Notes to the Group financial statements 21 – 32

• Note 21: Called up equity share capital and share premium account
• Note 22: Other reserves
• Note 23: Non-controlling interest
• Note 24: Cash flows from operating activities
• Note 25: Disposal of subsidiaries
• Note 26: Share-based payments
• Note 27: Operating lease arrangements
• Note 28: Capital commitments
• Note 29: Contingent liabilities
• Note 30: Related party transactions
• Note 31: Subsequent events
• Note 32: Pension schemes

Note 21. Called up equity share capital and share premium account

Allotted equity share capital and share premium

Following the passing of a special resolution at the Company's 2009 AGM, the Company no longer has an authorised share capital.

Note 22. Other reserves

During 2010 the Company issued 80,431,796 ordinary shares via an equity placing. In accordance with the provisions of Section 612 of the Companies Act 2006, the Company has transferred the premium on the shares issued of $1,464.8 million ($1,432.9 million net of expenses) (2009: $565.0 million, $549.3 million net of expenses), using the market value at the date of acquisition, to retained earnings as the premium is considered to be realised.

The foreign currency translation reserve represents exchange gains and losses arising on translation of foreign currency subsidiaries, monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur, which form part of the net investment in a foreign operation, and exchange gains or losses arising on long-term foreign currency borrowings which are a hedge against the Group's overseas investments.

The hedge reserve represents gains and losses on hedging instruments classed as cash flow hedges that are determined as an effective hedge.

The treasury shares reserve represents the cost of shares in Tullow Oil plc purchased in the market and held by the Tullow Oil Employee Trust to satisfy awards held under the Group's share incentive plans (see note 26).

Note 23. Non-controlling interest

The non-controlling interest relates to Tulipe Oil SA, where the Group acquired a 50% controlling shareholding during 2007.

Note 24. Cash flows from operating activities

Note 25. Disposal of subsidiaries

Tullow completed the sale of Tullow Oil UK Limited incorporating the 51.68% interest in the Hewett-Bacton complex to ENI in November 2008, recognising a profit of $395.6 million.

An additional $16.0 million has been recognised on this sale during 2009 following the settlement of tax and other working capital adjustments.

Note 26. Share-based payments

2005 Performance Share Plan (PSP)

Under the PSP, senior executives can be granted nil exercise price options (normally exercisable three to ten years following grant) over shares worth up to 200% of salary p.a. (300% in exceptional circumstances). Awards made before 8 March 2010 were made as conditional awards to acquire free shares on vesting. To provide flexibility to participants, those awards have been converted into nil exercise price options. Awards granted in 2010 vest subject to a Total Shareholder Return (TSR) performance condition. Half of an award is tested against constituents of the FTSE 100 index (excluding investment trusts) and the other half against a comparator group of oil and gas companies. Performance is measured over a fixed three-year period starting on 1 January prior to grant, and an individual must normally remain in employment for three years from grant for the shares to vest. No dividends are paid over the vesting period. There are further details of PSP award measurement in the Directors' Remuneration Report.

The shares outstanding under the PSP are as follows:

The expected life is the period from date of grant to vesting. Expected volatility was determined by calculating the historical volatility of the Company's share price over a period commensurate with the expected life of the awards. The weighted average fair value of the awards granted in 2010 was 700.8p per award (2009: 579.9p).

The Group recognised a total charge of $12.6 million (2009: $9.4 million) in respect of the PSP.

2005 Deferred Share Bonus Plan (DSBP)

Under the DSBP, the portion of any annual bonus above 75% of the base salary (60% for bonuses paid for 2007 and earlier years) of a senior executive nominated by the Remuneration Committee is deferred into shares. Awards normally vest following the end of three financial years commencing with that in which they are granted. They are granted as nil exercise price options, normally exercisable from when they vest until 10 years from grant. Awards granted before 8 March 2010 as conditional awards to acquire free shares have been converted into nil exercise price options to provide flexibility to participants.

The shares outstanding under the DSBP are as follows:

The expected life is the period from the date of grant to the vesting date. The fair value of the awards granted in 2010 was 1,263.1p per award (2009: 760.2p).

The Group recognised a total charge of $1.3 million (2009: $0.8 million) in respect of the DSBP.

2000 Executive Share Option Scheme (ESOS)

The only share option scheme operated by the Company during the year was the 2000 ESOS. Options normally only become exercisable from the third anniversary of the date of the grant and if the performance condition has been met. The awards are tested against constituents of an index and 100% of awards will vest if the Company's TSR is above the median of the index over three years following grant. For awards from March 2008 the Index is the FTSE 100 index (excluding investment trusts); for awards before March 2008, the Index is the FTSE 250 index (excluding investment trusts).

Options granted under the previous 1998 ESOS had all been exercised at 31 December 2009. All awards under the 1998 ESOS were made prior to 7 November 2002 and therefore, under the IFRS transitional provisions, they have not been accounted for in accordance with IFRS 2, Share-based payments.

The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options under the 2000 ESOS during the year.

The weighted average share price at exercise for options exercised in 2010 was 1,231.9p (2009: 1,000.5p).

Options outstanding at 31 December 2010 had exercise prices of 79p to 1,299.9p (2009: 63.0p to 1,179.0p) and remaining contractual lives of 1 to 10 years.

The fair values were calculated using a proprietary binomial valuation model. The principal inputs to the options valuion model were:

Expected volatility was determined by calculating the historical volatility of the Company's share price over a period commensurate with the expected lifetime of the awards.

The fair values and expected lives of the options valued in accordance with IFRS 2 were:

The Group recognised a total charge of $11.5 million (2009: $7.6 million) in respect of the ESOS.

UK & Irish Share Incentive Plans (SIPs)

These are all-employee plans set up in the UK and Ireland, to enable employees to save out of salary up to prescribed monthly limits. Contributions are used by the Plan trustees to buy Tullow shares ('Partnership Shares') at the end of each three month accumulation period. The Company makes a matching contribution to acquire Tullow shares ('Matching Shares') on a one-for-one basis. Matching shares are subject to time-based forfeiture over three years on leaving employment in certain circumstances or if the related Partnership Shares are sold.

The fair value of a Matching Share is its market value at the start of the accumulation period.

For the UK plan, Partnership Shares are purchased at the lower of the market values at the start of the Accumulation Period and the purchase date (which is treated as a three-month share option for IFRS 2 purposes). For the Irish plan, shares are bought at the market price at the purchase date which does not result in any IFRS 2 accounting charge.

Matching shares vest three years after grant and dividends are paid to the employee during this period.

The Group recognised a total charge of $0.2 million (2009: $0.2 million) for the UK SIP Plan and $0.2 million (2009: $0.2 million) for the Irish SIP plan.

Note 27. Operating lease arrangements

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:

Operating lease payments represent rentals payable by the Group for certain of its office properties and a lease for an FPSO vessel for use on the Chinguetti field in Mauritania. Leases on office properties are negotiated for an average of six years and rentals are fixed for an average of six years. The FPSO lease runs for a minimum period of seven years from February 2006 and the contract provides for an option to extend the lease for a further three years at a slightly reduced rate.

Note 28. Capital commitments

Capital commitments as at 31 December 2010 are $876.3 million (2009: $1,270.0 million, 2008: $877.7 million).

Note 29. Contingent liabilities

At 31 December 2010 there existed contingent liabilities amounting to $221.0 million (2009: $239.4 million, 2008: $106.1 million) in respect of performance guarantees for abandonment obligations, committed work programmes and certain financial obligations.

Note 30. Related party transactions

The Directors of Tullow Oil plc are considered to be the only key management personnel as defined by IAS 24 – Related Party Disclosures.

Short-term employee benefits

These amounts comprise fees paid to the Directors in respect of salary and benefits earned during the relevant financial year, plus bonuses awarded for the year.

Post employment benefits

These amounts comprise amounts paid into the pension schemes of the Directors.

Amounts awarded under long-term incentive schemes

These amounts relate to the shares granted under the annual bonus scheme that is deferred for three years under the Deferred Share Bonus Plan (DSBP).

Share-based payments

This is the cost to the Group of Directors' participation in share-based payment plans, as measured by the fair value of options and shares granted, accounted for in accordance with IFRS 2, Share-based Payments.

There are no other related party transactions. Further details regarding transactions with the Directors of Tullow Oil plc are disclosed in the Remuneration Report.

Note 31. Subsequent events

Since the balance sheet date Tullow has continued to progress its exploration, development and business growth strategies.

In January 2011 the Group announced the Tweneboa-3 appraisal well in the Deepwater Tano licence offshore Ghana had successfully encountered gas condensate in excellent high quality sandstone reservoirs. The results of drilling, wireline logs and samples of reservoir fluids, together with the well's down-dip position, confirm the Greater Tweneboa Area resource base potential.

In March 2011 the Group announced the Enyenra-2A appraisal well in the Deepwater Tano licence offshore Ghana had successfully encountered oil in excellent quality sandstone reservoirs. Good evidence of communication with Owo-1 confirms that the Owo oil discovery, now renamed Enyenra, is a major light oil field.

Note 32. Pension schemes

The Group operates defined contribution pension schemes for staff and Executive Directors. The contributions are payable to external funds which are administered by independent trustees. Contributions during the year amounted to $4.5 million (2009: $5.2 million). At 31 December 2010, there was a liability of $0.3 million (2009: $1.0 million) for contributions payable included in creditors.