Tullow Oil Tullow Oil plc 2010 Annual Report and Accounts 2010 Annual Report Oil & Gas United Kingdom Africa’s leading independent oil company Tullow Cover.indd 1 30/03/2011 14:05 Directors’ Report: Business review Risk management continued Risk KPI Impact Executive responsibility Policies and systems Mitigation Progress in 2010 Operational risk EHS failures and security incident No significant environmental incidents LTIFR <1.0 and top quartile industry safety performance Major event from drilling or production operations impacts staff, contractors, communities or the environment, leading to loss of reputation and/or revenue. Paul McDade EHS policies, IMS, toes, EMS, crisis management procedures, EHS policy, EHS Leadership Team EHS performance standards set and monitored regularly across the Group through Business Unit performance reporting. EHS management system implemented. Clear policies and procedures supported by strong leadership accountability and commitment throughout the organisation. EHS performance measures were met. A process was developed to identify and document significant EHS risks, along with a regular review process to update the EHS risk profile. Crisis management resources and procedures were also upgraded. A well-ranking process was devised to identify critical aspects and risk areas for the Tullow drilling programme. Mitigation is achieved by focusing on resources to manage risks, applying a portfolio management approach and engaging with the Board and Executive management through risk discussions. Jubilee project was delivered within 5% of the original $3.1 billion budget, and on schedule. First phase of Uganda EA 2 development got under way, with field development plans submitted to the GoU. The farm-down to CNOOC and Total is pending final approval. Key development failure Specific yearly base and stretch targets that reflect key project milestones Development projects fail to meet cost and schedule budgets, causing returns to be eroded. Paul McDade IMS, EHS systems and policies, DOA, Code of Business Conduct, risk management process and DLT. GELT, competitive capital allocation process, clear exploration strategy Technical, financial and Board approval required for all projects, and for all dedicated project teams. Risk evaluation and progress reporting initiated for all projects. Project milestone KPIs established for Ghana and Uganda. Board approval of E&A programme. Monthly reporting to Board on full finding costs per barrel and high grading of Group’s portfolio, with a view to measuring success of exploration spend. Continued use of appropriate technologies and technical excellence in exploration methodologies. Sustained exploration failure Reserves and resources organic replacement Full finding costs per barrel Failure to sustain exploration success limits replacement of reserves and resources, which impacts investor confidence on long-term strategic delivery. Angus McCoss Exploration and appraisal success ratio of 83% was achieved. This included discovery of the Enyenra and Tweneboa fields in Ghana, and successful exploration wells in Gabon, Pakistan and Sierra Leone. External risk Corporate responsibility TSR performance The overall political, industry or market environment negatively impacts the Group’s ability to grow and manage its business. Graham Martin Code of Business Conduct, CR policies Consistent ethical standards established and applied through Code of Business Conduct, and through contract and procurement procedures. Regular review of compliance requirements with periodic Board reporting. Successful relationships with Governments and other external stakeholders built and maintained. Through these relationships, trust is grown, key issues identified and processes improved. Social Enterprise projects aligned with the needs of stakeholders and the business in support of creating shared prosperity. Compliance Manager was appointed to monitor the application of revised Code of Business Conduct. Country risk TSR performance Government regulations change rapidly, resulting in expropriation of the Group’s assets and the introduction of burdensome tariffs or taxes. Political changes affect the competitive environment, with political instability and civil disturbances disrupting the Group’s operations. Volatility in commodity prices impacts the Group’s revenue streams, with adverse effect on liquidity. Hostile acquisition if not handled correctly causes major distraction and value erosion. Aidan Heavey Social Enterprise project selection criteria and guidelines Stakeholder engagement strategy and plan Detailed stakeholder mapping exercise and planning carried out for stakeholder engagement programme. Community relations teams expanded in Ghana and Uganda. New Social Enterprise project selection criteria developed. New Social Enterprise Committee and terms of reference launched. Oil and gas price volatility Realised commodity prices Ian Springett Hedging strategy Hedging strategy agreed by Board, with monthly reporting of hedging activity. Conservative hedging policy implemented, with realised oil and gas prices of $78/bbl and 42 pence per therm. Detailed monthly Board reporting of hedge positions. Board also reviewed and approved ongoing hedging strategy throughout the year. Defence strategy was reviewed with key advisers. Independent full-value review of reserves and resources completed. Hostile acquisition Remaining independent Graham Martin Documented defence manual Robust defence strategies against hostile acquisitions. Effective investor engagement and ongoing open and transparent communications programmes. 46 Tullow Oil plc 2010 Annual Report and Accounts www.tullowoil.com 47 pp 46-47 Tullow Oil present an enhanced risk table, identifying clear links between principal risks, group strategy, group KPIs and executive responsibility. The mitigation actions for each potential risk factor are clearly referenced and an interesting element of this example is the articulation of relevant policies and systems in place to deal with these financial and non-financial risks should they occur. www.blacksunplc.com © Black Sun Plc 2011 43 Directors’ Report: Business review Risk management 2
