Performance – material or immaterial? Tullow Oil plc 2010 Annual Report and Accounts Africa’s leading independent oil company Tullow Oil 2010 Annual Report Oil & Gas United Kingdom Tullow Cover.indd 1 30/03/2011 14:05 Directors’ Report: Business review Key Performance Indicators We measure our progress through seven KPIs that are closely aligned with delivering our strategy. Non-financial Lost Time Injury Frequency Rate (LTIFR) Financial Staff turnover 0.85 LTIFR 2.0 1.3% 3.0 Reserves and resources replacement 1,339% 1,500 Working interest production 58,100 boepd 80,000 Cash operating costs per boe $12.5 per boe 14 Operating cash flow before working capital $762 million 1,000 Total Shareholder Return (TSR) (3%) 100 90 1.95 1,339 2.5 2.5 1.5 2.0 73,100 64,720 66,600 58,300 58,100 949 822 987 99 12.4 12 10 8 12.5 800 2.3 2.0 1,250 1,232 60,000 11.6 11.6 762 80 70 66 49 1,000 8.9 600 588 60 50 40 1.5 1.0 0.81 0.54 0.76 0.85 1.5 1.3 750 40,000 6 400 1.0 500 434 437 20,000 4 200 2 30 20 10 06 07 08 09 10 0 06 07 0.5 0.5 0 06 07 08 09 10 0 06 07 08 09 10 250 0 173 06 07 08 09 10 0 06 07 08 09 10 The bonus element of the Executive Directors’ remuneration is linked to LTIFR, working interest production, cash operating costs per boe and TSR. Other KPIs relating to bonus remuneration include finding costs per barrel, specific finance and portfolio management objectives and key project milestones for Ghana and Uganda. (3) 10 2 08 09 0 06 07 08 09 10 0 One of our strategic priorities is to ensure safe people, procedures and operations. To measure this we have set Group objectives to deliver top quartile industry safety performance and achieve a preset absolute target. Measurement Throughout the Group there are rigorous and consistent incident reporting procedures in place. These include analysis, follow-up, remedial actions and communication of learnings. EHS is reported to the Board monthly and annually. Risk management We have clear EHS policies and procedures supported by strong EHS leadership, accountability and EHS commitment statements in each asset and at each level of the business. EHS is also part of all operational planning and activities. 2010 Performance In 2010, we did not achieve top quartile industry safety performance. We did not achieve our stretch target but we did achieve the baseline target of <1.0 LTIFR. As a result, the bonus element relating to this KPI was reduced by 66%. Our goal is to be the employer of choice in the industry so that we attract and retain the best people. Measurement We have a Board approved HR strategy and approximately 5% of the Board’s time annually is spent on HR matters. There are systems to identify issues early and we track and resolve any issues arising from our global employee survey. People who leave us are debriefed so we can improve our policies. Risk management Our best way to avoid a people skills shortage or unexpected departures is to retain our entrepreneurial culture. This allows people to contribute in the best way possible. It is important also to recognise and reward staff appropriately for their contribution. 2010 Performance 1.3% of staff left the Group in 2010, compared with 2.0% in 2009. This is another strong performance for the year, considering our total permanent workforce grew by 40% to 1,232 people. Replacement of reserves and resources is focused on continuing to grow the Group’s production potential. Measurement A review of each field is undertaken every two years by an independent engineer or if there is significant new data that indicates a material change to reserves or resources estimates on any field in the interim. Risk management The Group manages replacement risk by maximising reservoir performance in producing fields, through operational and technical capability and focused exploration campaigns that deliver material discoveries. 2010 Performance The Group achieved 1,339% organic reserves and resources replacement in 2010. On a yearly basis we aim to achieve production in line with the Group’s annual budget. Part of our strategy is to grow our production profile to fund a $500 million to $700 million exploration programme. Measurement Daily and weekly production are monitored from all producing assets. Production is reported weekly and on a monthly basis. Forecast updates are prepared regularly during the year. Risk management In mature assets strong production planning and monitoring mitigates unplanned interruptions. First Oil in Ghana is significantly enhancing our production profile. 2010 Performance The Group’s baseline production target for 2010 was 55,900 boepd; the stretch target was 58,700 boepd. 2010 actual production was 58,100 boepd and 94% of the bonus element relating to this KPI was awarded. Cash operating costs per barrel of oil equivalent (boe) are a function of industry costs, inflation, Tullow’s fixed cost base and production output. Measurement Cash operating costs are reported monthly on an asset basis and are monitored closely to ensure that they are maintained within preset annual targets. Risk management A comprehensive annual budgeting process covering all expenditure is undertaken and approved by the Board. Monthly reporting highlights any variances and corrective action is taken to mitigate the potential effects of cost increases. 2010 Performance In 2010, we set a baseline target of $13.6 per boe and a stretch target of $12.9 per boe. Cash operating costs for 2010 were $12.5 per boe. The bonus element relating to this KPI, which is linked to working interest production, was achieved. Tullow has a large requirement for capital to fund major project development and a very active exploration and appraisal programme. Our goal is to ensure that operating cash flow funds a significant proportion of capital expenditure. Measurement Operating cash flow is reported monthly with regular forecasting for longer periods to support long-range planning and investment decisions. Risk management Strong financial and operating management, disciplined monitoring and reporting, long-range cash flow forecasting and strong banking and equity relationships assist the Group in managing liquidity. Annual and project budgets require Board approval. 2010 Performance Realised oil price was 30% higher in 2010 and this was the primary driver of a 30% increase in operating cash flow. During the year Tullow invested $1.2 billion; 57% in P&D activities and 43% in E&A activities. 90% of the total was invested in Africa. Our strategic objective is to deliver substantial returns to shareholders through sustainable long-term growth. Our overall aim is to create and share prosperity so that local communities and wider society in the countries where we operate see real returns on our success. Measurement TSR (share price movement and dividend payments) is reported monthly and at year-end to the Board. The industry peer group is regularly reviewed. p20 p42 p86 For more information on Our strategy For more information on Risk management For more information on Remuneration Risk management The Executive team is responsible for the execution of Tullow’s strategy and it is reviewed annually with the Board as part of For all the latest news and results three-year business planning. Being visit: www.tullowoil.com a well run business, delivering in line with business plans, being open and transparent and maintaining strong capital market relationships underpin delivery of TSR. 2010 Performance The Macondo deepwater blowout in the Gulf of Mexico and the lack of a resolution to the Uganda tax dispute impacted Tullow’s share price resulting in TSR of minus 3%. As neither TSR absolute performance nor TSR performance versus comparator group was achieved, the bonus element of this KPI was not awarded. 10 Tullow Oil plc 2010 Annual Report and Accounts www.tullowoil.com 11 pp 10-11 Tullow Oil presents both financial and non-financial KPIs and, as well as providing trend data for each, there is reference made to risk management for each KPI. An interesting element of this example is the direct link made from some KPIs to Directors’ remuneration: one of the ‘non-financial’ KPIs – LTIFR – is one of the influencing factors of the bonus element of the remuneration package. www.blacksunplc.com © Black Sun Plc 2011 35 Directors’ Report: Business review Key Performance Indicators Monitoring the health of the business 1
