Directors' Report: Group overview
Key performance indicators (KPIs)
We measure our progress through seven KPIs that are closely aligned with delivering our strategy which seeks to deliver sustainable long-term growth. Four KPIs are linked to the bonus element of Executive Directors’ remuneration.
Lost Time Injury Frequency Rate (LTIFR)
Our top operational priority is to keep people safe. To measure this the Group’s objective is to deliver top quartile industry safety performance and achieve a preset absolute target.
Rigorous and consistent incident reporting procedures are in place throughout Tullow. These include analysis, follow-up, remedial actions and communication of learnings. H&S is reported to the Board monthly and annually.
H&S is part of all operational planning and activities. We also have clear H&S policies and procedures supported by strong EHS leadership, accountability and commitment in each asset and at each level of the business.
While we achieved our baseline target of <1.0 LTIFR, the Group did not deliver top quartile industry safety performance. In 2009, Tullow had its first ever fatality. As a result the bonus element relating to this KPI was reduced by 50%.
We aim to be the employer of choice in the industry so that we have the right resources and capabilities to deliver our strategy and business plans.
We have a Board approved HR strategy and HR resources are deployed throughout the Group. There are systems to identify issues early. People who leave are debriefed so we can improve our policies. An annual global employee survey is conducted.
Tullow’s best defence against the disruption to the business of a people skills shortage or unexpected departures is to create an environment that allows people to work and contribute in the best way possible and to recognise and reward them appropriately for their contribution.
2.0% of staff left the Group in 2009, compared with 2.3% in 2008. This is a strong performance during a year when the Group’s total staff grew by 24% to 669 people, following a 50% increase in 2008.
Working interest production
Production is key to revenue and cash generation. We aim to achieve production in line with the Group’s annual budget and market guidance.
Daily and weekly production is monitored from key producing assets. Production is reported weekly and monthly to senior management and forecast updates are prepared regularly during the year.
The Group’s investment in major field development in Ghana and Uganda will significantly enhance our production profile and is moving Tullow’s operating capability to the next level. A strong operational performance in production planning and monitoring mitigates against unplanned interruptions.
The Group’s baseline production target for 2009 was 58,700 boepd. 2009 actual production was 58,300 boepd, therefore the bonus element relating to this KPI was not awarded.
Reserves and resources replacement
Replacement of reserves and resources is focused on continuing to grow the Group’s production potential.
Reserves estimates for each field are reviewed by an independent engineer, in the event of significant new data or a material change. A review of each field is undertaken every two years. Resources estimates are also produced by an independent engineer.
The Group manages replacement risk by maximising reservoir performance in producing fields, through operational and technical capability, and continued exploration success based on focused material campaigns.
The Group achieved 437% organic reserves and resources replacement in 2009. This follows-on from a record 1,232% organic replacement in 2008.
Cash operating costs per boe
Cash operating costs per barrel of oil equivalent (boe) are a function of industry costs, inflation, our fixed cost base and production output. We aim to maintain these costs within strict predefined limits.
Cash operating costs are reported monthly on an asset basis and are monitored closely to ensure that they are within preset parameters.
A comprehensive annual budgeting process covering all expenditure is undertaken and approved by the Board. Monthly reporting highlights any variances and corrective action is taken to mitigate against the potential effects of cost increases.
In 2009, Tullow set a baseline target of £7.90 per boe and a stretch target of £7.51 per boe. Cash operating costs for 2009 were £7.28 per boe and the bonus element relating to this KPI was achieved.
Operating cash flow before working capital
Growing our business is capital and cash intensive and we aim to ensure in the medium term that capital expenditure together with debt and dividend commitments can be serviced from strong operating cash flow.
Operating cash flow is reported monthly with regular forecasting for longer periods to support long-range planning and investment decisions. Annual and project budgets require Board approval.
Strong financial and operating management, disciplined monitoring and reporting, long-range cash flow forecasting and strong banking and equity relationships assist the Group in managing liquidity.
Reduced commodity prices and lower sales volumes led to a reduction of 28% in operating cash flow in 2009. The operating cash flow and equity placing proceeds facilitated capital investment of £758 million in 2009.
Total Shareholder Return (TSR)
Our aim is to create shared prosperity for all stakeholders and our strategic objective is to achieve top quintile TSR growth versus our industry peer group.
TSR – share price movement and dividend payments – is reported monthly and on an annual basis at year-end to the Board. The industry peer group is regularly reviewed.
The Board is responsible for the execution of Tullow’s strategy and it is reviewed annually as part of three year business planning. Being a well run business, delivering well against business plans, being open and transparent and maintaining strong capital market relationships underpin delivery of TSR.
The stretch target relating to the bonus element for TSR is based on top quartile performance and an absolute return of 15% or more. In 2009, Tullow was third out of a 16 strong peer group and delivered 99% TSR. As a result the bonus element relating to this KPI was achieved.
The bonus element of the Executive Directors' remuneration is linked to LTIFR, Working interest production, Cash operating costs per boe and TSR. Other KPIs relating to bonus remuneration include finding costs per barrel, specific in-year finance and portfolio management objectives and key project milestones for Ghana and Uganda.
- Barrels of oil equivalent
- Barrels of oil equivalent per day
- Environment, Health and Safety
- Health and Safety
- Human Resources
- Key Performance Indicator
- Health and Safety
- Lost Time Injury Frequency Rate measured in LTIs per million hours worked
- Total Shareholder Return