2006 £ £ £ £
USD 2.0220 1.8425 1.9929 1.9572 NOK 11.7283 11.8140 10.7932 12.2312 EUR 1.4618 1.4668 1.3553 1.4843 LE 11.4482 10.7222 11.0931 11.2558 The fair value of the available-for-sale financial assets and the derivative financial instruments are detailed in note 13 and note 14 respectively.
Dana Petroleum plc Annual Report 2007 85 Notes to the Group Financial Statements continued
25. Called-up Share Capital
Number of 15p Ordinary ‘000' £'000
Authorised ordinary shares At 1 January and 31 December 2007 120,000 18,000
Number of 15p Ordinary ‘000' £'000 Allotted, called up and fully paid ordinary shares At 1 January 2006 83,825 12,574 Issued and fully paid for share option scheme exercises 2,184 327
At 31 December 2006 86,009 12,901 Issued and fully paid for share option scheme exercises 39 7 At 31 December 2007 86,048 12,908 During the year a total of 38,781 ordinary shares of 15p each were issued to various employees pursuant to the maturity of a share save scheme awards at a weighted average exercise price of £1.94. At 31 December 2007 the issued share capital of the Group was represented by 86,047,361 ordinary shares of 15p each (2006: 86,008,580). The Group has provided an unconditional and irrevocable guarantee for the Convertible Bonds ('Bonds') issued during the year by Dana Petroleum (Jersey) Limited, a wholly owned subsidiary, the details of which are contained in note 21. In accordance with the terms and conditions of the Bonds, the Bonds will be convertible into preference shares of the issuer, which will then be immediately exchanged for ordinary shares in the Company as guarantor.
Capital Structure The Group’s management remains committed to delivering and enhancing shareholder value, and building upon the progress made during recent years. The Board continues to believe that this can best be achieved by investing in the existing asset portfolio and through the acquisition of new commercial opportunities as they arise, rather than to provide shareholder return through dividends. This is, however, reviewed by the Board on a regular basis. The Group seeks to optimise the return on investment, by managing the capital structure to achieve capital efficiency via the appropriate level of access to the debt markets at attractive cost levels. Notes 20 and 21 to the financial statements provide further details of the financing activity in 2007. Capital for the Group is equity attributable to the equity holders of the Parent company, and is detailed in the Group Statement of Changes in Equity on page 60.
2007 2006 £’000 £’000
Borrowings financial liabilities 187,257 – Less Cash and cash equivalents (115,960) (109,878) Net debt/(funds) 71,297 (109,878) Capital 417,528 309,686 Gearing ratio 17% n/a
86 Dana Petroleum plc Annual Report 2007 26. Share-based Payments During the year the following share-based payment arrangements were in operation by the Company:
The 2006 Long-Term Incentive Plan (LTIP) The extent, nature, term and general terms and conditions, (including vesting), relating to this arrangement, are detailed in the Report on Directors’ Remuneration on pages 48 to 50. Details of LTIP awards outstanding are as follows:
LTIPs LTIPs Held Granted to 1 LTIPs at 31 Share Price January Granted Lapsed December At Grant Fair Value 2007 ‘000 ‘000 ‘000 ‘000 £ £
2006 award: Level 1 & 2 – 310,118 – 310,118 10.20 5.5096 2006 award: Level 3 – 98,733 (4,705) 94,028 10.20 5.9629 2007 award: Level 1 & 2 – 261,586 – 261,586 12.73 7.1201 2007 award: Level 3 – 123,507 – 123,507 12.73 7.5700 – 793,944 (4,705) 789,239 The fair valuation of the LTIP awards was undertaken by Halliwell Consulting, the Company's Remuneration consultants, using a Monte Carlo model, and utilised the following key inputs:
Risk free interest rate 4.7255% to 5.5184% Expected volatility 33.8827% to 34.8783% Exercise price £0.00 Dividend yield 0.00% Vesting period 3 years Expected life 3 years Forfeiture rate per annum 8.00%
The expected life is the period from the date of grant to the vesting date. The weighted average fair value of the awards granted in 2007 was £6.4171. The LTIP is an "equity settled" share based payment arrangement. The Company recognised a total expense during the year of £770,000 (2006: £Nil) in respect of the LTIP.
The Share Option Scheme The extent, nature, term and general terms and conditions, (including vesting), relating to this arrangement, are detailed in the Report on Directors’ Remuneration on page 55.
The Share Save Scheme The extent, nature, term and general terms and conditions, (including vesting), relating to this arrangement, are also detailed in the Report on Directors’ Remuneration on page 52. The Share Option and Share Save Scheme are considered to be “equity-settled” transactions, and for all awards post 7 November 2002, require to be fair valued at the date of award. The fair value process and the underlying assumptions used are described below. Based on the results of this actuarial review, the Share Save Scheme was demonstrated to be immaterial and accordingly the requirements of IFRS 2 – share based payment, are not applied to this arrangement. The “Phantom” Option Scheme Senior managers (excluding Directors), participate in this arrangement, which mirrors the terms and conditionality of the Share Option Scheme, except that on exercise they are “cash-settled” transactions. As such, these transactions also require to be fair valued, but at each reporting date. The following table illustrates the number and weighted average exercise prices (WAEP) of movements in the respective option schemes.
Dana Petroleum plc Annual Report 2007 87 Notes to the Group Financial Statements continued
26. Share-based Payments (continued)
Options Options Granted to Options Held at 31 Of Which 1 January Lapsed Granted Exercised December Exercisable 2007 ‘000’ ‘000’ ‘000’ ‘000’ ‘000’ ‘000’
Share Option Scheme 2,030 (1) ––– 2,030 (1) 2,030 (1)
WAEP £3.215 – – – (2) £3.215 £3.215
Phantom Option Scheme 600 – – 220 380 –
WAEP £4.467 – – £2.470 £5.622 –
Options Options Granted to Options Held at 31 Of Which 1 January Lapsed Granted Exercised December Exercisable 2006 ‘000’ ‘000’ ‘000’ ‘000’ ‘000’ ‘000’
Share Option Scheme 4,357 (1) 153 – 2,174 2,030 (1) 981 (1)
WAEP £2.645 £4.135 – £2.008 (2) £3.215 £2.231
Phantom Option Scheme 780 – – 180 600 –
WAEP £3.938 – – £2.175 £4.467 – (1) Included within this balance are options of 981,000 (2006: 981,000) shares that have not been recognised in accordance with IFRS 2 as the options were granted before 7 November 2002. These options have not been subsequently modified and therefore do not need to be accounted for in accordance with IFRS 2. (2) The weighted average share price at the date of exercise for the options exercised was £Nil (2006: £10.492)
For the share options outstanding as at 31 December 2007, the weighted average remaining contractual life is 4.71 years (2006: 5.71 years). The range of exercise prices for options outstanding at the end of the year was £2.0625 – £4.135 (2006: £2.0625 – £4.135). For the two awards of share options post 7 November 2002 (January 2003 and December 2004), the Company was assisted in the process of establishing the fair value at the date of the grant of the awards by CPRM, a professional actuarial firm, and part of the Cavanagh Group. CPRM estimated the fair value using a binomial model, utilising a risk free discount rate and taking into account the terms and conditions upon which the options were granted, and the performance conditions that were required to be satisfied before vesting. The risk free discount rate is a measure of the guaranteed returns that could be earned in the market over a given term at the valuation date. In line with IFRS 2 requirements, this has been set as the yield on a zero coupon government bond with a remaining term equal to the expected term on the option being valued, (allowing for expected early redemption of the option). CPRM were also provided with the detailed rules of each scheme and all the objective data relating to historic awards (grants, exercises, lapses, withdrawals etc) as well as the Company’s historic daily share price and staff turnover analysis. In addition, the following assumptions were also made with respect to the expected volatility of the Company’s share price and the expected life of an option. For volatility, the Company used share price data from 2002 onwards. This was the year the Company acquired 4 new producing / development assets in the North Sea, which were transforming to the Company, and which significantly reduced the influence of the historic Russian activity on the Company. This geographical shift has lead to a lower volatility in the Company’s share price which is expected to continue into the future. CPRM were able to corroborate this fact by establishing that the standard deviation of the Company’s share price (the measure of volatility) from the FTSE All Share Index throughout the historic period, reduced considerably from 2002 onwards. Accordingly, an annual volatility assumption of 34% was utilised. The life of the option depends on the trigger levels at which employees decide to exercise before the option expires and the extent to which option holders withdraw from the schemes due to staff turnover or mortality. Due to the small number of members included in the Dana schemes, the results of any historic analysis are very sensitive to personal circumstances at the time of exercise and therefore the results are not representative nor an appropriate profile to extrapolate into the future.
88 Dana Petroleum plc Annual Report 2007 Accordingly, on CPRM’s recommendation, the following profile was used which is consistent with their wider actuarial experience of actual member exercise rates but still aligned with the specific history for the Dana Scheme.
Profit Trigger 25% 50% 75% 100% 125% 150% No Trigger % Exercising 15 25 25 15 10 5 5 The staff turnover assumption is based on the Company’s historic rate of staff turnover amongst all share option holders. This was established from factual historic data at 8% pa. Mortality prior to expiry was assumed to be nil. The fair value of the Phantom (cash-settled) options was established in exactly the same way, and until the liability is ultimately settled, it is required to be remeasured at each reporting date, with changes to fair value recognised in the income statement. Deferred Share Payments A and B The extent, nature and general terms and conditions of these awards to Mr T P Cross are detailed in the Report of the Directors on page 41. The shares granted under these arrangements are subject to a five year holding period restriction, or until the termination of the employment contract of Mr T P Cross. The fair value of these awards are being amortised over a five year vesting period.
The carrying amount of the liability relating to the cash-settled options at 31 December 2007 is £2,775,000 (2006: £3,217,000). The expense recognised for the share based payments above in respect of employee services during the year to 31 December 2007 is £2,522,000 (2006: £3,110,000). The portion of that expense arising from equity-settled share based payment transactions is £981,000 (2006: £192,000).
27. Reconciliation of Movements in Equity The reconciliation of movements in equity is detailed in the Group Statement of Changes in Equity on page 60. The following is a description of the nature and purpose of each reserve:
Share capital The balance classified as share capital is the nominal value on issue of the Group’s equity share capital, comprising 15p ordinary shares. Share premium The balance classified as share premium is the premium on issue of the Group’s equity share capital, comprising 15p ordinary shares less any costs of issuing the shares. Cumulative translation reserve The cumulative translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries. Other reserves Other reserves records the fair value changes on available-for-sale investments, reserves relating to the Group’s transition to a UK listing from an Irish listing in 1997, and the equity component of the convertible bonds issue (see note 21).
Dana Petroleum plc Annual Report 2007 89 Notes to the Group Financial Statements continued
28. Net Cash Flows from Operating Activities Year to 31 Year to 31 December December 2007 2006 £’000 £’000
Profit for the Financial Year 61,840 41,597 Depreciation 54,319 36,502 Asset impairment 13,759 – Deferred income (1,100) (740) Interest income (7,433) (4,200) Interest expense 11,733 3,340 Taxation 81,431 55,530 Employee share scheme charge 1,117 192 Translation difference 2,918 9,679 Exploration and evaluation (2,306) – Fair value movements on derivatives 755 (521) Movements in working capital: Inventory movement (5,266) (657) Receivables movement (11,995) 5,663 Payables movement 1,988 (6,465) Cash Generated from Operating Activities 201,758 139,920
29. Acquisition of subsidiaries a) Ener Petroleum ASA (subsequently renamed Dana Petroleum Norway AS) On 12 June 2007 the Company signed conditional subscription and acquisition agreements for shares in the Norwegian independent oil company Ener Petroleum ASA ('Ener'), a company listed on the Norwegian OTC market. The Company agreed terms to conditionally subscribe for 1,518,750 new shares in Ener at a subscription price of NOK 160 per share, representing approximately 53% of the fully diluted share capital of Ener following the issuance of the new shares to Dana. In addition, the Company entered into share acquisition agreements for the purchase of certain existing shares in Ener, all at a price per share of NOK 220 payable in cash. These initiatives delivered control of approximately 93.7% of the total shares in Ener, following completion on 11 July 2007 and upon regulatory approvals from the Norwegian Ministry of Petroleum and Energy and The Norwegian Ministry of Finance. Thereafter a formal process was instigated to acquire the remaining minority shareholdings. This deal represents an important step for the Company as it creates a substantial business in Norway with the technical and financial strength to build further. The Ener transaction adds further to the Group's production and reserves and most importantly accelerates a portfolio of attractive business opportunities in Norway. The Group also now has in place an excellent technical team in Norway which is focused on delivering further growth. These factors support the goodwill arising on acquisition. The transaction has been accounted for by the purchase method of accounting with an effective date of 11 July 2007, being the date that the Group gained control of 93.7% of the total shares in Ener. The Group has consolidated the results of Ener from the date of acquisition. The fair value allocation to the former Ener assets is preliminary in nature and will be reviewed in accordance with the provisions of IFRS 3 – Business Combinations within the specified 12 month period from completion date. Due to the inherently uncertain nature of the oil and gas industry and intangible exploration evaluation assets in particular, the assumptions underlying the preliminary assigned values are judgemental in nature. To the extent that the purchase consideration exceeds the aggregate of the fair value of the identifiable assets and liabilities of Ener, then goodwill has been recognised and recorded on the acquisition. Deferred tax has also been recognised in respect of the fair value adjustments as applicable and incorporated into the calculation of goodwill shown opposite.
90 Dana Petroleum plc Annual Report 2007 Acquisition Acquisition Book Value Fair Value £’000 £’000
Intangible exploration and evaluation assets 7,697 8,464 Property, plant and equipment 108,981 51,179 Other current assets 11,517 10,184 Cash and cash equivalents 51,321 51,321 Trade and other payables (78,448) (78,465) Deferred tax liabilities –– Deferred tax liabilities included within goodwill – (53,053) Provisions (24,712) (24,712) Net Assets/(Liabilities) 76,356 (35,082) Goodwill arising on acquisition 82,249 Total consideration 47,167 Satisfied by: Cash 47,167 Net cash outflow arising on acquisition Cash and cash equivalents acquired 51,321 Cash consideration (47,167) 4,154 Ener has contributed a loss of £3,490,000 to the results of the Group. If the acquisition of Ener had been completed on the first day of the financial year, Group revenues for the year would have been £342,565,000 and Group profit attributable to equity holders of the parent would have been £58,588,000. b) Devon Energy, Egypt On 17 April 2007, the Group announced that its wholly owned subsidiary, Dana Petroleum (E&P) Limited, signed an agreement with Devon Energy Corporation (Devon) to acquire Devon's entire upstream petroleum business interests in Egypt spanning eight companies and eight production sharing contracts. The eight companies acquired are as follows:
Name of Company Country of Incorporation Former Name Dana Petroleum East Zeit Limited Cayman Islands Devon Energy East Zeit Limited Dana Petroleum East Beni Suef Limited Cayman Islands Devon Energy East Beni Suef Limited Dana Petroleum Qarun Limited Cayman Islands Devon Energy Qarun Limited Dana Petroleum WAG Limited Cayman Islands Devon Energy WAG Limited Dana Petroleum North Zeit Bay Limited Cayman Islands Devon Energy North Zeit Bay Limited Dana Petroleum Ras Abu Dahrig Limited Cayman Islands Devon Energy Ras Abu Dahrig Limited Dana Petroleum North Qarun Limited Bahamas Devon Energy North Qarun Limited Dana Petroleum South October Limited Bahamas Devon Energy South October Limited The transaction completed on 4 October 2007 following receipt of the normal regulatory and partner approvals, and a preliminary completion payment of US $346.5 million was made. This acquisition delivers a significant reserves and production growth step for the Group and strategically the acquisition compliments our previous Egyptian transactions. The new portfolio contains a good balance of producing oil fields with numerous attractive drilling opportunities, both on existing fields and within large exploration concessions. The Group now holds assets positioned across the major petroleum provinces in Egypt, namely the Nile Delta, Gulf of Suez and Western Desert. The Group also now has in place an excellent operating team in Egypt which is focused on delivering further growth. These factors support the goodwill arising on acquisition.
Dana Petroleum plc Annual Report 2007 91 Notes to the Group Financial Statements continued
29. Acquisition of subsidiaries (continued) The transaction has been accounted for by the purchase method of accounting with an effective date of 4 October 2007, being the date that the Group gained control of the eight companies. The Group has consolidated the results of the Egyptian companies from the date of acquisition. The fair value allocation to the former Devon assets is preliminary in nature and will be reviewed in accordance with the provisions of IFRS 3 – Business Combinations within the specified 12 month period from completion date. Due to the inherently uncertain nature of the oil and gas industry and intangible exploration evaluation assets in particular, the assumptions underlying the preliminary assigned values are judgemental in nature. To the extent that the purchase consideration exceeds the aggregate of the fair value of the identifiable assets and liabilities of the eight companies, then goodwill has been recognised and recorded on the acquisition. Deferred tax has also been recognised in respect of the fair value adjustments as applicable and incorporated into the calculation of goodwill shown below. The aggregated fair value assessment across all eight acquired companies is as follows:
Acquisition Acquisition Book Value Fair Value £’000 £’000
Intangible exploration and evaluation assets 20,540 11,891 Property, plant and equipment 59,716 92,838 Inventories 10,006 10,134 Other current assets 32,367 20,253 Cash and cash equivalents 4,073 4,683 Trade and other payables (3,519) (3,478) Deferred tax liabilities (8,724) – Deferred tax liabilities included within goodwill – (30,881) Provisions (331) (331) Net Assets 114,128 105,109 Goodwill arising on acquisition 63,524 Total consideration 168,633 Satisfied by: Cash 168,633 Net cash outflow arising on acquisition Cash and cash equivalents acquired 4,683 Cash consideration (168,633) (163,950) The Egyptian companies have contributed a profit of £7,460,343 to the results of the Group. If the acquisition of the Egyptian companies had been completed on the first day of the financial year, Group revenues for the year would have been £349,633,000 and Group profit attributable to equity holders of the parent would have been £83,362,000.
92 Dana Petroleum plc Annual Report 2007 30. Analysis of Net Debt
At 1 At 31 January Cash Exchange December 2007 Flows Differences 2007 2007 £’000 £’000 £’000 £’000
Cash at bank and in hand 59,864 (27,876) 644 32,632 Short term deposits 50,014 35,740 (2,426) 83,328 Cash and cash equivalents 109,878 7,864 (1,782) 115,960 Borrowing financial liabilities due after one year – (186,061) (1,196) (187,257) Net Funds 109,878 (178,197) (2,978) (71,297)
At 1 At 31 January Cash Exchange December 2006 Flows Differences 2006 2006 £’000 £’000 £’000 £’000 Cash at bank and in hand 49,445 14,594 (4,175) 59,864 Short term deposits 53,970 2,373 (6,329) 50,014 Cash and cash equivalents 103,415 16,967 (10,504) 109,878 Borrowing financial liabilities due after one year (11,588) 10,905 683 – Net Funds 91,827 27,872 (9,821) 109,878
31. Capital Commitments Exploration and Approved Development Commitments The Group has commitments for future capital expenditure of £189.7m (2006: £132.8m) which represent the Group’s share of obligations under existing Sale and Purchase contracts and Joint Ventures as detailed on pages 106 and 107.
32. Obligations under Operating Leases Minimum Lease payments under operating leases are as follows:
Property Property Land and Plant and Land and Plant and Buildings Equipment Buildings Equipment 2007 2007 2006 2006 £’000 £’000 £’000 £’000 Amounts payable on leases due: within one year 114 80 114 – in two to five years 457 290 457 – after five years – 95 114 – Rentals due under operating leases are charged against income on a straight line basis over the term of the lease.
Dana Petroleum plc Annual Report 2007 93 Notes to the Group Financial Statements continued
33. Related Party Transactions a) Key Management Personnel The Group defines key management personnel as the Directors of the Company. There are no transactions with Directors, other than their remuneration as disclosed in the Report on Directors’ Remuneration on pages 44 to 56. b) Other Related Parties Service fees of US$1,732,000 were received by the Group through Lukoil, the other significant shareholder in Yoganoil, the Group’s Russian subsidiary. In 2006, crude sales of US$18,556,000 were made by the Group through Lukoil. All service fees and sales were on an arms-length basis. At 31 December 2007 US$1,200,000 was owed by Lukoil to Yoganoil (2006: US$1,067,000) in respect of such service fees/sales.
34. Pensions The Group contributes to the personal pension arrangements of Executive Directors and employees up to a specified percentage of salary in lieu of a formal corporate scheme. Total pension contributions in lieu amounted to £417,000 (2006: £269,000) for the year ended 31 December 2007. A defined benefit scheme exists within a Group subsidiary but on the grounds of materiality this has not been disclosed.
35. Events Since the Balance Sheet Date During the first quarter of 2008, through a series of market purchases, the Company acquired a further 10,908,483 shares in Faroe Petroleum plc at a cost of £15,943,000, increasing the Group’s shareholding in that company to 27.5%.
94 Dana Petroleum plc Annual Report 2007 + + + + + COMPANY ACCOUNTS
CONTENTS Company Report of the Auditors 96 Company Balance Sheet 97 Notes to the Company Financial Statements 98 COMPANY Report of the Auditors
INDEPENDENT AUDITOR’S We report to you our opinion as to whether of the significant estimates and judgments REPORT TO THE MEMBERS the parent Company financial statements give made by the Directors in the preparation OF DANA PETROLEUM PLC a true and fair view and whether the parent of the parent Company financial statements, Company financial statements and the part and of whether the accounting policies We have audited the parent Company of the Report on Directors’ Remuneration to are appropriate to the Company’s financial statements of Dana Petroleum plc be audited have been properly prepared in circumstances, consistently applied and for the year ended 31 December 2007 which accordance with the Companies Act 1985. adequately disclosed. comprise the Balance Sheet and the related We also report to you whether in our opinion notes 36 to 51. These parent Company We planned and performed our audit so as to the information given in the parent Company financial statements have been prepared obtain all the information and explanations Report of the Directors is consistent with under the accounting policies set out therein. which we considered necessary in order the financial statements. The information We have also audited the information in the to provide us with sufficient evidence to given in the Report of the Directors includes Report on Directors’ Remuneration that is give reasonable assurance that the parent that specific information presented in the described as having been audited. Company financial statements and the part of Business Review and Financial Review that is the Report on Directors’ Remuneration to be We have reported separately on the Group cross referred from the Business Review and audited are free from material misstatement, financial statements of Dana Petroleum plc Future Activities section of the Report of the whether caused by fraud or other irregularity for the year ended 31 December 2007. Directors. or error. In forming our opinion we also This report is made solely to the Company’s In addition we report to you if, in our opinion, evaluated the overall adequacy of the members, as a body, in accordance with the Company has not kept proper accounting presentation of information in the parent Section 235 of the Companies Act 1985. records, if we have not received all the Company financial statements and the part Our audit work has been undertaken so that information and explanations we require for of the Report on Directors’ Remuneration to we might state to the Company’s members our audit, or if information specified by law be audited. those matters we are required to state to regarding Directors’ remuneration and other them in an auditors’ report and for no other transactions is not disclosed. Opinion purpose. To the fullest extent permitted We read other information contained in the In our opinion: by law, we do not accept or assume Annual Report and consider whether it is responsibility to anyone other than the ■ the parent Company financial statements consistent with the audited parent Company Company and the Company’s members as a give a true and fair view, in accordance financial statements. The other information body, for our audit work, for this report, or for with United Kingdom Generally comprises only the Report of the Directors, the opinions we have formed. Accepted Accounting Practice, of the the unaudited part of the Report on Directors’ state of the Company’s affairs as at Remuneration, the Chairman and Chief Respective 31 December 2007; Executive’s Review, the Business Review responsibilities of and the Financial Review. We consider the ■ the parent Company financial statements directors and auditors implications for our report if we become and the part of the Report on Directors’ The Directors’ responsibilities for preparing aware of any apparent misstatements or Remuneration to be audited have been the Annual Report, the Report on Directors’ material inconsistencies with the parent properly prepared in accordance with the Remuneration and the parent Company Company financial statements. Our Companies Act 1985; and financial statements in accordance with responsibilities do not extend to any other ■ the information given in the Report of the applicable United Kingdom law and information. Directors is consistent with the parent Accounting Standards (United Kingdom Company financial statements. Generally Accepted Accounting Practice) Basis of audit opinion are set out in the Statement of Directors’ We conducted our audit in accordance with Responsibilities. International Standards on Auditing (UK Ernst & Young LLP Our responsibility is to audit the parent and Ireland) issued by the Auditing Practices Registered auditor Company financial statements and the part Board. An audit includes examination, on Aberdeen of the Report on Directors’ Remuneration to a test basis, of evidence relevant to the 6 June 2008 be audited in accordance with relevant legal amounts and disclosures in the parent and regulatory requirements and International Company financial statements and the Standards on Auditing (UK and Ireland). part of the Report on Directors’ Remuneration to be audited. It also includes an assessment
96 Dana Petroleum plc Annual Report 2007 COMPANY Balance Sheet as at 31 December 2007
Note 2007 2006 £’000 £’000 Fixed Assets Property, Plant and Equipment 38 244 146 Investments 39 120,324 91,278 Available-for-Sale Financial Assets 41 30,032 14,390 150,600 105,814 Current Assets Debtors 42 94,151 79,906 Cash at Bank and in Hand 1,499 71,900 95,650 151,806 Creditors : Amounts Falling Due Within One Year 43 (6,438) (7,959) Net Current Assets 89,212 143,847 Total Net Assets 239,812 249,661
Capital and Reserves Called-up Share Capital 46 12,908 12,901 Share Premium Account 48 79,367 79,301 Other Reserves 48 39,357 2,321 Profit and Loss Account 48 108,180 155,138 Shareholders’ Funds 239,812 249,661 The financial statements were approved by the Board of Directors on 6 June 2008 and signed on its behalf by:
Thomas P Cross David A MacFarlane Director Director
Dana Petroleum plc Annual Report 2007 97 Notes to the COMPANY Financial Statements
36. Accounting Policies These financial statements have been prepared in pounds sterling under the historical cost convention, as modified by the revaluation of certain Investments and financial Instruments in accordance with the Companies Act 1985 and applicable accounting standards. The principal accounting policies adopted by the Company are set out below together with an explanation of where changes have been made to previous policies on the adoption of new accounting standards in the year. The following accounting policies are applied consistently in dealing with items which are considered material in relation to the Company's financial statements.
DIVIDENDS Dividends received are included in the accounts in the period the related dividends are actually received.
PROPERTY, PLANT & EQUIPMENT PP&E assets are stated in the balance sheet at cost less accumulated depreciation. Depreciation is provided on PP&E assets to write off the cost less estimated residual value of each asset over its expected useful economic life on a straight-line basis at the following annual rates: ■ Equipment 10% - 25% ■ Computer equipment 33%
INVESTMENTS Fixed asset investments in subsidiaries are included in the financial statements at cost less provisions for impairment.
AVAILABLE-FOR-SALE FINANCIAL ASSETS The Company determines the classification of its available-for-sale financial assets at initial recognition and re-evaluates this designation at each financial year end. When available-for-sale financial assets are recognised initially, they are measured at fair value, being the transaction price plus directly attributable transaction costs. After initial recognition available-for-sale financial assets are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the income statement.
DEFERRED TAXATION Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events have occurred at that date that will result in an obligation to pay more (or a right to pay less or to receive more) tax, with the following exceptions: ■ provision is made for tax on gains arising from the revaluation (and similar fair value adjustments) of fixed assets, and gains on disposal of fixed assets that have been rolled over into replacement assets, only to the extent that, at the balance sheet date, there is a binding agreement to dispose of the assets concerned. However, no provision is made where, on the basis of all available evidence at the balance sheet date, it is more likely than not that the taxable gain will be rolled over into replacement assets and charged to tax only where the replacement assets are sold; ■ provision is made for tax that would arise on remittance of the retained earnings of overseas subsidiaries, associates and joint ventures only to the extent that, at the balance sheet date, dividends have been accrued as receivable; ■ deferred tax assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be suitable taxable profits from which future reversal of the underlying timing differences can be deducted. Deferred tax is measured on an undiscounted basis at tax rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date.
ISSUE EXPENSES AND SHARE PREMIUM ACCOUNT Cost of share issues are written off against the premium arising on the issue of share capital.
98 Dana Petroleum plc Annual Report 2007 FOREIGN CURRENCIES The functional currency for the Company is pounds sterling. Transactions in foreign currencies during the year are recorded in the functional currency at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rates ruling at the balance sheet date.
PENSIONS The Company contributes to the personal pension arrangements of Executive Directors and employees up to a specified percentage of salary in lieu of a formal corporate scheme. Contributions in lieu of pensions are charged to the profit and loss account as incurred.
OPERATING LEASES Rentals under operating leases are charged to the profit and loss account as incurred.
SHARE BASED PAYMENTS The Company issues both equity-settled and cash-settled share based payments as an incentive to certain key management and staff. Equity- settled share based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share based payments is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of the number of shares that will eventually vest. Fair value is measured by use of an actuarial binomial model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.
37. Employment Costs
2007 2006 £’000 £’000
Wages and salaries 7,014 6,339 Pension costs 324 269 Social security costs 980 2,960 8,318 9,568 Included in wages and salaries is a total expense of share based payments of £2,515,000 (2006: £3,110,000) of which £1,530,000 (2006: £192,000) arises from transactions accounted for as equity-settled share based payment transactions. The carrying amount of the liability at the end of the year for cash-settled share based payment transactions is £2,775,000 (2006: £3,217,000). The weighted average number of employees (including Executive Directors) during the year was:
2007 2006
Management 14 10 Technical and administration 44 11 58 21 Details for each Director, of remuneration, pension entitlements and interests in share schemes are set out on pages 44 to 56.
Dana Petroleum plc Annual Report 2007 99 Notes to the COMPANY Financial Statements continued
38. Property, Plant and Equipment The movements during the year were as follows:
Total £’000
Cost: At 1 January 2007 1,337 Additions 242 At 31 December 2007 1,579
Depletion and Depreciation: At 1 January 2007 1,191 Provided in year 144 At 31 December 2007 1,335
Net Book Value At 31 December 2007 244 At 31 December 2006 146
39. Investments
Subsidiary Undertakings £’000
At 1 January 2007 91,278 Additions 75,488 Transfers and reclassifications 506 Provision for Impairment of Subsidiary Undertakings (46,948) At 31 December 2007 120,324 Of the additions above, £46,257,000 relate to the acquisition of Ener Petroleum ASA (‘Ener’), a company listed on the Norwegian OTC market. The Company was later renamed Dana Petroleum Norway AS. Further details of the acquisition are provided in note 40. Prior to the acquisition, the Company held 30,000 shares in Ener, originally acquired in December 2006 and held as an available-for-sale financial asset. Accordingly, the corresponding fair value prior to completion of the acquisition of £506,000 has been realised and reclassified as part of the investment in the subsidiary undertaking. Additions also includes an amount of £28,613,000, which is the fair value of the premium on the option that the Company has issued over its own shares to convertible bondholders in relation to the Convertible bonds detailed in note 46. A provision for impairment was recognised on the Company’s investment in Dana Petroleum Norway AS. At the year end the balance sheet of Dana Petroleum Norway AS had net liabilities (pre fair value adjustments) and hence a provision was recognised for the full investment value.
100 Dana Petroleum plc Annual Report 2007 Subsidiary Undertakings At 31 December 2007, the principal subsidiary undertakings of the Company were:
Name of Company Country of Incorporation/Operation Main Activity Dana Petroleum (E&P) Limited UK Oil & gas exploration & production Dana Petroleum (North Sea) Limited* UK Oil & gas exploration & production Dana Petroleum Norway AS Norway Oil & gas exploration & production Dana Petroleum East Zeit Limited* Cayman Islands/Egypt Oil & gas exploration & production Dana Petroleum East Beni Suef Limited* Cayman Islands/Egypt Oil & gas exploration & production Dana Petroleum Qarun Limited* Cayman Islands/Egypt Oil & gas exploration & production Dana Petroleum WAG Limited* Cayman Islands/Egypt Oil & gas exploration & production Dana Petroleum (Jersey) Limited Jersey Financing *Held by subsidiary undertaking. The Cayman and Jersey subsidiaries are managed and controlled from the UK and have UK tax residency. All of the above companies are wholly owned. Further details of subsidiary undertakings are available at the headquarters of Dana Petroleum plc.
40. Acquisition of subsidiaries Ener Petroleum ASA (subsequently renamed Dana Petroleum Norway AS) On 12 June 2007 the Company signed conditional subscription and acquisition agreements for shares in the Norwegian independent oil company Ener Petroleum ASA (‘Ener’), a company listed on the Norwegian OTC market. The Company agreed terms to conditionally subscribe for 1,518,750 new shares in Ener at a subscription price of NOK 160 per share, representing approximately 53% of the fully diluted share capital of Ener following the issuance of the new shares to Dana. In addition, the Company entered into share acquisition agreements for the purchase of certain existing shares in Ener, all at a price per share of NOK 220 payable in cash. These initiatives delivered control of approximately 93.7% of the total shares in Ener, following completion on 11 July 2007 and upon regulatory approvals from the Norwegian Ministry of Petroleum and Energy and The Norwegian Ministry of Finance. Thereafter a formal process was instigated to acquire the remaining minority shareholdings. This deal represents an important step for the Company as it creates a substantial business in Norway with the technical and financial strength to build further. The Ener transaction adds further to the Group’s production and reserves and most importantly accelerates a portfolio of attractive business opportunities in Norway. The Group also now has in place an excellent technical team in Norway which is focused on delivering further growth.
Dana Petroleum plc Annual Report 2007 101 Notes to the COMPANY Financial Statements continued
41. Available-for-Sale Financial Assets
2007 2006 £’000 £’000
At 1 January 14,390 13,082 Additions 7,720 5,212 Transfers and reclassifications (506) – Fair value adjustments 8,428 (3,904) At 31 December 30,032 14,390 The available-for-sale investments consist of:
a) Investments in the shares of Faroe Petroleum plc These are listed on the London AIM market, and by their nature have no fixed maturity date or coupon rate. During the year, the Group participated in a fund-raising by Faroe Petroleum plc acquiring 5,251,537 shares at a cost of £7,719,759, increasing the Group's total shareholding in Faroe Petroleum plc to 17,926,166 shares, equivalent to a 17.11% shareholding, maintaining the Group's position as the largest shareholder in this company. The fair value of this holding at the end of 2007 was £30,032,000 (2006: £13,498,000). During the first quarter of 2008, through a series of market purchases, the Company acquired a further 10,908,483 shares in Faroe Petroleum plc at a cost of £15,943,000, increasing the Group's shareholding in that company to 27.5%.
b) Investments in the shares of Dana Petroleum Norway AS (formerly Ener Petroleum ASA) These shares were first acquired in December 2006, as part of the Group's proposed offer to acquire Ener Petroleum ASA ('Ener'), a company listed on the Norwegian OTC market. This offer was subsequently aborted, but the Group acquired 30,000 shares at a cost of Nok 365 per share, during the offer process. The fair value of this holding at the end of 2006 was £892,000. In June 2007, the Group signed conditional subscription and acquisition agreements for shares in Ener which, following successful completion in July 2007, resulted in Ener becoming a wholly-owned subsidiary of the Group. The company was later renamed Dana Petroleum Norway AS. The available-for-sale fair value of £506,000 was realised and transferred to Investments in Subsidiaries.
42. Debtors
2007 2006 £’000 £’000
Other debtors and prepayments 1,049 1,139 Due from subsidiary undertakings 93,102 78,767 94,151 79,906
43. Creditors : amounts falling due within one year
2007 2006 £’000 £’000
Amounts owed to subsidiary companies 2,193 1,091 Accruals and other payables 4,245 6,868 6,438 7,959
102 Dana Petroleum plc Annual Report 2007 44. Deferred Taxation A deferred UK corporation tax asset of £Nil (2006: £684,000), in relation to losses not utilised has not been recognised as there is uncertainty whether the asset is recoverable. The asset would be recoverable if there are future suitable taxable profits from which the future reversal of the underlying timing differences would be deducted.
45. Financial Instruments An outline of the objectives, policies and strategies pursued by the Group and Company in relation to financial instruments is set out in the Financial Review on page 32 of this report, and in note 2 on pages 64 and 65.
46. Called-up Share Capital See note 25, page 86 for details of the share capital of the Company. The Company has provided an unconditional and irrevocable guarantee for the Convertible Bonds ('Bonds') issued during the year by Dana Petroleum (Jersey) Limited, a wholly owned subsidiary, the details of which are contained in note 21 on page 80. In accordance with the terms and conditions of the Bonds, the Bonds will be convertible into preference shares of the issuer, which will then be immediately exchanged for ordinary shares in the Company as guarantor.
47. Share-based payments See note 26, pages 87 to 89 for details of the share based payments for the Company.
48. Reserves
Share Profit and Premium Loss Other Account Account Reserves £’000 £’000 £’000 At 1 January 2007 79,301 155,138 2,321 Retained loss for the year – (47,938) – Employee share scheme credits – 980 – Fair value movements on available-for-sale financial assets, net of taxation –– 8,423 Fair value of Convertible bond option premium (note 39) –– 28,613 New shares issued 66 – – At 31 December 2007 79,367 108,180 39,357
Dana Petroleum plc Annual Report 2007 103 Notes to the COMPANY Financial Statements continued
49. Pensions The Company contributes to the personal pension arrangements of Executive Directors and employees up to a specified percentage of salary in lieu of a formal corporate scheme. Total pension contributions in lieu amounted to £324,000 (2006: £269,000) for the year ended 31 December 2007.
50. Company Profit and Loss Account In accordance with the provisions of the Companies Act 1985, the Company has not presented a profit and loss account. A loss for the year of £47,938,000 (2006: profit £126,518,000) has been dealt with in the profit and loss account of the Company.
51. Obligations under Operating Leases Annual commitments under operating leases are as follows:
Land and Land and Buildings Buildings 2007 2006 £’000 £’000
Payable on leases which expire: within one year 114 – in two to five years 457 – After five years – 114 Rentals due under operating leases are charged against income on a straight line basis over the term of the lease.
104 Dana Petroleum plc Annual Report 2007 proven and probable reserves and resources
Reserve quantities have been estimated by the Group’s petroleum engineers in accordance with the definition of proven and probable reserves applicable to mineral companies primarily involved in the extraction of oil and gas resources as set out in Appendix 1.1 to the UKLA Listing Rules.
RESERVES Europe Egypt Other International Total Oil Gas Petroleum Oil Gas Petroleum Oil Gas Petroleum Oil Gas Petroleum mmbbls bcf mmboe mmbbls bcf mmboe mmbbls bcf mmboe mmbbls bcf mmboe At 1 January 2007 60.8 309.3 114.1 – – – 16.5 – 16.5 77.3 309.3 130.6 Revisions of previous estimates (0.7) 49.5 7.8 – – – – – – (0.7) 49.5 7.8 Discoveries & extensions 1.1 10.1 2.9 – – – – – – 1.1 10.1 2.9 Acquisitions 15.0 40.1 21.9 31.4 – 31.4 – – – 46.4 40.1 53.3 Divestments (1.5) (0.2) (1.6) – – – (16.1) – (16.1) (17.6) (0.2) (17.7) Production (7.7) (12.8) (9.9) (0.8) – (0.8) (0.4) – (0.4) (8.9) (12.8) (11.1) At 31 December 2007 67.0 396.0 135.2 30.6 – 30.6 (0.0) – (0.0) 97.6 396.0 165.8
CONTINGENT RESOURCES Europe Egypt Other International Total Oil Gas Petroleum Oil Gas Petroleum Oil Gas Petroleum Oil Gas Petroleum mmbbls bcf mmboe mmbbls bcf mmboe mmbbls bcf mmboe mmbbls bcf mmboe At 1 January 2007 6.3 56.9 16.1 – – – 23.6 359.5 85.6 29.9 416.4 101.7 Revisions of previous estimates (0.1) (26.9) (4.7) – – – – – – (0.1) (26.9) (4.7) Discoveries & extensions 9.5 7.1 10.7 – – – – – – 9.5 7.1 10.7 Acquisitions 4.5 20.0 7.9 – – – – – – 4.5 20.0 7.9 Divestments (1.4) (0.0) (1.4) – – – – – – (1.4) (0.0) (1.4) At 31 December 2007 18.8 57.1 28.6 – – – 23.6 359.5 85.6 42.4 416.6 114.2
TOTAL RESOURCES Europe Egypt Other International Total Oil Gas Petroleum Oil Gas Petroleum Oil Gas Petroleum Oil Gas Petroleum mmbbls bcf mmboe mmbbls bcf mmboe mmbbls bcf mmboe mmbbls bcf mmboe At 1 January 2007 67.1 366.2 130.2 – – – 40.1 359.5 102.1 107.2 725.7 232.3 Revisions of previous estimates (0.7) 22.6 3.2 – – – – – – (0.7) 22.6 3.2 Discoveries & extensions 10.6 17.2 13.6 – – – – – – 10.6 17.2 13.6 Acquisitions 19.5 60.1 29.8 31.4 – 31.4 – – – 50.9 60.1 61.2 Divestments (3.0) (0.2) (3.0) – – – (16.1) – (16.1) (19.0) (0.2) (19.1) Production (7.7) (12.8) (9.9) (0.8) – (0.8) (0.4) – (0.4) (8.9) (12.8) (11.1) At 31 December 2007 85.8 453.1 163.9 30.6 – 30.6 23.6 359.5 85.6 140.1 812.6 280.1 NOTES 1. 2007 Proven and probable reserves and contingent resources have been assessed by the Company’s internal Reservoir Engineers, utilising data available from operators and other sources. The Company’s operated properties in Europe and Egypt have also been audited by a recognised Competent Person in accordance with the definition of proven and probable reserves applicable to mineral companies primarily involved in the extraction of oil and gas resources as set out in Appendix 1.1 to the UKLA Listing Rules. 2. Contingent resources relate to technically recoverable hydrocarbons for which commerciality has not yet been determined and are stated on a best estimate basis. 3. Other International reserve movements include movements in respect of the 20% minority interest in the South Vat-Yoganskoye oil field. The operation of this field was moved to a service agreement basis as of October 2007 and was therefore removed from the Company’s reserves and resources. 4. Quantities of oil equivalent are calculated using a gas-to-oil conversion factor of 5,800 scf of gas per barrel of oil equivalent.
Dana Petroleum plc Annual Report 2007 105 Exploration and Production Interests as at 31 March 2008
COUNTRY LICENCE/BLOCK DESIGNATION FIELD/DISCOVERY NAME OPERATOR NET % INTEREST Fields in Production & Under Development UK Lic. 128/Block 48/18b & 48/19b Anglia Gaz de France 25.00 UK Lic. P.224/Block 29/2a Banff CNR 12.40 UK Lic. P.213/Block 16/26 (Area P) Caledonia ChevronTexaco 25.78 UK Lic. P.607/Block 43/19a Cavendish RWE 50.00 UK Lic. P.249/Block 14/19 Claymore Talisman 7.52 UK Lic. P.219/Block 16/13a Enoch Talisman 8.80 UK Lic. P.238/Block 21/19 Gadwall Venture 50.00 UK Lic. P.073/Block 21/12 Goosander Venture 50.00 UK Lic. P.472/Block 210/24b Hudson Dana 47.50 UK Lic. P.686/Block 43/27a Johnston Caledonia 49.89 UK Lic. P.351/Block 21/18a Kittiwake Venture 50.00 UK Lic. P.238/Block 21/19 Mallard Venture 50.00 UK Lic. P.226/Block 210/15a Otter Total 19.00 UK Lic. P.025/Block 49/22 (Victor) Victor ConocoPhillips 10.00 Netherlands Prod. Licences F16-E, E15a, F13a F16-E Wintershall 1.18 Norway PL027B Jotun ExxonMobil 45.00 Egypt East Zeit East Zeit East Zeit Petroleum Co 100.00 (Dana/EGPC) Egypt Qarun Qarun, North Qarun, SW Qarun, Sakr, Qarun Petroleum Co 25.00 North Harun, Wadi Rayan (Apache/EGPC) Egypt East Beni Suef East Beni Suef, El Azhar, Gharibon, East Beni Suef 50.00 Lahun, Yusif Petroleum Co (Apache/EGPC) Egypt West Abu Gharadig Raml, Raml SW Agiba Petroleum Co 30.00 (Eni/EGPC)
North Sea Exploration Acreage and Discoveries UK Lic. P.1190/Block 204/13 – OMV 30.00 UK Lic. P.1262/Block 204/14b – OMV 30.00 UK Lic. P.1373 Blocks 208/13a, 14a, 15a, 18a, 19a, 20a 208/19-1 DONG 30.00 UK Lic. P.1374 Blocks 209/11a, 12, 13a – DONG 30.00 UK Lic. P.1454/Blocks 208/11,208/16,214/15 – DONG 30.00 UK Lic. P.1488/Blocks 213/9,213/10,213/14 & 213/15 – OMV 30.00 UK Lic. P.1484/Blocks 214/4b, 214/5b,214/8,214/9b, – OMV 30.00 214/12a 214/13a & 214/14a UK Lic. P.226/Block 210/15a – Total 19.00 UK Lic. P.1021/Block 210/20d – Total 26.00 UK Lic. P.472/Block 210/24a Melville Dana 64.83 UK Lic. P.570/Block 210/24b – Dana 47.50 UK Lic. P.212/Block 211/8a 211/8a-2 Dana 50.00 UK Lic. P.188/Block 211/11a – BP 25.00 UK Lic. P.296/Block 211/13a – Dana 50.00 UK Lic. P.201/Block 211/22a (North-west Area) 211/22a-1 Dana 50.00 UK Lic. P.090/Block 3/25a (Deep) 3/25a-2 Total 15.00 UK Lic. P.219/Block 16/13a J1 Talisman 11.00 UK Lic. P.1474/Block 16/18c – Dana 100.00 UK Lic. P.883/Block 21/11a Dauntless Venture 50.00 UK Lic. P.073/Block 21/12 & 21/13a – Venture 50.00 UK Lic. P.743/Block 21/16a Durward Venture 50.00 UK Lic. P.1415/Block 21/17a Wagtail, Whinchat Dana 50.00 UK Lic. P.351/Block 21/18a – Venture 50.00 UK Lic. P.238/Block 21/19 Grouse Venture 50.00 UK Lic. P.185/Block 21/20a (excluding Cook Field and North Bligh Shell 30.50 East area) UK Lic. P.185/Block 21/20f ALL – Noble 35.00 UK Lic.421/Block 21/20b Christian Venture 50.00
106 Dana Petroleum plc Annual Report 2007 COUNTRY LICENCE/BLOCK DESIGNATION FIELD/DISCOVERY NAME OPERATOR NET % INTEREST UK Lic. P.1051/Block 23/11 (N) – Dana 80.00 UK Lic. P.1051/Block 23/11 (S) Barbara Dana 100.00 UK Lic. P.749/Blocks 23/16c & d Barbara, Mortimer Dana 50.00 UK Lic. P.359 Block 23/16b Barbara Extension Barbara Shell 40.00 UK Lic. P.224/Block 29/2a 29/2a-2 CNR 13.50 UK Lic. P.607/Block 43/19a – RWE 25.00 UK Lic. P.1134/Blocks 43/13b & 18 Browney RWE 25.00 UK Lic. P.1135/Blocks 43/14a & 19b – RWE 25.00 UK Lic. P.1136/Blocks 43/20e – RWE 25.00 UK Lic. P.380/Block 43/26a – Eon Ruhrgas 27.78 UK Lic. P.686/Block 43/27a Gunn Eon Ruhrgas 57.78 UK Lic. P.1330/Blocks 42/28d & 29b – Dana 100.00 UK Lic. P.001/Blocks 42/29a (Monkwell area) Monkwell Dana 50.001 UK Lic. P.456/Block 48/2a Babbage Eon Ruhrgas 40.00 UK Lic. P.1245/Blocks 48/3b & 48/4 – Ithaca 25.00 UK Lic. P.128/Block 48/18b 48/19b – Gaz de France 25.00 Netherlands Expl. Licence A15 A15-3 Wintershall 9.00 Netherlands Expl. Licence E18a – Wintershall 5.00 Netherlands Expl. Licence B17a B17a-6 Wintershall 8.83 Norway PL. 311/311b Blocks 31/1a, b,c & Block 31/2 b – Marathon 25.00 Norway PL. 329 Blocks 6607/1, 6607/2 & 6607/4 – Eni 10.00 Norway PL.027b Block 25/8d – ExxonMobil 50.00 Norway PL.337 Block 16/10a Storskrymten Det Norske Oljeselskap 25.00 Norway PL.440s Block 2/8a – Det Norske Oljeselskap 20.00 Norway PL.464 Blocks 31/3 & 32/1 – Dana 55.002 Norway PL.484 Block 6608/10 – Noreco 30.002 Norway PL.485 Blocks 6508/3, 6608/12, 6609/10 & 6609/11 – Det Norske Oljeselskap 30.002
Egyptian Exploration Acreage and Discoveries Egypt North Ghara PSC – BP 25.00 Egypt South Feiran PSC – Eni 20.00 Egypt West El Burullus PSC – Gaz de France 50.00 Egypt North Zeit Bay PSC Abydos Dana 100.00 Egypt South October PSC – Dana 65.00 Egypt Ras Abu Darag PSC – Dana 100.00 Egypt West Abu Gharadig PSC – Eni 30.00 Egypt North Qarun PSC – Dana 50.00 Egypt East Beni Suef PSC – Apache 25.00
International Exploration Acreage and Discoveries Kenya Block L5 PSC – Woodside 27.00 Kenya Block L7 PSC – Woodside 27.00 Mauritania Block 1 PSC Faucon Dana 36.00 Mauritania Block 2 PSC – Tullow 10.731 Mauritania Block 7 PSC Pelican Dana 36.00 Mauritania Block 8 PSC – Dana 26.25 Morocco NW Safi – Norsk Hydro 26.25 Morocco Tanger-Larache – Repsol 15.00 Morocco Bouanane – Dana 50.00 Senegal St. Louis PSC – Tullow 30.00
1 Net % Interest subject to regulatory approval and / or final legal completion of signed transaction. 2 Interests granted in APA2007 awards and subject to finalisation of licence award process. For PSC’s in Egypt with Development Leases, Dana’s equity is the Company’s equity pursuant to the PSC. The operator is the Operating Company pursuant to the PSC which is a Joint Venture between the Contractor and EGPC.
Dana Petroleum plc Annual Report 2007 107 DIRECTORS, ADVISERS AND OTHER INFORMATION
Directors Bankers Colin R Goodall, Non-Executive Chairman# ABN AMRO BANK N.V. Thomas P Cross, Chief Executive# 250 Bishopsgate David A MacFarlane, Finance Director London Stuart M Paton, Technical and Commercial Director EC2M 4AA Angus M Pelham Burn, Non-Executive Director* Bank of Scotland D Ian Rawlinson, Non-Executive Director* 39 Albyn Place Philip J Dayer, Non-Executive Director* Aberdeen Brian Johnston, Non-Executive Director* AB10 1YN * Independent Non-Executive Director and member of Audit, Remuneration and Nominations Committees Solicitors # Member of the Nominations Committee McGrigors LLP 52-54 Rose Street Group Headquarters Aberdeen 17 Carden Place AB10 1UD Aberdeen Allen & Overy LLP AB10 1UR One Bishop’s Square London Secretary and Registered Office E1 6AO John J Arnton LLB Pellipar House Financial Advisers & Stockbrokers 9 Cloak Lane ABN AMRO Hoare Govett Limited London 250 Bishopsgate EC4R 2RU London EC2M 4AA Auditors Ernst & Young LLP Registrars Blenheim House Capita IRG plc Fountainhall Road Beckenham Road Aberdeen Beckenham AB15 4DT Kent BR3 4TU
108 Dana Petroleum plc Annual Report 2007 Cert no. TT-COC-2201 SUCCESSFUL ISSUE OF £141.5M 17 CONVERTIBLE exploration wells BOND & NEW planned in 2008 $400M DEBT FACILITY
VALUABLE NEW UK OIL FIELDS +30% DISCOVERED AT growth predicted WEST AND EAST in Group production RINNES for 2008
PROVEN & PROBABLE 30 RESERVES producing fields in INCREASED TO UK, Egypt, Norway 165.8 MMBOE & Netherlands (2006 130.6)
SIGNIFICANT NEW GAS DISCOVERY AT WEST EL BURULLUS +3 new field 1st developments already sanctioned WELL IN EGYPT in 2008 DANA PETROLEUM IS A FTSE 250 INDEPENDENT OIL & GAS EXPLORATION AND PRODUCTION COMPANY.
WE AIM TO DELIVER GROWTH FOR Annual Report and Accounts 2007 SHAREHOLDERS THROUGH THE CREATION AND EXECUTION OF HIGH Tel +44 (0) 1224 652 400 Fax +44 (0) 1224 652 401 IMPACT OPPORTUNITIES IN THE www.dana-petroleum.com NORTH SEA AND EGYPT. EXPANDING HORIZONS Dana Petroleum plc Annual Report and Accounts 2007 designed & produced by Communiqué Associates Limited, Edinburgh and Aberdeen and Edinburgh Limited, Associates Communiqué by produced & designed