Tullow Oil plc Annual Report 2011 - The Group

Financial review continued2011 Group working interest productionOil 73%Gas 27%Operating costs, depreciation and impairmentsUnderlying cash operating costs, which excludes depletion andamortisation and movements on the underlift/overlift, amountedto $386 million; $13.5/boe (2010: $264 million; $12.5/boe).DD&A charges before impairment amounted to $514 million;$18.0/boe for the year (2010: $356 million; $16.8/boe). The Grouprecognised an impairment charge of $51 million; $1.8/boe (2010:$4.3 million; $0.20/boe) in respect of the M’Boundi field in theCongo due to field underperformance and an impairmentreversal of $17 million; $0.6/boe in respect of the Chinguettifield in Mauritania due to improved field performance.At the year-end, the Group was in a net overlift position of 220,000barrels. The movements during 2011 in the underlift and stockposition have given rise to a credit of $2.1 million to cost of sales(2010: credit of $35.6 million).Administrative expenses of $122.8 million (2010: $89.6 million)include an amount of $23.6 million (2010: $10.2 million)associated with IFRS 2 – Share-based Payments. The increasein total general and administrative costs is primarily due to thecontinued growth of the Group during 2011 with Tullow’s totalworkforce increasing by 26% to 1,548 people.Exploration costs written-offExploration costs written-off were $121 million (2010: $155 million),in accordance with the Group’s successful efforts accountingpolicy. This requires that all costs associated with unsuccessfulexploration are written-off in the income statement. This write-offis principally associated with unsuccessful exploration activitiesin Ghana, Liberia, Gabon and the UK, together with newventures activity.Operating profitOperating profit grew 332% to $1.13 billion (2010: $262 million).The increase was principally due to increased sales volumesand higher commodity prices, partly offset by higher operatingcosts and DD&A charges following Ghana First Oil production inNovember 2010.Derivative instrumentsTullow continues to undertake hedging activities as partof the ongoing management of its business risk and to protectagainst volatility and to ensure the availability of cash flowfor reinvestment in capital programmes that are drivingbusiness growth.At 31 December 2011, the Group’s derivative instruments had anet negative fair value of $47 million (2010: negative $82 million),inclusive of deferred premium. While all of the Group’s commodityderivative instruments currently qualify for hedge accounting,a pre tax credit of $27 million (2010: charge of $28 million)has been recognised in the income statement for 2011. Thecredit is in relation to the increase in time value of the Group’scommodity derivative instruments; mainly caused by theGroup’s oil hedging activity at relatively higher commodityprices throughout the year, compared with the forward curveon 31 December 2011.At 9 March 2012 the Group’s commodity hedge position to theend of 2014 was as follows:Hedge position 2012 2013 2014Oil hedgesVolume (bopd) 34,500 25,500 12,000Current price hedge($/bbl) 117.4 111.9 104.6Gas hedgesVolume (mmscfd) 29.1 12.2 3.0Current price hedge(p/therm) 60.2 68.3 75.9Net financing costsThe net interest charge for the year was $86 million(2010: $55 million) and reflects the increase in net debtlevels during 2011, offset by an increase in interest capitalisedduring the year on qualifying assets and by a one-off gain of$22 million resulting from the purchase of the FPSO by theJubilee partners in December 2011 and consequent settlementof the Ghana FPSO finance lease liability.TaxationThe tax charge of $384 million (2010: $90 million) relatesto the Group’s North Sea, Gabon, Equatorial Guinea and newsignificant Ghanaian activities. After adjusting for explorationcosts and profit on disposal of subsidiaries, the Group’sunderlying effective tax rate is 32% (2010: 27%). The increasein the effective tax rate is mainly due to the increase in profitsbefore tax driven by the new Ghanaian activities which aresubject to a 35% tax rate.36Tullow Oil plc 2011 Annual Report and Accounts