TULLOW OIL PLC PLC OIL TULLOW TULLOW OIL PLC 2014 ANNUAL REPORT & ACCOUNTS 2014 ANNUAL REPORT & ACCOUNTS & REPORT ANNUAL 2014 AFRICA’S LEADING INDEPENDENT OIL COMPANY 2014 IN SUMMARY CASH FLOW DEVELOPMENT $1.5 BILLION TEN pre-tax operating cash flow Project on track and on budget > page 58 TEN SPECIAL FEATURE EXPLORATION REALISING OUR 4/7 WILDCAT POTENTIAL commercial discoveries in Kenya Our special feature focuses on Tullow’s > page 32 development of the Tweneboa, Enyenra and Ntomme (TEN) fields offshore Ghana. PORTFOLIO MANAGEMENT The project is on target to deliver first oil in mid-2016 on time and on budget and our special feature tracks the project’s progress SALES COMPLETED so far and milestones to come. of non-core gas assets in UK & Norway > page 20 > page 36 About the report Each year, Tullow Oil aims to produce an open, transparent and balanced Annual Report which gives an honest portrayal of our performance, strategy and impacts. We also publish, approximately one month after this Annual Report, our Sustainability Report which gives greater detail on our sustainability performance and objectives. Each year we try to improve our reporting and we welcome feedback on how well we are doing. Please give us your feedback: [email protected] You can find this report and additional information about Tullow Oil on our website www.tullowoil.com Cover: TEN Project FPSO Turret head lift at Keppel shipyard, Singapore PRODUCTION EHS SCORECARD 75,200 BOEPD 41/48 Group working interest production score against 16 performance indicators > page 34 > page 38 FUNDING SHARED PROSPERITY $650 MILLION $1,395 MILLION second corporate bond issue strengthens the socio-economic investment Group’s balance sheet > page 48 > page 36 OUR PEOPLE EXPLORATION WRITE-OFF 72% $1.7 BILLION engagement score across the Group write-off of unsuccessful exploration activities > page 46 in 2014 and prior years > page 36 Group 2014 2013 Sales revenue ($m) 2,213 2,647 Operating (loss)/profit ($m) (1,965) 381 Net (loss)/profit after tax ($m) (1,640) 216 Basic earnings per share (cents) (170.9) 18.6 Pre-tax operating cash flow ($m) 1,545 1,901 Dividend per share (pence) 4.0 12.0 TULLOW OIL PLC 2014 ANNUAL REPORT & ACCOUNTS 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 the Atlantic Margins. Our key activities include core exploration campaigns, selective development projects and growing our high-margin production. We have a prudent financial strategy with diverse sources of debt and funding. Our portfolio of over 130 licences spans 22 countries and is organised into three regions. At the end of 2014, we had a total workforce of approximately 2,000 people, with 50% of these working in our African operations. We are headquartered in London and our shares are listed on the London, Irish and Ghanaian Stock Exchanges. STRATEGIC REPORT CORPORATE GOVERNANCE Chairman’s statement 4 Corporate governance compliance 70 The oil life cycle 6 Audit Committee report 79 Our business model 8 Nominations Committee report 84 Market review 10 EHS Committee report 86 Chief Executive’s review 12 Directors’ remuneration report 88 Our strategy & business plans 14 Other statutory information 105 Key Performance Indicators (KPIs) 16 Special feature 20 FINANCIAL STATEMENTS Strategic summaries Statement of Directors’ responsibilities 112 How we create value Independent auditor’s report for the Exploration & Appraisal 32 Group Financial Statements 113 Development & Production 34 Group Financial Statements 118 Finance & Portfolio Management 36 Company Financial Statements 152 Five year financial summary 160 How we run our business Responsible Operations 38 Supplementary information Governance & Risk Management 40 Shareholder information 161 Organisation & Culture 46 Licence interests 162 Shared Prosperity 48 Commercial reserves and resources 168 Transparency disclosure 169 DIRECTORS’ REPORT Glossary 172 Operations review 52 Financial review 58 Long-term risks 62 WHERE WE OPERATE West & North Africa South & East Africa Europe, South America & Asia This region contributes the majority of Tullow considers this region to have This region consists of future Tullow’s production which comes from great potential for exploration and frontier exploration acreage as well Ghana and our non-operated assets future development. The Group is as some of Tullow’s mature non-core in West Africa, providing cash flow to focused on its Uganda and Kenya gas production assets. help fund the Group’s operations. exploration and appraisal campaigns and progressing developments. OPERATIONS IN LICENCES ACREAGE (SQ KM) TOTAL WORKFORCE 22 COUNTRIES 136 330,250 2,042 COMMITTED TO CREATING VALUE FOR SHAREHOLDERS & HOST COUNTRIES STRATEGIC REPORT Chairman’s statement 4 The oil life cycle 6 Our business model 8 Market review 10 Chief Executive’s review 12 Our strategy & business plans 14 Key Performance Indicators (KPIs) 16 Special feature 20 Strategic summaries How we create value Exploration & Appraisal 32 Development & Production 34 Finance & Portfolio Management 36 How we run our business Responsible Operations 38 Governance & Risk Management 40 Organisation & Culture 46 Shared Prosperity 48 The world-class Jubilee field is Tullow’s flagship producing asset. It produced an average of 100,000 barrels of oil per day in 2014. PRINCE AMOAKO JUBILEE FIELD PRODUCTION SUPERINTENDENT, GHANA Strategic Report CHAIRMAN’S STATEMENT SIMON THOMPSON CHAIRMAN BALANCING RISK & REWARD IN A CHALLENGING MARKET 2014 was a challenging year for the oil industry and for Tullow, which was reflected in our financial and share price performance. DEAR SHAREHOLDER For some years, cost pressures have been building across Responding to change the industry, which have depressed returns on new projects, Throughout the year, Tullow responded to the changing despite high oil prices. The industry as a whole, including landscape. At the beginning of 2014, we took the decision Tullow, has also experienced low levels of commercial to reduce our future expenditure on complex deepwater exploration success. Over the past three-to-four years, oil exploration until the costs of exploration and development production from unconventional oil shale projects in the reduced sufficiently to render the risk/reward ratio attractive USA has experienced major growth. This has come at a time once again. When the oil price started to fall in mid-2014, when demand from the developed world has been subdued we moved even more decisively to reduce our overall and demand growth from China and the other major exploration budget from $0.8 billion in 2014 to approximately emerging economies has slowed. The growing imbalance $0.2 billion in 2015, in order to conserve cash and refocus between supply and demand was brought to a head at the our exploration programme on lower-cost onshore and low OPEC meeting in November 2014 when low-cost producers, complexity offshore exploration and appraisal that have the potential to yield early production and cash flows. including Saudi Arabia, signalled that they were no longer prepared to cede market share to accommodate rising Prioritising shareholders’ interests production from the USA. As a result of these pressures, A core part of our strategy over the past few years has been the oil price collapsed from a peak of $115/bbl in mid-2014 to monetise our exploration success by selling part of our to $53/bbl at the end of the year. The combination of high equity interest to fund the development of new projects. costs and falling prices means that the whole industry As industry conditions deteriorated, and competition for faces a significant margin squeeze until operating and assets reduced, it became clear that this part of our capital costs can be reduced to more sustainable levels, strategy was no longer in the best interests of our shareholders. a process that is already under way. We therefore decided to retain our full stake in the TEN 4 Tullow Oil plc 2014 Annual Report and Accounts “Our focus is on maximising cash flow from our existing producing assets and advancing our world-class portfolio of development assets in Ghana, Kenya & Uganda.” REPORT STRATEGIC Project in Ghana. We took steps to strengthen and diversify and social performance, and our leadership position on our balance sheet by issuing a second bond in early 2014. transparency of payments to governments has been widely We also reallocated our capex to projects, such as TEN, recognised. We have also reinforced our commitment to the that will generate new production and cash flow in the safety of our workforce and the protection of the environment, short-to-medium term, and protected part of the downside and our zero tolerance approach to bribery and corruption. REPORT DIRECTORS’ risk on our existing producing assets by hedging some 60% of our 2015 entitlement oil sales with an average floor price An exceptional team of people of around $86/bbl. In these unsettled times we are more than ever reliant upon the talents, enthusiasm and commitment of our Prudent financial management people. I have been impressed by the way in which the whole Despite these steps, 2014 was still a difficult year. organisation, led by Aidan Heavey and the other members Production was down on the prior year at 75,200 boepd, of the Executive team, has moved quickly to refocus and primarily due to European gas asset sales, field performances streamline the business to deliver our revised strategy. and lower Gabon production because of licence disputes. During the year we also welcomed Mike Daly to the Board, As a result, revenues dropped from $2.6 billion in 2013 to who brings directly relevant experience of the oil industry $2.2 billion in 2014. The Board has carefully reviewed the and has already made a valuable contribution to our debates.