Annual Report & Accounts 2003 01 Highlights 02 Chairman’s statement 04 Financial review 06 Operational review 09 Social performance summary 10 Health, safety, environment and security 11 Board of directors 12 Corporate governance 14 Report of the directors 16 Remuneration report 25 Statement of directors’ responsibilities 26 Auditors’ report 27 Accounting policies 30 Consolidated profit and loss account 32 Balance sheets 33 Consolidated cash flow statement 34 Notes to the accounts 57 Five year summary 57 Shareholder information 58 Reserves 59 Worldwide licence interests 60 Addresses 01 HIGHLIGHTS Financial performance • Profit after tax and exceptional charges up 80 per cent at £40.8 million (2002: £22.6 million) • Net cash inflow of £255.2 million* (2002: £93.2 million) • Nil gearing at year-end • Strong forward cash flow with most of our booked reserves sold under long-term gas contracts • Production of 36,000 boepd in first two months of 2004 Operational achievements • Deal with Fusion built Premier’s West African position, generated significant value and exploration success with Chinguetti and Tiof discoveries in Mauritania • Successful exploration in Pakistan • Non-core asset disposals realised cash of £18.2 million (2002: £23.4 million) • Total reserves, including discoveries awaiting commercialisation, in excess of 200 mmboe • Replenished exploration portfolio during the year with 18 well 2004 drilling programme in place * Includes restructuring and joint ventures. Premier Oil Annual Report & Accounts 2003 02 CHAIRMAN’S STATEMENT 2003 was a year of transformation for Premier. Record levels of Following the restructuring, Premier’s booked reserve base amounts production and profit, and a strong balance sheet, were to 175 million barrels of oil equivalent (mmboe), with a majority of complemented by exploration and commercial success and these reserves relating to fields already in production and therefore the completion of the corporate restructuring, announced in with limited associated future capital expenditure. Total reserves – September 2002. including as yet unbooked discoveries in Indonesia and Mauritania – are expected to be in excess of 200 mmboe when these unbooked ‘New’ Premier has emerged as a strong operational and financial discoveries are commercialised. business generating healthy cash flows to pursue exploration and commercial opportunities. Operationally, increases in gas sales were recorded in Pakistan, Indonesia and Myanmar. The successful completion of development Financial and operating performance of the Bhit and Zamzama fields in Pakistan, on time and within Comparison of the group’s performance in 2003 to that of 2002 budget, have been a significant contributor. In Singapore, demand is made complex by the corporate restructuring completed on from buyers has been above expectations and has been successfully 12 September 2003, due to the inclusion of profits until that date met by our operated West Natuna Gas Project. In Albania, we have from the assets disposed. decided to withdraw from the Patos Marinze project following disappointing pilot production. Production for the year averaged 53,600 barrels of oil equivalent per day (boepd), in line with 2002 levels. However this annual average The group’s health, safety and environment record continues to masks the impact of the restructuring completion – in the first half show strong performance. In 2003 the group incurred only four lost of 2003 production averaged a record 62,000 boepd, reducing to time injuries in over 5 million man-hours worked. This represents a 33,900 boepd after the restructuring completion, with the growth 39 per cent improvement from 2002. This continued improvement coming from gas projects in South and South East Asia more than over the last three years is made more remarkable by the challenging offsetting the decline in our mature UK production. environments in which Premier operate. In June, we achieved two years of continuous operations at West Natuna without a lost Net profit after exceptional charges relating to the restructuring time incident. amounted to £40.8 million, up from £22.6 million in 2002. Excluding exceptional charges, net profits were £63.6 million (2002: £35.7 million), On the exploration front, whilst drilling early in the year had been an increase of 78 per cent. The increased profitability mainly reflects disappointing, our efforts to replenish the exploration portfolio were higher operating profits in Asia and lower interest charges on lower rewarded with excellent drilling results on our new acreage in debt – offset by the exceptional financing charge resultant from the Mauritania secured by a deal with Fusion Oil and Gas, where three early repayment of debt due to the restructuring. In addition, there wells out of four were successful. Successes at Kadanwari and was an exceptional provision for oil and gas assets in 2002. Basic Zamzama also contributed to an excellent last quarter. In 2003 earnings per share increased by 111 per cent to 30.0 pence Premier drilled eleven exploration and appraisal wells, with a 50 per (2002: 14.2 pence). cent commercial success rate recorded. Reported profits include those attributable to the assets in Myanmar The Fusion deal has given us critical mass in West Africa, where new and Indonesia which we transferred in September 2003 as part of the interests in Mauritania, Gabon and the SADR complement our restructuring; excluding these, and the associated exceptional charge, existing positions in Guinea Bissau – where we are currently operating net profits from ongoing operations amounted to £17.1 million. a well to test the Sinapa prospect – and Gabon. The significant Tiof discovery in Mauritania will be appraised in 2004. Net cash flow, including joint ventures in Myanmar and Pakistan, was strong at £255.2 million (2002: £93.2 million). This includes We are continuing to seek future exploration opportunities in our £150.6 million received as part of the restructuring, and is after focus areas of the UK, South and South East Asia and Africa. capital expenditure of £43.0 million which was partly offset by proceeds of disposal of non-core assets as part of our portfolio Commercial management programme, amounting to £18.2 million (2002: In addition to the Fusion deal, commercial activity in 2003 has £23.4 million). continued on securing a second sale of gas from the West Natuna Gas Project to buyers in Singapore, where negotiations are currently The restructuring has transformed the balance sheet, which started ongoing. Additionally, non-core assets in the UK and Australia were the year with net debt of £249.5 million – a gearing level of 80 per sold in the year raising £18.2 million cash. cent. At the end of 2003, we had net cash of £7.1 million and an ungeared balance sheet. 03 New Premier commercial opportunities with the objective of adding significantly to The restructuring has had a number of consequences. Our two major net asset value during the year. shareholders – Amerada Hess and Petronas – have departed, and Premier is smaller, about half the size in terms of oil and gas reserves Our strong cash generative base business is more than sufficient and production (30–35,000 boepd). As mentioned, the company has to fund our exciting exploration programme if the high first quarter no net debt and generates strong cash flows, given reasonable oil 2004 oil prices can be maintained. Our strong balance sheet prices and the high proportion of booked reserves which are under provides scope to pursue attractive new projects. long-term gas contracts. This base business generates sufficient cash flows to fund a strong exploration programme. Our strategy is to add Premier is in good shape and we intend to keep it that way. significant value for shareholders through high impact exploration and commercial deal-making, concentrating primarily on the front end – pre development – phase of the exploration and production cycle, whilst maintaining a strong base business, and a strong balance sheet which can be deployed if and when opportunities arise. Communication with shareholders New accounting standards and governance rules over the last few years have substantially increased the length and complexity of Sir David John KCMG annual reports, making them less user friendly. Chairman To keep shareholders better informed we are sending you two documents. The formal all-inclusive annual report and accounts is the detailed stand-alone record of corporate performance. The other is a short summary, which allows a quick but informative review of 2003, financial and operational facts and the plan for 2004. I hope you will find this an improvement. The Board and staff On 9 December Robin Allan and Simon Lockett joined the Board as Directors of Business Development and Operations respectively. Robin trained as a geologist and has been with Premier for 18 years, most recently as Country Manager in Indonesia. Simon Lockett, in his 10 years with Premier, has been involved in corporate planning and investor relations in London, and was Commercial Manager in South East Asia, based in Indonesia, and Country Manager for Albania. A time of major restructuring and new directions inevitably brings uncertainty. The results being achieved in these circumstances and the feeling of enthusiasm for the future throughout Premier is a tribute to the quality and character of Premier people. I would also like to pay tribute to your non-executive Board members for their steadfast and tireless support for the