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Tullow has seven KPIs which are closely aligned with the Group's growth strategy. Delivering against these KPIs will ensure strong progress with our strategic objectives and creation of shareholder value.
The bonus element of the Executive Directors' remuneration is directly linked to Lost Time Incident Frequency Rate, working interest production, reserves and resources replacement, cash operating costs per barrel of oil equivalent and Total Shareholder Return.
In 2012, the Board agreed a scorecard of EHS KPIs, replacing the single lost time injury frequency rate (LTIFR) measure previously used. The new scorecard provides a more complete view of Tullow's EHS performance and focuses on proactive interventions and learning from incidents, rather than concentrating on statistics of past events.
Measurement The scorecard consists of nine leading and lagging indicators that could have a significant impact on Tullow’s business. Each indicator is scored on the basis of full delivery (three points), partial delivery (two points), in progress (one point) and failure to deliver (zero). On this basis, delivery of all nine targets would result in a score of 27. Full details of the EHS scorecard can be found in the Corporate Responsibility section of the report.
Risk management: Early identification of potential risks can mitigate EHS events for all of our operations and activities. EHS is the responsibility of all personnel in Tullow and is overseen by the Group's Chief Operating Officer, supported by an EHS strategy group and over 100 EHS professionals embedded in the business. A new EHS Board Committee, chaired by non-executive Director Anne Drinkwater, has been formed.
2012 performance: The stretch target was full delivery of all targets resulting in a score of 27 and the base target was set at 19 points, calculated on the basis of a mix of full delivery of the majority of targets and partial delivery of the remainder of the targets. In 2012, the EHS scorecard was 22 out of 27, meeting the base target for the year.
Our employee numbers grew 17% to 1,415 people in 2012. Tullow has made further progress with succession planning and talent management to ensure we have appropriate people to deliver our future growth plans and major projects. Our goal is to build and retain a strong, unified team and be the employer of choice amongst our peers.
Measurement: Staff turnover rates are measured on an ongoing basis. Leavers go through a debriefing process to collect feedback and to help to improve the Group’s people policies and practices. A global employee and contractor survey is conducted every two years which results in clear action plans to resolve issues raised.
Risk management: We can avoid unexpected leavers and a skills shortage by appropriately managing, recognising and rewarding our staff. We must continue to develop our people and provide suitable training opportunities in a strong and positive working environment.
2012 performance: Staff turnover in 2012 was 2.9%. There is no specific stretch or baseline target set for staff turnover. Over the past five years the Group has consistently achieved a staff turnover rate much less than 5%.
Resources growth is an important aspect of high-grading the Group’s portfolio. This can include acquisitions, new ventures, new licences and farm-downs. Reserves and resources replacement is a key indicator of exploration success and field performance and measures the percentage of production that has been replaced during the year. In addition, Tullow undertakes active portfolio management as part of driving resources growth.
Measurement: A Group reserves report is produced by an independent expert who conducts a review of each field at least every two years or when there is significant new data that indicates a material change to commercial reserves or contingent resources.
Risk management: The Group manages replacement risk by exploring for high-value light oil in conventional plays in chosen core areas. We also focus on maximising reservoir performance in producing fields through technical and operational capability.
2012 performance: The Group achieved over 350% organic reserves and resources replacement in 2012 and has total reserves and resources of 1,203 mmboe. Group contingent resources have been enhanced by discoveries in Kenya (Ngamia) and Côte d’Ivoire (Autruche) and increased resources due to appraisal success in Uganda (Jobi-Rii). The Group also entered five new countries during 2012. We do not set specific targets for reserves and resources replacement but focus instead on the totality of replenishing and high-grading our portfolio of assets.
Tullow sets working interest production targets as part of the Group’s annual budget to provide a source of funding for the Group in the form of high-margin significant annual cash flow.
Measurement: Daily and weekly production is monitored for all key producing assets and reported weekly to senior management and on a monthly basis to the Board. Regular production forecasts are prepared during the year to measure progress against annual targets.
Risk management: We can mitigate unplanned interruptions through strong production planning and monitoring. Developing efficient and cost-effective solutions to any production issues, to protect the reserves and resources of the assets in the long term. We are also transitioning our production from lower-value gas in mature fields to high-value light oil production in new areas.
2012 performance: The Group’s working interest production in 2012 was 79,200 boepd, marginally below the baseline production target of 81,700 boepd. The slight shortfall was principally due to the enforced shutdown of third-party non-operated production in the UK CMS area in December 2012 that has now been fully resolved. The stretch target for 2012 was 89,870 boepd.
$14.6 per boe
Operating expense per barrel of oil equivalent (boe) is a function of industry costs, inflation, Tullow’s fixed cost base and production output.
Measurement: Operating expenses are monitored closely to ensure that they are maintained within preset annual targets and are reported each month on an asset-by-asset basis.
Risk management: 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 the potential effects of cost increases.
2012 performance: Operating expense for 2012 achieved the Group’s stretch target of $14.1 per boe, after taking account of the uncontrollable effect of royalty on reported figures in relation to oil price. This was achieved due to strong cost management and operational delivery. The baseline target for 2012 was set at $15.7 per boe.
Our goal is to ensure that operating cash flow funds a significant proportion of the Group’s annual capital expenditure. In 2012, capital expenditure was $1.9 billion and capital expenditure is forecast to be $2 billion in 2013. Approximately 50% is allocated to our 40 well E&A programme, with the remainder to selected development and operations activity.
Measurement: Operating cash flow before working capital and divestment proceeds is reported monthly, with regular forecasting for longer periods to support long-range planning and investment decisions.
Risk management: Strong financial and operating management with disciplined monitoring and reporting. The Group manages liquidity through long-range cash flow forecasting and strong banking and equity relationships. Annual and project budgets require Board approval.
2012 performance: Tullow generated strong operating cash flow of $1.8 billion in 2012. This was marginally lower than in 2011, principally due to higher costs. Production sales volumes averaged 68,000 boepd in 2012 and realised oil prices were in line with 2011 average levels.
Tullow’s exploration-led strategy is focused on building long-term sustainable value growth. Our primary strategic objective is to deliver substantial returns to shareholders.
Measurement: TSR (share price movement and dividend performance) is reported monthly and at year-end to the Board. TSR is measured against an industry peer group, which is regularly reviewed, and the FTSE 100. For the purpose of remuneration, TSR is calculated from the fourth-quarter average relative share price.
Risk management: Tullow has a consistent and clear strategy. The Group undertakes a three-year business planning process each year, which is reviewed and approved by the Board. Executive Directors are responsible for the safe delivery of the business plan objectives, which are set out in the Risk management section. The business plan is aligned with the Group’s strategy, strategic priorities and business model.
2012 performance: The Group delivered a negative 9% TSR in 2012 based on the year-end share price, compared with a 12% increase in 2011. The baseline target is median TSR performance in relation to the peer group and the stretch target is upper quartile performance. Based on the average share price in the fourth quarter of 2012 relative to the fourth quarter of 2011, Tullow was ranked 7th out of 19 peers for TSR performance.