G E N E L E N E R G Y A N N U A L R E P O R T 2 0 1 6 A focused business ANNUAL REPORT 20 16 OUR PURPOSE Who we are Genel Energy is the largest holder of reserves and resources in the Kurdistan Region of Iraq, where we have been operating for over a decade. Through the Miran and Bina Bawi gas fields, Genel is positioned to be the cornerstone provider of KRI gas to Turkey under the KRI-Turkey Gas Sales Agreement. CONTENTS Chief Executive’s Officer’s statement Key information Chairman’s statement Strategic report 1 2 4 Where we operate 8 12 Our business model and strategy 14 Key performance indicators 16 Operating review 20 Our sustainable approach 24 Financial review 28 Risk management 30 Principal risk and uncertainties Governance 34 Chairman’s statement on corporate governance 36 Board of Directors 38 Executive Committee 39 Corporate governance 44 Audit Committee 46 Nomination Committee 48 HSSE Committee 50 Directors’ remuneration report 69 Other statutory and regulatory information 72 Statement of directors’ responsibilities Financial statements 73 80 Financial statements and notes Independent auditors’ report Other information 106 Report on payments to governments year 2016 107 Glossary of technical terms IBC Shareholder information Discover more about Genel Energy on our website www.genelenergy.com GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 STRATEGIC REPORT KEY INFORMATION 1 CASH PROCEEDS ($ million) 2P RESERVES (net MMbbls) PRODUCTION (bopd, working interest) $ 255 148 429 242 2014 2015 2014 2015 69,000 85,000 207 2016 161 53,000 2016 2014 2015 2016 HIGHLIGHTS OUTLOOK ESSENTIAL READING • • • • • The KRG’s February 2016 commitment to pay contractor export payments and address outstanding receivables led to a significant increase in cash proceeds during 2016. $207 million cash proceeds were received in 2016, with Genel generating $59 million in free cash flow (2015: $179 million outflow). $67 million in cash proceeds received in 2017 to date, representing full settlement of invoices for 2016 production. 2016 net production averaged 53,300 bopd (2015: 84,900), at the lower end of revised guidance. Strong liquidity position at the end of 2016, with unrestricted cash balances of $407 million. READ MORE P8 • • • • • Signature of amended PSCs and GLA in February 2017, with a focus now on concluding negotiations with potential partners. Market environment The Kurdistan Regional Government’s cash liquidity improved in 2016, facilitating regular payments. Continued engagement with the KRG over accelerating the recovery of unpaid entitlements. Tawke 2017 production expected to average around year to date production levels of 111,000 bopd, in line with the Operator’s guidance. Peshkabir-2 Cretaceous discovery in early 2017 – accelerated appraisal and early production planning. 2017 capex guidance for Taq Taq and Tawke reiterated at $50-75 million. KRI gas business and Africa exploration expenditure also reiterated at c.$50 million. READ MORE P6 CEO statement Maximising the value of our oil assets, accelerating the recovery of the receivable, building on the momentum in the development of our gas assets. READ MORE P8 Sustainability Genel has been drilling for a decade in the Kurdistan Region of Iraq, making a significant contribution to the local community. READ MORE P21 • Bond buy-back announced. READ MORE P11 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 2 STRATEGIC REPORT CHAIRMAN’S STATEMENT I am pleased to welcome you to Genel Energy’s sixth annual report Tony Hayward Chairman Last year we spoke of Genel Energy’s resilience, and 2016 saw this tested once again. There is now greater stability in the oil industry, and there are opportunities in the Genel portfolio that provide clear reasons for optimism going forward. Following a difficult 2015 for the entire oil industry, after hitting a low in February 2016, the oil price and operating environment improved across the remainder of the year. For the Kurdistan Region of Iraq, an economy almost entirely dependent on income from its oil exports, these tailwinds have begun to make a difference. At the start of the year the continued fall in the oil price, coupled with the financial cost of the fight against ISIS and the ongoing lack of budget transfers from Baghdad, placed a significant financial strain on the KRG. Despite this the KRG reaffirmed its commitment to pay exporters based on the contractual entitlements under the Production Sharing Contract governing each licence. Payments for exports were made throughout the year, with over half a billion dollars paid for gross exports from Taq Taq and Tawke. This resulted in Genel generating free cash flow in the year, a testament to our low cost base and a notable achievement during a difficult time for the industry. The recovery in the oil price facilitates ongoing and regular payments, and provides a basis from which the KRG can turn its attention to progressing the gas development. Despite the disappointment associated with the further impairments to our balance sheet, there remains significant value potential in the portfolio. Maximising the recovery of oil from our fields, the recovery of our full receivable entitlement, as well as the development of our gas assets, remain key priorities for Genel going forward. KRI oil assets Payments throughout 2016 enabled a resumption of investment at Taq Taq and Tawke. Tawke’s production performance remains robust, and the asset is now the primary driver of value in Genel’s oil business. We will work together with the operator, DNO, as the field continues to generate significant cash flow and value for the partners in years ahead. The regularity of payments also allowed appraisal drilling at the nearby Peshkabir discovery, with very encouraging initial results. Further appraisal activity is planned for 2017, but we already believe the potential exists to add to our production going forward. Challenges continue at the Taq Taq field, and production performance has been disappointing. Work done in 2016, and the first two months of 2017, helped to refine our understanding of the remaining potential. This regrettably led to a further write-down of reserves. Additional drilling in 2017, and further investment at the field, will be targeted and appropriate in order to maximise the recovery of remaining oil and generate positive cash flow from operations on an annual basis. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 3 We retain high-impact onshore exploration opportunities in the portfolio, our oil fields remain cash flow generative, and our gas assets provide a very large scale opportunity that is rare for an independent E&P company. Outlook We recognise that 2016 share price performance has been disappointing, and the Board and management team are focused on a strategy to reverse this trend. We retain high-impact in the onshore exploration opportunities portfolio, our oil fields remain cash flow generative, and our gas assets provide a very large scale opportunity that is rare for an independent E&P company. The regularity of payments for our oil production, coupled with our confidence in them continuing throughout 2017 and beyond, provides us with optionality regarding our financial position. The Board will continue to assess the appropriate capital structure for the business as the framework for our gas development evolves ahead of our 2019 bond refinancing. in our With the opportunities available portfolio we are confident that we have the strategy and team to grow the business in coming years. We look forward to updating you on progress throughout 2017. Tony Hayward Chairman READ MORE Where we operate P6 READ MORE Corporate Governance P34 Momentum in the gas business As we look ahead, of great encouragement is the momentum behind the development of the Miran and Bina Bawi gas fields. Across the industry, 2016 saw accelerated adoption of natural gas usage, with the Middle East recording the strongest regional growth rate. Turkey continues to be one of the largest gas consuming markets in the world, and its willingness to diversify supply away from the 88% it gets from just three countries provides a compelling reason for Turkey and the KRG to drive forward the development of Genel’s fields. Miran and Bina Bawi alone have the potential to help meet a meaningful percentage of this demand. The finalisation of documentation of the Production Sharing Contracts and Gas Lifting Agreements for both fields in February 2017 is a significant milestone. There remain many challenges to bringing these assets to production, but this is a company-changing opportunity. Management changes In order to ensure that we have an appropriate team in place to best deliver on our strategy, Paul Schofield was appointed Chief Operating Officer in May 2016. With thirty five years’ management and technical experience encompassing all aspects of the upstream oil and gas business, Paul has been a welcome addition to the team. Jim Leng and Sir Graham Hearne retired from the Board during 2016, having both made valuable contributions in the establishment of Genel Energy as a respected London-listed company. It was a great pleasure working with them. Simon Lockett was added to the Board, bringing significant knowledge and experience of the oil sector. Post-period end, we have also welcomed Tolga Bilgin to the Board. Responsible operations 2016 was the tenth anniversary of Genel Energy drilling at Taq Taq, and we are proud of the work done to support the local community and the KRI as a whole in that time. Since drilling began Taq Taq has been a major source of revenue to the KRG, and we have also invested around $25 million on local community projects, 178 separate projects, as well as currently providing employment to over 400 local people. This work continues, and is a credit to the team in the KRI. funding over As well as the local community, we take our responsibilities to our employees, contractors, and partners seriously. In 2016 we achieved our target of zero injuries across the business, something that we will strive to emulate in 2017 and beyond. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 44 STRATEGIC REPORT WHERE WE OPERATE Genel at a glance KURDISTAN REGION OF IRAQ TURKEY Gas assets Exploration and appraisal assets Oil production SYRIA IRAN IRAQ KRI EXPORT PIPELINE P E S H K A B I R T A W K E B I N A B A W I T A Q T A Q M I R A N C H I A S U R K H KRI PIPELINE EXPORTS 2016 – the key economic driver for the KRI KRG exports via Ceyhan KRG gross export revenues 3 9 6 , 3 1 6 bopd 650,000 600,000 550,000 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 6 5 9 9 3 , , 3 9 0 0 0 3 $ million 800 9 2 1 , 5 1 5 , 3 1 0 5 1 5 6 3 2 4 1 5 , , 4 1 3 7 5 4 7 2 7 , 1 1 4 8 0 8 4 6 5 , 5 9 8 9 3 5 , 6 4 0 2 2 5 , 700 600 500 400 300 200 100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 55 NET 2P RESERVES BY LICENCE 2016 NET PRODUCTION MMbbls bopd Tawke – 126 Taq Taq – 36 Peshkabir – 8 2016 CAPITAL EXPENDITURE Taq Taq – 26,500 Tawke – 26,800 NET UNRISKED RESERVES AND RESOURCES $ million MMbbls Producing assets – 40 Exploration and appraisal – 21 KRI – 1,712 Somaliland – 1,250 Morocco – 899 . 4 3 8 4 8 8 6 4 . 0 1 . 5 4 . 7 7 5 4 . 7 6 6 4 . 6 6 9 4 3 1 . 5 4 0 6 3 5 . BRENT OIL PRICE 2016 $/bbl 60 8 4 . 1 4 . 1 2 8 3 8 1 . 2 3 . 0 7 0 3 50 40 30 20 10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 66 STRATEGIC REPORT WHERE WE OPERATE continued Our market environment Building solid foundations The Kurdistan Region of Iraq is a semi- autonomous region, governed by the Kurdistan Regional Government. The KRI has been central to the fight against ISIS, while sheltering people displaced by the fighting in Iraq and Syria. With this backdrop, the KRI continues its work to create a sustainable economic framework. If 2015 was the year that the KRI proved its resilience in the face of numerous challenges, 2016 was the year that the KRG took significant steps forward, maintaining the security of its borders and improving its economic situation. Boosted by a recovery in the Brent oil price from lows of $30/bbl to $55/bbl, KRI oil exports increased in value, while significant economic reforms helped the KRG move towards financial stability. Moving into 2017, the Kurdistan Region of Iraq is now achieving a monthly fiscal breakeven. ISIS on the defensive The Peshmerga, working alongside Baghdad- controlled forces and supported by a wide international coalition has helped to vastly shrink the territory under ISIS control in Iraq. At the time of writing, the liberation of Mosul has been continuing, with the east and south of the city back under coalition control and ISIS suffering numerous defeats on the western wing of the city. Prior to the Mosul campaign, the terrorist group had already been driven from its last remaining oilfields in Iraq, cutting its most significant source of revenue. The Kurdistan Region of Iraq remained safe and secure in 2016. The military battle is the humanitarian being won, although struggle continues. In total, 1.8 million refugees and internally displaced persons are currently sheltered within the borders of the KRI, constituting 97% of Syrian refugees in Iraq and 40% of internally displaced Iraqis. The KRG has provided leadership for the humanitarian response, and the territorial pressure on ISIS is allowing the KRG to plan for the voluntary and dignified return of IDPs to their homes. organisations Non-governmental have provided valuable support to the KRG, although the lack of significant financial aid from the international community means that the KRG economy continues to suffer a significant strain. Maturing oil industry External factors continue to put pressure on the finances of the KRG, finances that were already overburdened by public spending, but the recent rise in the oil price has been a significant boon for an economy based almost entirely on its natural resources. As the KRI continued to suffer economic hardship in 2016, Genel, with its partners in TTOPCO, provided vocational training courses for residents of villages close to Taq Taq Boosted by a recovery in the Brent oil price from lows of $30/bbl to $55/bbl, KRI oil exports increased in value, while significant economic reforms helped the KRG move towards financial stability. Pipeline exports via the Turkish port of Ceyhan continued throughout 2016, peaking at just under 600,000 bopd in November. Sales by the KRG to international traders were regular and predictable throughout the year, and major companies are publicly committing to operations in the KRI, with Rosneft signing a Cooperation Agreement fields of upstream, infrastructure, logistics and trading in early 2017. the in GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 77 Turkey, a meeting that followed closely behind January 2017 talks between KRG Prime Minister Nechirvan Barzani and Turkish President Erdogan, at which they discussed the further development of cooperation in the field of energy amongst other things. The requirement for energy is one of the key drivers of the Turkey-KRG relationship. Turkey has one of the fastest growing gas markets in the world, and gas from Russia, Iran and Azerbaijan makes up 88% of imports. There is a clear incentive for Turkey to diversify supply, especially when this can be done while reducing costs, and KRI gas offers the opportunity to diversify supply from a secure, long-term source at a cheaper cost than all other alternatives. Regional relationships 2016 saw a continuation in the more stable relationship between Baghdad and Erbil since the election of Iraqi Prime Minister Haider al- Abadi. The Peshmerga has fought alongside Iraqi troops in the campaign to liberate Mosul, with this military cooperation indicative of an improvement in the overall relationship between the respective authorities. In the second half of 2016 a deal was reached between the KRG and Baghdad’s Northern Oil Company regarding the federally controlled Kirkuk fields, with both sides agreeing to split the export volumes equally. This agreement has been built on in 2017, with new commitments by Baghdad to bring Kirkuk crude to Kurdish refineries. In February 2017 this agreement has seen 40,000 bopd of NOC crude transported to KAR’s refineries west of Erbil, generating fuel for Mosul and liberated areas to offset the losses of the Bayji and Qayyarah refineries. As the relationship with Baghdad has stabilised, the relationship between Turkey and the KRG has continued to improve. In February 2017, President Barzani visited Central processing facility at Taq Taq With the addition of Rosneft, international trading houses have now provided pre- payments to the KRG for oil exports totalling around $3 billion since 2014, helping to boost liquidity in the region and strengthen the KRI’s fiscal position. Regular payments to the KRG have in turn facilitated regular payments to oil companies operating in the KRI, and just under $700 million was paid to IOCs in 2016. An oil price of $55 per barrel, with exports at 550,000 bopd, generates $750 million monthly the KRG. Coupled with economic reforms, this has moved the KRG towards a current account surplus. for through on Economic reforms The Kurdistan Regional Government has followed to modernise its economy and significantly reduce public spending. Working with the World Bank, the KRG has carried out a full economic audit, looking to cut costs and build a solid economic bedrock. its promise Actions have been taken to diversify sources of government income, including the overhaul of the taxation system and a reduction in electricity fuel subsidies. The KRG has also moved to an electronic payment system for salaries, requiring all government employees to be biometrically registered. Austerity measures have led to temporary salary reductions throughout the public sector, which continues to provide employment for over 50% of the KRI workforce. The work undertaken has led to an 80% drop in the consolidated fiscal deficit, from $6.5 billion in 2014 to an estimated $1.3 billion in 2016. At the same time, government spending has decreased by c.70% as the KRG continues to implement austerity measures. Non-salary operating expenditure has also fallen by over 50%. Qubad Talabani, Deputy Prime Minister of the KRG, stated at a conference in London that the payment for salaries (excluding the Peshmerga) has been reduced from $750 million to c.$450 million per month. Although part of this has been achieved through temporary salary cuts, the biometric registration programme paves the way to making an element of this reduction permanent. As of March 2017, biometric registration of government wage-earners crossed over one million people. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 8 STRATEGIC REPORT CHIEF EXECUTIVE OFFICER’S STATEMENT Maximising recovery, generating positive cash flow, building on renewed momentum in the gas business Murat Özgül Chief Executive Officer The last three years have been a difficult period for Genel. The entire E&P sector struggled with a collapsing oil price environment, the Kurdistan Region of Iraq faced a challenging security situation, and from our Taq Taq sharp production declines and subsequent reserve downgrades. field has suffered While acknowledging the recent disappointing share price performance and cumulative impact of impairments, there are now clearer opportunities for value creation than there have been for some time, driven by the significant opportunity afforded by our gas assets. the Kurdistan Genel has operated in the KRI, and worked alongside Regional Government, for over a decade. We have acknowledged the difficult times that the KRG has faced economically, and the hard work that has delivered a working payment mechanism for oil exports. In February 2016 a mechanism was implemented by the KRG through which the receivable would begin to be recovered. Alongside monthly payments for current sales based on a proxy for contractual PSC entitlement, the KRG agreed to make further payments equivalent to five percent of the monthly netback revenue derived from our producing fields towards the recovery of outstanding entitlements. This was a promising start, and we will continue to work with the KRG to build on this. has the KRG As part of its commitment to transparent governance, engaged internationally recognised auditing firms to audit the KRI oil sector. This process will also cover unpaid entitlements to oil companies. We are confident that once this audit process is complete, the KRG will remain committed to the full settlement of unpaid entitlements in a timely fashion, and we remain focused on recovering the full amount of our receivable. 2016 was a watershed for contractor payments, with Genel receiving $207 million in the year, an increase from $148 million in 2015. This led us to generate free cash flow after interest payments for the period, a notable performance at a time of low oil prices. The willingness and ability of the Kurdistan Regional Government to make regular payments has been welcome at a time when they continue to implement significant austerity measures. Our key focus is the receivables. recovery outstanding of Building a transformational gas business While the oil business continues to generate cash, the gas business is now moving forward towards development. In 2016, hampered by the KRG’s economic crisis and regional geopolitical events, progress was slower than expected. Expenditure was accordingly kept to a minimum, with the Pre-FEED and upstream Gas Development Plan studies for the Miran and Bina Bawi fields being the focus of activity. 2016 was a watershed for contractor payments, with Genel receiving $207 million in the year, an increase from $148 million in 2015. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 9 The development of our Miran and Bina Bawi assets has the potential to be transformational for Genel, and we are focused on demonstrating the value proposition to the industry and market. Workers at Taq Taq Overleaf: The successful Peshkabir-2 well, on the Tawke licence An updated view on discount rates, and the pace of the development timetable, amongst other factors, has led the Company to reduce the carrying value of the Miran and Bina Bawi fields in the Company’s accounts from $1,448 million to $867 million. Despite this write- down, the development of our gas assets represents a huge opportunity for the Company, and for the Kurdistan Region of Iraq as a whole. Indeed, while 2016 progress was slow, momentum has recently returned to the gas project. We are very pleased to have finalised documentation for the amended Miran and Bina Bawi Production Sharing Contracts and Gas Lifting Agreements. This was an important milestone allowing us to focus on the next step of concluding negotiations with potential partners, which will be the catalyst for pre-development activity to start in earnest in order to move the KRI gas project towards FID. Our focus in 2017 is the positive conclusion of discussions with a strategic partner for the project, followed by a completion of the midstream agreement and financing of the gas processing facility. playing the same role in the development of gas exports which will provide a huge boost to the KRG’s economy. Cash generative oil assets Despite a period of export pipeline downtime in the first quarter of 2016, Tawke field performance remained strong, producing an average of 107,000 bopd in the year. Regular payments allowed investment in the field to restart in the first quarter and continue throughout the year, with the development programme offsetting natural well decline at the field. Tawke reserve estimates also remain stable, with gross proved plus probable (2P) reserves estimated at 504 MMbbls, compared to 543 MMbbls at year-end 2015, with the difference between that and the prior year being primarily the production in 2016. The Tawke field is now our cornerstone oil asset. It remains a low cost field, and we look forward to working with DNO to maximise the cash generation and value of this key asset in the future. We expect that Tawke production in 2017 will average around year to date production levels, in line with the Operator’s current view. The development of our Miran and Bina Bawi assets has the potential to be transformational focused on for Genel, and we are demonstrating the value proposition to the industry and market. Genel has been central to the Kurdistan Region of Iraq’s development as an oil province, and we now look forward to The Peshkabir discovery, under the Tawke PSC, provides potential upside. Following the discovery of Jurassic oil in the Peshkabir 1 well in 2012, the Peshkabir-2 well, spudded in October 2016, discovered additional oil in the Cretaceous horizon in the southern flank of the field in early 2017. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 10 STRATEGIC REPORT CHIEF EXECUTIVE OFFICER’S STATEMENT continued The Tawke partners are considering a number of options to step up the appraisal of the new discovery, including the drilling of a third well in the second half of 2017. Options are also for possible early under consideration from Peshkabir-2, Peshkabir production incorporating oil transportation to the Tawke field’s production facilities at Fishkabur 12 kilometres away. Taq Taq field performance in 2016 was disappointing. It is both a mature and complex field, where the recent production decline has been faster than expected. Having produced over 200 million barrels of oil, the focus is now on maximising oil recovery while controlling costs, with an overall aim of generating positive cash flow from operations. There remains continued uncertainty at the field over reserves estimation and future production rates, and the Company has removed guidance for Taq Taq in 2017. Ongoing work at Taq Taq is aimed at maximising oil recovery at Taq Taq and its value to Genel. In 2016 capital expenditure totalled $61 million across Genel’s entire business, a reduction of 30% on initial guidance and almost $100 million down on the prior year. Both fields continue to benefit from low capital and operating costs, and appropriate expenditure remains a key priority for Genel. As such, investment at both Taq Taq and Tawke will keep pace with the payments that we receive. Development of reserves and resources The reduction in the Company’s 2P reserves at the end of 2016 primarily reflects the updated assessment of Taq Taq 2P reserves, a consequence of a reassessment of the gross rock volume above the oil water contact and fracture porosity in the undrained Cretaceous Shiranish reservoir. The Peshkabir Cretaceous discovery represents the best current prospect for near-term reserve bookings, and we look forward to spudding the Peshkabir-3 appraisal well in the second half of the year. As with all aspects of the business, our focus on cost and value means we will prioritise those areas of the portfolio that meet our In this regard, value creation criteria. following the drilling of the CS-12 well and a subsequent review of licence prospectivity, we have agreed the sale of our 40% interest in the Chia Surkh licence to Petoil, subject to KRG approval. On completion Petoil will pay Genel an initial consideration of $2 million, and an additional $25 million in staged payments contingent on future crude oil production from the Chia Surkh licence. CASH RECEIPTS 2016 $207 million Taq Taq – 125 Tawke – 82 to in Somaliland. The potential In line with our strategy to concentrate on low-cost, onshore activity with high-impact potential, we look forward to stepping up activity is significant – our licences cover an area the size of the entire KRI, with the geology analogous the proven hydrocarbon province in Yemen. The acquisition of 2D seismic data on the Odewayne and SL-10B/13 blocks is now underway. The data will be acquired as part of a Somaliland government- owned project, with the Company purchasing the associated data from the government. We look forward to maturing prospects towards drilling in the medium term. The Company is currently in discussions with the Moroccan government over the nature, scope, and timing of the activity related to the maximum future exploration commitment of c.$30 million. Appropriate expenditure remains a key priority for Genel. As such, investment at both Taq Taq and Tawke will keep pace with the payments that we receive. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 11 2017 is a very important year for Genel and especially the development of the gas business. We are working with the KRG and in discussions with counterparties to move things rapidly forward, promising an improved future for Genel and the KRI. Murat Özgül Chief Executive Officer We are encouraged by the frequency of payments in early 2017 and look forward to that continuing over the balance of 2017. We are also focused on working with the KRG to accelerate the recovery of the receivable for the oil that we have produced in recent years. Outlook We have very clear priorities for the coming year. We will look to maximise recovery from our oil fields while controlling costs, with an overall aim of generating positive cash flow from operations. As ever, we continue to keep a close eye on our financial position, cost control is key across the business, and investment will match the payment environment. We are encouraged by the frequency of payments in early 2017 and look forward to that continuing over the balance of 2017. We are focused on working with the KRG to accelerate the recovery of the receivable for the oil that we have produced in recent years. The KRG has already stated that an increase in the oil price would lead to an increase in the allocation of netback revenues paid to IOCs each month, and the improvement we have seen in their economic situation bodes well in this regard. The receipt of full cash entitlements remains our focus, although there are other options available. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 1212 STRATEGIC REPORT OUR BUSINESS MODEL AND STRATEGY Our business model HOW WE CREATE VALUE We create value by finding and monetising natural resources. To achieve this we must execute exploration campaigns, deliver selective development projects, maximise our production over the life of field, and monetise at all points of the cycle, ensuring that we are suitably financed through a mix of diverse funding options and portfolio management. 1 2 EXPLORATION AND APPRAISAL Execute high-impact E&A programmes, mitigating environmental impact, with a view to increasing reserves and resources. Key focus Genel continues to prioritise near-term spend on our KRI production and development assets, while our refocused exploration strategy targets low-cost onshore opportunities. 2016 activity Appraisal work in the KRI in 2016 focused on Chia Surkh, and the Peshkabir-2 well at Tawke, which discovered additional oil in the Cretaceous horizon in early 2017. DEVELOPMENT AND PRODUCTION Safely deliver selective development projects for the benefit of both Genel and the communities in which we operate. The key aim is to maximise production of natural resources over the life of field and increase cash flow. Key focus Genel is concentrating on assets in the KRI, where production costs are amongst the lowest in the world. 2016 activity An increase in regularity of payments allowed work programmes to resume at Taq Taq and Tawke. The mid-stream pre-FEED for Miran and Bina Bawi gas fields was completed. Our strategy HOW WE OPERATE Our business model illustrates our value creation story, and is guided by our strategy. As we pursue our strategy, the way in which we conduct ourselves with our host communities and governments is crucial to our success as a business, and underpins everything that we do. Our record on health, safety and the environment is a source of pride for Genel, and we strive to ensure that our operations provide benefits for those communities in which we operate. 1 2 MAXIMISE THE POTENTIAL OF OUR KRI OIL ASSETS AND COMMERCIALISE OUR KRI GAS BUSINESS Oil production in the KRI is managed to ensure long-term value creation, maximising production over the life of the field and investing at an appropriate level to the external environment. Our Miran and Bina Bawi fields contain an estimated 11 tcf of mean raw gas resources, the commercialisation of which has the potential to be transformational for both Genel and the KRI. CREATE VALUE WITH THE DRILL BIT We are committed to realising the value in our portfolio through a focused drilling programme, exploring, appraising and developing our assets, with the flexibility in our portfolio allowing us to manage expenditure appropriately. READ MORE P8 READ MORE P16 $ GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 1313 3 Our oil reserves Oil production in the KRI provides ongoing cash generation. Our reserves are being produced at some of the lowest costs in the industry, making our assets cash flow breakeven at a Brent oil price of less than $20/bbl. A payment mechanism announced in February 2016 helped provide clarity over export receipts, and over $200 million was received by Genel in 2016. The KRI gas development The Miran and Bina Bawi gas project will benefit from an industry leading cost structure, helping Turkey both diversify and lower the cost of energy imports. Underpinned by a government backed gas sales agreement between Turkey and the KRG, our gas assets provide a unique opportunity. The signing of documentation signalled renewed momentum in 2017. READ MORE P17 READ MORE P19 FINANCE AND PORTFOLIO MANAGEMENT Manage financial and business assets to provide flexibility in our capital structure in order to pursue strategic objectives and underpin future growth. Key focus Managing the portfolio in an appropriate way for the external environment, minimising expenditure and managing our level of debt. 2016 activity Capital expenditure was reduced by 61%, and a successful bond buy-back in March 2016 helped reduce debt and bolster the balance sheet, while regular payments from the KRI stabilised the receivable. $ 3 4 5 PURSUE SELECTIVE, ACCRETIVE M&A OPPORTUNITIES MAINTAIN THE HIGHEST LEVEL OF CORPORATE GOVERNANCE RETURN EXCESS CASH TO SHAREHOLDERS We continue to look to leverage the skills and knowledge of the management team and identify upstream assets that would add to reserves and/or resources and complement the existing KRI position. The strength of our management team, and an experienced Board, provides the expertise to grow the business and the governance necessary to maintain the integrity of the Company and effectively manage risk. The Company aims to retain a strong balance sheet and flexibility in our capital structure in order to pursue its strategic objectives and underpin future growth. We continue to evaluate and evolve our capital structure to reflect the needs of the business, with a view to returning capital to investors when appropriate. READ MORE P26 READ MORE P34 READ MORE P24 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 14 STRATEGIC REPORT KEY PERFORMANCE INDICATORS Measuring our progress NET 2P RESERVES 161 (net mmbbls) 2015: 242 mmbbls TOTAL NET RESERVES AND UNRISKED RESOURCES 4.1 (bnboe) 2015: 4.2 bnboe NET PRODUCTION 53,000 (bopd) 2015: 85,000 bopd 5 4 4 3 5 4 9 2 4 2 4 2 1 6 1 500 400 300 200 100 0 6 5 4 3 2 1 0 9 5 . 4 5 . 8 4 . . 2 4 1 . 4 5 8 9 6 5 4 4 4 3 5 90 80 70 60 50 40 30 20 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Definition 2P reserves are proved plus probable reserves. Definition Net reserves and resources include 3P reserves, 2C contingent resources and prospective resources. Definition Production is measured in barrels of oil produced per day. Definition Definition Cash flow generated from operating activities, minus capital expenditure. Lost time incident frequency measures the Loss of primary containment records number of lost time incidents per million any unplanned or uncontrolled release of Definition work hours. Performance Gross 2P reserves at Tawke were 504 MMbbls at the end of 2016, compared to 543 MMbbls at the end of 2015, with the difference being field production in the year. At Taq Taq, a reassessment of gross rock volume and fracture porosity in the undrained Shiranish formation resulted in a reduction in gross 2P reserves from 172 MMbbls at the end of 2015 to 59 MMbbls at the end of 2016. Note that end-2015 reserves have been restated, from 264 MMbbls to 242 MMbbls, following the Tawke reserves update announced on 18 March 2016. Relevance to strategy Our strategy is to enhance the value of our existing 2P reserves through active reservoir management and cost effective development. The Company also looks to replace 2P reserves through a combination of maturing contingent resource to commerciality, exploration for new sources of hydrocarbons and M&A activity. Performance Net reserves and unrisked resources remained largely unchanged in 2016. Further maturation of the Sidi Moussa prospect inventory added 449 MMbbls of unrisked prospective resource, notably through the addition of a series of Cretaceous prospects. This was offset by the removal of the Miran Deep prospect, a block wide reassessment of Chia Surkh volumes subsequent to the CS-12 well result, and the reduction of 3P reserves at Taq Taq. Performance The 2016 development programme at Taq Taq failed to offset natural decline, with production at the field down 48% compared to 2015. Production at Tawke was also lower compared to 2015, a result of reduced investment made in the prior year as regular payments were not forthcoming. A scaled back work programme in 2016 has helped to mitigate against field decline. Relevance to strategy Prospective resources are those quantities of hydrocarbons estimated to be potentially recoverable from undiscovered accumulations by application of future development projects, and have the potential to drive long term growth. Relevance to strategy Production from our fields provides Genel’s revenue generation, and is a key measure of our operational performance. Our oil production in the KRI is managed to ensure long-term value creation, with production maximised over the life of the field. material from a piece of equipment (such as a pipe, vessel, or tank) used for containment of potentially harmful or hazardous substances and products. Performance Performance Performance The receipt of over $200 million in payments 2016 was a landmark year, as we achieved There were two fluid releases at Taq Taq, for oil exports, and a 61% reduction in capital our target of zero injuries across both one totalling five litres of hydraulic lift expenditure, led to positive free cash flow TTOPCO and Genel operations. We continue fluid, the other c.1000 litres of diesel generation in 2016. to review processes and make improvements from an onsite generator. Clean up was where possible in order to strive to repeat undertaken, and there was no lasting this performance in coming years. harm to the environment. As always, a full investigation of both incidents was undertaken and lessons learned. Relevance to strategy Relevance to strategy Relevance to strategy Production from operating activities The safety of our workforce remains of Part of our commitment to being a forms Genel’s revenue generation. Net paramount importance. Genel is committed sustainable business is for the impact on cash illustrates the success of monetisation to running safe and reliable operations the environment around our operations of these activities, reflecting both money across our portfolio, aiming at zero fatalities to be minimised. Asset integrity is a major received and the minimisation of and no lost time incidents. operating costs. Free cash flow has replaced capital expenditure as a KPI, which did not reflect Genel’s focus on cash generation. priority for Genel and we plan and execute the operations of our business and our engagement of subcontractors so as to minimise risk and mitigate potential impact. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 15 FREE CASH FLOW LOST TIME INCIDENTS 59 ($ million) 2015: ($179) million 0 Hours lost due to injury per million work hours 2015: 0.6 SPILLS – LOSS OF PRIMARY CONTAINMENT 2 Incidents where there has been a loss of primary containment 2015: 1 200 100 0 -100 -200 -300 -400 -500 -600 4 7 9 5 9 7 1 - 3 5 2 - 1 6 5 - 6 . 1 5 . 1 2.0 1.5 1.0 0.5 0.0 0 . 1 . 6 0 0 7 6 5 4 3 2 1 0 7 6 1 1 2 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2P reserves are proved plus probable Net reserves and resources include 3P Production is measured in barrels of oil Definition reserves. Definition Definition reserves, 2C contingent resources and produced per day. prospective resources. Definition Cash flow generated from operating activities, minus capital expenditure. Definition Lost time incident frequency measures the number of lost time incidents per million work hours. Performance Performance Performance Gross 2P reserves at Tawke were 504 Net reserves and unrisked resources The 2016 development programme at MMbbls at the end of 2016, compared to remained largely unchanged in 2016. Further Taq Taq failed to offset natural decline, 543 MMbbls at the end of 2015, with the maturation of the Sidi Moussa prospect with production at the field down 48% difference being field production in the inventory added 449 MMbbls of unrisked compared to 2015. Production at Tawke year. At Taq Taq, a reassessment of gross prospective resource, notably through the was also lower compared to 2015, a result rock volume and fracture porosity in the addition of a series of Cretaceous prospects. of reduced investment made in the prior year undrained Shiranish formation resulted in This was offset by the removal of the Miran as regular payments were not forthcoming. a reduction in gross 2P reserves from 172 Deep prospect, a block wide reassessment A scaled back work programme in 2016 has MMbbls at the end of 2015 to 59 MMbbls at of Chia Surkh volumes subsequent to the helped to mitigate against field decline. the end of 2016. Note that end-2015 reserves CS-12 well result, and the reduction of 3P have been restated, from 264 MMbbls to reserves at Taq Taq. 242 MMbbls, following the Tawke reserves update announced on 18 March 2016. Performance The receipt of over $200 million in payments for oil exports, and a 61% reduction in capital expenditure, led to positive free cash flow generation in 2016. Performance 2016 was a landmark year, as we achieved our target of zero injuries across both TTOPCO and Genel operations. We continue to review processes and make improvements where possible in order to strive to repeat this performance in coming years. Definition Loss of primary containment records any unplanned or uncontrolled release of material from a piece of equipment (such as a pipe, vessel, or tank) used for containment of potentially harmful or hazardous substances and products. Performance There were two fluid releases at Taq Taq, one totalling five litres of hydraulic lift fluid, the other c.1000 litres of diesel from an onsite generator. Clean up was undertaken, and there was no lasting harm to the environment. As always, a full investigation of both incidents was undertaken and lessons learned. Relevance to strategy Relevance to strategy Relevance to strategy Our strategy is to enhance the value of Prospective resources are those Production from our fields provides Genel’s our existing 2P reserves through active quantities of hydrocarbons estimated revenue generation, and is a key measure reservoir management and cost effective to be potentially recoverable from of our operational performance. Our oil development. The Company also looks to undiscovered accumulations by application production in the KRI is managed to ensure replace 2P reserves through a combination of future development projects, and have long-term value creation, with production of maturing contingent resource to the potential to drive long term growth. maximised over the life of the field. commerciality, exploration for new sources of hydrocarbons and M&A activity. Relevance to strategy Production from operating activities forms Genel’s revenue generation. Net cash illustrates the success of monetisation of these activities, reflecting both money received and the minimisation of operating costs. Free cash flow has replaced capital expenditure as a KPI, which did not reflect Genel’s focus on cash generation. Relevance to strategy The safety of our workforce remains of paramount importance. Genel is committed to running safe and reliable operations across our portfolio, aiming at zero fatalities and no lost time incidents. Relevance to strategy Part of our commitment to being a sustainable business is for the impact on the environment around our operations to be minimised. Asset integrity is a major priority for Genel and we plan and execute the operations of our business and our engagement of subcontractors so as to minimise risk and mitigate potential impact. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Production and sales Net working interest production in 2016 averaged 53,300 bopd, at the lower end of the Company’s 53-60,000 bopd guidance range, which was revised from 60-70,000 bopd in July 2016. Production declined by 37% year-on-year, with the underperformance versus initial guidance primarily a result of greater than anticipated declines at Taq Taq during the year. Following a hiatus in drilling activity in the second half of 2015, development activity at both Taq Taq and Tawke resumed in early 2016 as the KRG’s payment announcement provided confidence of ongoing cash receipts. Investment at Tawke helped to offset natural well declines at the field, with drilling activity at Taq Taq only partially mitigating natural well decline. During 2016, the majority of production from both fields was exported by the KRG through the KRI-Turkey pipeline. The Taq Taq field also continued to supply the domestic Bazian refinery. Small volumes from both fields were also supplied into the domestic market, principally during downtime in the KRI-Turkey pipeline. All sales routes from both fields are currently invoiced at the same price under the terms of the February 2016 payment mechanism. The Company continues to expect that the majority of production from both fields will be exported by the KRG through the KRI-Turkey pipeline. The KRI domestic market does provide a secondary sales route disruptions to KRI-Turkey pipeline uptime. in the event of meaningful The Company announced on 28 March 2017 that previous guidance for 2017 Taq Taq gross average production of 24-31,000 bopd had been removed given the ongoing uncertainties in reserves estimation and future production from the field. Consequently, the previous 35- 43,000 bopd 2017 production guidance for the Company has also been removed. Average 2017 year to date production for the Company is 40,000 bopd, representing its net share of Taq Taq and Tawke production. Reserves and resources At 31 December 2016, Genel’s proven plus probable (2P) net working interest reserves were 161 MMbbls. In the 2015 Annual Report and Accounts, end-2015 2P net reserves were reported as 264 MMbbls. Shortly after publication of the Company’s 2015 results, the Tawke operator updated its assessment of end-2015 Tawke reserves and resources, leading to a revision of the Company’s end- 2015 net 2P reserve position to 242 MMbbls (as stated in the table below). Compared to this latter figure, end-2016 net 2P reserves represent a 33% year-on-year reduction. Year-end 2016 gross Tawke 2P reserves were estimated by the operator, DNO ASA, at 504 MMbbls, compared to 543 MMbbls at year- end 2015. The year-on-year change is explained by production in 2016 of 39 MMbbls. Genel’s net share of Tawke 2P reserves at 16 STRATEGIC REPORT OPERATING REVIEW Tawke ultimate recovery unchanged, new discovery at Peshkabir Paul Schofield COO TAWKE SALES ROUTE 2016 bopd Export via pipeline – 105,500 Domestic sales – 1,000 Refinery sales – 400 TAQ TAQ SALES ROUTE 2016 bopd Export via pipeline – 41,000 Domestic sales – 1,600 Refinery sales – 17,600 GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 17 activity at Tawke field recommenced. In the first half of 2016, a workover programme on eight existing wells was implemented, which helped offset natural well declines. In the second half of the year, four new production wells were drilled, three of which were in the shallow Jeribe reservoir and the fourth in the main Cretaceous reservoir. Combined, these development wells added in excess of 10,000 bopd (sum of initial well rates) of new production for investment of $11 million, again offsetting declines from the existing well stock. The firm programme for Tawke in 2017 includes two further development wells (T-35 and T-21N) in the main Cretaceous reservoir and two shallow Jeribe wells. Workovers of existing wells are also planned. Additional activity includes further Cretaceous and Jeribe wells, is contingent on reservoir performance and regular payments from the KRG for current sales and unpaid entitlements. in 2017, which The Tawke field has produced an average of 111,000 bopd in 2017 year to date and is currently producing 108,000 bopd. The Company expects that the average Tawke production in 2017 will be around year to date production levels, in line with operator guidance. publication of the Company’s 2015 results, the Tawke operator updated its assessment of end-2015 Tawke reserves and resources, resulting in the Company’s end-2015 2C net resources position being upgraded to 1,284 MMboe. Furthermore, a decision has been taken to include KRI gas business resource estimates on a raw gas instead of sales gas basis at end-2016. This, amongst other factors, results in a comparable end-2015 2C resource number of 1,552 MMboe. Compared to this latter figure, 31 December 2016 2C net resources were practically unchanged year- on-year. In 2016, 2C resources attributable to the Chia Surkh PSC were reduced following a block wide assessment of volumes following the CS- 12 drilling results. Elsewhere, net Peshkabir 2C resources of 12 MMboe were added following the Cretaceous discovery in early 2017. Net Miran oil 2C resources of 39 MMbbls were added to 2C following their removal from 2P reserves. KRI oil assets Tawke PSC (25% working interest) The Tawke field produced a gross average of 107,000 bopd in 2016, compared to 135,000 bopd in 2015, representing a 21% decline year-on-year. The majority (98%) of sales from the field were by the KRG through the KRI-Turkey pipeline, with the remainder either being refined at the Tawke field or sold in the domestic market. A total of 33 development wells have been drilled at the field, with 28 of these currently producing. Surface facilities capacity is currently 200,000 bopd with water handling capacity of up to 16,000 bpd. Following the KRG’s February 2016 payment announcement, well intervention and drilling end-2016 is 126 MMbbls. At the Peshkabir field, gross 2P reserves at year-end 2016 were unchanged at 32 MMbbls (8 MMbbls net to Genel). that the 2P On 29 February 2016, the Company initial gross announced recoverable reserves (referred to in the industry as Estimated Ultimate Recovery, or EUR) for the Taq Taq field had been downgraded from 683 MMbbls to 356 MMbbls. On 28 March 2017 the Company announced a further downward revision of Taq Taq 2P EUR to 267 MMbbls, implying gross 2P reserves of 61 MMbbls at year-end 2016 (from 172 MMbbls at year-end 2015). Genel’s net share of Taq Taq 2P reserves at year-end 2016 is 27 MMbbls. The further reduction of 2P EUR for Taq Taq is a consequence of a reassessment of the gross rock volume above the oil water contact and fracture porosity in the undrained Cretaceous Shiranish reservoir, following an analysis of reservoir surveillance data and well performance from 2016 and the first two months of 2017. Following a technical and commercial review of development planning for the Miran oil discovery, and capital allocation decisions across Genel’s business, the Company has decided that it would be prudent to move Miran oil volumes from reserves to resources pending clarity on the nature and timing of partner(s) for the KRI gas business. This reduced 2P reserves by 23 MMbbls (net). At 31 December 2016, Genel’s 2C net contingent resources were 1,549 MMboe. In the 2015 Annual Report and Accounts, 31 December 2015 net 2C resources were reported as 1,252 MMboe. Shortly after 31 December 2015 Production Acquisitions and disposals Extensions and discoveries New developments Revision of previous estimates 31 December 2016 Remaining reserves (MMboe) Resources (MMboe) 1P Gross 447 (61) – – – 2P Gross 777 (61) – – – 1C Gross 1,065 – – – – Net 242 (19) – – – Net 123 (19) – – – (11) 375 (5) 99 (119) 597 (62) 161 15 1,080 Contingent Prospective 2C Net 798 Gross 2,186 Net Gross Net 1,552 3,433 1,994 – – – – 13 811 – – 48 – – – 12 – – – – – – – – – (82) (15) 492 2,152 1,549 3,925 317 2,311 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Genel continued to work towards the commercialisation of the significant resource base at the Miran and Bina Bawi fields, currently estimated at 11 tcf (gross 2C basis) of raw gas. capacity of 55,000 bwpd. The Company currently intends to announce Taq Taq field production on a monthly basis going forward. The TT-29z well is currently drilling at the field and aims to reduce the uncertainty on the free water level in the north flank, which in turn will give better understanding on remaining reserves at this location. TT-29 will also target a shallower Tertiary anomaly which could add new reserves if successful. Operations on the well are scheduled to complete in mid-2017. In addition, the firm 2017 programme for Taq Taq comprises two sidetracks of existing Cretaceous producers, further development of the Pilaspi reservoir and ESP/jet pump installation. The Company remains of the view that Taq Taq is under drilled on the flanks of the field. Accordingly, an opportunity register, which consists of new development well locations Paul Schofield and Simon Lockett at Taq Taq 18 STRATEGIC REPORT OPERATING REVIEW continued Taq Taq (44% working interest, joint operator) The Taq Taq field produced an average of 60,000 bopd in 2016, a 48% year-on-year decline. A total of 28 development wells have been drilled at the Taq Taq field. During the year, 68% of field output was sold by the KRG through the KRI-Turkey pipeline, with a further 29% trucked to the domestic Bazian refinery and the remainder sold into the domestic market. During 2016, three existing production wells were side-tracked. All three sidetracks (TT- 27x, TT-07z and TT-16y) were contributing a total of 9,000 bopd at year-end 2016, most of which was from the TT-16y well. Production rates from the other two sidetracks were lower than anticipated due to the well completions being compromised as a result of drilling and completion problems. Notwithstanding the contribution from the side-track wells drilled in 2016, Taq Taq field production underperformed expectations in the year, primarily as a rising oil water contact in the Shiranish reservoir reduced the productivity from key wells. Following the analysis of reservoir surveillance data and well performance from 2016, and the first two months of 2017, assumptions on gross rock volume above the oil water in the contact and fracture porosity formation were undrained Shiranish reassessed. This resulted in a further reduction in gross proven and probable (2P) EUR from 356 MMbbls at end-2015 to 267 MMbbls at end-2016. These changes have been supported by McDaniel & Associates in its updated Competent Person’s Report (CPR) dated 28 March 2017. In addition, the Company has been working on an updated Field Development Plan (‘FDP’) for the Taq Taq field. The scope of this activity has been extended to incorporate the results of recent well performance and will be further refined on the back of future development activity. The strategy at Taq Taq is to maximise recovery from the field while controlling costs, with an overall aim of generating positive cash flow from operations. The Taq Taq field has produced an average of 28,000 bopd in 2017 to date. The Company has previously stated that the field is reliant on production from a limited number of key wells – production is currently 19,000 bopd from 15 wells, with five of these wells accounting for 77% of field production. Recently, key producing wells have exhibited high rates of decline as a result of water breakthrough, exacerbating the decline rate across the field. Taq Taq field water production is currently 13,000 bpd, representing a water cut of c.40%, significantly less than total water handling GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 19 and remedial work on existing wells, is being prepared. The Company is working with its partner in the field to determine the optimal forward development programme. The partners have agreed to further refine the future activity as the results of ongoing development activity are known. Future activity levels at Taq Taq are also subject to the continuation by the KRG of regular payments for crude sales and historical receivables. KRI gas assets Miran and Bina Bawi fields (100% working interest, operator) In 2016, Genel continued to work towards the commercialisation of the significant resource base at the Miran and Bina Bawi fields, currently estimated at 11 tcf (gross 2C basis) of raw gas. The focus during 2016 was on finalising the upstream PSCs and terms of gas supply to the midstream processing facilities. At the asset level, the focus was on preliminary engineering studies, with both the upstream Gas Development Plan and midstream pre- FEED awarded in mid-2016. In February 2017, the Company announced that it had finalised Amended and Restated Production Sharing Contacts and Gas Lifting Agreements for the Miran and Bina Bawi fields. As a result, Genel’s interests in both Miran and Bina Bawi increased to 100% (from 75% and 80% respectively). These changes are not reflected in year-end 2016 reserves and resources as they occurred after the reporting date of 31 December 2016. The GLAs contain conditions precedent, which, inter alia, include the execution of final agreements on the midstream gas processing facilities and pipeline transportation, the execution of the financing documents and the completion of updated competent person’s reports for Miran and Bina Bawi. Both Genel and the KRG have the option to terminate the GLAs by February 2018. If the conditions precedent are not satisfied within 12 months, the KRG has a right to terminate the GLAs. In the event of termination, and a subsequent failure to conclude new gas lifting agreements within one year period, the KRG can also terminate the Miran and Bina Bawi PSCs. During the three year period following such a termination, Genel would have a right of first refusal to participate in the development of the Miran and Bina Bawi gas fields with a 49% working interest on the same terms offered to any third party. With this part of the gas documentation finalised, Genel is now focused on the next step of concluding negotiations with potential partners. In mid-2016, the Company awarded the pre- Front End Engineering Study (‘FEED’) contract for the midstream facilities to Fluor and Gas Development Plan (‘GDP’) to Baker Hughes RDS. The midstream pre-FEED was completed in early 2017 and has identified a number of potential sites for the processing facilities at both Miran and Bina Bawi. In addition, an option to process gas from Miran and Bina Bawi at one plant located close to the Taq Taq field is under consideration. The next step in the midstream development planning entails a full FEED study and Environmental Impact Assessment. The GDP, which has now been completed, has focussed on dynamic reservoir modelling, production profiles, drilling locations, well completion concepts and the subsurface reservoir management plan for Miran and Bina Bawi. The GDP is broadly supportive of the findings of the existing third party CPRs for Miran and Bina Bawi with respect to the level of contingent resources at both fields. for Capital expenditure estimates the upstream development and midstream processing facilities are still at a very preliminary stage. In particular, further sub- surface work may be needed at both Miran and Bina Bawi to refine the distribution of resources across the fields, potential well locations, and well deliverability. The Company envisages that this activity, if implemented, would be funded as part of a farm-down of its 100% upstream interest in both fields. As a result, the Company believes that is appropriate that updated cost estimates for the gas project await finalisation of the partnership structure for both the upstream and midstream. In 2016, the Company formally relinquished its 40% interest in the Dohuk licence. Exploration and appraisal Cost effective onshore E&A activity, both in the KRI and internationally, is an important part of the Company’s growth strategy. This strategy yielded tangible success in early 2017 with the Cretaceous discovery at Peshkabir-2. Further appraisal of Peshkabir will be the focus in 2017, in addition to committed activity on the Africa exploration portfolio. and explore KRI The Peshkabir-2 well was spudded in October 2016 to both appraise the 2012 Jurassic discovery Cretaceous prospectivity 18 km to the west of the Tawke field. In January 2017, the Tawke partners announced that oil had been discovered in the Cretaceous, with the well flowing at a stable rate of 3,800 bopd of 28° API oil. The well has reached a planned depth of 3,500 metres and was completed to facilitate rigless testing of the Jurassic, during March and April 2017. The Tawke partners plan to appraise the Cretaceous discovery with the Peshkabir-3 well later in 2017, as well as investigate the for early production from potential Peshkabir-2 via the existing Tawke facilities. The Tawke operator’s initial estimate of gross 2C contingent resources for the Peshkabir Cretaceous discovery is 48 MMboe. The CS-12 exploratory appraisal well on the Chia Surkh licence spudded on 30 March 2016, with a view to refining the resource potential of the licence after the successful CS-10 and CS-11 wells in 2013. Genel was carried on its share of the CS-12 well costs by its partner Petoil. The well was drilled to a measured depth of 2,500 metres ahead of time and budget. The primary Oligocene and Eocene objectives proved to be water bearing. A testing programme in the previously proven Miocene section established a modest level of oil resources. Following consideration of the well results and a review of the prospectivity on the licence, the Company signed a Sales and Purchase Agreement in January 2017 to transfer its 40% interest in the Chia Surkh licence to its partner, Petoil, which remains subject to approval by the Ministry of Natural Resources. Petoil will pay Genel an initial consideration of $2 million, and an additional $25 million in staged payments contingent on future crude oil production from a commercial development at Chia Surkh. As part of a portfolio high-grading exercise, the Company’s 40% working interest in the Ber Bahr licence is in the process of relinquishment. Africa Onshore Somaliland, the acquisition of 2D seismic data on the Odewayne (Genel 50%, operator) and SL-10B/13 (Genel 75%, operator) blocks commenced in March 2017. The data will be acquired as part of a Somaliland government owned speculative 2D seismic acquisition project, with the Company purchasing the associated data from the government. This new data is expected to deliver a step change in the company’s understanding of this highly prospective but underexplored area. The current 2D seismic will satisfy the outstanding commitment in the current exploration phase on both licences. Any further activity beyond the current exploration phase is discretionary. The Company is currently in discussions with the Moroccan government over the nature, scope and timing of the activity related to the maximum future exploration commitment of c.$30 million. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 20 STRATEGIC REPORT OUR SUSTAINABLE APPROACH Making a positive contribution to communities Supporting and sustaining the communities in which we operate is fundamental to Genel Energy’s success. Natural resources should be a boon to a region, and it is imperative that local people share the benefits of the resources found in their area. As well as providing economic benefits for a country as a whole, we strive to directly support local communities through providing opportunities, while leaving the environment untarnished for future generations. K EY FOCUS AREAS Health and safety Our primary consideration is the safety and wellbeing of our employees, and all of our operations are conducted in a manner that protects employees and contractors. Community development The development of positive and enduring relationships with the people and communities in which we operate is crucial to our success as a business. $ Sharing success Genel’s activities power economic growth, and we work in partnership with local people in order to support and sustain the communities in which we operate. People We are committed to developing our employees, promoting diversity, fairness and respect in the workplace, and providing recognition based on success and achievement. Environment Our operations are managed in order to minimise environmental impact and prevent any adverse effects, leaving the local area untarnished for future generations. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 21 10 YEARS OF DRILLING BY TTOPCO AT TAQ TAQ $25m spent on local community projects 390 local people given vocational training barrels of oil produced 206m $ $ $ $12bn $ $ value of total Taq Taq oil sales 400 people employed from the local community 178 social projects funded, including a library, nursery, art school, refugee camp, and road 5,800 medical visits made to local people in 15 local villages 11 local companies established to provide services to Taq Taq $ $ $ STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 22 STRATEGIC REPORT OUR SUSTAINABLE APPROACH continued Providing lasting benefits We are committed to conducting all of our operations in a manner that protects Genel’s employees and contractors from injuries and illnesses, as well as having regard to the healthy and safety of the general public and the protection of the environment. Health and safety A safe workplace is a priority for Genel, and we are proud of our performance in this area. 2016 was a landmark year, as we achieved our target of zero injuries across both TTOPCO and Genel operations. This achievement reflects the progress made in our safety culture and performance. We are also proud of the fact that there has never been a Genel or TTOPCO fatality, and we continue to take proactive steps to keep it this way. In 2016 we introduced improved signage across our sites to help raise awareness of potential dangers. At Taq Taq, TTOPCO took on a new HSE overseer, bolstering our efforts to run the safest possible site. The employee permit to work was also updated, tightening procedures and making clear to all what their responsibilities are. The development of life-saving rules was finalised in June, following discussion with employees and contractors. Based around three core areas – process safety, personal safety, and driving – training has been rolled out to all employees across the business. New in all Genel rules have been operated fields, with contractors made aware of their obligations. instigated People Our talented, experienced and motivated staff are key to the success of our Company. At 31 December 2016, Genel employed 128 people. Of these, 68 are based in Ankara, 19 in London, 17 in the Kurdistan Region of Iraq, and 24 in our African operations. Reaffirming our commitment to providing opportunities for local people, TTOPCO employed 507 people, of whom 78% (395 employees) are from the local area. Our commitment to employing a diverse and balanced workforce enables us to build an effective and talented workforce at all levels of the organisation, including the Board. The value we place on equal opportunities and diversity of ideas, skills, knowledge, experience, culture, ethnicity and gender is evident in our daily operations as well as formalised in our policies and procedures. Our recruitment policy is to appoint individuals based solely on their skills, experience and suitability to the role. 30% (39 employees) of our workforce are women. Of those, 13% (5 employees) hold senior management positions within our organisation. Environment Our operations are managed in accordance with our policy of minimising environmental impacts and potential adverse effects. This includes a focus on effective design, efficient operation, and responsible energy use. GENDER DIVERSITY EMPLOYEES Female – 30% Male – 70% LOCAL EMPLOYMENT TTOPCO From the local area – 78% Outside local area – 22% the completed Fluor pre-Front End Engineering Design study relating to the Miran and Bina Bawi fields around the end of 2016. This included the environment design basis, environmental aspect identification, and scope of work for the environment impact assessment, for which a consultant will shortly be selected. We continue to report our greenhouse gas (‘GHG’) emissions in accordance with the requirements of the UK’s Companies Act (Strategic Report and Directors’ 2006 Reports) Regulations 2013, for all Genel operated assets or facilities. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 23 TTOPCO have helped landowners to receive appropriate compensation in a timely manner, with over £2 million paid to landowners to date, of which $643,000 has been paid to 44 farmers to date near Taq Taq, and $455,000 to 48 farmers in the vicinity of Miran. Persons the KRG The Kurdistan Region of Iraq is continuing the fight against is ISIS, and accommodating significant numbers of Internally Displaced seeking sanctuary in the region, with almost two million people now sheltering in the KRI. Following the construction of the Koya refugee camp in 2015, and work with Save the Children, over 1500 children are benefiting from the building of child friendly spaces in four camps across the KRI. In 2016 we continued to support IDPs and poor families, and 668 families around Taq Taq were provided with essential items. Outside the KRI, Somaliland suffered from a severe and widespread drought in 2016. Working with Hon. Hussein Abdi Dualeh, Minister of Energy and Minerals, Genel distributed food and water to affected families. Food and 60 tankers of water were delivered, providing vital support to over 1500 families based in the Waridad and Bali Arrale districts. As operations in Somaliland move forward, our social programme will similarly increase, addressing key community needs. The majority of energy and fuel data collected has been based on actual, measured consumption. 0.45% of emissions (5.2 tonnes of CO2 equivalent (tCO2e)) has been extrapolated from actual consumption figures. Emissions are calculated using appropriate conversion factors sourced from: the Defra/ DECC UK Government Conversion Factors for Company Reporting 2015 and the IEA CO2 Emissions from Fuel Combustion Highlights 2013 Edition. According to the methodologies outlined above, our total reportable scope 1 emissions in 2016 were 808 tCO2e, which included the combustion of diesel and LPG. Our total reportable scope 2 emissions were 348 tCO2e, attributable to purchased electricity at our offices and field operations. Our total reportable scope 1 and 2 emissions were therefore 1156 tCO2e, normalised to 9.97 tCO2e per employee (based on the 2016 monthly average number of employees). The GHG emissions from facilities we operate were 1156 tCO2e in 2016, which is lower than those reported (1605 tonnes tCO2e) in 2015. The main reasons for this decrease were the Ber Bahr block relinquishment and lower level of field maintenance activities at Miran and Bina-Bawi blocks in Kurdistan Region of Iraq. Community development We partner with and invest in communities close to our operations to achieve mutual long-term benefits, and we see it as our responsibility to help local people develop the skills to thrive and play a part as we unlock the potential of our host countries’ natural resources. Natural resources form the bedrock of the KRI economy, and our contributions through infrastructure construction, capacity building payments, and employee and contractor wages have a direct and material impact on development. As well as bringing these general benefits to the KRI, we work with communities and the KRG in order to support pressing local needs. To date 178 projects have been carried out by TTOPCO, at a cost of over $25 million. Projects include the building of educational facilities, provision of medical support, and including the addition of sewerage, electricity roads, and telecommunication towers. Away from Taq Taq, $22.5 million has been spent by Genel on a further 38 community investment projects. infrastructure lines, Tri-partite conversations, working with local communities and the government, help to prioritise investment where it is most needed. In 2016 the KRI continued to suffer economic hardship, and so the priority was on providing opportunities for economic empowerment. Genel, with its partners in TTOPCO, launched the Local Communities Economic Development Programme for the Taq Taq area. The project aims to assist and promote an improvement of skills for individuals and families situated in rural areas by training them to develop attributes that provide the potential to generate their own private income and increase their general employability status. The programme encompassed a number of strands, including vocational training courses for residents of villages close to Taq Taq. These courses included agriculture, needlework, and hairdressing. The courses have been underway since August, with 190 people having been trained. A similar project in the Miran area saw 148 people receive vocational training. The TTOPCO training centre has also been the venue for English language and IT training for 79 local people. In addition to work done to improve economic prospects, we have continued to carry out those activities that make a positive difference to day to day lives. Daily waste collection takes place from nine villages surrounding Taq Taq, and villages are also provided with piped water and medical support. Since this initiative began, 5,800 medical visits have been made. Land and crop compensation is also an important aspect of community relations, helping to retain support through the effective reimbursement for any people adversely the Company’s operations. To date, in line with the policy of the Ministry of Natural Resources, Genel and impacted by STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 24 STRATEGIC REPORT FINANCIAL REVIEW Managing cash flows Ben Monaghan Chief Financial Officer We have flexibility in our capital expenditures and are able to moderate spend on our producing assets to match payment flows. 2016 was a challenging year for the oil sector globally as the price of Brent crude fell to $27/ bbl in January before recovering to $55/bbl at the end of the year. These financial challenges were particularly felt by the KRI, with the oil price drop deepening its ongoing economic crisis, while the war with ISIS and the influx of displaced persons had an ongoing impact on the KRG’s financial position, and in turn the ability to pay oil companies, including Genel, for both current production and past receivable balances. Despite these challenges significant progress was made during 2016 towards establishing a working payment system and, despite the macro headwinds and the decline in production at Taq Taq, the Company delivered positive free cash flow in the year.. This achievement is due to a combination of factors: The resumption of regular payments for oil deliveries by the KRI We received $153.4 million from the KRG for oil delivered by Genel during 2016. Whilst arrears remained outstanding for October, November and December deliveries at the end of the year, and the temporary payment system does not reflect our view of our entitlement, receiving nine payments for both Taq Taq and Tawke sales during 2016 represents significant progress from the 2015 payment backdrop. Since year-end the outstanding arrears for 2016 deliveries have been settled in full. The initiation of payments towards recovery of the receivable Total payments of $53.9 million were received by Genel towards repayment of the receivable during 2016. Whilst this initial payment stream is limited in comparison to the amount outstanding, we welcome both the initiation of the payment flows and the KRG’s public commitment to increase the quantum as their financial situation improves. Our low cost asset base and the structure of the Production Sharing Contracts Our oil assets remain amongst the lowest cost in the world, with operating costs of less than $2.0/bbl in 2016. These low operating costs capital expenditure and appropriate fiscal terms to fairly balance risk and reward at different oil prices between the oil producers and the KRG. combine with efficient The flexible nature of our capital expenditure We have flexibility in our capital expenditures and are able to moderate spend on our producing assets to match payment flows, with our capital expenditure accordingly dropping 61% year-on-year. We have no committed capital in our gas business and so have also been able to match spending to the pace of the project. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 RESULTS SUMMARY ($ MILLION UNLESS STATED) Production (bopd, working interest) Revenue EBITDAX1 Depreciation Impairment of exploration assets Exploration expense Impairment of property, plant and equipment Impairment of receivables Operating loss Cash flow from operating activities Capital expenditure2 Free cash flow3 Cash4 Net debt5 KRG receivable EPS (¢ per share) 25 2016 2015 53,300 84,900 190.7 130.7 (128.9) (779.0) (36.1) (218.3) (191.3) 343.9 279.4 (172.5) (144.1) (28.9) (1,038.0) – (1,222.9) (1,104.1) 131.0 61.2 59.1 407.0 241.2 253.5 71.2 157.2 (179.2) 455.3 238.8 422.9 (448.60) (417.30) 1. EBITDAX is earnings before interest, tax, depreciation, amortisation, exploration expense and impairment which is operating loss adjusted for the add back of depreciation ($128.9 million), exploration costs written off ($36.1 million) and any impairments ($1,188.6 million) 2. Capital expenditure is additions of intangible assets and additions of property, plant and equipment (oil and gas assets only) 3. Free cash flow is net cash generated from operating activities less cash outflow due to purchase of intangible assets and purchase of property, plant and equipment (oil and gas assets only) 4. Cash reported at 31 December 2016 excludes $19.5 million of restricted cash 5. Net debt is reported debt less cash A continued focus on costs across the business We have maintained a tight control on costs and continue to ensure that we are structured and resourced appropriately for the external environment. Total headcount has fallen from 223 at the end of 2014 to 129 at the end of 2016, and total general and administrative costs have reduced from $47.0 million to $26.0 million over the same period. There are some elements of the 2016 accounts that warrant further comment: Impairments to our producing assets The further reduction in reserves and amended production outlook for Taq Taq, together with an increase in the discount rate applied to our impairment testing as a result of the continued regional financial challenges, has led to an impairment of $180.8 million. Our oil price assumptions for impairment purposes are set out on page 23 and we have provided sensitivities on two key estimates in the relevant note. The change in discount rate and oil price has also impacted our carrying value of Tawke, resulting in an impairment of $37.5 million. the Impairments to our exploration assets, including the gas business Genel has invested over $1.4 billion in the acquisition and early development of the Miran and Bina Bawi fields. They represent a very attractive and low cost gas project, close to market with a governmental buyer in place, than decision with the potential to generate significant value for both the KRG and Genel. In light of a revised timing and phasing of the project to reflect slower progress towards a final investment previously anticipated, we have reviewed our carrying value for gas for impairment purposes. This revised timing, together with the revisions to our discount rate and oil price assumptions detailed above, has resulted in an impairment charge of $581.3 million. We have also impaired Chia Surkh by $197.7 million following the CS-12 well result and the expected completion of the subsequent sale of our interest to Petoil. Impairment to the receivable We have again provided substantial disclosure around the accounting approach taken in relation to the receivable. Our accounting follows the commercial judgment that the KRG intends to repay the debt and has the capability to do so over time, given a rising oil price. The current mechanism of repayment is linked to a percentage of field netback revenues, and we have used an assumption of this percentage multiplied by forecast field production and oil price to calculate future cash flows and a present value. Given the higher oil price has not yet resulted in a higher percentage being applied by the KRG to field revenue we have reduced our future assumptions to a flat 5% payment for impairment purposes, in line with current levels. This assumption, together with the reduction in forecast Taq Taq production and amended oil prices results in a book impairment of $191.3 million. This has no impact whatsoever on our right to recover the amount due from the KRG, which we are entitled to recover in full, which is the nominal value of $515.9 million. As we look to 2017 there is a clear set of financial priorities for the Company: • Continue to press the KRG for timely and full payments for oil deliveries, and for a transparent mechanism for reconciliation and recovery of the receivable • Secure equity and debt investment into the gas assets, thereby progressing the project towards first gas • Continue to focus on all aspects of the Company’s cost base, whether capital, operating or administrative expenditure • Manage liquidity appropriately ahead of the 2019 maturity of the Company’s bond debt STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 26 STRATEGIC REPORT FINANCIAL REVIEW continued Financial results for the year Income statement Production of 53,300 bopd was significantly reduced compared to last year (2015: 84,900 bopd). The combination of lower production, lower oil price and lower capex reducing cost oil by 44%, resulted in a 45% reduction in revenue to $190.7 million (2015: $343.9 million) and a 53% reduction to EBITDAX of $130.7 million (2015: $279.4 million). Despite lower production, production costs of $35.1 million were broadly in line with last year ($36.3 million) as a result of lower capitalisation of costs due to lower capital activity. reduced depreciation of oil assets to $127.8 million (2015: $172.0 million). production Lower Impairment of exploration assets includes $581.3 million relating to the Miran and Bina Bawi gas assets and the write-off of $197.7 million relating to the Chia Surkh licence following the drilling of CS-12. In addition, $36.1 million has been accrued relating to expenditures the current year on exploration activity and exit/relinquishment of exploration licences. in Impairment of property plant and equipment was $218.3 million in 2016 (2015: $1,038.0 million relating to Taq Taq). General and administrative costs were $26.0 million (2015: $28.7 million). Finance income of $16.2 million (2015: $1.3 million) was comprised of $14.2 million discount unwind on trade receivables and $2.0 million of bank interest income. Finance expense of $61.0 million (2015: $57.8 million) was comprised of $51.0 million of bond interest together with non-cash discount unwind expense of $10.0 million. In the KRI, the Company is either exempt from tax or tax due has been paid on its behalf by the KRG from the KRG’s own share of in no tax payment revenues, resulting required or expected to be made by the Company. Tax presented income statement of $0.4 million relates to taxation of the Turkish and UK service companies. in the Capital expenditure Capital expenditure in the year was $61.2 million (2015: $157.2 million). Cost recovered development spend of $40.3 million (2015: $109.2 million) was incurred on the producing assets in the KRI with spend on exploration and appraisal assets amounting to $20.9 million (2015: $48.0 million), principally incurred on the Miran and Bina Bawi PSCs. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 27 DEBT Net debt/EBITDAX < 3.0 Equity ratio > 40% Minimum liquidity > $75m (>$100m from May 2018) YE2016 1.8 60% 407 As we look to 2017 there is a clear set of financial priorities for the Company. Cash flow and cash Net cash flow from operations was $131.0 million (2015: $71.2 million). This was positively impacted by $53.9 million (2015: nil) of proceeds being received the KRG receivable, and $153.4 million (2015: $148.2 million) received for current sales. Operating expense, exploration expense and corporate costs amounted to a cash outflow of $56.3 million (2015: $87.0 million), with net payment of creditors resulting in a cash out flow of circa $20 million (2015: inflow circa $10 million). for Cash flows for capital spend on Taq Taq and Tawke was $51.2 million (2015: $120.2 million), with $20.7 million (2015: $130.2 million) cash out flow on exploration and evaluation assets – principally Miran and Bina Bawi. Free cash flow was $59.1 million compared to a cash outflow of $179.2 million last year. After which, $35.4 million was used to buy back bonds with nominal value of $55.4 million and $52.0 million (2015: $46.1 million) was paid on bond interest expense. $19.5 million of cash is restricted and therefore excluded from reported cash of $407.0 million (2015: $455.3 million). Overall there was a net decrease in cash of $47.8 million compared to a decrease of $33.0 million included bond last year, which issuance proceeds of $196.2 million. Debt The Company has $730.0 million of bonds maturing in 2019 in issuance, of which $55.4 million are held by the company resulting in total externally held debt of $674.6 million (2015: $730.0 million) and net debt of $241.2 million (2015: $238.8 million). The bond has three financial covenant maintenance tests, which are summarised in the table above. Net assets Net assets at 31 December 2016 were $1,333.4 million (2015: $2,574.8 million) and consist primarily of oil and gas assets of $1,537.1 million trade (2015: $2,602.1 million), receivables of $253.5 million (2015: $422.9 million) and net debt of $241.2 million (2015: $238.8 million). Liquidity/cash counterparty risk management The Company monitors its cash position, cash forecasts and liquidity on a regular basis. The Company holds surplus cash held in government gilts or treasury bills or on time deposits with a number of major financial institutions. Suitability of banks is assessed using a combination of sovereign risk, credit default swap pricing and credit rating. Dividend No dividend (2015: nil) will be paid for the year ended 31 December 2016. Going concern The directors have assessed that the cash balance held provides the Company with adequate headroom over forecast operational and potential acquisition expenditure for the 12 months following the signing of the annual report for the period ended 31 December 2016 for the Company to be considered a going concern. Ben Monaghan Chief Financial Officer Receivables At 31 December 2016, the reported KRG receivable was $253.5 million (2015: $422.9 million), detailed disclosure is provided on this balance significant accounting estimates and judgements section of note 1 and in note 10 to the financial statements. the in STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 28 STRATEGIC REPORT RISK MANAGEMENT The changing environment reinforces the need for careful monitoring across all our operations The Board ensures that Genel’s risk appetite is appropriate to the external environment and the situation of the Company. The risk management systems and internal control processes are designed to support the Board in identifying key risks and associated judgements, enabling them to make effective, timely and appropriate decisions. Ongoing uncertainty in the environment in which we operate, both in the global oil industry and in the Kurdistan Region of Iraq, makes the management of risk a key focus and integral to Genel’s success as a business. Clearly defined executive accountability allows key risks to be carefully monitored, with information flowing up to the Board through appropriate channels and allowing informed decisions to be made. It is the responsibility of the Board to: • accurately identify and assess the principal risks to the business • mitigate controllable risks to an acceptable level; and • where possible, build resilience to accepted non-controllable risks The Board is responsible for Genel’s risk management, which it does primarily by: • Setting the overall risk appetite of the Company • Assessing what level of risk is acceptable to bear • Providing oversight of appropriate risk management systems and internal control processes THE BOARD AND ITS COMMITTEES The Board is supported by its Committees, which apply their expertise to the assessment and management of certain risks. The Committees report findings and/or recommendations to the Board. The allocation of risks to the appropriate Committees is summarised in the table below: Board and Committees Responsibility BOARD • Overall responsibility for risk oversight • Overall responsibility for all principal risks AUDIT COMMITTEE READ MORE P44 • Risk management and internal control systems • Financial controls REMUNERATION COMMITTEE READ MORE P50 • Compensation and reward • Board composition NOMINATION COMMITTEE READ MORE P46 • Board composition HSSE COMMITTEE READ MORE P48 • Health and safety risks • Security risks • Environmental risks GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 2929 RESPONSIBILITIES Board • Identifies and assesses the potential impact, likelihood and sensitivity of the principal risks of the business • Identifies new risks or changes in the nature, probability or impact of existing risks • Makes effective, appropriate and timely decisions on how principal risks are managed or accepted • Ensures that decisions taken are appropriately executed throughout the business through appropriate delegation of authorities and policies STRATEGY • Where appropriate, approves policies on key risks and provides direction on risk management and appropriate risk mitigation ! RISK ASSESSMENT AND REVIEW IDENTIFIES RISKS • Monitors the effectiveness of controls in place through reporting, assurance and detailed reviews in order to assess where action is required • Identifies where controls are not appropriate or not operating effectively READ MORE P40 BOARD SETS CONTROLS TO MITIGATE OR MANAGE RISKS ! RISK REGISTER DOCUMENTS RISKS AND ALLOCATES EACH RISK TO A RISK OWNER REPORTING AND ASSURANCE ON EFFECTIVENESS OF CONTROLS RISK OWNER REPORTS ASSESSMENT OF RISKS TO THE BOARD RISK OWNER DESIGNS, OPERATES, MONITORS AND REPORTS ON CONTROLS Executive Committee • Leads the identification, understanding and assessment of risks to the business for review and discussion by the Board • Assigns risks to relevant Executive Committee members as risk owners READ MORE P38 Risk owners • Put in place processes and procedures that execute the decision taken by the Board as to what is the appropriate management or mitigation of each principal risk • Assess and report risk and monitor the design and operating effectiveness of any mitigating controls and procedures • Provide oversight of the daily operations of the key areas of the business READ MORE P30 The principal risks and uncertainties set out on the following pages represent the Board’s assessment of the most significant risks that may seriously affect the performance, future prospects or reputation of the Company and may threaten its business model, future performance, solvency or liquidity. They do not comprise all the risks and uncertainties faced by the Company – risks that are generally part of normal activity as an E&P company are identified, assessed, managed and monitored at the functional level with close oversight and reported to the Board by a member of the Executive Committee. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 3030 STRATEGIC REPORT PRINCIPAL RISKS AND UNCERTAINTIES RISK Board DEVELOPMENT AND RECOVERY OF OIL RESERVES AND RESOURCES IN THE KRI Paul Schofield, COO READ MORE P16 COMMERCIALISATION OF KRI GAS BUSINESS Murat Özgül, CEO READ MORE P8 M&A ACTIVITY Ben Monaghan, CFO READ MORE P24 TREND APPROACH OPPORTUNITIES THREATS MITIGATING ACTIONS Genel aims to realise the value in the portfolio through a focused drilling programme to explore, appraise and develop our assets. Genel continues to build appropriate technical capability to assess reservoir potential and future performance. • Successful exploration and appraisal • Capital constraints lead to reduced work • COO appointed to focus on producing activity increases Company reserves programme, impacting recovery assets • Reservoir management increases • Poor reservoir performance recoverable volumes • Progress on gas business unlocks resource value • Engagement of third party to carry out independent review on Taq Taq reservoir • CPR updated for Taq Taq and Tawke • Successful appraisal activity ongoing at Peshkabir The development and commercialisation of Genel’s gas assets in the KRI is a key focus, with the potential to generate material and stable cash flow once onstream. • Progress on the gas business moves • Project reliant on key milestones beyond • Level of expenditure maintained at Miran and Bina Bawi towards the control of the Company an appropriate level development and transformational • Failure to engage a farm-in partner would • Pre-FEED and upstream Gas Development monetisation lead to increased exposure to costs and Plan studies complete threaten viability of project • PSC amendments and gas lifting agreement signed • Ongoing discussions with potential partners The pursuit of selective, value accretive M&A opportunities is part of the Company strategy. • Execution of a transaction that positively • Execution of a transaction adversely • An experienced Board oversees impacts the Company’s valuation, impacts the Company’s liquidity, balance and signs off on all M&A decisions asset quality, and equity story, among sheet, valuation, asset quality, and equity • Established process to ensure that other factors story, among other factors an appropriate level of due diligence is performed KRI NATURAL RESOURCES INDUSTRY Pars Kutay, Head of Government Affairs The Company is dependent on its strong relationship with the KRG in order to realise the value of its principal oil and gas assets. • Ongoing strong relationship facilitates • Deterioration in the relationship with • The Company has a long history of further opportunity in the KRI the KRG or a change in policy by the KRG cooperation with the KRG, maintaining READ MORE P6 RECOVERY OF AMOUNTS OWED FOR EXPORT SALES Murat Özgül, CEO READ MORE P11 Genel is owed $515.9 million by the Kurdistan Regional Government for unpaid exports. • Improved financial position of the KRG • Payments from the KRG become less • Ongoing dialogue with the KRG allows the quantum of regular payments to increase, reducing the receivable and increasing Company liquidity regular, reducing the Company’s ability to manage debt and carry out its strategic priorities results in a significant loss of value for the Company a regular dialogue and seeking to work collaboratively with them, local communities, local suppliers and subcontractors to achieve mutually beneficial objectives REGIONAL RISK Pars Kutay, Head of Government Affairs There is a history of political and social instability in the areas in which the Company operates. Genel to pursue strategic objectives • Stable environment for operations allows • Increased instability in Turkey impacts • Active monitoring of developments in READ MORE P6 the relationship with the KRG and the monetisation route for KRI oil and gas • Security situation in Somaliland precludes further activity Turkey, Iraq, the KRI, and Somaliland, including dialogue with key political figures CORPORATE GOVERNANCE FAILURE Murat Özgül, CEO The Company’s strategy is to maintain high standards of corporate governance • Good corporate governance is proven to • Corporate governance failure would likely • New risk management policies and provide benefits to business and value to negatively impact investor perception of procedures were introduced in 2016 READ MORE P34 shareholders the Company GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 Key Increased Unchanged Decreased 3131 TREND APPROACH OPPORTUNITIES THREATS MITIGATING ACTIONS Genel aims to realise the value in the portfolio through a focused drilling programme to explore, appraise and develop our assets. Genel continues to build appropriate technical capability to assess reservoir potential and future performance. • Successful exploration and appraisal activity increases Company reserves • Reservoir management increases recoverable volumes • Progress on gas business unlocks resource value • Capital constraints lead to reduced work • COO appointed to focus on producing programme, impacting recovery • Poor reservoir performance assets • Engagement of third party to carry out independent review on Taq Taq reservoir • CPR updated for Taq Taq and Tawke • Successful appraisal activity ongoing at Peshkabir The development and commercialisation of Genel’s gas assets in the KRI is a key focus, with the potential to generate material and stable cash flow once onstream. • Progress on the gas business moves • Project reliant on key milestones beyond • Level of expenditure maintained at Miran and Bina Bawi towards development and transformational monetisation the control of the Company an appropriate level • Failure to engage a farm-in partner would lead to increased exposure to costs and threaten viability of project • Pre-FEED and upstream Gas Development Plan studies complete • PSC amendments and gas lifting agreement signed • Ongoing discussions with potential partners The pursuit of selective, value accretive M&A opportunities is part of the • Execution of a transaction that positively • Execution of a transaction adversely • An experienced Board oversees Company strategy. impacts the Company’s valuation, asset quality, and equity story, among other factors impacts the Company’s liquidity, balance sheet, valuation, asset quality, and equity story, among other factors and signs off on all M&A decisions • Established process to ensure that an appropriate level of due diligence is performed The Company is dependent on its strong relationship with the KRG in order • Ongoing strong relationship facilitates • Deterioration in the relationship with • The Company has a long history of to realise the value of its principal oil and gas assets. further opportunity in the KRI the KRG or a change in policy by the KRG results in a significant loss of value for the Company cooperation with the KRG, maintaining a regular dialogue and seeking to work collaboratively with them, local communities, local suppliers and subcontractors to achieve mutually beneficial objectives RECOVERY OF AMOUNTS OWED FOR Genel is owed $515.9 million by the Kurdistan Regional Government for unpaid exports. • Improved financial position of the KRG allows the quantum of regular payments to increase, reducing the receivable and increasing Company liquidity • Payments from the KRG become less • Ongoing dialogue with the KRG regular, reducing the Company’s ability to manage debt and carry out its strategic priorities REGIONAL RISK Pars Kutay, Head of Government Affairs There is a history of political and social instability in the areas in which the Company operates. • Stable environment for operations allows Genel to pursue strategic objectives • Increased instability in Turkey impacts the relationship with the KRG and the monetisation route for KRI oil and gas • Security situation in Somaliland precludes further activity • Active monitoring of developments in Turkey, Iraq, the KRI, and Somaliland, including dialogue with key political figures CORPORATE GOVERNANCE FAILURE The Company’s strategy is to maintain high standards of corporate governance • Good corporate governance is proven to provide benefits to business and value to shareholders • Corporate governance failure would likely negatively impact investor perception of the Company • New risk management policies and procedures were introduced in 2016 DEVELOPMENT AND RECOVERY OF OIL RESERVES AND RESOURCES RISK Board IN THE KRI Paul Schofield, COO READ MORE P16 COMMERCIALISATION OF KRI GAS BUSINESS Murat Özgül, CEO READ MORE P8 M&A ACTIVITY Ben Monaghan, CFO READ MORE P24 KRI NATURAL RESOURCES INDUSTRY Pars Kutay, Head of Government Affairs READ MORE P6 EXPORT SALES Murat Özgül, CEO READ MORE P11 READ MORE P6 Murat Özgül, CEO READ MORE P34 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 3232 STRATEGIC REPORT PRINCIPAL RISKS AND UNCERTAINTIES continued RISK Audit Committee CAPITAL STRUCTURE AND FINANCING Ben Monaghan, CFO READ MORE P24 HSSE Committee LOCAL COMMUNITIES Pars Kutay, Head of Government Affairs READ MORE P20 HEALTH AND SAFETY RISKS Paul Schofield, COO READ MORE P22 TREND APPROACH OPPORTUNITIES THREATS MITIGATING ACTIONS The Company aims to retain a strong balance sheet and flexibility in our capital structure in order to pursue its strategic objectives and underpin future growth. • Improved financial situation for the KRG • Capital constraints lead to reduced • Reduction in spend on capital activities leads to increased payments and investment, impacting value of increased liquidity Company assets • Ongoing reduction of G&A costs • Bond buy-back reduced debt levels and interest expense Supporting and sustaining the communities in which we operate is fundamental to Genel’s success. • Strong local relationships continue • A loss of local community support could • An ongoing community investment and to facilitate Genel’s pursuit of strategic objectives give rise to disruption to projects or education programme, and commitment operations, or cause material reputational to providing local employment damage, which could in turn affect the Company’s revenues, operations, and cash flows The safety of employees is a primary consideration across all Genel operations. Company reputation • Continued strong performance enhances • Failure of safety procedures leads • Appointment of new HSE overseer to injuries and/or fatalities, adverse environmental impact, and material reputational damage by TTOPCO • Employee permit to work updated • Signage at sites improved Viability statement In accordance with provision C.2.2. of the 2014 revision of the Code, the Directors have assessed the prospects and viability of the Company over a longer period than the 12 months required by the ‘Going Concern’ provision. Choice of assessment period their viability The Directors extended statement to the five-year period up to March 2022 which, although inevitably introducing cash flow uncertainty given the inherent volatility in long-term oil price, cost and production forecasting, was felt to be an appropriate period for the following reasons: • The production assumptions are • • supported by recent external reserve reports on both existing producing assets It captures the maturity of the Company’s $675 million unsecured bonds, due in 2019 It captures the timetable for the anticipated farm out and final investment decision on the Company’s gas project Review of financial forecasts In reviewing the expected evolution of the company’s business, associated cash flows and capital structure over the review period the Directors took into account: • The Company’s latest life of field cash flow projections for the oil producing assets on a proven and probably basis and the potential impact of the recent Peshkabir oil discovery • Projections of the rate of recovery of the receivable from the KRG • The potential value of the Company’s gas business and other potential asset portfolio management opportunities • The Company’s outstanding bond and the refinancing options ahead of its maturity in May 2019 together with forecast results of interim covenant tests • The potential evolution of debt capital market appetite for KRI risk and associated refinancing capacity • The oil price forecast set out in our accounting policies note GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 Key Increased Unchanged Decreased 3333 TREND APPROACH OPPORTUNITIES THREATS MITIGATING ACTIONS CAPITAL STRUCTURE AND FINANCING The Company aims to retain a strong balance sheet and flexibility in our capital structure in order to pursue its strategic objectives and underpin future growth. • Improved financial situation for the KRG leads to increased payments and increased liquidity • Capital constraints lead to reduced investment, impacting value of Company assets • Reduction in spend on capital activities • Ongoing reduction of G&A costs • Bond buy-back reduced debt levels and interest expense LOCAL COMMUNITIES Pars Kutay, Head of Government Affairs Supporting and sustaining the communities in which we operate is fundamental to Genel’s success. • Strong local relationships continue to facilitate Genel’s pursuit of strategic objectives • A loss of local community support could give rise to disruption to projects or operations, or cause material reputational damage, which could in turn affect the Company’s revenues, operations, and cash flows • An ongoing community investment and education programme, and commitment to providing local employment The safety of employees is a primary consideration across • Continued strong performance enhances • Failure of safety procedures leads all Genel operations. Company reputation to injuries and/or fatalities, adverse environmental impact, and material reputational damage • Appointment of new HSE overseer by TTOPCO • Employee permit to work updated • Signage at sites improved RISK Audit Committee Ben Monaghan, CFO READ MORE P24 HSSE Committee READ MORE P20 HEALTH AND SAFETY RISKS Paul Schofield, COO READ MORE P22 A range of sensitivities were run on the assumptions set out above to reflect different scenarios including, but not limited to, changes to production profiles, commodity price assumptions and receivable recovery rates. Consideration of principal risks The principal assumptions underlying the forecasts above were reviewed in the context of the risks and mitigating actions set out in the Principal Risks on pages 30 to 33 including in particular those that specifically relate to the company’s viability including: Viability assessment Based on their review of these assumptions and sensitivities in the context of the funding options and risks referred to above, the Directors found that there was a reasonable expectation that the company will be able to continue its liabilities as they fall due over the five year period to March 2022. in operation and manage Our 2016 strategic report, from pages 1 to 33 has been reviewed and approved by the Board of Directors on 29 March 2017. • Recovery of amounts owed for export sales • Development and recovery of reserves and resources • Major capital projects • KRI natural resources industry • Regional risk Murat Özgül Chief Executive Officer STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 34 CORPORATE GOVERNANCE CHAIRMAN’S STATEMENT ON CORPORATE GOVERNANCE Committed to high standards of corporate governance Tony Hayward Chairman review The Board, assisted by the work of the Audit Committee, the keeps under governance framework, risk management and internal controls. You can read more about the enhancements we have made to our risk oversight in the Audit Committee report on pages 44 and 45. We have continued to monitor our performance as a Board and have completed an internal effectiveness review for 2016. More details of the findings and our improvement programme are set out in this report on page 43. Tony Hayward Chairman I am pleased to present my second Corporate Governance Report to shareholders as your Chairman. Non-Executive Directors to have input to the appointment recommendations put forward to the whole Board for approval. 2016 has been a year of change at Board level which has resulted in the reduction of the number of Directors from ten to nine. These changes have also driven a comprehensive review of our committee structures. In January 2016, as part of the on-going refreshing of the Board, Simon Lockett was appointed as an Independent Non-Executive Director. Since his appointment Simon has undergone a comprehensive induction programme which has included meeting with key department heads in both London and Ankara and visits to our operational sites in the KRI. Jim Leng and Sir Graham Hearne retired as Directors at the conclusion of the 2016 AGM. Simon Lockett was appointed Chairman of the HSSE Committee where his deep understanding of the industry brings significant insight to the Committee deliberations. Chakib Sbiti was appointed Chairman of the Remuneration Committee where his previous international experience in the industry would inform the discussions on remuneration. All Independent Non–Executive Directors were appointed to the Nomination Committee. Succession planning and Board composition are vital to ensuring the formation of a high performing Board that ultimately leads to the success of the Company. Accordingly it is appropriate for all Independent During 2016 the Company was pleased to have attracted a new Turkish shareholder in Bilgin Grup Dogˇ al Gaz A.S˛ . who currently hold 15.09% of the Company’s shares making them our second largest shareholder. This entry on the register continues to demonstrate the strong support and confidence in the Company within Turkey. In March 2017 we announced the appointment of Tolga Bilgin as a Non-Executive Director. Tolga is CEO of Bilgin Energy and brings with him extensive experience in the Turkish energy sector. In March 2016 we launched a bond buy-back offer to holders of our senior unsecured bonds and successfully repurchased $55.4 million worth of bonds in issue, thereby reducing our outstanding debt and strengthening the Company’s balance sheet. We have continued with this strategy having announced a further bond buy-back at the time of publishing our 2016 results. During these challenging times for both the Company and the industry we remain committed to ensuring we operate to high standards of corporate governance and support the Company in delivering on its business objectives. To that end we continue to comply with the UK Corporate Governance Code as is appropriate to our Company. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 3535 THE BOARD Our Committee structure BOARD OF DIRECTORS AUDIT COMMITTEE Ensuring integrity and objectivity of published financial information REMUNERATION COMMITTEE Ensuring an appropriate approach to remuneration that supports delivery of the business strategy NOMINATION COMMITTEE Ensuring the continuance of a high calibre Board Chairman George Rose Members Simon Lockett Chakib Sbiti Chairman Chakib Sbiti Members Mehmet Ög˘ütçü George Rose Chairman Tony Hayward Members Simon Lockett Mehmet Ög˘ütçü George Rose Chakib Sbiti HSSE COMMITTEE Ensuring a responsible and credible approach to HSSE Chairman Simon Lockett Members Mehmet Ög˘ütçü Chakib Sbiti Meetings in 2016 3 scheduled and 2 ad hoc Meetings in 2016 3 scheduled and 4 ad hoc Meetings in 2016 1 scheduled Meetings in 2016 3 scheduled READ MORE P44 READ MORE P67 READ MORE P46 READ MORE P48 BOARD COMPOSITION Independent Directors 44% (4 Directors) Non-Independent Directors 44% (4 Directors) Executive Director 12% (1 Director) INTERNATIONAL DIVERSITY Number of Directors 1 1 Swiss Canadian 3 3 1 British Turkish Moroccan SKILLS AND EXPERIENCE OF THE BOARD Number of Directors Oil and gas Managing and leading Governance Financial/ capital markets HSSE Remuneration Foreign affairs 6 9 4 3 4 4 5 Total number of Directors = 9 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 36 CORPORATE GOVERNANCE BOARD OF DIRECTORS A strong board with demonstrable skills and experience in international oil and gas markets 1 4 7 2 5 8 3 6 9 SARAH ROBERTSON Company Secretary Appointed: 25 July 2013 Skills and experience: Sarah was Deputy Company Secretary at Misys plc prior to joining Genel in July 2012. Previously she was Regional Head of Secretariat EMEA & the Americas for Standard Chartered Bank plc and had also held senior positions in the secretariat at RSA plc and Telewest Communications plc (now Virgin Media). Sarah is a Fellow of the Institute of Chartered Secretaries and Administrators and holds an MSc in corporate governance. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 37 1 TONY HAYWARD (59) Chairman Appointed: as Non-Executive Director on 2 June 2011 and as an Executive Director and Chief Executive Officer on 21 November 2011. Tony stepped down as Chief Executive Officer and was appointed as Chairman of the Board on 12 July 2015. Committee memberships: Chairman of Nomination Committee. the Key skills and experience: Tony has extensive leadership experience and knowledge of the global oil and gas industry both at a macro and micro level having previously acted as Group Chief Executive of BP plc from 2007 to 2010. He was Chief Executive for BP plc’s upstream activities and a member of the main board of BP plc from 2003. Prior to this, in 2000, he was appointed BP’s Group Treasurer where he gained significant experience in financial markets. Current external appointments: Tony is the Non- Executive Chairman at Glencore plc and a Partner and member of the Advisory Board of AEA Capital. 4 CHAKIB SBITI (62) Independent Non-Executive Director Appointed: 19 April 2012 Committee memberships: Chairman of the Remuneration Committee and member of the Audit, Nomination and HSSE Committees. Key skills and experience: Chakib has over 30 years’ experience in the oil and gas industry through various roles held at Schlumberger, an international oilfield services company. Chakib was the Executive Vice President of Oilfield Services from 2003 to 2010 and President Asia from 1999, a role which was expanded to include the Middle East for the period 2001 to 2003. He has also been special adviser to the Chairman and Chief Executive Officer of Schlumberger (since 2010) and held various senior operational roles prior to 1999. Through the various roles Chakib has held at Schlumberger he has gained extensive experience in HSSE, foreign affairs and managing and leading an international business. Current external appointments: Chakib Independent Director of SNC-Lavalin. is an Previous relevant experience: Tony has also served on the boards of TNK-BP, Corus and Tata Steel. 5 MEHMET ÖG Independent Non-Executive Director ÜTÇÜ (55) 2 MURAT ÖZGÜL (44) Chief Executive Officer Appointed: as an Executive Director and Chief Executive Officer 12 July 2015 Key skills and experience: Murat Özgül joined Genel in 2008 as Chief Commercial Officer and was responsible for leading its merger with Vallares PLC in 2011. From his roles within Genel Murat brings his experience within the industry, leadership, and foreign affairs to the Board. Previous relevant experience: Prior to joining the Company, Murat was the CEO of INTA Spaceturk, an imaging satellite operating company, and held engineering and managerial positions at Roketsan and INTA Defense. 3 GEORGE ROSE (65) Senior Independent Non-Executive Director Appointed: 02 June 2011 Committee memberships: Chairman of the Audit Committee and member of the Remuneration and Nomination Committees. Key skills and experience: George brings with him recent and relevant financial experience. Until March 2011 George served as the Group Financial Director and member of the Board of BAE Systems plc a position he held for 13 years. George is also a Fellow of the Chartered Institute of Management Accountants and has a wealth of experience in governance to draw on from his former appointment as Non-Executive Chairman of the Audit Committee of Laing O’Rourke plc amongst other appointments. Current external appointments: George is the Senior Independent Non-Executive Director of Experian plc and on 16 February 2016 George was appointed as a Non-Executive Director of EXPO 2020 LLC. Previous relevant experience: George retired from the Board of National Grid plc in July 2013, where he served as a Non-Executive Director and was Chairman of the Audit Committee. Other past Non- Executive Directorships include Orange plc and Saab AB. He was previously a member of the UK’s Financial Reporting Review Panel and the Industrial Development Advisory Board. George’s earlier career consisted of several financial management positions in the automotive sector, at Ford Motor Company, Leyland Vehicles Ltd and the Rover Group. Appointed: 21 November 2011 Committee memberships: Member of the Remuneration, Nomination and HSSE Committees. Key skills and experience: Mehmet brings with him his expertise in foreign affairs and the oil and gas industry having previously served as Director for International Government and Corporate Affairs at BG Group (2005-2011) and as a Turkish diplomat in Ankara, Beijing, Brussels and Paris (1986-1994). Current external appointments: Mehmet is currently Chairman of Global Resources Partnership, a natural resources strategy group. In February 2016 Mehmet was appointed as a Non-Executive Director of Saudi Crown Holding. He was also appointed as an i ecam Group in Independent Board member of April 2015 and as the Energy Charter Secretary – General’s special envoy for the MENA region in March 2013. Since September 2013 he has led the Bosphorus Energy Club, a gathering of top energy, investment and geopolitical executives in Eurasia, MENA and Southeast Europe. Previous relevant experience: Mehmet served as the head of the OECD’s global forum on international investment and regional outreach programmes (2000-2005) and the Principal Administrator for Asia-Pacific and Latin America at the International Energy Agency (1994-2000). 6 SIMON LOCKETT (52) Independent Non-Executive Director Appointed: 19 January 2016 Committee memberships: Chairman of the HSSE the Audit and Committee and member of Nomination Committees. Key skills and experience: Simon has recent experience within the industry having formerly held the position of Chief Executive Officer of Premier Oil plc between 2005 and 2014. Prior to being appointed as CEO Simon held a number of senior operational roles at Premier Oil including Operations Director between 2003 and 2005. Through his experience and ongoing external appointments Simon provides additional insight into the international oil industry, governance, financial and HSSE matters. Current external appointments: Simon is currently a Non-Executive Director of Triyards Holdings Limited where he also serves as the Chairman of the Remuneration Committee and a member of the Audit and Nomination Committees. He is also a Non-Executive Adviser to the Board and CEO of Pico Petroleum Limited, a privately owned exploration and production company based in Cairo. Previous relevant experience: Until May 2016 Simon was the Chairman and a member of the Audit, Nomination and Remuneration Committee of Loyz Energy Limited. 7 THE HONOURABLE NATHANIEL ROTHSCHILD (45) Non-Executive Director Appointed: 19 May 2011 Key skills and experience: Nathanial brings with him extensive experience in financial markets and in managing and leading global businesses. Current external appointments: Nathaniel was appointed Executive Chairman of Volex plc in November 2015 following his appointment to the Board as a Non-Executive Director in October 2015. Nathaniel is a member of the Belfer Center’s International Council at the John F. Kennedy School of Government at Harvard University. Previous relevant experience: Until January 2013, Nathaniel was a Non-Executive Director of Barrick Gold Corporation, the world’s largest gold company. He was previously Co-Chairman of Asia Resource Minerals plc. 8 GULSUN NAZLI KARAMEHMET WILLIAMS (39) Non-Executive Director Appointed: 21 November 2011 Key skills and experience: Nazli has experience in managing and leading large corporations. Between 2004 and August 2014 Nazli worked at Digiturk, a leading satellite broadcasting network. She was Chief Content Officer between 2007 and August 2014, with primary responsibility for overseeing all content acquisitions, production and creative services (including on-air promotion and print TV guides) and overall content strategy. Previous relevant experience: Until 2013 Nazli was also a board member of Turkcell lleti im Hizmetleri A. a leading GSM operator in Turkey. Turkcell’s shares trade on the Istanbul (IMKB) and New York Stock Exchanges (NYSE). 9 ÜMIT TOLGA BILGIN (42) Non-Executive Director Appointed: 16 March 2017 Key skills and experience: Tolga has current experience within the energy sector as CEO and Deputy Chairman of Bilgin Enerji Yatirim Holding A. . having held this position since 2014. Bilgin Energy is one of the largest companies within the Turkish renewable energy sector. Through his current role and various positions held at Bilgin Energy inlcuding managing the development of wind, hydro and thermal energy projects, Tolga brings experience in management, leadership and project financing to the Board. Current external appointments: Since 2006 Tolga has served as the Chairman of the Wind Power and Hydropower Plants Businessmen’s Association. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 38 CORPORATE GOVERNANCE EXECUTIVE COMMITTEE Experienced in the industry and the KRI 1 BEN MONAGHAN Chief Financial Officer Ben Monaghan joined Genel as CFO in 2015. Prior to joining the Company he was Head of European Oil and Gas Investment Banking at J.P. Morgan in London, where he worked for 20 years raising equity and debt capital and advising on mergers, acquisitions, joint ventures and divestitures in the global energy sector. Ben also has two years’ experience as an auditor with Arthur Andersen in the UK, Russia and France, and holds an MA degree from Cambridge University. 2 STEPHEN MITCHELL General Counsel Stephen Mitchell has practiced as a lawyer for over 35 years. Prior to joining the Company he was Vice President – Group Legal with BHP Billiton plc and prior to that he was Group General Counsel and Head of Risk Management at Reuters Group plc, in which he advised on a broad range of matters including mergers and acquisitions, joint ventures, corporate governance and compliance. Stephen was a partner in Freehills in Australia for six years prior to joining Reuters and holds a BEc and LLB from Monash University in Australia. 3 PARS KUTAY Head of Government & Public Affairs Pars Kutay joined Genel in December 2010. Pars is responsible for developing, co-ordinating and implementing policies on government and public affairs in countries where we operate. Pars was a partner at AB Consultancy and Investment Services from 1995 to 2010. Between 1984 and 1995 he served in Turkey’s Undersecretariat of Treasury and Foreign Trade. He is a graduate of Law from Ankara University and holds degrees in International Finance and Environmental Law from Ankara University. 4 PAUL SCHOFIELD Chief Operating Officer Paul has 35 years’ management and technical experience encompassing all aspects of the upstream oil and gas business. He started his petroleum engineering career at Shell in 1981, subsequently working with Enterprise Oil, Tuscan Energy and Hess. Paul joined Hess in 2006, holding a number of senior roles. Immediately prior to joining Genel, Paul was the most senior Hess representative in the management team for the Carigali Hess Operating Company, a significant Malaysian joint venture company operating in the Malaysia-Thailand joint development area. Paul holds a BSc Honours degree in Chemistry from Bristol University, and is a member of the Society of Petroleum Engineers. 5 ELLIOT MILNE Commercial Director Elliot Milne joined Vallares PLC in 2011 and advised on the merger with Genel that year, following which he has worked at Genel in a variety of commercial roles. Prior to joining Vallares, Elliot worked in Ethiopia for 12 months as a consultant to the Coffee Initiative Project, established by the Bill Gates Foundation. From 2006 to 2010 he worked at Goldman Sachs in their leveraged finance and natural resources M&A team in Australia. Elliot holds a BEc and LLB from the University of Sydney. 6 GOZDE TUTANC Head of Human Resources Gozde has over 20 years’ experience in the telecom, consultancy, FMCG and media sectors. She joined Genel in 2014 as Head of Human Resources for Turkey and the Kurdistan Region of Iraq. Prior to joining the Company, Gozde worked in different HR management roles at Turkcell, a leading Turkish telecoms company, and held HR positions at DDI- Development Dimensions International and Coca- Cola. Gozde holds a BSc in Psychology from the Middle East Technical University in Ankara, and an Executive-MBA certification from the Koc University in Istanbul. 1 4 2 5 3 6 GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 CORPORATE GOVERNANCE 39 for shareholders Corporate governance Our objective remains to create long-term value the exploration, development and production of our oil and gas resources. We have low-cost oil large-scale gas producing assets and development assets that are important to the growth of the KRI. through We operate to a high level of governance within a culture that values ethical standards, personal and corporate integrity and respect for others. The Board governs the Company consistent with our business strategy and commitment to a transparent and high-quality governance system. Our view is that governance is not just a matter for the Board and that a strong governance culture must be fostered throughout the organisation. Our expectations of our employees and of those with whom we conduct business are set out in our code of conduct, which is summarised below and is available on our website at www.genelenergy.com. This report aims to provide shareholders with a comprehensive summary of our governance arrangements and an explanation of how the Company has approached the main principles of the UK Corporate Governance Code (the ‘Code’) during 2016. Genel Energy plc is a Jersey incorporated company with a standard listing on the London Stock Exchange. Notwithstanding our standard listing, we are committed to complying with the regulatory requirements in both Jersey and the UK. We are in full compliance with the provisions of the Code with the exception of B.6.2. which provides that the evaluation of the Board of FTSE 350 companies should be externally facilitated every three years. Given the size of the Company it was considered more appropriate to conduct an internal review of the Board’s effectiveness which was facilitated by the Company Secretary. A copy of the Code can be found at www.frc.org.uk/corporate/ ukcgcode.cfm As corporate governance principles continue to evolve, we will continue to adopt best practice guidelines as appropriate to our business. Market Abuse Regulations In 2016, the Company introduced a new share dealing policy and supporting procedures in response to the enactment of the Market Abuse Regulations which came into force on 3 July 2016. The Board is responsible for taking all proper and reasonable steps to ensure full compliance with the Market Abuse Regulations, including ensuring that staff are fully trained and understand their obligations under the new regime. Face-to-face training was provided to employees impacted by the new arrangements during June and July 2016. In addition to the adoption of the new share dealing policy we have also updated our tight well policy and procedures and introduced a new market sounding policy. A disclosure committee has been established and is made up of the CFO, the General Counsel, the Head of Investor Relations and the Company Secretary. The CEO is invited to attend as appropriate. The objectives of the disclosure committee are the timely identification of inside information and to assist the Company with the reporting to the market in accordance with the Market Abuse Regulations. Code of conduct Our code of conduct defines what we stand for as a Company and sets out the principles that guide all of our business activities. All staff have received training on how to represent Genel in accordance with the principles of the code of conduct. We strive for operational excellence and aim to conduct our business in a responsible, ethical and safe manner with high standards of financial reporting, corporate governance, and compliance with applicable laws. The code of conduct sets guidelines by which we conduct our business and how we expect our board, employees, suppliers, partners and others to behave. As a result, being able to demonstrate behaviours aligned with the code of conduct forms part of the performance objectives for every employee. SpeakUp All employees are encouraged to raise any concerns they may have and to report any suspected or known violations of the code of conduct without fear of retaliation. We operate an run and confidential ‘SpeakUp’ hotline. All issues raised via this route are investigated and reported to the Audit Committee. independently Business conduct We conduct our business in an open, honest and ethical manner. We do not tolerate any form of bribery. We aim to ensure that all financial and non-financial information we create is complete and accurate, and we strive to provide accurate and timely information to external stakeholders, including governments, in the locations in which we operate. We take steps to protect against inappropriate use of confidential and privileged information and we aim to protect and use our business assets appropriately. Our policy is not to make political donations and we have not done so in the period under review (2015: nil). Conflicts of interest We seek to avoid conflicts of interest wherever possible. We believe it is important that the decision making process is not impaired by an individual being conflicted by either an actual or a potential conflict. However, we recognise that from time to time situations may arise which could result in actual or potential conflicts and, accordingly, we have a formal system in place enabling Directors and members of senior management to declare any such conflicts and for those conflicts to be reviewed and, if appropriate, authorised by the Board. A register of conflicts is maintained by the Company Secretary. The Audit Committee and the Board have applied the principles and processes set out above during 2016 and confirm that they have operated effectively. Third parties We maintain high standards of business conduct in our dealings with all third parties in to promote mutually beneficial order relationships and protect our reputation. We do not seek to win or maintain business by acting illegally or contrary to our contractual agreements. Our relationships with third parties are conducted on a fair and honest basis. We expect our third parties to maintain the same standards of business conduct as we adhere to. to creating a Communities and environment Protecting and sustaining the communities and environment in which we operate is fundamental to maintaining our operating licences and long-term sustainable business. We strive to maintain high standards of environmental protection and we do not compromise our environmental values for profit or production. We seek to and maintain constructive engagement with the local communities affected by our operations and assets, and invest to help them develop in a sustainable manner. We contribute to socio-economic development and provide transparency in respect of our contributions and their impact. Further information on how we engage with communities can be found in the community engagement and investment section of this report on page 20. proactive STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 40 CORPORATE GOVERNANCE CORPORATE GOVERNANCE continued BOARD ATTENDANCE Date January February February March April July August September November December Attendance5 Scheduled/Ad hoc Scheduled Scheduled Ad-hoc Ad-hoc Scheduled Scheduled Ad-hoc Scheduled Scheduled Ad-hoc Scheduled Tony Hayward Murat Özgül George Rose Chakib Sbiti1 Simon Lockett2 Mehmet Ö˘gütçü Nathaniel Rothschild Gulsun Nazli Karamehmet Williams3 Jim Leng4 Sir Graham Hearne4 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1. Chakib Sbiti was unable to attend the ad-hoc Board meeting held in August 2016 due to prior commitments 2. Simon Lockett was unable to attend the ad-hoc Board meetings held in February and March 2016 due to prior commitments 3. Gulsun Nazli Karahmehmet Williams was unable to attend the ad-hoc Board meeting held in December 2016 due to prior commitments 4. Jim Leng and Sir Graham Hearne both retired as Directors of the Company on 27 April 2016 5. Denotes the attendance percentage at scheduled Board meetings by each Director BOARD TIME SPENT Business strategy – 40% Corporate governance/ risk management – 15% Financial management – 20% Projects – 25% The role of the Board The Board’s role is to provide leadership in delivering on the long-term success of the Company within a framework of prudent and effective controls. for It approving the Company’s strategy and business plan and keeping under review the resources of financial and operational the Company. It monitors the performance of the business and management against those strategic objectives with the overall is responsible objective of creating and delivering value to shareholders. The performance of the Board and the contributions of Directors to the Board’s decision making processes are essential to fulfilling this role. The Directors may exercise all the powers of the Company subject to the provisions of relevant law, the Company’s articles and any special resolution of the Company in the furtherance of their role. The Board has reserved certain matters for its own consideration and decision making. Authorities have been delegated to Board Committees and these are set out clearly in each Committee’s terms of reference which are reviewed regularly to ensure that they remain appropriate and relevant. Copies of the terms of reference are available on our website. Specific matters reserved for the Board include setting the Company’s objectives and business strategy and its overall supervision. Significant acquisitions, divestments and other strategic decisions will all be considered and determined by the Board in accordance with the Company’s delegated authorities. The Board reviews the matters reserved for its decision annually, subject to the limitations imposed by the Company’s constitutional documents and applicable law. The Board and its Committees have access to the advice and services of the Company Secretary and the General Counsel and may seek advice from independent experts at the expense of the Company as appropriate. Individual Directors may also seek independent legal advice at the expense of the Company, in accordance with the Board’s agreed procedure. In addition, the Board has extensive access to members of senior management, who attend Board meetings by invitation, and present regularly to the Board on the performance of the business. Board composition There are nine Directors on the Board, of whom one is Executive and eight (including the Chairman) Non-Executive. Four are independent under the Code and four are not considered independent (excluding the Chairman who was not independent on appointment). Skills, knowledge, experience and attributes of Directors The Board considers that a diversity of skills, background, knowledge, experience, perspective and gender is required in order to govern the business effectively. The Board and its Committees work actively to ensure that the Executive and Non-Executive Directors continue to have the right balance of skills, experience, independence and group knowledge necessary to discharge their responsibilities in accordance with the highest standards of governance. The Non-Executive Directors bring with them international and operational experience gained both in the sectors in which we operate GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 and in other areas of business and public life. Murat Özgül brings additional perspectives to the Board’s work through a deep understanding of the business and the region within which it operates. Together they oversee the strategy of the Group and monitor the pursuit of the corporate strategy. All Directors are required to devote sufficient time and demonstrate commitment to their role. Further details of the Directors’ skills and experience are set out on pages 36 to 37 of this Annual Report. Independence of the Board The Independent Non-Executive Director’s (George Rose, Chakib Sbiti, Simon Lockett and Mehmet Ö˘gütçü) are responsible for ensuring appropriate challenge of management and the decisions of the Board. the Company The Non-Executve Directors who are not considered independent comprise two of the founders of (Nathaniel Rothschild, Non-Executive Director and Tony Hayward, Chairman), plus Gulsun Nazli Karamehmet Williams who has been nominated for appointment to the Board by Focus Investments Limited in accordance with the relationship agreement between the Company and Focus and Ümit Tolga Bilgin who was appointed on 16 March 2017. The Independent Directors and the Chairman meet regularly in private session after Board meetings and on other occasions over dinner. Independent The Board recognises that following Tolga Bilgin’s appointment as a Director that there is a majority of Non-Independent Directors on the Board however it considers that there is an appropriate balance between Executive and and Non- Non-Executive, to Independent Directors, with a view promoting and shareholder governing the business effectively. The Board will monitor this closely to ensure that the independent thinking of the Board is not compromised. It is the intention of the Board to return to an equal balance of independent versus non-independent directors as soon as practicably possible. interests Meetings of the Board The Board meets approximately six times each year and schedules other meetings as necessary to fulfil its role. During the year the Board held ten meetings in total in various locations, four of which were in addition to In recognition of the those scheduled. 41 the challenging operating environment Directors felt it appropriate to meet more regularly during 2016 to monitor developments at Taq Taq and receive frequent updates on the gas business. There are detailed agendas for each Board meeting which are developed by the Chairman and the Company Secretary. The Board also has an annual rolling agenda that sets out the key topics for consideration at each meeting. In addition to scheduled meetings of the Board, Directors receive updates from management in-between meetings on the performance of the business against the agreed strategy and on its operations. Operation of the Board The Chairman is responsible for ensuring that the Board operates effectively. The Board has an open style of communication and debates issues openly and constructively within an environment that encourages healthy debate and challenge both inside and outside the boardroom. The Directors receive board papers and other relevant information in a timely manner ahead of meetings. Board papers are delivered through an electronic portal that enables Roles and responsibilities It is important to ensure that there is a clear division of roles between the Chairman, Chief Executive Officer and Senior Independent Director of the Company. TONY HAYWARD Chairman MURAT ÖZGÜL Chief Executive Officer Tony Hayward is the Chairman. The Chairman reports to the Board and is responsible for the leadership and overall effectiveness of the Board, overseeing the strategy of the Company and for setting the Board’s agenda. Specific responsibilities of the Chairman include ensuring the effective running of the Board, ensuring that the Board agenda is forward-looking with an emphasis on strategic issues and ensuring the performance of the Board and its Committees is effective and in line Murat Özgül is the Chief Executive Officer. The Chief Executive Officer is responsible for all executive management matters of the Group. He reports to the Chairman and to the Board directly. Specific responsibilities include the day-to-day management of the Group within delegated authority limits, identifying and executing strategic with best practice. A culture of openness and debate is encouraged by the Chairman through ensuring constructive relations between Executive and Non- Executive Directors and ensuring effective communication between the Company and its shareholders. The Chairman’s other significant commitments are included in his biography on page 37. There have been no changes to these during 2016. opportunities, managing the risk profile and ensuring appropriate internal controls are in place, maintaining a dialogue with the Chairman and the Board on important and strategic issues, ensuring the proper development of senior management and succession planning for executive positions. GEORGE ROSE Senior Independent Non-Executive Director George Rose is the Senior Independent Director. The Senior Independent Director is available to shareholders who have concerns that cannot be addressed through the normal channels of the Chairman or the Chief Executive Officer. He chairs the Nomination Committee when it is considering succession to the role of Chairman and acts as a sounding board for the Chairman and an intermediary for other Directors if and when necessary. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 42 CORPORATE GOVERNANCE CORPORATE GOVERNANCE continued Directors to access them wherever they are in the world. The timely provision of relevant information to Directors is vital in ensuring they are able to fulfil their role of effective oversight and challenge and for enabling the Board to make effective decisions. Directors’ induction and ongoing development In order to govern the Group effectively, Non- Executive Directors must have a clear understanding of the overall strategy, together with a sound knowledge of the business and the industry within which it operates. The Chairman, together with the Company Secretary, is responsible for ensuring that all new Directors receive a full, formal and tailored induction upon appointment to the Board. This includes a detailed overview of the Company and its governance practices and meetings with key personnel from across the Group in order to develop a full understanding of the business, its strategy and business priorities in each area. Upon his appointment Simon Lockett received a full and comprehensive induction on the operations, processes, policies and procedures across the business. The induction included a comprehensive schedule of meetings with senior management in London and Ankara to develop his understanding of the business. In addition, Chakib Sbiti receveid a full induction on the Company’s approach to remuneration strategy and practices upon his appointment as Chairman of the Remuneration Committee. As part of ongoing board development Directors attended a detailed half-day education session on the gas project in July 2016. Risk monitoring and reporting The Group keeps under review the major risks to which its operations in all regions are exposed by leveraging its local expertise, industry knowledge and strategic relationships. In particular, the Group continues to have a regular dialogue with its key stakeholders in the Kurdistan Region of Iraq, such as the KRG, the Turkish government and other regional public bodies. We maintain similar relationships within the Africa region to ensure the risks across the organisation as a whole are fully understood and mitigated appropriately and within the Group’s tolerance for risk. During the year, the Group’s risk management approach was reviewed and enhanced culminating in the adoption of an updated risk management policy and procedures. Our risk management the procedures identification of the key risks and key risk indicators, the controls by which these are managed and mitigated, and how these controls are monitored. The senior management review and update the risk management process and keep under constant review the risks identified. The Board undertakes a robust assessment of facilitate the principal risks facing the Company at least annually. It focuses its assessment on those risks that could impact our business model, solvency, liquidity or future performance. The Board also reviews and monitors the risk management and internal control systems and each such review covers all material controls, including financial, operational and compliance controls. Further details of the principal risks and uncertainties to which the Group’s operations are exposed, and the framework within which these risks are managed, are set out on pages 28 to 33. Internal controls The Board is responsible for maintaining and reviewing the effectiveness of the Group’s system of internal control. This system is designed to identify, evaluate and manage the significant risks to which the Group is exposed. The Board has established processes to meet the obligations placed on listed companies and the expectations of the UK Corporate Governance Code to publish a long-term viability statement and to continually monitor systems of risk management and internal control. These processes lines of include having clear responsibility, documented levels of delegated authority and appropriate operating procedures. We recognise that the system is designed to manage, rather than eliminate, the risk of failure to achieve business objectives, and can only provide reasonable, and not absolute, assurance against misstatement or loss. Our long term viability statement can be found on pages 32 to 33. The Audit Committee supports the Board in the performance of its responsibilities by reviewing those procedures that relate to risk financial processes management controls. The Audit Committee considers the reports of the internal audit function and the external auditor and reports to the Board on such matters as it feels should be brought to the Board’s attention. and A detailed budget is produced annually in accordance with our financial processes and reviewed and approved by the Board. Operational reports are provided to the Executive Committee on a monthly basis and performance against the budget kept under regular review in accordance with the Group’s financial procedures manual. The CEO reports to the Board on performance and key issues as they arise. The assessment of controls and risk management processes provides a reasonable basis for the Board to make proper judgements on an ongoing basis as to the financial position and prospects of the Group. The Board has conducted a review of the effectiveness of the system of internal control for the year ended 31 December 2016 and up to the date of the signing of the financial statements, and is satisfied that it remains appropriate to the business. Communication with stakeholders Part of the Group’s code of conduct sets a framework for how it partners with, and invests in, communities (local, regional and global) to achieve mutual long-term benefits. The Group contributes to socio-economic development through taxes, royalties and other local payments and donations. Further details of our community programmes can be found on pages 20 to 23. 2017 AGM The 2017 AGM will be held on Tuesday, 6 June 2017 at J.P. Morgan, 60 Victoria Embankment, London EC4Y 0JP, UK at 11.00am. The Notice of AGM accompanies this Annual Report and sets out the business to be considered at the meeting. The AGM will provide an opportunity for shareholders to meet with the Directors and senior management. Both this Annual Report and the Notice of AGM are available on our website at www.genelenergy.com Communication with institutional investors We communicate on a regular basis with our shareholders via presentations and calls as part of our annual investor calendar. We also liaise with them on an ad-hoc basis as and when questions arise. Our major shareholders are also encouraged to meet with the Chairman to discuss any matters that they would like to raise outside the formal investor calendar. The Board receives investor relations updates at each scheduled Board meeting covering key investor meetings and activities, as well as shareholder and investor feedback. We also engage with our shareholders at our AGM and via our website at www.genelenergy.com During the year we also communicated with our bondholders via calls and scheduled meetings. 2016 Investor relations activity Q1 2 conferences in the UK Investor meetings in the UK and Middle East Q2 2 conferences in the UK Investor meetings in the UK US investor roadshow Investor visit to KRI and Ankara Q3 Investor meetings in the UK 3 conferences in the UK Q4 Investor meetings in the UK 4 conferences in the UK GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 43 Board committees The Board has established four committees: the Audit Committee, the Remuneration Committee, the Nomination Committee and the Health, Safety, Security and Environment Committee. These Committees have adopted terms of reference under which authority is delegated by the Board and copies of which are available on our website at www.genelenergy.com. Each Committee consists only of Independent Non-Executive Directors (with the exception of the Nomination Committee, which is chaired by Tony Hayward who was not independent upon his appointment as Chairman). A Reserves Committee has also been established which is made up of Tony Hayward, Simon Lockett and Chakib Sbiti. The objective of this Committee is to provide oversight of the assessment of the Company’s reserves and resources and report to the Audit Committee on its findings. Board effectiveness As in previous years the Board effectiveness review was facilitated internally by the Company Secretary. Whilst this is not in compliance with B.6.2 of the UK Corporate Governance Code, which requires that an externally facilitated effectivess review is undertaken every three years, given the size of the Company this approach is considered appropriate. Actions from the 2015 effectiveness review Progress made against the actions Board development Given the significance of the gas development to the Company, the Board would focus its development plan for the year on the development cycle of the gas project, including project financing. The Board discussed the gas project at the majority of Board meetings held during the year. More specifically, an in depth education session was held in July 2016. This covered the commercial structure, the process to reach FID, the development programme, including the HSE aspects of the project, the economics, political influences and investor perception of the project. Board effectiveness It was recognised that following the changes to Board composition during the year, the need to ensure that the new Board operated effectively was a priority for 2016. Additional meetings outside of the usual Board cycle were held during the year to ensure that the Board remained fully informed on matters of significance during the year. Political Risk in 2015, the Political Risk Committee was disbanded as it was felt that given the importance of political risk to the Company, this should be a matter for the whole Board. As this is a complex region in which to operate regular updates would be provided to Directors from appropriate commentators. An external speaker attended the November Board dinner over which the political landscape in the region was discussed in detail and the opportunity provided for Directors to ask questions and broaden their understanding of the turmoil in the KRI region. In addition the Head of Government and Public Affairs, Pars Kutay, presents a political update at every scheduled Board meeting. Remuneration Whilst the Remuneration Committee reviews in detail management targets when considering remuneration payouts to the executives, it will pay particular attention to this area given the difficult economic environment the Company is operating in. Actions arising from the 2016 effectiveness review The Committee has completed periodic reviews of the bonus targets to ensure that they remain relevant and appropriate in the current operating environment. Development Effectiveness Financing As the gas business develops, Directors should continue to be educated on the complex project inputs throughout 2017 and beyond As in 2015, and following further changes to board composition during the year, the directors should continue to focus on its operational effectiveness during 2017 and the induction process for new Directors The Board, supported by the Audit Committee, will focus on maintaining the financial strength of the Company in the lead up to the refinancing in 2019 Underlying business The Directors recognise the need to focus on the achievement of core business targets and the need to support management in that regard The review of the performance of each of the Directors has been undertaken by the Chairman and the Senior Independent Director led the review of the Chairman’s performance. Following these performance reviews, the Board considers that each of the Directors continue to make an effective and valuable contribution and demonstrate their commitment to the role. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 44 CORPORATE GOVERNANCE AUDIT COMMITTEE Ensuring integrity and clarity of published financial information AUDIT COMMITTEE Chairman Members Meetings in 2016 George Rose Chakib Sbiti 3 scheduled Simon Lockett 2 ad hoc Objective Progress To increase shareholder confidence by ensuring the integrity and objectivity of published financial information To advise the Board on whether the Annual Report taken as a whole is fair, balanced and understandable, and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy Scrutinised areas uncertainty in particular impairments and the receivable involving significant judgement, estimation or Reviewed reserves, resources and revenue Reviewed and received reports from the external auditors on the annual financial statements and other published financial information Ensured compliance with financial reporting standards and relevant financial and governance requirements Considered the quality and appropriateness of the accounting policies and practices and financial reporting disclosures, in particular in respect of revenue recognition and impairment of receivable Considered the Annual Report as a whole including the basis for the going concern assumption, the viability statement and underlying assumptions. Assessed the Annual Report in the context of whether, taken as a whole, it is fair, balanced and understandable To assist the Board in meeting its financial reporting, risk management and internal control responsibilities Monitored compliance with financial reporting standards and relevant financial and governance requirements To assist the Board in ensuring the effectiveness of the internal accounting and financial controls of the Company To monitor the Company’s treasury and financing arrangements To strengthen the independent position of the Company’s external auditors by providing channels of communication between them and the Non-Executive Directors Kept under review the risk register and retained oversight of the Group risk framework and by doing so supports the Board on assessing the Company’s tolerance for risk Kept key accounting policies and practices under review to ensure that they remain appropriate Kept under review the effectiveness of the systems of internal control, including the adherence to company policies, internal audit outputs and the compliance programme including the ‘SpeakUp’ arrangements and the anti-bribery and corruption processes and procedures Monitored the cash position of the Company in a difficult economic environment and kept the treasury policy under review to ensure it remains appropriate and aligned with the Company’s cash position Reviewed the long-term financing requirements of the Company including initial plans for the refinancing of the Company debt Monitored the effectiveness and independence of the external auditor and compliance with the non-audit services policy To review the performance of the Company’s auditing arrangements internal and external Monitored the effectiveness and indepedence of the external auditor and compliance with the non-audit services policy Received regular updates from the Head of Internal Audit on the annual audit programme and reviewed the outputs from the programme, keeping any actions idenitified under review GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 AUDIT COMMITTEE ATTENDANCE Date Scheduled/Ad hoc George Rose Chakib Sbiti1 Simon Lockett2 Mehmet Ögütçü3 Jim Leng4 February Scheduled March Ad-hoc March Ad-hoc July November Attendance5 Scheduled Scheduled Scheduled 45 n/a n/a n/a 100% 100% 100% 100% 100% n/a n/a n/a n/a 1. Chakib Sbiti was unable to attend an ad-hoc Audit Committee meeting in March 2016 due to prior commitments 2. Simon Lockett was appointed as a member of the Audit Committee on 27 April 2016 3. Mehmet Ö gütçü stepped down as a member of the Audit Committee on 27 April 2016 4. Jim Leng retired as a Director on 27 April 2016 5. Denotes the attendance percentage at scheduled Audit Committee meetings AUDIT COMMITTEE TIME SPENT Governance and audit – 20% Financial reporting – 30% Financing – 15% Reserves and resources – 15% Risk management and internal control – 20% All the members of the Committee are Independent Non-Executive Directors. The Chairman, George Rose, has recent and relevant financial experience and both Chakib Sbiti and Simon Lockett are industry experts. The Committee relies on information and support from management to enable it to carry out its duties and responsibilities effectively. The Audit Committee has detailed terms of reference which set out its areas of responsibility. The Company also operates an independent ‘SpeakUp’ hotline for all staff and the Committee reviews annually matters reported and the outcome of any investigations. The significant issues considered by the Committee in relation to the 2016 accounts and how these were addressed were: • Reserves and resources – the Committee considered the underlying processes and judgements made, including the output from the Reserves Committee process, when considering the assessment of reserves and resources for the purposes of the financial statements. • Impairment of oil and gas assets – the Committee considered the process for review, key inputs and judgements made along with the supporting evidence when completing the assessment of the recoverable values of assets and the sensitivities applied. • Impairment of receivable – as well as the process, key inputs and judgements made in respect of the assessment of the recoverable value of the KRG receivable the Committee also considered the supporting evidence underlying the judgements made in respect of the recoverability of the receivable. • During the year the FRC Conduct Committee raised a number of points on the Company’s 2015 Annual Report. As a result of the correspondance, additional disclosures have been included in the 2016 financial statements in resepct of the Group’s reporting of the trade receivables balance. • Risk reporting – the Committee considered and recommended to the Board an enhanced risk management policy and underlying procedures. The updated policy and procedures built on the existing risk management framework, further embedding risk management and oversight processes within the business. Internal audit The Board recognises that an effective internal audit function is vital to delivering a strong governance culture. Each year the Committee approves an internal audit plan for the year ahead which is aligned to the Group’s risk profile. In November 2016 the Committee reviewed the outcome of the internal audit work performed in accordance with the 2016 internal audit plan. There had been no significant findings during the year and the Head of Internal Audit confirmed that management had worked openly and collaboratively during the audit process. The Committee held a private meeting with the Head of Internal Audit at that meeting. External audit The effectiveness and the independence of the external auditor are key to ensuring the integrity of the Group’s published financial information. Prior to the commencement of the audit, the Committee reviews and approves the external auditor’s audit plan. PwC present to the Committee their proposed plan of work which is designed to ensure that there are no material misstatements in the financial statements. The Committee monitors and approves the provision of non-audit services by the Company’s external auditors in accordance with the policy on non-audit services. The provision of non-audit services is generally limited to services that are closely connected to the external audit or to projects that require a detailed understanding of the Group (for example taxation advice) which require pre-authorisation by the Committee under the terms of the policy. In 2016, the level of non-audit fee paid was $0.1 million, further details of which can be found on page 93 of the notes to the financial statements. These fees reflect the services and advice provided by PwC in respect of tax and accounting advice received during the year. PwC have been appointed as the Company’s auditors for the past five years following a tendering process in 2011. In 2016 the Audit Partner was rotated and Michael Timar was appointed as the Senior Statutory Auditor to the Company. When considering the re-appointment of the Company’s external auditors, the Committee reviews the external auditor’s independence and objectivity. In November 2016 the Committee reviewed the effectiveness of the external audit process. It reviewed papers from both management and the external auditors, including the planning and execution of the audit process. The Audit Committee met privately with the external auditors in the absence of management. Following this review, the Committee was satisfied that the external auditor remains both effective and fully independent and on that basis their reappointment will be proposed and recommended at the forthcoming AGM. The Committee reviewed its own effectiveness during the year. The transition to the new Audit Partner during the year had been a success. The review had identified some areas for focus in 2017 including supporting the Board in the lead up to the 2019 re-financing, ensuring close scrutiny of the areas of judgement made during the year and to increase time allocated by the Committee on the work of Internal Audit. they reflect to ensure The Committee has also reviewed its terms of its reference responsibilities in the context of the review of internal financial control systems and financial risk management systems. The Committee terms of reference can be found on our website at www.genelenergy.com. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 46 CORPORATE GOVERNANCE NOMINATION COMMITTEE Ensuring a high calibre Board NOMINATION COMMITTEE Chairman Members Meetings in 2016 Tony Hayward Simon Lockett 1 scheduled Mehmet Ögütçü George Rose Chakib Sbiti Objective Progress Review the structure, size and composition of the Board, having due regard to the Company’s strategic, operational and commercial requirements and overall diversity of Board members The size of the Board has been reduced from ten Directors to nine. Continued to keep under review potential candidates as part of the ongoing refresh of the Board Annually reviewing the time required from Non-Executive Directors and making recommendations as to their reappointment at the AGM Reviewed the performance of the CEO and each of the Non-Executive Directors and made recommendations for their re-appointment at the 2017 AGM. The review of the Chairman’s performance was carried out by the Senior Independent Director Keeping under review succession arrangements for Directors and other senior executives Board succession was discussed at each Non-Executive Director meeting held during the year Review Board Committee membership NOMINATION COMMITTEE Date Scheduled/Ad hoc Tony Hayward Mehmet Ögütçü George Rose Chakib Sbiti1 Simon Lockett1 Sir Graham Hearne2 A comprehensive review of Committee composition was undertaken during the year following which the compostion of the Committees was changed February Attendance3 Scheduled Scheduled 100% 100% 100% – – 100% n/a n/a 1. Chakib Sbiti and Simon Lockett were appointed to the Nomination Committee on 27 April 2016 2. Sir Graham Hearne retired as a Director on 27 April 2016 3. Denotes the attendance percentage at scheduled Nomination Committee meetings GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 47 NOMINATION COMMITTEE TIME SPENT Effectiveness – 30% Succession – 70% the year ahead, In the Nomination Committee will keep under review the composition and balance of the Board to ensure the appropriate experience and skills to delivery the Company’s strategy. When considering candidates for appointment to the Board, the Committee undertakes a comprehensive search process using Spencer Stuart, an independent external search agency. Spencer Stuart were not engaged on the appointment of Tolga Bilgin. During 2016 the Committee continued to work with Spencer Stuart to assist with the refreshing of the Board over time. As part of their remit they have been asked to provide a pool of candidates from a diverse range of backgrounds and with due regard to gender diversity. Spencer Stuart have no other connection with the Company. All the members of the Nomination Committee, with the exception of Tony Hayward, are Independent Non-Executive Directors. The Nomination Committee assists the Board in ensuring that the Board consists of high- calibre individuals whose background, skills, experience and personal characteristics will augment the present Board and meet its future needs and diversity aspirations. The Nomination Committee is aware of the need to align the Board’s composition with the Compay’s strategy and to ensure the Board has the necessary skills to ensure that Company’s long-term success. Currently there is one female Director on the Board and, when the opportunity arises we will consider candidates based on merit and against objective criteria and with due regard for the benefits of diversity on the Board. The Committee has spent time considering whether additions were needed to the Board following the retirement of Jim Leng and Sir Graham Hearne on 27 April 2016 but it was felt that a smaller board was more appropriately aligned to the size of the ongoing business. That said in March 2017 the Committee recommended the appointment of Tolga Bilgin as a Non- Executive Director. Tolga’s experience in the Turkish energy market aligns with the Company’s next stage of its develpoment of the gas business. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 48 CORPORATE GOVERNANCE HSSE COMMITTEE Ensuring a focused approach to HSSE HSSE COMMITTEE Chairman Members Meetings in 2016 Simon Lockett Chakib Sbiti 3 scheduled Mehmet Ögütçü Objective Progress To ensure that the Company maintains a responsible and credible approach to HSSE matters (including asset integrity and major hazard risk management), in line with international best practice and emerging legal requirements Received updates on developments both from a regulatory and operational perspective Monitors the collaboration of the operators in the region to develop a common approach to mitigating and managing the risks associated with oil field operations To assist the Company in maintaining its relationships with the communities in which it operates, including through social investment and development activities The environmental impact arising from our operations is reviewed regularly and any areas of concern are reviewed by the Committee To assist the Board and other committees in assessing HSSE risks, in determining, implementing and reviewing the Company’s HSSE strategy and processes Risks allocated to the Committee under the risk management system were reviewed in detail and a report provided to the Audit Committee on the effectiveness of the HSSE controls and risk mitigation processes To ensure the quality of the Company’s reporting and disclosure (both internally and to shareholders) in relation to HSSE matters To assist the Company in developing the HSSE culture Monitored performance against the HSE KPI targets and LTI targets Reviewed and monitored the GHG emissions output and disclosure made in the Annual Report in accordance with the GHG Protocol Endorsed and sponsored the Genel ‘HSE Golden Rules’ and the launch of the Genel Life Saving Rules Received regular updates on the approach to safety culture and security across the organisation particularly in the aftermath of the failed coup in Turkey and the battle to regain control of Mosul Provided feedback to the Remuneration Committee on the HSSE performance elements of the 2016 annual bonus performance targets GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 49 HSSE COMMITTEE Date Scheduled/Ad hoc Simon Lockett1 Chakib Sbiti2 Mehmet Ögütçü3 Sir Graham Hearne4 February July November Attendance5 Scheduled Scheduled Scheduled Scheduled 100% 100% 66% 100% n/a n/a 1. Simon Lockett was appointed as a member of the HSSE Committee on 19 January 2016 and as HSSE Committee Chairman on 27 April 2016 2. Chakib Sbiti stepped down as Chairman of the HSSE Committee on 27 April 2016 3. Mehmet Ö gütçü was unable to attend a HSSE Committee Meeting in November 2016 due to flight delays 4. Sir Graham Hearne retired as a Director on 27 April 2016 5. Denotes the attendance percentage at scheduled HSSE Committee meetings HSSE COMMITTEE TIME SPENT Culture – 20% Planning and monitoring – 50% Risk monitoring and mitigation – 20% Security – 10% Genel’s HSSE policy reflects international best practice including but not limited to the IFC Performance Standards and ICMM Sustainable Development Framework. At each meeting of the Committee an update is received from management on the progress made against the HSSE strategic plan which it approves at the beginning of each year. In 2016 the plan contained actions in the following areas: leadership and culture, contractor operational management, readiness, HSE management system, health, environment and HSE safety performance. During the course of the year progress was made against each of these areas including the launch of the Genel Life Saving Rules which complements our emergency response and crisis management procedures that were also reviewed and updated during the year. Various crisis and emergency management exercises were completed in order to ensure preparedness in the event of a crisis. During the year across the organisation 39 HSSE training sessions were held on topics including but not limited to H2S awareness, process safety and administering first aid with 91% of employees attending two or more sessions. Operations activities included engaging and supporting Petoil on HSE matters during the drilling of the CS-12 well and providing pre- FEED deliverables on the Miran and Bina Bawi gas development project. In line with the UK Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013 the Company prepares and reports our greenhouse gas emissions which can be found in our corporate responsibility section on pages 20 to 23. The Committee reviewed the greenhouse gas emissions occurring from operations in 2016 and is pleased to note a year-on-year reduction of 28%. In recognition of the importance of HSSE to our business the 2016 annual bonus objectives contain an element specifically allocated to HSSE. The Committee reviewed progress against the 2016 HSSE objectives and made the Remuneration Committee on these elements the details of which may be found on page 63 of the Annual Report on Remuneration. recommendations to The Committee reviewed its own effectiveness during the year. During 2016 good progress had been made on enhancing the already strong HSE culture within the business. The Committee agreed to focus on the following areas during 2017: • HSSE aspects of the gas project; • HSSE culture across the organisation; and • Increased site visits by Committee members its The Committee terms of reviews reference annually, which can be viewed at www.genelenergy.com. All the members of the Committee throughout the year have been Independent Non-Executive Directors. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION – 50 CORPORATE GOVERNANCE DIRECTORS’ REMUNERATION REPORT Remuneration Committee Chairman’s statement REMUNERATION COMMITTEE Chairman Members Meetings in 2016 Chakib Sbiti George Rose 3 scheduled Mehmet Ögütçü 4 ad hoc On behalf of the Remuneration Committee, I am pleased to present Genel’s Directors’ Remuneration Report for the year ended 31 December 2016, my first Report as Remuneration Committee Chairman. As a Jersey registered company we are not required to prepare a remuneration report in accordance with UK legislation. However, as in previous years it remains the policy of Genel to comply with high standards of corporate governance. As such we have once again prepared our Directors’ Remuneration Policy Report and Annual Report on Remuneration in accordance with the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended). Remuneration Policy As we have chosen to comply with UK remuneration reporting regulations, at our 2017 AGM we are seeking shareholder approval for our new Remuneration Policy (the ‘Policy’). Our last policy was approved by shareholders in 2014 and will shortly be reaching the end of its three-year term. Therefore, during 2016 we reviewed our Policy to ensure that our approach remains appropriate and aligned with the Company’s strategy in the new challenging energy business environment. remuneration to We believe that the remuneration structure set out in the current Policy remains clear, transparent, and simple and aligned with our strategic priorities while also promoting behaviours which are in the best interests of our shareholders. We are therefore proposing some small changes to the Policy to align it with the way good practice for UK listed companies has evolved in recent years: • We were an early adopter of post- performance period holding periods on PSP awards, and our policy approved in 2014 included a three-year holding period. Holding periods are now more common for UK listed companies and it has become established that a two-year holding period is expected. We are therefore proposing to bring our Policy in line with this practice • We introduced clawback provisions in 2015, however these will now be formally included in the Policy. For PSP awards these clawback provisions will apply during the holding period The Policy, if approved by shareholders, will apply from the 2017 AGM. The vote on the Policy will not be binding as we are not covered by the same statutory protections afforded UK companies. However the Committee’s intention is to operate within the Policy for a three-year period following its approval. The Policy is set out on pages 52 to 59. Remuneration for 2016 Full details of the Remuneration Committee’s decisions for 2016 are set out in the Annual Report on Remuneration on pages 61 to 68. In the 2015 Annual Report we stated that the intention was to measure performance for Murat Özgül’s 2016 annual bonus against a scorecard which would include 30% based on individual performance. However, during 2016 the Committee reviewed the bonus framework and decided that following the write down of reserves at Taq Taq and given the importance of the delivery of the gas, financial, safety and and operational business environment objectives, individual performance element should be removed and the weightings for these business objectives be increased to 35.8%, 21.4%, 21.4% and 21.4% respectively, a total of 100% on company performance. the Further details of the 2016 annual bonus performance objectives and how they were assessed can be found on pages 62 and 63. The performance period for PSP awards granted in 2014 ended on 31 December 2016. These awards will lapse as Genel’s relative TSR ranking was below median of the peer group. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 2016 PSP award Genel is currently operating in a challenging environment and the Company is focussing on ensuring payment continuity with the KRG, maximising the value of oil assets, delivering the value of the KRI gas business and growing our resource base. The Committee considers that Murat Özgül is critical to the achievement of these objectives and to growing shareholder value. Therefore, to enhance Murat’s alignment with shareholders to deliver these objectives over the key period of the next three years, the Committee increased his PSP grant for 2016 on a one-off basis to 225% of salary. His 2017 PSP award will revert to the normal level of 150% of salary. Approach to remuneration in 2017 Details of how we intend to apply our Policy over the coming year are set out on pages 66 and 67. The Committee determined that Murat Özgül’s base salary will not be increased for 2017. The Committee also decided that, while relative TSR is an important measure of long- term performance, the current focus of the Company is on absolute long-term value creation through developing our oil assets, recovering monies owed for past exports and establishing the gas business. Therefore, 2017 PSP awards will be assessed 50% on relative TSR against our peer group, and 50% against absolute TSR targets. Details of the targets are set out on pages 66 and 67. The Committee considers that these targets are appropriately stretching and that maximum vesting would represent significant value creation. 51 2017 AGM Together with my fellow Committee members and Board colleagues, I will be available at our 2017 AGM to answer any questions regarding our Policy on executive remuneration and the activities of the Committee. On behalf of the Committee I would welcome any feedback and look forward to receiving your support for our Policy and our Annual Report on Remuneration. Chakib Sbiti Chairman of the Remuneration Committee REMUNERATION COMMITTEE Date February February April Scheduled/Ad hoc Scheduled Ad-hoc Ad-hoc April Ad-hoc July September November Attendance5 Scheduled Ad hoc Scheduled n/a n/a n/a n/a n/a n/a Chakib Sbiti1 George Rose Mehmet Ögütçü2 Simon Lockett3 Jim Leng4 Sir Graham Hearne4 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 100% 100% 50% 100% 100% 100% 1. Chakib Sbiti was appointed Chairman of the Remuneration Committee on 27 April 2016 2. Mehmet Ö gütçü was appointed as a member of the Remuneration Committee on 27 April 2016 and was unable to attend a Remuneration Committee Meeting in November due to a flight delay 3. Simon Lockett was appointed a member of the Remuneration Committee on 19 January 2016 and stepped down as a member of the Committee on 27 April 2016 4. Jim Leng and Sir Graham Hearne both retired as Directors of the Company on 27 April 2016 5. Denotes the attendance percentage at scheduled Remuneration Committee meetings Objective Progress To determine the Remuneration Policy for the Chairman, CEO, CFO and broad framework for remuneration for members of the Executive Committee To review and have regard to remuneration practices across the Company In respect of performance related elements of the Remuneration Policy formulate suitable performance related criteria and monitor their operation To review all aspects of any equity incentive plans operated or to be established by the Company To have regard in the performance of its duties to any published guidelines or recommendations regarding the remuneration of directors of listed companies and formation and operation of share schemes Reviewed and updated the Remuneration Policy ahead of submission to shareholders for approval at the 2017 AGM and proposed a limited number of changes to align with UK practice Considered remuneration practices across the Company including management recommendations for salary increases, bonus payments and share awards Completed a mid-year review of performance against bonus targets, re-aligning the targets for the CEO to 100% of target to be measured on Company performance for 2016 Reviewed the 2014 PSP performance against relative TSR of a comparator group which resulted in no shares vesting under the award The Committee considered alternative approaches to the equity incentive plans. As a result of the review it was agreed to review the performance measures for the 2017 PSP award. Further details are set out on pages 66 and 67 As part of its deliberations during the year, governance updates were received from both Deloitte and the Company Secretary to ensure that any decisions taken and recommendations made were done so in the context of the wider remuneration landscape whilst remaining appropriate for the specific challenges facing the Company To ensure that provisions regarding the disclosure of information, including pensions, as set out in The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations and the UK Corporate Governance Code, are fulfilled. Reviewed and updated the Company’s Remuneration Policy to be put forward to shareholders under a binding vote at our 2017 AGM Reviewed the Annual Report of Remuneration for 2016 prior to submission to shareholders for a non-binding vote at the AGM STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 52 CORPORATE GOVERNANCE REMUNERATION POLICY REPORT from letter the Chairman of REMUNERATION POLICY REPORT This part of the report sets out our Directors’ Remuneration Policy (the ‘Policy’). This Policy will be put forward for binding shareholder approval at the 2017 AGM as outlined above in the the Remuneration Committee. The new Policy, if approved, will previous replace Remuneration Policy approved at the 2014 AGM. The effective date of the Policy is the date on which the Policy is approved by shareholders (i.e. the date of our 2017 AGM, 6 June or at any adjournment thereof). Further details regarding the operation of the Policy can be found on pages 61 to 68. the The Committee will keep the Policy under review to ensure that it continues to promote the attraction, retention and motivation of the high-performing executive talent required to deliver the business strategy. It is the Committee’s intention that the Policy be put to shareholders for approval every three years. Should any changes be required before the end of the three-year period, the amended Policy will be put to shareholders, following shareholder consultation as appropriate. The proposed policy includes a number of changes from the previous policy approved by shareholders at the 2014 AGM: • The holding period for PSP awards will be reduced from three years to two years in line with established market practice • The clawback provisions introduced in 2015 have been included in the policy REMUNERATION POLICY TABLE Fixed remuneration Element Salary Purpose and link to strategy Operation Maximum opportunity Performance measures • To provide fixed • The Committee takes into • While there is no defined None remuneration which is balanced, taking into account the complexity of the role and the skills and experience of the individual Benefits • To provide a simple and broadly market competitive benefit cash allowance account a number of factors when setting salaries, including: – scope and complexity of the role – the skills and experience of the individual – salary levels for similar roles within the international industry – pay elsewhere in the Group – Salaries are reviewed, but not necessarily increased, annually with any increase usually taking effect in January • A cash supplement is provided in lieu of benefits (including pension) • The cash supplement is not included in calculating bonus and long-term incentive quantum maximum opportunity, salary increases are normally made with reference to the average increase for the Company’s wider employee population • The Committee retains discretion to make higher increases in certain circumstances, for example, following an increase in the scope and/or responsibility of the role or the development of the individual in the role • Cash supplement is set None as a percentage of base salary and paid in lieu of all benefits (including pension) • While there is no defined maximum opportunity, the cash supplement is currently 25% of base salary • Should an individual participate in the Mandatory Pension Scheme provided by the Company to all UK based employees the cash supplement will be reduced in line with the Company contribution made • The Committee keeps the benefit policy and level of cash supplement under review. The Committee may adjust cash supplement levels in line with market movements GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 53 The Company is incorporated in Jersey rather than the UK. Accordingly, the Company does not have the benefit of the statutory protections afforded by the UK Companies Act 2006 in the event that there were to be any inconsistency between this Policy and any contractual entitlement or other rights of a Director. Therefore, in the event that there were to be any payment which was inconsistent with this Policy, the Company would not have the statutory right, under section 226E of the UK Companies Act 2006 to recover such payments from its Directors. Variable remuneration Element Purpose and link to strategy Operation Maximum opportunity Performance measures Annual bonus • To incentivise and reward the achievement of annual financial, operational and individual objectives which are key to the delivery of the Company’s short- term strategy • Maximum award opportunity for Executive Directors is 150% of base salary for each financial year • At least 70% of the award will be assessed against Group metrics including financial, operational, safety and environment, and CSR performance. Any remainder of the award will be based on performance against individual objectives • A sliding scale of between 0% and 100% of the maximum award is paid dependent on the level of performance • Awards are based on objectives set by the Committee over a combination of goals which may include financial, operational and individual goals measured over one financial year • Objectives and the mix of goals are set annually to ensure that they remain targeted and focused on the delivery of the Company’s short-term goals • The Committee sets targets which require appropriate levels of performance, taking into account internal and external expectations of performance • As soon as practicable after the year-end, the Committee meets to review performance against objectives and determines payout levels • Bonus payments are made in cash, although there is the flexibility to pay in shares • No part of the bonus is currently subject to deferral, although the Committee retains the flexibility to apply deferral to all or part of the bonus (in cash or shares) in the future should it be considered appropriate STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 54 CORPORATE GOVERNANCE REMUNERATION POLICY REPORT continued REMUNERATION POLICY TABLE continued Variable remuneration Element Purpose and link to strategy Operation Maximum opportunity Performance measures Performance share plan (‘PSP’) • To incentivise and reward the creation of long-term shareholder value • To align the interests of the Executive Directors with those of shareholders Restricted share plan (‘RSP’) • Normally used to buy out awards forfeited by new Executive Directors on recruitment • Murat Özgül will not receive grants under this scheme following his appointment as CEO • The usual maximum award opportunity in respect of a financial year is 200% of base salary • However, in circumstances that the Committee deems to be exceptional, awards of up to 300% of base salary may be made • Vesting of awards is dependent on financial, operational and/or share price measures, as set by the Committee, which are aligned with long-term strategic objectives of the Company. No less than half of an award will be based on share price measures. The remainder will be based on either financial, operational or share price measures • At the minimum level of acceptable performance, no more than 30% of the award will vest rising to 100% for maximum performance • The plan rules allow for a maximum award of 300% of base salary in respect of a financial year. Only in circumstances that the Committee deems to be exceptional will awards be made at this level • Awards will only be made to Executive Directors in recruitment scenarios • The Committee may attach performance conditions to awards if appropriate • Awards granted under the PSP (normally in the form of conditional share awards or nil-cost options) vest subject to achievement of performance conditions measured over a period of at least three years • Awards can be reduced or cancelled in certain circumstances as set out below • Any shares that vest may benefit from the value of dividends (if any) which would have been paid during the period between award and vesting and may assume reinvestment in the Company’s shares • Shares that vest are normally subject to a holding period of two years from the vesting date although the Committee retains the discretion to apply a different holding period, or no holding period • Any vested options must be exercised within ten years of the date of grant • The Committee will where possible make buy-out awards on a like-for-like basis as set out in the recruitment policy • Awards can be reduced or cancelled in certain circumstances as set out below • Awards will vest on a date determined by the Committee at grant, subject to the individual’s continued employment and, if the Committee considers appropriate, performance conditions • Any shares that vest may benefit from the value of dividends paid (if any) during the period between award and vesting which may assume reinvestment in the Company’s shares GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 55 • The performance conditions may be replaced or varied if an event occurs or circumstances arise which cause the Committee, acting fairly and reasonably, to determine that a substituted or amended performance condition would be more appropriate (taking into account the interests of the shareholders of the Company) provided that the amended performance condition would not be materially less difficult to satisfy • The Committee may elect, prior to vesting or exercise in the case of options, to deliver the value of vested awards as cash principles is designed Remuneration arrangements throughout the Company for Executive The Remuneration Policy the line with Directors in remuneration underpin that remuneration across the Company. When making decisions in respect of Executive Director remuneration arrangements, the Committee takes into consideration the pay and conditions for employees throughout the inflationary Company, impact for the countries in which we operate. As stated in the policy table, salary increases are normally made with reference to the average increase for the wider employee population. including the local The Company places a significant focus on variable remuneration, ensuring that a meaningful proportion of remuneration across all employees is based on performance, through its operation of the annual bonus plan throughout the Company and participation in share incentive plans. Genel is committed to strengthening and widening employee share ownership by the use of share incentives granted under our share plans. As a result approximately 90% of employees participate in our share plans. The Committee does not directly consult with our employees as part of the process of determining executive pay. However, there is wide employee participation in our share plans. Notes to the policy table The Committee reserves the right to make any remuneration payments and/or payments for loss of office (including exercising any discretions available to it in connection with such payments) notwithstanding that they are not in line with the Policy set out above where the terms of the payment were agreed (i) before the 2014 AGM (the date the Company’s first shareholder-approved directors’ remuneration policy came into effect); (ii) before the Policy set out above came into effect, provided that the terms of the payment were consistent with the shareholder-approved Directors’ Remuneration Policy in force at the time they were agreed; or (iii) at a time when the relevant individual was not a Director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a Director of the Company. For these purposes ‘payments’ includes the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are ‘agreed’ at the time the award is granted. Performance measures and targets Annual bonus The annual bonus performance measures are designed to provide an appropriate balance between incentivising Executive Directors to meet financial targets for the year and to deliver a combination of specific strategic, operational and personal goals. This balance allows the Committee to review the Company’s performance in the round against the key elements of our strategy and appropriately incentivise and reward Executive Directors. Bonus targets are set by the Committee each year to ensure that Executive Directors are focused on the key objectives for the next twelve months. In doing so, the Committee takes into account a number of internal and external reference points, including the Company’s business plan. returns sustainable PSP The ultimate goal of our strategy is to provide long-term to shareholders. The Committee currently considers that a mix of absolute and relative TSR is the most appropriate measure to assess the underlying financial performance of the business while creating maximum alignment with shareholders and encouraging long-term value creation. Malus provisions Under the PSP and RSP, prior to vesting, the Committee may cancel or reduce the number of shares awarded or impose additional conditions on an award in circumstances where the Committee considers it to be appropriate. Such circumstances may include a material misstatement of the Company’s audited financial results, a material breach of health and safety regulations, a material failure of risk management or serious reputational damage to the Company. The Committee has considered malus provisions in the context of the annual bonus and is satisfied that malus is appropriately taken into account at the time the Committee approves a bonus payment. Clawback provisions Clawback provisions apply to the annual bonus, PSP and RSP awards where it is considered appropriate. Such circumstances may include a material misstatement of the Company’s audited results, misconduct of the individual and any error in the calculation of any performance condition. Clawback may be applied up to one year after payment for bonus awards and two years after vesting for PSP and RSP awards. Plan rules The PSP and RSP shall be operated in accordance with the rules of the plans as approved by shareholders and amended from time to time in accordance with those rules. In particular: • The plan rules provide for adjustments in certain circumstances, for example, awards may be adjusted in the event of variation of the Company’s share capital, demerger, special dividend, re- organisation or similar event • In the event of a change of control of the Company, existing share awards will vest in line with the plan rules to the extent the Committee determines, taking into account the extent to which any performance conditions (where applicable) have been satisfied and, unless the Committee determines otherwise, the time elapsed since that time. The Committee may, in the event of a winding-up of the Company, demerger, delisting, special dividend or other event which the Committee considers may affect the price of shares, allow awards to vest on the same basis STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 56 CORPORATE GOVERNANCE REMUNERATION POLICY REPORT continued CHAIRMAN AND NON-EXECUTIVE DIRECTORS Element Purpose and link to strategy Operation Maximum opportunity Performance measures Chairman fees • To provide an appropriate reward to attract and retain a high-calibre individual with the relevant skills, knowledge and experience Non-Executive Director (NED) fees • To provide an appropriate reward to attract and retain high-calibre individuals with the relevant skills, knowledge and experience • The fee for the Chairman is normally reviewed annually but not necessarily increased • The remuneration of the Chairman is set by the Committee • The Chairman receives a set fee for the role; no additional fees are payable for other Committee memberships • The fee is payable in cash, although the Committee retains the right to make payment in shares • Whilst there is no • None maximum level, fees are set considering: – market practice for comparative roles – the time commitment and duties involved – the requirement to attract and retain the quality of individuals required by the Company • Expenses reasonably and wholly incurred in the performance of the role of Chairman of the Company may be reimbursed or paid for directly by the Company, as appropriate, and may include any tax due on the expense • The Chairman does not participate in any of the Group’s incentive plans • The fees for the Non- • Whilst there is no • None maximum level, fees are set considering: – market practice for comparative roles – the time commitment and duties involved – the requirement to attract and retain the quality of individuals required by the Company • Expenses reasonably and wholly incurred in the performance of the role of Non-Executive Director of the Company may be reimbursed or paid for directly by the Company, as appropriate, and may include any tax due on the expense • The Non-Executive Directors do not participate in any of the Group’s incentive plans Executive Directors are normally reviewed annually but not necessarily increased • The remuneration of the Non-Executive Directors is a matter for the Chairman and the Executive Directors • Non-Executive Directors receive a standard basic fee. Where applicable, they also receive additional fees for Committee chairmanship and for the membership of two or more Committees • Although no additional fee is currently paid for the role of the Senior Independent Director or the Chairman of the Nomination Committee, the Company retains the flexibility to pay such a fee if appropriate • The fee is payable in cash, although the Committee retains the right to make payment in shares Non-Executive Directors may receive professional advice in respect of their duties with the Company which will be paid for by the Company. Non-Executive Directors are also covered by the Company’s directors’ and officers’ insurance policy and provided with an indemity. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 57 remuneration Recruitment policy In determining for new appointments to the Board, the Committee will consider all relevant factors including, but not limited to, the calibre of the individual and their existing package, the external market and the existing arrangements for the Company’s current Executive Directors, with a view that any arrangements offered are in the best interests of the Company and shareholders and without paying any more than is necessary. Where the new appointment is replacing a previous Executive Director, salaries and total remuneration opportunity may be higher or lower than the previous incumbent. If the appointee is expected to develop into the role, the Committee may decide to appoint the new Executive Director to the Board at a lower than typical salary. Larger increases the wider employee (above population) may be awarded over a period of time to move closer to market level as their experience develops. those of the Company where Benefits will normally be limited to those outlined in the remuneration policy table above. However, additional benefits may be provided by the Committee considers it reasonable and necessary to do so. Such circumstances may include where an Executive Director is required to relocate in order to fulfil their duties. In such cases, a cash payment higher than the 25% of salary that is ordinarily paid would normally be provided under the Company’s standard expatriate policy in lieu of certain benefits, which may include the provision of a housing allowance, education support, health insurance, tax advice, a relocation or repatriation allowance and a home leave allowance. It is expected that the structure and quantum of the variable pay elements would reflect those set out in the policy table above. However, the Committee recognises that, as an independent oil and gas company, it is competing with global firms for its talent. As a result, the Committee considers it important that the recruitment policy has sufficient flexibility in order to attract the calibre of individual that the Company requires. Therefore: • Under the annual bonus, the Committee reserves the right to provide either a one-off or ongoing maximum bonus opportunity of up to 200% of salary if this is required to secure an external appointment • The Committee would also retain the discretion to flex the balance between annual and long-term incentives and the measures used to assess performance for these elements, whilst maintaining the intention that a significant portion of variable pay would be delivered in shares • Variable pay could, in exceptional circumstances, be delivered via alternative structures, again with the intention that a significant portion would be share-based, but in all circumstances subject to an ongoing over-riding cap of 600% of salary. This cap excludes any awards made to compensate the Director for incentive awards or any other remuneration arrangements forfeited from their previous employer (see below) The above flexibility will only be used if the Committee believes such action is absolutely necessary to recruit and motivate a candidate from the global market. The Committee commits to explain to shareholders the rationale for the relevant arrangements following any appointment. Where an Executive Director is appointed from within the Group, the normal policy of the Company is that any legacy arrangements would be honoured in line with the original terms and conditions. Similarly, if an Executive Director is appointed following an acquisition of or merger with another company, legacy terms and conditions would be honoured. The Committee retains the discretion to make appropriate remuneration decisions outside the standard policy to meet the individual circumstances of the recruitment, when an interim appointment to fill an Executive Director role is made on a short-term basis or a Non-Executive Director or the Chairman takes on an executive function on a short- term basis. Buy outs In order to facilitate recruitment, the Committee may make a one-off award to ‘buy out’ incentive awards and any other compensation arrangements that a new hire has had to forfeit on leaving their previous employer. In doing so, the Committee will take into account all relevant factors including any performance conditions attached to the forfeited awards, the likelihood of those conditions being met, the proportion of the vesting/performance period remaining and the form of the award (e.g. cash or shares). Where possible, the forfeited awards will normally be bought out on an estimated like- for-like basis. The Committee is at all times conscious of the need to pay no more than is necessary, particularly when determining any possible buy-out arrangements. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 58 CORPORATE GOVERNANCE REMUNERATION POLICY REPORT continued Recruitment of Chairman and Non-Executive Directors In the event of the appointment of a new Chairman and/or Non-Executive Director, remuneration arrangements will normally be in line with those detailed in the relevant table above. Executive Director service contracts The key employment terms and other conditions of the current Executive Director, as stipulated in his service contract, is set out below. Element Policy Notice period • 12 months’ notice by either the Company or the Executive Director. This is also the policy for new recruits Termination payment • It is the Company’s policy for new service contracts that it may terminate employment by making a payment in lieu of notice (‘PILON’) equivalent to (i) 12 months’ base salary and (ii) the Executive Director’s annual benefit allowance • Upon termination by the Company, an Executive Director has a duty to mitigate, and use reasonable endeavours to secure alternative employment as soon as reasonably practicable. In Murat Özgül’s service contract, there are specific provisions requiring a reduction in any phased PILON payments in the event that he finds alternative employment Remuneration and benefits • Participation in all incentive schemes, including the annual bonus and the PSP, is non-contractual • Outstanding awards will be treated in accordance with the relevant plan rules The service contract of an Executive Director may also be terminated immediately and with no liability to make payment in certain circumstances, such as the Executive Director bringing the Group into disrepute or committing a fundamental breach of their employment obligations. Unless otherwise approved, an Executive Director may accept only one position as a Non-Executive Director (but not as a Non-Executive Chairman) of a FTSE 100 company that is not a competitor of the Company, subject to prior notification to the Chairman of the Company and the approval of the Board or duly authorised Committee thereof. Policy on payment for loss of office In the event that the employment of an Executive Director is terminated, any compensation payable will be determined in accordance with the terms of the service contract between the Company and the employee, as well as the rules of any incentive plans. The Company considers a variety of factors when considering leaving arrangements for an Executive Director, including individual and business performance, the obligation for the Director to mitigate loss (for example by gaining new employment) and other relevant circumstances (e.g. ill health). The Committee may make other payments in connection with a Director’s cessation of office or employment where the payments are made in good faith in discharge of an existing legal obligation (or by way of damages for breach of such an obligation) or by way of settlement of any claim arising in connection with the cessation of a Director’s office or employment. Any such payments may include but are not limited to paying any fees for outplacement assistance and/or the Director’s legal and/or professional advice fees in connection with his cessation of office or employment. If the Executive Director’s employment is terminated by the Company, the Executive Director may receive a time pro-rated bonus, subject to Remuneration Committee discretion. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 59 The treatment of outstanding share awards is governed by the relevant share plan rules. The following table summarises the leaver provisions of share plans under which Executive Directors may currently hold awards. Plan PSP and RSP Treatment for any other leaver reason • Awards lapse in full Leaver reasons where awards may continue to vest Vesting arrangements • Death • Injury, ill health or disability • Retirement • Sale of the Company or business by which the participant is employed outside the Group • Any other scenario in which the Committee determines good leaver treatment is justified (other than summary dismissal) • Awards will vest to the extent determined by the Committee taking into account the achievement of any performance conditions at the relevant vesting date and, unless the Committee determines otherwise, the period of time which has elapsed between grant and cessation of employment • The vesting date for such awards will normally be the original vesting date, although the Committee has the flexibility to determine that awards can vest upon cessation of employment • In the event of death, all unvested awards will normally vest at that time to the extent determined by the Committee taking into account the achievement of any relevant performance conditions as at the date of death and, unless the Committee determines otherwise, the period of time that has elapsed since grant Chairman and Non-Executive Director letters of appointment The Chairman and Non-Executive Directors have letters of appointment which set out their duties and responsibilities. They do not have service contracts with either the Company or any of its subsidiaries. The key terms of the appointments are set out in the table below. Provision Period Policy • In line with the UK Corporate Governance Code, the Chairman and all Non-Executive Directors are subject to annual re-election by shareholders at each AGM • After the initial three-year term, the Chairman and the Non-Executive Directors are typically expected to serve a further three-year term Termination • The appointment of the Chairman and Non-Executive Directors is terminable by either the Company or the Director by giving three months’ notice • The Chairman and Non-Executive Directors are not entitled to any compensation upon leaving office STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 60 CORPORATE GOVERNANCE REMUNERATION POLICY REPORT continued Illustration of the Remuneration Policy The chart that follows provides illustrative values of the remuneration package for the Executive Director under three assumed performance scenarios. The chart is for illustrative purposes only and actual outcomes may differ from those shown. Chief Executive Officer Murat Özgül (£’000) 3,000 2,500 2,000 1,500 1,000 500 0 £0.78m 100% Minimum £2.66m 35% 35% 30% Maximum £1.69m 17% 37% 46% Target Fixed Pay Annual Bonus Performance Share Plan Assumed performance Assumptions used All performance scenarios • Consists of total fixed pay, consisting of base salary and cash supplement in lieu of benefits and D E X F I Y A P Y A P E L B A R A V I Minimum performance Performance in line with expectations Maximum performance pension • Base salary – salary effective as at 1 January 2017 • Benefits – 25% of base salary • No pay-out under the annual bonus • No vesting under the PSP • Two-thirds of the maximum pay-out under the annual bonus. This represents 100% of base salary for the CEO • 30% vesting under the PSP. This represents 60% of base salary for the CEO • Value of awards under the PSP based on the 2017 award under the Policy of 150% of salary • The maximum pay-out under the annual bonus. This represents 150% of base salary for the CEO • 100% vesting under the PSP • Value of awards under the PSP based on the 2017 award under the Policy of 150% of salary PSP awards have been shown at face value, with no share price growth, dividend accrual or discount rate assumptions. Consideration of shareholder views The Committee continues to be mindful of shareholder views when evaluating and setting ongoing remuneration strategy and we commit to consulting with shareholders prior to any significant changes to our Remuneration Policy. It is the Committee’s policy to correspond with shareholders that have engaged on remuneration matters during the year, which it has done and the Committee has considered their views at its meetings. Minor Changes The Committee may make minor amendments to the Policy set out above for regulatory, exchange control, tax or administrative purposes or to take account of a change in legislation without obtaining shareholder approval for that amendment. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 ANNUAL REPORT ON REMUNERATION 61 ANNUAL REPORT ON REMUNERATION This part of the Annual Report provides details of the implementation of the Directors’ Remuneration Policy (the ‘Policy’) for the year ended 31 December 2016 and discusses how the Policy will be implemented in the 2017 financial year. Details of the Policy can be found on pages 52 to 59. Audited information Single total figure table showing remuneration for each Director The following table sets out the total remuneration for Executive Directors and Non-Executive Directors for the period in office for the year ended 31 December 2016, and comparison figures for 2015. Name Executive Directors Murat Özgül2 Tony Hayward3 Julian Metherell4 Salary/fees £’000 Benefits £’000 2016 2015 2016 2015 2016 625 – – 296 374 153 156 – – 74 94 38 670 – – Bonus £’000 2015 161 0 0 LTIP1 £’000 2015 0 0 0 2016 68 – – Total £’000 2015 531 468 191 2016 1,519 – – 1. LTIP shares include shares under the Company’s PSP and the RSP. The 2014 awards under the PSP lapsed following the announcement of the Company’s results in 2017 2. Murat Özgül was appointed as a Director and CEO on 12 July 2015 3. Tony Hayward stepped down as CEO on 12 July 2015 and was subsequently appointed Chairman (see below) 4. Julian Metherell retired as a Director on 21 April 2015 Name Non-Executive Directors Tony Hayward1 George Rose Simon Lockett2 Mehmet Ö˘gütçü Nathaniel Rothschild Chakib Sbiti Gulsun Nazil Karamehmet Williams Rodney Chase3 Jim Leng4 Sir Graham Hearne4 Mark Parris5 Murat Yazici6 Salary/fees £’000 Benefits £’000 2016 2015 2016 2015 2016 Bonus £’000 2015 LTIP1 £’000 2015 2016 Salary/fees Total £’000 20167 2015 208 96 82 80 64 92 64 – 37 33 – – 122 120 – 100 80 115 80 204 115 100 46 77 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 208 96 82 80 64 92 64 – 37 33 – – 122 120 – 100 80 115 80 204 115 100 46 77 1. Tony Hayward was appointed Chairman on 12 July 2015 2. Simon Lockett was appointed as a Director on 19 January 2016 3. Rodney Chase resigned as a Director on 12 July 2015 4. Jim Leng and Sir Graham Hearne retired as Directors on 27 April 2016 5. Mark Parris retired as a Director on 21 April 2015 6. Murat Yazici resigned as a Director on 15 December 2016 7. Non-Executive Director fees were reduced by 30% effective from 1 May 2016 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 62 CORPORATE GOVERNANCE ANNUAL REPORT ON REMUNERATION continued Additional disclosures in respect of the single total figure table Base salary The table below shows base salaries which were effective during 2016. Murat Özgül Tony Hayward1 Base salary on 1 Jan 2016 £625,000 n/a Base salary on 1 Jan 2015 or at date of appointment £625,000 £705,000 1. Tony Hayward received a fee for his role as Chairman of £260,000 per annum with effect from 12 July 2015 (the date of his appointment); this was reduced to £182,000 with effect from 1 May 2016 Salary information for 2017 is provided on page 66. Benefits In line with the Committee’s aim to provide a simple, transparent package, the CEO receives a cash supplement of 25% of base salary in lieu of all benefits, including pension, private health insurance, life assurance and company car provision. The cash supplement is not used in the calculation of bonus and long-term incentive quantum. In the event that the CEO participates in the Mandatory Pension Plan offered by the Company the cash supplement will be reduced by the amount contributed by the Company into the Mandatory Pension Plan. Tony Hayward ceased to receive a benefit allowance upon his appointment as Chairman. Annual bonus The 2016 annual bonus scorecard was approved based on the Company’s performance against key business objectives (with a weighting of 70%) and individual performance (with a weighting of 30%). During the year the Committee agreed that given the strategic importance of the targets set out on the annual bonus scorecard, the CEO’s performance for 2016 would be measured 100% on the achievement on the business objectives. These included progress against the gas project (35.8%), financial targets (21.4%), operational targets (21.4%) and health and safety performance (21.4%). Although Genel delivered strong performance against the specific operational, financial and health and safety performance targets, progress on the gas project during the year was slower than anticipated. We announced that documentation had been finalised on previously agreed terms of amended and restated production shareing contracts and gas lifting agreements and accordingly only 50% of the gas target was achieved. Inevitability, the Company’s overall financial performance was impacted by the extremely difficult trading environment, both globally and in the KRI. Details of the Company’s performance against each of the objectives are set out below. Murat Özgül 2016 bonus As % of maximum £670,000 71.4% 2016 – Annual bonus, Remuneration Committee assessment of performance against targets The 2016 annual bonus was assessed by the Committee based on the Company’s performance against key business objectives. The Committee agreed at the mid-year review of progress against targets that the key business objectives were of such importance in securing the future strategic direction of the Company that the CEO should be measured 100% against delivery of those targets. Further detail is set out in the table below. Bonus performance measure Weighting Performance target Assessment of performance against metrics Gas 35.8% To demonstrably progress the gas project towards project sanction Operational 21.4% Working interest production at above 60k bopd Meet capital expenditure KPIs Whilst progress was made on the commercialisation of the gas project during 2016; it was not until early 2017 that definitive gas agreements were signed. Performance against this target was significantly impacted by the fiscal challenges in the region, the fight against ISIS and the move to liberate Mosul as well as the attempted coup in Turkey New production guidance in the range of 53-60k bopd was published during the year with final production at the lower end of the revised guidance Capital expenditure was managed within target Performance assessment 17.9% 0% 10.7% GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 63 Bonus performance measure Weighting Performance target Assessment of performance against metrics Financial 21.4% Secure the financial strength of the Company though receipt of cash payments, managing the business on a cash flow neutral basis and managing ongoing work obligations Safety and Environment 21.4% Maintain existing safety performance Strengthen internal capability and contractor management Continue to develop a robust operating management system and enhance the existing HSE culture During 2016 payments have regularised and the cash receipts have increased significantly year on year. This has enabled the business to operate on a cash flow neutral basis. Ongoing work commitments are being actively managed Strong performance with zero LTIs, no serious incidents and no spills reported in 2016 Improvements made to the contractor management system and all contract activities were executed safely with onsite HSE supervision During the year we continued to build on the positive HSE culture through development of Genel’s Life Saving Rules and by revising and updating the crisis management procedures. HSE training and development was delivered across all sites and will remain ongoing, thereby embedding a positive HSE culture Performance assessment 21.4% 21.4% Performance share plan awards made in 2016 PSP awards are granted in the form of a nil-cost conditional share award over shares in the Company with the number of conditional awards granted determined by reference to a percentage of base salary. As discussed on page 51, given the exceptional circumstances during 2016, the 2016 awards were based on a face value of 225% of salary for the CEO (as shown below). The Committee decided that, for the 2016 awards, it would continue to measure the performance of the Company against that of its sectoral peers using a relative TSR measure. This involves comparing the TSR of the Company over a three-year performance period with the TSR of each of the companies in the sectoral peer group below. At the end of the performance period the companies are ranked and awards made under the PSP vest in accordance with the schedule below depending on the Company’s TSR performance over the three-year period. The Committee considered that TSR was the most appropriate measure to create maximum alignment with shareholders and encourage long-term value creation. The sectoral peer group for the 2016 PSP awards was reviewed in February 2016 to ensure that it remained appropriate. BP Cairn Energy DNO Enquest Gulf Keystone Ophir Energy Premier Oil Seplat Petroleum SOCO International Nostrum Oil & Gas Royal Dutch Shell Tullow Oil Awards will vest according to the following schedule: TSR ranking of the Company Below median Median Between median and upper quartile Upper quartile Proportion of award vesting 0% 30% Straight-line basis 100% The following table provides details of the awards made under the PSP on 7 May 2016. Performance for these awards is measured over the three financial years from 1 January 2016 to 31 December 2018. Murat Özgül Type of award Conditional share award Face value (£) £1,406,250 Face value (% of salary) Threshold vesting (% of face value) Maximum vesting (% of face value) End of performance period 225% 30% (median) 100% (upper quartile) 31 Dec 2018 Face value has been calculated using the average share price 10 dealing days, prior to the date of grant, of 123.88 pence. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 64 CORPORATE GOVERNANCE ANNUAL REPORT ON REMUNERATION continued Share awards The following table provides a summary of all share awards as at 31 December 2016. Further details of the Company’s share plans are set out on page 103. Exercise price At 1 January 2016 Granted during the year Vested during the year Released during the year Exercised during the year Lapsed during the year At 31 December 2016 Performance period end Expiry date Scheme Grant date Murat Özgül2 19/12/2011 787.58 31,764 SOP PSP PSP PSP RSP CEO award PSP 01/03/2013 21/03/20141 15/04/2015 15/04/2015 21/08/2015 07/05/2016 Tony Hayward3 PSP PSP PSP PSP 29/05/2012 01/03/2013 21/03/20141 15/04/2015 – – – – – – – – – – – – – – – 65,052 49,009 34,588 112,757 260,210 375,000 93,750 – 1,135,171 102,131 134,352 98,231 212,030 – – – – – – – – – – – – – – Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil – – – – – – – – – – – 31,764 19/12/2014 19/12/2021 49,009 – 31/12/2015 01/03/2023 – – – – – 34,588 31/12/2016 21/03/2024 112,757 31/12/2017 15/03/2025 195,158 n/a 15/04/2025 375,000 n/a 21/08/2025 1,135,171 31/12/2018 07/05/2026 102,131 31/12/2014 29/05/2022 134,352 – 31/12/2015 01/03/2023 – – 98,231 31/12/2016 21/03/2024 212,030 31/12/2017 15/04/2025 1. The 2014 awards under the PSP will lapse following the announcement of the Company’s results in 2017 2. Awards made to Murat Özgül prior to 12 July 2015 were made to him in his capacity as President, KRI and Turkey 3. Awards made to Tony Hayward prior to 12 July 2015 were made to him in his capacity as CEO Payments to past Directors In 2016, there were no payments made to past Directors during the year. Payments for loss of office In 2016, there were no payments to Directors for loss of office. Statement of Directors’ shareholding and share interests The beneficial interests of the Directors in the Company’s shares as at 31 December 2016 are shown in the table below. There have been no changes in the Directors’ shareholdings and interests since 31 December 2016. The Company does not currently operate a formal shareholding guideline as Executive Directors must normally hold any vested shares under the PSP for three years following vesting for share awards up to and including 2016 and for two years for awards made in 2017 and beyond. Executive Directors are expected to build up their holding over time. Ordinary shares as at 31 December 2015 or date of leaving Ordinary shares as at 31 December 2016 or date of leaving Interest in share options granted under the Company share plans as at 31 December 2016 Director Murat Özgül Tony Hayward Simon Lockett Mehmet Ö˘gütçü George Rose Nathaniel Rothschild Gulsun Nazli Karamehmet Williams Chakib Sbiti Jim Leng Sir Graham Hearne 37,942 1,483,876 – – 90,000 22,119,970 – 80,100 50,000 90,000 102,994 1,483,876 – – 90,000 22,119,970 – 80,100 50,000 90,000 1,884,438 412,392 – – – – – – – – This represents the end of the audited section of the report. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 65 Historical TSR performance and CEO remuneration outcomes The following graph shows the Company’s TSR since trading of Genel Energy plc’s shares began on the London Stock Exchange on 21 November 2011 against the FTSE 350 Oil & Gas Producers Index. The Committee believes that the FTSE 350 Oil & Gas Producers Index remains the most appropriate Index as these companies are Genel’s direct UK listed comparators. TOTAL SHAREHOLDER RETURN 140 120 100 80 60 40 20 0 21/11/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015 31/12/2016 Genel Energy FTSE350 Oil & Gas Producers The table below summarises the CEO single figure for total remuneration, annual bonus pay-outs and LTIP vesting levels as a percentage of maximum opportunity over the period since listing to the end of the 2016 financial year. Chief Executive Officer CEO single figure remuneration (£’000) Annual bonus pay-out (as a % of maximum opportunity) Long-term incentive vesting out-turn (as a % of maximum opportunity) 2011 2012 2013 2014 2015 2015 2016 Tony Hayward Murat Özgül 139 n/a n/a 1,691 1,779 2,521 90% 95% 90% n/a n/a 82.5% 468 0% 0% 531 1,519 36.25% 71.4% 0%1 0% 1. The Committee exercised its discretion to reduce the vesting the 2013 PSP awards from 30% to 0% Percentage change in remuneration of the Chief Executive Officer The table below shows the percentage change in the Chief Executive Officer’s salary, benefits and annual bonus between the financial years ended 31 December 2015 and 31 December 2016 compared to the average for permanent employees of the Group. Chief Executive Officer All employees % change in base salary 2016/2015 % change in benefits 2016/2015 % change in annual bonus 2016/2015 (6.7%) 3.0% (7.0%) (4.0%) 316.1% 44.3% The percentage change in base salary and benefits for the CEO comparison data in 2015 includes data for Tony Hayward up to 12 July 2015 and Murat Özgül thereafter. Murat Özgül received no salary increase in 2016 and accordingly the percentage change for the CEO base salary and benefits is in real terms 0%. The percentage change in annual bonus for the CEO compares 2016 outcomes against 2015. 2015 includes data for Tony Hayward up to 12 July 2015 and Murat Özgül thereafter. Tony Hayward did not receive a bonus in 2015 and Murat Özgül’s bonus represented the six months during 2015 that he was CEO. Therefore the year-on-year change in bonus awards for the CEO overstates the difference in performance and bonus outcomes. Relative importance of the spend on pay The table below illustrates the current year and prior year overall expenditure on pay. The regulations require that we report distributions received by shareholders through dividends and share buy-backs. It is currently the Company’s policy not to pay dividends. We did not buy back shares during 2016. Remuneration paid to all employees 2015 2016 $m 41.0 22.1 Remuneration paid to all employees represents total staff costs from continuing operations. The $18.9 million decrease in staff costs relates to a decrease in the number of employees (28% reduction during 2016). STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 66 CORPORATE GOVERNANCE ANNUAL REPORT ON REMUNERATION continued Implementation of Remuneration Policy in 2017 This section provides an overview of how the Committee is proposing to implement our Remuneration Policy in 2017. Base salary In determining Executive Director salary increases for 2017, the Committee took into consideration a number of factors including: • The individual’s skills and experience • Business performance • Salary levels for similar roles within the industry • Pay and conditions elsewhere in the Company The Committee has decided that no salary increase would be made for Murat Özgül in 2017. The table below shows base salaries for 2017. Base salary from 1 Jan 2017 Murat Özgül £625,000 Benefits As outlined above, Murat Özgül receives a cash supplement in lieu of all benefits, including pension, private health insurance, life assurance and company car provision. The cash supplement is not included in calculating bonus and long-term incentive quantum. For 2017, the cash supplement remains set at 25% of base salary. 2017 Benefits allowance Murat Özgül £156,250 2017 – Annual bonus targets The target bonus for Murat Özgül for 2017 remains at 100% of base salary, with a maximum bonus of 150% of base salary. For 2017, the performance of the Executive Director will be measured 70% against Company metrics and 30% against individual performance. The metrics have been changed to place a greater emphasis in 2017 on operational and financial performance and 35% of the bonus will relate to operational and financial performance (50% of Company metrics compared to 42.8% in 2016). Bonus performance measures Specific targets Percentage Gas Financial Safety and environment Operational Progress the commercialisation of the gas business Secure the financial strength of the Company 20% 20% Secure clarity on the mechanism for the recovery of the receivable balance Manage the Group on a cash flow neutral basis Develop contractor capability and management 15% Maintain existing zero performance rate on LTI’s, high potential incidents, fatalities and spills Continue to embed HSE culture Manage the Group within guidance 15% Increase 2P reserves Performance share plan PSP awards are granted in the form of nil-cost conditional share award over shares in the Company with the number of awards granted normally determined by reference to a percentage of base salary. The Committee has reviewed the most appropriate measure to create maximum alignment with shareholders and encourage long-term value creation. As part of this review the Committee considered the likely outturn for the 2015 and 2016 PSP awards and the need to attract and retain executive talent whilst ensuring that the targets are no less stretching. Having considered all of these factors it was agreed that it would be appropriate to amended the PSP performance measures to 50% relative TSR and 50% absolute TSR. The Committee has reviewed the existing TSR peer group and accordingly the peer group for the measurement of the relative TSR element of the 2017 award will be as follows: BP Cairn Energy DNO Enquest Gulf Keystone Nostrum Oil & Gas Ophir Energy Premier Oil Royal Dutch Shell Seplat Petroleum SOCO International Tullow Oil GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 67 The relative TSR vesting schedule will remain the same as for awards made in 2016, as outlined on page 63. The absolute TSR targets will be measured on compound annual growth rates (CAGR) as follows: Absolute TSR of the Company Below 15% p.a. 15% p.a. Between 15% p.a. and 35% p.a. 35% p.a. or more Proportion of element vesting 0% 30% Straight-line basis 100% The Committee is comfortable that these targets are appropriately stretching. The threshold target of 15% p.a. is set in line with Genel’s cost of capital, ensuring this element vests only when shareholders make a return. Chairman and Non-Executive Director remuneration Following the 30% reduction applied to fees in 2016, the fee levels for the Chairman and Non-Executive Directors remain unchanged in 2017. Role Non-Executive Chairman Senior Independent Director additional fee Non-Executive Director fee Additional fee for membership of two or more Board Committees Additional fee for Committee chairmanship: Role Audit Committee Remuneration Committee HSSE Committee Nomination Committee Fee £182,000 No additional fee £56,000 £14,000 Fee £14,000 £10,500 £10,500 No additional fee The Committee is responsible for determining the Remuneration Policy for the Executive Directors and the Chairman of the Board. The Chairman of the Board together with the Executive Director determine the fees and overall remuneration for the Non- Executive Directors. Activities of the Remuneration Committee The Committee held three scheduled and four ad-hoc meetings during the year. Details of the attendance of Committee members at meetings during 2016 is set out on page 51 of this Annual Report. All of the members of the Committee are Independent Non-Executive Directors. Key activities during the year included the following: • Review of the Remuneration Policy • Preparation and approval of the Directors’ Remuneration Report • Review of the executive base salary level in the context of pay for the wider workforce and the current operating environment • Review of performance objectives of the CEO and Executive Committee in order to determine the level of bonus earned in respect of the 2016 financial year • Review of the TSR performance outcomes in respect of the 2014 PSP award • Approval of the annual bonus plan framework for 2017 • Consideration of the remuneration arrangements of the Chief Executive Officer and members of the Executive Committee for 2017 • Consideration and determination of the performance criteria for the 2016 PSP awards • Review and re-alignment of the performance measures applied to the 2017 PSP awards • Approval of share plan awards, including to those below Board level • Consideration of corporate governance and market practice developments STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 68 CORPORATE GOVERNANCE ANNUAL REPORT ON REMUNERATION continued REMUNERATION COMMITTEE TIME SPENT All employee remuneration – 10% Executive Director remuneration – 40% Governance – 10% Long term incentive plans for all employees – 30% Remuneration policy for Executive Directors – 10% Advisers to the Committee The Committee has appointed Deloitte LLP (‘Deloitte’) to provide independent advice on remuneration matters under consideration by the Committee. Deloitte was appointed by the Committee as it was felt they had the most relevant experience and expertise to advise the Committee on remuneration related matters. Deloitte is a leading remuneration adviser and a member of the Remuneration Consultants Group and as such voluntarily operates under the code of conduct in relation to executive remuneration consulting in the UK. Deloitte also provided support and advice to the Company including in respect of the operation of the Company’s share plans during the year. The Committee is satisfied that the advice they have received has been objective and independent. Deloitte’s fees in respect of advice to the Committee in the year under review were £58,050 and were charged on the basis of their standard terms of business for the advice provided. The Committee also consulted during the year with the Chairman (Tony Hayward), CEO (Murat Özgül), the Company Secretary (Sarah Robertson) and the Head of Human Resources (Gozde Tutanc). No member of the Committee nor any party from whom advice was sought participated in discussions regarding their own remuneration. Shareholder voting At the AGM held on 27 April 2016, votes cast by proxy and at the meeting in respect of the Annual Report on Remuneration for the year ended 31 December 2015 were as follows: To approve the Annual Report on Remuneration for the year ended 31 December 2015 Number of votes cast For Against Abstentions 174,041,025 158,059,457 15,981,568 6,370,000 90.82% The Committee is pleased to note that the vast majority of our shareholders supported the Annual Report on Remuneration in 2016. Chakib Sbiti Chairman of the Remuneration Committee 29 March 2017 GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 OTHER STATUTORY AND REGULATORY INFORMATION 69 Other statutory and regulatory information Principal activities The Company is the holding company for the Group. The Group is principally engaged in the business of oil and gas exploration and production. Results and dividends Ordinary activities after taxation of the Group for the period 1 January 2016 to 31 December 2016 amounted to a loss of $1,248.9 million. No interim dividend was paid and the Directors are not recommending a final dividend for the period ended 31 December 2016. Subsequent events There have been no subsequent events since 31 December 2016. Share capital As at 29 March 2017, the Company had allotted and fully paid up share capital of 280,248,198 ordinary shares of 10 pence each with an aggregate nominal value of £28,024,819.80. 1,853,008 shares are held as treasury shares. Resolutions in relation to share capital At the AGM of the Company held on 27 April 2016, the shareholders granted the Company authority to make market purchases of up to 27,838,247 ordinary shares (representing approximately 10% of the aggregate issued ordinary share capital of the Company at 16 March 2016) and hold as treasury shares any ordinary shares so purchased. Shareholders will be asked to renew this authority at the forthcoming AGM. Full details are included in the Notice of AGM. Rights attaching to the ordinary shares Holders of ordinary shares are entitled to attend, speak and vote at general meetings of the Company and may receive a dividend and, on a winding-up, may share in the assets of the Company. As of 24 February 2016 the Company no longer has any suspended voting ordinary shares in issue. Restrictions on transfer of shares There are no specific restrictions on the transfer of shares in the Company other than (i) as set out in the articles of association (ii) pursuant to the Company’s share dealing policy, (iii) as imposed from time to time by law and regulation and (iv) as set out in the Merger Agreement. Save as set out in the Merger Agreement and the Relationship Agreement, the Company is not aware of any arrangements or agreements between holders of the Company’s shares that may result in restrictions on the transfer of securities or on voting rights. No person has any special rights of control over the Company’s share capital and all issued shares are fully paid. Employee share schemes Details of the Company’s employee share schemes are set out in note 18 to the financial statements of this Annual Report. Articles of association of the Company Under the Jersey Companies Law, the capacity of a Jersey company is not limited by anything contained in its memorandum or articles of association. Accordingly, the memorandum of association of a Jersey company does not contain an objects clause. Certain provisions have been incorporated into the articles of association to enshrine rights that are not conferred by the Jersey Companies Law, but which the Company believes shareholders would expect to see in a company listed on the London Stock Exchange. Provisions in the articles of association also require shareholders to make disclosures pursuant to chapter 5 of the Disclosure and Transparency Rules, and require the Directors to comply with chapter 3 of the Disclosure and Transparency Rules and themselves to require any persons discharging managerial responsibilities (within the meaning ascribed in the Disclosure and Transparency Rules) in relation to the Company who are not Directors to do so, and to use reasonable endeavours to procure that their own and such persons’ connected persons do so. The articles of association may be amended by a special resolution of the shareholders. for rules Appointment and replacement of Directors the appointment and The replacement of Directors are set out in the articles of association. Certain additional provisions relating to the appointment of Directors are included in the Relationship Agreement between the Company and Focus. Directors The biographical details of the Directors of the Company who were in office during the year and as at the date of this Annual Report are set out on pages 36 and 37. Details of Directors’ service agreements and letters of appointment are set out on pages 58 and 59. Details of the Directors’ interests in the ordinary shares of the Company and in the Group’s long-term incentive schemes are set out in the Annual Report on Remuneration on page 64. Details of Directors submitting themselves for election and re-election at the AGM are set out in the Notice of Meeting. Service contracts and letters of appointment for all Directors are available for inspection at the registered office of the Company and will be available for inspection at the AGM. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 70 CORPORATE GOVERNANCE OTHER STATUTORY AND REGULATORY INFORMATION continued Subject to applicable law and the articles of association and to any directions given by special resolution, the business of the Company will be managed by the Board, which may exercise all the powers of the Company. to the Listing Rules that apply to controlling shareholders. Whilst the Relationship Agreement reflected the majority of the requirements we felt it prudent to amend it to align it to the specific obligations under Listing Rule 6.1.4(d). Directors’ indemnities As at the date of this Annual Report, indemnities granted by the Company to the Directors are in force to the extent permitted under Jersey law. The Company also maintains directors’ and officers’ insurance cover, the level of which is reviewed annually. liability Related party transactions Details of transactions with Directors and Officers are set out in note 20 to the financial statements. There were no other related party transactions to which the Company was a party during the period. Shareholder agreements Merger Agreement On 7 September 2011, the Company, Elysion Energy Holding B.V. (formerly Genel Energy Holdings B.V.), Focus Investments and PRM entered into a merger agreement (the ‘Merger Agreement’) pursuant to which the Company agreed to purchase, and the Sellers agreed to sell, the entire issued ordinary share capital of Genel Energy International Limited in consideration for the issue of 130,632,522 ordinary shares (the ‘Consideration Shares’). The Merger Agreement was amended by a deed of amendment entered into on 29 October 2011. Investments entered Relationship Agreement On 7 September 2011, the Company, Elysion and Focus into a relationship agreement which regulates the ongoing relationship between Elysion, Focus (the Investments ‘Relationship Agreement’). the Company and On 14 October 2015 Mehmet Sepil retired as President and on 18 November 2015 Mehmet Sepil’s holding in the Company fell to below 10% of the voting rights in the Company. Accordingly, certain rights of Elysion under the Relationship Agreement ceased to have effect including the right to nominate a representative to the Genel Board. The principal purpose of the Relationship Agreement is to ensure that the Company is capable at all times of carrying on its business independently of Focus Investments (and their Associates) and that all transactions and relationships between the Company and Focus Investments are at arm’s length and on a normal commercial basis. For the purposes of the Relationship Agreement, the term ‘Associate’ includes, in the case of Focus Investments, Mehmet Emin Karamehmet. On 12 February 2015 the Relationship Agreement was amended to reflect changes The Relationship Agreement will terminate upon the earlier of (i) the Company ceasing to have any of its ordinary shares listed on the Official List and admitted to trading on the London Stock Exchange’s main market for listed securities, and (ii) Elysion and Focus Investments together with their respective Associates ceasing between them to be entitled to exercise, or control the exercise of, in aggregate 10% or more of the Voting Rights. Pursuant to the terms of the Relationship Agreement, it has been agreed that, among other things: (a) For so long as Focus Investments and its respective Associates are, entitled to exercise or control the exercise of, in aggregate, 10% or more of the Voting Rights, Focus Investments will, and will procure so far as it is reasonably able to do so, that each of its Associates will: i. not take any action which precludes or inhibits any member of the Group its business from independently of Focus Investments and its respective Associates; carrying on ii. not exercise any of its Voting Rights to procure any amendment to the articles of association of the Company which would be inconsistent with or breach any provision of the Relationship Agreement; iii. if and for so long as paragraph 11.1.7R(3) of the Listing Rules applies to the Company, abstain from voting on any resolution required by paragraph 11.1.7R(3) of the Listing Rules to approve a ‘related party transaction’ (as defined in paragraph 11.1.5R of the Listing Rules) involving Focus Investments or any of its Associates as the related party; iv. comply with all provisions of the Listing Rules, the Disclosure and Transparency Rules, the requirements of the London Stock Exchange and the FSMA that apply in connection with it the Company; to v. ensure that the business and affairs of in the Company are conducted accordance with its articles of association; and vi. exercise all of its Voting Rights in a manner consistent with the intention that at all times at least half of the Directors (excluding the Chairman) are Independent Non-Executives and that certain committees of the Board shall comply with Governance Code; the UK Corporate (b) For so long as Focus Investments and its respective Associates are, between them, entitled to exercise or control the exercise of, in aggregate, 10% or more of the Voting Rights, Focus Investments will, and will procure that each of its Associates will: i. conduct all transactions and arrangements with any member of the Group on arm’s length and on normal commercial terms; ii. not take any action that would have the effect of preventing the Company from complying with its obligations under the Listing Rules; and iii. not propose or procure the proposal of a shareholder resolution which is intended or appears to be intended to circumvent the proper application of the Listing Rules; (c) Provided that Focus Investments and its Associates are entitled to exercise or control the exercise of 10% or more of the Voting Rights, Focus Investments shall be entitled to nominate for appointment to the Board one Director by giving notice to the Company; (d) For so long as Focus Investments together with their its Associates are entitled to exercise or to control the exercise of, in aggregate, 10% or more of the Voting Rights, subject to compliance by the Company with its legal and regulatory obligations, the Company shall procure that Focus Investments is provided with financial and other information as is necessary or reasonably required by them for the purposes of their accounting or financial control requirements or to comply with their legal or tax obligations as a shareholder of the Company. The rights described at (b)–(d) above will terminate and cease to be of any effect in the event that Focus Investments (or any Affiliate (as defined in the Merger Agreement) of Focus Investments that holds any ordinary shares) ceases to be controlled by Mehmet Emin Karamehmet. The Director nominated by Focus Investments pursuant to the Relationship Agreement is Gulsun Nazli Karamehmet Williams (Non- Executive Director). Information in strategic report Particulars of the Group’s use of financial instruments, an indication of the Group’s financial risk management objectives and policies, including its policy for hedging each major type of forecasted transaction for which hedge accounting is used and details of the exposure of the Group to price risk, credit risk, liquidity risk and cash flow risk are set out GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 71 Number of ordinary shares 12,744,963 Majedie Asset Management Limited Between the 31 December 2016 and 29 March 2017 the Company has received a notification from Bilgin Grup Dogˇal Gaz A.S˛. that they hold 42,000,000 ordinary shares (15.09%). Political donations No political donations were made, nor was any political expenditure incurred, by any Group company in the year ending 31 December 2016 (2015: nil). Auditors and disclosure of relevant audit information So far as each Director is aware, there is no relevant information of which the Company’s auditor is unaware. Each Director has taken all steps that ought to have been taken as a Director to make him or herself aware of any relevant audit information and to establish that PwC are aware of that information. Following a review of the independence and effectiveness of the auditor, a resolution to reappoint PricewaterhouseCoopers LLP as the Company’s auditor will be proposed at the AGM. AGM Your attention is drawn to the Notice of AGM enclosed with this report, which sets out the resolutions to be proposed at the forthcoming AGM. The meeting will be held at J.P. Morgan, 60 Victoria Embankment, London EC4Y 0JP UK on Tuesday, 6 June 2017 at 11.00am. By order of the Board Murat Özgül Chief Executive Officer in note 16 to the financial statements and in the Strategic Report in this Annual Report. Name Particulars of important events affecting the Group which have occurred since the last financial year and indications of likely future developments in the business of the Group are set out in the Strategic Report in this Annual Report. Details of our approach to greenhouse gas emissions are set out on pages 22 and 23. Corporate responsibility The Group is fully committed to high standards of environmental, health and safety management. The report on the Group’s corporate responsibility programme, together with an outline of the Group’s involvement in the community, are set out on pages 20 to 23. Employment policies We are an equal opportunities employer and base all decisions on individual ability regardless of race, religion, gender, sexual orientation, age or disability. Applications for employment by disabled persons will always be considered, having regard to their particular aptitudes and abilities. Should any employee become disabled, every practical effort to provide continued employment. Depending on their skills and abilities, they will enjoy the same career prospects and scope for realising their potential as other employees. Appropriate training will be arranged, including retraining for alternative work for those who become disabled, to promote their career development within the Group. is made Diversity policy Whilst the Company has not adopted a Diversity Policy the Board and the Company are committed to employing a diverse and balanced workforce. Diversity of ideas, skills, knowledge, experience, culture, ethnicity and gender are important when building an effective and talented workforce at all levels of the organisation, including the Board. Substantial shareholdings As at 31 December 2016, the Company had been notified of the following significant holdings (being 5% or more of the voting rights in the Company) in the Company’s ordinary share capital, which are set out in next column. Name Focus Investments Limited Bilgin Grup Dogˇal Gaz A.S˛. NR Holdings Limited Number of ordinary shares 64,589,351 28,059,225 22,119,970 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 72 CORPORATE GOVERNANCE STATEMENT OF DIRECTORS’ RESPONSIBILITIES Statement of Directors responsibilities Directors’ responsibility statement We confirm that to the best of our knowledge: • the Audited Financial Statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the undertakings included in the consolidation taken as a whole; • the Directors’ Report contained in this Annual Report includes a fair review of the development and performance of the business and the position of the Company and the Group together with a description of the principal risks and uncertainties that they face; and • the Annual Report and Audited Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy. By order of the Board Murat Özgül Chief Executive Officer The Directors are responsible for preparing the Annual Report, Directors’ Remuneration Report and the Group Financial Statements in accordance with applicable law and regulations. The Directors prepare Financial Statements for each financial year. The Directors are required by the IAS Regulation to prepare the Group Financial Statements under International Financial Reporting Standards (‘IFRS’) as adopted by the European Union. The Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period. In preparing IAS 1 requires that Directors: the Financial Statements, • Properly select and apply accounting policies • Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information • Provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance and • Make an assessment of the Group’s ability to continue as a going concern The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Group. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in Jersey or the United Kingdom the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. governing GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 FINANCIAL STATEMENTS INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF GENEL ENERGY PLC 73 REPORT ON THE GROUP FINANCIAL STATEMENTS Our opinion In our opinion, Genel Energy plc’s group financial statements (the ‘financial statements’): • give a true and fair view of the state of the group’s affairs as at 31 December 2016 and of its loss and cash flows for the year then ended; have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European • Union; and have been prepared in accordance with the requirements of the Companies (Jersey) Law 1991. • What we have audited The financial statements, included within the Annual Report, comprise: • • • • • the consolidated balance sheet as at 31 December 2016; the consolidated statement of comprehensive income for the year then ended; the consolidated cash flow statement for the year then ended; the consolidated statement of changes in equity for the year then ended; and the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. The financial reporting framework that has been applied inw the preparation of the financial statements is IFRSs as adopted by the European Union, and applicable law. Overview of our audit Materiality $22m (2015: $35m) Based on 1% of total assets. Areas of focus – Revenue recognition – Recoverability and balance sheet classification of amounts receivable from the Kurdistan Regional Government (‘KRG’) Change in level of risk – No change – No change – Impairment reviews of oil producing assets – Impairment review of gas evaluation and other exploration assets – No change – Increase Highlights of what we reported to the audit committee • There are significant judgements and estimates in relation to revenue recognition and the recoverable values of the producing assets, KRG receivable and Gas evaluation assets. • The judgements and estimates are within reasonable ranges to the extent that there is third party data to support an assumption, and otherwise agree to underlying plans, budgets and forecasts. • The most significant judgement taken relates to the Gas evaluation assets and the level of project risk assumed in the carrying value. Our audit approach Context The context for our audit is set by Genel’s major activities in 2016 together with the steadily improved world oil prices. The group’s cash flow generating assets continue to be its interests in the producing oil fields in the Kurdistan Region of Iraq (‘KRI’), Tawke and Taq Taq. In 2016, the latter has seen a decline in production below initial expectations and at the year-end there was a further downgrade in expected reserves following assessments by management’s experts. Regular payments have been received from the KRG in respect of export sales from these fields through most of the year in line with the proxy mechanisms announced in February 2016, which included an additional allowance for recovery of the outstanding receivable related to prior period production. Other notable events have included: the buy back of $55.4 million of bonds; the agreed sale of the Chia Surkh licence following assessment of drilling results in the year; and, in early 2017, alongside completing signature of the Gas Lifting Agreement and Production Sharing Contracts for the Miran and Bina Bawi gas fields, management have reassessed the likely development plan for these fields. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 74 FINANCIAL STATEMENTS INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF GENEL ENERGY PLC continued Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Overall group materiality $22m Rationale for the benchmark applied 1% of total assets Reporting level $1.1m $22 million (2015: $35 million) is based on 1% of total assets, consistent with FY15. We considered whether this measure continues to be appropriate and in concluding that it is, we considered the activities of the group and also materiality levels used by auditors of other similar upstream oil and gas companies. As a significant portion of the group’s net assets is represented by exploration assets, we believe an asset measure is the most relevant. Consistent with prior years, we used a lower specific materiality for certain income statement financial statement line items. In 2016, we used 5% of EBITDAX ($7 million) (2015: $5 million) for revenue, production costs, and general and administrative costs. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above $1.1 million (2015: $1.75 million) being 5% of our overall materiality. We also report misstatements below that amount that, in our view, warranted reporting for qualitative reasons. How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the group, the accounting processes and controls, and the industry in which the group operates. In prior years the group’s business segments were based on geography, however with operations now almost solely based in the Kurdistan Region of Iraq, the group is now structured along three business segments being the type of assets it operates: Oil producing assets, Gas evaluation assets and Exploration assets. The group financial statements are a consolidation comprising the group’s operating businesses in these segments as well as centralised functions. Because of their size, the majority of our audit work was performed on two major segments, being (a) the main trading entity for the Kurdistan oil producing assets, Taq Taq and Tawke and (b) the entity that holds the evaluated gas assets, Miran and Bina Bawi. We also performed specific procedures on certain financial statement line items elsewhere in the group including: exploration expenses related to the Moroccan and Somaliland exploration licences, operating expenses and related payables, cash and cash equivalents and borrowings. PwC UK performed all of the audit work, both in the UK and at the group’s operations in Ankara. The scope of our audit and our areas of focus We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (‘ISAs (UK & Ireland)’). We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as ‘areas of focus’ in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identified by our audit. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 75 Area of focus How our audit addressed the area of focus Revenue recognition (Note 1) All of the group’s revenues arise from production on its two oil fields in Kurdistan, Taq Taq and Tawke. The Production Sharing Contracts (‘PSCs’) in respect of these fields, to which the group is party, are complex in nature and could be subject to alternative interpretation. The group recognises revenue in accordance with their interpretation of the terms of the PSCs, and on the assumption that it is probable that economic benefits will flow to the entity. This is based on continued payments from the KRG during 2016, together with public statements by the KRG of their intention to pay all amounts that are due. Invoices to the KRG are based on a proxy mechanism for the PSCs announced by the KRG in February 2016. As a result, the amounts invoiced by the group and revenue calculated in accordance with the PSC can differ, and this is taken into account when assessing the revenue recognised. Management maintain a revenue model which is developed from the terms in the PSCs, and to which the main inputs and assumptions are production volumes, oil price and netback adjustments, and capital expenditure (which is recovered at cost in accordance with the PSC). There is an inherent risk that these inputs, assumptions and estimates are inaccurate and that the interpretations and calculations made are not appropriate. The complexity of the PSCs and alternative interpretations could result in misstatements in a number of financial statement line items including revenue, cost of sales, property plant and equipment, trade and other receivables, trade and other payables and income taxes. Change in level of risk: No change We designed our procedures to test the revenue calculated by management’s PSC model by: • agreeing each element of entitlement included in revenue back to the relevant PSC, and testing the mathematical accuracy of the model. • We tested the key inputs as follows: • Volume of oil sold – for a sample of domestic and export sales, we agreed the internal daily production and loading reports to third party signed pipeline volume reports and the third party signed loading documents without exception. • Pricing of oil sold –for sales we agreed the prices to the Brent crude oil prices made available by third parties and to industry and market data available. Our testing of pricing did not identify any misstatements. • Netback adjustments – we compared the netback adjustment estimates to the request for payment statements sent out to the KRG on a monthly basis in 2016. This is considered the best evidence currently available in respect of these adjustments. • Capital expenditure – for a sample of transactions, we agreed expenditure to third party evidence without exception. • Capacity building payments – we recalculated the amounts owed under the PSC and compared this to managements calculation and actual payments made. We reconciled the financial statements to the revenue calculated in the PSC models. We did not identify any material exceptions. The differences between amounts owed under the PSC and amounts received in accordance with the proxy mechanism are discounted based on when management expects to receive this revenue. We recalculated the discount applied and compared this to management’s calculations, noting no material differences. We reviewed the disclosure in note 1, significant estimates and judgements. We agreed with management that the netback adjustments to pricing is a significant judgement that leads to an estimate in the amount of revenue recorded. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 76 FINANCIAL STATEMENTS INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF GENEL ENERGY PLC continued Area of focus How our audit addressed the area of focus Recoverability and balance sheet classification of amounts receivable from the KRG (Note 10) The amounts receivable from the KRG reduced from $423m at 31 December 2015 to $264m at 31 December 2016 largely as a result of the receipt of cash against the opening receivable being offset by additions to the balance, and an impairment recorded of $180.3m.The recoverable value of trade receivables is a significant estimate with key judgements in relation to the amounts and timing of recovery. A detailed description with regards to how the group is recovering the amounts outstanding from the KRG, together with the judgements made in assessing the recoverable amount is set out on pages 86 and 87 of the financial statements. Change in level of risk: No change Impairment reviews of oil producing assets (Note 9) In 2016, the performance of the group’s Taq Taq producing asset was below expectation levels, which is an indicator of impairment. In addition the group’s market capitalisation continues to be below consolidated net assets which is also an indicator of impairment. Management performed an impairment assessment of each of its producing assets in accordance with the requirements of IAS 36 – Impairment of assets (‘IAS 36’) as at 31 December 2016. Both producing assets, Taq Taq and Tawke, were impaired and a charge of $195.6m (2015: $1,038m) was recorded. This reflects the further reduction in reserves and amended production outlook for Taq Taq, together with the impact of an increase in the discount rate across both fields. Further information can be found in note 9. Change in level of risk: No change We assessed management’s review of the recoverability of the receivable and note that a number of significant assumptions were made in calculating the recoverable value of the trade receivable. The key assumption is that the KRG will continue to pay 5% of monthly revenue towards the historical receivable until the earlier of amounts being repaid or the end of field life. We agreed this is consistent with the KRG public announcement in February 2016, and also consistent with the requests for payment issued by the group during the year as well as payments received. This is a change in assumption from 31 December 2015, when management assumed an increasing % of collection linked to increasing oil prices. We consider this change to be appropriate based on the reasons set out in note 1 on page 87 as it reflects the evidence that has become available during the year. In order to calculate the recoverable value of the receivable the 5% assumption is applied to expected revenue from each asset over the lives of those assets. This is based on production profiles, future oil price assumptions and netback adjustments which we agreed to the inputs used in the impairment models for both Taq Taq and Tawke. For which we set out our testing below. As explained in note 10, within the calculation management have, in accordance with accounting standards, discounted future receipts using the effective interest rate for the period in which the related revenue was recognised. We compared these rates to the yield on Iraqi bonds adjusted for maturity and credit risk and consider the rates used appropriate. We also assessed the classification of the trade receivable between current and non-current and checked that the current portion represents amounts expected to be received in 2017. As there is uncertainty in the pace of recovery of the KRG receivable we agreed that the judgements made by management are significant and that appropriate disclosure has been made in note 1 and note 10 to the financial statements including appropriate sensitivities. We considered management’s evaluation of its producing assets in Kurdistan and agree that impairment triggers exist. The recoverable amounts for Taq Taq and Tawke have been assessed on a fair value less costs of disposal (FVLCD) basis using a discounted cash flow. We tested the mathematical accuracy of the impairment models provided by management, and checked that the valuation approach was in accordance with the requirements of IAS 36. We tested the key inputs and assumptions used in the models as follows: • Reserves and production profile – for both producing assets, we compared these to the Competent Person’s Report (CPR) issued in 2017. We discussed the key assumptions with management, read minutes of the Reserves Committee and inspected approved budgets. There were no issues arising from this work. • Expenditure – the capital and operating expenditure for Taq Taq has been compared to the CPR. For Tawke, we compared the forecasts to the operator’s estimates used to prepare the CPR, without exception. • Oil prices – we compared short and long term price assumptions used by management to the consensus prices from a collection of 14 brokers and 3 independent consultants. We found that management’s assumptions up to 2019 are close to average, but in the medium to long term move towards the higher end of the brokers’ range. Netback adjustments to the oil prices were agreed to those used in the current PSC model which has been discussed above. • Discount rate – Our valuations experts independently calculated an appropriate post-tax discount rate range which is consistent with management’s assumption of 15%. We identified an error in the application of discounting in both the oil producing and gas evaluation asset models, which was adjusted by management. We assessed the sufficiency of the impairment charge and the extent of disclosure made in note 9 and consider these to be appropriate. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 77 Area of focus How our audit addressed the area of focus Impairment review of gas evaluation and other exploration assets (Note 8) Evaluated gas assets – The Production Sharing Contracts (‘PSC’s) and Gas Lifting Agreements (‘GLA’s) for both Miran and Bina Bawi gas fields were finalised by the end of 2016 and approved by the KRG in 2017. Evaluated gas assets – For the Miran and Bina Bawi gas assets we tested the mathematical accuracy of the model provided by management and assessed the compliance of the model with the requirements of IAS 36. As with the producing assets, the impairment model assesses recoverable value based on FVLCD based on a discounted cash flow. This was accompanied by a reassessment of the likely field development plan, which together with the ongoing gap between the group’s market capitalisation and the value of consolidated net assets, required an assessment for impairment indicators in accordance with IFRS 6 – Exploration for and evaluation of mineral resources (‘IFRS 6’) as at the year end. An impairment charge of $552m was recorded in accordance with IAS 36. Exploration assets – Management also assessed each of its exploration assets for impairment indicators in accordance with the requirements of IFRS 6. The evaluation of results from drilling at the Chia Surkh exploration asset resulted in an agreement to transfer the group’s interest to the operator, Petoil Inc and an impairment of $198m was recorded. In the current year, there have been no impairment indicators noted under IFRS 6 in respect of exploration interests in Somaliland and Tawke Peshkabir. Change in level of risk: Increased year on year due to the impairment indicators and complexity of impairment calculations undertaken by management. We tested the key inputs as follows: • Recoverable oil and gas resources, production and expenditure profile – we compared these to the estimates prepared by qualified reservoir engineers and assessed the relevant persons’ qualifications, experience and independence in this context. Where possible we agreed management’s assumptions to the 2013 CPR which is the latest available external data. • Oil prices – the assumptions are consistent with those used in the Taq Taq and Tawke models, which we assessed as set out above. • Gas price – we agreed the fixed price to the GLA without exception. • Timing of first oil / gas – there is a considerable amount of uncertainty on timing of the final investment decision, sale of first oil and first gas and identifying a farm-in partner and these factors are inter-dependant. Based on our enquiries and sensitivity analysis we consider management’s estimates on timing of these to be within a reasonable range. We independently assessed the discount rate for the project and compared this with the discount rate applied by management to the cash flows in the model, which was higher. This allowed us to assess the level of project risk implicit in management’s calculated net present value. We concluded that the level of project risk implied was such that the resulting net present value was at the higher end of an acceptable range for this type of asset and its stage of development. We assessed the sufficiency of the impairment charge and the extent of disclosure made including relevant sensitivities in note 8 to the financial statements. We considered the impairment charges and the disclosure provided to be appropriate. Exploration assets – We assessed management’s evaluation of each of the exploration assets in both the Africa and Kurdistan portfolios and corroborated this evaluation by reading minutes of meetings, making enquiries of management and reading information in the public domain such as press releases from joint operation partners. Based on our assessment, we agreed with management on carrying the value of the Somaliland and Tawke Peshkabir exploration assets and the write off of all expenditure incurred on Chia Surkh as at 31 December 2016. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 78 FINANCIAL STATEMENTS INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF GENEL ENERGY PLC continued Going concern The directors have voluntarily complied with Listing Rule 9.8.6(R)(3)(a) of the Financial Conduct Authority and provided a statement in relation to going concern, set out on page 84, note 1, required for companies with a premium listing on the London Stock Exchange. The directors have requested that we review the statement on going concern as if the company were a premium listed company. We have nothing to report having performed our review. The directors have chosen to voluntarily report how they have applied the UK Corporate Governance Code (the ‘Code’) as if the company were a premium listed company. Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to the directors’ statement about whether they considered it appropriate to adopt the going concern basis in preparing the financial statements. We have nothing material to add or to draw attention to. As noted in the directors’ statement, the directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial statements. The going concern basis presumes that the group has adequate resources to remain in operation, and that the directors intend it to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the group’s ability to continue as a going concern. OTHER REQUIRED REPORTING Consistency of other information ISAs (UK & Ireland) reporting As a result of the directors’ voluntary reporting on how they have applied the Code, under ISAs (UK & Ireland) we are required to report to you if, in our opinion: • • • information in the Annual Report is: – materially inconsistent with the information in the audited financial statements; or – apparently materially incorrect based on, or materially inconsistent with, our knowledge of the group acquired in the course of performing our audit; – or otherwise misleading. the statement given by the directors on page 44, in accordance with provision C.1.1 of the Code, that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the group’s position and performance, business model and strategy is materially inconsistent with our knowledge of the group acquired in the course of performing our audit. the section of the Annual Report on page 44, as required by provision C.3.8 of the Code, describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We have no exceptions to report. The directors’ assessment of the prospects of the group and of the principal risks that would threaten the solvency or liquidity of the group As a result of the directors’ voluntary reporting on how they have applied the Code, under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to: • • • the directors’ confirmation on page 29 of the Annual Report, in accordance with provision C.2.1 of the Code, that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity. the disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. the directors’ explanation on page 32 of the Annual Report, in accordance with provision C.2.2 of the Code, as to how they have assessed the prospects of the group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We have nothing material to add or to draw attention to. Adequacy of information and explanations received Under the Companies (Jersey) Law 1991 we are required to report to you if, in our opinion, we have not received all the information and explanations we require for our audit. We have no exceptions to report arising from this responsibility. Other voluntary reporting Opinions on additional disclosures Strategic Report and Directors’ Report and Governance In our opinion, the information given in the Strategic Report and the ‘Directors’ Report and Governance’ for the financial year for which the financial statements are prepared is consistent with the financial statements. Directors’ Remuneration Report The company voluntarily prepares a Directors’ Remuneration Report in accordance with the provisions of the UK Companies Act 2006. The directors have requested that we audit the part of the Directors’ Remuneration Report specified by the Companies Act 2006 to be audited as if the parent company were a UK Registered listed company. In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 79 Corporate governance statement The company voluntarily prepares a corporate governance statement that includes the information with respect to internal control and risk management systems and about share capital structures required by the Disclosure Guidance and Transparency Rules sourcebook of the Financial Conduct Authority. The directors have requested that we report on the consistency of that information with the financial statements. In our opinion the information given in the Corporate Governance Statement set out page 42 with respect to internal control and risk management systems and about share capital structures is consistent with the financial statements. Matter on which we have agreed to report by exception Corporate governance statement The company’s voluntary Corporate Governance Statement includes details of the company’s compliance with the UK Corporate Governance Code. The directors have requested that we review the parts of the Corporate Governance Statement relating to the company’s compliance with the ten further provisions of the UK Corporate Governance Code specified for auditor review by the Listing Rules of the Financial Conduct Authority as if the company were a premium listed company. We have nothing to report having performed our review. Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the Statement of Director’s Responsibilities set out on page 72, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Article 113A of the Companies (Jersey) Law 1991 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. What an audit of financial statements involves An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: • whether the accounting policies are appropriate to the group’s circumstances and have been consistently applied and adequately disclosed; • • the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Michael Timar for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Recognized Auditors London, United Kingdom 29 March 2017 (a) The maintenance and integrity of the Genel Energy plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. (b) Legislation in the Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 80 FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the period ended 31 December 2016 Revenue Production costs Depreciation of oil and gas assets Gross profit Impairment of exploration assets Exploration expense Impairment of property, plant and equipment Impairment of receivables General and administrative costs Operating loss Operating loss is comprised of: EBITDAX Depreciation and amortisation Impiarment of exploration assets Exploration expense Impairment of property, plant and equipment Impairment of receivables Gain arising from bond buy-back Finance income Finance expense Loss before income tax Income tax expense Total comprehensive expense Attributable to: Shareholders’ equity Loss per ordinary share Basic Diluted Notes 3 3 3 3 3 3 3 3 3 3 3 3 15 5 5 6 2016 $m 190.7 (35.1) (127.8) 27.8 (779.0) (36.1) 2015 $m 343.9 (36.3) (172.0) 135.6 (144.1) (28.9) (218.3) (1,038.0) (191.3) (26.0) – (28.7) (1,222.9) (1,104.1) 130.7 (128.9) (779.0) (36.1) 279.4 (172.5) (144.1) (28.9) (218.3) (1,038.0) (191.3) 19.2 16.2 – – 1.3 (61.0) (57.8) (1,248.5) (1,160.6) (0.4) (1.0) (1,248.9) (1,161.6) (1,248.9) (1,248.9) (1,161.6) (1,161.6) ¢ ¢ 7 7 (448.60) (417.30) (448.60) (417.30) GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 CONSOLIDATED BALANCE SHEET At 31 December 2016 81 Assets Non-current assets Intangible assets Property, plant and equipment Trade and other receivables Current assets Trade and other receivables Restricted cash Cash and cash equivalents Total assets Liabilities Non-current liabilities Trade and other payables Deferred income Provisions Borrowings Current liabilities Trade and other payables Deferred income Total liabilities Net assets Owners of the parent Share capital Share premium account Retained earnings Total equity Notes 2016 $m 2015 $m 8 9 10 10 11 11 12 13 14 15 12 13 916.7 622.0 172.6 1,711.3 94.6 19.5 407.0 521.1 1,672.7 929.4 365.3 2,967.4 79.0 – 455.3 534.3 2,232.4 3,501.7 (87.7) (39.2) (23.0) (78.0) (46.0) (25.2) (648.2) (694.1) (798.1) (843.3) (95.3) (5.6) (100.9) (80.6) (3.0) (83.6) (899.0) (926.9) 1,333.4 2,574.8 17 43.8 43.8 4,074.2 4,074.2 (2,784.6) (1,543.2) 1,333.4 2,574.8 These consolidated financial statements on pages 80 to 105 were authorised for issue by the Board of Directors on 29 March 2017 and were signed on its behalf by: Murat Özgül Ben Monaghan Chief Executive Officer Chief Financial Officer STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 82 FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the period ended 31 December 2016 At 1 January 2015 Total comprehensive expense Share-based payments Release of NCI1 Share capital $m 43.8 Share premium $m 4,074.2 Retained earnings $m (392.3) Total shareholders’ equity $m 3,725.7 – – – – – – (1,161.6) (1,161.6) 2.9 7.8 2.9 7.8 At 31 December 2015 and 1 January 2016 43.8 4,074.2 (1,543.2) 2,574.8 Total comprehensive expense Share-based payments – – – – (1,248.9) (1,248.9) 7.5 7.5 At 31 December 2016 43.8 4,074.2 (2,784.6) 1,333.4 1. The non-controlling interest of $7.8m was released following the expiry of the C shares of Genel Energy Holding Company Limited. NCI $m 7.8 – – (7.8) – – – – Total equity $m 3,733.5 (1,161.6) 2.9 – 2,574.8 (1,248.9) 7.5 1,333.4 GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 CONSOLIDATED CASH FLOW STATEMENT For the period ended 31 December 2016 Cash flows from operating activities Loss for the period Adjustments for: Gain on bond buy-back Finance income Finance expense Taxation Depreciation and amortisation Exploration expense Impairment of exploration assets Impairment of property, plant and equipment Impairment of receivables Other non-cash items Changes in working capital: Proceeds against overdue receivable Trade and other receivables Trade and other payables and provisions Cash generated from operations Interest received Taxation paid Net cash generated from operating activities Cash flows from investing activities Purchase of intangible assets Purchase of property, plant and equipment Restricted cash Acquisition of intangibles Net cash used in investing activities Cash flows from financing activities Repurchase of Company bonds Net proceeds from bond issuance Interest paid Net cash generated from/(used in) financing activities Net decrease in cash and cash equivalents Foreign exchange loss Cash and cash equivalents at 1st January Cash and cash equivalents at 31 December 83 Notes 2016 $m 2015 $m (1,248.9) (1,161.6) 15 5 5 6 3 3 3 3 11 (19.2) (16.2) 61.0 0.4 128.9 36.1 779.0 218.3 191.3 7.5 53.9 (49.6) (13.2) 129.3 2.0 (0.3) – (1.3) 57.8 1.0 172.5 10.7 144.1 1,038.0 – 1.1 – (190.2) (0.9) 71.2 1.0 (1.0) 131.0 71.2 (20.7) (130.2) (51.2) (19.5) – (120.2) – (3.9) (91.4) (254.3) 15 (35.4) – (52.0) – 196.2 (46.1) (87.4) 150.1 (47.8) (0.5) 455.3 (33.0) (0.8) 489.1 407.0 455.3 11 11 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 84 FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of significant accounting policies 1.1 Basis of preparation The consolidated financial statements of Genel Energy Plc (‘the Company’) have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union and interpretations issued by the IFRS Interpretations Committee (together ‘IFRS’) and are prepared under the historical cost convention except as where stated and comply with Jersey company law. The significant accounting policies are set out below and have been consistently applied throughout the period. Items included in the financial information of each of the Company‘s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in US dollars to the nearest million ($m) rounded to one decimal place, except where otherwise indicated. For explanation of the key judgements and estimates made by the Company in applying the Company’s accounting policies, refer to significant accounting estimates and judgement on pages 85 and 87. The Company provides non-Gaap measures to provide greater understanding of its financial performance and financial position. EBITDAX is presented in order for the users of the accounts to understand the underlying cash profitability of the Company, which excludes the impact of costs attributable to exploration activity, which tend to be one-off in nature, and the non-cash costs relating to depreciation, amortisation and impairments. Free cash flow is presented in order to show the free cash flow generated that is available for the Board to use to finance or invest in the business. Net debt is reported in order for users of the accounts to understand how much debt remains unpaid if the Company paid its debt obligations from its available cash. There have been no changes in related parties since year-end and there are not significant seasonal or cyclical variations in the Company’s total revenues. Going concern At the time of approving the consolidated financial statements, the directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the 12 months from the balance sheet date and therefore its consolidated financial statements have been prepared on a going concern basis. Foreign currency Foreign currency transactions are translated into the functional currency of the relevant entity using the exchange rates prevailing at the dates of the transactions or at the balance sheet date where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income within finance income or finance costs. Consolidation The consolidated financial statements consolidate the Company and its subsidiaries. These accounting policies have been adopted by all companies. Subsidiaries Subsidiaries are all entities over which the Company has control. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date that control ceases. Transactions, balances and unrealised gains on transactions between companies are eliminated. Joint arrangements Arrangements under which the Company has contractually agreed to share control with another party, or parties, are joint ventures where the parties have rights to the net assets of the arrangement, or joint operations where the parties have rights to the assets and obligations for the liabilities relating to the arrangement. Investments in entities over which the Company has the right to exercise significant influence but neither control nor joint control are classified as associates. The Company recognises its assets and liabilities relating to its interests in joint operations, including its share of assets held jointly and liabilities incurred jointly with other partners. Acquisitions The Company uses the acquisition method of accounting to account for business combinations. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date. The Company recognises any non-controlling interest in the acquiree at fair value at time of recognition or at the non-controlling interest‘s proportionate share of net assets. Acquisition-related costs are expensed as incurred. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 85 Farm-in/farm-out Farm-out transactions relate to the relinquishment of an interest in oil and gas assets in return for services rendered by a third party or where a third party agrees to pay a portion of the Company’s share of the development costs (cost carry). Farm-in transactions relate to the acquisition by the Company of an interest in oil and gas assets in return for services rendered or cost-carry provided by the Company. Farm-in/farm-out transactions undertaken in the development or production phase of an oil and gas asset are accounted for as an acquisition or disposal of oil and gas assets. The consideration given is measured as the fair value of the services rendered or cost-carry provided and any gain or loss arising on the farm-in/farm-out is recognised in the statement of comprehensive income. A profit is recognised for any consideration received in the form of cash to the extent that the cash receipt exceeds the carrying value of the associated asset. Farm-in/farm-out transactions undertaken in the exploration phase of an oil and gas asset are accounted for on a no gain/no loss basis due to inherent uncertainties in the exploration phase and associated difficulties in determining fair values reliably prior to the determination of commercially recoverable proved reserves. The resulting exploration and evaluation asset is then assessed for impairment indicators under IFRS6. 1.2 Significant accounting judgements, estimates and assumptions The preparation of the financial statements in accordance with IFRS requires the Company to make judgements and assumptions that affect the reported results, assets and liabilities. Where judgements and estimates are made, there is a risk that the actual outcome could differ from the judgement or estimate made. The Company has assessed the following as being areas where changes in judgements, estimates or assumptions could have a significant impact on the financial statements. Estimation of future oil price The estimation of future oil price has a significant impact throughout the financial statements, primarily in relation to the estimation of the recoverable value of property, plant and equipment, intangible assets and trade receivables. It is also relevant to the assessment of going concern and the viability statement. The Company’s forecast of average Brent oil price for future years is based on a range of publicly available market estimates and is summarised in the table below, with the 2021 price then inflated at 2% per annum. $/bbl Forecast Prior year forecast 2017 55 45 2018 60 55 2019 68 65 2020 72 75 2021 76 77 Estimation of the hyrdrocarbon reserves and resources and associated production profiles Estimates of hydrocarbon reserves and resources are inherently imprecise, require the application of judgement and are subject to future revision. The Company’s estimation of the quantum of oil and gas reserves and resources and the timing of its production and monetisation impact the Company’s financial statements in a number of ways, including: testing recoverable values for impairment; the calculation of depreciation and amortisation; assessing the cost and likely timing of decommissioning activity and associated costs; and the carrying value of trade receivables. This estimation also impacts the assessment of going concern and the viability statement. Proven and probable reserves are estimates of the amount of hydrocarbons that can be economically extracted from the Company’s assets. The Company estimates its reserves using standard recognised evaluation techniques. Proven and probable reserves (‘2P’ – generally accepted to have circa 50% probability) are used for the assessment of the Company’s assets classified as property, plant and equipment and therefore form the basis of testing for depreciation and testing for impairment. Under PRMS definition, 2P reserves only refers to projects that are currently sanctioned or are already in development. Hydrocarbons that are not assessed as 2P are considered to be resources and are classified as exploration and evaluation assets. Estimates of resources for undeveloped or partially developed fields are subject to greater uncertainty over their future life than estimates of reserves for fields that are substantially developed and being depleted. As a field goes into production, the amount of proved reserves will be subject to future revision once additional information becomes available through, for example, the drilling of additional wells or the observation of long-term reservoir performance under producing conditions. As those fields are further developed, new information may lead to revisions. Assessment of reserves and resources are determined using estimates of oil and gas in place, recovery factors and future commodity prices, the latter having an impact on the total amount of recoverable reserves. Change in accounting estimate The Company has updated its estimated reserves and resources with the accounting impact summarised below under estimation of oil and gas asset values and estimation of recoverable value of trade receivables. Estimation of oil and gas asset values Estimation of the asset value of oil and gas assets is calculated from a number of inputs that require varying degrees of estimation. Principally oil and gas assets are valued by estimating the future cash flows based on a combination of reserves and resources, costs of appraisal, development and production, production profile and future sales price and discounting those cash flows at an appropriate discount rate. Future costs of appraisal, development and production are estimated taking into account the level of development required to produce those reserves and are based on past costs, experience and data from similar assets in the region, future petroleum prices and the planned development of the asset. However, actual costs may be different from those estimated. Discount rate is assessed by the Company using various inputs from market data, external advisers and internal calculations. Discount rates used for impairment testing are disclosed in the relevant note. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 86 FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued Change in accounting estimate – Gas assets (intangible assets) The gas assets have been tested for impairment as a result of a revision to the assumed date of project sanction and phasing together with updated cost estimates. The combination of these factors has resulted in both a reduction and delay in the timing of the cash flows associated with the asset and a consequent reduction in its carrying value. In addition, the estimate of the discount rate used for impairment testing of gas assets has increased from 12.5% to 15%. This increase reflects investor perception of a sustained increase in both Turkish and KRI risk given the continued political and financial uncertainty in both countries. The revised estimates and assumptions have resulted in an impairment expense of $581.3 million. Sensitivities to oil price and discount rate are provided in note 8. Change in accounting estimate – Oil assets (property, plant and equipment) In early 2017, the Company updated its estimation of the reserves and production profiles of Taq Taq and Tawke and commissioned an update of the Competent Persons Report for Taq Taq and of the technical assessment for Tawke. This process has resulted in an amendment to the estimated oil reserves at Taq Taq, where estimated 2P oil reserves were reduced. These reserves assessments were used, together with updated estimates for the other components of the assessment, to perform impairment testing on both assets. In addition, the discount rate used for impairment testing of oil assets has increased from 12.5% to 15%. This increase reflects market perception of a sustained increase in KRI risk given continued political and financial uncertainty. The calculated present values of the assets have resulted in an impairment expense of $218.3 million. Sensitivities to oil price, discount rate and production are provided in note 9. Estimation of netback price and entitlement used to calculate reported revenue, trade receivables and forecast future cash flows Netback price is used to value the Company’s revenue, trade receivables and its forecast cash flows used for impairment testing and viability. The Company does not have direct visibility on the components of the netback price because sales are managed by the KRG, but invoices are currently raised for payments on account using a netback price that has been temporarily agreed with the KRG for the purpose of receiving interim payments. For revenue recognition, the Company has estimated the netback price using the methodology agreed with the KRG for receiving these payments on account. In line with its IOC payment process that began in September 2015 and was given structure by its announcement on 1 February 2016, the KRG has commenced an audit of cost, production and revenue, including detailed analysis of the components of netback. The Company expects to then reach agreement with the KRG on the appropriate netback adjustment to use in the calculation of the Company’s entitlement under the PSC and the resulting trade receivable balance. The audit and reconciliation process began this year, but is not complete and may take some time and conversations with the KRG are ongoing. The outputs of the reconciliation and settlement process may result in changes to the estimates made by the Company. A $1/bbl difference in netback price would impact current year revenue by circa $4 million and reported trade receivables by circa $4 million. Estimation of the recoverable value of trade receivables Trade receivables of $253.5 million relates to money owed by the KRG principally for export sales that were made after mid-2014. The KRG has stated publicly on a consistent basis that it intends to pay full entitlement following a reconciliation process. When assessing the nominal value of the receivable the Company has taken into account the latest information on the entitlement it is owed under the PSC for oil that has been sold but not yet paid for. In addition, a calculation has been made for the interest that has accrued on the balance under the terms of the PSC at LIBOR plus 2%. The Company has excluded consideration of any value for export sales that were made before mid-2014 (including exports marketed by the State Oil Marketing Organisation (‘SOMO’) where payment is outstanding). The total unrecognised receivable balance relating to these sales excluding interest is estimated at circa $300m. The Company expects that ultimately a reconciliation calculating full entitlement under the terms of the PSC will be agreed with the KRG – this reconciliation will form the basis for calculating amounts owed and for agreeing a mechanism to settle the balance. Subject to the reconciliation process that has been started by the KRG, the Company is fully confident of its contractual right to the nominal value of the receivable. The Company expectation is that it will be settled with cash, although it is possible that the debt could be settled in a number of ways such as with assets or through an improvement in future contractual terms. The success and pace of the recovery of the balance depends on some or all of a number of factors, including: the financial environment in the KRI and the financial budget of the KRG; oil price; volumes of production from the KRI as a whole as well as from the Company’s fields; and ongoing negotiations with regard to various sources of potential finance for the KRI. On 1 February 2016, the KRG announced an interim mechanism to make monthly payments to the IOCs. The mechanism has two components: the first component is a proxy for monthly entitlement due under the terms of the PSC; the second component is intended to contribute towards repayment of the receivable. The contribution towards the receivable was set at and currently remains at 5% of field revenue. The KRG stated that it intends to increase this percentage as the oil price improves. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 87 Previously when assessing the recoverable value of the receivable, the Company assessed that the percentage of field revenue paid towards the receivable would be increased to 10% from July 2017 and to 20% from January 2018. Whilst the KRG made the current 5% payments relatively consistently over the current year and at half year was broadly up to date, by year-end payments were two months in arrears against the agreed schedule. In addition, contrary to the KRG’s stated intention to increase payments, there has been no increase in payments despite oil price increasing from $30/bbl in February 2016 to over $50/bbl. Although the Company expects either an increase in payments, or an alternative structure to be agreed to accelerate the recovery of the receivable, the Company has assessed that there is not sufficient evidence to offset existing contrary evidence and support the use of these expectations as assumptions for impairment testing. Consequently the Company has used the current basis of payment of 5% of field revenue for the purposes of assessing impairment and does not currently take into account the potential for increased payments or alternative methods of settling the balance. The carrying value of trade receivables is compared to the present value of the forecast monthly contributions using the effective interest rate for the period in which the revenue was recognised. For the period over which the receivable was recognised, the Company has assessed the effective interest rate to be between 8% and 13% using an adjusted prevailing Iraqi government 2028 bond as a proxy, resulting in a blended rate of 8.3%. Change in accounting estimate As explained above, for the purposes of impairment testing the Company has assumed the percentage of field revenue paid towards the receivable is fixed at the current mechanism of 5%. When combined with the updated production, reserves and oil price outlook this resulted in an impairment of $191.3 million. Business combinations The recognition of business combinations requires the excess of the purchase price of acquisitions over the net book value of assets acquired to be allocated to the assets and liabilities of the acquired entity. The Company makes judgements and estimates in relation to the fair value allocation of the purchase price. The fair value exercise is performed at the date of acquisition. Owing to the nature of fair value assessments in the oil and gas industry, the purchase price allocation exercise and acquisition-date fair value determinations require subjective judgements based on a wide range of complex variables at a point in time. The Company uses all available information to make the fair value determinations. In determining fair value for acquisitions, the Company utilises valuation methodologies including discounted cash flow analysis. The assumptions made in performing these valuations include assumptions as to discount rates, foreign exchange rates, commodity prices, the timing of development, capital costs, and future operating costs. Any significant change in key assumptions may cause the acquisition accounting to be revised. 1.3 Accounting policies Revenue Revenue for petroleum sales is recognised when the significant risks and rewards of ownership are deemed to have passed to the customer, it can be measured reliably and it is assessed as probable that economic benefit will flow to the Company. For exports this is when the oil enters the export pipe, for domestic sales this is when oil is collected by truck by the customer. Revenue is recognised at fair value. The fair value is comprised of entitlement due under the terms of the PSC and royalty income. Entitlement has two components: cost oil, which is the mechanism by which the Company recovers its costs incurred on an asset, and profit oil, which is the mechanism through which profits are shared between the Company, its partners and the KRG. The Company pays capacity building payments on profit oil, which becomes due for payment once the Company has received the relevant proceeds. Profit oil revenue is always reported net of any capacity building payments that will become due. Royalty income is earned on partner sales from the Taq Taq field and is recognised when it becomes due or, when received in advance, amortised in line with partner entitlement. The Company’s oil sales are made to the KRG and are valued at a netback price, which is calculated from the estimated realised sales price for each barrel of oil sold, less selling, transportation and handling costs and estimates to cover additional costs. A netback adjustment is used to estimate the price per barrel that is used in the calculation of entitlement and is explained further in significant accounting estimates and judgements. Income tax arising from the Company’s activities under production sharing contracts is settled by a third party at no cost and on behalf of the Company. However the Company is not able to measure the tax that has been paid on its behalf and consequently revenue is not reported gross of income tax paid. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 88 FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued Intangible assets Exploration and evaluation assets Oil and gas assets classified as exploration and evaluation assets are explained under Oil and Gas assets below. Other intangible assets Other intangible assets (predominately software) that are acquired by the Company are stated at cost less accumulated amortisation and less accumulated impairment losses. Amortisation is expensed on a straight-line basis over the estimated useful lives of the assets of between 3 and 5 years from the date that they are available for use. Property, plant and equipment The Company’s oil and gas assets classified as property, plant and equipment are explained under Oil and Gas assets below. Other property, plant and equipment Other property, plant and equipment are principally the Company’s leasehold improvements and other assets and are carried at cost, less any accumulated depreciation and accumulated impairment losses. Costs include purchase price and construction cost. Depreciation of these assets commences is expensed on a straight-line basis over their estimated useful lives of between 3 and 5 years from the date they are available for use. Oil and gas assets Costs incurred prior to obtaining legal rights to explore are expensed to the statement of comprehensive income. Exploration, appraisal and development expenditure is accounted for under the successful efforts method. Under the successful efforts method only costs that relate directly to the discovery and development of specific oil and gas reserves are capitalised as exploration and evaluation assets within intangible assets. Costs of activity that do not identify oil and gas reserves are expensed. All lease and licence acquisition costs, geological and geophysical costs and other direct costs of exploration, evaluation and development are capitalised as intangible assets or property, plant and equipment according to their nature. Intangible assets comprise costs relating to the exploration and evaluation of properties which the directors consider to be unevaluated until assessed as being 2P reserves and commercially viable. Once assessed as being 2P reserves they are tested for impairment and transferred to property, plant and equipment as development assets. Where properties are appraised to have no commercial value, the associated costs are expensed as an impairment loss in the period in which the determination is made. Development expenditure is accounted for in accordance with IAS 16 – Property, plant and equipment. Assets are depreciated once they are available for use and are depleted on a field-by-field basis using the unit of production method. The sum of carrying value and the estimated future development costs are divided by total forecast 2P production to provide a $/barrel unit depreciation cost. Changes to depreciation rates as a result of changes in reserve quantities and estimates of future development expenditure are reflected prospectively. The estimated useful lives of property, plant and equipment and their residual values are reviewed on an annual basis and changes in useful lives are accounted for prospectively. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the statement of comprehensive income for the relevant period. Where exploration licences are relinquished or exited for no consideration or costs incurred are neither derisking nor adding value to the asset, the associated costs are expensed to the income statement. Subsequent costs The cost of replacing part of an item of property and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company, and its cost can be measured reliably. The net book value of the replaced part is expensed. The costs of the day-to-day servicing and maintenance of property, plant and equipment are recognised in the statement of comprehensive income. Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are expensed to the statement of comprehensive income on a straight-line basis over the period of the lease. Financial assets and liabilities Classification The Company assesses the classification of its financial assets on initial recognition as either at fair value through profit and loss, loans and receivables or available for sale. The Company assesses the classification of its financial liabilities on initial recognition at either fair value through profit and loss or amortised cost. Recognition and measurement Regular purchases and sales of financial assets are recognised at fair value on the trade-date – the date on which the Company commits to purchase or sell the asset. Loans and receivables are subsequently carried at amortised cost using the effective interest method. Trade and other receivables Trade receivables are amounts due from crude oil sales, sales of gas or services performed in the ordinary course of business. If payment is expected within one year or less, trade receivables are classified as current assets otherwise they are presented as non-current assets. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 89 Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Cash and cash equivalents In the consolidated balance sheet and consolidated statement of cash flows, cash and cash equivalents includes cash in hand, deposits held on call with banks, other short-term highly liquid investments and includes the Company’s share of cash held in joint operations. Interest-bearing borrowings Borrowings are recognised initially at fair value, net of any discount in issuance and transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the statement of comprehensive income over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates. Borrowings are presented as long or short-term based on the maturity of the respective borrowings in accordance with the loan or other agreement. Borrowings with maturities of less than twelve months are classified as short-term. Amounts are classified as long-term where maturity is greater than twelve months. Where no objective evidence of maturity exists, related amounts are classified as short-term. Trade and other payables Trade and other payables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method. Provisions Provisions are recognised when the Company has a present obligation as a result of a past event, and it is probable that the Company will be required to settle that obligation. Provisions are measured at the Company’s best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material. The unwinding of any discount is recognised as finance costs in the statement of comprehensive income. Decommissioning Provision is made for the cost of decommissioning assets at the time when the obligation to decommission arises. Such provision represents the estimated discounted liability for costs which are expected to be incurred in removing production facilities and site restoration at the end of the producing life of each field. A corresponding cost is capitalised to property, plant and equipment and subsequently depreciated as part of the capital costs of the production facilities. Any change in the present value of the estimated expenditure attributable to changes in the estimates of the cash flow or the current estimate of the discount rate used are reflected as an adjustment to the provision. Offsetting Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. Impairment Oil and gas assets The carrying amounts of the Company’s oil and gas assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs of disposal. For value in use, the estimated future cash flows arising from the Company’s future plans for the asset are discounted to their present value using a pre-tax discount rate that reflects market assessments of the time value of money and the risks specific to the asset. For fair value less costs of disposal, an estimation is made of the fair value of consideration that would be received to sell an asset less associated selling costs. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (cash generating unit). The estimated recoverable amount is then compared to the carrying value of the asset. Where the estimated recoverable amount is materially lower than the carrying value of the asset an impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Non-financial assets that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Property, plant and equipment and intangible assets Impairment testing of oil and gas assets are explained above. When impairment indicators exist for other non-financial assets, impairment testing is performed based on the higher of value in use and fair value less costs to sell. Financial assets A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimate of future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. All impairment losses are recognised as an expense in the statement of comprehensive income. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 90 FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. Explanation of impairment testing of trade receivables is provided under significant accounting estimates and judgements. Share capital Ordinary shares are classified as equity. Employee benefits Short-term benefits Short-term employee benefit obligations are expensed to the statement of comprehensive income as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Share-based payments The Company operates a number of equity-settled, share-based compensation plans. The economic cost of awarding shares and share options to employees is recognised as an expense in the statement of comprehensive income equivalent to the fair value of the benefit awarded. The fair value is determined by reference to option pricing models, principally Monte Carlo and adjusted Black-Scholes models. The charge is recognised in the statement of comprehensive income over the vesting period of the award. At each balance sheet date, the Company revises its estimate of the number of options that are expected to become exercisable. Any revision to the original estimates is reflected in the statement of comprehensive income with a corresponding adjustment to equity immediately to the extent it relates to past service and the remainder over the rest of the vesting period. Finance income and finance costs Finance income comprises interest income on cash invested, foreign currency gains and the unwind of discount on any assets held at amortised cost. Interest income is recognised as it accrues, using the effective interest method. Finance expense comprises interest expense on borrowings, foreign currency losses and discount unwind on any liabilities held at amortised cost. Borrowing costs directly attributable to the acquisition of a qualifying asset as part of the cost of that asset are capitalised over the respective assets. Taxation Under the terms of the KRI PSCs, the Company is not required to pay any cash taxes although it is uncertain whether the Company is exempt from tax or whether tax has been paid on its behalf. If tax has been paid on its behalf by the government, then it is not known at what rate tax has been paid due to uncertainty in relation to the workings of any existing tax payment mechanism. It is estimated that the tax rate would be between 0% and 40%. If tax has been paid it would result in a gross up of revenue with a corresponding debit entry to taxation expense with no net impact on the income statement or on cash. In addition, it would be assessed whether any deferred tax asset or liability was required to be recognised. Segmental reporting IFRS8 requires the Company to disclose information about its business segments and the geographic areas in which it operates. It requires identification of business segments on the basis of internal reports that are regularly reviewed by the CEO, the chief operating decision maker, in order to allocate resources to the segment and assess its performance. Related parties Parties are related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the party in making financial or operational decisions. Parties are also related if they are subject to common control. Transactions between related parties are transfers of resources, services or obligations, regardless of whether a price is charged and are disclosed separately within the notes to the consolidated financial information. New standards Effective 1 January 2016, the Company has adopted the following amendments to standards: Annual improvements to IFRSs 2012-2014 Cycle; Amendments to IFRS 10 Consolidated Financial Statements; Amendments to IFRS 11 Joint Arrangements; Amendments to IFRS 12 Disclosure of Interests in Other Entities; Amendments to IAS 1 Presentation of Financial Statements; Amendments to IAS 16 Property, Plant and Equipment; Amendments to IAS 27 Separate Financial Statements; Amendments to IAS 28 Investments in Associates and Joint Ventures; Amendments to IAS 38 Intangible Assets. The adoption of these amendments has had no material impact on the Company’s results or financial statement disclosures. The following new standards issued by the IASB and endorsed by the EU have yet to be adopted by the Group: IFRS 9 Financial Instruments (effective 1 January 2018); IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018). The Company’s review of IFRS15 and IFRS9 is underway but is not yet completed, with neither currently expected to have a material impact on the results or financial statements of the Company. The following new accounting standards and amendments to existing standards have been issued but are not yet effective and have not yet been endorsed by the EU: IFRS 16 Leases (effective 1 January 2019); Amendments to IFRS 2 Share Based Payments (effective 1 January 2018); Amendments to IAS 7 Statement of Cash Flows (effective 1 January 2017); Amendments to IAS 12 Income Taxes (effective 1 January 2017); Clarifications to IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018). The Company is currently assessing the impact of adopting the new accounting standards noted above on its audited consolidated financial statements. The Group has not early adopted any other standard, amendment or interpretation that was issued but is not yet effective. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 91 2. Segmental information The Company has three reportable business segments: oil, gas and exploration. Capital expenditure decisions for the oil segment are considered in the context of the cash flows expected from the production and sale of crude oil. The segments have been changed from geographical to asset type in order to better reflect how the Chief Operating Decision Maker now considers the deployment of capital. The oil segment is comprised of the producing assets, Taq Taq and Tawke, which are located in the KRI and make predominantly all sales to the KRG; the gas segment is comprised of the upstream and midstream activity on Miran and Bina Bawi also in the KRI; the exploration segment is comprised of the company’s exploration activity, principally located in the KRI, Somaliland and Morocco. For the period ended 31 December 2016 Revenue Cost of sales Gross profit Exploration expense Impairment of exploration assets Impairment of property, plant and equipment Impairment of receivables General and administrative costs Operating loss Operating loss is comprised of: EBITDAX Depreciation Exploration expense Impairment of exploration assets Impairment of property, plant and equipment Impairment of receivables Gain arising from bond buy-back Finance income Finance expense Loss before tax Capital expenditure Total assets Total liabilities Gas $m Exploration $m Other $m Total $m Oil $m 190.7 (162.9) 27.8 – – – – – – – – (0.7) (581.3) (35.4) (197.7) (218.3) (191.3) – – – – – – – – – – – – – – (26.0) 190.7 (162.9) 27.8 (36.1) (779.0) (218.3) (191.3) (26.0) (381.8) (582.0) (233.1) (26.0) (1,122.9) 155.7 (127.9) – – – – (25.0) 130.7 (1.0) (128.9) – – (0.7) (581.3) (35.4) (197.7) (218.3) (191.3) – 14.3 (1.1) – – – – (0.1) – – – – – – – – – (36.1) (779.0) (218.3) (191.3) 19.2 1.9 19.2 16.2 (59.8) (61.0) (368.6) (582.1) (233.1) (64.7) (1,248.5) 40.6 933.1 12.1 872.5 8.5 59.7 – 61.2 367.1 2,232.4 (93.3) (97.9) (47.3) (660.5) (899.0) Total assets and liabilities in the other segment are predominantly cash and debt balances. ‘Other’ includes corporate assets, liabilities and costs, elimination of intercompany receivables and intercompany payables, which are non-segment items. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 92 FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 2. Segmental information continued For the period ended 31 December 2015 Revenue Cost of sales Gross profit Exploration expense Impairment of exploration assets Impairment of property, plant and equipment General and administrative costs Operating loss Operating loss is comprised of: EBITDAX Depreciation Exploration expense Impairment of exploration assets Impairment of property, plant and equipment Finance income Finance expense Restated1 Oil $m 343.9 (208.3) 135.6 – – (1,038.0) (2.6) (905.0) 305.0 (172.0) – – (1,038.0) – (0.9) Restated1 Gas $m Restated1 Exploration $m Restated1 Other $m Restated1 Total $m 343.9 (208.3) 135.6 (28.9) (144.1) (1,038.0) (28.7) (1,104.1) – – – – – – (26.1) (26.1) (25.6) (0.5) – – – 279.4 (172.5) (28.9) (144.1) (1,038.0) 1.3 1.3 (56.8) (57.8) – – – – – – – – – – – – – – (0.1) – – – (28.9) (144.1) – – (173.0) – – (28.9) (144.1) – – – Profit/(Loss) before tax (905.9) (0.1) (173.0) (81.6) (1,160.6) Capital expenditure Total assets Total liabilities 109.2 18.3 1,438.2 1,430.5 29.7 256.1 – 157.2 376.9 3,501.7 (105.5) (87.5) (23.4) (710.5) (926.9) 1. The Company has changed its assessment of segments as explained above and consequently has restated its prior year segmental reporting. Total assets and liabilities in the other segment are predominantly cash and debt balances. ‘Other’ includes corporate assets, liabilities and costs, elimination of intercompany receivables and intercompany payables, which are non-segment items. All of the oil and gas segments are located in the KRI, with the exploration segment located principally in the KRI, Somaliland and Morocco. All revenue relates to sales made to the KRG. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 3. Operating costs Production costs Depreciation of oil and gas assets Cost of sales Impairment of exploration assets Exploration expense Exploration costs Impairment of property, plant and equipment (note 9) Impairment of receivables (note 10) Corporate cash costs Corporate share based payment expense Depreciation and amortisation of corporate assets General and administrative expenses 93 2016 $m 35.1 127.8 162.9 779.0 36.1 815.1 2015 $m 36.3 172.0 208.3 144.1 28.9 173.0 218.3 191.3 1,038.0 – 17.4 7.5 1.1 26.0 26.7 1.5 0.5 28.7 Depreciation has reduced as a result of a lower carrying value of assets and lower production volumes, offset by an increase in estimates of future capital expenditure. Corporate cash costs have reduced as a result of restructuring programmes. The expensing of the cost of share based payments and depreciation and amortisation of corporate assets has increased as a result of reduced capitalisation because of reduced capital activity. Impairment of exploration assets is explained in note 8. Exploration expense relates to accruals for costs or obligations relating to licences where there is ongoing activity or that have been, or are in the process of being, relinquished. Fees payable to the Company’s auditors: Audit of consolidated financial statements and subsidiary accounts Tax and advisory services Total fees 2016 $m 0.4 0.1 0.5 2015 $m 0.4 0.2 0.6 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 94 FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 4. Staff costs and headcount Wages and salaries Social security costs Share based payments 2016 $m 20.9 1.2 7.5 29.6 2015 $m 38.1 2.9 2.7 43.7 Reduction in staff costs caused by the restructuring programme have been partly offset by a normalised share based payment charge compared to the prior year, which inclued the reversal of previously expensed costs due to the lapsing of options. Average headcount was: Turkey KRI UK Somaliland 5. Finance expense and income Bond interest payable Unwind of discount on liabilities Finance expense Bank interest income Unwind of discount on trade receivables Finance income 2016 73 19 21 24 137 2016 $m (51.0) (10.0) (61.0) 2.0 14.2 16.2 2015 102 25 32 24 183 2015 $m (50.1) (7.7) (57.8) 1.3 – 1.3 Annual bond interest has increased because there has been a full year of interest payable on the $230 million nominal value of bonds issued in March 2015, offset by the buy-back of $55.4m nominal value of bonds in March 2016 (see note 15). 6. Taxation A taxation charge of $0.4 million (2015: $1.0 million) was made in the Turkish and UK services companies. All other corporation tax due has been paid on behalf of the Company by the government from the government’s share of revenues and there is no tax payment required or expected to be made by the Company. Under the terms of the KRI PSCs, the Company is not required to pay any cash taxes although it is uncertain whether the Company is exempt from tax or whether tax has been paid on its behalf. If tax has been paid on its behalf by the government, then it is not known at what rate tax has been paid due to uncertainty in relation to the workings of any existing tax payment mechanism. It is estimated that the tax rate would be between 0% and 40%. If tax has been paid it would result in a gross up of revenue with a corresponding debit entry to taxation expense with no net impact on the income statement or on cash. In addition, it would be assessed whether any deferred tax asset or liability was required to be recognised. 7. Earnings per share Basic Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of shares in issue during the period. Loss attributable to equity holders of the Company ($m) Weighted average number of ordinary shares – number 1 Basic earnings per share – cents per share 1. Excluding the purchase of own shares now held as treasury shares 2016 (1,248.9) 2015 (1,161.6) 278,395,190 278,351,746 (448.60) (417.30) GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 95 Diluted Because the Company reported a loss in both years, diluted EPS is anti-dilutive and therefore diluted EPS is the same as basic EPS. Loss attributable to equity holders of the Company ($m) Weighted average number of ordinary shares – number1 Adjustment for performance shares, restricted shares and share options Total number of shares Diluted earnings per share – cents per share 1. Excluding the purchase of own shares now held as treasury shares. 8. Intangible assets Cost At 1st January 2015 Acquisitions Additions Other Exploration costs written off Transfer to property, plant and equipment (note 9) Balance at 31 December 2015 and 1st January 2016 Additions Discount unwind of contingent consideration Impairment of exploration assets and transfer to assets held for sale Exploration costs written off Balance at 31 December 2016 Accumulated amortisation and impairment At 1st January 2015 Amortisation charge for the period At 31 December 2015 and 1 January 2016 Amortisation charge for the period Impairment of gas assets At 31 December 2016 Net book value At 31st December 2016 At 31st December 2015 2016 (1,248.9) 2015 (1,161.6) 278,395,190 278,351,746 1,853,008 1,896,452 280,248,198 280,248,198 (448.60) (417.30) Exploration and evaluation assets $m Other assets $m Total $m 1,682.4 101.0 48.5 2.4 (144.1) (12.9) 1,677.3 20.9 9.8 (1997) (4.6) 5.8 – 0.5 – – – 6.3 – – – – 6.3 1,503.7 (3.1) (1.5) (4.6) (1.1) – (5.7) 0.6 1.7 (.31) (1.5) (4.6) (1.1) (581.3) (587.0) 916.7 1,672.7 1,676.6 101.0 48.0 2.4 (144.1) (12.9) 1,671.0 20.9 9.8 (199.7) (4.6) 1,497.4 – – – – (581.3) (581.3) 916.1 1,671.0 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 96 FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 8. Intangible assets continued Exploration and evaluation assets are principally: the Company’s PSC interests in exploration and appraisal assets in the Kurdistan Region of Iraq, comprised of the Miran (book value: $528.6 million, 2015: $754.9 million) and Bina Bawi (book value: $338.4 million, 2015: $671.9 million) gas assets; and its interest in licences in Somaliland. Impairment of Miran and Bina Bawi is explained in significant accounting estimates and judgements in note 1. In addition, costs of $197.7 million have been written off in relation to the Chia Surkh licence following the drilling of CS-12. The Company has agreed to sell the asset for an initial consideration of $2.0 million, with further consideration of up to $25 million contingent on the asset achieving specified production milestones – completion is conditional on KRG consent being obtained. The balance has been transferred to assets held for sale within debtors. The net book value of $0.6 million (2015: $1.7 million) of other assets is principally software. Sensitivities Long term Brent price +/- $10/bbl Discount rate +/- 2.5% 9. Property, plant and equipment Cost At 1st January 2015 Additions Transfer from intangible assets (see note 8) Other At 31 December 2015 and 1st January 2016 Addition At 31 December 2016 Accumulated depreciation and impairment At 1st January 2015 Depreciation charge for the period Impairment At 31 December 2015 and 1st January 2016 Depreciation charge for the period Impairment At 31 December 2016 Net book value At 31 December 2016 At 31 December 2015 Miran $m Bina Bawi $m 69 / (74) 14 / (14) 141 / (106) 127 / (93) Other assets $m Total $m 9.2 – – (0.3) 8.9 – 8.9 (4.7) (1.6) – (6.3) (1.6) – (7.9) 1.0 2.6 2,442.0 109.2 12.9 3.7 2,567.8 40.3 2,608.1 (426.8) (173.6) (1,038.0) (1,638.4) (129.4) (218.3) (1,986.1) 622.0 929.4 Oil and gas assets $m 2,432.8 109.2 12.9 4.0 2,558.9 40.3 2,599.2 (422.1) (172.0) (1,038.0) (1,632.1) (127.8) (218.3) (1,978.2) 621.0 926.8 Oil and gas assets are the Company’s share of oil assets at the Taq Taq and Tawke producing fields in the Kurdistan Region of Iraq. Impairment of Taq Taq and Tawke is explained in significant accounting estimates and judgements in note 1. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 Sensitivities Carrying value Long term Brent price +/- $10/bbl Discount rate +/- 2.5% Production and reserves +/- 10% 10. Trade and other receivables Trade receivables – non current Trade receivables – current Other receivables and prepayments 97 Taq Taq $m 140 +/- 8 +/- 9 +/- 16 2016 $m 172.6 80.9 13.7 267.2 Tawke $m 481 +/- 24 +/- 40 +/- 36 2015 $m 365.3 57.6 21.4 444.3 Trade receivables are monies owed by the KRG for export sales made via the KRG pipeline since mid-2014. The total amount owed by the KRG is estimated to be $515.9 million. For the significant balance that is overdue, caused by non-payment in the past, the Company has calculated its carrying value assuming the percentage of field revenue paid towards the receivable is fixed at the current mechanism of 5%. This assumption has been combined with updated production, reserves and oil price outlook, resulting in the carrying value of trade receivables being $253.5 million. Further information is provided in in the significant accounting estimates and judgements in note 1. Ageing of trade receivables Under the terms of the PSC, payment is due within 30 days. Proceeds received are allocated between current and past sales in accordance with the allocation provided by the KRG under the current payment mechanism. Proceeds allocated to the receivable are allocated on a first-in-first- out basis. Period ended 31 December 2016 Trade receivables at 31 December 2016 Year-ended 31 December 2015 Trade receivables at 31 December 2015 Movement on trade receivables in the period Carrying value at 1 January Revenue excluding royalty Net proceeds Discount unwind Impairment Other Carrying value at period end Year of sale of amounts overdue Not due $m 17 2016 $m 30 2015 $m – 2014 $m 207 Year of sale of amounts overdue Not due $m 23 2015 $m 168 2014 $m 232 2016 $m 422.9 186.2 Total $m 254 Total $m 423 2015 $m 232.9 338.6 (182.8) (148.2) 14.2 (191.3) 4.3 253.5 – – (0.4) 422.9 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 98 FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 10. Trade and other receivables continued Recovery of the carrying value of the receivable Explanation of the assumptions and estimates in testing the KRG receivable for impairment are provided in note 1. The estimated recovery of the carrying value of the receivable based on the existing mechanism is summarised in the following table, which summarises the cash flows arising on payments being received based on 5% of field revenue: Nominal balance recovered in the period Net present value of total cash flows 2017 81 2018 36 2019 41 2020+ 159 Total 317 254 Sensitivities The key sensitivity to the carrying value of trade receivables is the KRG prioritisation of payments of amounts owed to IOCs. The KRG has paid 5% of field revenue through 2016. It is the Company’s assumption that the KRG will continue to pay IOCs and if a combination of oil price, KRG production volumes and KRG cost reductions increase KRG cash generation, the KRG will increase the percentage of field revenue paid towards the receivable. Impairment testing is sensitive to a number of inputs, but principally: the cash generated from field revenue; and the percentage of field revenue paid towards the receivable. Cash generated from field revenue Cash generated from field revenue is an output of production volumes in the period, netback price and timing of payments. The sensitivity of the carrying value of the receivable to changes in cash generated from field revenue is provided in the table below: Current payment mechanism (5%) -20% 236 -10% 245 Base 254 +10% 261 +20% 269 Percentage of field revenue paid towards the receivable Impairment testing assumes that the receivable is recovered from a percentage of field revenues. In the downside case this would be nil – either through interrupted production or non-payment by the KRG. The Company has analysed KRG cash generation and estimates that it is possible that the KRG will increase payments towards the receivable in the future. Sensitivity to a stepped increase in payments is provided below: Current payment mechanism Stepped increase in payments % of field revenue paid towards receivable NPV at different effective interest rates 2017 5% 5% 2018 5% 10% 2019 5% 15% 2020+ 5% 20% Base less 2.5% Base 8.3%1 Base plus 2.5% 269 404 254 378 240 355 1. The weighted average rate is 8.3%, see significant accounting estimates and judgements for further explanation. Fair value The fair value of the receivable, based on the current 5% payment mechanism, has been estimated as circa $200 million. The Company assess the KRG receivable to be categorised as Level 3 under IFRS13. Fair value has been calculated using the cash flows assuming 5% of field revenue is paid towards the receivable, from 2P production profiles using the price deck disclosed in the accounting policies note. The resulting cash flows are discounted using the estimated appropriate discount rate for the KRG receivable. The discount rate is estimated by taking the discount rate calculated for current KRG sales using the approach outlined in the significant accounting estimates and judgements section of the accounting policies note and adding an additional premium to reflect the inferior credit quality of the receivable to the KRG’s current sales. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 99 Amounts owed for export sales marketed by the Federal Government of Iraq In addition to the trade receivables owed by the KRG for sales made principally from mid- 2014, the Company is owed monies for export sales that were made prior to mid-2014. These were export sales made through the FGI controlled pipe and consequently the marketing and collection of cash was controlled by the State Oil Marketing Organisation (SOMO) of the FGI. No revenue or receivable has been recognised for these sales because the directors assessed that it was not probable that economic benefit would flow – consequently it is also not considered for the purposes of impairment testing of trade receivables. It is estimated that the Company is owed circa $300 million excluding interest for these export sales. 11. Cash and cash equivalents and restricted cash Cash and cash equivalents Restricted cash Restricted cash of $19.5 million is principally related to the Company’s exploration activities in Morocco. 12. Trade and other payables Trade payables Other payables Accruals Deferred consideration for Bina Bawi asset Non-current Current 2016 $m 407.0 19.5 426.5 2015 $m 455.3 – 455.3 2016 $m 13.6 37.3 49.4 82.7 2015 $m 15.1 15.2 50.3 78.0 183.0 158.6 87.7 95.3 183.0 78.0 80.6 158.6 The Company’s payables are predominantly short-term in nature or are repayable on demand and, as such, for these payables there is minimal difference between contractual cash flows related to the financial liabilities and their carrying amount. Deferred consideration includes a balance of $82.7m originally recognised at its discounted fair value. The nominal value of this balance is $145.0 million and its payment is contingent on gas production at the Bina Bawi asset meeting certain volume thresholds. The unwind of the deferred consideration is capitalised against the asset and the balance reassessed at each balance sheet date. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 100 FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 13. Deferred income Non-current Current 2016 $m 39.2 5.6 44.8 2015 $m 46.0 3.0 49.0 Deferred income relates to payments received in the past relating to future royalty income and is recognised in line with the explanation provided in the revenue section of the accounting policies note. 14. Provisions Balance at 1st January Interest unwind Additions Reversal Balance at 31 December Non-current Current Balance at 31 December 2016 $m 25.2 0.9 0.6 (3.7) 23.0 23.0 – 23.0 2015 $m 19.4 0.8 5.0 – 25.2 25.2 – 25.2 Provisions cover expected decommissioning and abandonment costs arising from the Company’s assets. The decommissioning and abandonment provision is based on the Company’s best estimate of the expenditure required to settle the present obligation at the end of the period discounted at 4%. The cash flows relating to the decommissioning and abandonment provisions are expected to occur between 2031 and 2039. 15. Borrowings and net debt 2014 Bond issue maturing May 2019 Cash Net Debt 1 Jan 2016 $m Bond buy-back $m Discount unwind $m Net other changes in cash $m 31 Dec 2016 $m 694.1 (455.3) 238.8 (54.6) 35.4 (19.2) 8.7 – 8.7 – 648.2 12.9 12.9 (407.0) 241.2 In March 2016, the Company repurchased $55.4 million nominal value of its own bonds for net cash of $35.4m. The purchased bonds had a book value of $54.6 million and have been retained by the Company with it being most likely that the bonds will be cancelled. Consequently Company net debt was reduced by $19.2 million and the $730 million bond is reported net of the $55.4m nominal value of bonds held by the Company. The bond is reported net of unamortised discount on issuance and issuance costs. The fair value of the net $675m bond at 31 December 2016 was $549 million (FY2015: fair value of $730 million bond was $511m). GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 101 2014 Bond issue maturing May 2019 2015 Bond issue maturing May 2019 Cash Net Debt 1 Jan 2015 $m New Bond Issue $m Merger of bonds $m Discount unwind $m 491.4 – – 196.2 (489.1) (196.2) 2.3 – 196.2 (196.2) – – 6.5 – – 6.5 Net other changes in cash $m – – 230.0 230.0 31 Dec 2015 $m 694.1 – (455.3) 238.8 On 10 April 2015, the Company issued a new $230m bond with a maturity of May 2019 and an annual coupon of 7.5% payable twice annually. The new bond was then merged with the existing $500m bond maturing May 2019, resulting in a merged $730m nominal value bond with a maturity date of May 2019 paying a coupon of 7.5%. 16. Financial risk management Credit risk Credit risk is managed on a Company basis, except for credit risk relating to trade receivable balances, which is explained in significant accounting estimates and judgements in note 1. Credit risk arises from cash and cash equivalents, trade and other receivables and other assets. The carrying amount of financial assets represents the maximum credit exposure. The maximum credit exposure to credit risk at 31 December was: Trade and other receivables Cash and cash equivalents 2016 $m 265.8 407.0 672.8 2015 $m 440.1 455.3 895.4 Credit risk for trade receivables is explained in note 10. There are no other receivables overdue at the period end and no provision for doubtful debt has been made. Cash is deposited in US treasury bills or on term deposits with banks that are assessed as appropriate based on, among other things, sovereign risk, CDS pricing and credit rating. Liquidity risk The Company is committed to ensuring it has sufficient liquidity to meet its payables as they fall due. At 31 December 2016 the Company had cash and cash equivalents of $407.0 million (2015: $455.3 million). Currency risk As substantially all of the Company’s transactions are measured and denominated in US dollars, the exposure to currency risk is not material and therefore no sensitivity analysis has been presented. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 102 FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 16. Financial risk management continued Interest rate risk The Company reported borrowings of $648.2 million (2015: $694.1 million) in the form of a bond maturing in May 2019, with fixed coupon interest payable of 7.5% on the nominal value of $675 million. Although interest is fixed on existing debt, whenever the Company wishes to borrow new debt or refinance existing debt, it will be exposed to interest rate risk. A 1% increase in interest rate payable on a balance similar to the existing debt of the Company would result in an additional cost of $6.8m per annum. Capital management The Company manages its capital to ensure that it remains sufficiently funded to support its business strategy and maximise shareholder value. The Company’s short term funding needs are met principally from the cash flows generated from its operations and available cash of $407.0 million. 17. Share capital At 1 January 2015 – fully paid1 Conversion of suspended ordinary voting shares on 13 February 2015 as a result of a sale of 2,000,000 and 1,400,000 voting ordinary shares by affiliated shareholders to third parties on 10 December 2014 and 16 December 2014 respectively At 31 December 2015 and 1 January 2016 Conversion of suspended voting ordinary shares on 24 February 2016 as a result of a sale of 27,339,017 voting ordinary shares by affiliated shareholders to third parties between 22 September 2015 and 13 February 2016 At 31 December 2016 – fully paid1 1. Voting ordinary shares includes 1,853,008 (2015: 1,865,720) treasury shares Suspended Voting Ordinary shares Voting Ordinary shares Total Ordinary Shares 33,538,301 246,709,897 280,248,198 (3,916,616) 3,916,616 – 29,621,685 250,626,513 280,248,198 (29,621,685) 29,621,685 – – 280,248,198 280,248,198 On the sale of voting ordinary shares from an affiliated shareholder to a third party, the affiliated shareholders have a right of conversion of suspended voting ordinary shares to voting ordinary shares in order to maintain their voting ordinary share percentage at just below 30% of the Company. Details of those sales and resulting conversions are set out below. Between the 22 September 2015 and 13 February 2016 27,339,017 voting ordinary shares were transferred from affiliated shareholders to third parties. On 24 February 2016 29,621,685 suspended voting ordinary shares were converted to ordinary shares in accordance with the terms of the suspended voting ordinary shares. On 13 February 2015 3,916,616 suspended voting ordinary shares were converted to voting ordinary shares in accordance with the terms of the suspended voting ordinary shares. There have been no changes to the authorised share capital since it was determined to be 10,000,000,000 ordinary shares of £0.10 per share. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 103 18. Share based payments The Company has three share-based payment plans: a performance share plan, restricted share plan and a share option plan. The main features of these share plans are set out below. Key features Form of awards Performance conditions Vesting period Dividend equivalents PSP RSP SOP Performance shares. The intention is to deliver the full value of vested shares at no cost to the participant (e.g. as conditional shares or nil-cost options). Restricted shares. The intention is to deliver the full value of shares at no cost to the participant (e.g. as conditional shares or nil-cost options). Market value options. Exercise price is set equal to the average share price over a period of up to 30 days to grant. Performance conditions will apply. For awards granted to date, these are based on relative TSR measured against a Group of industry peers over a three-year period. Awards will vest when the Remuneration Committee determines whether the performance conditions have been met at the end of the performance period. Performance conditions may or may not apply. For awards granted to date, there are no performance conditions. Performance conditions may or may not apply. For awards granted to date, there are no performance conditions. Awards typically vest over three years. Awards typically vest after three years. Options are exercisable until the 10th anniversary of the grant date. Provision of additional cash/shares to reflect dividends over the vesting period may or may not apply. For awards granted to date, dividend equivalents do not apply. Provision of additional cash/shares to reflect dividends over the vesting period may or may not apply. For awards granted to date, dividend equivalents do not apply. Provision of additional cash/shares to reflect dividends over the vesting period may or may not apply. For awards granted to date, dividend equivalents do not apply. In 2016, awards were made under the performance share plan and restricted share plan, no awards were made under the share option plan, the numbers of outstanding shares under the PSP, RSP and SOP as at 31st December 2016 are set out below: Outstanding at the beginning of the year Granted during the year Forfeited/lapsed during the year Exercised during the year Outstanding at the end of the year PSP Options (nil cost) 1,748,823 3,399,136 (794,621) – RSP Options (nil cost) 968,138 2,118,008 (334,429) (275,308) SOP CEO award (nil cost) 325,727 375,000 – (89,131) – – – – 4,353,338 2,476,409 236,596 375,000 Exerciseable at the end of the year 102,131 63,802 140,088 93,750 The range of exercise prices for share options outstanding at the end of the period is nil to 1,046.00p. The weighted average remaining contractual life of the outstanding share options is 2 years. The blended exercise price for SOPs is 890p. Fair value of options granted has been measured either by use of the Black-Scholes pricing model or by use of a formula based on past calculations. The model takes into account assumptions regarding expected volatility, expected dividends and expected time to exercise. In the absence of sufficient historical volatility for the Company, expected volatility was estimated by analysing the historical volatility of FTSE-listed oil and gas producers over the three years prior to the date of grant. The expected dividend assumption was set at 0%. The risk-free interest rate incorporated into the model is based on the term structure of UK Government zero coupon bonds. The inputs into the fair value calculation for RSP and PSP awards granted in 2015 and fair values per share using the model were as follows: STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 104 FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 18. Share based payments continued Share price at grant date Exercise price Fair value on measurement date Expected life Expected dividends Fair value on measurement date Share price at balance sheet date Change in share price between grant date and 31 December 2016 RSP 7/5/2016 RSP 8/5/2016 RSP 19/9/2016 PSP 7/5/2016 PSP 8/5/2016 125p – 125p 110p – 110p 110p – 110p 125p – 32p 125p – 32p 1-3 years 1-3 years 1-3 years 3-6 years 3-6 years – 125p 72p – 110p 72p – 110p 72p – 32p 72p – 32p 72p -36% -23% -23% -36% -36% The weighted average fair value for PSP awards granted in the period is 32p and for RSP awards granted in the period is 125p. Total share based payment charge for the year was $7.5m (2015:$2.9 million), which is fixed using the share price at the date of grant. In the previous year the charge included the reversal of previously expensed costs principally caused by the non-vesting of options. 19. Capital commitments and operating lease commitments Under the terms of its PSCs and JOAs, the Company has certain commitments that are generally defined by activity rather than spend. The Company’s capital programme for the next few years is explained in the operating review and is in excess of the activity required by its PSCs and JOAs. The Company leases temporary production and office facilities under operating leases. During the period ended 31 December 2016 $3.8 million (2015: $4.0 million) was expensed to the statement of comprehensive income in respect of these operating leases. Drill rigs are leased on a day-rate basis for the purpose of drilling exploration or development wells. The aggregate payments under drilling contracts are determined by the number of days required to drill each well and are capitalised as exploration or development assets as appropriate. The Company had no material outstanding commitments for future minimum lease payments under non-cancellable operating leases. 20. Related parties The directors have identified related parties of the Company under IAS24 as being: the shareholders; members of the Board; and members of the executive committee, together with the families and companies, associates, investments and associates controlled by or affiliated with each of them. The compensation of key management personnel including the directors of the Company is as follows: Board remuneration Key management emoluments and short-term benefits Share-related awards There are no other significant related party transactions. 2016 $m 1.0 7.4 0.1 8.5 2015 $m 1.8 9.0 1.6 12.4 GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 105 21. Subsidiaries and joint arrangements For the period ended 31st December 2016 the principal subsidiaries and joint operations of the Company were the following: Entity name Genel Energy Holding Company Limited1 Genel Energy Finance Plc2 Genel Energy Finance 2 Plc1 Genel Energy Finance 3 Plc2 Genel Energy Netherlands Holding 1 Cooperatief B.A.3 Genel Energy Netherlands Holding 2 B.V.3 Genel Energy International Ltd4 Taq Taq Operating Company Limited4 Genel Energy Miran Bina Bawi Limited2 A&T Petroleum Company Limited5 Genel Energy Africa Exploration Limited2 Genel Energy Africa Limited2 Genel Energy Exploration 2 Limited2 Genel Energy Limited2 Genel Energy Somaliland Limited2 Genel Energy Gas Company Limited1 Phoenicia Energy Company Limited6 Genel Energy UK Services Limited2 Genel Energy Yonetim Hizmetleri Anonim Sirketi7 Genel Energy Petroleum Services Limited2 Barrus Petroleum Limited8 Barrus Petroleum Cote d’Ivoire Sarl9 Taq Taq Petroleum Refinery Company Limited10 Taq Taq Drilling Company Limited11 Country of Incorporation Ownership % (ordinary shares) Jersey UK Jersey UK Netherlands Netherlands Anguilla BVI UK Cayman Islands UK UK UK UK UK UK Malta UK Turkey UK Isle of Man Cote d’Ivoire BVI BVI 100 100 100 100 100 100 100 55 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 55 1. Registered office is 12 Castle Street, St Helier, Jersey JE2 3RT 2. Registered office is Fifth Floor, 36 Broadway, London SW1H 0DB 3. Registered office is Prins Bernhardplein 200, 1097 JB, Amsterdam, Netherlands 4. Registered office is PO Box 1338. Maico Building, The Valley, Anguilla and is a joint operation service company through which the Company jointly operates the Taq Taq PSC with its partner 5. Registered office is PO box 309 Ugland House, Grand Cayman, KY1-1104, Cayman Islands 6. Registered office is 85 St John Street, Valletta, VLT 1165, Malta 7. Registered office is Next Level Is Merkezi, Eskisehir Yolu, Dumlupınar Bulvarı, No:3A-101, Söğütözü, Ankara, 06500, Turkey 8. Registered office is 6 Hope Street, Castletown, IM9 1AS, Isle of Man 9. Registered office is 7 Boulevard Latrille Cocody, 25 B.P. 945 Abidjan 25, Cote d’Ivoire 10. Registered office is Ellen L Skelton Building, Fishers Lane, Road Town, Tortola, BVI 11. Registered office is 3rd Floor, Geneva Place, Waterfront Drive, PO Box 3175, Road Town, Tortola BVI 22. Annual report Copies of the 2016 annual report will be despatched to shareholders in April 2017 and will also be available from the Company’s registered office at 12 Castle Street, St Helier, Jersey JE2 3RT and at the Company’s website – www.genelenergy.com. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 106 OTHER INFORMATION REPORT ON PAYMENTS TO GOVERNMENTS FOR THE YEAR 2016 Introduction and basis for preparation This report sets out details of the payments made to governments by Genel Energy plc and its subsidiary undertakings (“Genel”) for the year ended 31 December 2016 as required under the Disclosure and Transparency Rules of the UK Financial Conduct Authority (the ‘DTRs’) and in accordance with our interpretation of the draft Industry Guidance issued for the UK’s Report on Payments to Governments Regulations 2014, as amended in December 2015 (‘the Regulations’). The DTRs require companies in the UK and operating in the extractives sector to publically disclose payments made to governments in the countries where they undertake exploration, prospection, development and extraction of oil and natural gas deposits or other materials. This report is available to download at www.genelenergy.com/investor-relations/results-reports-presentations. Governments All of the payments made in relation to licences in the Kurdistan Region of Iraq (‘KRI’) have been made to the Ministry of Natural Resources of the Kurdistan Regional Government (‘KRG’). All other payments have been made to the national governments of the relevant country where the licence is based. Production entitlements Production entitlements are the host government’s share of production during the reporting period from projects operated by Genel. Production entitlements from projects that are not operated by Genel are not covered by this report. The figures reported have been produced on an entitlement basis rather than on a liftings basis. Production entitlements are paid in-kind and the monetary value disclosed is derived from management’s calculation of revenue from the field. Royalties Royalties represent royalties paid in-kind to governments during the year for the extraction of oil. The terms of the Royalties are described within our Production Sharing Contracts and can vary from project to project. Royalties have been calculated on the same barrels of oil equivalent basis as production entitlements. Licence fees These are fees and other sums paid as consideration for acquiring a licence for gaining access to an area where extractives are performed. Materiality threshold Total payments below £86,000 made to a government are excluded from this report as permitted under the Regulations. PAYMENTS TO GOVERNMENTS – 2016 Country/Licence Payments in bbls Kurdistan Total1 Taq Taq2 Tawke3 Morocco Total Somaliland Mir Left Total Odewayne SL-10B/ SL-13 Production entitlement (bbls) 13,799,444.39 13,799,444.39 Royalties in kind (bbls) 2,201,957.06 2,201,957.06 Total (bbls) 16,001,401.45 16,001,401.45 – – – – – – – – – – – – – – – *Estimated value in $millions (this amount is not paid to the KRG, and is calculated to meet the reporting requirements under the Regulations) Value of production entitlements ($million) Value of royalties ($million) Licence fees ($million) Capacity building payments4 Total ($million) 522.94* 83.17 – 24.5 630.61 522.94 83.17 – 13.6 619.71 – – – 10.9 10.9 – – – – – – – – 0.15 0.15 0.49 0.15 0.34 0.15 0.15 0.49 0.15 0.34 – – – – – 1. Under the lifting arrangements implemented by the KRG, the KRG takes title to crude at the wellhead and then transports it to Ceyhan in Turkey by pipeline. The crude is then sold by the KRG into the international market. All proceeds of sale are received by or on behalf of the KRG, out of which the KRG then makes payment for cost and profit oil in accordance with the PSC to Genel, in exchange for the crude delivered to the KRG. Under these arrangements, payments are in fact made by or on behalf of the KRG to Genel, rather than by Genel to the KRG. For the purposes of the reporting requirements under the Regulations however, we are required to characterise the value of the KRG’s entitlement under the PSC (for which they receive payment directly from the market) as a payment made to the KRG. 2. The amount reported for Taq Taq, with the exception of Capacity Building Payments, is the gross payment made to the KRI by the operating company (TTOPCO), Genel’s share of these payments is equal to 55%. 3. Payments in relation to Tawke are made by the Operator with the exception of capacity building payments which are made directly by Genel in relation to our interest in the Tawke Production Sharing Contract. 4. Capacity building payments reported are payments made by Genel directly to the KRI in cash as required by the Production Sharing Contract. GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 GLOSSARY OF TECHNICAL TERMS 107 ‘AGM’ annual general meeting ‘Companies Act 2006’ Companies Act 2006, as amended ‘Company’ ‘CPR’ ‘Elysion’ Genel Energy plc competent person’s report Elysion Energy Holding B.V. ‘Focus Investments’ Focus Investments Limited ‘FRC’ ‘FSMA’ ‘FTSE’ ‘GHG’ ‘GLA’ ‘Group’ ‘HSE’ UK Financial Reporting Council the Financial Services and Markets Act 2000 of the UK, as amended FTSE International Limited greenhouse gases gas lifting agreement the Genel Energy group of companies health, safety and environment ‘ ICMM Sustainable Development Framework’ the sustainable development framework set out by the International Council on Mining and Metals ‘IDP’ internally displaced person ‘IFC Performance Standard’ the performance standards set out by the International Finance Corporation ‘IOC’ International Oil Company ‘Jersey Companies Law’ Companies (Jersey) Law 1991 (as amended) ‘KRG’ ‘KRI’ the Kurdistan Regional Government the Kurdistan Region of Iraq ‘Listing Rules’ the Listing Rules of the UK Listing Authority ‘LoPC’ ‘LTI’ ‘LTIF’ ‘NGO’ ‘NOC’ loss of primary containment lost time incident lost time incident frequency: the number of lost time incidents per million work hours non-governmental organisation Northern Oil Company ‘Ordinary Shares’ the voting ordinary shares and/or the suspended voting ordinary shares as the context requires ‘PRM’ ‘PSC’ ‘PSP’ ‘PwC’ ‘RSP’ ‘SOMO’ ‘SOP’ Petroleum Resources Management N.V. production sharing contract performance share plan PricewaterhouseCoopers LLP restricted share plan State Oil Marketing Organisation share option plan ‘Standard Listing’ a standard listing under Chapter 14 of the Listing Rules ‘TSR’ ‘TTOPCO’ ‘UKLA’ total shareholder return Taq Taq Operating Company Limited UK Listing Authority STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 108 OTHER INFORMATION GLOSSARY OF TECHNICAL TERMS continued Certain resources and reserves terms ‘1P’ proved reserves ‘2P’ ‘3P’ ‘2C’ proved plus probable reserves proved plus probable plus possible reserves contingent resources Units of measurement ‘bbl’ barrel ‘bcma’ ‘bnboe’ ‘bopd’ ‘boepd’ ‘km’ ‘mcf’ ‘MMbbls’ ‘MMboe’ ‘tcf’ ‘tCO2e’ billion cubic metres per annum billion barrel oil equivalent barrels of oil per day barrels of oil equivalent per day kilometres thousand cubic feet millions of barrels million barrels of oil equivalent trillion cubic feet tonnes of CO2 equivalent GENEL ENERGY ANNUAL REPORT AND ACCOUNTS 2016 SHAREHOLDER INFORMATION ShareGift If you hold a small number of shares and find it uneconomical to sell them, you may wish to donate your shares to charity free of charge through ShareGift. ShareGift collects donations of unwanted shares, sells them and donates the proceeds to UK charities. Further details are available at www. sharegift.org or by calling +44 (0) 20 7930 3737. AGM This year’s AGM will be held at J.P. Morgan, 60 Victoria Embankment, London EC4Y 0JP, UK on Tuesday, 6 June 2017 at 11.00am. Details of the business to be considered at the AGM are set out in the accompanying notice of meeting. Dividend and dividend history We have not paid any dividends to shareholders to date and no final dividend is proposed in respect of the year ended 31 December 2016. Registrars Our registrars are Equiniti Registrars. All enquiries relating to the administration of shareholdings should be directed to Equiniti Registrars, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA. Telephone: 0371 384 2030 lines are open Monday – Friday excluding UK Bank Holidays, 8.30am – 5.30pm (from outside the UK: +44 121 415 7047). Share price information The current price of the Company’s shares is available on the Company’s website at www.genelenergy.com S T R A T E G I C R E P O R T G O V E R N A N C E F I N A N C I A L S T A T E M E N T S O T H E R I N F O R M A T I O N Contacts and Auditors Registrar Equiniti (Jersey) Limited PO Box 75 26 New Street St Helier Jersey Channel Islands JE4 8PP Independent Auditors PricewaterhouseCoopers LLP 1 Embankment Place London WC2N 6RH Registered Office 12 Castle Street St Helier Jersey JE2 3RT London Office Fifth Floor 36 Broadway Victoria London SW1H 0DB Ankara Office Next Level Is¸ Merkezi Eskis¸ ehir Yolu Dumlupınar Bulvarı No: 3A-101 Sögütözü 06500 Ankara, Turkey Consultancy, design and production by Luminous www.luminous.co.uk G E N E L E N E R G Y A N N U A L R E P O R T 2 0 1 6 Registered Office 12 Castle Street St Helier Jersey JE2 3RT London Office Fifth Floor 36 Broadway Victoria London SW1H 0DB ¸ ¸ Ankara Office Next Level Is Merkezi Eskisehir Yolu Dumlupınar Bulvarı No:3A-101 Sögütözü 06500 Ankara, Turkey ˘ www.genelenergy.com