Tullow Oil plc Annual Report 2011 - The Group

Risk management continuedStrategic risk continuedSustained exploration failurePerformanceindicatorReserves andresources organicreplacementFinding costs per boeExecutiveresponsibilityAngus McCossExploration DirectorImpactFailure to sustain exploration success limitsreplacement of reserves and resources, whichimpacts investor confidence in long-termstrategic delivery.Policies and systemsGELT, competitive capital allocation process,clear exploration strategy.Mitigation processBoard approval of E&A programme. Monthly reporting to the Boardon finding costs per boe and high-grading of Group’s portfolio, witha view to measuring success of exploration spend.Continued use of appropriate technologies and technical excellencein exploration methodologies. South America discovery opens newhydrocarbon basin.Progress in 2011E&A success ratio of 74% was achieved. This included discoveries inGhana and Uganda and the significant Zaedyus discovery offshoreFrench Guiana.FINANCIAL RISKInsufficient liquidity, inappropriate financial strategyPerformanceindicatorLiquidity profileExecutiveresponsibilityIan SpringettChief Financial OfficerImpactAsset performance and excessive leverage leadsto the Group being unable to meet its financialobligations. This scenario, in the extreme,impacts on the Group’s ability to continueas a going concern, or causes a breach ofbank covenants.Policies and systemsFinancial strategy, cash flow forecasting andmanagement, capital allocation processes.Mitigation processPrudent approach to debt and equity, with balance maintainedthrough refinancing, equity placing and portfolio management activity.Regular Board review and approval for financing options. Short-termand long-term cash forecasts reported on a monthly basis to SeniorManagement and the Board. Maintenance of strong banking andequity relationships.Progress in 2011Balance sheet was strengthened through commitment increaseof $1.0 billion agreed with the Reserves Based Lending Facility.The Group now has total debt facilities of $4.15 billion. Portfoliomanagement included acquiring Nuon’s Dutch assets, EO Group’sGhana interests as well as a number of farm in deals in Africa.Cost and capital disciplinePerformanceindicatorCash operatingcosts per boeFinding costs per boeCapital expenditureand cost managementtargetsExecutiveresponsibilityPaul McDadeChief Operating OfficerAngus McCossExploration DirectorImpactIneffective cost control leads to reduced marginsand profitability, reducing operating cash flow andthe ability to fund the business.Policies and systemsDelegation of Authority (DoA) and budgeting andreporting processes, project approval processfor all significant categories of expenditure.Mitigation processComprehensive annual budgeting processes covering all expenditureare approved by the Board. Executive management approval is requiredfor major categories of expenditure, and investment and divestmentopportunities are ranked on a consistent basis, resulting in effectivemanagement of capital allocation.Progress in 20112011 capital expenditure of $1.4 billion principally on completion ofPhase 1 development of the Jubilee field in Ghana and E&A activitiesin Ghana, Uganda and French Guiana.OPERATIONAL RISKEHS failures and security incidentPerformanceindicatorNo significantenvironmentalincidents, LTIFR