Tullow Oil plc Annual Report 2011 - The Group

More informationPageLong-term performance risks 431Cash operating costs per boe$13.5 PER BOEOperating cash flow beforeworking capital$1,832 MILLIONTotal shareholder return12%Board of Directors 81Directors’ remuneration report 88BUSINESS REVIEW151211.611.612.412.513.52,0001,6001,832100756699963007 08 09 10 111,200800400094998760578907 08 09 10 1150250-251207 2 09 (3) 1108 10Cash operating costs per barrel of oilequivalent (boe) are a function of industrycosts, inflation, Tullow’s fixed cost baseand production output.Measurement: Cash operating costs arereported monthly on an asset basis andare monitored closely to ensure thatthey are maintained within presetannual targets.Risk management: A comprehensiveannual budgeting process covering allexpenditure is undertaken and approvedby the Board. Monthly reportinghighlights any variances and correctiveaction is taken to mitigate the potentialeffects of cost increases.2011 performance: In 2011, we set abaseline target of $12.8 per boe and astretch target of $12.2 per boe. Cashoperating costs for 2011 were $13.5 perboe. The higher cash operating cost perboe was due to lower than expectedproduction rates.Tullow has a large requirement for capitalto fund major project development anda very active exploration and appraisalprogramme. Our goal is to ensure thatoperating cash flow funds a significantproportion of annual capital expenditure.In 2011, capital expenditure was$1.4 billion, 90% of which was invested inAfrica. Capital expenditure is forecast tobe $2 billion in 2012, split approximately50% E&A : 50% Development &Operations (D&O).Measurement: Operating cash flowbefore working capital is reportedmonthly with regular forecasting forlonger periods to support long-rangeplanning and investment decisions.Risk management: Strong financial andoperating management, disciplinedmonitoring and reporting, long-rangecash flow forecasting and strong bankingand equity relationships assist the Groupin managing liquidity. Annual and projectbudgets require Board approval.2011 performance: Production salesvolumes increased 41% to 66,800 boepdand realised oil price was 38% higher in2011. Combined, these are the primarydrivers of a 132% increase in operatingcash flow before working capital.Our strategy is focused on buildingsustainable long-term value growth andour objectives are to deliver substantialreturns to shareholders as well as fulfilour commitments to make a positive andlasting contribution where we operate.Measurement: TSR (share pricemovement and dividend payments)is reported monthly and at year-endto the Board. TSR is measuredagainst an industry peer group,which is regularly reviewed, andthe performance of the FTSE 100.Risk management: Tullow has aconsistent and clear exploration-ledgrowth strategy. Strategic plans arereviewed annually with the Board as partof three-year business planning and theExecutive team is responsible for itsexecution. Running our business well,delivering in line with business plans,being open and transparent andmaintaining strong capital marketrelationships underpin delivery of TSR.2011 performance: The performance ofthe FTSE 100 in 2011 was impacted by aseries of financial and political events anddelivered negative TSR of 2%. Despite thedelays in the completion of the Ugandanfarm-down and the slower than expectedramp-up in production in Ghana, Tullow‘sTSR was 12% in 2011. This represents atop quartile performance versus thecomparator group.33www.tullowoil.com