Share incentive arrangements

Performance Share Plan (PSP)

Under the PSP, senior executives are eligible for conditional awards of rights over whole shares worth up to 200% of salary each year (300% in exceptional circumstances, such as to facilitate the recruitment of a new Executive Director). Currently, it is the policy to grant the Executive Directors 200% of salary each year, although the Committee may vary the allocation taking into account the circumstances which prevail at the time (but always subject to the plan maximum).

PSP awards vest subject to a TSR-based performance condition under which the Company’s TSR performance is measured over a fixed three-year period commencing on 1 January in the financial year in which the award is granted, with no opportunity to re-test.

For the awards made in 2008, 2009 and 2010, half are subject to performance against the constituents of the FTSE 100 Index at the start of the performance period (of which Tullow is a constituent) and the other half are subject to performance against a comparator group of international Oil & Gas companies. The group used for the awards made in 2008 and 2009 is as follows:

For the awards made in 2010, the group is as follows:

TSR is calculated, in common currency, in line with best practice.

For each portion of the award, vesting is as follows:

In addition, no award will vest unless the Committee considers that both the Group’s underlying financial performance and its performance against other key factors (e.g. Health & Safety) over the relevant period is satisfactory.

This approach has served the Company well, as it encourages the Executive Directors to generate returns to shareholders in excess of both the market generally and a group of sector peers, and is a robust reflection of management’s success in achieving the strategic targets required to ensure the Group’s continued growth.

As highlighted earlier, the Committee has undertaken a review of the Company’s long-term incentives for 2011 and future cycles and is expecting to make changes to the PSP structure following consultation with major shareholders. Full disclosure will be provided in the 2011 DRR.

Share Ownership Guidelines

To further align their interests with shareholders, the Executive Directors are required to retain at least 50% of the shares that vest under the PSP and DSBP (after selling sufficient shares to pay tax liabilities) until they have built up a shareholding worth at least 200% of base salary (with existing holdings taken into account).

Share Option Scheme

Before the introduction of the PSP in 2005, Executive Directors were eligible for grants of options under the 2000 Executive Share Option Scheme (the ‘2000 Scheme’). The 2000 Scheme expired in the year under review, with shareholder approval obtained for a replacement scheme – the 2010 Share Option Plan – at the 2010 AGM. It is intended that Executive Directors (and other PSP participants) will not be granted options under the 2010 Share Option Plan.

All-employee Share Incentive Plans

Executive Directors may also participate, on the same terms as other employees, in the Tullow Oil UK and Irish Share Incentive Plans. These all-employee plans enable employees to save out of salary up to prescribed limits each month. Each quarter’s contributions are used by the Plan trustees to acquire Tullow Oil shares (Partnership shares). The Group makes a matching contribution to acquire a matching number of shares (Matching shares) on a one-for-one basis.

Sourcing of shares and dilution

Awards under all the Group share schemes may be satisfied using either newly issued shares or shares purchased in the market and held in the Tullow Oil Employee Trust. Awards under the Group’s discretionary schemes which may be satisfied by new issue shares must not exceed 5% of the Company’s issued share capital in any rolling 10-year period, and the total of all awards satisfied via new issue shares under all plans must not exceed 10% of the Company’s issued share capital in any rolling 10-year period.

As at 31 December 2010, the headroom under the Company’s 5% and 10% limits was 6.7 million and 44.4 million shares respectively, out of an issued share capital of 888.2 million shares.

As at 31 December 2010, the Tullow Oil Employee Trust held 0.81 million shares.