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Energising Asia
About us
Who we are, what we do Salamander Energy is an Asia-focused independent oil and gas exploration and production company Strategy The Company aims to create sustainable shareholder value by expanding and developing its portfolio of upstream oil and gas assets. In order to achieve this, the Company intends to pursue the following strategies. Pursue organic-led future growth with scope for add-on acquisitions The Group operates anchor assets in each core area, which are in proven basins with growth characteristics, and where technical risks are viewed as low due to managements knowledge of the geology and petroleum system. Production and reserve growth is targeted from current developments, discoveries and low risk step-out exploration prospects in each of the core areas. The Company also intends to target potentially transformational exploration prospects such as those in Block G4/50 in Thailand and those prospects in the North Kutei that contain large volumes of prospective resources and where the Group believes it has a strong understanding of the local geology.
Create value through hub positions in core areas The Company has developed hub positions in each of its core areas. In each core area, the Group has a majority equity stake and operatorship. Through building an acreage bank around each anchor asset, the Company can target exploration and appraisal close to existing assets. Through exploring and appraising prospects and discoveries around core production and development assets in these core areas, the Company will seek to benet from exploiting technical, operational and nancial synergies. Maintain regional focus The Company has a pure regional focus on South-East Asia, which provides a number of strategic benets to the Company, including an ability to anticipate and respond to changes in the local operating, asset trading and economic environment, extensive and focused technical knowledge, an understanding of many of the hydrocarbon basins in the South-East Asian region, and the ability to benet from the Companys network of contacts and relationships across the region. The Company believes its local knowledge and relationships provide a sustainable competitive edge, increasing its chances of protably exploiting its current portfolio and of capturing new opportunities.
Business review 4 6 8 10 12 13 19 20 24 27 34 36 Greater Bualuang Greater Kerendan North Kutei Chairmans and Chief Executives review Key performance indicators Operational review Statement of proved and probable reserves Financial review Risk management Corporate social responsibility Board of directors and advisers Senior management
Corporate governance 37 43 50 60 Directors report Corporate governance statement Remuneration report Directors responsibilities statement
Financial statements 61 63 72 73 74 75 76 97 98 99 100 104 IBC IBC Independent Auditors Report Statement of accounting policies and general information Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated cash ow statement Notes to the consolidated nancial statements Parent Company balance sheet Parent Company statement of changes in equity Parent Company cash ow statement Notes to the Parent Company nancial statements Glossary Corporate directory Our ofces
Operations
MMboe of 2P reserves MMboe of prospective resource in top 15 prospects
Financial
MM of revenue MM of post-tax operating cash ow
75.3 925
2P Reserves increased by 13.6% to 75.3 MMboe (2010: 66.3 MMboe) Average daily production of 18,600 boepd (2010: 20,300 boepd) Bualuang East Terrace oil discovery, 8 MMbo added to 2P reserves Matured prospect inventory in North Kutei, independent CPR points to 676 MMboe of gross mean prospective resources in four high-graded prospects
$408 $194
Revenue increased by 26.2% to $408.0 million (2010: $323.4 million) Record pre-tax operating cash ow, before working capital changes, increased by 68% to $293.6 million (2010: $174.4 million) Record post-tax operating cash ow increased by 82% to $193.9 million (2010: $106.5 million) Prot before tax of $112.6 million (2010: loss of $113.7 million) Loss after tax of $45.5 million (2010: $169.5 million) Year-end cash and funds balance of $85.8 million (2010: $99.2 million) Net debt of $210.1 million (2010: $190.2 million)
Portfolio management Re-aligned portfolio to focus on three core areas Disposed of mature, low margin, non-core interests in Offshore Northwest Java (ONWJ) and Southeast Sumatra (SES) PSCs Deepened interest in Kerendan development, Greater Kerendan area, Indonesia Expanded acreage position in Greater Bualuang area, Gulf of Thailand, through G4/50 farm-in
Outlook 2012 average daily production rate forecast to be 12,000 13,000 boepd following disposal of non-core producing assets Bualuang Bravo Platform on schedule for installation 3Q 2012 Ensco-53 rig mobilised for development and exploration drilling in Greater Bualuang area Tutung Alpha-3 spudded, gas appraisal drilling ahead Signed 12 month contract for Atwood Mako jack-up rig in Greater Bualuang area from 3Q 2012 Exploration drilling in North Kutei to commence 4Q 2012
Thailand Production (Net WI) Sinphuhorm Bualuang Total 1P reserves Liquids (MMbbls) Gas (Bcf) Total (MMboe) 2P reserves Liquids (MMbbls) Gas (Bcf) Total (MMboe) Revenue Liquids ($MM) Gas ($MM) Total ($MM) Indonesia Production (Net WI) SES ONWJ Kambuna Total 1P reserves Liquids (MMbbls) Gas (Bcf) Total (MMboe) 2P reserves Liquids (MMbbls) Gas (Bcf) Total (MMboe) Revenue Liquids ($MM) Gas ($MM) Total ($MM)
Liquids (bopd) Gas (mcfd) Total (boepd) Liquids (bopd) Gas (mcfd) Total (boepd)
2P Reserves MMboem
39 7,785 7,821
7,921 7,921
2011
+9.0
2011: 75.3 2010: 66.3 2009: 64.8 2008: 67.7 Production boepd
-1,700
2011: 18,600 2010: 20,300 2009: 13,600 2008: 9,600 Revenue millionm
+84.6
2011: $408.0 2010: $323.4 2009: $157.1 2008: $100.8 Post-tax operating cash ow million
+87.4
2011: $193.9 2010: $106.5 2009: $53.6 2008: $25.5
1 Greater Bualuang Oil production, development and exploration Low risk, high value exploration in over 6,000 sq km stepping away from the Bualuang oil eld. The Bualuang oil eld and East Terrace have 34.2 MMboe of 2P reserves. Production is forecast to grow signicantly in 2013 following a 16 well development drilling programme starting in 2H 2012. Atwood Mako rig contracted for 12 months from 3Q 2012 Over 20 prospects on B8/38 5,000 sq km of 3D seismic on G4/50, over 20 leads identied on old 2D 4 exploration wells in 2012 Low risk, high value barrels 2 Greater Kerendan Gas development and exploration 1 Acreage position based on Kerendan gas eld development with upside to the booked reserve position from the Kerendan eld, satellite exploration and new acreage opportunities. Booked 19 MMboe of 2P reserves on Kerendan eld Further 23.4 MMboe of certied resource awaiting commercialisation, development drilling in 2H 2012 to start this process c. 1 Tcf of low risk step out exploration to be tested in 2H 2012 Potential to send gas in to higher value East Kalimantan gas markets
3 North Kutei Oil and gas appraisal and exploration Angklung discovery opened a new play in the North Kutei basin with multi-Tcf of gas and hundreds of millions of barrels of oil potential. 676 MMboe of gross mean unrisked prospective resource potential independently certied in 4 most drill ready prospects Oil and gas potential Close proximity to Bontang LNG plant provides ready market at excellent price Drilling expected to commence 4Q 2012 Key Areas of focus Other assets Ofces
Bangkok
Singapore
Greater Bualuang
Salamander has a proven track record of creating value in the Greater Bualuang area. With an expanded acreage position in this area, Salamander has the opportunity to apply its technical knowledge and create material value through the discovery and exploitation of new oil elds.
alamander operates two licences in the Greater Bualuang area, B8/38 and G4/50. The Group has a 100%* equity interest in these licences, which cover over 6,000 sq km. The B8/38 licence contains the Bualuang oil eld and a number of step-out exploration prospects. G4/50 surrounds the B8/38 licence and the Group believes it to be highly prospective exploration acreage with over 20 potential leads mapped from the old 2D data. The Group has delivered consistent reserves growth on the Bualuang eld with ultimately recoverable proven and probable reserves growing from initial estimates of 15 MMbo to 43.5 MMbo as at 31 December 2011. This includes 8 MMbo from the East Terrace discovery made during 2011. The Group can also see additional resources in reservoirs above and below the main producing reservoir.
2012 will see further investment in the Bualuang eld with the installation of the Bravo Wellhead Platform that will provide a further 16 drilling slots. The Group has signed a twelve month contract for the Atwood Mako rig with the rig expected on location in 3Q 2012. The Atwood Mako will drill sixteen development wells, commencing in 3Q 2012, that will see production grow to approximately 15,000 boepd in 2013. Reserves (MMboe) 2011: 34.2 2010: 26.5 2009: 22.5 2008: 15 Production (boepd) 2012: 8,500 (F) 2011: 7,800 2010: 8,100 2009: 8,900 The Group plans to further exploit its understanding of the regional hydrocarbon play by drilling step-out exploration prospects, both in B8/38 and G4/50. The Group has drilled one exploration well to date that resulted in the Bualuang East Terrace oil discovery. This will be followed up by the Far East and NW Terrace Cluster prospects in the B8/38 licence during 2Q 2012. In G4/50, the Group completed an extensive 3D seismic survey in 1Q 2012 and it will be processing and interpreting this data in 1H 2012 before starting to drill exploration wells with the Atwood Mako rig starting in 2H 2012 and running through 2013. Having a rig on long term contract will also provide the Group with the ability to rapidly appraise any exploration success. The Group benets from a number of operational and nancial synergies by operating across such a large swathe of acreage, one example being the ability to offset exploration costs against income tax generated from the Bualuang eld. In summary, Salamander has a proven track record of creating value in the Greater Bualuang area. With an expanded acreage position in this area, Salamander has the opportunity to apply its technical knowledge and create material value through the discovery and exploitation of new oil elds.
* Moeco retains a 50% back in right Further information Business review. Pages 14/15 Corporate responsibility. Page 31
1 2 3 B8/38 Block (100%), operator 1 North West Prospect 2 North West Fault Terrace Cluster 3 Bualuang, oil eld 4 North East Fault Terrace Cluster 5 East Terrace 6 Far East Prospect G4/50 Block (100%*), operator * Moeco retains a 50% back-in right 4 6 5
1 1 Ocean Sovereign rig drilling Bualuang East Terrace exploration well, FPSO in background. 2 Bualang Bravo Wellhead Platform under construction. 3 Western Patriot completing 3D seismic survey in G4/50 licence. 4 Map of G4/50 at tertiary level showing lead areas identied from 2D data.
Greater Kerendan
The Kerendan gas eld contains 280 Bcf of certied resource. During 2011 the Group signed a GSA for the supply of 120 Bcf of gas leading to the Group booking 19 MMboe of 2P reserves.
alamander operates the Bangkanai PSC in the Barito basin, Central Kalimantan, having acquired a 69% operated interest in this PSC in 4Q 2010 and deepened its interest to 80% in 4Q 2011. The licence contains the Kerendan gas eld development and a number of additional step-out exploration targets. The Kerendan gas eld contains 280 Bcf of certied resource. During 2011 the Group signed a gas sales agreement (GSA) for the supply of 120 Bcf of gas leading to the Group booking 19 MMboe of 2P reserves. The gas is being sold to PLN for local power generation. A 320 MW power plant is being constructed 3 km from the Kerendan eld with the capacity to handle three times the volume of the initial GSA. Given this ready market for the gas, the Group hopes to commence the process of commercialising the remaining 160 Bcf of certied contingent on completion of its 2012 development drilling. Furthermore, there is over one Tcf of exploration upside on the Bangkanai PSC. The most immediate prospects for drilling are West Kerendan and Sungai Lahei, which are scheduled to be drilled in 2H 2012. In the event the Group discovers upwards of 1 Tcf of gas in the Greater Kerendan area then it will be economical to build a pipeline to East Kalimantan where there are multiple commercialisation options at a higher price than those that can be realised from local power. The Group has also been awarded two Joint Study Areas adjacent to the Bangkanai PSC. These present it with potential acreage additions in an area where the Group is developing its understanding of the regional petroleum geology and where there is a clear market for incremental gas volumes to be commercialised. Salamanders position in the Greater Kerendan area exhibits a number of the characteristics the Group looks for when entering a new region: hard resource with upside development potential to anchor position; exploration and appraisal upside; and the opportunity to expand into surrounding acreage.
NE Bangkanai joint study (100%) West Bangkanai joint study (100%) Bangkanai PSC (80%), operator Kerendan gas eld
1 1
Kerendan 2 Kerendan 1 Kerendan 3
1 Staging area at Luwe Hulu. 2 Cross section of the Kerendan gas eld.
Platform interior
Platform rim
Platform margin
3 Salamander employees inspecting the access road to the West Kerendan location. 3 4 An isochron showing the Oligocene platform rim facies. A Kerendan eld B West Kerendan location
A
Reefal boundstones and adjacent packstones Porous grainstones: Moldic and micro-porosity low permeability Platform rim wackestones to packstone low porosity Porous due to late vuggy dissolution, high permeability
B 2 4
North Kutei
An independent report by ISIS concluded that the Groups four most drill ready prospects have mean unrisked resource potential of 676 MMboe.
he Group has a dominant acreage position in the North Kutei Basin through operated interests in the Bontang PSC (100%) and the Southeast Sangatta PSC (75%). The Kutei is one of the most prolic basins in Indonesia, yet its northern section has been lightly explored and Salamander is the rst operator actively to explore in this part of the basin for over 25 years. In 2010, Salamander made the Angklung-1 discovery that owed gas from Pliocene sandstones. The Angklung discovery was a play-opening well as it proved the presence of reservoir quality sandstones in the North Kutei. Furthermore, it validated the Groups hypothesis that the bright amplitude anomalies visible on the 3D seismic correspond with gas in Pliocene sandstones. Multiple follow-up prospects have been identied from the 3D seismic on the Bontang PSC and SE Sangatta PSCs. An independent report by ISIS Petroleum Consultants concluded that the Groups four most drill ready prospects have gross mean unrisked resource potential of 676 MMboe. The Group plans to drill up to eight exploration wells across its acreage to prove up resources starting in 4Q 2012. There are a number of options for commercialisation of gas in the event of further exploration success. The Bontang LNG plant, which is less than 100 km from the Groups prospects, provides an attractive commercialisation option with two of eight trains idle and recent export prices of $17 per Mcf. In addition there are multiple local industrial and power generation markets which would be expected to realise in excess of $7 per Mcf. As the dominant acreage holder, Salamander is uniquely positioned to exploit this emerging new play in the North of the Kutei basin. A rig is expected on location in 2H 2012, when the Group will embark on a multi-well programme.
1 3 456
SE Sangatta PSC (75%), operator 1 North Kendang 2 Rehab Nose 3 South Kendang Bontang PSC (100%), operator 4 Angklung discovery 5 Kecapi 6 Bedug 7 Tutung discovery
Tutung discovery
North Kendang
2 Prospect map across Bontang and SE Sangatta PSC. 3 Angklung-1 well aring gas during testing. 3 3 4 Canyon and channel mapping in the Bontang PSC.
Doli-Doli
Chairmans and Chief Executives review The Board believes that Salamander has never been better positioned to create and capture value for shareholders and we look forward to the year ahead with a keen sense of anticipation.
uring 2011 the Group commenced a high-grading of its portfolio with the aim of focusing on areas where it has large, operated interests with material upside exposure and high quality, anchor assets. These areas include the Greater Bualuang area, in the Gulf of Thailand; the North Kutei area and the Greater Kerendan area, both in Indonesia. In all of these areas the Groups position is based around a core asset with upside potential as well as low risk step-out exploration and appraisal opportunities and the chance to add new acreage in areas where we have a detailed knowledge of the hydrocarbon systems. This re-alignment is a natural progression in portfolio development as the Group matures, and follows our earlier drilling programmes across a diverse range of assets in Southeast Asia. Having identied the three core areas around which to focus the Groups future growth, the second half of the year saw the Group divest small, non-operated interests in the ONWJ and SES PSCs. These were highly taxed, high cost barrels which generated relatively limited free cash ow and were in long term decline. The Group used these funds to expand in its core areas with the farm-in to the G4/50 block in the Greater Bualuang area, Thailand and increasing its interest in the Greater Kerendan area, through the acquisition of additional equity in the Bangkanai PSC. Both of these areas offer higher potential returns and more tangible growth opportunities than the ONWJ and SES PSCs. With the Groups renewed focus, assets outside of these high-graded areas are now considered non-core and the Group may determine in the future where appropriate to harvest cash ow, divest or withdraw from these positions. Markets Despite difcult global economic conditions, the Groups principal markets of Indonesia and Thailand continue to grow, with the IMF forecasting GDP growth in 2012 of 6.3% in Indonesia and 4.8% in Thailand. The demand for new gas-red power projects in Indonesia remains strong. This is an important market for the Group as it explores for gas in the Greater Kerendan and North Kutei areas. Demand for gas remains exceptionally strong in the North Kutei area, where the presence of the Bontang LNG plant has led to the growth of a number of local markets for gas, including petrochemicals, fertiliser, power and LNG. With the oil price remaining consistently above the $100 per barrel level since early 2011, the Groups markets can be described as buoyant.
Highlights On the operational side, production averaged 18,600 boepd for the year, despite the sale of the ONWJ and SES PSCs in the second half of 2011. Production comprised 84% liquids and 16% gas while average realisations during the year were $104.45 per barrel (2010: $73.16 per barrel) and $5.47 per Mcf (2010: $5.12/Mcf). Even allowing for disposals, the Group grew its 2P (proved and probable) reserves by 9.0 MMboe (13.6%) during the year, reporting a 2P gure of 75.3 MMboe at year end, representing a reserve replacement ratio of 235%. Alongside this, the Groups proved reserve base grew by 37% to 48 MMboe (64% of the 2P gure), reecting the continued successful development of the Groups agship Bualuang oil eld. Since the drilling of the play-opening Angklung-1 well at the end of 2010, our technical teams have been working hard throughout 2011 to dene the prospectivity in our acreage in the North Kutei area, offshore Indonesia. The well has opened an exciting new oil & gas play located offshore East Kalimantan, close to the Bontang LNG plant, an area with a strong market for gas. We are therefore pleased to have had an independent third party Competent Persons Report (CPR) report commissioned and recently completed, analysing the potential of our acreage. This CPR report highlights the potential for over 676 MMboe of gross mean prospective oil and gas resources in the top four high-graded prospects in our acreage. We are continuing our technical work on our operated blocks and look forward to testing the prospectivity of this new play area. On the nancial front, the increase in average realisations drove revenue to record levels of $408.0 million (2010: $323.4 million) and we are pleased to report a record post-tax operating cash ow of $193.9 million (2010: $106.5 million) and record prot before tax of $112.6 million (2010: loss of $113.7 million). The Group reported a year-end cash and cash equivalents position, including restricted bank deposits, of $85.8 million (2010: $99.2 million). Corporate responsibility The Group recognises, and takes seriously, the need for it to be a responsible corporate citizen. The Chief Executive oversees the implementation of the Groups policies in this area from Anti-Bribery and Corruption (ABC) through to Health and Safety, community
engagement and employment practices. A focus area in 2011 was the implementation of a new code of conduct reecting the new ABC legislation and the roll-out of a comprehensive training programme to educate all employees on their responsibilities in this area. The Group has also embarked on a review of its internal policies and reporting structure with regards to corporate responsibility matters in order to enhance its performance in this area and this will be concluded in 2012. More details can be found in the Corporate Responsibility section of this report. We strengthened the senior management team during 2011, creating the new positions of Group Technical Director and Exploration Manager, Indonesia, reinforcing our position as having one of the leading and most capable operating teams in the region. We were also delighted to welcome Dr Jonathan Copus as Chief Financial Ofcer; the Board has been impressed by the contribution he has already made in his short time with us. Since the period end we have further strengthened the Board with the appointment of Dr Carol Bell as a Non-executive Director. We would also like to thank all our staff for their continued dedication, professional attitude and enthusiasm. Outlook Following the strategic rationalisation in 2011 and the material growth in the Groups reserve base, the 2012 drilling programme will see Salamander directing its resources to operating in its core focus areas where it has discoveries, is looking to progress eld developments and conduct low risk step out exploration. We therefore already have a detailed understanding of the hydrocarbon systems in our core basins and this is reected in the relatively low risk nature of the programme. As a result, we are increasingly condent that we can capture material value through the drill-bit. Meanwhile, the core business continues to grow with production expected to rise to over 20,000 boepd in 2014. With a more focused approach, the Group will seek to accelerate its plans across its core areas. The Board believes that Salamander has never been better positioned to create and capture value for shareholders and we look forward to the year ahead with a keen sense of anticipation.
Charles Jamieson Chairman 23 March 2012 James Menzies Chief Executive 23 March 2012
Further information Financial review. Page 20 Operational review. Page 13 Corporate responsibility. Page 27
KPI
Comment
Outlook
Lower year-on-year production following the sale of interests in the ONWJ and SES PSCs during 2H 2011
Production in 2012 is expected to average 12,000 13,000 boepd. Production is forecast to rise to over 20,000 boepd in 2014 The Group is looking to add reserves close to infrastructure through development/exploration activity in a number of core areas
Represents an all in cost of the reserves base. 2011 saw the addition of low cost reserves from the Kerendan eld and reects reserves upgrades and exploration success on the Bualuang eld/East Terrace Opex per bbl was broadly in line with 2010
Operating costs
Opex per bbl is expected to stay broadly at in 2012 before falling in 2013 as production from Bualuang rises The disposal of the low margin ONWJ/SES production should also improve cash ow on a unit basis
Operating cash ow
Operating cash ow per bbl grew strongly as a result of increasing gas realisations, higher oil prices and an increase in the proportion of oil in the production mix The Group materially increased reserves during 2011
Successful development drilling on the Kerendan eld could lead to commercialising further gas resource and further reserve bookings The Group targets zero LTIs every year and has an active HSE plan to help try to achieve this
Three LTIs were reported in 2011. The LTIFR is in line with the OGP average
Operational review
The prospect density seen in B8/38 and anticipated in G4/50 will provide numerous drillable targets with high value potential and low well costs.
he Group had a busy year operationally in 2011 completing over 3.5 million man hours worked on operated projects, participating in the drilling of 14 wells and shooting 3,000 km of 2D seismic data and 2,700 sq km of 3D seismic data. 28.3 MMboe of 2P reserves were added through the commercialisation of gas from the Kerendan eld, the discovery of oil in the Bualuang East Terrace prospect and upward revision of reserves in the Bualuang main eld. In addition, the disposal of the low margin ONWJ and SES PSCs released capital for investment in the Groups three core areas, namely Greater Bualuang, Greater Kerendan and the North Kutei. Production for the year averaged 18,600 boepd and in 2012 it is expected to average between 12,000 and 13,000 boepd. The reduction is principally a result of the sale of the ONWJ and SES PSCs. Growth is expected in the coming years through increased volumes from the Bualuang eld and commencement of production from the Kerendan and South Sembakung developments which are expected to drive average daily production to over 20,000 boepd in 2014. Operationally, as well as focusing on delivering and maintaining production, the Group developed its plans for the activities in its core areas in 2012. In the Greater Bualuang area in Thailand, the construction of the Bualuang Bravo platform began in mid-2011 and it is scheduled for installation in 3Q 2012. The Bravo platform will provide 16 production well slots and will allow the full eld development of the Bualuang main reservoir and the East Terrace discovery to proceed and so increase production from 2013 onwards. In the North Kutei in Indonesia, the Group acquired, processed and interpreted a 3D seismic survey over part of the SE Sangatta licence and has mapped a number of large oil and gas prospects. It also completed a detailed technical review of the acreage incorporating data from the Angklung-1 well that has further improved the understanding of the hydrocarbon system in this part of the basin. This has formed the basis of planning for an extensive drilling campaign starting in 2012 that has transformational potential for Salamander with the initial four prospects targeting a gross 676 MMboe of mean prospective resource.
Thailand Greater Bualuang The Groups activities during 2011 in the Greater Bualuang area included: an exploration success with the Bualuang East Terrace oil discovery; an appraisal of the deeper T2 reservoir conrming its commercial potential; further development drilling on the Bualuang eld; start of construction of the Bualuang Bravo platform; and the entry through farm-in to the G4/50 acreage surrounding the Groups existing B8/38 block. At year end the Group also booked additional 8 MMbo of 2P reserves on the Bualuang eld, both as a result of increased recovery factor on the main eld and the incorporation of reserves found in the East Terrace. B8/38 (100%, Operator) Production from the Bualuang eld averaged 7,800 bopd during the year under review. Following a delay in the arrival of the Ocean Sovereign jack-up rig, due to the rig owner having to resolve administrative issues and then some damage to the rig during jacking up operations, Phase 5 of Bualuang development drilling was successfully completed in September. This programme comprised drilling of three new horizontal wells, the side-tracking of two existing production wells and the work-over of one water disposal well. The delay due to the problems with the rig resulted in total production from the eld being lower than had been anticipated at the start of 2011 but the performance of the wells once drilled was in line with the pre-drill expectations. To facilitate future production growth, the Group has sanctioned the Bravo wellhead platform. This sixteen slot platform will be bridge linked to the Bualuang Alpha platform, and is scheduled for installation during 3Q 2012. The platform is being built by Thai Nippon Steel and is currently progressing on schedule. There is a small development drilling programme planned for 1H 2012 using the Ensco-53 rig, but the majority of development drilling in 2012 will take place in the second half, once the Bravo platform has been installed. This will see ten development wells drilled on the main Bualuang eld which will facilitate production growth in 2013. The Group has signed a 12 month extendable contract for the new build Atwood Mako jack-up rig will mobilise in 3Q 2012. Average daily production from Bualuang in 2012 is expected to be approximately 8,500 bopd.
Finally, in the Kerendan eld, the Group nished its re-evaluation of the previous operators work programme, completed requisite upgrades to the rig and obtained the outstanding environmental permits. This will enable the Group to execute an exploration and development drilling campaign in 2012 that will full the requirements of the signed Kerendan gas sales agreement and target additional material reserves in satellite prospects which have low risk characteristics. HSE The number of man-hours worked on operated projects increased by 40 per cent compared to 2010. The Board places a high emphasis on maintaining high standards of HSE performance throughout its operations and with the current and forecast increase in operated man-hours, the Board instructed the HSE adviser to conduct a review of lost time injuries and HSE culture within the Company. The review concluded that the Groups HSE management system, and the HSE culture evident at the operating sites, is well developed compared to other operators in the region. Since the completion of the report HSE performance has been excellent with no recordable incidents since September 2011. Reserves and resources The Group entered 2011 with 66.3 MMboe of 2P reserves. During the year the Group added reserves due to an upgrade at the Bualuang eld, the partial inclusion of the Bualuang East Terrace discovery, and the rst reserve bookings against the Kerendan eld. Set against this was the disposal of the Groups interest in the ONWJ and SES PSCs plus the production of 6.6 MMboe net to Salamander. As a result of these movements as at 31 December 2011 the Groups 2P reserves were 75.3 MMboe, a 13.6% increase on the previous year and a year on year reserves replacement ratio of 235%.
Reserves and resources continued Thailand continued In the middle of 2011, the Group made the Bualuang East Terrace oil discovery that has resulted in the addition of 8 MMbo to the Groups 2P reserves. The East Terrace will be brought on stream with six wells drilled from the Bravo Platform in 1H 2013. The Ensco-53 Jack-Up rig is currently mobilising to location. Due to its delayed arrival the Group has elected to switch the order of the drilling programme and commence with the drilling of the two planned development wells. This will enable it to increase production and take advantage of current high oil prices. Exploration drilling will follow the completion of the two development wells with the Bualuang NW Terrace and Bualuang Far East exploration wells expected to be completed by early June. G4/50 (100%1, Operator) During 2H 2011 the Group acquired a 100% interest in the G4/50 block in the Gulf of Thailand. G4/50 is a very large block (5,800 sq km) surrounding the Groups B8/38 licence and was the golden block of the last exploration licensing round in Thailand, receiving more bids than any other block. The proximity to the B8/38 licence means the Group has a detailed understanding of the geology of the block and the hydrocarbon system that it contains. The block consists of ve sub-basins, two of which are covered by 2,500 sq km of existing 3D seismic. In February 2012, the Group concluded the acquisition of a 3,000 sq km 3D seismic survey over two of the other sub-basins. The Groups interpretation of the existing 2D and 3D data sets shows a large number of leads which, when combined with the new 3D, are expected to generate multiple prospects mature for drilling. These will be targeted for exploration drilling from 2H 2012 onwards using the Atwood Mako jack-up rig. There are nancial and operational synergies from operating across a larger swathe of acreage. From a nancial perspective, the Group is able to offset 50% of its exploration costs against income tax incurred on production from the Bualuang eld. The prospect density seen in B8/38 and anticipated in G4/50 will provide numerous drillable targets with high value potential and low well costs. Other assets The Sinphuhorm gas eld (9.5%) in Thailand remains a reliable production asset and average daily production in 2011 was 83 MMscfd with average
realisations of 8.96 per Mcf. Production was impacted slightly at the year end as disruption caused by the extensive ooding in Thailand prompted a fall in electricity demand. During 2012, production is expected to average 92 MMscfd as demand returns to normal levels. The Group drilled the Dao Ruang-2 appraisal well (50%, operator) in 1H 2011 on the eastern ank of the large Dao Ruang structure. Despite encountering gas shows, on test the well failed to ow at a sustained commercial rate. The Dao Ruang-3 appraisal well was also drilled targeting the northern ank of the structure. This also encountered gas shows, but the well data indicated that the well would have limited potential as a producer and so it was not tested. After extensive post well evaluations were completed the two wells were plugged and abandoned as sub-commercial gas discoveries. Post the period end the Group completed the successful appraisal of the Dong Mun discovery in Block L27/43 (27%) with the Dong Mun-3 sidetrack (DM-3ST). The well ow tested at a rate of 15 MMscfd and has been suspended as a future producer. The Operator is now preparing to le for commerciality.
1 Moeco retains a 50% back in right
Indonesia Greater Kerendan The Group added to its operated position in the Bangkanai PSC, one of its three core areas of activity, during 2011 by acquiring a further 11% of the equity to take its working interest to 80%. The Bangkanai PSC is anchored around the Kerendan gas eld development. The Group signed a Gas Sales and Purchase Agreement during 1H 2011 for the supply of up to 20 MMscfd of gas at a price of $4.79 per MMbtu. This commercialised 120 Bcf of gas which will be sent to a new build PLN operated power plant 3 km from the eld. As a result of signing the GSA the Group has booked 19.0 MMboe of 2P reserves against the Kerendan eld at year end 2011. There is a further 160 Bcf of contingent resource certied on the Kerendan eld which the Group will seek to commercialise on completion of further development drilling in 2012. The PLN operated power plant is being built to receive over three times the volumes currently contracted so there will be a ready market to commercialise further resources. The PLN power plant will be connected by transmission lines currently under construction to the main Kalimantan electricity grid.
North Kutei During 2011 the Group has been completing its technical review of its North Kutei acreage in light of the play-opening Angklung-1 exploration success at the end of 2010 and incorporating the newly acquired 3D seismic over the SE Sangatta licence. The North Kutei is one of the Groups three core areas, with potential mean recoverable resources of c. 3 Tcf of gas and 400 million barrels of oil. With the Angklung-1 well having tested high gas ow rates from very good quality Pliocene channel sands providing positive calibration for the 3D seismic, the Group is condent that the numerous amplitude anomalies apparent on the seismic data in the Bontang and SE Sangatta PSCs equate to gas-bearing Pliocene sandstones. These are slope channel features with stacked reservoir potential, providing multiple objectives for each exploration well. There is also evidence of further upside in the form of an oil and gas play in the deeper Miocene sandstones. The Angklung-1 well intersected 125 metres of oil saturated Miocene sands but these sands were poorly developed as they lie outside the main channel complexes and so have relatively poor quality reservoir in the Angklung well. However, the new seismic has allowed a much better imaging of the Miocene section and the traps mapped, along with the evidence for active oil seeps across the basin (including a seep that appears to be coming from the bounding fault of the giant Kendang structure on the SE Sangatta licence) highlight the potential of the Miocene play in this under-explored part of the basin. To begin unlocking value, the Group would like to commit to a contract for a rig and drill up to eight wells across the basin in order to prove up resources. The rst targets are likely to be Kecapi, Bedug, Kendang North and Kendang South. The Group has identied approximately 20 prospects and leads that would provide follow on potential. This represents an attractive exploration opportunity with a tangible route to commercialisation and the Group has been in discussions with selected potential partners concerning a farm-out of its position in its two operated PSCs. As part of that process, the Group has had an independent assessment of the resource potential in the North Kutei completed by ISIS Petroleum Consultants. ISIS provides the following resource estimates for the initial prospects:
Reserves and resources continued Indonesia continued The DrillCo-1 rig began mobilisation in March 2012 and is expected to be fully rigged up on location and spudding in June. It will complete a development drilling programme on the Kerendan eld consisting of three wells. Meanwhile, the gas processing facilities have received Indonesian government approval and will be constructed and ready to deliver rst gas by the end of 2013. In addition to the main Kerendan eld, the Bangkanai PSC contains a number of exploration leads and prospects, one of which, the West Kerendan prospect, is scheduled to be drilled during 4Q 2012. West Kerendan is part of the same reefal build-up that reservoirs the Kerendan eld and is estimated to contain 335 Bcf of mean potential resource in the Oligocene Berai carbonate horizon, the productive zone of the Kerendan eld. Beneath the Berai objective in West Kerendan there is a deeper Eocene clastic target in a large four way dip closed structure called Sungai Lahei. The West Kerendan exploration well will be deepened to investigate the potential of Sungai Lahei, which is estimated to have mean resource potential of 580 Bcf. The Sungai Lahei structure was penetrated by Unocals Kerendan-2 well in the 1980s and although not tested the well logs reveal that there is gas pay in early Oligocene sands close to TD. West Kerendan-1 will drill the same structure up-dip from Kerendan-2 and is designed to penetrate several hundred metres of Eocene section. Whilst there is scope to send increased volumes of gas to the nearby PLN power plant, if the exploration potential in the Bangkanai PSC is realised it will be feasible to build a pipeline 220 km to Balikpapan to tie into the East Kalimantan pipeline infrastructure where there are multiple commercialisation options at a higher price than those that can be realised from local power generation. The Group has also entered into Joint Study Agreements for the North East Bangkanai and West Bangkanai areas that provide it with an opportunity to expand its acreage position in the basin.
Kecapi Bedug South Kendang North Kendang Total Total Net Salamander
Bontang PSC Bontang PSC SE Sangatta PSC SE Sangatta PSC (MMboe) (MMboe)
Gas (Bcf) Oil (MMbo) Gas (Bcf) Oil (MMbo) Gas (Bcf) Oil (MMbo) Gas (Bcf) Oil (MMbo) 676 534
Conversion factor 6 Bscf/MMboe Salamander has 100% working interest in Bontang PSC and 75% in SE Sangatta PSC All prospective resource gures are gross unless otherwise stated
In the event of further drilling success, there are multiple commercialisation options for gas in the area. The Bontang LNG plant is less than 100 km from the Groups North Kutei prospects and provides a very attractive commercialisation possibility with recent export cargoes realising $17/Mcf. The plant currently has two of its eight trains idle and is 1 Bcf per day short of feedstock. In addition to the LNG potential, either for export or for use domestically in Indonesia, local industrial and power generation potential exists in East Kalimantan and could be expected to realise in excess of $7/Mcf. Also on the Bontang PSC, the Group is currently drilling the Tutung Alpha-3 appraisal well on its Tutung gas condensate discovery. The MB Century Rig 28 is expected to complete the drilling during the second quarter of 2012. Market research reveals a latent demand for gas in this area of East Kalimantan and so even the potentially modest reserves at Tutung could be developed under attractive commercial arrangements. Other assets The Kambuna gas and condensate eld (50%, operator) in Indonesia averaged 9,600 boepd during 2011. This comprised 34 MMscfd of gas and 2,400 bcpd. The eld has now started to enter the natural decline phase. Compression facilities were installed in 1Q 2012 that will allow the production to continue and so extend the life of the eld. It is expected that production from the Kambuna eld will average approximately 4,200 boepd during 2012.
The Group sold its ve per cent non-operated interests in the ONWJ and SES PSCs in 2H 2011 for $57.7 million. These licences represented low margin, high tax, high cost barrels, in elds that are in long term decline. Therefore, the decision was taken to divest of these assets and reinvest the capital into the Groups core areas where there should be a higher return on investment. Production from these PSCs, averaged over the year, made a net contribution of 4,600 boepd to the Groups 2011 production. The South Sembakung eld development (21%) continued to make progress with three development wells completed during 2011. Work has also been largely completed on the processing facilities and production is on schedule to commence in 2013. In the Bengara-1 PSC (41%) in the Tarakan Basin of Northeast Kalimantan, Indonesia, the South Sebuku-2 appraisal well was drilled in 4Q 2011 and encountered over 15 metres of net gas-bearing sandstones in the Tabul formation. Drill stem tests (DSTs) were conducted across three of the gas-bearing zones and owed at an aggregate rate of 10.9 MMscfd. The operator is preparing a Plan of Development for submission to the Indonesian regulator with a view to it being approved before the end of 2012.
Reserves and resources continued Vietnam In Block 101-100/04 (30%, operator), offshore Northern Vietnam, the Group drilled the Cat Ba-1X exploration well. The well encountered 38 metres of net hydrocarbon pay in Tertiary clastics, the secondary objective of the well. The primary objective section was dry. The in-place resource volumes encountered by the well were judged to be below the levels needed for commercial development and so the well was plugged and abandoned as a sub-commercial oil and gas discovery. Subsequently in 2012 the Group led for withdrawal from all of its licences in Vietnam and started the process of closing down its operations in country. Summary The Group made considerable progress in growing its reserve base in 2011. Not only did reserves increase on an absolute basis, but the value per barrel of these reserves also grew. This reects Salamanders strategy of realigning the portfolio to transfer capital to where it will generate the most potential value for shareholders, specically through focus on the three core areas of Greater Bualuang, Greater Kerendan and the North Kutei. With the divestment of non-core producing assets production shrank year on year; however, growth is forecast point forward with a changing production mix, also leading to greater cash generation. The Bualuang East Terrace discovery was material, and part of the discovered resource has been added to the Groups 2P reserves. The 2012 exploration and appraisal programme is focussed on three low risk areas where the Group is stepping out from existing elds or discoveries. Hence the 2012 drilling programme has a lower risk prole compared to recent years and will target c. 290 MMboe of mean unrisked resource potential.
Mike Buck Chief Operating Ofcer 23 March 2012
The Groups proven and probable (2P) commercial working interest reserves at 31 December 2011 were as follows:
Thailand Oil MMbo Gas Bcf Oil MMbo Indonesia Gas Bcf Oil MMbo Total Gas Bcf MMboe1
All gas reserves are converted at 6.0 Bcf/MMbo except Kambuna, which is converted at 4.8 Bcf/MMbo, and Kerendan, which is converted at 5.5 Bcf/MMbo.
2P commercial reserves are based on reports produced by the Groups independent engineer, RPS Energy, and supplemented by the Group where necessary with additional and more recent information. The Group provides for amortisation on its oil and gas properties on a net entitlements basis, which reects the share of future production estimated to be attributable to the Group under the terms of the PSCs related to each eld. Total proved and probable entitlement reserves were 66.0 MMboe at 31 December 2011 (31 December 2010: 54.0 MMboe). The 2011 reserves replacement ratio was 235% (2010: 121%).
Financial review
Units
2011
2010
2009
2008
Realised prices: Oil and liquids Gas Revenue Operating costs per boe Prot/(loss) before taxation Loss after taxation Capital expenditures: Acquisitions Exploration and appraisal Development and production Net disposal proceeds Net debt1 Gearing2 Pre-tax operating cash ow3
1 2 3
104.45 5.47 408.0 15.46 112.6 (45.5) 7.5 84.6 99.0 45.7 210.1 42 293.6
73.16 5.12 323.4 15.11 (113.7) (169.5) 116.7 73.5 24.2 190.2 39 174.4
51.37 4.03 157.1 13.99 (3.0) (13.5) 7.1 34.3 79.0 119.3 23 40.4
60.52 4.99 100.8 10.64 (75.5) (66.5) 510.5 112.7 91.4 45.8 21 26.8
See note 21 to the consolidated nancial statements for further details Gearing is dened as debt divided by debt plus book net equity Before movements in working capital
Salamander has entered into a busy 2012 programme of activity across its three core areas of focus and capital will be allocated to enhance the Groups core production and development value as well as to test a range of high-impact exploration and appraisal opportunities with moderate to low geological risk.
or Salamander, 2011 was a year characterised by portfolio reorganisation around the Groups three core geographic areas of focus. In parallel with this activity, a strong commodity market environment drove a material expansion in cash generation, which in turn provides a solid platform from which the Group can reinvest across its production, development and exploration operations. Although disposal of the ONWJ and SES PSC interests led year on year to a decline in production, volumes disposed of were low margin, high tax, high cost, and produced from elds in long term decline. In contrast, within the retained business, Salamander enhanced value through production optimisation, exploration success, the booking of new reserves, and an agreement to narrow further the discount to Dubai at which Bualuang crude is sold. In 1H 2011, Salamander renanced its debt facilities; a combined Senior and Junior $325 million, sevenyear, reserve based lending (RBL) facility was put in place with a group of eight banks. Statement of Comprehensive Income Revenue, realisations and production
Revenue grew in 2011 to $408.0 million (2010: $323.4 million), 71% of which was generated in
Statement of Comprehensive Income continued Revenue, realisations and production continued Thailand, 29% in Indonesia (2010: 63% and 37% respectively). 83% of Salamanders revenue was derived from oil; the balance in gas (2010: 80% oil, 20% gas). There were no signicant hedging gains/losses. Oil and gas realisations averaged $104.45/bbl and $5.47/Mcf respectively across 2011 (2010: $73.16/bbl and $5.12/Mcf). Higher oil realisations in 2011 reect robust commodity markets, but also the continued narrowing of the discount to Dubai at which Salamander sells its Bualuang crude (Dubai less $1.97/bbl in 2011; Dubai less $3.98/bbl in 2010). In detail, the Dubai-Brent spread widened in 2011 (4.5% average discount in 2011, versus 1.8% in 2010); however, both crudes currently trade at approximate par. Against that backdrop, at 1 January 2012, Salamanders Bualuang sales discount closed further, the Group having agreed with PTT a $1.10/bbl Dubai discount until 31 December 2013. For gas, higher crude oil prices enhanced the demand-led upward trend of Thai and Indonesian domestic gas prices, but the year-on-year rate of growth in Salamanders average gas realisation slowed versus 2010 (7% 2011 versus 27% 2010). At the eld level, 2011 Kambuna realisations averaged $5.04/Mcf (2010: $4.51/Mcf); Sinphuhorm realisations (indexed to high sulphur fuel oil) averaged $8.96/Mcf (2010: $7.07/Mcf). Underpinning revenue, Group production averaged 18,600 boepd across 2011. Volumes fell 8% versus 2010 (20,300 boepd) principally due to Salamanders decision in the fourth quarter to sell its low margin Offshore North West Java and South East Sumatra production operations. Adjusting for these disposals, underlying output was broadly at year on year, production from the Bualuang eld being tempered by delays to Phase 5 development drilling due to the late arrival of the Ocean Sovereign jack-up rig. Cost of sales Cost of sales equalled $205.5 million in 2011; this was materially below the $320.8 million total reported for 2010. Breaking this down, direct operating costs totalled $104.9 million; broadly at on 2010 ($102.5 million). Against lower Group production, unit opex rose to $15.46/boe (2010: $15.11/boe). Beyond direct operating costs, year-on-year comparisons are obscured by a number of non-cash adjustments in 2010.
In 2011, following reserve upgrades on Bualuang, amortisation declined to $109.0 million ($16.07/boe). The 2010 results also included an impairment charge of $48.6 million, for which there is no equivalent in the current year. Also within cost of sales, between 2010 and 2011, Salamander reported a favourable $47.5 million swing in oil inventories (2011: $34.8 million negative versus 2010: $12.7 million positive). Underlying the Groups 2011 position was a cargo of produced oil, held within the Bualuang FPSO at year end, but not sold until January 2012. Netting revenue with cost of sales, gross prot in 2011 totalled $202.5 million (2010: $2.6 million. Exploration expenses Salamanders total exploration expenses fell in 2011 to $57.8 million (2010: $95.9 million). Within this gure, costs written off include: historic Kambuna exploration activity (Indonesia); Dao Ruang-2 and -3 (North East Thailand); Cat Ba (Vietnam); and prelicence exploration expenses. Prot on disposal of assets During the year, the Group disposed of its Offshore North West Java and South East Sumatra assets in Indonesia, booking a prot on disposal of $6.8 million. Administrative expenses Administrative expenses rose in 2011 to $14.6 million (2010: $12.7 million), this largely reecting the Group gearing up for increased future drilling activity. Finance revenue and expense In May 2011, Salamander completed the renance of its debt facilities; a $325 million combined senior and junior seven year, Reserve Based Lending (RBL) facility being put in place with a group of eight banks. Following this activity, nance costs rose in 2011 to $22.2 million (2010: $15.5 million), primarily due to the write off of unamortised fees of $5.5 million in respect of the previous RBL facilities. It is the Groups policy to undertake limited oil price hedging to protect the cash ows funding its future capital expenditure programmes. In respect of 2011, the Group entered into an oil price hedging programme of 4,000 bpd for put options with a strike price of $60/bbl, and in respect to 2012, the Group entered into an oil price hedging programme of 1,800 bpd at an average swap price of $103/bbl and 1,800 bpd put options at a strike price of $70/bbl. Other
Statement of Comprehensive Income continued Finance revenue and expense continued nancial losses totalled $2.1 million (2010: $7.4 million gain); this is predominantly attributable to the mark-to-market accounting of the Groups hedging (see note 25). In 2011, Salamander reported a pre-tax prot of $112.6 million (2010: loss of $113.7 million). Taxation Arising predominantly from increased Bualuang revenues, total current taxation charges rose to $121.4 million (2010: $71.6 million). In addition, deferred taxation charges amounted to $36.7 million (2010: net credit of $15.7 million). A reconciliation of the Groups tax charge to prot before tax is set out in note 10 to the Financial Statements. Looking forward, as Salamander expands its levels of exploration and appraisal activity over both the B8/38 and G4/50 licences, the Group will look to optimise any scal synergies against Bualuang production. Salamanders net loss for 2011 totalled $45.5 million; equivalent to 29 pence loss per share (2010: $169.5 million; 110 pence loss per share). Balance Sheet Capital expenditure Although 2011 was a lower prole year for exploration news ow, absolute levels of activity were not that dissimilar, the Group drilling ve exploration and appraisal wells in 2011 versus six in 2010. Capital expenditures in 2011 totalled $191.1 million compared to $214.4 million. 2011 included the acquisition of a further 11% of the Greater Kerendan asset, Bangkanai, at a cost of $7.5 million, whereas 2010 included the acquisition of the remaining 40% of the Gulf of Thailand asset, Bualuang, at a cost of $107.5 million, and the initial 69% acquisition of Bangkanai as a cost of $9.2 million. In addition, capital expenditure in Thailand amounted to $93.3 million (2010: $3.1 million) and Indonesia of $87.0 million (2010: $95.6 million).
2011s most notable exploration success was the East Terrace discovery (B8/38, Western Gulf of Thailand), where an initial 8.0 million barrels of the elds estimated 12 million barrels of commercially recoverable oil resources were independently certied as 2P reserves at end 2011. In 2012, Salamander is scheduled to drill up to nine exploration and appraisal wells; activity in the Gulf of Thailand and East Kalimantan will test follow-up prospectivity that Salamander considers to have been signicantly de-risked by successes on the Bualuang East Terrace and Angklung. Cash and net debt At end-2011, Salamanders total gross debt equalled $295.8 million (end-2010: $289.5 million). Of this gure, bank borrowings totalled $195.8 million (principally a $325 million, seven year, reserves based lending facility, renanced in May 2011) (2010: $189.5 million) with the remainder being a $100 million convertible bond (issued March 2010). Against this were cash and funds of $85.8 million, $25.4 million of which lay in restricted bank deposits (end-2010: $99.2 million, of which $9.4 million was restricted). Within the 2011 restricted gure was a $21.4 million bank guarantee relating to the pre-funding of the 3D seismic survey on the G4/50 licence (Western Gulf of Thailand). This activity was completed in late February 2012, with the release of funds back to Salamander during 1H 2012. Taken together, Salamanders end-2011 total net debt equalled $210.1 million (2010: $190.2 million), the Groups gearing rising to 42% (end 2010: 39%). Cash ow statement Operating cash ow Turning to cash ow, in 2011, before taxation and movements in working capital, Salamander generated cash from operations of $293.6 million, a 68.3% rise over 2010 (2010: $174.4 million). Underlying this sharp year-on-year rise is Salamanders September 2010 acquisition of an additional 40% of the Bualuang oil eld, Salamanders interest rising to 100%. Salamanders 2011 full-year cash taxation payments totalled $102.1 million (2010: $18.7 million). This was driven by Bualuangs rst full year of Special Remuneratory Benet payments, which year on year are calculated against Salamanders expanded Bualuang working interest. In 2011 SRB payments totalled $65.2 million (2010: $36.3 million).
Cash ow statement continued Operating cash ow continued Post movements in working capital and taxation, net cash generated from operating activities equalled $193.9 million, an 82.1% rise over 2010 (2010: $106.5 million). Expressed on a unit basis, net cash from operating activities expanded to $34.69/entitlement boe in 2011 (2010: $17.99/boe). At constant commodity prices, this trend of improvement should continue post the disposal of low margin production in Offshore Northwest Java and South East Sumatra. Investing cash ow Net cash used in investing activities rose to $203.3 million (2010: $159.0 million). Headline 2011 development outows totalled $108.2 million (2010: $117.4 million), the investment broadly distributed between: Thailand $51.8 million (2010: $97.1 million) and Indonesia $52.4 million (2010: $20.0 million). The Group sold its Indonesia ONWJ and SES assets during 2011, with an effective date of 30 June 2011, for $55.0 million, plus/minus working capital movements. Net proceeds from the disposals in 2011 totalled $45.7 million, after adjusting for cash movements between the effective date and closing date of the transaction. This principally related to the sale of Salamanders 5% non-operated interests in the Offshore Northwest Java and Southeast Sumatra PSCs. 2011 exploration outows totalled $123.3 million (2010: $48.2 million). This amount includes $30.4 million of Angklung well costs (successfully drilled in 4Q 2010, with some costs paid in 2011). Beyond Angklung, Salamanders 2011 exploration expenditure was distributed: Thailand $38.8 million (2010: $6.3 million), Indonesia $30.4 million (2010: $45.2 million), Vietnam $15.6 million (2010: credit of $3.3 million from farm-out proceeds) and Lao PDR $3.8 million (2010: nil). In 2010 a substantial portion of the Groups exploration costs were carried by third parties. Financing cash ow Net cash used in nancing activities rose to $19.5 million (2010: inow of $95.1 million); however, the year-on-year evolution reects very specic nancing activities: higher interest costs of $13.9 million in 2011 (2010: $9.4 million) related to the renancing of the Groups Reserve Based lending
facility and Salamander receiving cash inows of $97.3 million during 2010 in respect of issuance of a convertible bond. Across 2011, Salamanders operations led to a $28.9 million outow of cash, which compares to a $42.7 million cash inow in 2010. Financial outlook Salamander has entered into a busy 2012 programme of activity across its three core areas of focus and capital will be allocated to enhance the Groups core production and development value as well as to test a range of high-impact exploration and appraisal opportunities with moderate to low geological risk. Reecting the 2H 2011 disposal of the producing ONWJ and SES assets in Indonesia, management reiterates 2012 production guidance in the range 12,000 to 13,000 boepd. This rate represents a drop in year-on-year production following disposals; however, the forecast cash ow impact is limited due to the low margin nature of the barrels sold. By improving the unit cash margin generated by its base business, Salamander has also increased its leverage to the current robust crude and gas price environment, a situation that is enhanced by the continued narrowing of the discount to Dubai at which Bualuang crude is sold, and the relative strengthening of Dubai versus Brent. Having started 2012 with cash balances of $85.8 million, capital expenditure for the current year is budgeted to total c. $225 million; this is evenly split between production & development and exploration & appraisal activities. In Thailand, where the majority of Group capex is to be invested, the Group will target tax synergies across its enlarged Greater Bualuang position, with both SRB and income tax forecast to fall in 2012. Elsewhere, Salamander remains in farm-out discussions with regard to its North Kutei position, and options around non-core assets also remain under review. As always, the Group continues to assess the phasing of its work programmes and all funding options across its growing portfolio.
Dr Jonathan Copus Chief Financial Ofcer 23 March 2012
Risk management
he identication and mitigation of risks are of critical importance to the Group as it continues to expand and operate the majority of its activities. Effective risk management is essential if the Group is to deliver its strategic and operational objectives whilst maintaining its excellent HSE record. The Groups Executive Directors monitor the Groups key risks and receive regular reports on nancial, operational and HSE performance. The Groups Executive Directors then report to the Audit Committee on a six monthly basis, and provide more frequent updates on any particular risks as required. The Audit Committee provides oversight whilst ultimate authority remains with the Board of Directors. The Group operates internationally and is affected by a wide range of risks. Some of these risks, such as political stability in the countries in which we operate, the ability to attract and retain the best employees and changes in local laws are faced by all companies. A summary of the key risks faced by the Group, as currently identied, together with the measures taken to mitigate against these risks, is provided overleaf.
Effective risk management is essential if the Group is to deliver its strategic and operational objectives whilst maintaining its excellent HSE record.
Strategic risks
Description An inappropriate or poorly executed strategy may lead to a failure to create shareholder value or meet shareholders expectations for value accretion Specic areas of risk Unbalanced portfolio mix Poor allocation of capital Lack of either organic or acquisition opportunities Deteriorating macroeconomic conditions Mitigants SE Asia is forecast by the IMF to remain a high growth region in 2012. The Board monitors regional economic, political and energy market trends and forecasts and takes account of these when reviewing/planning the Groups forward strategy The Group prioritises capital allocation towards its three focus areas, which are in proven basins with growth characteristics, and where the Directors believe technical risks are low due to the managements knowledge of the geology and petroleum system All M&A activity is subject to Board approval and measured against consistent investment and strategic criteria. Assets are only acquired which are expected to materially add value and/or improve the quality of the asset base
Operational risks
Description An issue that has an impact on Group operations in that it affects operational delivery, corporate reputation and/ or revenue Specic areas of risk Drilling operations Oil/liquids spill Local community issue Rig availability Asset performance Sustained exploration failure Insurable risk Mitigants The Group has denitive operating procedures to be followed at all times. Regular training and monitoring are conducted to ensure these procedures are both followed and understood Full community engagement occurs through all phases of a project life cycle The Group has a diversied portfolio of production, development and exploration that reduces exposure to failure of any one asset / project / well To ensure that all exploration and appraisal wells are consistently analysed, ranked and risked a robust technical peer review process is in place before projects are recommended for Board approval The Board has appointed an independent Technical Advisory Committee to review on a quarterly basis the Groups technical work in its three core areas and report its ndings back to the Board The Group is insured against physical risk to assets in line with industry practice. In addition certain operational interruption insurances are put in place
HSE risks
Description Specic areas of risk Injured personnel Accident in the workplace Leaks/spillage causing environmental incident Mitigants A comprehensive HSE management system is in place across the Group and monitored at Board level through performance reporting. Procedures are compliant with the Equator Principles and are regularly monitored by the IFC/World Bank HSE specialists. All policies and procedures are available to all employees through the Group Intranet site and regularly reinforced by senior management Full community engagement occurs through all phases of a project life cycle Spill recovery and crisis management protocols in place and drills carried out to test procedures and reinforce them Full monitoring of the local ecosystem (e.g. reefs, water quality etc) to ensure there is no impact as a result of Group operations
Financial risks
Description The Group is unable to meet its nancial commitments through either asset underperformance and/or nancial constraints Specic areas of risk Liquidity risk Oil price Capital and operating costs FX exposure Credit and counterparty risk Interest rate risk Debt levels and capital structure Mitigants Budgets are set annually and the Groups nancial performance is reported to and monitored by senior management and the Board on a monthly basis with variance from budget highlighted. All key nancial and operating metrics are measured and monitored in this manner The Group believes it prudent to maintain a conservative approach to leverage and actively manages its balance sheet to ensure an efcient capital structure The diverse nature of the Groups asset base, including xed price gas and oil production under a PSC regime, partially hedge oil price volatility. The Group also hedges against oil price falls on occasion to minimise downside risk to cash ow and the current programme is detailed in the nancial review
External risks
Description Market, industry or political risks that may impact on Group operations and/or cash ows Specic areas of risk Fiscal regime Investor sentiment Corporate governance Legal, regulatory and litigation Mitigants The Group seeks to foster and maintain strong links with all external stakeholders. Regular interaction occurs with host country governments, regulators, industry partners, shareholders and local community representatives The Group sets out the principles by which it operates in the Group Code of Conduct that can be found on the website (www.salamander-energy.com). In summary the Group is committed to complying with various laws and regulations it is subject to around the world as well as the Combined Code The Group has rolled out a programme to brief and train employees on their responsibility to comply with the UK Bribery Act Appropriately trained and experienced staff are employed who can appropriately identify, assess and respond to external risks
Corporate responsibility
Performance highlights CO2 and greenhouse gas (GHG) emissions effectively maintained at 2010 rate despite increase in activity
Our approach We aim to be a world class oil and gas business, and we recognise that our approach to Corporate Responsibility (CR) is an important aspect of this overall goal. Our main areas of CR impact and opportunity comprise environmental matters, health and safety issues, our employees, our local communities and our approach to business conduct. The achievement of our overall business aim is clearly linked to our ability to manage all of these areas effectively. We appreciate, and take seriously, our responsibilities to conduct our operations safely and in full co-operation with the communities in which we operate. We ensure that the health and safety of our employees is protected; that our impact on the environment is minimised; and that we can be sensitive to the needs of, and provide long term sustainable benets for, the communities in which we operate. We conduct all of our business in a fair manner and comply fully with the relevant legal, regulatory and international accord requirements which apply to our businesses. These include the UK Bribery Act, the International Labour Organisation Declaration on Fundamental Principles and Rights at Work, the UN Universal Declaration on Human Rights, the OECD Guidelines for Multinational Enterprises, the International Finance Corporation Environmental and Social Performance Standards and the Equator Principles. The Group benchmarks its HSE performance against the Oil and Gas Producers (OGP) average. The Group CR Steering Committee continually reviews its approach to this important area and seeks to enhance our procedures accordingly.
Flaring and venting reduced by 69% through improved process; well below the OGP average Tonnes of oil to environment per unit of production well below the OGP average Oil in produced water per unit of production well below the OGP average Completed an independent review of HSE culture in operations and found we are better than average when compared with other operators in the region Completed Group-wide roll-out and training programme around UK Bribery Act Management systems Salamander adopts a rigorous, top-down approach to Corporate Responsibility. During 2011 the Group strengthened the leadership team through the appointment of a Group Technical Director. With this, and the appointment of a new Chief Financial Ofcer, the organisational structure of the Group was updated. The Group CFO is responsible for the legal and nancial functions within which responsibility for the risk register lies. The Group COO is responsible for HSE, CP&L and HR functions as well as the assets and the Group Technical Director is responsible for the technical services provided to the rest of the Group. All of these roles report directly to the Group Chief Executive. The Senior Management Team meets quarterly to discuss management level issues and Health, Safety and Environment are always key agenda items. The Group HSE Advisor reports directly to the Group COO and each of our operated assets has a dedicated HSE and CSR team to monitor activity and ensure Group guidelines are being followed. A separate CSR steering committee, chaired by the Group Chief Executive, meets bi-annually to discuss the Groups investment in community based projects. The committee monitors project performance against agreed objectives. CSR Committees are also convened in the countries where we operate and report to the Group Steering Committee.
Performance The Group has a rigorous set of HSE standards, procedures and guidelines that are made available to all employees via the Groups Intranet. It is made clear to all employees and contractors that they are expected to adhere to these standards when engaging in any business related activity on behalf of the company. The Executive Directors reinforce this message with HSE review trips being conducted at least annually and their ndings are reported back to the Board of Directors. The number of man-hours operated increased by 40% during 2011 when compared to 2010. 2011 was the Companys busiest year on its operated projects. It was disappointing that three lost time injuries were recorded. This represents a LTIFR of 0.85 for the year which is in line with the OGP average for drilling operations, but behind the Groups goal of zero LTIs. Although all three incidents were relatively minor, the Group completed full reviews into each LTI and has ensured that appropriate action has been taken to mitigate against reoccurrence. An independent investigation was carried out in conjunction with the Indonesian authorities during the period, into an incident on the Kambuna condensate pipeline manifold station, where a gas leak occurred during booster operations. The causes were identied and all recommendations have been fully implemented. As a result of the higher than anticipated LTIFR and TRIFR in the rst eight months of 2011, the Board instructed the HSE Advisor to conduct a review of the circumstances behind each incident and to determine whether the increased incidence was a consequence of aws in the HSE management system and if there was a suitable and acceptable HSE culture developing within the Company. The ndings of the review were that there is no fundamental aw with the Groups HSE management system, the HSE culture evident at the operating sites is better than average when compared with other operators in the region and the culture is still developing. Following the review line managers have been reminded of their responsibility to proactively promote the HSE culture and it has been made a key performance indicator for the operating ofces to increase the number of formal HSE visits and presentations that take place. Additionally the Companys management encourages knowledge sharing around the Group to support improved performance.
Management systems continued The Group completes a stakeholder mapping exercise on entering a new licence. The results of this are used by our local community development ofcers to determine with whom to engage. The engagement programme will typically include local recruitment, communication of the Groups planned activity, meeting local ofcials and conducting town hall style meetings. This process helps to identify community development projects that meet the needs of stakeholders. The UK Bribery Act became law in July 2011. The scope of the Act embraces all of the Groups activities. The Group has undertaken a comprehensive internal training programme with the Group CFO and General Counsel conducting presentations in all ofces to educate employees as to the new laws and their implications. Further to this every employee has completed an online training programme designed to improve understanding of the practical implications of this law. Particular attention was paid to the issue of facilitation payments, which are specically prohibited under this legislation. The Company maintains whistle-blowing procedures which permit employees to report any concerns they may have in condence to our senior management team. Health and safety Policy highlights Salamander Energy will operate in accordance with the following principles. We will promote a culture within the company in which all employees share a commitment to a healthy and safe workplace We will comply with applicable laws and regulations and apply recognised international standards where laws and regulations are not in place Ensure that employees and contractors are properly trained and aware of the importance of health and safety matters
Lost Time Injury (LTI) Lost Time Injury Frequency (LTIF) Total Recordable Injury (TRI) Total Recordable Injury Rate (TRIR) Hours worked (millions)
There were no fatalities recorded LTIF rate remains close to the OGP drilling average Increased as man-hours worked increased Investigation completed into spike in TRIR during the rst three quarters of 2011 since when zero TRIs have been recorded 40% increase in man-hours
CO2 emissions (tonnes) CO2 emissions (tonnes per thousand tonnes production)
83,076 77
54,996 74
Increased as a direct result of increased level of operating activity Marginal increase on a per unit basis despite 400% increase in fuel usage during busy exploration campaigns, balanced by the effect of two new vapour recovery units installed at Kambuna eld. Well below OGP average of 133 Well below OGP average of 158 69% reduction in aring driven by introduction of two new vapour recovery units at Kambuna eld Well below OGP average of 15.5 8 very small (a few litres) spills resulting from corrosion in the old pipeline used to export Kambuna condensate. The condensate evaporates quickly which assists clean-up operations and minimises any environmental impact Increase as result of pipeline corrosion causes identied and action being taken to rectify Increase as result of pipeline corrosion causes identied and action being taken to rectify Remains well below OGP average of 4.5 Driven by pressure decline in Kambuna eld as it reaches maturity Driven by pressure decline in Kambuna eld as it reaches maturity Well below OGP average of 9.1
GHG emissions (tonnes per thousand tonnes production) Flaring and venting (MMscf) Flaring and venting (tonnes per thousand tonnes of production) Oil and chemical spills
80 47.0 0.99 15
78 151.3 4.62 5
Oil and chemical spills total spilt (tonnes) Oil and chemical spills released to the environment (tonnes) Tonnes of oil to the environment per million tonnes of production Produced water discharged (tonnes) Oil in produced water discharged (tonnes) Oil in produced water (tonnes per million tonnes production)
Health and safety continued Performance continued In the six months since the completion of the review there have been no lost time injuries or recordable incidents on any Group operation despite continued high levels of operating activity, suggesting that the increased emphasis on HSE has had a direct and positive impact on the working culture. Targets for 2012 Zero fatalities Zero LTIs TRIR 20% below OGP average Environment Policy highlights Salamander Energy will operate in accordance with the following principles. We are committed to protecting and conserving the environment in which we work We will adhere to the International Finance Corporations Performance Standards on Social and Environmental Sustainability We strive to meet the challenges presented to the oil and gas industry by climate change matters We strive to see viable ways to minimise the environmental impact of our operations, reduce waste generation, conserve resources and respect biodiversity We will comply with applicable laws and regulations and apply recognised international standards where laws and regulations are not in place Performance The level of operated activity increased signicantly in 2011 and the Group successfully maintained its emissions at a constant rate on a unit basis despite a 400% increase in fuel usage. The prime driver for this performance was the installation of new vapour recovery units at the Kambuna eld, North Sumatra, which resulted in a 69% reduction in aring. The Group is constantly seeking ways to improve its emissions performance. As part of its forward
30 Business review Salamander Energy PLC Annual Report 2011
development of the Bualuang oil eld (see Operating Review) the Group will use produced gas as fuel on the new production processing facilities. All produced water is already re-injected into the reservoir so there is no surface disposal of produced water. Cuttings generated during drilling operations are recovered and sent ashore for incineration. With these measures in place and the use of produced gas planned our target is for Bualuang to be a minimal emissions installation in 2014. The Groups performance on aring and venting, oil spilt to the environment and oil in produced water is well within the Groups goal of being under the OGP averages. The Group is committed to minimising the environmental impact of its operations. We obtain all the relevant environmental permits prior to commencement of our operations and procedures are in place to monitor on-going operations. Examples include monitoring sea water quality in the Gulf of Thailand and soil quality and mineral levels in onshore locations in Indonesia. Targets for 2012: Keep CO2 and GHG emissions below OGP average Continue to seek ways of pollution prevention, emission reduction and improving the environmental performance of our operations Continue to work towards making our operations at Bualuang minimal emissions in 2014 Business conduct Policy highlights Salamander Energy will operate in accordance with the following principles. We aim to treat all our stakeholders fairly and with integrity We will not tolerate any form of bribery and corruption within our business activities or within business activities of those who perform services on our behalf We will comply with applicable laws and regulations (in particular the UK Bribery Act) and apply recognised international standards where laws and regulations are not in place
Business conduct continued Performance During 2011 the Group updated its Code of Business Conduct to reect the implementation into law of the UK Bribery Act. As part of its response to the Act the Group also implemented an explicit Anti-Bribery and Corruption Policy. Both documents are available to read at www.salamander-energy.com. As part of the Groups roll-out of the new Code of Conduct and Anti-Bribery and Corruption Policy the Groups Chief Financial Ofcer and Group General Counsel visited all of the operating ofces to deliver presentations outlining the Group policy and the implications for our employees. As part of the Groups plans to heighten awareness of these policies and the behaviour expected, all employees were required to complete an online training programme. Employees Policy highlights Salamander Energy is committed to upholding the principles outlined in the International Labour Organisation Declaration on Fundamental Principles and Rights at Work. These include the four fundamental principles and rights at work which are outlined below. Freedom of association and the effective recognition of the right to collective bargaining Elimination of all forms of forced or compulsory labour Effective abolition of child labour Elimination of discrimination in respect to employment and occupation The Group is an equal opportunity employer and is committed to achieving and maintaining a workforce that represents the population as a whole and is compliant with applicable local laws and contractual obligations. The Company seeks to employ individuals who are qualied on the basis of merit and ability to ll its work positions regardless of gender, ethnic origin, colour, disability, marital status, race, religion, nationality, age, responsibility for dependants or sexual orientation. Each employee, consultant and contractor is expected to abide by the Companys Equal Opportunities Policy at all stages of employment. All employees and consultants are recruited and promoted fairly on the basis of their ability for the job.
The company is mindful of encouragement that UK listed companies are receiving to demonstrate greater diversity amongst its employees at a senior level and intends to adopt the related reporting requirements indicated by the revised UK Corporate Governance Code within our next annual report. Performance At year-end 2011 the Group directly employed 212 employees. Of these employees 33% were female and 90% of the workforce was comprised of staff from the host countries of our operations. Local communities Policy highlights Salamander Energy is committed to operation in accordance with the following principles: We will uphold the principles outlined in the UN Universal Declaration on Human Rights We will behave responsibly and with sensitivity towards the local communities in the areas in which we operate We will provide sustainable benets and avoid the creation of a dependency culture Performance Building strong relationships with local communities is of the utmost importance to the Group in order to preserve its licence to operate. The Group adopts a pro-active approach to its community relations, seeking to engage with local stakeholders early in the operational planning stage and recognising any concerns/issues. The Group employs a number of specialist government liaison and community liaison ofcers, usually people who are from the area of our operations and have a detailed understanding of the local, national and regional environmental and social sensitivities. During 2011, in recognition of the importance of the Greater Bualuang area to the Groups future growth, a concerted effort was made to further develop relationships with local communities who have previously objected to a number of operators offshore activities elsewhere in the Gulf of Thailand. A new head of CSR for Thailand was recruited who is a specialist in this area having previously worked for a major oil and gas company on CSR programmes related to its operations in the Gulf of Thailand. Through numerous engagements with the local community, principally through town hall meetings
Local communities continued Performance continued with the key local stakeholders, the Group was able to increase awareness and understanding of its activities and the initiatives undertaken to mitigate against any damage to the local environment. This process resulted in a request for the Group to run rst aid, CPR and diving workshops as local shermen recognised that the safety of their own offshore activities was a big risk for them. The initial workshop was a success with over 70 attendees and the Group plans to run similar workshops again in the future. Plans are being developed in conjunction with the local communities and authorities for further projects in the area, one such being the creation of articial reefs that assist coral growth, provide new sh spawning grounds and attract divers, thus protecting natural reefs. As a result of its developing relationship with local stakeholders the Group was able to complete its recent 3D seismic survey in the G4/50 licence without disruption. The oods in Thailand during the fourth quarter of 2011 caused widespread devastation and as part of the community Salamander contributed to the relief effort. Not only did the Group provide a $16,000 nancial donation to the relief effort but a large number of employees gave up their time to help. In Indonesia, the Group continued to build on its strong community relations. There are wellestablished community operations in place in the Kambuna and North Kutei areas. These have now been running for several years and the Groups presence has resulted in increased employment opportunities for local people and improved infrastructure through investment into projects to support and foster local development. The Group also supports local cultural festivals, which has helped integrate it into the local community and generates support for its operational activities. The strength of our reputation was highlighted in the wake of the pipeline re near the village of Pangkalan Batu. Despite four homes being burned down the Groups response to the incident, including the construction of four new homes, was well received by the local community and received positive comment in the local media.
2011 was the Groups rst year as an operator in the Greater Kerendan area. Here the challenge was to establish the Group within the local community. As part of our social mapping we completed discussions with a wide range of stakeholders and it quickly became apparent that the local community would like local access roads repaired so they can use them for transport during the dry season when the river (the primary form of local transport) is impassable. The Group completed road repairs near two villages, Luwe Hulu and Muara Pari. The main source of income in the area is from rubber farming and following discussions with villagers in Kerendan village Salamander opened a rubber nursery in the village that has become a focal point for village life. These programmes have helped build the Groups reputation with the villagers and ensured that operations have, to date, proceeded with the full support of the community. Summary With operated man-hours expected to continue to increase there is no room for complacency in the Groups approach to CR and HSE. Following the rst half of 2011, when the Groups HSE performance was below expectations, it is pleasing to see that our internal drive to reinforce our processes and procedures has led to a marked improvement in performance in the second half of the year. This will continue to be an area of focus for us in 2012. We continue to strive to reduce emissions and are on target for our principal producing asset, the Bualuang oil eld, to be a minimal emissions facility by 2014. Our local teams are doing an excellent job in building relationships with local stakeholders and this helps the Group deliver projects that can benet the local community and ensure that we retain support and understanding for our operations. Finally, we strive to be a good employer and corporate citizen and adhere to the International Finance Corporation Environmental and Social Performance Standards and other globally recognised standards of corporate conduct.
1 1 Water sampling in the Babalan River, North Sumatra. 2 Air quality sampling at Kambuna. 3 Rubber nursery, Kerendan village, Central Kalimantan. 3 4 First-aid training for sherman, Chumphon province, Thailand.
Charles Jamieson Chairman(N) Charles Jamieson is Salamanders Chairman and a founder of Salamander. He holds an MBA from INSEAD and is a chartered accountant. Prior to joining Salamander, he spent over 25 years with Premier Oil plc where he held a number of posts, including Finance Director and Chief Executive Ofcer. He is currently also Chairman of Vostok Energy plc. James Menzies Chief Executive Ofcer James Menzies is a founder of Salamander and its Chief Executive Ofcer. He holds a BSc (Hons) in Geology and an MSc in Geophysics and Planetary Physics. After a period as a geophysicist at Schlumberger and ERC, he spent eleven years at LASMO plc holding a variety of posts including Senior Geophysicist in Vietnam, Chief Geophysicist in Indonesia, Head of Corporate Development and Head of Strategy and Corporate Affairs. He spent four years as a Senior Partner at Lambert Energy Advisory prior to the founding of Salamander. He is currently a Non-executive Director of Transunion Petroleum Limited. Mike Buck Chief Operating Ofcer Mike Buck is Salamanders Chief Operating Ofcer. He holds a BSc (Hons) in Geology with Geophysics and an MSc in Petroleum Geology (dist.). He spent 20 years with LASMO plc as a Geophysicist in Indonesia and the UK Continental Shelf, Chief Geophysicist in Colombia, Exploration Manager in Vietnam and Exploration and General Manager in Libya. He then spent four years with ENI as Managing Director in Tehran and Managing Director in Pakistan. Overall he has 30 years of international exploration and production experience.
Dr Jonathan Copus Chief Financial Ofcer Jonathan Copus is Salamanders Chief Financial Ofcer and was appointed to the Board in October 2011. He began his oil and gas career working as an exploration geologist for Shell International in its Deepwater E&P team based in Holland and Houston. He then left industry, working for more than 10 years as a highly ranked oil and gas equity research analyst, most recently with Deutsche Bank, where he was a Director of the Oil and Gas Equity Research team. Jonathan has a PhD from the University of Cambridge and a First Class BSc in Geology from the University of Durham. Struan Robertson Senior Independent Non-executive Director(#N) (R) (A) Struan Robertson is Salamanders Senior Independent Non-executive Director. He was educated at the University of Natal and the University of Cape Town, followed by Wharton Business School. He spent over 23 years at BP plc where he held a number of posts, including CEO of Oil Trading International, Executive Chairman of BP Asia Pacic, based in Singapore, and Downstream Senior Vice President for Technology and Marketing, based in London. Between 2000 and 2004 he was Group Chief Executive of Wates Group Ltd. He is currently Non-executive Chairman of Eredene Capital PLC and holds non-executive directorships with Henderson TR Pacic Investment Trust plc and Group 5 Ltd, listed in Johannesburg.
Dr Carol Bell Non-executive Director Carol Bell is an Independent Non-executive Director of the Company and was appointed to the Board in January 2012. She began her career in corporate planning and business development in the exploration and production sector at Charterhouse Petroleum and RTZ Oil & Gas. She enjoyed a successful career in the City, as a Managing Director of Chase Manhattan Banks Global Oil & Gas Group, Head of European Equity Research at JP Morgan and several years as an equity research analyst in the oil and gas sector at Credit Suisse First Boston and UBS Phillips & Drew. She is currently a Non-executive Director of Det norske oljeselskap ASA, Petroleum Geo-Services ASA and Hardy Oil and Gas plc. She is also a trustee of the Renewable Energy Foundation and a member of the Investment Advisory Committee of Gemini Oil & Gas. Robert Cathery Non-executive Director(#R) (N) Robert Cathery is an Independent Non-executive Director of the Company and a founder of Salamander. He was a Director of Vickers da Costa and Schroders Securities as well as Head of Corporate Sales at SG Securities (London) Ltd. He also spent four years as Head of Oil & Gas at Canaccord Europe. He is currently a Non-executive Director of Vostok Energy plc, SOCO International plc and Central Asia Metals plc. James Coleman Non-executive Director James Coleman is an Independent Non-executive Director of the Company. He is a Canadian citizen and a Senior Partner, former Chairman of the international law rm of Macleod Dixon based in Calgary and was a Board member of GFI Oil & Gas Corporation until that
company was acquired by Salamander on 17 March 2008. He is currently a Non-executive Director of Anterra Energy Inc and a Non-executive Chairman of Sulliden Exploration, Inc, Energold Drilling, Inc and Gold Reserve, Inc all publicly quoted companies in Canada. John Crowle Non-executive Director(R) (A) John Crowle is an Independent Non-executive Director of the Company with over 35 years experience in the oil industry. He was educated at Durham University and Stanford University Business School. He spent more than 18 years at Enterprise Oil where he held a number of posts, including Group Exploration Manager. Between 2002 and 2004 he was at Royal Dutch Shell as General Manager of New Ventures Organisation Cluster, based in The Hague. He is currently a Non-executive Director of Rockhopper Exploration plc and a member of the Durham University Earth Sciences Advisory Board. Michael Pavia Non-executive Director(#A) Michael Pavia is an Independent Non-executive Director of the Company and was appointed to the Board in July 2007. A chartered accountant, he has had a distinguished career in the energy sector, having been Finance Director of UK independent LASMO plc and then SEEBOARD plc (now a subsidiary of EDF Energy plc). He is currently a Non-executive Director of Thames Water Utilities Ltd, Telecom Plus PLC, Wales & West Utilities Ltd and Non-executive Chairman of PetroGranada Ltd, a Colombian E&P company. Michael is also the Hon. Treasurer and a Director of the charity Elizabeth Finn Care.
(N) Nominations Committee member (R) Remuneration Committee member (A) Audit Committee member Corporate advisers Joint corporate brokers Goldman Sachs and Oriel Securities Ltd Registered auditor Deloitte LLP Bankers HSBC Bank plc Legal advisers Clifford Chance LLP Financial PR Brunswick Group LLP
Senior management
Steve Adams Business Development Manager Steve has extensive worldwide experience in the oil and gas industry and joined Salamander from Murphy where he was Deepwater Exploration Manager with responsibility for exploration activity and Southeast Asian new ventures. Steve has also worked for BP, LASMO, ENI, CNR and PEXCO. Graham Balchin General Manager, Thailand Graham joined Salamander from BG Group where he has worked on numerous projects around the globe, most recently running its activities in Trinidad & Tobago. Graham has over 25 years industry experience, having also worked for AGIP, LASMO, Amerada Hess and BP. John Bell Group Technical Director John was appointed Group Technical Director in January 2012, having previously been Salamanders General Manager, Thailand. He has over 25 years experience in the oil and gas industry, a number of which were spent in Southeast Asia. John worked for LASMO for 17 years and subsequently spent four years with ENI, before working for Hess.
Nick Comrie-Smith Exploration Manager Nick joined Salamander in 2006 and is currently Exploration Manager based in Bangkok. He has over 23 years industry experience, predominantly with ConocoPhillips, and has been involved with exploration and appraisal projects in Turkey, the North Sea, Gulf of Mexico, and for the last 14 years, South East Asia. He brings an in depth knowledge of hydrocarbon plays across the region, and signicant experience in new ventures exploration. Don DiBenedetto Senior Manager Exploitation Don has over 25 years of reservoir and petroleum engineering experience in the oil and gas industry. Starting his career with Exxon in Canada, Don has also lived and worked in North Africa, East Africa and the Middle East. He has worked privately as a consultant and with state oil companies. Most recently, he was Engineering Manager with Talisman Energy Indonesia. Guus Harting Regional Operations Director Guus is Salamanders Regional Operations Director. He has over 30 years of industry experience managing production and development operations in both onshore and offshore environments. He started his career with Shell and has also worked for, or as a consultant to, Qatar General Petroleum Company, Mobil Oil, Chevron and SBM.
Ken Jones Regional Drilling Manager Ken Jones is Salamanders Regional Drilling Manager. He has over 30 years of global industry experience and prior to joining Salamander Ken was working for Shell as a drilling consultant on its operations in Cameroon. Ken has also worked as a consultant on drilling matters to OMV (Venezuela), and Gaz de France (Algeria). Prior to this Ken worked for LASMO for over 12 years, with assignments in Indonesia, Pakistan and the UK, as well as spells with Amoco and Union Oil. Charles Morgan Group General Counsel Charles has over 25 years experience providing legal counsel in the international upstream oil and gas sector, having previously worked for companies such as BP, LASMO and CEPSA. He received his MA in Jurisprudence from Oxford and was admitted to the Bar of England and Wales and California, USA. Shaun Richardson Regional Geoscience Director Shaun Richardson has over 30 years of industry experience and was most recently Exploration Director for Harvest Natural Resources with responsibility for South East Asia. Prior to that Shaun spent nearly 18 years with BG Group, including a spell as Chief Geologist in Jakarta. He also worked earlier in his career for Gearhart, Britoil plc and BP Exploration.
Tony Rouse Group Financial Controller Tony joined Salamander at its inception in 2005 as Group Financial Controller. He brings with him 20 years of nancial experience which he gained working with such companies as Premier Oil plc (for three years), LASMO plc (seven years) and BP (eleven years). Some of Tonys assignments abroad have taken him to such countries as Myanmar, Colombia, Libya and Egypt. Prior to joining Salamander, Tony was running his own consultancy franchise providing advice to small and medium-sized companies. Jerry Smart Exploration Manager, Indonesia Jerry joined Salamander in 2011 and is Exploration Manager, Indonesia. Jerry has 30 years industry experience, principally with LASMO and Eni SpA. He was previously based in Indonesia for ve years with LASMO in the early-mid 90s and has also managed exploration projects in Libya, Pakistan, Ghana, Brazil, Venezuela, the Gulf of Mexico, Alaska and the North Sea. Craig Stewart General Manager, Indonesia Craig has over 30 years industry experience and joined Salamander in April 2012 from Vico Indonesia where he was President and CEO. Vico Indonesia is one of the main operators in the Kutei basin: it produces over 80,000 boepd and employs 700 people and 1,800 permanent contractors. Craig started his career as a drilling engineer with Unocal before moving on to take managerial roles with Unocal in both Thailand and Indonesia and with Eni in Indonesia.
Directors report
The Directors submit their report together with the audited Consolidated and Parent Company Financial Statements of Salamander Energy PLC for the year ended 31 December 2011. Salamander Energy PLC is the holding company of the Group and its issued ordinary shares were admitted to listing on the main market of the London Stock Exchange on 5 December 2006, under the designation SMDR. Principal activities The principal activities of the Group which are intended to continue into the future are as an independent oil and gas exploration, development and production company focused on building a portfolio of assets in Asia. The Group operates through a number of subsidiary and other undertakings, including Jointly Controlled Entities, which are set out in note 16 to the consolidated Financial Statements. The Groups head ofce is in London with regional ofces in Singapore, Thailand, Indonesia and Vietnam. Business review The Company is required by Section 417 of the Companies Act 2006 to include a review of its business in this report. The information that fulls this requirement is contained in the following sections of the Annual Report, which are incorporated by reference and are deemed to form part of this Directors Report: Chairmans and Chief Executives Review; Operational Review; Financial Review; Risk Management; Corporate Responsibility; and Corporate Governance Statement.
Directors The Directors who served in ofce during the nancial year and subsequently were as follows: Charles Jamieson (Chairman) James Menzies (Chief Executive) Mike Buck Jonathan Copus (appointed on 31 October 2011) Nick Cooper (resigned on 31 May 2011) Struan Robertson (Senior Independent Non-executive Director) Michael Pavia John Crowle Robert Cathery James Coleman Carol Bell (appointed on 25 January 2012)
37
Directors continued With regard to the appointment and replacement of Directors, the Company is governed by its Articles of Association, the UK Corporate Governance Code, the Companies Act and related legislation. The Companys Articles of Association give power to the Board to appoint Directors but require the Directors to submit themselves for election at the rst Annual General Meeting (AGM) following their election and thereafter retire by rotation and offer themselves for re-election by shareholders at least every three years. However, the Company is supportive of the recommendation from the UK Corporate Governance Code that all Directors annually stand for re-election. Accordingly, and as at the 2010 and 2011 AGM, all Board members will offer themselves for re-election at the 2012 AGM. The powers of Directors are described in the Board Terms of Reference, copies of which are included on the Companys website, www.salamander-energy.com, and summarised in the Corporate Governance section of this report. Results and dividends The consolidated Financial Statements for the year ended 31 December 2011 are as set out in the Financial Statements section of this report. The Groups loss after tax for the year was $45.5 million (2010: post-tax loss of $169.5 million). The Company has declared no dividend for the year ended 31 December 2011 (2010: nil). It is not the Directors current intention that the Company will pay a dividend for the foreseeable future. Directors interests The Directors interests in the ordinary shares of the Company and Directors remuneration are as set out in the Remuneration Report. The shareholders of the Company have not specied any guidance in respect to Directors holdings of shares. Capital structure and ordinary shares Details of the issued share capital together with details of movements in share capital during the year are included in note 27 to the consolidated Financial Statements. The Company has one class of ordinary shares. Details of employee share schemes are disclosed in the Remuneration Report and in note 28 to the consolidated Financial Statements. On a show of hands at a general meeting (including any AGM) of the Company every holder of ordinary shares present in person and entitled to vote shall have one vote and, on a poll, every member present in person or by proxy and entitled to vote shall have one vote for every ordinary share held. The notice of general meeting species deadlines for exercising voting rights either by proxy or in person in relation to resolutions to be passed at the general meeting. All proxy votes are counted and the numbers for, against or withheld in relation to each resolution are announced at the general meeting and, in accordance with the current requirements of the UK Corporate Governance Code, will be published on the Companys website after the meeting. There are no restrictions on the transfer of ordinary shares in the Company other than: pursuant to the Listing Rules of the Financial Services Authority whereby employees of the Company require the approval of the Company to deal in the Companys securities; pursuant to the Companys various share scheme arrangements;
38
Capital structure and ordinary shares continued certain restrictions may from time to time be imposed by laws and regulations (for example, insider trading laws and market requirements relating to close periods); and pursuant to Article 31 of the Companys Articles of Association.
Article 31 of the Companys Articles restricts the percentage of Salamander shares that may be held by Canadian residents to below 10% so as to permit the Company to rely on exemptions from certain obligations which the Company may be subject to under Canadian Securities Law. Article 31 of the Companys Articles confers upon the Board the power to require Canadian citizens benecially owning Salamander shares to transfer their Salamander shares when the threshold of 10% Canadian Salamander Shareholders is approached. In the event that such Canadian Salamander shareholders are required to transfer their Salamander shares under Article 31, the relevant Salamander shares will be sold in the market at the best price reasonably obtainable in the market and the net proceeds (if any) will be remitted to the relevant Canadian Salamander Shareholder. This compulsory transfer power is generally available to the Board to exercise from time to time, and the Board is free to exercise this power in its absolute discretion. The Directors are not aware of any agreements between holders of the Companys shares that may result in restrictions on the transfer of securities or on voting rights. No person has any special rights of control over the Companys share capital and all issued shares are fully paid. The Companys Articles of Association may only be amended by a special resolution at a general meeting of the shareholders. Powers relating to the issuing and buy back of shares are also included in the Articles and the authority to issue shares is renewed by shareholders each year at the AGM. Convertible bonds Convertible bonds were issued during March 2010 and are described in note 22 of the consolidated Financial Statements. Pending conversion, the convertible bonds carry no votes at meetings of the Company. Ordinary shares in the Company issued on conversion will rank pari passu with the Companys existing issued share capital. On a change of control of the Company, bondholders have an entitlement to exercise their conversion rights. Change of control In relation to agreements that take effect, alter or terminate upon a change of control of the Company, details of the Groups Reserves Based Lending facilities are set out in note 21 to the consolidated Financial Statements. There are, in addition, a number of other agreements so affected, such as commercial contracts, property lease arrangements and employee share plans, none of which are considered to be signicant in terms of their likely impact on the business of the Group as a whole.
39
Signicant shareholders At 23 March 2012, being the latest practicable date prior to the publication of this Annual Report, the signicant interests in the voting rights of the Companys issued ordinary shares as notied in accordance with Chapter 5 of the Disclosure and Transparency Rules were as follows:
Voting rights attaching to issued ordinary shares Percentage of total voting rights Nature of holding
FinVentures UK RS Investments Phineus Partners LP Artemis Investment Management Ltd BlackRock Floriline SA Legal & General Investment Management Employees
The Company has a policy of providing employees with information about the Company and actively encourages employee involvement and consultation. Emphasis is placed on keeping employees informed of activity and nancial performance by way of briengs and publication to staff of all relevant information and corporate announcements. 2011 saw an increase in employee levels in line with the growth in operated activity. At year end Salamander employed 212 people compared with 163 employees at the end of 2010. The Group has a diverse workforce comprising a mixture of local employees and expatriates. It is an equal opportunities employer and gives every consideration to applications for employment by disabled persons where the requirements of the job may be adequately lled by a disabled person. Where existing employees become disabled, it is the Companys policy wherever practicable to provide continuing employment under similar terms and conditions and to provide training, career development and promotion wherever appropriate. Business conduct Our Code of Business Conduct sets out the way we work at Salamander and comprises our vision and values. The Code of Business Conduct is supported by the Groups policies, standards, procedures and processes. Our values, set out in our Code of Business Conduct, can be viewed in full on the Groups website at www.salamander-energy.com. These values are supported by policies which dene how we will carry out our responsibilities and the rules under which the Group operates. The Groups policies are approved by the Board and the assurance of Group performance is provided by a combination of effective management processes and embedded risk and compliance activities. Independent assurance is provided both by internal reviews and independent external auditors. The Group also requires its suppliers, contractors and agents to adhere to its Code of Business Conduct and to adopt similar ethical standards. During the year, as part of our regular review of Group policies in consultation with representatives from our main businesses, proposals were made for the further amendment of Group policies and procedures. The revised Group policies and procedures were implemented during the year as an enhanced, integrated ethics, compliance and anti-fraud programme to maintain the Groups high ethical standards. These included a detailed programme to combat fraud and corruption and clear policy statements emphasising our zero tolerance of any form of fraud, bribery or corruption.
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Business conduct continued During 2011, employees received briengs and training on the Code of Business Conduct and expected standards of behaviour. All employees undertook a bespoke online training programme to deal with fraud and corruption risks and received face-to-face briengs as required in each ofce. The training programme on combating corruption recognises the requirements of the new UK Bribery Act, which came into force 1 July 2011. The training and briengs will be repeated annually as part of an ongoing Group compliance programme. As part of the Companys compliance programme, a condential reporting system was introduced during 2010 for raising any concerns about the conduct of our business. The system also includes an external reporting line. All reports that are registered will be investigated and appropriate action taken. Any concerns raised, and opportunities for improvement, will be discussed by the Audit Committee as part of its regular review of business risks. Annual General Meeting The Companys fth Annual General Meeting as a listed public company will be held at 2pm on Friday 22 June 2012 at the Institute of Directors, 116 Pall Mall, London SW1Y 5ED. The notice of meeting and an explanatory circular to shareholders setting out the AGM business accompanies this Annual Report. Principal risks and uncertainties The Board has established a process for identifying, evaluating and managing the signicant risks the group faces, which are set out in the Risk Management section of this report. Payment policy The Groups policy in respect of its vendors is to agree and establish terms of payment when contracting for the goods or services and to abide by those payment terms. The Company is the holding company of the Group and has no trade creditors. Further details can be found in note 24 to the consolidated Financial Statements. Charitable and political donations During the year the Group made no political donations (2010: nil). Charitable donations made by the Group amounted to $11,300 (2010: $1,700). Auditors Each person who is a Director at the date of approval of this Annual Report conrms that, as far as each Director is aware, there is no relevant audit information of which the Companys Auditors are unaware. In addition, each Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Companys Auditors are aware of that information. This conrmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006. Deloitte LLP were rst appointed as Auditors to the Company in September 2005 and have expressed their willingness to continue as Auditors. A resolution to reappoint Deloitte LLP as the Groups Auditors will be proposed at the forthcoming AGM.
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Going concern The Group has signicant expenditure commitments on its exploration and development portfolio within the next 12 months. As highlighted in note 21 to the consolidated Financial Statements, the Group meets these investment requirements through a combined senior and junior seven year Reserves Based Lending (RBL) facility, entered into in May 2011, and a $100 million convertible bond, the terms of which are described in note 22 to the consolidated Financial Statements. In order to ensure it remains within the terms of these loan facilities, the Group regularly produces cash ow statements and forecasts and sensitivities are run for different scenarios including, but not limited to, changes in commodity prices, different production rates from the Groups producing assets and delays to development projects (of which the most signicant in the next 12 months relates to the expansion of the Bualuang eld). The commodity (primarily oil price) risk also affects the availability under the Reserves Based Lending facility, but is partly managed by a 2012 hedging programme. To optimise the development of the portfolio, or in the event there are unexpected adverse changes to the Groups cash ows, the Directors are condent that the Group could manage its nancial affairs, including the securing of additional capacity under its RBL, portfolio management, share placings and deferring of non-essential capital expenditure, so as to ensure that sufcient funding remains available for the next 12 months. Accordingly, notwithstanding the above uncertainties, the Directors believe that the Groups forecasts and projections, taking account of reasonably possible changes in economic assumptions, show that the Group will be able to meet all its contractual commitments and to operate within the level of its current reserves based lending facility for the foreseeable future, being 12 months from the date of this report. After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and accounts. Approved by the Board
Martha Bruce Company Secretary 23 March 2012
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Chairmans introduction The Boards role is to provide Salamander stakeholders with leadership and direction for the development and execution of the Companys strategy, along with being collectively accountable for the long term success and achievements of the business. Attaining good governance is linked with organisational culture and, by ensuring the risks and rewards of doing business are properly balanced and managed, a responsible business is created. At Salamander, we are 100% committed to all principles of good governance and ethical behaviour. Aims and objectives Salamander strives to apply best industry practice in all of its activities. The Board, management and staff of Salamander are committed to applying the highest standards of business ethics, corporate governance and health, safety and environmental control. To this end, the Group has put in place policies and procedures within which it conducts its activities along with working practices and a business culture to ensure openness and full accountability. Compliance with the Financial Reporting Councils UK Corporate Governance Code The Board is committed to achieving the highest standards of corporate governance. The principal governance rules applying to companies with a premium listing of equity shares on the London Stock Exchange are contained in the UK Corporate Governance Code adopted by the Financial Reporting Council in June 2010 and available publicly from www.frc.org.uk (the Code). The Board conrms that the Company has applied the principles of the Code as described in this report and complied with its provisions throughout the nancial year ended 31 December 2011. Board of Directors On 31 December 2011, the Board comprised the Non-executive Chairman, the Chief Executive Ofcer, the Chief Financial Ofcer, the Chief Operating Ofcer and ve Independent Non-executive Directors. Dr Nick Cooper resigned as Chief Financial Ofcer from the Board and Company on 31 May 2011. Dr Jonathan Copus was appointed as Chief Financial Ofcer on 31 October 2011. All of the Executive Directors have extensive upstream oil and gas experience. The majority of the Nonexecutive Directors have held senior appointments in oil and gas companies and, together, the Non-executive Directors bring a broad range of business and commercial experience to the Board. The membership and brief biographies of the Board members are set out in the Board of Directors and Advisers section. These demonstrate a wealth of experience and sufcient calibre to bring independent judgement on issues of strategy, performance, resources and standards of conduct, which are fundamental to the continuing success of the Group. The Board structure ensures that no individual or group dominates the decision-making process. The role of the Board is clearly dened. The Board is accountable to shareholders for the creation and delivery of strong, sustainable nancial performance and long term shareholder value. To achieve this, the Board directs and monitors the Groups affairs within a framework of controls which enable risk to be assessed and managed effectively. It sets the Groups strategic aims, ensuring that the necessary resources are in place to achieve those aims, and reviews management and nancial performance. The Board also has responsibility for setting the Groups core values and standards of business conduct and for ensuring that these, together with the Groups obligations to its stakeholders, are widely understood throughout the Group.
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Board of Directors continued There is a clear separation between the roles of the Chairman and Chief Executive Ofcer. The Chairmans key responsibilities are the effective running of the Board, ensuring that the Board plays a full and constructive part in the development and determination of the Groups strategy, and acting as guardian of the Boards decision-making process. The Chairmans other signicant commitment is as Chairman of Vostok Energy Limited. The Board believes that the Chairmans obligations are unaffected by this directorship. The key responsibilities of the Chief Executive Ofcer are managing the Groups business, proposing and developing the Groups strategy and overall commercial objectives in consultation with the Board and, as leader of the executive team, implementing the decisions of the Board and its committees. In addition, the Chief Executive Ofcer is responsible for maintaining regular dialogue with major shareholders as part of the Companys overall investor relations programme. The Board has established a process for identifying, evaluating and managing the signicant risks the Group faces. Additionally, the Board is responsible for the Groups system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material mis-statement or loss. In accordance with the revised Turnbull guidance on internal control published in October 2005, the Board regularly reviews the effectiveness of the Groups system of internal control, which has been in place throughout 2011 and up to the date of approval of this Annual Report. As part of its review of internal controls during the year, the Group undertook various audits and reviews, implemented relevant training programmes and also conducted a review of its policies and procedures. The Boards monitoring covers control matters, including nancial, operational and compliance controls and risk management. It is based principally on reviewing reports from management to consider whether signicant risks are identied, evaluated, managed and controlled and whether any signicant weaknesses are promptly remedied and indicate a need for more extensive monitoring. The Audit Committee assists the Board in discharging its review responsibilities. A summary of the key risks facing the Group and mitigating actions are described in the Risk Management section of this report. Following its review of the system of internal control, including the review of the Groups policies and procedures noted above, the Board conrms that necessary actions have been taken or are being taken to remedy any signicant failings or weaknesses identied from that review. The Audit Committee took the decision in 2010 to establish an internal audit function. During the rst half of 2011, various audits and reviews were carried and the ndings of those audits and reviews were reported to the Audit Committee. Management, in conjunction with the Audit Committee, is currently establishing plans and determining resourcing in order to undertaken audits and reviews during 2012. Non-executive Directors are appointed for an initial term of three years. Thereafter, they may serve one or more three year terms subject to satisfactory performance. The letters of appointment of each Non-executive Director are available for inspection. The Senior Independent Non-executive Director is Struan Robertson. In this role he is available to shareholders who have concerns that cannot be resolved through discussion with the Chief Executive or Chairman. All Directors appointed by the Board are required by the Companys Articles of Association to be subject to re-election by shareholders at the next AGM after their appointment. Subsequently, the Articles of Association of the Company provide that Directors are subject to re-election by shareholders at least every three years. However, the Company is supportive of the recommendation from the Code that all Directors annually stand for re-election. Accordingly, and as at the 2010 and 2011 AGM, all Board members will offer themselves for re-election at the 2012 AGM.
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Board of Directors continued Prior to such re-elections, the Chairman and the Nominations Committee will review each Directors performance to ensure they continue to be effective and demonstrate commitment to the role. The Board meets at least quarterly during the year and on an ad hoc basis as required. The attendance record of each Director is shown below.
Board Director Attended Possible Audit Committee Attended Possible Remuneration Committee Attended Possible Nominations Committee Attended Possible
Charles Jamieson James Menzies Mike Buck Jonathan Copus (appointed October 31 2011) Nick Cooper (resigned on 31 May 2011) Struan Robertson Michael Pavia John Crowle Robert Cathery James Coleman
7 7 7 1 3 7 7 7 7 7
7 7 7 1 3 7 7 7 7 7
In addition to the formal meetings of the Board, the Chairman and Executive Directors maintain frequent contact with the other Directors to discuss any issues of concern they may have relating to the Group or as regards their area of responsibility and to keep them fully briefed on on-going matters relating to the Groups operations. Directors have access to a regular supply of nancial, operational and strategic information, as well as the Company Secretary, to assist them in the discharge of their duties. Such information is provided as part of the normal management reporting cycle undertaken by senior management. Board papers are generally circulated seven days in advance of Board meetings. In addition, each formal Board meeting includes a review of the history, performance and future potential of an individual asset or business unit, designed to ensure that all material assets are considered on a cyclical basis and to enable Board members to familiarise themselves with the key assets and operations of the Group. The Board formally reviews the Groups risk register twice a year with the constant monitoring of events by the Executive Directors. All Directors and Board committees have access to independent professional advice, at the Companys expense, as and when required. The Company Secretary, in consultation with the Chairman and Chief Executive, provides an induction process for each new Director tailored to their individual knowledge and experience. The Company provides training to Directors where required. Training can include attendance at seminars, briengs by advisers and internal briengs. The Group maintains Directors and ofcers liability insurance cover, the level of which is reviewed annually. A formal schedule of matters reserved for Board approval is in place. In addition to those formal matters required by the Companies Act to be set before a Board of Directors, the matters reserved include: the Groups overall strategy and policy, approval of annual and interim results, business plans, material acquisitions and disposals, material contracts and major capital expenditure projects and budgets. Subject to those reserved matters, the Board delegates authority for the management of the business primarily to the Chief Executive and a Senior Executive Committee. Certain other matters are delegated to the Audit, Remuneration and Nominations Committees, each of which is described in more detail below.
45 Corporate governance Salamander Energy PLC Annual Report 2011
Directors conicts Where the Articles of Association of a company contain a provision to that effect, the Companies Act 2006 allows Directors of public companies to consider, and if thought t, authorise situations where a Director has an interest that conicts, or may potentially conict, with the interests of the Company. The Articles of Association of the Company contain a provision to this effect. Directors of the Company who have an interest in matters under discussion at a Board meeting must declare that interest and abstain from voting. Only Directors who have no interest in the matter being considered are able to approve a conict of interest situation and in taking the decision the Directors must act in a way they consider, in good faith, would be most likely to promote the Companys success. The Directors are able to impose limits or conditions when giving authorisation if they think this is appropriate. During the year procedures, based upon the GC100 guidance, were in place to review any conicts of interest. Following its introduction, the system for the declaration and authorisation of conicts has been followed by the Company. The system has been tested and the Board considers that these procedures are operating effectively. Board performance Annual performance appraisal of the Board, its committees, individual Directors and the Chairman is carried out, with the evaluation process involving Directors input to a detailed questionnaire followed by individual interviews and feedback with the Chairman. The results of the survey, together with any recommendations for improving effectiveness, are presented by the Chairman to the whole Board for discussion. The Non-executive Directors, led by the Senior Independent Director, meet without the Chairman to evaluate his performance in leading the Board and chairing meetings to conduct the Boards business. In addition to their attendance at Board and, as appropriate, committee meetings, the Chairman and the Non-executive Directors will also meet formally (without executive management present) to examine and review the Board performance of the executive management, both individually and as a team; this review process is in part dealt with by the Board committees referred to below. Separately, the Chairman and Chief Executive hold informal meetings with the Non-executive Directors to discuss issues affecting the Group such as target objectives and remuneration matters. An external review of the Board was carried out in March 2011 by Socia Limited, which has no other relationship with the Company. The review has been the subject of Board discussion and actions have been agreed to implement the recommendations from the review. Audit Committee The members of the Audit Committee are Michael Pavia (Chairman), Struan Robertson and John Crowle. Other Board members may also be invited to attend committee meetings. Michael Pavia is considered to have recent and relevant nancial experience. Meetings are held at least three times a year. The Chief Financial Ofcer is invited to attend meetings where appropriate and the Groups Auditors are regularly invited to attend meetings, including once at the planning stage before the audit and once during the year-end audit and half-year review at the reporting stage. At least once a year the Audit Committee will also meet the Groups external Auditors without management being present. The work of the Audit Committee in respect of the nancial year has included: consideration of matters relating to the appointment of the Groups Auditors; reviewing the independence, objectivity and effectiveness of the Groups Auditors;
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Audit Committee continued reviewing the integrity of the Groups annual and half-year reports, interim management statements and any other formal announcement relating to its nancial performance; reviewing the effectiveness of the Groups system of internal control and compliance procedures; and reviewing the Groups arrangements for its employees to raise concerns, in condence, about possible wrongdoing in nancial reporting or other matters.
In fullling its responsibility of monitoring the integrity of nancial reports to shareholders, the Audit Committee has reviewed accounting principles, policies and practices adopted in the preparation of public nancial information and has examined documentation relating to the Annual Report and Half-year Report. The clarity of disclosures included in the Financial Statements was reviewed by the Audit Committee, as was the basis for signicant estimates and judgements. In assessing the accounting treatment of major transactions open to different approaches, the Committee considered written reports by management and the external Auditors. The Committees recommendations are submitted to the Board for approval. In addition, the Committee has responsibility for the implementation of internal controls and receives an update at each meeting as to the status of the development of internal controls. In addition, audits and reviews are undertaken during the year on specic areas of internal control, at the direction of the Audit Committee, and the outcome and ndings of those audits and reviews, along with recommendations, are reported to the Audit Committee to consider and to implement appropriate responses. The committee also reviewed the independence and effectiveness of the external Auditors, accepting that their independence had been maintained throughout the audit process for the nancial year. The committee considers that at this stage it is more efcient to use a single audit rm to provide certain non-audit services for transactions and tax matters. However, to regulate the position, the committee has established a policy on the provision of non-audit services by the external Auditor. In compiling that policy, which sets out the external Auditors permitted and prohibited non-audit services and a fee threshold requiring prior approval by the Audit Committee for any new engagement, reference was made to Ethical Standard 5 of the Auditing Practices Board. Further information relating to the independence of the Auditors is set out below and details of non-audit fees during the year are shown in note 6 to the consolidated Financial Statements. The terms of reference of the Audit Committee are included on the Companys website, www.salamander-energy.com. Remuneration Committee The members of the Remuneration Committee are currently Robert Cathery (Chairman), John Crowle and Struan Robertson. The primary duty of the Remuneration Committee is to determine and agree with the Board the framework or broad policy for the remuneration of the Groups Chief Executive, Chairman, the Executive Directors, the Company Secretary and such other members of the executive management as it is designated to consider. The remuneration of Non-executive Directors is a matter for the Chairman and the executive members of the Board. No Director may be involved in any decisions as to their own remuneration. Further details of the work of the Remuneration Committee are set out in the Remuneration Report. The terms of reference of the Remuneration Committee are included on the Companys website, www.salamander-energy.com.
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Nominations Committee The members of the Nominations Committee are Struan Robertson (Chairman), Charles Jamieson and Robert Cathery. The Nominations Committees terms of reference, which are included on the Companys website, www.salamander-energy.com, are to review regularly the structure, size and composition (including the skills, knowledge and experience) required of the Board compared to its current position and make recommendations to the Board with regard to any changes. The Nominations Committee also considers future considerations of the composition of the Board, taking into account the challenges and opportunities facing the Group, and what skills and expertise are needed on the Board. Following a decision of the Board that the appointment of a new Director is appropriate, the duty of the committee is to present for consideration suitably qualied candidates. In making such recommendations, the committee evaluates the balance of skills, knowledge and experience on the Board and develops a description of the role and required capabilities. Candidates are then identied for interview. The committee also makes recommendations to the Board regarding the re-election and/or re-appointment of any director. Similar selection processes would apply for the appointment of a Chairman. Succession plans for key management roles, including the Executive Directors, are reviewed on an ongoing basis. The committee met twice during the year and its activities included a review of the Companys succession plans and discussion in respect of the on-going structure and capability of the Board. The appointments of Jonathan Copus in October 2011 and Carol Bell in January 2012 were made following a search led by the Senior Independent Non-executive Director in conjunction with external consultants and recommendations made to the Committee, the brief including but not limited to the need for diversity in the boardroom. The committee noted that Carol had wide commercial experience gained through a successful career in oil and gas, and banking, which would be an asset to the Board. In addition, Jim Coleman will not be standing for re-election at the forthcoming Annual General Meeting. The committee keeps itself updated on key developments relevant to the Company, including, most recently, on the subject of diversity in the boardroom. The Board believes in creating throughout the Company a culture free from discrimination in any form. The committee believes in providing mentoring for women in senior roles to help them maximise their careers at the Company. The Board and committee have chosen not to set specic representation targets for women at Board level at this time. However, it conrms that the benets of diversity, including gender diversity, will continue to be an active consideration when changes to the Boards composition are next contemplated, within the overriding objective of ensuring that the Board has the appropriate balance of skills, experience and independence. Auditor independence The Board is satised that Deloitte LLP has adequate policies and safeguards in place to ensure that auditor objectivity and independence are maintained. The external Auditors report to the Audit Committee annually on their independence from the Company. In accordance with professional standards, the partner responsible for the audit is changed every ve years, and last changed in 2010. The Audit Committee considers whether the audit should go out to tender but has taken the view that partner rotation at both the Group and operating business level has been sufcient to maintain the necessary independence. There are no contractual restrictions on the Audit Committee as to the choice of external Auditors. The Audit Committee has also adopted a formal policy on the Companys relationship with its Auditor in respect of non-audit work. The policy is reviewed annually by the Audit Committee.
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Auditor independence continued In line with its terms of reference, the Audit Committee undertakes a thorough assessment of the quality, effectiveness, value and independence of the audit provided by Deloitte LLP on an annual basis, seeking the views and feedback of the Board, together with those of the Group. Following the most recent review, the Audit Committee has determined to recommend to the Board the re-appointment of Deloitte LLP at the 2012 AGM. Shareholder relations Communication with shareholders is given high priority and there is regular dialogue with institutional investors, as well as general presentations to analysts at the time of the release of the annual and half-year results. Management completed over 200 meetings with institutions during 2011. The Board receives regular investor relations reports covering key investor meetings and activities, as well as shareholder and investor feedback. The Group publishes its periodic results and other stock market announcements on the Investor Relations section of the Companys website www.salamander-energy.com and regular news updates in relation to the Group, including the status of exploration and development programmes, are also included on the website. Shareholders and other interested parties can subscribe to receive these news updates by e-mail by registering online on the website. The Board also uses the Annual General Meeting to communicate with private and institutional investors and welcomes their participation. The Board aims to ensure that the entire Board is available at the AGM to answer questions and explain details of the resolutions proposed at the AGM. Notice of the AGM and related papers are sent to shareholders at least 20 clear business days before the meeting in accordance with the Code and Companies Act. Approved by the Board of Directors on 23 March 2012
Martha Bruce Company Secretary 23 March 2012
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Remuneration report
This report has been prepared in accordance with Schedule 8 to the Accounting Regulations under the Companies Act 2006. The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the principles relating to Directors remuneration in the UK Corporate Governance Code. As required by the Act, a resolution to approve the report will be proposed at the Annual General Meeting of the Company, at which the Financial Statements will be approved. The Act requires the Auditor to report to the Companys members on certain parts of the Directors Remuneration Report and to state whether in their opinion those parts of the report have been properly prepared in accordance with the Accounting Regulations. The report has therefore been divided into separate sections for audited and unaudited information. Unaudited information Remuneration Committee The Company has established a Remuneration Committee, which is constituted in accordance with the recommendations of the UK Corporate Governance Code. The members of the Remuneration Committee are currently Robert Cathery (Chairman), Struan Robertson and John Crowle. Details of each committee members attendance at committee meetings held during the year are provided in the Corporate Governance Statement. The committees primary duty is to determine and agree with the Board the framework or broad policy for the remuneration of the Groups Chief Executive, the Chairman, the Executive Directors, the Company Secretary and such other members of the senior management as it is designated to consider. The remuneration of the Non-executive Directors is a matter for the Chairman and the executive members of the Board. The main responsibilities of the committee are to: set and monitor performance criteria for any bonus arrangements operated by the Company and its Group, ensuring that they represent achievable and motivating rewards for appropriate levels of performance and, where appropriate, are justiable taking into account the Companys and Groups overall performance and the corresponding return on shareholders investment in the same period; recommend to the Board, the policy for, and scope of, pension arrangements for the Executive Directors and other senior management taking into account the future liabilities of any recommendation and to detail precisely which elements of the remuneration packages are pensionable; review and approve the Companys share option and share award schemes (including any long term co-investment plans), approve proposed option grants or share awards to Directors or senior management, and to set or recommend performance criteria for share awards; and within the terms of the agreed policy, determine the total individual remuneration package for the Companys Chairman, Executive Directors, Company Secretary and other senior management including, where appropriate, bonuses, incentive payments and share options or other share awards.
The committee members have no personal or nancial interest other than as shareholders in matters to be decided and no day-to-day involvement in running the business. The Chief Executive is invited to attend meetings of the committee but does not take part in the decision making of the committee. The committee has access to external consultancy services on remuneration and sector issues. Hewitt New Bridge Street Consultants were employed to assist, as required, only with matters relating to the Companys Performance Share Plan. Hewitt New Bridge Street Consultants have no connection with the Company.
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Unaudited information continued Remuneration Committee continued The committee is formally constituted with written terms of reference and its main responsibilities are detailed above. The terms of reference of the Remuneration Committee are available on the Companys website, www.salamander-energy.com. Historical comparator performance chart The Companys IPO and listing on the London Stock Exchange took place on 5 December 2006. The chart below shows the Companys share price performance since listing compared with the performance in the same period of the FTSE All Share Oil & Gas Producers Index and the FTSE 250 Index, which the committee considers are the closest comparable indices.
140 120 100 80 60 40 20 0
2011 September 2011 October 2011 January
Salamander Energy FTSE All Share Oil & Gas Producers Index FTSE 250 Index
This chart looks at the value of the Company from listing of 100 invested in the Companys issued ordinary share capital compared with the values of 100 invested in the FTSE All Share Oil & Gas Producers Index and the FTSE 250. It is assumed that any dividends are re-invested. Executive Directors remuneration The Groups remuneration policy is to provide remuneration packages which ensure that Directors and senior managers are fairly and responsibly rewarded for their contributions. The aim is to provide remuneration packages which are sufciently competitive to attract, retain and motivate individuals of the quality required to achieve the Groups objectives and thereby enhance shareholder value. The committee takes account of the level of remuneration paid to Executive Directors and senior managers of comparable public companies and best practice standards. It is the intention that this policy will continue to apply for 2012 and subsequent years subject to ongoing review as appropriate. The main details of the Executive Directors Service Agreements relating to base salary, annual bonus, share plan awards, pensions and other benets for 2011 are as set out below.
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2011 August
2011 March
2011 December
2011 November
2011 February
2011 April
2011 June
2011 May
2011 July
Service Agreements The Service Agreements for the Executive Directors are for no xed term and may in normal circumstances be terminated by either party on giving six months notice. The Company reserves the right and discretion to pay the Executive Director in lieu of notice. If the Company terminates the employment of an Executive Director by exercising its right to pay in lieu of notice, the Company is required to make a payment equal to the aggregate of basic salary and the cost to the Company of providing other contractual benets (which excludes bonus) for the unexpired portion of the duration of any entitlement to notice. If, within 12 months of a change of control, the Company terminates the employment of an Executive Director in breach of the terms of his Service Agreement in circumstances where the Company is not entitled to terminate the Executive Directors employment, the Executive Director will be entitled to payment of a xed sum equal to six months base salary (not including accrued bonus). In return for the payment of such a xed sum, the Executive Director agrees to waive, release and discharge any entitlement to further or additional compensation of any kind whatsoever.
Date of contract Notice period
James Menzies Mike Buck Jonathan Copus Nick Cooper (resigned on 31 May 2011) Salary
The annual base salaries of the Executive Directors for the year to 31 December 2011 were as follows:
Salary s
James Menzies Mike Buck Jonathan Copus Nick Cooper (resigned on 31 May 2011)
The salary of each Executive Director is subject to regular review by the Remuneration Committee and such a review took place in January 2012. During the review, a 5% salary increase for James Menzies and Mike Buck, and a 10% salary increase for Jonathan Copus, were agreed by the Remuneration Committee for the year to 31 December 2012. When determining the salary of the Executive Directors the committee takes into consideration: the levels of base salary for similar positions with comparable status, responsibility and skills, in organisations of broadly similar size and complexity, in particular the levels of base salary at those comparable companies within the FTSE Oil & Gas Producers sector and the comparator group; the performance of the individual Executive Director; the individual Executive Directors experience and responsibilities; and pay and conditions throughout the Company.
Bonus Each of the Executive Directors is eligible for a discretionary annual bonus up to a maximum of 100% of their base salary. The bonus may only be payable to the extent that individual and corporate performance targets set by the Remuneration Committee are achieved in the relevant year.
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Bonus continued Executive bonus levels are assessed on the level of the Companys performance against nancial, operational and strategic targets. These may include, but are not limited to : share price performance; reserves replacement; execution of planned exploration drilling programme; HSE performance; nancial performance; and production growth.
Considering the above, the Remuneration Committee assessed that an award of 60% of the maximum bonus potential was appropriate when judging by the achievements of the executive team against the above priorities and when looking at a broader picture of the Companys performance over the period. The general targets for the annual bonus plan are reviewed and agreed by the Remuneration Committee each year to ensure that they are appropriate to the current position of the Company. The committee is in no doubt that in the current economic environment, achieving substantial progress in these priority areas will continue to be extremely challenging. Non-executive Directors do not participate in any bonus arrangements. Pay and conditions across the Group Consideration has also been given to general pay and employment conditions across the Group. The Group operates in a number of different countries and has many employees who perform a diverse range of jobs. Therefore, although it is difcult to take into account pay and employment conditions across the Group specically when setting the remuneration of the Executive Directors: all employees, including the Directors, are paid by reference to the market rate; consistently high performance is rewarded through a number of performance related bonus schemes across the Group; the Group offers internal promotion opportunities; the Group offers employment conditions which are commensurate with a UK listed company including high standards of health and safety and equal opportunity policies; the Group offers a range of benets depending on employee location including pension, exible benets, paid annual leave and healthcare insurance; and the Company believes that share plans are important to align the interests of employees and shareholders. Therefore, the Company offers the following employee share plans: the Performance Share Plan, open to Executive Directors and senior management; and the Deferred Share Plan (as approved by the shareholders at the 2009 Annual General Meeting), open to all other employees.
The Remuneration Committee will continue to assess these and other matters, such as the prevailing market conditions, when determining levels of remuneration for Executive Directors.
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Performance Share Plan In accordance with the Companys Performance Share Plan (PSP) and at the discretion of the Remuneration Committee, all eligible employees including Executive Directors may be awarded share options in the Company, the vesting of which are subject to conditions as set out in this report (awards). The committee supervises the operation of the PSP including the levels of awards made to employees and Executive Directors. (As approved by the shareholders at the 2009 Annual General Meeting, a new deferred bonus scheme replaced the PSP for certain employees but not Directors, recognising that the PSP continuing to apply to all employees was not appropriate.) The PSP remains the sole long term incentive arrangement for all Executive Directors. During the year, as approved by the shareholders at the 2010 Annual General Meeting, the individual limit in the PSP was increased. The PSP was rst adopted when the Company listed on the London Stock Exchange in 2006. When it was adopted, the PSP was structured so as to provide a competitive long term incentive compared to other companies of a similar size (Salamander initially listed within the FTSE Small Cap), and with the features conforming to prevailing market practice and best practice at that time. In 2010, the Remuneration Committee reviewed the operation of the PSP in the context of Salamander as a FTSE 250 constituent and concluded that, in order to remain competitive relative to the market, changes to its operation for 2010 and future years were required, namely, an increase to the individual limit in the PSP to 200% of salary p.a. The PSP is operated in line with: awards are made annually to Executive Directors worth up to 200% of salary (which is the maximum grant limit except where the Remuneration Committee deems it necessary to grant a higher award in specic circumstances). Other senior management were also granted awards at a lower percentage of salary. In 2009, the Remuneration Committee decided to amend its policy of granting awards to the whole workforce, and limited participation in the PSP to senior executives; the vesting of awards is subject to a relative total shareholder return (TSR) performance condition, comparing Salamanders TSR performance to that of a selected group of other listed Oil & Gas Exploration & Production companies, measured over three years; and 30% of awards vest for median performance, and awards vest in full for upper quartile performance (with a sliding scale between the two points).
The PSP is intended to facilitate the retention and incentivisation of employees of the Group and to align their interests with those of shareholders by enabling employees, including Executive Directors, to receive shares in Salamander, subject to the satisfaction of performance conditions and continued employment. Accordingly, the Remuneration Committee believes that the PSP provides an appropriate degree of exibility in the way in which a share based incentive arrangement can be operated by the Group, while giving due consideration to best and market practice. Awards vest on or following the third anniversary of the date of grant once the committee has determined the extent to which the applicable performance condition (see below) has been satised and provided the participant remains an employee with the Group. Awards, once vested, will normally remain capable of exercise for a period of 12 months.
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Performance Share Plan continued Awards granted to all employees, including the Executive Directors, will vest based on Salamanders performance against an industry-specic peer group of companies drawn from the constituents of the FTSE 250, FTSE Small Cap and AIM listed companies in the Oil and Gas Producers sector with market capitalisations in excess of 100 million at or around the date of grant. The comparator groups for the 2011 and 2010 awards were:
2011 Awards 2010 Awards
Afren Aurelian Energy Bowleven Cairn Energy Coastal Energy Cove Energy Encore Enquest Faroe Petroleum Geopark Holdings Gulf Keystone Gulfsands Petroleum
Heritage Oil Ithaca Energy JKX Oil & Gas Jubilant Energy Melrose Resources Nautical Petroleum Petroceltic Premier Oil San Leon SOCO International Tullow Oil Valiant Petroleum
Afren Bankers Petroleum Bowleven Cairn Energy Coastal Energy Dana Petroleum plc Dragon Oil Enquest Geopark Holdings Gulf Keystone Gulfsands Petroleum Heritage Petroleum
Ithaca Energy JKX Oil & Gas plc Melrose Resources plc Petroceltic Premier Oil Regal Petroleum Serica Energy SOCO International Sterling Energy Tullow Oil Valiant Petroleum
Awards vest as follows in relation to Salamanders relative TSR performance over the performance period: if Salamander is ranked below median, none of the award will vest; for a ranking position of median, 30% of the award will vest; for a ranking position of upper quartile or better, full vesting (100% of the award) will occur; and for a ranking between median and upper quartile, there will be straight line vesting between 30% and 100%.
Hewitt New Bridge Street carried out a performance monitoring exercise in respect of the awards made on 28 March 2008 under the terms of the Salamander Performance Share Plan. Their calculations were carried out to 27 March 2011, the end of the performance period for these awards and therefore represented nal results. As noted above, these awards were subject to a TSR performance condition relative to the 2011 comparator group over a performance period. Based on Salamanders TSR and ranking being between median and upper quartile, the awards vested at 62.53% of the number of awards granted on 28 March 2008. The market price on vesting of the awards was 2.822365. Details of the Directors interests further to the vesting of this award are set out later in this Remuneration Report. At 31 December 2011, a total of 4,676,140 awards of options over ordinary shares (representing 3.0% of the Companys issued share capital of 154,797,171 ordinary shares at the year end) were outstanding and granted to eligible employees including the Executive Directors. Further information regarding share based payments is included in note 28 to the consolidated Financial Statements. Benets Executive Directors receive a dened pension contribution (or salary supplement in lieu of pension contributions) equal to 15% of their salary, private medical cover and life assurance of up to four times salary.
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Non-executive Directors remuneration The Companys policy on Non-executive Directors remuneration is to set compensation at a level which is sufciently competitive to attract, retain and motivate high quality non-executives and to be consistent with best practice standards. Non-executive Directors may not participate in the Companys PSP or pension arrangements. Each of the Non-executive Directors is entitled to reimbursement of reasonable expenses incurred in the course of their duties and to Directors and ofcers liability insurance cover. The Board reviews Non-executive Directors (including the Chairmans) remuneration periodically to ensure it remains competitive. Additional fees are paid to the chairmen of the Audit, Remuneration and Nominations committees. Save in relation to Charles Jamieson (70,000), the fees of each Non-executive Director set out below comprise a 45,000 annual base fee and an additional annual fee of 5,000 for chairing a Board committee. Struan Robertson also receives an additional annual fee of 10,000 for his role as Senior Independent Non-executive Director. John Crowle receives an additional annual fee of 5,000 in recognition of his responsibility for advising, as required, on technical issues. All Non-executive Directors have letters of appointment with the Company. Charles Jamieson, Struan Robertson, John Crowle and Robert Cathery were appointed on 27 June 2007. Michael Pavia and James Coleman were appointed on 30 June 2008. All appointments are subject to satisfactory performance and the requirements of the Companys Articles of Association for one-third of the Directors to retire by rotation and offer themselves for re-appointment at each AGM.
Annual salary s Date of contract Notice period
Charles Jamieson Struan Robertson Michael Pavia John Crowle Robert Cathery James Coleman Aggregate remuneration of Directors (audited) The total amount of Directors remuneration was as follows:
Three months One month One month One month One month One month
2011 s
2010 s
Emoluments Gains on exercise of share options Amounts receivable under long term incentive schemes Money purchase pension combinations Total aggregate remuneration
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Remuneration of Directors (audited) The remuneration of Directors during 2011 was as follows:
2011 Base salary s Bonus s Benets s Total s 2010 Total s
Executive Directors James Menzies Mike Buck1 Jonathan Copus Nick Cooper Non-executive Directors Charles Jamieson Struan Robertson Michael Pavia John Crowle Robert Cathery James Coleman Total
391,400 288,400 42,628 116,967 70,000 60,000 50,000 50,000 50,000 45,000 1,164,395
690,355 636,947 204,512 136,990 70,000 60,000 50,000 50,000 50,000 45,000 1,993,804
567,519 499,019 418,719 70,000 60,000 50,000 50,000 50,000 45,000 1,810,257
1 In line with the Groups policy, expatriate employees are paid a net salary by the Group in their host country based on their base salary and other factors associated with living abroad. The salary and benets reported above for Mike Buck include his net expatriate salary grossed up for income tax payable in his host country, and other expatriate benets. As a result of Singapore tax legislation, Mike Buck is no longer able to claim an exemption on income earned based on time spent outside of the country. As a result, his benets have been grossed up at the higher rate of applicable income tax. 2 Jonathan Copus received a bonus of 155,000 during 2011, being a signing on bonus of 30,000 and a performance bonus of 125,000. 3 Included in the benets above are pension contributions of 125,909 (2010: 141,000).
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Remuneration of Directors (audited) continued At 31 December 2011, the following awards had been made to Executive Directors under the PSP:
Award date Awards granted Number Awards exercised Number Awards lapsed Number Earliest exercise Date Latest exercise Date At 1 Jan 2011 Number At 31 Dec 2011 Number
James Menzies 13/12/06 05/10/07 28/03/08 27/03/09 11/05/10 04/04/11 Mike Buck 13/12/06 05/10/07 18/12/07 28/03/08 27/03/09 11/05/10 04/04/11 Nick Cooper 13/12/06 05/10/07 28/03/08 27/03/09 11/05/10 04/04/11 Jonathan Copus 31/10/11
112,360 125,261 113,605 244,186 322,444 255,901 82,397 91,858 44,000 166,285 184,442 237,590 188,558 93,633 104,384 94,671 203,488 237,590 188,558 163,452
112,360 9,987 42,951 82,397 7,324 3,508 62,659 93,633 8,323 35,793 203,488 237,590 188,558
13/12/09 05/10/10 28/03/11 27/03/12 11/05/13 04/04/14 13/12/09 05/10/10 18/12/10 28/03/11 27/03/12 11/05/13 04/04/14 13/12/09 05/10/10 28/03/11 27/03/12 11/05/13 04/04/14 31/10/14
13/12/10 05/10/11 28/03/12 27/03/13 11/05/14 04/04/15 13/12/10 05/10/11 18/12/11 28/03/12 27/03/13 11/05/14 04/04/15 13/12/10 05/10/11 28/03/12 27/03/13 11/05/14 04/04/15 31/10/15
680,235
822,531
632,317
610,590
535,749
163,452
1 Awards are in the form of a nominal cost option and no payment is required for the grant of an award. However, participants who are granted nominal cost options under the PSP are required to pay the Company the nominal value of 0.10 for each share issued upon the exercise of the option. 2 The committee considers the interests of shareholders when deciding on how the PSP is operated and ensures that no individual is granted excessive levels of awards, taking into consideration the overall quantum and structure of that individuals compensation package. In circumstances where the committee considers it appropriate to do so, including the recruitment or retention of an employee or Executive Director, the committee may exceed the normal 200% limit at its discretion. 3 The aggregate value of awards granted in 2008 by the committee to Mike Buck (Chief Operating Ofcer) was equivalent to 200% of his base annual salary, reecting his increased operational responsibilities and contribution to the Groups performance. 4 The highest and lowest closing prices of the Companys shares during the year were 1.82 and 3.18 respectively. The mid-market price of the Companys shares at 31 December 2011 was 2.02. 5 During 2010 Hewitt New Bridge Street carried out a performance monitoring exercise in respect of the awards made on 5 October 2007 under the terms of the Salamander Energy Performance Share Plan. These awards were subject to a total shareholder return performance condition relative to a comparator group over a performance period and accordingly vested at 91.79% of the number of awards granted on 5 October 2007. The market price on vesting of the awards was 2.5289. The Executive Directors exercised the full award vested, receiving ordinary shares after selling shares sufcient to cover the cost of the option price and tax resulting from the exercise of the vested awards. No other options lapsed or were exercised during the year. 6 During 2011 Hewitt New Bridge Street carried out a performance monitoring exercise in respect of the awards made on 28 March 2008 under the terms of the Salamander Energy Performance Share Plan. These awards were subject to a total shareholder return performance condition relative to a comparator group over a performance period and accordingly vested at 62.53% of the number of awards granted on 28 March 2008. The market price on vesting of the awards was 2.82. The Executive Directors exercised the full award vested, receiving ordinary shares after selling shares sufcient to cover the cost of the option price and tax resulting from the exercise of the vested awards. 58 Corporate governance Salamander Energy PLC Annual Report 2011
Remuneration of Directors (audited) continued At 31 December 2011, the following awards had been made to Executive Directors under the DEP:
Award date Awards granted Number Awards exercised Number Awards lapsed Number Earliest exercise Date Latest exercise Date At 1 Jan 2011 Number At 31 Dec 2011 Number
40,388
31/10/13
31/10/14
40,388
Directors interests in shares The following sets out the interests of the past and serving Directors and their immediate families in the ordinary shares of the Company during the nancial year:
Benecial Shares At 1 January 2011 Number At 31 December 2011 Number
Charles Jamieson James Menzies Mike Buck Nick Cooper (resigned on 31 May 2011) Struan Robertson Michael Pavia John Crowle Robert Cathery1 James Coleman
1 At 23 March 2012, Directors holdings in ordinary shares were the same as reported at 31 December 2011.
Approval The Directors Remuneration Report has been approved by the Board of Directors of the Company. Signed on behalf of the Board
Robert Cathery Chairman of the Remuneration Committee 23 March 2012
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The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Financial Statements for each nancial year. Under that law the Directors are required to prepare the Group Financial Statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation and have also chosen to prepare the Parent Company Financial Statements under IFRSs as adopted by the EU. Under company law the Directors must not approve the accounts unless they are satised that they give a true and fair view of the state of affairs of the Group and of the prot or loss of the Group for that period. In preparing these Financial Statements, International Accounting Standard 1 requires that Directors: properly select and apply accounting policies; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; provide additional disclosures when compliance with the specic requirements in IFRSs are insufcient to enable users to understand the impact of particular transactions, other events and conditions on the entitys nancial position and nancial performance; and make an assessment of the Groups ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that are sufcient to show and explain the Groups transactions and disclose with reasonable accuracy at any time the nancial position of the Group and enable them to ensure that the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and nancial information included on the Groups website. Legislation in the United Kingdom governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions. Directors responsibility statement We conrm that to the best of our knowledge: the Financial Statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, nancial position and prot or loss of the Company and the undertakings included in the consolidation taken as a whole; and the business review, which is incorporated into the Directors Report, includes a fair review of the development and performance of the business, the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
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We have audited the Financial Statements of Salamander Energy plc for the year ended 31 December 2011, which comprise the Consolidated Statement of Comprehensive Income, the Consolidated and Parent Company Statements of Changes in Equity, the Consolidated and Parent Company Balance Sheets, the Consolidated and Parent Company Cash Flow Statements, the Statement of Accounting Policies and General Information and the related notes 1 to 30 and 1 to 11. The nancial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the Parent Company Financial Statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the companys members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Companys members those matters we are required to state to them in an Auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Companys members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and Auditor As explained more fully in the Directors Responsibilities Statement, the Directors are responsible for the preparation of the Financial Statements and for being satised that they give a true and fair view. Our responsibility is to audit and express an opinion on the Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Boards Ethical Standards for Auditors. Scope of the audit of the Financial Statements An audit involves obtaining evidence about the amounts and disclosures in the Financial Statements sufcient to give reasonable assurance that the Financial Statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Groups and the Parent Companys circumstances and have been consistently applied and adequately disclosed; the reasonableness of signicant accounting estimates made by the Directors; and the overall presentation of the Financial Statements. In addition, we read all the nancial and non-nancial information in the Annual Report to identify material inconsistencies with the audited Financial Statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on Financial Statements In our opinion: the Financial Statements give a true and fair view of the state of the Groups and of the Parent Companys affairs as at 31 December 2011 and of the Groups loss for the year then ended; the Group Financial Statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the Parent Company Financial Statements have been properly prepared in accordance with IFRSs adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and the Financial Statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group Financial Statements, Article 4 of the IAS Regulation.
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Separate opinion in relation to IFRSs as issued by the IASB As explained in the Statement of Accounting Policies and General Information section to the consolidated Financial Statements, the Group, in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (IASB). In our opinion the Group Financial Statements comply with IFRSs as issued by the IASB. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: the part of the Directors Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and the information given in the Directors Report for the nancial year for which the Financial Statements are prepared is consistent with the Financial Statements.
Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or the Parent Company Financial Statements and the part of the Directors Remuneration Report to be audited are not in agreement with the accounting records and returns; or certain disclosures of Directors remuneration specied by law are not made; or we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review: the Directors statement, contained within the Directors Report, in relation to going concern; the part of the Corporate Governance Statement relating to the Companys compliance with the nine provisions of the UK Corporate Governance Code specied for our review; and certain elements of the report to shareholders by the Board on Directors remuneration.
David Paterson (Senior Statutory Auditor) For and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, UK 23 March 2012
62
General information on the Company and the Group Salamander Energy Plc (the Company) is a company registered in Great Britain on 13 September 2006 under the Companies Act, which serves as a holding company for the Group. The address of the registered ofce is 4th Floor, 25 Great Pulteney Street, London W1F 9LT. The nature of the Groups operations and its principal activities are as an independent oil and gas exploration, development and production company focused on building a portfolio of assets in Southeast Asia. Financial information The nancial information is presented in US Dollars because that is the currency of the primary economic environment in which the Group operates. Foreign operations are included in accordance with policies set out later in this section. At the date of authorisation of this nancial information, the following Standards and Interpretations which have not been applied in this nancial information were in issue but are not yet effective: IFRS 1 (amended) IFRS 7 (amended) IFRS 9 IFRS 10 IFRS 11 IFRS 12 IFRS 13 IAS 1 (amended) IAS 12 (amended) IAS 19 (revised) IAS 27 (revised) IAS 28 (revised) IFRIC 20 Severe Hyperination and Removal of Fixed Dates for First-time Adopters Disclosures Transfers of Financial Assets Financial Instruments Consolidated Financial Statements Joint Arrangements Disclosure of Interests in Other Entities Fair Value Measurement Presentation of Items of Other Comprehensive Income Deferred Tax: Recovery of Underlying Assets Employee Benets Separate Financial Statements Investments in Associates and Joint Ventures Stripping Costs in the Production Phase of a Surface Mine
The adoption of IFRS 9, which the Group plans to adopt for the year beginning on 1 January 2015, will impact both the measurement and disclosures of nancial instruments. The Directors anticipate the adoption of the other Standards and Interpretations listed above will not have a material impact on the Financial Statements of the Group. Accounting policies and presentation of nancial information Basis of preparation The Financial Statements have been prepared in accordance with IFRSs and IFRIC interpretations adopted for use in the European Union and therefore the consolidated Financial Statements comply with Article 4 of the EU IAS Regulation. The Financial Statements have also been prepared in accordance with IFRS as issued by the IASB.
63
Accounting policies and presentation of nancial information continued Basis of preparation continued The Financial Statements have been prepared under the historical cost convention except for the revaluation of certain nancial instruments. Historical cost is generally based on the fair value of the consideration given in exchange for the assets. The Financial Statements have been prepared on a going concern basis as set out in the Directors Report. The separate Financial Statements of the Parent Company are presented as required by the Companies Act 2006. As permitted by the Act, the separate Financial Statements have been prepared in accordance with IFRS. The Financial Statements have been prepared on the historical cost basis. The principal accounting policies are the same as those set out in the Statement of Accounting Policies and General Information in this section. As a Consolidated Statement of Comprehensive Income is included, a separate statement of comprehensive income for the Parent Company has not been included in accordance with section 408 of the Companies Act 2006. The loss for the year for the Parent Company is disclosed in the Statement of Changes in Equity in the Company Financial Statements. Adoption of new and revised accounting standards In the current year, a number of new and revised Standards and Interpretations have been adopted, including amendments to IFRS 3 (Business Combinations), IFRS 7 (Financial Instruments: Disclosures) and IAS 24 (Related Party Disclosures). However, none of these revisions had any impact on the Group. Basis of consolidation The consolidated Financial Statements consist of the Financial Statements of the Company and all its subsidiary undertakings. All intra-group transactions, balances, income and expenses are eliminated on consolidation. The results of subsidiaries acquired or disposed of during the year are included in the Consolidated Statement of Comprehensive Income from the effective date of acquisition or up to the effective date of disposal, as appropriate. Revenues and the results of subsidiary undertakings are consolidated in the Consolidated Statement of Comprehensive Income from the dates on which control over the operating and nancial decisions is obtained. Where necessary, adjustments are made to the results of subsidiary and joint venture entities to bring the accounting policies into line with those used by the Group. Commercial reserves Commercial reserves are proved and probable (2P) oil and gas reserves, which are dened as the estimated quantities of crude oil, natural gas and natural gas liquids which geological, geophysical and engineering data demonstrate with a specied degree of certainty to be recoverable in future years from known reservoirs and which are considered commercially viable. There should be a 50% statistical probability that the actual quantity of recoverable reserves will be more than the amount estimated as proven and probable reserves and a 50% statistical probability that it will be less. Joint ventures A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control. Where a Group Company undertakes its activities under joint venture arrangements directly, the Groups share of jointly controlled assets and any liabilities incurred jointly with other ventures are recognised in the Financial Statements of the relevant Company and classied according to their nature.
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Accounting policies and presentation of nancial information continued Joint ventures continued Liabilities and expenses incurred directly in respect of interests in jointly controlled assets are accounted for on an accruals basis. Income from the sale or use of the Groups share of the output of jointly controlled assets, and its share of joint venture expenses, are recognised when it is probable that the economic benets associated with the transaction will ow to/from the Group and their amount can be measured reliably. Joint venture arrangements which involve the establishment of a separate entity in which each venturer has an interest are referred to as jointly controlled entities. The Group reports its interest in jointly controlled entities using proportionate consolidation, that is, the Groups share of the assets, liabilities, income and expenses of jointly controlled entities that are combined with the equivalent items in consolidated Financial Statements on a line-by-line basis. Where the Group transacts with its jointly controlled entities, unrealised prots and losses are eliminated to the extent of the Groups interest in the joint venture. Acquisitions On an acquisition that qualies as a business combination in accordance with IFRS 3 Business Combinations, the assets and liabilities of a subsidiary are measured at their fair value as at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identiable net assets acquired is recognised as goodwill, which is treated as an intangible asset. Any deciency of the cost of acquisition below the fair values of the identiable net assets acquired is credited to the Statement of Comprehensive Income in the period of acquisition. If the Group acquires a group of assets or equity in a company that does not constitute a business combination in accordance with IFRS 3 Business Combination, the cost of the acquired group of assets or equity is allocated to the individual identiable assets acquired based on their relative fair value. Revenue Revenue represents the sales value, net of VAT and equivalent taxes, of the Groups share of liftings in the period together with tariff income. Interest income is recognised when it is probable that the economic benets will ow to the Group and the amount of revenue can be measured reliably. Income received under take-or-pay sales contracts in respect of undelivered volumes is accounted for as deferred income. Revenue is recognised when goods are delivered and title has passed. Interest revenue Interest revenue is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the nancial asset to that assets net carrying amount. Derivative nancial instruments and hedge accounting The Group uses derivative nancial instruments to manage its exposure to movements in oil and gas prices, interest rates and foreign exchange. The Group does not use derivatives for speculative purposes.
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Accounting policies and presentation of nancial information continued Derivative nancial instruments are stated at fair value The purpose for which a derivative is used is established at inception. To qualify for hedge accounting, the derivative must be highly effective in achieving its objective and this effectiveness must be documented at inception and throughout the period of the instrument (designation). Gains or losses on derivatives that do not qualify for hedge accounting treatment (either from inception or during the life of the instrument) are taken directly to the Statement of Comprehensive Income in the period. These include economic hedges that might qualify as accounting hedges, but were not designated as such at inception. The fair values of derivative instruments are calculated using quoted prices. Where such prices are not available, a discounted cash ow analysis is performed using the applicable yield curve for the duration of the instruments for non-optional derivatives, and option pricing models for optional derivatives. Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities of the contracts. Interest rate swaps are measured at the present value of future cash ows estimated and discounted based on the applicable yield curves derived from quoted interest rates. The estimated fair value of these derivatives is included in other creditors or other debtors in the Balance Sheet and the related changes in the fair value are included in other nancial gains and losses in the Statement of Comprehensive Income. Upon settlement , the cumulative amount of previously recognised gains or losses is reversed out of other nancial gains and losses and, together with any nal realised gains or losses, recorded within revenue. During 2011 and 2010 there were no derivatives that were designated as hedges for accounting purposes. Cost of sales Underlift and overlift Lifting or offtake arrangements for oil and gas produced in certain of the Groups jointly owned operations are such that each participant may not receive and sell its precise share of the overall production in each period. The resulting imbalance between cumulative entitlement and cumulative production is underlift or overlift. Underlift and overlift are valued at market value and included within debtors and creditors respectively. Movements during an accounting period are adjusted through cost of sales such that gross prot is recognised on an entitlements basis. Share based payment The Company has applied the requirements of IFRS 2 Share Based Payment. The Group makes equity settled share based payment to certain employees. Equity settled share based schemes are measured at fair value of the equity instrument at the date of grant. The fair value excludes the effect of non-market based vesting conditions. Details regarding the determination of the fair value of equity-settled share based transactions are set out in note 28. The fair value determined at the grant of the equity settled share based payment is expensed on a straight line basis over the vesting period, based on an estimate of shares that will eventually vest. At each balance sheet date, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of the non-market based vesting conditions. The expenses so recognised are simultaneously added back as an adjustment through equity.
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Accounting policies and presentation of nancial information continued Operating leases Rentals under operating leases are charged to the Statement of Comprehensive Income on a straight line basis over the term of the lease. Operating prot Operating prot is stated before investment income and nance costs. Foreign currencies The individual Financial Statements of each Group Company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated Financial Statements, the results and nancial position of each Group Company are expressed in US Dollars, which is the functional currency of the Company, and the presentation currency for the consolidated Financial Statements. On consolidation, Financial Statements of foreign currency denominated subsidiaries are translated into US Dollars whereby the results of the overseas operations are translated at the average rate of exchange for the period and their Balance Sheets at rates of exchange ruling at the balance sheet date. Transactions in foreign currencies in individual subsidiaries are recorded at the rates of exchange ruling at the transaction dates. Monetary assets and liabilities are translated into US Dollars at the exchange rates ruling at the balance sheet date, with a corresponding charge or credit to the Statement of Comprehensive Income. Finance costs and borrowings Finance costs of borrowings are allocated to periods over the term of the related debt at a constant rate on the carrying amount. Debt is shown on the Balance Sheet net of arrangement fees and issue costs, and amortised through to the statement of comprehensive income as nance costs over the term of the debt. Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to prepare for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognised in prot and loss in the period in which they are incurred. Taxation Current and deferred tax, including UK corporation tax and overseas corporation tax, are provided at amounts expected to be paid using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred corporation tax is recognised on all temporary differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more, or right to pay less tax in the future have occurred at the balance sheet date. Deferred tax assets are recognised only to the extent that it is considered more likely than not that there will be suitable taxable prots from which the underlying temporary differences can be deducted. Deferred tax is provided on temporary differences arising on acquisitions that are categorised as business combinations. Deferred tax is recognised at acquisition as part of the assessment of the fair value of assets and liabilities acquired. Any deferred tax is charged or credited in the statement of comprehensive income as the underlying temporary difference is reversed. Deferred tax is calculated at the rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax laws and rates that have been enacted at the balance sheet date.
67 Financial statements Salamander Energy PLC Annual Report 2011
Accounting policies and presentation of nancial information continued Exploration and evaluation assets The Group adopts the successful efforts method of accounting for exploration and evaluation costs. All licence acquisition, exploration and evaluation costs are initially capitalised as intangible xed assets in cost centres by well, eld or exploration area, as appropriate. Directly attributable administration costs and borrowing costs are capitalised insofar as they relate to specic exploration and development activities. Pre-licence costs are expensed in the period they are incurred. If prospects are deemed to be impaired (unsuccessful) on completion of an evaluation, the associated capitalised costs are charged to the Statement of Comprehensive Income. If the eld is determined to be commercially viable, the attributable costs are transferred to property, plant and equipment in a single eld cost centre. Property, plant and equipment Property, plant and equipment is stated in the Balance Sheet at cost less accumulated amortisation and depreciation. Oil and gas properties Oil and gas properties expenditures carried within each eld are amortised from the commencement of production, on a unit of production basis, which is the ratio of oil and gas production in the period to the estimated quantities of commercial reserves at the end of the period plus the production in the period, on a eld-by-eld basis. Costs used in the unit of production calculation comprise the net book value of capitalised costs plus the estimated future eld development costs. The production and reserve estimates used in the calculation are on an entitlements basis. Changes in the estimates of commercial reserves or future eld development costs are dealt with prospectively. Where there has been a change in economic conditions (including commodity assumptions and cost of capital) that indicate a possible impairment of a eld previously determined to be commercially viable, the recoverability of the net book amount relating to that eld is assessed by comparison with its recoverable amount, which is typically the estimated discounted future cash ows based on managements expectations of future oil and gas prices and future costs. Any impairment identied is charged to the Statement of Comprehensive Income as additional depreciation, depletion and amortisation. Where conditions giving rise to impairment subsequently reverse, the effect of the impairment charge is also reversed as a credit to the Statement of Comprehensive income, net of any depreciation that would have been charged since the impairment. Provision for decommissioning is recognised in full when the related facilities are installed, where the Group has a legal or constructive obligation to decommission. A corresponding amount equivalent to the provision is also recognised as part of the cost of the related property, plant and equipment. The amount recognised is the estimated cost of decommissioning, discounted to its net present value and is reassessed each year in accordance with local conditions and requirements. Changes in the estimated timing of decommissioning or decommissioning cost estimates are dealt with prospectively by recording an adjustment to the provision, and a corresponding adjustment to property, plant and equipment. The unwinding of the discount on the decommissioning provision is included as nance costs. Other xed assets Property, plant and equipment, other than oil and gas properties, is depreciated at rates calculated to write off the cost less estimated residual value of each asset on a straight line basis over its expected useful economic life of between three and ve years.
68
Accounting policies and presentation of nancial information continued Investments Investments in subsidiaries and joint venture entities held by the Company as non-current assets are stated at cost less any provision for impairment. Share issue expenses and share premium account Costs of share issues are written off against the premium arising on the issue of share capital. Inventories Inventories of oil are stated at their net realisable values. Inventories of materials are stated at the lower of cost or net realisable value. Financial instruments Financial assets and nancial liabilities are recognised in the Groups Balance Sheet when the Group becomes a party to the contractual provisions of the instrument. Financial assets All nancial assets are recognised and derecognised on a trade date where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, plus transaction costs, except for those nancial assets classied as at fair value through prot and loss, which are initially measured at fair value. Financial assets are classied into the following specied categories: nancial assets at fair value through prot and loss (FVTPL), held-to-maturity investments, available-for-sale (AFS) nancial assets and loans and receivables. The classication depends on the nature and purpose of the nancial assets and is determined at the time of initial recognition. Loans and receivables Trade receivables, loans, and other receivables that have xed or determinable payments that are not quoted in an active market are classied as loans and receivables. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short term receivables when the recognition of interest would be immaterial. Effective interest method The effective interest method is a method of calculating the amortised cost of a nancial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the nancial asset. Income is recognised on an effective interest basis for all debt instruments. Income is recognised on an effective interest basis for debt instruments other than those nancial assets classied as at FVTPL. Financial assets at fair value through prot and loss(FVTPL) Financial assets are classied as nancial assets at fair value through prot and loss where the Group acquires the nancial asset principally for the purpose of selling in the near term, is a part of an identied portfolio of nancial instruments that the Group manages together and has a recent actual pattern of short term prot taking, as well as all derivatives that are not designated and effective as hedging instruments. Financial assets at fair value through prot and loss are stated at fair value, with any resultant gain or loss recognised in Prot and Loss. The net gain or loss recognised in prot and loss incorporates any dividend or interest earned on the nancial asset and is included in the other nancial gains and losses line item in the Consolidated Statement of Comprehensive Income. Fair value is determined in the manner described in note 25.
69 Financial statements Salamander Energy PLC Annual Report 2011
Accounting policies and presentation of nancial information continued Financial instruments continued Impairment of nancial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the nancial asset, the estimated future cash ows of the investment have been impacted. All impairment losses are taken to the Statement of Comprehensive Income. Trade receivables are assessed for impairment based on the number of days outstanding on individual invoices. Any trade receivable that is deemed uncollectible is immediately written off to the Statement of Comprehensive Income; any subsequent recoveries are also taken directly to the Statement of Comprehensive Income upon receipt of cash collected. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits, and other short term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignicant risk of changes in value. Derecognition of nancial assets The Group derecognises a nancial asset only when the contractual rights to the cash ows from the asset expire; or it transfers the nancial asset and substantially all the risks and rewards of ownership of the asset to another entity. Financial liabilities Financial liabilities are classied as either nancial liabilities at FVTPL or other nancial liabilities. Financial liabilities at fair value through prot and loss (FVTPL) Financial liabilities are classied as at FVTPL where the nancial liability is either held for trading or it is designated as at FVTPL. Financial liabilities at FVTPL are stated at fair value, with any resultant gain or loss recognised in prot and loss. The net gain or loss recognised in prot and loss incorporates any interest paid on the nancial liability and is included in the other nancial gains and losses line item in the Consolidated Statement of Comprehensive Income. Fair value is determined in the manner described in note 25. Other nancial liabilities Other nancial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other nancial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a nancial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the nancial liability, or, where appropriate, a shorter period. Derecognition of nancial liabilities The Group derecognises nancial liabilities when, and only when, the Groups obligations are discharged, cancelled or they expire. Critical judgements and accounting estimates In the process of applying the Groups accounting policies described above, management has made judgements and estimates that may have a signicant effect on the amounts recognised in the Financial Statements.
70
Accounting policies and presentation of nancial information continued Critical judgements and accounting estimates continued Management is required to assess the level of the Groups commercial reserves together with the future expenditures to access those reserves, which are utilised in determining the amortisation and depreciation charge for the period and assessing whether any impairment charge is required. The Group employs independent reserves specialists who periodically report on the Groups level of commercial reserves by evaluating the estimates of the Groups in house reserves specialists and where necessary referencing geological, geophysical and engineering data together with reports, presentations and nancial information pertaining to the contractual and scal terms applicable to the Groups assets. In addition the Group undertakes its own assessment of commercial reserves and related future capital expenditure by reference to the same datasets using its own internal expertise. The estimates adopted by the Group may differ from the independent reserves specialists estimates where management considers that adjustments are appropriate in the circumstances. Management is required to assess intangible xed assets for impairment with reference to the indicators provided in IFRS 6 Exploration for Evaluation of Mineral Resources. Note 12 to the consolidated Financial Statements discloses the carrying value of such assets. Management is required to determine the fair value of the assets and liabilities acquired under a business combination, including the cost of the acquisition, and allocate a fair value cost to the underlying assets acquired. There were no transactions in the current year that qualied as a business combination. Management is required to review and potentially test property, plant and equipment for impairment, usually by estimating a pre-tax value in use for each asset held and comparing that value to the net book amount of the asset being carried in the Balance Sheet. Such a review is done on at least an annual basis. This requires estimates to be made from, in particular, future commodity prices, production volumes, capital/operating expenditure and an appropriate pre-tax discount rate. Details of certain impairments that arose in the current year are provided in note 13 to the consolidated Financial Statements. Management, with regard to the BNPP led Reserves Based Lending facility, is required to estimate the amount of borrowings that are classied as due within one year and the amount that is classied as due after one year, as the calculations are based on uncertain future assumptions such as oil price and other economic factors. In recording a provision for decommissioning, management is required to make estimates as to the legal requirements, related costs, timing of work and the discount rate. Management is required to make assumptions in respect of the inputs used to calculate the fair values of share based payment arrangements. Details of these assumptions and the resultant charge to the Statement of Comprehensive Income are provided in note 28 to the Consolidated Financial Statements. The Group is subject to income tax principally in Thailand and Indonesia. In deciding whether provisions are required for uncertain tax positions, management is required to make judgements as to the status of on-going discussions with the relevant tax authorities and other counterparties and uses both its in house tax expertise and advice from independent tax advisers. In such circumstances the Group recognises liabilities for anticipated taxes based on the best information available and where the anticipated liability is both probable and estimable. Management is required to assess the carrying value of investments in subsidiaries in the Parent Company Balance Sheet for impairment by reference to the recoverable amount. This requires an estimate of amounts recoverable from oil and gas assets within the underlying subsidiaries, which is inherently uncertain.
71
Notes
2011 $000s
2010 $000s
Continuing operations Revenue Cost of sales Impairment Other cost of sales Total cost of sales Gross profit Exploration expenses: Exploration costs written off Pre-licence exploration expenses Total exploration expenses Profit on disposal of subsidiary undertakings Administration expenses Operating profit/(loss) Interest revenue Finance costs Other financial (losses)/gains Profit/(loss) before tax Taxation: Current tax Deferred tax Total Taxation Loss for the year (and total comprehensive loss) attributable to equity owners of the Company
323,374 (48,575) (272,184) (320,759) 2,615 (91,336) (4,532) (95,868) (12,707) (105,960) 399 (15,523) 7,431 (113,653) (71,564) 15,699 (55,865) (169,518)
$s
3, 13 3 3
12
30
6 7 8 9
10 10
Notes
$s
11
(0.29)
(1.10)
72
Notes
2011 $000s
2010 $000s
Assets Non-current assets Intangible exploration and evaluation assets Property, plant and equipment Other receivables: Restricted bank deposits Other Deferred tax asset Total non-current assets Current assets Inventories Trade and other receivables Restricted bank deposits Cash and cash equivalents Total current assets Total assets Liabilities Non-current liabilities Borrowings Convertible bonds Provisions Deferred tax liability Total non-current liabilities Current liabilities Trade and other payables Borrowings due within one year Current tax liability Total current liabilities Total liabilities Net assets Equity Share capital Share premium Other reserves Retained loss Total equity, all attributable to owners of the Company
12 13
239,278 517,005 4,339 6,516 3,075 770,213 20,375 109,991 5,041 89,860 225,267 995,480
14 14 17
18 19 14 20
21 22 23 17
80,010 88,084 9,490 121,583 299,167 108,676 103,796 64,450 276,922 576,089 419,391 30,034 381,565 261,786 (253,994) 419,391
24 21
60,851 17,303 83,807 161,961 592,857 378,973 30,160 381,565 266,704 (299,456) 378,973
27
Approved by and authorised for issue, and signed on behalf of, the Board of Directors.
Jonathan Copus Chief Financial Ofcer 23 March 2012 Company Number 5934263
73
Total $000s
At 1 January 2010 Ordinary shares issued Share based payments Convertible bond Comprehensive loss for the year At 31 December 2010 Ordinary shares issued Share based payments Comprehensive loss for the year At 31 December 2011 Other reserves Other reserves comprise:
572,006 3,070 2,562 11,271 (169,518) 419,391 126 4,918 (45,462) 378,973
2011 $000s
2010 $000s
Share based payment reserve Convertible bond (see note 22) Merger reserve Total other reserves
74
Notes
2011 $000s
2010 $000s
Cash flow from operating activities Profit/(Loss) before tax Adjustments for: Amortisation, depreciation and impairment Exploration write-offs Profit on disposal of subsidiary undertakings Interest revenue Finance costs Other financial losses/(gains) Share based payments Operating cash flow prior to movement in working capital (Increase)/Decrease in inventories Decrease/(Increase) in trade and other receivables Decrease in trade and other payables Cash generated from operations Payment of tax Net cash from operating activities Investing activities Expenditure on intangible assets Purchase of property, plant and equipment Proceeds from disposal of subsidiary undertakings Movement in restricted bank deposits Interest received Net cash used in investing activities Financing activities Interest paid Other financial payments Cash flows in respect of long term borrowings, net Drawdown of borrowings facilities Repayment of borrowings facilities Issue of convertible bond Proceeds in respect of shares issued Net cash (used in)/from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effect of foreign exchange rate changes Cash and cash equivalents at the end of the year
112,649 109,308 50,316 (6,807) (55) 22,247 2,084 3,836 293,578 (34,551) 53,395 (16,461) 295,961 (102,052) 193,909 (123,318) (108,211) 45,673 (17,465) 4 (203,317) (13,877) (2,762) 221,712 (224,678) 126 (19,479) (28,887) 89,860 (597) 60,376
(113,653) 186,884 91,336 - (399) 15,523 (7,431) 2,092 174,352 3,951 (51,623) (1,479) 125,201 (18,693) 106,508 (48,228) (117,389) 6,271 382 (158,964) (9,426) (5,292) 98,053 (88,546) 97,273 3,070 95,132 42,676 47,753 (569) 89,860
30
Prior year other financial receipts/payments have been reclassified to separately disclose the proceeds in respect of shares issued.
75
Segmental analysis
The Groups reportable and geographical segments are Thailand, Indonesia, the Philippines, Lao PDR, Vietnam and Other. Other activities include its corporate centre in the UK. Information regarding the Groups operating segments is reported below. Segment revenues and results The following is an analysis of the Groups revenue, results and assets by reportable segment (as reviewed by management):
2011 Thailand $000s Indonesia $000s Philippines $000s Lao PDR $000s Vietnam $000s Other $000s Total $000s
Revenue (external) Operating profit/(loss) Interest revenue Finance cost Other financial losses Profit before tax Tax Loss for the year Non-current assets Total assets Depreciation and amortisation Additions to non-current assets
291,438 152,996
116,212 14,630
250
(131) (16,361)
350 408,000 (14,459) 136,925 55 55 (22,247) (22,247) (2,084) (2,084) 112,649 (158,111) (158,111) (45,462)
254
1,131 15,079
1 This balance predominantly consists of the long term and short term restricted bank deposits of $1,363,000 and $24,011,000 respectively.
2010 Thailand $000s Indonesia $000s Philippines $000s Lao PDR $000s Vietnam $000s Other $000s Total $000s
Revenue (external) Operating profit/(loss) Interest revenue Finance cost Other financial gains Loss before tax Tax Loss for the year Non-current assets Total assets Depreciation and amortisation (Reversal of impairment)/ Impairment Additions to non-current assets
203,931 121,167
122,368 (167,968)
(6,909)
(7,915)
(25,058)
(2,925) 323,374 (19,277) (105,960) 399 (15,523) 7,431 (55,865) 399 (15,523) 7,431 (113,653) (55,865) (169,518)
13 1,284 5 (134)
The accounting policies used for the reportable segments are the same as the Groups accounting policies.
76
For the purposes of monitoring segment performance and allocating resources between segments, the Groups Chief Operating Ofcer monitors the tangible, intangible and nancial assets attributable to each segment. All assets are allocated to reportable segments with the exception of the segments nancial assets (except for trade and other receivables) (see note 19) and tax assets. Information about major customers Included in revenues arising from Thailand are revenues of approximately $264,550,000 (2010: $203,391,000), and in Indonesia revenues of $27,100,000 (2010: $46,544,000), which arose from sales to the Groups largest customers. 2 Revenue
2011 $000s 2010 $000s
Revenue, excluding interest revenue (see note 7), comprises: Sales of oil Sales of gas Oil and gas derivatives: Realised settlement gains/(losses) Total revenue (excluding interest revenue) 339,435 68,215 350 408,000 261,405 64,894 (2,925) 323,374
Total revenue in accordance with IAS 18 includes interest revenue and amounted to $408,004,000 (2010: $323,773,000). 3 Cost of sales
2011 $000s 2010 $000s
Cost of sales comprises: Operating costs Royalty payable Amortisation of oil and gas properties Impairment Overlift Movement in inventories of oil Total cost of sales 104,895 26,117 109,034 (34,550) 205,496 102,490 16,801 137,830 48,575 2,341 12,722 320,759
Of total royalties payable of $26,117,000 (2010: 16,801,000), $3,361,000 (2010: $2,773,000) was payable in respect of Thailand assets where the royalty was deductible as an advance payment of income tax to the extent income tax was payable (see note 10). 4 Employee numbers and costs
The monthly average number of employees (including Executive Directors and consultants) employed and charged to operations was as follows:
2011 Number 2010 Number
127 68 195
94 39 133
77
Their aggregate remuneration was as follows: Wages and salaries Share based payment (see note 28) Pension Social security Total employee costs 32,003 4,918 1,266 1,303 39,490 19,134 2,562 559 888 23,143
A proportion of total employee costs were directly attributable to capital and other projects and were capitalised or expensed consistent with the project expenditures as follows:
2011 $000s 2010 $000s
Non-current assets Operating costs Administrative expenses Total employee costs 5 Operating lease arrangements
2011 $000s
2010 $000s
FPSO lease Office leases Minimum lease payments under operating leases recognised in Statement of Comprehensive Income for the year
At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:
2011 FPSO $000s Ofces $000s 2010 FPSO $000s Ofces $000s
Within one year Within two to five years Greater than five years Total outstanding operating lease commitments
Ofce leases are negotiated for an average term of two years with rentals xed for an average of two years. The FPSO lease is negotiated for an average term of ve years with an option to extend for up to a further ve years at the same xed rate.
78
Operating prot/(loss)
2011 $000s 2010 $000s
Operating prot/(loss) is stated after charging/(crediting): Impairment Exploration costs written off Pre-licence exploration expenses Profit on disposal of subsidiary undertakings Employee costs expensed (see note 4) Amortisation and depreciation of property, plant and equipment Auditors remuneration (see below): Audit services Non-audit services Movement in inventories of oil Operating lease arrangements (see note 5): FPSO lease Office leases Auditors remuneration The following is an analysis of gross fees paid to the Companys Auditor, Deloitte LLP:
2011 $000s 2010 $000s
50,316 7,502 (6,807) 23,643 109,034 602 265 (34,764) 19,901 2,683
48,575 91,336 4,532 13,908 137,830 540 1,694 12,722 13,778 2,089
Audit services Fees payable to the Companys Auditor for the audit of the Companys annual accounts Audit of the Companys subsidiaries pursuant to legislation Total audit fees Non-audit services Audit related assurance services Corporate finance services (reporting accountant services) Tax compliance services Tax advisory services Other assurance services Total non-audit services Total Audit related assurance services represents the fees for the Groups half-year review.
Fees payable to Deloitte LLP and their associates for non-audit services to the Company are not required to be disclosed because the consolidated Financial Statements are required to disclose such fees on a consolidated basis. 7 Interest revenue
2011 $000s 2010 $000s
55 55
17 382 399
79
Finance costs
2011 $000s 2010 $000s
Long term borrowings Amortisation of capitalised arrangement fees Interest expense Unwinding of discount: Convertible bonds Provision for decommissioning Less interest capitalised Total finance costs
Interest capitalised during the year arose on the general borrowings pool and is calculated by applying a capitalisation rate of 4.7% (2010: 4.6%) to expenditure on such assets. The amortisation of capitalised arrangement fees includes a $5.5 million charge for the write-off of unamortised fees in respect of the previous reserves based lending (RBL) facility and bridge loan facilities, which were replaced by a new RBL facility in May 2011 (see note 21). 9 Other nancial gains and losses
2011 $000s 2010 $000s
(Loss)/profit relating to oil derivatives Profit/(loss) relating to interest rate swap derivatives (Loss)/profit on investments Currency exchange loss Total other financial (losses)/gains
No other gains and losses have been recognised in respect of loans and receivables, other than those recognised in note 7. No gains or losses have been recognised on nancial liabilities measured at amortised cost other than as disclosed in note 8. 10 Taxation
2011 $000s 2010 $000s
Current taxation Income tax current year Income tax prior year adjustment Special remuneratory benefit Total current tax Deferred taxation Income tax Special Remuneratory Benet Total deferred tax (see note 17) Total tax charge
Special remuneratory benet (SRB) is a tax that arises on certain elds in Thailand and is payable at a variable rate dependent on a number of nancial and operational metrics.
80
10 Taxation continued Reconciliation of tax charge to loss before tax The tax charge for the year can be reconciled to the prot/(loss) before tax per the Statement of Comprehensive Income as follows:
2011 $000s 2010 $000s
Profit/(loss) before taxation Applicable rate Tax at the applicable rate of tax Tax effect of: Items which are not deductible for tax: Exploration expenses Other UK losses not recognised Foreign losses not recognised Thailand special remuneratory benefit Different foreign tax rates Total tax charge
The Groups operations are conducted primarily outside the United Kingdom. Accordingly the applicable tax rate used above is the average statutory rate of tax (excluding SRB), weighted in proportion to accounting prots, applicable across the Group. 11 Loss per ordinary share The calculation of the basic and diluted loss per share is based on the following data:
Units 2011 2010
Loss for the purpose of basic and diluted earnings per share being the net loss attributable to equity holders of the Parent Weighted average number of ordinary shares for the purpose of basic and diluted earnings per share1 Loss per ordinary share Basic and diluted
$000s
000s
$s
1 As there is a loss for the years ended 31 December 2011 and 2010, there is no difference between the basic and diluted earnings per share. Potentially dilutive ordinary shares for the year ended 31 December 2011 were 4,200,086 (2010: 4,305,854) in respect of share options and 17,982,465 (2010: 17,982,465) in respect of convertible bonds.
81
Exploration and evaluation At 1 January Additions Transfers to property, plant and equipment Costs written off At 31 December
The amounts shown above for intangible exploration and evaluation assets represent the Groups current exploration projects. The transfer to property, plant and equipment in 2011 includes transfer of intangible costs in respect of Thailand (Bualuang East Terrace) and Indonesia (Kerendan) on commercialisation of the related assets. Included within the total amount are assets held in Indonesia of $177,616,000 (2010: $172,576,000) and Thailand of $45,873,000 (2010: $66,021,000). 13 Property, plant and equipment
Oil and gas properties Cost $000s Amortisation $000s Total $000s Other xed assets Cost $000s Depreciation $000s Total $000s Total net book value $000s
1 January 2010 Additions for the period Amortisation and depreciation Impairment 31 December 2010 Additions for the period Disposals for the period Transfers from intangible assets Amortisation and depreciation 31 December 2011
742,762 127,256
863 575,945 688 127,944 (610) (138,309) (48,575) 941 517,005 683 107,185 (38,866) 46,754 (142) (109,308) 1,482 522,770
870,018 (353,954) 516,064 106,502 106,502 (38,866) (38,866) 46,754 46,754 (109,166) (109,166) 984,408 (463,120) 521,288
Additions to oil and gas properties include capitalised interest of $1,809,000 (2010: $182,000) charged at an average rate of 4.7% (2010: 4.6%). Included in the net book amount at 31 December 2011 in oil and gas properties are assets amounting to $464,117,000 (2010: $402,315,000) pledged against the Groups existing seven year reserve based lending facility. During 2011, the Group disposed of its Indonesia ONWJ and SES assets, effective 30 June 2011, for consideration of $55,000,000. The transaction closed on 12 October 2011. Adjusting for working capital movement from the effective date to the closing date, net cash proceeds received amounted to $45,673,000. The 2010 impairment charge of $48.6 million is the net effect of a $91.5 million charge in respect of Kambuna and a $42.9 million write-back in respect of the Bualuang asset in Thailand. All the above impairments were calculated based on the respective assets value in use, using managements best estimate of future commodity prices, the latest estimate of commercial reserves and a pre-tax discount rate of 12.5%.
82
14 Other receivables Restricted long term and short term bank deposits of $1,363,000 and $24,011,000 respectively (2010: $4,339,000 and $5,041,000) represent deposits held as security against bank guarantees issued by the bank on behalf of the Group in support of certain of its operations. The Other balance of $23,889,000 (2010: $6,516,000) represents VAT arising on the Groups Indonesian exploration and evaluation activities, which will only be recovered once the related assets begin production. 15 Commitments and guarantees Bank guarantees At 31 December 2011, there were outstanding bank guarantees issued by banks on behalf of the Group, amounting to $27,000,000 (2010: $16,500,000). Capital commitments The Groups outstanding nancial capital commitments represent the minimum agreed amounts the Group will expend completing its obligated work programmes of carrying out geophysical and geological studies, and to drill exploration and appraisal wells. At 31 December 2011, the Group anticipates it will discharge its minimum nancial capital commitments as follows:
2012 $000s 2013 $000s 2014 $000s
91,000
50,000
Under certain Indonesia licence agreements, BPMigas has the right to determine that a 10% undivided interest in the total rights and obligations under the PSC be offered to a Government-designated Indonesian company, the shareholders of which shall be Indonesian nationals or a local government company (the Indonesian Participant).
83
16 Group Companies The subsidiaries and jointly controlled entities of the group, the activity of which relates to oil and gas exploration, development and production, at the balance sheet date were as follows: Subsidiaries
Company Country of operation Country of incorporation Percentage holding
Salamander Energy Group Limited1 Salamander Energy (E&P) Limited PHT Partners LP Salamander Energy (Holdco) Limited Salamander Energy Singapore Pte Ltd Salamander Energy (S.E. Asia) Limited Salamander Energy (Bontang) Company Pte Ltd Salamander Energy (Philippines) Limited Salamander Energy (Indonesia) Limited Salamander Energy (Vietnam) Limited Salamander Energy (Simenggaris) Limited Salamander Energy (Bengara) limited Salamander Energy (Lao) Company Limited Salamander Energy (Canada) Limited Salamander International Holdings Limited Salamander Energy (Asahan) Limited Salamander Energy (Seruway) Limited Salamander Bualuang & Kambuna Holdings Limited Salamander Energy (Bualuang) Limited Salamander Energy (Glagah Kambuna) Limited Salamander Energy (Kutai) Limited Salamander Energy (S.E. Sangatta) Limited Salamander Energy (North Sumatra) Limited Salamander Energy (Bualuang Holdings) Limited
100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
United States of America United States of America Great Britain Singapore Great Britain Indonesia The Philippines Indonesia Vietnam Indonesia Indonesia Lao PDR Canada British Virgin Islands Indonesia Indonesia British Virgin Islands British Virgin Islands Indonesia Indonesia Indonesia Indonesia Great Britain Great Britain Indonesia Great Britain Singapore Great Britain Singapore Great Britain Great Britain Great Britain Great Britain Great Britain Lao PDR Canada British Virgin Islands British Virgin Islands British Virgin Islands British Virgin Islands British Virgin Islands British Virgin Islands Great Britain Great Britain British Virgin Islands Great Britain Great Britain Great Britain
Salamander Energy (Glagah Kambuna Holdings) Limited Bontang Energy Limited1 Salamander Energy Thailand LLC Salamander Energy (Thailand) Co., Ltd Salamander Energy (South Sokang) Limited Salamander Energy (Bangkanai) Limited Salamander Energy (JS) Limited Salamander Energy (Central Kalimantan) Limited
Thailand United States of America Thailand Indonesia Indonesia Indonesia Indonesia Thailand Great Britain British Virgin Islands Great Britain Belize
1 Salamander Energy Group Limited and Bontang Energy Limited are the only direct subsidiaries of the Company.
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The following amounts are included in the Financial Statements relating to proportionately consolidated jointly controlled entities of the Group:
2011 $000s 2010 $000s
Total revenue Total expenses Non-current assets Current assets Non-current liabilities Current liabilities 17 Deferred tax assets and liabilities Net deferred tax liabilities were:
At 1 January (Disposal)/acquisition of subsidiaries Debited/(credited) to Statement of Comprehensive Income (see note 10) At 31 December Deferred tax assets and liabilities included in the Balance Sheet were as follows:
Deferred tax assets Deferred tax liabilities Net deferred tax liabilities
At 31 December 2011, the Group had unused tax losses of $134,500,000 available for offset against future prots. The Group has not recognised a potential deferred tax asset of $33,600,000 (2010: $10,456,000) relating to these losses, as there was insufcient evidence of future taxable prots in the relevant jurisdictions. With the exception of losses of $2,600,000 (2010: $2,700,000) which expire in 15 to 20 years, these losses can be carried forward indenitely. In addition, at the balance sheet date the Group has other deductible temporary differences of $16,600,000. The Group has not recognised a potential deferred tax asset on these temporary differences as there was insufcient evidence of future taxable prots in the relevant jurisdictions. There are no signicant unrecognised temporary differences associated with undistributed prots of subsidiaries and joint ventures. The net deferred tax liability of $155,192,000 (2010: $118,508,000) materially arose as a result of accelerated tax depreciation.
85
18 Inventories
2011 $000s 2010 $000s
2011 $000s
2010 $000s
Prepayments Trade debtors Underlift Other debtors Total trade and other receivables
Trade debtors disclosed above are classied as loans and receivables and are therefore measured at amortised cost. The Other debtors balance above primarily relates to VAT and amounts owed by other joint venture partners. The Group does not hold any collateral or other credit enhancements over these balances nor does it have a legal right of offset against any amounts owed by the Group to the counterparty. The average age of trade debtors is 8.2 days (2010: 68.5 days). The Group does not have any receivables that are past their due date. No provision for doubtful debts has been raised (2010: nil) as it is believed that all trade debtor balances are recoverable. The Directors consider the carrying amount of trade and other receivables approximates to their fair value. 20 Cash and cash equivalents
2011 $000s 2010 $000s
Amounts held directly by the Group Amounts held in joint ventures Total cash and cash equivalents
Of the amounts held directly by the Group, $13,418,000 (2010: $24,491,000) was held in debt service accounts and subject to restrictions in accordance with the Groups debt facility, the key terms of which are described in note 21 to the consolidated Financial Statements. Financial institutions which held greater than 5% of the Groups cash and cash equivalents at the balance sheet date, and their credit ratings, were as follows:
S&P Credit Rating 2011 $000s 2010 $000s
HSBC Bank Plc The Hong Kong and Shanghai Banking Corporation Ltd BNPP BNI
86
21 Borrowings
2011 $000s 2010 $000s
Principal repayable on maturity Less deferred fees Total unamortised borrowings Less amounts due within one year Total long term borrowings
In May 2011, the Group completed the renancing of its existing borrowings, replacing its combined $230 million senior/junior reserves based lending facilities and $90 million acquisition bridge facility with combined $325 million senior/junior reserves based lending facilities. The new facilities have been arranged for a tenure of seven years and have a cost of debt and securitisation comparable to the previous facilities. Net debt
2011 $000s 2010 $000s
Amounts due on maturity Borrowings Convertible bonds (see note 22) Total gross debt Less restricted bank deposits Less cash and cash equivalents (see note 20) Total net debt
At the balance sheet date, the principal repayable on maturity (excluding the convertible bonds, see note 22) is calculated to be repayable as follows:
2011 $000s 2010 $000s
On demand or due within one year In the second year In the third to fifth year inclusive After five years Total principal payable on maturity
Total gross debt at the balance sheet date includes a seven year reserves based lending facility re-nanced in May 2011 and a convertible bond issued in March 2010 (see note 22). The reserves based lending facilities are secured against certain of the Groups Thailand and Indonesia development and producing assets, and includes certain covenants relating to the ratio of the loan balance outstanding to the net present value of cash ows of the secured assets. There has been no breach of terms on the borrowing facility. The key terms of the facility are: Initial facilities amount of $325 million (senior: $250 million; and junior: $75 million). The Group may draw an amount up to the lower of the facility amount or the borrowing base amount as determined by the forecast cash ows arising from the borrowing base assets. Interest accrues at a rate of between 2.80% and 3.30% plus LIBOR depending on the maturity of the assets. The borrowing base amount is re-determined on a bi-annual basis, with the Group further having the option to undertake two mid-period redeterminations in each year should it elect to do so.
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21 Borrowings continued Net debt continued No early repayment penalties. Change of control provisions.
At 31 December 2011, the Group had drawn fully against the amount that was available under the facility (2010: fully drawn against the facility available). 22 Convertible bonds The convertible bonds were issued on 30 March 2010 at an issue price of $100 million. The bonds are convertible into ordinary shares of the Company at any time between the date of issue of the bonds and their settlement date. On issue, each bond was convertible at a price of 3.637 per share and using a xed rate of exchange of 1 = $1.529. The conversion price is set at a 37.5% premium to the volume weighted average share price of the ordinary shares at the date the convertible bonds were issued. If the bonds have not been converted, they will be redeemed on 30 March 2015 at par. Interest of 5% will be paid annually up until that settlement date. The net proceeds received from the issue of the convertible bonds have been split between the nancial liability element (estimated at the time of issue using the prevailing market interest rate for similar non-convertible debt) and an equity component of $11,586,000 (before expenses of $315,000) representing the fair value of the embedded option to convert the nancial liability into equity of the Company. The movement in the liability component during the year was as follows:
2011 $000s 2010 $000s
Liability component at start of period Issues during the period Coupon interest charged Unwinding of discount Interest paid Less deferred fees relating to debt component Amortisation of deferred fees Liability component at end of period Reported in: Non-current liabilities Trade and other payables in current liabilities Total liability component
88,414 3,795 1,738 (2,500) (2,410) 342 89,379 88,084 1,295 89,379
The total convertible bond interest expensed for the period is calculated by applying an effective interest rate of 8% to the liability component. The liability component is measured at amortised cost. The difference between the carrying amount of the liability component at the date of issue and the amount reported in the Balance Sheet at 31 December 2011 represents the effective interest rate less interest paid to that date. At 31 December 2011, using a discount rate of 8%, the convertible bonds have a fair value of $93,399,000 (2010: $91,306,000).
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23 Provisions Provisions for decommissioning and restoration of oil and gas assets are:
2011 $000s 2010 $000s
Of the total above, it is expected that the rst decommissioning is to take place from 2014 ($3,000,000 in respect of the Kambuna eld) with the remainder expected to fall due from 2025. 24 Trade and other payables
2011 $000s 2010 $000s
Trade creditors Overlift Other creditors Accrued expenses Total trade and other payables
The average credit period taken for trade purchases is 36.5 days (2010: 80.2 days). The Directors consider the carrying value of trade and other payables (on which no interest is incurred) approximates to their fair value. 25 Derivative nancial instruments Capital risk management The Group manages its capital to ensure that entities in the Group are able to continue as going concerns while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt, which includes the borrowings and convertible bonds disclosed in notes 21 and 22, cash and cash equivalents as disclosed in note 20, and equity attributable to equity holders of the Company, comprising issued capital, reserves and retained earnings as disclosed in note 27 and the Statement of Changes in Equity. This is further discussed in the Directors Report. Gearing ratio Management reviews the capital structure on a continuing basis. The gearing ratio, dened as borrowings divided by net book equity plus borrowings at the year end, was as follows:
2011 $000s 2010 $000s
Signicant accounting policies Details of signicant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which the income and expenses are recognised, in respect of each class of nancial asset, nancial liability and equity instrument, are disclosed in the Statement of Accounting Policies.
89
Financial assets Restricted bank deposits Cash and bank balances Loans and receivables Mark-to-market value of oil derivatives Financial liabilities Mark-to-market value of interest rate swap derivatives Mark-to-market value of oil derivatives Amortised cost
Financial assets and liabilities exclude tax receivables and payables as they do not constitute a contractual right or obligation to receive or pay cash or another nancial asset. There were no reclassications of nancial assets during the year (2010: nil). Financial risk management The Groups Board of Directors monitors and manages the nancial risks relating to the operations of the Group through an internal risk register. These include commodity, foreign exchange, credit, liquidity and interest rate risks. Commodity price risk The Groups policy is to consider oil and gas price hedging when and where it is economically attractive to lock in prices at levels that protect the cash ow of the Salamander Group, its business plan and debt related coverage ratios. All hedging transactions to date have been related directly to expected cash ows and no speculative transactions have been undertaken. For 2011, the Groups oil production was all sold at prices relative to the spot market. 2011 production was hedged with put options for 4,000 bopd with a price of $60.00 per barrel, all of which expired in 2011. During September 2011 the Group purchased put options for 1,800 bopd with a price of $70.00 per barrel and swaps for 1,800 bopd with an average swap price of $103 per barrel. During 2011, 77% of the Groups gas production (its Indonesian gas production) was sold at xed prices under long term contracts with the balance (its Thai gas production) sold at prices based on a formula related to spot medium sulphur fuel oil prices. The Group held no hedges with respect to its gas production during 2011. The key variable which affects the fair value of the Groups hedging instruments is market expectations about future commodity prices. The following illustrates the sensitivity on hedging mark-to-market values to net income and equity to a 20% increase and a 20% decrease in this variable (a positive sign indicates a positive effect on net income and vice versa): Increase/(decrease) to mark-to-market value
2011 Oil $000s 2010 Oil $000s
(13,722) 15,394
(256) 1,165
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25 Derivative nancial instruments continued Foreign exchange risk The Group undertakes certain transactions denominated in foreign currencies, hence exposures to exchange rate uctuations arise. Exchange rate exposures are managed through maintaining the majority of the Groups cash and cash equivalent balances in US Dollars, the Groups presentational currency and the functional currency of all its subsidiaries. The Group also holds, from time to time, cash balances in UK Pounds Sterling and other currencies to meet short term commitments in those currencies. The carrying amounts of the Groups foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows:
Asset 2011 $000s 2010 $000s Liabilities 2011 $000s 2010 $000s
UK Pounds Sterling Singapore Dollar Indonesian Rupiah Thailand Baht Vietnamese Dong
The following table details the Groups sensitivity to a 20% increase or decrease in the US Dollar against the relevant foreign currency. The sensitivity analysis includes only foreign currency denominated monetary items and adjusts their translation at the year end for a 20% change in the foreign currency rate. A positive number below indicates an increase in prot after tax where the US Dollar strengthens by 20% against the relevant currency. For a 20% weakening of the US Dollar against the relevant currency, there would be an equal and opposite impact on the prot after tax and the balances below would be negative.
2011 $000s 2010 $000s
Change in profit or loss UK Pounds Sterling Singapore Dollar Indonesian Rupiah Thailand Baht Vietnamese Dong Credit risk
Credit risk refers to the risk that a counterparty will default on its obligations, resulting in a nancial loss to the Group. The Group is exposed to the following credit and counterparty risks. In respect of cash and cash equivalents, the Groups principal nancial asset, the credit risk is deemed limited because the majority of the cash and cash equivalents are deposited with banks with AA or AA- credit ratings assigned by international credit-rating agencies, as set out in note 20. In respect of the Groups trade sales, the Group manages credit risk through dealing with, whenever possible, either international energy companies or state owned companies based in Thailand and Indonesia, and obtaining sufcient collateral where appropriate. The Group consistently monitors counterparty credit risk. The carrying value of nancial assets recorded in the Financial Statements represents the Groups maximum exposure to credit risk at the year end without taking account of any collateral obtained. In addition, the Groups operations are typically structured via contractual joint venture arrangements. As such the Group is reliant on joint venture partners to fund their capital or other funding obligations in relation to assets and operations which are not yet cash generative. The Group closely monitors the risks and maintains a close dialogue with those counterparties considered to be highest risk in this regard.
91 Financial statements Salamander Energy PLC Annual Report 2011
25 Derivative nancial instruments continued Liquidity risk The Group manages its liquidity risk by maintaining adequate cash and cash equivalents, and borrowing facilities to meet its forecast short, medium and long term commitments. The Group continually monitors its actual and forecast cash ows to ensure that there are adequate reserves and banking facilities to meet the maturing proles of its nancial assets and liabilities. The following tables detail the Groups remaining contractual maturities for its non-derivative nancial liabilities. The tables have been drawn up based on the undiscounted cash ows of nancial liabilities based on the earliest date the Group was required to pay at the balance sheet date. The table includes both interest and principal cash ows.
2011 Weighted average effective interest rate %
23 months $000s
15 years $000s
5+ years $000s
Total $000s
Non-interest bearing Variable interest rate instruments Fixed interest rate instruments Total
23 months $000s
15 years $000s
5+ years $000s
Total $000s
Non-interest bearing Variable interest rate instruments Fixed interest rate instruments Total
Additionally, note 15 to the Financial Statements sets out the Groups outstanding nancial commitments at the balance sheet date. The following table details the Groups remaining contractual maturities for its derivative nancial liabilities:
2011 Less than 1 month $000s 13 months $000s 3 months to 1 year $000s Total $000s
176 33 209
302 66 368
The Group is exposed to interest rate movements through its lendings, bank borrowings and cash and cash equivalent deposits, which are at rates xed to LIBOR. The sensitivity analysis below has been determined based on the Groups exposure to an interest rate movement and is prepared assuming the amount of the net debt and interest rate swaps outstanding at the balance sheet date were outstanding for the whole year.
92
25 Derivative nancial instruments continued Interest rate risk continued For net debt, if interest rates had been 1% higher or lower and all other variables were held constant, the Groups loss after tax for the year ended 31 December 2011 would have increased or decreased by $1.1 million (2010: $0.9 million) respectively. This is principally attributable to the Group maintaining a lower cash and cash equivalents position as described in note 20. For interest rate swaps, if interest rates had been 1% higher or lower and all other variables were held constant, the Groups loss after tax for the year ended 31 December 2011 would have decreased or increased by $0.6 million and $0.2 million respectively (2010: decreased or increased by $0.8 million and $0.3 million respectively). Fair value of nancial instruments Fair value of nancial instruments carries at amortised cost The Directors consider that the carrying amounts of nancial assets and liabilities recorded at amortised cost in the Financial Statements approximate their fair values. Valuation techniques and assumptions applied for the purposes of measuring fair value The fair values of nancial assets and liabilities are determined as follows: The fair values of nancial assets and nancial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices (includes listed redeemable notes, bills of exchange, debentures and perpetual notes). The fair values of other nancial assets and nancial liabilities (excluding derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash ow analysis using prices from observable current market transactions and dealer quotes for similar instruments. The fair values of derivative instruments are calculated using quoted prices. Where such prices are not available, a discounted cash ow analysis is performed using the applicable yield curve for the duration of the instruments for non-optional derivatives, and option pricing models for optional derivatives. Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities of the contracts. Interest rate swaps are measured at the present value of future cash ows estimated and discounted based on the applicable yield curves derived from quoted interest rates.
Fair value of nancial assets and nancial liabilities The following list provides an analysis of nancial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable: Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets and liabilities; Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
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Derivative financial liabilities held to hedge the Groups exposure on expected future sales and interest rate movements Derivative financial liabilities
Level 1 $000s
(768) (768)
2010 Level 2 $000s
Level 3 $000s
(768) (768)
Total $000s
Derivative financial assets held to hedge the Groups exposure on expected future sales Derivative nancial assets
494 494
494 494
Derivative financial liabilities held to hedge the Groups exposure on expected future interest rate movements Derivative nancial liabilities
(1,427) (1,427)
(1,427) (1,427)
All of the Groups fair value nancial assets and liabilities are deemed to be Level 2. There were no transfers between Levels 1 and 2 during the year (2010: nil). 26 Related party transactions Transactions with key management personnel Details of the remuneration of key management personnel (dened as the three Executive Directors and the members of the leadership team) are provided below:
2011 $000s 2010 $000s
Short term employee benefits Share based payment Total key management employee costs
27 Share capital Share capital as at 31 December 2011 amounted to $30,160,000 (2010: $30,034,000). Allotted and fully paid equity share capital
2011 Ordinary shares 10p Number 2010 Ordinary shares 10p Number
At 1 January 8 March 2010: allotment of shares 19 October to 14 December 2010: allotment of shares to employees 11 January to 9 December 2011: allotment of shares to employees At 31 December
The Company has one class of ordinary shares, which carry no right to xed income.
94 Financial statements Salamander Energy PLC Annual Report 2011
28 Share option schemes and share based payment Performance Share Plan The Company has an equity-settled share option scheme for employees called the Salamander Energy Performance Share Plan (PSP). Further details of the PSP are set out in the Remuneration Report. Awards under the PSP may be satised by the issue of new shares, or the transfer of shares from the Companys treasury or shares purchased in the market. In any ten year period, the Company may not issue (or have the possibility to issue) more than 10% of the issued capital of the Company pursuant to awards granted under the PSP and any other rights granted under any other employee share plan adopted by the Company. Shares held in treasury will count as new issue shares for the purposes of the above limits unless institutional bodies decide that they need not count. Shares purchased in the market will not, however, count towards the limit described above. Movement in PSP shares during the year was as follows:
2011 Shares under option Number Weighted average price s 2010 Shares under option Number Weighted average price s
Outstanding at 1 January Granted during the Year Exercised during the Year Lapsed during the Year Outstanding at 31 December Exercisable at 31 December
The expense recognised for unvested employee share options of $3,654,300 (2010: $2,348,200) relates wholly to equity-settled share based payment arising from grants made under the PSP. Of this amount, $801,000 (2010: $324,000) was capitalised as being directly attributable to capital and other projects. At 31 December 2011, the total future expense relating to unvested awards not yet recognised was $4,116,685, which is expected to be recognised over the following three years. The weighted average market price of shares at the date of exercise was 2.61. Outstanding share options at 31 December 2011 will vest between 2012 and 2014 subject to the vesting criteria. The weighted average fair value of share options granted during the year, as estimated at the date of grant, was 2.27 per share (2010: 1.67). This was calculated using a Monte Carlo simulation model based on the following assumptions:
2011 2010
Weighted average share price at date of grant Exercise price Expected volatility Expected life Expected dividend Risk-free interest rate
There is a 12 month window for exercise. However, as the exercise price is nominal it is assumed that recipients exercise at the end of the performance period. Therefore, an expected life of three years after the date of grant has been assumed.
95
28 Share option schemes and share based payment continued Deferred Equity Plan The Company also has another equity-settled share option scheme for employees called the Salamander Energy Deferred Equity Plan (DEP). The DEP follows a similar principle to the PSP scheme, but removes the requirement of a comparator group with shares settled after a period of two years by the issue of new shares, or the transfer of shares from the Companys treasury or shares purchased in the market. Movement in DEP shares during the year was as follows:
2011 Shares under option Number Weighted average price s 2010 Shares under option Number Weighted average price s
Outstanding at 1 January Granted during the year Exercised during the year Lapsed during the year Outstanding at 31 December Exercisable at 31 December
239,457 239,457
The expense recognised for unvested employee share options of $1,263,700 (2010: $213,800) relates wholly to equity-settled share based payment arising from grants made under the DEP. Of this amount, $281,000 (2010: $146,000) was capitalised as being directly attributable to capital and other projects. At 31 December 2011, the total future expense relating to unvested awards not yet recognised was $1,706,779, which is expected to be recognised over the following two years. Outstanding share options at 31 December 2011 will vest between 2012 and 2013 subject to the vesting criteria. The weighted average fair value of share options granted during the year, as estimated at the date of grant, was 3.03 per share (2010: 1.67). This was calculated using a Monte Carlo simulation model based on the following assumptions:
2011 2010
Weighted average share price at date of grant Exercise price Expected life Expected dividend Risk-free interest rate
There is a 12 month window for exercise. However, as the exercise price is nominal it is assumed that recipients exercise at the end of the performance period. Therefore an expected life of two years after the date of grant has been assumed. 29 Dividends The Company has declared no dividend for the year (2010: nil). 30 Prot on disposal of subsidiary undertakings During the year the Group sold the subsidiary undertakings which held its 5% non-operated interests in the offshore North West Java and South East Sumatra PSCs. The total net proceeds from the sale were $45,673,000 (after accounting for cash movements between the effective date and closing date of the transaction), realising a gain of $6,807,000. The entities disposed of did not qualify as a discontinued operation.
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Notes
2011 $000s
2010 $000s
Assets Non-current assets Investments Loans to Group companies Total non-current assets Current assets Other receivables Cash and cash equivalents Total current assets Total assets Liabilities Non-current liabilities Convertible bonds Total non-current liabilities Current liabilities Other payables Borrowings due within one year Total current liabilities Total liabilities Net assets Equity Share capital Share premium Other reserves Retained loss Total equity
3 9
90,887 90,887 1,270 1,270 92,157 788,143 30,160 381,565 399,034 (22,616) 788,143
88,084 88,084 2,216 73,945 76,161 164,245 803,530 30,034 381,565 394,116 (2,185) 803,530
10
Approved by and authorised for issue, and signed on behalf of, the Board of Directors.
Jonathan Copus Chief Financial Officer 23 March 2012 Company Number 5934263
97
Total $000s
At 1 January 2010 Issue of shares Share based payment Convertible bond Profit for the year At 31 December 2010 Issue of shares Share based payment Loss for the year At 31 December 2011 Other reserves Other reserves comprise:
667,204 3,070 2,562 11,271 119,423 803,530 126 4,918 (20,431) 788,143
2011 $000s
2010 $000s
Share based payment reserve Convertible bond Merger reserve Total other reserves
98
2011 $000s
2010 $000s
Cash flow from operating activities (Loss)/profit before tax Adjustments for: Reversal of provision against investment Interest revenue Finance costs Other financial losses Share based payment Operating cash flow prior to movement in working capital Decrease in other receivables (Decrease)/increase in other payables Net cash used in operating activities Investing activities Repayments of loans to/(loans to) Group companies Interest received Net cash provided by/(used in) investing activities Financing activities Interest paid Cash flows in respect of other long term borrowings, net: Issue of convertible bond Drawdown of acquisition bridge facility Repayment of acquisition bridge facility Proceeds from issue of shares Net cash (used in)/provided by financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effect of foreign exchange rate change Cash and cash equivalents at the end of the year
(20,431) (13) 9,666 3,836 (6,942) 24 (902) (7,820) 54,839 7 54,846 (5,772) 15,000 (90,000) 126 (80,646) (33,620) 43,140 (37) 9,483
119,423 (128,313) (4,527) 6,762 58 2,205 (4,392) 87 885 (3,420) (141,256) 4,527 (136,729) (6,762) 97,273 71,878 162,389 22,240 20,958 (58) 43,140
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Segmental analysis
The Company currently operates only in the United Kingdom and its activities comprise one class of business, being that of a holding company for the Group. 2 Employee numbers and costs
The monthly average number of employees (being the Executive Directors) employed was as follows:
2011 Number 2010 Number
3 3
2011 $000s
3 3
2010 $000s
Wages and salaries Share based payment Pensions Social security Total employee costs
Details of Directors remuneration are provided in the Remuneration Report. A proportion of employee costs were charged to other subsidiaries of the Group. Share based payments Share based payments are disclosed in note 28 to the consolidated Financial Statements. 3 Investments
The Groups principal subsidiaries and jointly controlled entities are as set out in note 16 to the consolidated Financial Statements. Fair value information regarding investments in subsidiaries and jointly controlled entities has not been disclosed as their fair value cannot be measured reliably, as they are investments in unquoted group companies. 4 Other receivables
2011 $000s 2010 $000s
24 24
At the reporting date the Group had no past due or impaired receivables. The Directors consider the carrying amount of other receivables approximates their fair value. 5 Convertible bonds
Other payables
2011 $000s 2010 $000s
Other creditors Accrued expenses Total other payables The Directors consider the carrying value of other payables approximates their fair value. 7 Commitments and guarantees
1,250 20 1,270
Bank guarantees At 31 December 2011, there were outstanding bank guarantees issued by banks on behalf of the Company, amounting to $27,000,000 (2010: $16,500,000). Guarantees were issued against work programme obligations of subsidiary undertakings of the Company. Salamander Energy Plc has entered into certain parent guarantee and other undertakings in relation to the BNPP Borrowing Base Facility Agreement. 8 Financial instruments
Full details of the Companys risk management and nancial instrument policies are shown in note 25 to the consolidated Financial Statements. Signicant accounting policies The Company follows the accounting policies as shown in the Statement of Accounting Policies. Categories of nancial instruments
2011 $000s 2010 $000s
Financial assets Cash and bank balances Preference coupon receivable from Salamander Energy Group Limited Loans and receivables Financial liabilities Amortised cost Financial risk management
Foreign exchange risk The carrying amounts of the Companys UK Pounds Sterling monetary assets and liabilities at the balance sheet date were as follows:
Assets 2011 $000s 2010 $000s Liabilities 2011 $000s 2010 $000s
UK Pounds Sterling
332
801
755
The following table details the Companys prot/(loss) after tax sensitivity to a 20% change in US Dollars against UK Pounds Sterling.
65
This is mainly due to the Company holding UK Sterling Pounds cash and cash equivalent deposits. Interest rate risk If interest rates had been 1% higher or lower and all other variables were held constant, the Companys loss for the year ended 31 December 2011 would have increased or decreased as applicable by $0.1 million (2010: increase or decrease of $0.3 million). Liquidity risk The following tables detail the Companys remaining contractual maturity for its non-derivative nancial liabilities. The tables have been drawn up based on the undiscounted cash ows of nancial liabilities based on the earliest date on which the Company can be required to pay. The table includes both interest and principal cash ows.
2011 Weighted average effective interest rate %
5+ years $000s
Total $000s
n/a 5%
20 833 853
112,500
5+ years $000s
Total $000s
Non-interest bearing Variable interest rate instruments Fixed interest rate instruments Total
n/a 2.7% 5%
Fair value of nancial instruments carried at amortised cost The Directors consider that the carrying amounts of nancial assets and liabilities recorded at amortised cost in the Financial Statements approximate their fair values. Valuation techniques and assumptions applied for the purposes of measuring fair value. The fair values of nancial assets and liabilities are determined as follows. The fair values of nancial assets and nancial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices (includes listed redeemable notes, bills of exchange, debentures and perpetual notes). The fair values of other nancial assets and nancial liabilities (excluding derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash ow analysis using prices from observable current market transactions and dealer quotes for similar instruments.
Liquidity risk continued The fair values of derivative instruments are calculated using quoted prices. Where such prices are not available, a discounted cash ow analysis is performed using the applicable yield curve for the duration of the instruments for non-optional derivatives, and option pricing models for optional derivatives. Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities of the contracts. Interest rate swaps are measured at the present value of future cash ows estimated and discounted based on the applicable yield curves derived from quoted interest rates. Related party transactions
Transactions with Directors Transactions with Directors are included in the Remuneration Report. Related party transactions with subsidiary companies The Company entered into the following transactions with related parties during the year affecting the Statement of Comprehensive Income as follows:
2011 $000s 2010 $000s
Interest receivable from Salamander Energy Group Limited The Company held balances with related parties at the balance sheet date as follows:
2011 $000s
4,397
2010 $000s
Investment in Salamander Energy Group Limited Investment in Bontang Energy Limited Preference coupon receivable from Salamander Energy Group Limited Loans to Salamander Energy Group Limited 10 Share capital Share capital as at 31 December 2011 amounted to $30,160,000 (2010: $30,034,000). Allotted and fully paid equity share capital
At 1 January 8 March 2010: allotment of shares 19 October to 14 December 2010: allotment of shares to employees 11 January to 9 December 2011: allotment of shares to employees At 31 December
The Company has one class of ordinary shares, which carry no right to xed income. 11 Dividends The Company has declared no dividend for the year (2010: nil).
Glossary
$ or US Dollar bbl Bcf boepd boe bopd E&P Fernandez & Wells FPSO GAAP GDP HSE IAS IMF IPO IFRS LSE LNG LTI LTIF Mbo Mbopd Mboepd MMbo MMboe Mscf MMscfd Mutton Chops OGP ONWJ PSC PSP SEGL SES TD TRIR
United States Dollar UK Pounds Sterling Euro Barrel Billion standard cubic feet of gas Barrels of oil equivalent per day Barrels of oil equivalent Barrels of oil per day Exploration and production Outlandish coffee, outlandish prices Floating Production Storage Ofoad Generally Accepted Accounting Principles Gross domestic product Health, Safety and Environmental International Accounting Standards International Monetary Fund Initial Public Offering International Financial Reporting Standards London Stock Exchange Liquid natural gas Lost Time Injury: a fatality or lost workday case. The number of LTIs is the sum of fatalities and lost work day cases Lost Time Injury Frequency (per million man hours worked) Thousand barrels of oil Thousand barrels of oil per day Thousand barrels of oil equivalent per day Million barrels of oil Millions barrels of oil equivalent Thousand standard cubic feet of gas Million standard cubic feet per day of gas Unfortunate facial hair choice, typical of the early Victorian oil executive Oil and Gas Producers Offshore North West Java PSC Production Sharing Contract Performance Share Plan Salamander Energy Group Limited, a wholly owned subsidiary of the Company from 5 December 2006 South East Sumatra PSC Total Depth Total Recordable Injury Rate: the number of recordable injuries (fatalities + lost workday cases + restricted workday cases + medical treatment cases) per 1,000,000 hours worked
Corporate directory
Our ofces
Directors Charles Jamieson Chairman and Non-executive Director James Menzies Chief Executive Ofcer Mike Buck Chief Operating Ofcer Dr Jonathan Copus Chief Financial Ofcer Struan Robertson Senior Independent Non-executive Director Michael Pavia Independent Non-executive Director Dr Carol Bell Independent Non-executive Director John Crowle Independent Non-executive Director Robert Cathery Independent Non-executive Director James Coleman Independent Non-executive Director Secretary Martha Bruce
Registered ofce 4th Floor 25 Great Pulteney Street London W1F 9LT Auditors Deloitte LLP 2 New Street Square London EC4A 3BZ Lawyers Clifford Chance LLP 10 Upper Bank Street London E14 5JJ Bankers HSBC Bank plc 8 Canada Square London E14 5HQ Corporate brokers Goldman Sachs Peterborough Court 133 Fleet Street London EC4A 2BB Oriel Securities Ltd 150 Cheapside London EC2V 6ET Public relations Brunswick Group LLP 16 Lincolns Inn Fields London WC2A 3ED Registration number 5934263
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Salamander Energy 4th Floor 25 Great Pulteney Street London W1F 9LT Phone +44 (0) 20 7432 2680 Fax +44 (0) 20 7692 5524 Email info@salamander-energy.com Website salamander-energy.com