TULLOW OIL PLC PLC OIL TULLOW 2017 ANNUAL REPORT & ACCOUNTS & REPORT ANNUAL 2017 TULLOW OIL PLC 2017 ANNUAL REPORT & ACCOUNTS AFRICA’S LEADING INDEPENDENT OIL COMPANY www.tullowoil.com D AFRICA’S LEADING INDEPENDENT OIL COMPANY Tullow Oil is a leading independent oil and gas exploration and production company. Our focus is on finding and monetising oil in Africa and South America. Our key activities include targeted Exploration and Appraisal, selective development projects and growing our high-margin production. We have a prudent financial strategy with diverse sources of funding. Our portfolio of 90 licences spans 16 countries and is organised into three Business Delivery Teams. We are headquartered in London and our shares are listed on the London, Irish and Ghana Stock Exchanges. 1 2 3 STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Our Group highlights 1 Directors’ report 56 Statement of Directors’ responsibilities 108 Our operations 4 Audit Committee report 67 Independent auditor’s report for the Chairman’s foreword 6 Nominations Committee report 73 Group Financial Statements 109 Chief Executive Officer’s foreword 8 EHS Committee report 76 Group Financial Statements 117 Chief Financial Officer’s foreword 10 Remuneration report 78 Company Financial Statements 153 Executive Team overview 12 Other statutory information 101 Five-year financial summary 162 Market outlook 14 Supplementary information Our strategy 16 Shareholder information 163 Our business model 18 Licence interests 164 Key performance indicators 20 Commercial reserves and resources 168 Creating value 24 Transparency disclosure 169 Operations review 26 Sustainability data 176 Finance review 31 Tullow Oil plc subsidiaries 179 Responsible Operations 36 Glossary 181 Governance & Risk management 38 Board of Directors 40 Principal Risks 42 Organisation & Culture 50 Shared Prosperity 52 You can find this report and additional information about Tullow Oil on our website: www.tullowoil.com Cover: TEN FPSO, Prof. John Evans Atta Mills, offshore Ghana OUR GROUP HIGHLIGHTS MAKING GOOD PROGRESS Our business has developed organically and through acquisitions since 1986. We have a diversified world-class asset base focused on Africa and South America that is performing well and generating value across our three core Business Delivery Teams. REVENUE CAPITAL INVESTMENT LICENCES 1 2,3 $1,723 M $225M 90 Across 16 countries 2016: $1,270M 2016: $857M UNDERLYING CASH OPERATING COSTS FREE CASH FLOW NEW VENTURES 3 3 $11.1 /BOE $543M 37,244 KM2 Added to our exploration new acreage 2016: $14.3/BOE 2016: $(792)M portfolio in 2017 ADJUSTED EBITDAX NET DEBT TOTAL WORKFORCE 3 3 $1,346 M $3.5BN 1,030 Our talented employees and contractors 2016: $941M 2016: $4.8BN work together across our Corporate Centre and Business Delivery Teams LOSS AFTER TAX GEARING4 LOST TIME INJURY FREQUENCY (LTIF) 3 $(189) M 2.6 TIMES 0.37 2016: $(597)M 2016: 5.1 TIMES 2016: ZERO >> Key performance indicators 20 1. Total revenue does not include proceeds from Tullow’s corporate business interruption insurance of $162 million. 2. 2017 capex excludes Uganda capex covered by farm-down. 3. Non-GAAP measures are reconciled on pages 34 to 35. 4. Gearing ratio calculated as Net Debt/Adjusted EBITDAX. www.tullowoil.com 1 WEST AFRICA 2017 OIL PRODUCTION EXCEEDS EXPECTATIONS Offloading tanker at the TEN field, offshore Ghana. 2 Tullow Oil plc 2017 Annual Report and Accounts 1 STRATEGIC REPORT Our operations 4 Chairman’s foreword 6 Chief Executive Officer’s foreword 8 Chief Financial Officer’s foreword 10 Executive Team overview 12 Market outlook 14 Our strategy 16 Our business model 18 Key performance indicators 20 Creating value 24 Operations review 26 Finance review 31 Responsible Operations 36 Governance & Risk management 38 Board of Directors 40 Principal Risks 42 Organisation & Culture 50 Shared Prosperity 52 www.tullowoil.com 3 STRATEGIC REPORT OUR OPERATIONS A STRENGTHENED PORTFOLIO Tullow has continued to high-grade and progress its portfolio of assets through 2017, exceeding expectations at our West Africa producing assets, advancing development projects in East Africa and developing an exciting prospect inventory for exploration drilling. OPERATING COUNTRIES LICENCES ACREAGE (SQ KM) TOTAL GROUP PRODUCTION 1 16 90 263,820 94,700 BOEPD Tullow’s key operations are Tullow’s portfolio of licences Our acreage onshore Tullow’s producing assets in Africa and South America. is balanced between and offshore Africa and performed well in 2017, These are split into three exploration, development South America includes beating original guidance Business Delivery Teams, and production activities. newly acquired licences of 78–85,000 bopd. as set out below. in Côte d’Ivoire and Peru. >> Key performance indicators 21 1. Includes production equivalent insurance payments: 7,400 bopd WEST AFRICA EAST AFRICA Tullow’s West Africa team is focused on WORKING INTEREST PRODUCTION In this high-potential region, Tullow optimising existing production across 70,000 is progressing the development of our operated and non-operated 65,600 its discoveries in Uganda and Kenya. 60,000 producing assets in West Africa and Europe, as well as pursuing new 50,000 Key activities exploration opportunities. 40,000 58,200 • The Uganda project is working boepd 30,000 towards reaching a Final Investment Key activities Decision in the first half of 2018 • Following the ITLOS ruling and 20,000 13,000 • In Kenya, the completion of the Government approval of the Greater 10,000 6,200 3,400 3,000 South Lokichar Basin appraisal has 2,200 600 Jubilee Full Field Development 700 0 confirmed material oil resources to Plan, plans are on track to deliver support substantial oil production incremental drilling across both the Gabon Ghana Mauritania TEN and Jubilee fields, to sustain Congo (Brazz) NetherlandsCôte d’Ivoire • A project focused on Amosing and United Kingdom and maximise production in the Equatorial Guinea Ngamia, as the Foundation Stage coming years Jubilee field production-equivalent of the South Lokichar development, insurance payments: 7,400 bopd has been defined • The Turret Remediation Project is progressing with bearing stabilisation • TEN facilities tested to over • Kenya’s Early Oil Pilot Scheme and FPSO rotation to its permanent 80,000 bopd; commissioning will be under way in 2018, with spread moored position planned completed; production averaged initial water injection tests ongoing for 2018 56,000 bopd in 2017 and production facilities being constructed in the field >> Operations review: West Africa 26 4 Tullow Oil plc 2017 Annual Report and Accounts 1 United Kingdom P Dublin London Jamaica E Pakistan E Mauritania EP Guyana E Ghana EDP Equatorial Guinea DP Suriname E Uganda D Accra Côte d’Ivoire EP Kenya ED Gabon EDP Nairobi Kampala Namibia E Zambia E Peru E Uruguay E Cape Town Note: Tullow sold its interests in Norway and the Netherlands during 2017. Key: E Exploration D Development P Production Key offices EAST AFRICA NEW VENTURES The New Ventures Team is responsible for Tullow’s frontier exploration activity across Africa and South America. Key activities • Portfolio reset over last 36 months, divesting non-core assets, farming down existing assets to the right equity levels and acquiring new acreage • Extensive seismic data across several licences will significantly increase the prospect inventory, allowing Tullow to target high-impact, low-cost and basin-testing opportunities • Exciting and significant new acreage positions in Peru and Côte d’Ivoire further strengthen our South American and African portfolios • Preparing for basin testing wells from the second half of 2018 onwards >> >> Operations review: East Africa 28 Operations review: New Ventures 29 www.tullowoil.com 5 STRATEGIC REPORT CHAIRMAN’S FOREWORD READY FOR GROWTH My focus for my two-year tenure is twofold: to provide stability for Tullow after 30 years of leading the Company and to support Paul and his Executive Team as they move Tullow into its next phase of growth. DEAR SHAREHOLDER At the beginning of 2017, the risks to the business that lay We began 2017 by announcing our $900 million farm-down ahead included our gearing being at 5.1x net debt/adjusted in Uganda, an excellent deal that recognised the value of this EBITDAX, the ITLOS process was still to be resolved and our world-class asset. This, coupled with major cost cutting over Reserves Based Lending (RBL) facility needed to be refinanced. the last three years, meant that your Company started 2017 We therefore needed to give the business greater operational with a positive outlook. and financial flexibility by materially reducing our debt through the combination of a Rights Issue and ensuring the business Dealing with our high level of debt has been a priority of the generated free cash flow in a low oil price environment. Board and management over the last three years. As a Board, we had never intended to reach such high levels of debt; a Rights Issues are not often popular, but with a continuing low combination of the International Tribunal for the Law of the Sea oil price, a highly leveraged balance sheet and limited cash flow (ITLOS) proceedings between Ghana and Côte d’Ivoire and the available to invest in the business, we needed the flexibility it fall in the oil price meant we were obliged to develop the TEN offered. To create shareholder value we needed to both reduce field at a level of equity that we had not anticipated. While that the risks and invest in the high rate of return projects in our level of equity is now creating significant value in terms of our portfolio. We have actively listened to feedback from share of production from the TEN field, our debt position earlier shareholders, both before and after the Rights Issue, and it is this year, while manageable, was restricting our ability to invest my hope that shareholders will look at the strength of our in the business.