Notes 21 - 33
Note 21. Obligations under finance leases
|Amounts payable under finance leases:|
|– Within one year||–||62.5||4.6|
|– Within two to five years||–||232.5||4.6|
|– After five years||–||401.3||–|
|Less future finance charges||–||(353.9)||(0.4)|
|Present value of lease obligations||–||342.4||8.8|
|Amount due for settlement within 12 months (note 18)||–||15.7||4.4|
|Amount due for settlement after 12 months (note 18)||–||326.7||4.4|
The fair value of the Group's lease obligations approximates the carrying amount. The average remaining lease term as at 2010 was 10 years and 2009: two years. For the year ended 31 December 2010, the effective borrowing rate was 14% (2009: 2.8%).
The decrease during the year is due to the Jubilee FPSO (Kwame Nkrumah) being derecognised as a finance lease as it was acquired from the lessor by the Jubilee field unit partners, a $22.3 million gain was recognised in finance income in respect of this transaction.
Note 22. Provisions
(i) Decommissioning costs and other provisions
|At 1 January||278.6||223.5||194.0|
|New provisions and changes in estimates||81.6||55.5||6.6|
|Acquisition of subsidiary||86.6||–||–|
|Disposal of subsidiary||–||–||(2.2)|
|Unwinding of discount (note 7)||20.9||13.3||14.7|
|Currency translation adjustment||(10.2)||(3.4)||12.4|
|At 31 December 2011||440.8||278.6||223.5|
The decommissioning provision represents the present value of decommissioning costs relating to the UK, African and Asian oil and gas interests, which are expected to be incurred up to 2035. A review of all decommissioning estimates was undertaken by an independent specialist in 2010 which has been assessed and updated internally for the purposes of the 2011 financial statements.
Assumptions, based on the current economic environment, have been made which management believe are a reasonable basis upon which to estimate the future liability. These estimates are reviewed regularly to take into account any material changes to the assumptions. However, actual decommissioning costs will ultimately depend upon future market prices for the necessary decommissioning works required which will reflect market conditions at the relevant time. Furthermore, the timing of decommissioning is likely to depend on when the fields cease to produce at economically viable rates. This in turn will depend upon future oil and gas prices, which are inherently uncertain.
(ii) Deferred taxation
|Accelerated tax depreciation
|Revaluation of financial assets
|Other timing differences
|* Certain numbers shown above do not correspond to the 2010 and 2009 financial statements as a result of retrospective a restatement as set out in note 1.|
|At 1 January 2009||(544.9)||44.0||8.7||(4.1)||(7.5)||(503.8)|
|Charge/(credit) to income statement (*restated)||39.2||21.5||(2.9)||44.6||(0.2)||102.2|
|Credit to other comprehensive income||–||–||(12.4)||–||–||(12.4)|
|Credit directly to equity||–||–||–||1.3||–||1.3|
|At 1 January 2010||(521.7)||70.2||(6.6)||42.7||(8.5)||(423.9)|
|Charge/(credit) to income statement (*restated)||(106.8)||(5.3)||6.0||143.9||6.0||43.8|
|Credit to other comprehensive income||–||–||8.2||–||–||8.2|
|Credit directly to equity||–||–||–||3.7||–||3.7|
|At 1 January 2011||(622.6)||63.0||7.4||189.4||(2.3)||(365.1)|
|Charge/(credit) to income statement||(111.7)||(0.3)||(9.0)||(79.9)||3.4||(197.5)|
|Acquisition of subsidiary||(462.8)||(10.1)||–||–||–||(472.9)|
|Credit to other comprehensive income||–||–||2.9||–||–||2.9|
|Charge directly to equity||–||–||–||(5.1)||–||(5.1)|
|At 31 December 2011||(1,150.3)||52.6||1.3||104.4||1.0||(991.0)|
|Deferred tax liabilities||(1,030.0)||(465.5)||(474.3)|
|Deferred tax assets||39.0||100.4||50.4|
No deferred tax has been provided on unremitted earnings of overseas subsidiaries, as the Group has no plans to remit these to the UK in the foreseeable future.
Deferred tax assets are recognised only to the extent it is considered probable that those assets will be recoverable. This involves an assessment of when those deferred tax assets are likely to reverse, and a judgement as to whether or not there will be sufficient taxable profits available to offset the tax assets when they do reverse. This requires assumptions regarding future profitability and is therefore inherently uncertain. To the extent assumptions regarding future profitability change, there can be an increase or decrease in the level of deferred tax assets recognised which can result in a charge or credit in the period in which the change occurs.
Note 23. Called up equity share capital and share premium account
Allotted equity share capital and share premium
|Equity share capital allotted and fully paid||Share premium|
|Ordinary shares of 10 pence each|
|At 1 January 2009||732,889,567||119.7||231.1|
|Issues during the year|
|– Exercise of share options||66,938,141||9.7||–|
|– New shares issued in respect of royalty obligation||4,486,268||0.7||11.2|
|At 1 January 2010||804,313,976||130.1||242.3|
|Issues during the year|
|– Shares issued||82,004,589||13.1||2.1|
|– Exercise of share options||1,918,305||0.3||7.1|
|At 1 January 2011||888,236,870||143.5||251.5|
|Issues during the year|
|– Shares issued||13,668,742||2.2||285.5|
|– Exercise of share options||3,009,637||0.5||14.8|
|At 31 December 2011||904,915,249||146.2||551.8|
The Company does not have an authorised share capital.
Note 24. Other reserves
|Foreign currency translation reserve
|At 1 January 2009||755.1||(171.6)||46.9||(22.6)||607.8|
|Hedge movement (note 20)||–||–||(43.7)||–||(43.7)|
|Currency translation adjustment||–||42.0||–||–||42.0|
|Vesting of PSP shares||–||–||–||14.1||14.1|
|Purchase of treasury shares||–||–||–||(5.7)||(5.7)|
|At 1 January 2010||755.1||(129.6)||3.2||(14.2)||614.5|
|Hedge movement (note 20)||–||–||(28.9)||–||(28.9)|
|Currency translation adjustment||–||(11.4)||–||–||(11.4)|
|At 1 January 2011||755.1||(141.0)||(25.7)||(14.2)||574.2|
|Hedge movement (note 20)||–||–||11.4||–||11.4|
|Currency translation adjustment||–||(34.5)||–||–||(34.5)|
|At 31 December 2011||755.1||(175.5)||(14.3)||(14.2)||551.1|
During 2011 the Company issued 3,531,546 ordinary shares via an equity placing in Ghana and 10,137,196 ordinary shares in respect of the EO Group Limited transaction (2010: 80,431,796 ordinary shares via 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 $nil million ($nil million net of expenses) (2010: $1,464.8 million, $1,432.9 million net of expenses and 2009: $565.0 million, $549.3 million net of expense) 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 27).
Note 25. Non-controlling interest
|At 1 January||60.6||42.1||36.7|
|Share of profit for the year||40.0||18.5||5.4|
|Distribution to minority shareholders||(25.0)||–||–|
|At 31 December||75.6||60.6||42.1|
The non-controlling interest relates to Tulipe Oil SA, where the Group acquired a 50% controlling shareholding during 2007.
Note 26. Cash flows from operating activities
|* Certain numbers shown above do not correspond to the 2010 financial statements as a result of a retrospective restatement as set out in note 1.|
|Profit before taxation||1,072.9||179.2|
|Depletion, depreciation and amortisation||533.8||367.3|
|Exploration costs written off||120.6||154.7|
|Profit on disposal of oil and gas assets||–||(0.5)|
|Profit on disposal of other assets||(2.0)||–|
|Share-based payment charge||28.5||11.9|
|Loss on hedging instruments||(27.2)||27.7|
|Operating cash flow before working capital movements||1,832.3||789.3|
|Increase in trade and other receivables||(91.9)||(66.7)|
|Increase in inventories||(43.8)||(56.3)|
|Increase in trade payables||206.5||151.7|
|Cash generated from operations||1,903.1||818.0|
Note 27. Share-based payments
2005 Performance Share Plan (PSP)
Under the PSP, senior executives can be granted nil exercise price options (normally exercisable between three to ten years following grant). At the 2011 Annual General Meeting, the annual grant limit for an individual was increased to 300,000 shares. 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 vest subject to a Total Shareholder Return (TSR) performance condition. 50% (70% for awards granted to Directors in 2011) of an award is tested against a comparator group of oil and gas companies. The remaining 50% (30% for awards granted to Directors in 2011) is tested against constituents of the FTSE 100 index (excluding investment trusts). 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:
|2011 PSP shares||2011 Average weighted share price at grant
|2010 Average weighted share price at grant
|2009 Average weighted share price at grant
|Outstanding at 1 January||4,101,876||978.6||4,305,486||687.0||3,856,913||552.9|
|Exercised during the year||(389,126)||942.5||(1,441,136)||371.2||(1,095,350)||354.1|
|Forfeited/expired during the year||(29,170)||1249.8||(37,445)||1120.7||(28,644)||780.3|
|Outstanding at 31 December||5,857,534||1116.0||4,101,876||978.6||4,305,486||687.0|
|The inputs of the option valuation model were:|
|Risk free interest rate||1.6% pa||1.9% pa||1.9% pa|
|Dividend yield||0.4% pa||0.5% pa||0.8% pa|
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 2011 was 728.8p per share subject to an award (2010: 700.8p, 2009: 579.9p).
The Group recognised a total charge of $17.0 million (2010: $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 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:
|2011 DSBP shares||2011 Share price at grant
|2010 DSBP shares||2010 Share price
|2009 DSBP shares||2009 Share price
|Outstanding at 1 January||301,951||896.6||231,457||716.3||200,633||507.9|
|Exercised during the year||–||–||(22,445)||629.5||(104,467)||396.0|
|Outstanding at 31 December||367,877||980.0||301,951||896.6||231,457||716.3|
|The inputs of the option valuation model were:|
|Dividend yield||0.4% pa||0.5% pa||1.0% pa|
The expected life is the period from the date of grant to the vesting date. The fair value of the awards granted in 2011 was 1344.1p per share subject to an award (2010: 1263.1p, 2009: 760.2p).
The Group recognised a total charge of $1.7 million (2010: $1.3 million, 2009: $0.8 million) in respect of the DSBP.
2010 Share Option Plan (2010 SOP) and 2000 Executive Share Option Scheme (2000 ESOS)
The only share option scheme operated by the Company during the year was the 2010 SOP. Options have an exercise price equal to market value shortly before grant and normally only become exercisable from the third anniversary of the date of the grant.
Options granted prior to 2011 were granted under the 2000 ESOS on very similar terms except that their exercise was subject to a performance condition. These awards are tested against constituents of the FTSE 100 index (excluding investment trusts) and 100% of awards will vest if the Company's TSR is above the median of the index over three years following grant.
The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options under the 2010 SOP and 2000 ESOS during the year.
|2011 Number||2011 WAEP p||2010 Number||2010 WAEP p||2009 Number||2009 WAEP p|
|Outstanding as at 1 January||13,941,969||623.9||13,257,841||436.6||14,688,105||282.1|
|Granted during the year||3,616,898||1368.5||2,814,218||1274.3||3,155,150||781.0|
|Exercised during the year||(2,620,511)||363.9||(1,918,305)||247.8||(4,486,268)||168.4|
|Forfeited/expired during the year||(214,838)||1176.6||(211,785)||939.0||(99,146)||643.1|
|Outstanding at 31 December||14,723,518||845.0||13,941,969||623.9||13,257,841||436.6|
|Exercisable at 31 December||5,782,542||360.2||6,062,182||246.1||5,700,412||177.8|
The weighted average share price at exercise for options exercised in 2011 was 1387.2p (2010: 1231.9p, 2009: 1000.5p).
Options outstanding at 31 December 2011 had exercise prices of 82p to 1374.2p (2010: 79p to 1299.9p, 2009: 63.0p to 1179.0p) and remaining contractual lives of one to 10 years.
The fair values were calculated using a proprietary binomial valuation model. The principal inputs to the options valuation model were:
|Risk-free interest rate||1.2-2.4% pa|
|Dividend yield||0.4-0.6% pa|
|Employee turnover||5% pa|
|Early exercise||At rates dependent upon potential gain from exercise|
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:
|Award date||Weighted average exercise price
|Weighted average fair value
|Weighted average expected life from grant date years|
|Jan – Dec 2007||396.9||123.4||4.8|
|Jan – Dec 2008||647.3||205.8||4.3|
|Jan – Dec 2009||781.0||283.5||4.0|
|Jan – Dec 2010||1274.3||456.2||4.3|
|Jan – Dec 2011||1368.5||580.4||4.7|
The Group recognised a total charge of $19.0 million (2010: $11.5 million, 2009: $7.6 million) in respect of the SOP and 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 $0.6 million (2010: $0.2 million, 2009: $0.2 million) for the UK SIP Plan and $0.2 million (2010: $0.2 million, 2009: $0.2 million) for the Irish SIP plan.
Note 28. Operating lease arrangements
|Minimum lease payments under operating leases recognised in income for the year||7.0||6.5|
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:
|Minimum lease payments under operating leases|
|Due within one year||16.4||17.1|
|After one year but within two years||10.0||16.3|
|After two years but within five years||20.8||23.2|
|Due after five years||73.9||66.8|
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 29. Capital commitments
Contracted capital commitments as at 31 December 2011 are $1,049.2 million (2010: $876.3 million, 2009: $1,270.0 million).
Note 30. Contingent liabilities
At 31 December 2011 there existed contingent liabilities amounting to $147.0 million (2010: $221.0 million, 2009: $239.4 million) in respect of performance guarantees for abandonment obligations, committed work programmes and certain financial obligations.
Note 31. 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||8.7||7.0|
|Post employment benefits||1.1||0.9|
|Amounts awarded under long-term incentive schemes||3.7||1.4|
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).
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 Directors' remuneration report.
Note 32. Subsequent events
Since the balance sheet date Tullow has continued to progress its exploration, development and business growth strategies.
In February 2012, Tullow signed two new Production Sharing Agreements (PSAs) with the Government of Uganda. The new PSAs cover the EA-1 and Kanywataba licences in the Lake Albert Rift Basin. Tullow has also been awarded the Kingfisher production licence.
In February 2012, Tullow completed the farm-down of one-third of its Uganda interests to both Total and CNOOC for a total consideration of $2.9 billion paving the way for full development of the Lake Albert Rift Basin oil and gas resources.
In February 2012 the Group announced the Jupiter-1 exploration well in the Block SL-07B-11 offshore Sierra Leone had successfully encountered hydrocarbons. This has been confirmed by the results of drilling, wireline logs and samples of reservoir fluids.
Note 33. 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 $10.1 million (2010: $4.5 million). At 31 December 2011, there was a liability of $0.3 million (2010: $0.3 million) for contributions payable included in creditors.