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Santos LtdANNUAL REPORT
2019
Karoon Energy Ltd Annual Report 2019
01
Our Vision
02
Chairman and Managing
Director’s Review
05
Karoon Energy –
Towards Production
CONTENTS
09
101
Strengths and Risks
Directors’ Declaration
10
Operations Review
102
Independent Auditor’s
Report
19
108
Sustainability Report
Additional Securities
Exchange Information
06
22
110
Financial Year 2019 Highlights
Directors’ Report
Glossary of Terms
07
55
Karoon’s Footprint –
South America and Australia
Auditor’s Independence
Declaration
113
Corporate Directory
08
Resource Summary
56
Consolidated Financial
Statements
Unless otherwise stated, items in photographs shown
in this Annual Report are not assets of the Company.
Karoon Energy Ltd Annual Report 2019
OUR VISION
Karoon’s strategic vision is to transform into a global E&P company
with material production to underpin growth through a highly
prospective exploration portfolio and entrepreneurial spirit.
01
CHAIRMAN AND MANAGING DIRECTOR’S REVIEW
Mr Bruce Phillips
Independent
Non-Executive Chairman
Mr Robert Hosking
Managing Director
Delivering the southern Santos Basin Strategy has been the major pillar
of Karoon’s core strategy since 2015 and will enable Karoon to take
advantage of any recovery in long-term oil prices as Karoon develops
this regional portfolio.
Dear Shareholders,
A Transformative Year
Karoon is moving rapidly from a successful
oil and gas explorer to a global Exploration
(‘E&P’) company with
and Production
material
production
underpinned by a highly prospective
exploration portfolio. On completion of the
transaction, the Baúna acquisition should
prove to be immediately beneficial for
Karoon.
long-term
oil
Karoon’s top strategic objective over recent
years has been to secure a high-quality
production asset. On completion,
the
acquisition of the Baúna oil production
asset will realise this first major pillar of
Karoon’s
contains
developed oil reserves in a world class
geological setting and offers immediate
to grow production upon
potential
installation and/or replacement of up to
4 electrical submersible pumps (‘ESPs’).
strategy.
Baúna
synergies
Baúna is located 60 km from Karoon’s
Neon light oil discovery. Baúna potentially
offers
project
development opportunities by providing
options to realise the second pillar of
Karoon’s strategy, which is to develop the
Neon and Goiá light oil discoveries.
new
and
The third pillar, and the fundamental building
block of Karoon’s strategy, is exploration
led growth where the focus is on acquiring
high-equity interests in under explored,
early stage offshore acreage within proven
Karoon expects to be able increase it to
over 30,000 bopd through focused well
workovers, installation and/or replacement
of up to 4 ESPs, and the tie-in of the Patola
oil discovery.
Karoon has commenced planning work
associated with workovers to install new
ESPs in some wells and replace existing
ESPs in other wells. Development planning
work for Patola will begin in the fourth
quarter of calendar year 2019. Once
complete, a Plan of Development will be
submitted to the Agência Nacional do
Petróleo, Gás Natural e Biocombustíveis
(‘ANP’, the Brazilian oil and gas regulator),
with approvals expected before field
execution work targeted for the first quarter
of calendar year 2021.
The acquisition of Baúna will result in
reserves booking, with
Karoon’s first
certified 2P reserves of 52.5 million barrels
of oil and the addition of 15 million barrels of
2C contingent resources in Concession
BM-S-40 as at 1 January 2019.
Karoon’s southern Santos Basin assets will
include producing reserves from Baúna and
contingent resources from Patola, Neon
and Goiá and future upside opportunities
from Clorita. Karoon will be in a position to
build significant value by producing and
developing its existing exploration assets
and taking advantage of a number of
available synergies between these assets.
petroleum
completion,
systems. On
the Baúna acquisition should give Karoon
the cash flow and balance sheet strength
exploration
to
support
opportunities
the
Company
geological
knowledge.
the basins where
compelling
extensive
in
has
Progressing the Southern
Santos Basin Strategy
Concession BM-S-40 contains the Baúna
light oil field and the existing undeveloped
Patola oil discovery and is in close proximity
to Karoon’s existing Santos Basin portfolio.
Karoon still needs to complete the funding,
commercial and regulatory approvals for
to
the Baúna acquisition and move
transaction completion. Once
is
this
complete, Karoon will have a world-class
cornerstone asset in Baúna to deliver on
Karoon’s southern Santos Basin Strategy.
Delivering
the southern Santos Basin
Strategy has been the major pillar of
Karoon’s core strategy since 2015 and will
enable Karoon to take advantage of any
recovery in long-term oil prices as Karoon
develops this regional portfolio.
On completion, the Baúna oil reserves and
production will be added to Karoon’s asset
portfolio and allow the Company to focus
on generating and expanding cash flow
in the short-term to pay down borrowings
associated with the acquisition. Baúna
approximately
currently
20,000 barrels of oil per day (‘bopd’) and
produces
02
Karoon Energy Ltd Annual Report 2019 “Baúna potentially offers synergies and new project
development opportunities by providing options to
realise the second pillar of Karoon’s strategy, which
is to develop the Neon and Goiá light oil discoveries.”
A Development Path for Neon
and Goiá
Karoon submitted a Development Plan
(‘PD’) to the ANP for the Neon and Goiá
fields during August 2019. The Neon and
Goiá fields will be
retained under a
Production License that extends for 27
years giving Karoon time to produce full
economic resources from the discoveries.
Karoon expects that the potential future
development of Neon and Goiá could add
value to Baúna via synergistic logistics
savings and consolidation of field planning.
The first of these synergies could be cost
savings associated with the drilling of a
Neon ‘control well’ in the same campaign
as the Baúna workovers and Patola tie-in
during calendar year 2021. The ‘control
well’ has the twin goals of delineating
the field and
the southern extent of
assisting with locating and designing the
first horizontal production well. The
2C contingent resource estimates for the
Neon and Goiá discoveries are 55 million
barrels and 27 million barrels respectively,
and their development will target peak
production of an additional 30,000 bopd.
to produce
A potential Neon phase-1 development is
from 2 horizontal
planned
production wells and 1 gas injection well
tied
into a small floating production,
storage and off-loading facility (‘FPSO’) with
the aim of ensuring a low risk, high rate of
return
initial phase. Further expansion
opportunities would be assessed after
phase-1 production begins. The planned
Neon development
‘right sized
development’ for Karoon and together with
Baúna could foreseeably take Karoon’s
southern Santos Basin operated production
to 50,000 bopd.
is a
Tumbes Basin Offshore Peru:
a High Impact Opportunity
During the financial year, Karoon completed
the farm-out to Tullow of an equity interest in
Block Z-38. Karoon is currently finalising
negotiations for a rig contract for the drilling
of the Marina-1 exploration well. The Marina
Prospect has an unrisked best estimate
gross prospective resource of 256 mmbbls.
This Prospect will be the first drilled in
Block Z-38.
The farm-out to Tullow followed extensive
work completed by Karoon in recent years
to better define the Block’s prospectivity. It
leaves Karoon with a 40% operated interest
in the Block, subject to Karoon completing
its farm-in obligations. Success at the
Marina Prospect could re-invigorate the
region for large prospective opportunities.
Karoon has assessed multi-billion barrel
prospectively in the deeper water, akin and
of similar oil type to the existing production
along the shallow water and onshore areas
where oil production in this region of Peru
has been conducted for over 100 years.
Karoon is continuing to prepare for drilling
operations, currently targeting drilling early
2020 calendar year.
Adjacent to and south of Block Z-38, Karoon
agreed a Technical Evaluation Agreement
(‘TEA’) for Area 73. The TEA increases
Karoon’s potential prospective acreage
the Tumbes Basin without
position
creating a large economic commitment and
allows Karoon to utilise the results of the
Marina-1 well to plan a larger strategy for
the region.
in
Given its 100% ownership of the entire
Santos Basin portfolio, Karoon will look to
bring in a joint operation partner to assist
with any future development of Neon.
Karoon has additional exploration upside
within its strategic southern Santos Basin
area with exploration Block S-M-1537. This
Block lies to the south of Baúna and
potentially provides
incremental
growth through the Clorita exploration lead.
future
Brazil in the Global Oil Context
The financial year was a volatile period with
oil prices ranging from US$52 to US$80 a
barrel. The period saw a continuation of a
positive trend for the global oil and gas
industry with oil prices rising to higher than
average
the
levels
previous 3 financial years.
in comparison
to
Generally, the oil and gas industry remained
competitive as various companies and
private investment firms looked to take
advantage of global opportunities. Karoon
its engagement with entities
continued
looking to sell production and near-term
development assets, and with buyers
looking to enter Brazil through access to
Karoon’s potential Neon development
opportunity. As a result of under investment
in conventional oil, and investor pressure to
slow capital spending on unconventional
producing basins, Karoon is hopeful that oil
prices will continue to trend upwards over
the medium-term.
improving
Karoon’s standing in Brazil sees it well
positioned within an
local
environment as Brazil continues to actively
seek to attract investment in its oil and gas
sector. During 2018, Brazil was the 9th
largest global oil producer with an
established E&P industry producing on
average 3.4 million bopd during calendar
year 2018, with 25% of the world’s FPSO’s
stationed offshore of Brazil.
03
Karoon Energy Ltd Annual Report 2019 CHAIRMAN AND MANAGING DIRECTOR’S REVIEW (CONTINUED)
the
Karoon is firmly focused on delivering on its
strategic agenda for the benefit of its
shareholders. While there is still much more
work to be done, the Karoon team is
enthusiastic about
the
Company. Karoon has certainly come a
long way since
IPO during
the
June 2004, when it listed on the Australian
Securities Exchange with a market
capitalisation of $8 million, to now being
focussed in Brazil and operating in one of the
most prolific oil and gas basins in the world.
future of
initial
The Board of Directors would like to thank
you, our shareholders, for your continued
support and patience, which we
feel
confident will lead to future success for all of
us. We would also like to take the opportunity
to thank the dedicated employees and
contractors of Karoon for their continuing
efforts to advance Karoon towards its
long-term goals.
Mr Bruce Phillips
Independent Non-Executive Chairman
Mr Robert Hosking
Managing Director
25 September 2019
Australia: Attractive Northern
Carnarvon Basin Potential
Karoon has established itself with a highly
skilled exploration team in Australia. As a
result of that skill set it has been able to
identify opportunities in the subsurface
in Australia.
the permit
Our Australian focus is now firmly directed
towards the Carnarvon Basin, offshore
Western Australia, where the reprocessing
of seismic data in the eastern part of
exploration permit WA-482-P is ongoing.
The eastern extent of
is
geographically close to the recent Dorado
oil discovery made by Karoon’s
joint
operation partner Santos Limited and also
This
Carnarvon
discovery has revived interest and provided
new
opportunities within WA-482-P.
During the financial year Santos Limited, as
the operator,
renewal
to conduct
for WA-482-P
application
seismic re-processing and geological and
geophysical (‘G&G’) studies, which will
enable the joint operation to review the
prospectivity in more detail.
submitted a
Petroleum
Limited.
Australia: EPP46 and WA-314-P
Due to the difficulties associated with
regulatory approvals to conduct operations,
Karoon has commenced discussions with
the
to surrender
Ceduna Sub-basin exploration permit
EPP46. An application has also been
made to surrender Karoon’s remaining
Browse Basin exploration permit WA-314-P.
regulatory authorities
Looking Ahead – Good
Governance and Prudent
Management
In line with our strategy, the Board of
Director’s priority for capital management is
to achieve the best returns for shareholders
in the medium to longer term. The Board
believes that acquiring a world class long-
life production asset that complements
Karoon’s existing portfolio is also the best,
lowest risk and most effective method of
delivering near term value.
Despite Karoon’s success in signing a
binding SPA to acquire the Baúna asset, the
Board continues to remain conscious of
other capital management initiatives. These
will continue to be monitored alongside the
reconfiguration of the business required for
the integration of a significant production
asset.
With respect to cost-cutting measures,
senior management has been reviewing
Karoon’s current overhead structure and
separately has made significant progress
over the last 24 months in reducing Karoon’s
overall spend. Fundamental changes, such
as multi-million dollar
in
guaranteed work programme commitments
have already been achieved in Brazil, Peru
and Australia and a new workplan is being
formulated to prepare for the upcoming
exploration, appraisal and development
work in Brazil and Peru.
reductions
Importantly, the Board has continued to
target overall corporate costs, in an effort
to become more efficient as Karoon
transitions
in
recognition of the desire for shareholders to
see tangible spending reductions (without
adversely impacting Karoon’s operational
capabilities).
into oil production and
The Board and senior management both
understand that Karoon’s operations must
be sustainable and most of all operated
safely, securely and in an environmentally
effective way, whilst still maintaining the
high degree of historical geological success
through disciplined due diligence, if the
Company is to attain the status of a top tier
global mid-cap E&P company.
Whilst the Board of Directors of Karoon has
a good breadth of skills and experience, we
will continue to review its composition and
size to ensure we continue to have the right
capabilities to support the delivery of our
strategy, particularly as we
transition
to oil production in Brazil.
04
Karoon Energy Ltd Annual Report 2019 KAROON ENERGY – TOWARDS PRODUCTION
(’Karoon’ or
Our History
‘the
Karoon Energy Ltd
Company’) was
incorporated during
November 2003, listing on the Australian
Securities Exchange during June 2004 with
a market capitalisation of $8 million and an
issue price of $0.20 per ordinary share.
Karoon was founded by Managing Director
Mr Robert Hosking
and Director
of Exploration Mr Mark Smith.
The Company was built on bold
ambition, driven principally by a focus on
geology and
impact
exploration opportunities with world class
growth potential.
looking at high
Shortly after listing, Karoon made its first
big strategic move and acquired acreage
in one of Australia’s emerging LNG
provinces, the Browse Basin. Over the next
decade, the region saw an unprecedented
level of LNG activity during which time
Karoon discovered the multi-TCF Poseidon
gas discovery
(2009). Poseidon was
subsequently sold by Karoon during June
2014 for US$600 million, and a contingent
milestone
to
US$200 million.
consideration
up
of
During 2008 Karoon sought to broaden its
exploration portfolio and was attracted to
the Santos Basin, offshore Brazil, by the
basin geology at the same time as the
major pre-salt discoveries were being made
in Brazil. Karoon secured a footprint with
5 offshore exploration Blocks during
Bid Round 9 and subsequently made 3 oil
discoveries between 2012 and 2015, with
the Neon light oil discovery providing a
potential future strategic growth opportunity
for the Company.
Following the sale of the multi-TCF Poseidon
gas discovery during June 2014,
the
Company turned its efforts and resources to
take advantage of the cyclical downturn in
the global oil market to try and secure a
foundation production or development
asset to underpin the next decade of growth
and beyond. Karoon focused its efforts on
the regions where it had built a strong
knowledge base and had an existing
presence, being Brazil, Peru and Australia.
Pillar 2
Realise value by developing
existing discoveries
Karoon has undertaken work required to
move Neon and Goiá forward. Prior to FID
being reached, Karoon anticipates drilling a
‘control well’
the
southern region of the Neon field. On
completion of the acquisition, the addition
of Baúna, which is located near the Neon
light oil discovery, brings significant
logistical and field management synergies
and new project development opportunities.
to assist delineating
in
Pillar 3
Exploration led growth
Karoon has a highly specialist technical
team assessing outstanding opportunities
in the short-term. Validation of this skill set
will be gained from drilling the Marina-1
exploration well
the Tumbes Basin,
offshore Peru, where the Company has
secured a dominant footprint, and the
consolidation of its offshore acreage in the
southern Santos Basin, Brazil. As pillars 1
and 2 are progressed, Karoon will look to
use its exploration skill set and a measured
approach to provide a new pipeline of
highly prospective opportunities. Karoon
has historically driven value through the
geotechnical workup of exploration and
appraisal acreage to identify prospective
opportunities. The focus is on acquiring
high-equity interests in under explored early
stage offshore acreage within proven
petroleum systems.
During July 2019, Karoon executed on its
priority strategic goal of acquiring a high
quality, cash generating production asset,
by signing a binding sale and purchase
agreement (‘SPA’) to acquire the Baúna
light oil field in the Santos Basin, offshore
for a headline consideration of
Brazil,
US$665 million. On completion,
this
acquisition will transform Karoon, providing
a solid foundation for future growth and
complement
‘Three Pillar’ corporate
strategy.
its
Our Strategy
The corporate vision is to transform Karoon
from successful oil and gas explorer to a
global Exploration and Production company
long-term oil production
with material
underpinned by a highly prospective
exploration portfolio, providing a foundation
future exploration and production
for
to medium-term,
growth.
this will be achieved through Karoon’s
‘Three Pillar’ corporate strategy which is
focused on production and exploration
opportunities in proven petroleum basins
where Karoon has an existing footprint,
possesses strong technical knowledge of
the geology and also has
regulatory
expertise.
the short
In
Pillar 1
Acquire a high quality cash
generating production asset
On completion, the acquisition of Baúna will
realise the first major pillar of Karoon’s
strategy. Baúna is a producing asset in the
offshore southern Santos Basin that Karoon
understands well. The opportunity is to
utilise the current undeveloped resources
(from the existing undeveloped Patola oil
discovery) and realise immediate potential
to grow production upon the workover of a
number of existing production wells.
05
Karoon Energy Ltd Annual Report 2019 Karoon Energy Ltd Annual Report 2019
FINANCIAL YEAR 2019 HIGHLIGHTS
> During July 2019, Karoon signed a binding SPA to acquire the Baúna light oil field in the Santos
Basin, offshore Brazil, for a headline consideration of US$665 million. Completion is expected
during the first half of calendar year 2020 and the headline consideration will be reduced by
interim net cash flows from the acquisition’s effective date of 1 January 2019, which is expected
to be approximately US$140-US$200 million at close.1
> Baúna’s current oil production is approximately 20,000 bopd with potential to grow to over
30,000 bopd by calendar year 2022 following the workover of existing production wells and the
tie-in of the existing undeveloped Patola oil discovery. Baúna is located 50-60 km from Karoon’s
Neon and Goiá discoveries, and 50 km from Karoon’s Clorita exploration area.
> The Baúna acquisition concludes the Company’s search for a high-quality production asset
at this stage. Planning for increasing production at Baúna by calendar year 2022 has
already commenced.
> In preparation to drill the high impact Marina-1 exploration well, offshore Peru, during early
2020 calendar year, rig negotiations are being concluded alongside Karoon’s new farm-out
partner Tullow Oil Peru Limited Sucursal del Peru (‘Tullow’).
> Karoon continued pursuing its southern Santos Basin Growth Strategy with finalisation of the
PD for the Neon and Goiá fields and submission of it to the ANP during August 2019. The
submission of the PD does not mean that Karoon has reached, nor is compelled
to reach, a final investment decision (‘FID’) to proceed into a development of the fields.
1. Disclosed in the 25 July 2019 ASX announcement ‘Karoon Baúna Acquisition Presentation’.
06
KAROON’S FOOTPRINT – SOUTH AMERICA AND AUSTRALIA
1 Block
Tumbes Basin, Peru
Area 73
TEA
KEY
Karoon assets
Subject to ANP approval and
transaction completion
Technical Evaluation Agreement
3 Blocks
Santos Basin, Brazil
2 oil discoveries
Baúna oil field,
approximately 20,000 bopd.
100% operated interest on
completion of the acquisition.
WA-314-P
Browse Basin
WA-482-P
Northern Carnarvon Basin
EPP46
Ceduna Sub-basin
Permit/ Block
Country
S-M-1037, S-M-1101
S-M-1357
Z-38
WA-482-P
EPP46
WA-314-P
Brazil
Brazil
Peru
Australia
Australia
Australia
* Denotes Karoon’s operatorship of the permit/Block.
Basin
Santos
Santos
Tumbes
Interest
100% *
100% *
40% *
Northern Carnarvon
50%
Type
Phase
Oil
Oil
Oil
Oil
Exploration
Exploration
Exploration
Exploration
Ceduna Sub-basin
100% *
Oil & Gas
Discussions to surrender
Browse
100% *
Oil
Application to surrender
Forward-looking Statements
This Annual Report may contain certain
‘forward-looking statements’ with respect to
the financial condition, results of operations
and business of Karoon and certain plans
and objectives of the management of
Karoon. Forward-looking statements can
generally be identified by words such as
‘may’, ‘could’, ‘believes’, ‘plan’, ‘will’, ‘likely’,
‘estimates’, ‘targets’, ‘expects’, or ‘intends’
and other similar words that involve risks
and uncertainties, which may include, but
the outcome and
are not
effects of
this
report. Indications of, and guidance on,
the subject matter of
limited
to,
future earnings and financial position
and performance are also
forward-
looking statements.
Investors are cautioned not to place undue
reliance on forward-looking statements as
actual outcomes may differ materially from
forward-looking statements. Any forward-
looking statements, opinions and estimates
provided in this report necessarily involve
uncertainties, assumptions, contingencies
and other factors, and unknown risks may
arise, many of which are outside the control
of Karoon. Such statements may cause the
actual results or performance of Karoon to
future
be materially different
from any
statements
results or performance expressed or implied
statements.
by
forward-looking
such
Forward-looking
including,
without limitation, guidance on future plans,
are provided as a general guide only and
should not be relied upon as an indication
or guarantee of future performance. Such
forward-looking statements speak only as
of the date of this Annual Report.
Karoon disclaims any intent or obligation
forward-looking
to update publicly any
statements, whether as a
result of
new information, future events or results
or otherwise.
07
Karoon Energy Ltd Annual Report 2019 1C
30
16
46
Low
223
445
668
2C
55
27
82
Best
549
1,398
1,947
3C
92
46
138
High
1,350
3,727
5,077
recovered by
Prospective Resources
Cautionary Statement
The estimated quantities of petroleum that
may potentially be
the
application of a future development project
relate
to undiscovered accumulations.
These estimates have both an associated
risk of discovery and a risk of development.
Further
and
evaluation is required to determine the
existence of a significant quantity of
potentially moveable hydrocarbons. There
is no certainty that any portion of the
prospective resource estimated on behalf
of Karoon will be discovered. If discovered,
there
it will be
commercially viable to produce any portion
of the prospective resources evaluated.
is no certainty
exploration,
appraisal
that
RESOURCE SUMMARY
Management’s Assessment of Contingent and Prospective Resources
Net Contingent Resource (mmbbls)
Discovery
Neon
Goiá
TOTAL
Block
S-M-1037
S-M-1101
Interest
Type
100%
100%
Oil
Oil
Net Unrisked Prospective Resource (mmbbls)
Block / Permit
Interest
Type
Basin, Country
Tumbes, Peru
Z-38
Northern Carnarvon, Australia WA-482-P
TOTAL
The contingent and prospective resource
volume estimates were assessed by
Karoon’s Engineering Manager, Mr Lino
Barro, and are based on seismic survey
data, geological and engineering well data
regional geological and
and other
They were
engineering
information.
in
prepared on a probabilistic basis
accordance with the Petroleum Resources
Management System approved by
the
Society of Petroleum Engineers, the World
Petroleum Council, the American Association
of Petroleum Geologists and the Society of
Petroleum Evaluation Engineers.
40%
50%
Oil
Oil
The discovered contingent
resources
are categorised as contingent because
further evaluation is required to confirm
commerciality.
‘Resources
estimates
in
The contingent and prospective resource
presented were
volume
disclosed
the 8 May 2018 ASX
Update’.
announcement
Karoon is not aware of any new information
or data
these
resource estimates and all material
technical parameters
assumptions and
underpinning the estimates in the relevant
ASX announcement continue to apply and
have not materially changed.
that materially affects
08
Karoon Energy Ltd Annual Report 2019
STRENGTHS AND RISKS
Strengths
> On track to secure material production.
> Highly qualified and experienced personnel to manage the
transition to production.
> Demonstrated ability to create and develop strategic partnerships
with oil and gas industry participants.
> Proven track record of monetising exploration and appraisal assets.
> Robust balance sheet to fund organic and non-organic growth
opportunities.
> Significant acreage position in proven and prospective petroleum
systems.
Specific Risks
> Geological evaluation relies on the interpretation of complex
and often uncertain data, which might not lead to a fully
accurate outcome.
> Financial markets are uncertain and Karoon may be unsuccessful
in obtaining additional funding via debt and equity raisings
to existing shareholders and new investors, and obtaining
interim net cash inflows from the acquisition’s effective date of
1 January 2019 through to closing to complete the acquisition
of a 100% equity interest in Concession BM-S-40. Operating
risks, such as adverse weather conditions, mechanical failures,
equipment and personnel availability and permitting delays, can
have adverse economic implications.
> Application of leading seismic techniques and leading-edge
exploration and analysis technology.
> Proven track record of drilling success with a 62% exploration
and appraisal drilling success rate over the life of the Company.
> Track record of successfully operating 2 exploration and
appraisal drilling campaigns in Brazil, drilling a total of 6 wells
plus 2 side-tracks, with a Total Recordable Incident Rate (‘TRIR’)
of less than 1 per 200,000 man hours.
> Insurance coverage may be insufficient to cover all risks
associated with oil and gas exploration, evaluation, development
and production.
> Volatile market conditions for oil and gas may affect the
Company’s ability to attract capital and may cause a variable
return on its operations.
> The business requires substantial capital investment and
maintenance expenditures, which may be financially onerous.
> The outcome of farm-out discussions and processes are uncertain.
> Exchange rate fluctuations
in United States dollars and
Brazilian REALS.
> Social, political and geographical risks associated with multi-
national operations.
> Environmental damage associated with field operations.
09
Karoon Energy Ltd Annual Report 2019 OPERATIONS REVIEW
FOR THE FINANCIAL YEAR ENDED 30 JUNE 2019
SANTOS BASIN, BRAZIL
Karoon entered Brazil during 2008 through Bid Round 9 with the award of a
100% participating interest in 5 offshore exploration Blocks in the Santos Basin,
located approximately 200 km off the coast of Santa Catarina in Sao Paulo
state waters, Brazil.
to
look overseas
increasing competition
in offshore
Following early success
led
Australia,
Karoon
for new
opportunities. New basins of interest were
identified based on proven petroleum
systems with the potential to deliver world
class
resources where Karoon could
acquire a material acreage position on
reasonable financial and fiscal terms.
During 2007 Karoon identified the Santos
Basin, offshore Brazil, as an exciting
opportunity with prolific oil prone source
rocks, proven exploration potential and a
well-established oil and gas industry.
interest
Karoon entered Brazil during 2008 through
Bid Round 9 with the award of a 100%
participating
5 offshore
exploration Blocks in the Santos Basin,
located approximately 200 km off
the
coast of Santa Catarina in Sao Paulo state
waters, Brazil.
in
Since then, Karoon has acquired significant
operational experience and geological data
through over a decade of operating in the
Santos Basin. During this time Karoon
made 3 oil discoveries (Neon, Goiá and
Bilby), from 2 Karoon operated exploration
and appraisal drilling campaigns with a
safety record of TRIR of less than 1 per
200,000 man hours worked.
Consistent with its southern Santos Basin
Growth Strategy, Karoon expanded
its
exploration acreage position in the area
during 2017 through Bid Round 14 with the
acquisition of exploration Block S-M-1537.
The Block covers 171 sq km with a water
depth of approximately 400 metres. The
Block presents an exciting exploration
opportunity with the main target, the Clorita
exploration area, mapped
to contain
reservoirs comprising Oligocene turbidite
sands with high porosity and permeability
as seen in the producing Baúna and
Piracaba oil producing accumulations.
On 25 July 2019 Karoon advanced its top
strategic priority of acquiring a quality, cash
generating production asset by signing a
binding SPA with Petrobras for a 100%
operating interest in Concession BM-S-40,
which includes the producing Baúna light
oil field and the existing undeveloped Patola
oil discovery. Headline consideration for the
purchase was US$665 million and a non-
refundable cash deposit of US$49.9 million
was paid to Petrobras during July 2019.
Baúna is strategically located near Karoon’s
existing southern Santos Basin assets,
approximately 50-60 km to the southwest of
Neon and Goiá and approximately 50 km to
the north of the Clorita exploration area. This
proximity offers significant opportunities to
realise synergies with any potential Neon
development
shared
through
management model and the potential for
operational synergies through logistics and
shared shore base facilities. The 100%
interest in Baúna, along with Karoon’s other
a
Key Statistics
Blocks:
Karoon Equity Interest:
Operator:
Gross Acreage:
Water Depth:
Type:
Status:
S-M-1037, S-M-1101 *
100%
Karoon
175 sq km
400 metres (average)
Oil
S-M-1537
100%
Karoon
171 sq km
400 metres
Oil
Exploration phase
Exploration phase
* As part of the annexation for the Neon and Goiá light oil discoveries Blocks S-M-1102 and S-M-1165 where terminated and included as part of the
retained gross acreage above.
10
Karoon Energy Ltd Annual Report 2019 Brazil
Map Area
South
America
~
Sao Paulo
Santos
Rio de Janerio
~
‘
Sao Jose dos Campos
~
Mexilhao Area
Cedro
Belmonte
~
Mexilhao
Corcovado
Mato do Gat
Libra
Franco
Merluza
Panoramix
Lagosta
Parati
Macunaima
Iara Entorno
Cernambi
Vampira
Piracuca
Neon
S-M-1101
Goia
Guajama
Carcara
Lula
Jupiter
Bigua
S-M-1037
Abare Oeste
Caramba
Sapinhoa
Tubarao
Estrela do Mar
Coral
Caravela Sul
Cavalo Marinho
Itajai
Baúna
Baúna Sul
Concession BM-S-40
Clorita
S-M-1537
Florianopolis
NORTH
200 km
LEGEND
Oil and gas field
Oil field
Gas field
Lead
Oil pipeline
Gas pipeline
Gas pipeline planned/
under construction
Karoon Blocks
existing Santos Basin acreage, presents
significant farm-out optionality, and the
important economic
ability
to
efficiencies
exploration,
development and production.
between
realise
With a significant presence in Brazil and
after having undertaken a number of
successful exploration campaigns, Karoon
has developed a detailed knowledge of the
geology of the Santos Basin. In the process,
the Company has accrued valuable
understanding and experience of Brazil’s
regulatory regime, enabling it to assess and
pursue
and
development opportunities.
acquisition
significant
Concession BM-S-40 Baúna
Light Oil Field and the Existing
Undeveloped Patola Oil
Discovery
For Karoon, Baúna is a right-sized and
relatively uncomplicated producing asset
with currently 6 oil producers and 4 injectors
(1 gas and 3 water), and a leased FPSO
(the Cidade de Itajai) which has significant
under utilised capacity and with charter and
service contracts already in place.
Baúna is currently producing approximately
20,000 bopd which will transform Karoon
into a significant, ASX-listed oil producer on
completion of the acquisition. In addition,
Karoon has a clearly defined plan to
increase oil production from the current
field and nearby discoveries within
Concession BM-S-40 to between 30,000
and 40,000 bopd over the medium-term
through well workovers during calendar
year 2021 and installing and/or replacing
ESPs, and developing
the Patola oil
discovery.
“Baúna is currently
producing approximately
20,000 bopd which will
transform Karoon into a
significant, ASX-listed
oil producer on completion
of the acquisition.”
and
contingent
As part of the acquisition process, during
the September 2019 quarter an independent
reserves
resources
certification was prepared by a globally
recognised
certification
reserves
consultancy firm, AGR Petroleum Services
Reservoir Management Division (AGR).
AGR estimates the gross 2P reserves
the Baúna and Piracaba
estimate
oil producing accumulations
to be
52.5 mmbbls (from 1 January 2019, the
effective date), based on a US$65/bbl oil
price scenario. The gross 2C contingent
resources estimate is 18.8 mmbbls.
for
11
Karoon Energy Ltd Annual Report 2019 OPERATIONS REVIEW (CONTINUED)
FOR THE FINANCIAL YEAR ENDED 30 JUNE 2019
Block S-M-1537
The exploration phase for Block S-M-1537
is 7 years. The minimum work program
consists of seismic acquisition and
geological studies.
Seismic analysis shows encouraging
Amplitude versus Offset (‘AVO’) anomalies
supportive of the presence of trapped
oil. G&G studies and mapping work is being
undertaken over the Block.
The Block contains one main lead targeting
Oligocene turbidite sands with high porosity
and permeability as seen in the nearby
producing Baúna and Piracaba oil
producing accumulations.
Forward Work Program
Karoon has ambitious growth and
development plans for the southern Santos
Basin over the coming 4 years, including:
installation and/or
well workovers and
replacement of up to 4 ESPs at Baúna;
development drilling
the Patola oil
discovery and tie-in to the leased FPSO;
and progressing the development of the
Neon and Goiá fields.
for
The operational plan for Baúna has the
potential to grow oil production up to a peak
of 40,000 bopd by calendar year 2022 with
a further opportunity, on success, to see
a Neon development
targeting peak
production of an additional 30,000 bopd
(at 100%) starting in the next 5 years.
The Concession area also includes the
existing undeveloped Patola oil discovery
which
is adjacent to the Piracaba oil
producing accumulation. Karoon plans to
drill up to 2 production wells at Patola during
the calendar year 2021 well intervention
program and create a tie-in to the leased
FPSO, with additional production in excess
of 10,000 bopd expected.
Karoon will work towards completing the
government approvals and transition to
operatorship of Baúna during the first half of
calendar year 2020. Karoon is currently
working with Petrobras and the industry and
fulfil
environmental
the
to
regulators
conditions precedent under
the SPA.
outstanding
anticipates
Karoon
conditions will be satisfied and both parties
will be in a position to close the transaction
during the first half of calendar year 2020.
the
The remaining key conditions to be satisfied
are as follows:
• payment of the outstanding consideration
(purchase price less the deposit and
closing adjustments);
• Brazilian oil and gas regulatory approval
from the ANP;
• issue of a new environmental licence to
Karoon by the Brazilian environmental
agency, the Instituto Brasileiro do Meio
Ambiente e dos Recursos Naturais
Renovaveis (IBAMA); and
• assignment of the FPSO charter and
service contracts.
Karoon intends to use a portion of its
existing cash balance to fund part of the
Baúna acquisition. However, Karoon
is reliant on both debt and equity raisings
as well as interim net cash flows from
1 January 2019 to the date of closing to
complete the Baúna acquisition.
As at the date of this Annual Report, Karoon
had a US$250 million credit-approved
commitment from ING for a senior term loan
facility, subject to confirmatory due diligence
receipt of final documentation.
and
Negotiations
equity
underwriters had also commenced and
were well advanced.
potential
with
Blocks S-M-1037 and S-M-1101
Over the course of the financial year,
Karoon continued its pursuit of its southern
Santos Basin Growth Strategy, focusing
primarily on the Neon light oil discovery.
During January 2019, ANP approved the
annexation for the Neon and Goiá light oil
discoveries. Under the Australian regulatory
framework, this is akin to receiving a
Retention Licence over the oil discoveries.
for
While Karoon had previously targeted a
potential FID for the end of calendar year
2018, negotiations with industry suppliers
for equipment and services
the
Neon light oil discovery remain ongoing.
As a result of these negotiations, prior to
FID being reached, Karoon anticipates
drilling a ‘control well’ to assist delineating
the southern region of the field and assisting
with planning and design of both
development wells and infrastructure.
As new data is incorporated and the
uncertainties of the modelling are reduced,
the risks can be better identified and
complementary
mitigated,
development may be proposed. The initial
Neon development phase concept consists
of a 3 well development (2 oil producers,
1 gas injector) producing to a leased FPSO.
and
a
to
A renewed farm-out process is underway as
Karoon remains committed
farming
down an equity interest in the projects.
The addition of Baúna provides an
interesting regional package of assets with
the potential for a long production life, which
could be marketed at the right time to assist
in the potential development of Neon.
12
Karoon Energy Ltd Annual Report 2019 TUMBES BASIN AND TALARA BASIN, PERU
Karoon believes that the application of the first 3D marine seismic in Peru
was the key to understanding the prospectivity of the region.
Block Z-38
Ecuador Maritime Boundary
Peru Maritime Boundary
Albacora
Liquid hydrocarbon
indications in seabed
cores comparable with
oils in existing fields.
Marina-1
Corvina
Caleta La Cruz
Tumbes
Area 73
Pena
Negra
Zorritos & Cope
Tumbes Basin
Carpitas
&
Punta Brava
,
Mancora
Talara Basin Oil & Gas Fields
have produced over
1.7 billion bbls of oil to date
Talara Basin
NORTH
50 km
Map Area
Peru
South
America
LEGEND
Oil field
Prospects and leads
Drop core oil recovery
Proposed well location
3D Seismic Survey Area
Karoon Block and TEA
Basin outline
Communities
Key Statistics
Block:
Karoon Equity Interest:
Operator:
Gross Acreage:
Water Depth:
Type:
Status:
Z-38
40% *
Karoon
4,750 sq km
200 to 2,000 metres
Oil
Exploration phase
Key Statistics
Technical Evaluation Area:
Operator:
Gross Acreage:
Water Depth:
Type:
Status:
Area 73
Karoon
2,489 sq km
200-2,000 metres
Oil
TEA
* Karoon’s farm-in obligations to Pitkin Petroleum Peru Z-38 SRL are to be completed.
13
Karoon Energy Ltd Annual Report 2019 OPERATIONS REVIEW (CONTINUED)
FOR THE FINANCIAL YEAR ENDED 30 JUNE 2019
Karoon entered offshore Peru during 2008,
around the same time as it entered the
Santos Basin, offshore Brazil, and sought to
expand its prospective exploration portfolio
in geographies where Karoon could acquire
exploration acreage under competitive
terms.
to
de-risk
The Tumbes Basin presented an opportunity
to acquire relatively low-cost 3D marine
prospective
seismic
that
underexplored areas
contains a proven system with
large
structures and lying adjacent to the prolific
Talara Basin, which has produced over
1.7 billion barrels of oil to date.
in a Basin
Karoon’s entry into the Tumbes Basin Block
Z-38, offshore Peru, came through a farm-in
to acquire an initial 20% equity interest,
increasing the interest to 75% over time and
assuming
to
completion of farm-in obligations with Pitkin
Petroleum Peru Z-38 SRL. The Block is
located 10 km off the coast of Peru and
covers an area of 4,750 sq km.
operatorship,
subject
for
During January 2018, Karoon successfully
executed a farm-out of a 35% equity interest
to Tullow. Regulatory approval
the
assignment of the interest was received
during May 2019. Pursuant to the farm-out
agreement, Tullow will fund 43.75% of the
cost of the first exploration well, capped at a
total well cost of US$27.5 million (at 100%),
beyond which Tullow will pay its 35% share.
Historically, there has been little exploration
in
the
the offshore portion of both
Talara Basin and
the Tumbes Basin,
particularly in water depths over 120 metres.
Karoon believes that the application of the
first 3D marine seismic in Peru was the key
to understanding the prospectivity of the
region. Studies to date characterise the
geological setting as an active Oligocene-
Miocene pull-apart system which is similar
in dimension, process and age to the prolific
San Joaquin Basin in California, which has
produced over 12 billion barrels of oil and
3.5 TCF of gas to date. The Oligocene
in setting
Heath Formation
and characteristics to the San Joaquin
Miocene Monterey Formation source rock.
is similar
Karoon’s prospects lie in the undrilled
Block Z-38 basin centre, approximately
40 km from the Tumbes Basin edge fields.
As in the San Joaquin Basin, it is believed
reservoir quality will
improve with an
increase in sediment transport distance.
Marina-1 exploration well. Karoon
is
continuing discussions with regulators to
clear final approvals. This final stream of
works will pave the way for Karoon and
Tullow to progress plans to drill the Marina-1
exploration well.
Forward Work Program
Block Z-38 is in the third period term with the
current work program obligations, drilling of
Marina-1 and the reprocessing of 2D marine
seismic, to be completed by July 2020.
look
to drill
the Marina-1
Karoon will
exploration well during early 2020 calendar
year. The Marina Prospect will be the first
drilled in Block Z-38.
Karoon is currently reprocessing 3D marine
seismic data for Area 73. With Block Z-38
and the addition of Area 73, Karoon believes
it now has a high-quality strategic acreage
position and looks forward to testing the
Basin’s prospectivity with the drill bit in the
near term. Exploration success at Marina-1
would significantly enhance the prospects
identified in Area 73.
Equity Interests
Equity interests of the participants in Block
Z-38 are:
KEI (Peru Z38) Pty Ltd,
Sucursal del Peru (Operator)
Tullow
Pitkin Petroleum Peru Z-38 SRL
40% *
35%
25%
* Tullow’s interest is subject to satisfying
certain farm-out conditions. Karoon’s farm-in
obligations to Pitkin Petroleum Peru Z-38
SRL are also still to be completed.
“The first exploration well
to be drilled in Block Z-38,
Marina-1, has the potential
to open a new oil and gas
production opportunity
for the industry and
re-ignite one of the oldest
oil producing regions
in the world.”
Recent quantitative interpretation of seismic
data is encouraging, and numerous large
prospects have been identified. Amplitude
anomalies observed support the potential
presence of trapped hydrocarbons.
During the financial year, Karoon sought to
increase its footprint in Peru and entered a
strategic TEA for offshore Area 73, adjacent
to Block Z-38. The TEA, signed on
12 December 2018 and effective
for
18 months from 1 January 2019, gives
Karoon a strategic position in the area.
Area 73 is in the Talara Basin, however the
northern part of the TEA area is in the south
of the Tumbes Basin, and several prospects
have already been identified. Drilling at
Block Z-38 will provide additional knowledge
for potentially similar plays in Area 73,
providing significant leverage to any drilling
success.
The obligations under the Area 73 TEA are
for seismic reprocessing, interpretation and
geological studies. The TEA provides a right
to negotiate a
licence contract with
Perupetro SA (the Peruvian oil and gas
regulator) in respect of the whole area or
one portion of the area for a referenced
minimum work program. Area 73 is located
strategically in front of the Talara Basin oil
fields of the Peruvian northwest.
The first exploration well to be drilled in
Block Z-38, Marina-1, has the potential to
open a new oil and gas production
opportunity for the industry and re-ignite
one of the oldest oil producing regions in
the world. Karoon has mapped several
large structures around Block Z-38 and
Area 73. In addition, information obtained
from the Marina-1 well will be utilised to
further develop the geological model for
Area 73. The Marina Prospect has an
unrisked
prospective
resource of 256 mmbbls at 100%
(102 mmbbls net to Karoon).
estimate
best
Ocean state modelling commenced during
the financial year with the installation of
10 buoys around the Marina-1 well location,
which marked the beginnings of formal
operations for drilling.
Tendering for a drilling rig and services was
initiated during late calendar year 2018 and
bought strong interest from rig owners, and
a number of proposals were received.
Karoon is currently finalising rig negotiations
alongside Karoon’s new farm-out partner
Tullow for the drilling of the high impact
14
Karoon Energy Ltd Annual Report 2019 NORTHERN CARNARVON BASIN, AUSTRALIA
Australia
WA-482-P
Levitt-1
LEGEND
Oil field
Gas field
Karoon leads
Gas pipeline
3D Seismic survey area
Karoon permit
Key Statistics
Permit:
Karoon Equity Interest:
Operator:
Gross Acreage:
Water Depth:
Type:
Status:
NORTHERN CARNARVON BASIN
Io/Jansz
Goodwyn
Urania
Perseus
Exeter
Mutineer/Pitcairn
Angel
Amulet
Legendre
Dorado-1
Oil discovery
(July 2018)
Sage
Reindeer
Corvus
Wandoo
Campbell Chamois
Oryx
Stag
Port Hedland
Bambra
Dampier
Barrow
Narvik
Karratha
Maenad
Gorgon
Spar
Woollybutt
Western Australia
NORTH
100 km
WA-482-P
50%
Santos WA Northwest Pty Ltd (50% equity interest)
6,730 sq km
400 to 2,000 metres
Oil
Exploration phase
15
Karoon Energy Ltd Annual Report 2019 OPERATIONS REVIEW (CONTINUED)
FOR THE FINANCIAL YEAR ENDED 30 JUNE 2019
The Carnarvon Basin is one of Australia’s
largest and most prolific oil and gas regions.
The Basin area south and west of WA-482-P
is host to multiple world scale LNG projects,
a number of oil projects and is also a region
being
by major
international oil companies. During recent
times the region nearer to exploration permit
WA-482-P has played host to a series of
exploration campaigns looking to extend
the prospectivity of the Basin to previously
underexplored areas.
explored
actively
in
The Dorado oil discovery during July 2018
was one success the industry has had
recently
the Carnarvon Basin and
provided valuable information which can be
utilised by Karoon to better understand the
region. It showed that source rocks in the
area, seen by the industry as predominantly
gas prone, can generate prolific oil
resources. Dorado is billed as one of the
largest oil discoveries in recent times in
reported contingent
Australia, with a
resource
located
approximately 100 km from exploration
permit WA-482-P.
186 mmbbls
of
straddles
While in a relatively underexplored part of
the Northern Carnarvon Basin,
the
WA-482-P permit covers a significant area
Jurassic depocentres
and
(Wigmore Sub-basin and Whitetail Graben).
Good quality oil mature source rocks
seen in nearby wells are interpreted to be
present over large parts of the permit.
Successful drilling results would open up
new exploration plays in the Basin.
During September 2012, Karoon acquired a
100% equity interest in exploration permit
WA-482-P in the Northern Carnarvon Basin.
Forward Work Program
The firm 3 year work program of seismic
data reprocessing and geological studies
will be used to further de-risk numerous
large fault block features identified on high
quality 3D seismic.
The Levitt-1 exploration well has proven
reservoir quality in both the North Rankin
Formation and the Legendre Formation
objectives. Structures at the Legendre play
level have shown encouraging AVO
anomalies supportive of the presence of
trapped oil. Geological studies will assess
new concepts as to the presence of oil in
Jurassic depocentres such as the Wigmore
Sub-basin and Whitetail Graben, and
those
rocks such as
Triassic source
identified in the Dorado oil discovery.
the
Upon completion of
reprocessing
and geoscience studies, the focus will be
the numerous prospects
on de-risking
identified on the 3D dataset with a view
to attracting a
to partner
in progressing the area.
farminee
Equity Interests
Equity
interests of
WA-482-P are:
the participants
in
Karoon Gas (FPSO) Pty Ltd
Santos WA Northwest Pty Ltd
(Operator)
50%
50%
is
The permit
located approximately
300 km offshore from the Western Australia
coast in water depths ranging from 400 to
2,000 metres. The original exploration
permit covered an area of 13,539 sq km.
Karoon
farmed out a 50% equity
interest and operatorship in WA-482-P to
Apache Northwest Pty Ltd during May 2014,
now part of Santos Limited (formerly
Limited).
Quadrant Energy Australia
Following
the Levitt-1
farm-out,
exploration well was drilled and discovered
water bearing reservoirs, but with oil shows.
the
the
From the acquisition of the Capreolus 3D
marine seismic survey data
joint
operation has a high quality 3D data set
covering all of the renewed permit area.
Further seismic interpretation work will allow
Karoon to better define, risk and rank
the 10 significant prospects which have
been identified.
A ‘Renewal Application’ was lodged with
the National Offshore Petroleum Titles
Administrator (‘NOPTA’) by the Operator
on 8 March 2019. As part of the renewal
process there was a mandatory requirement
to relinquish approximately 50% of the area,
resulting in a reduction of the permit’s
area to 6,730 sq km. The renewal was
joint
subsequently approved and
operation committed to a firm 3 year
program of seismic reprocessing of existing
3D data and geoscience studies.
the
the original
All prospective areas of
exploration permit area were renewed, with
the net unrisked prospective resource
volume best estimate of WA-482-P still
assessed as 1,398 mmbbls.
16
Karoon Energy Ltd Annual Report 2019 CEDUNA SUB-BASIN, GREAT AUSTRALIAN BIGHT (‘GAB’), AUSTRALIA
Exploration Permit EPP46
Karoon was awarded exploration permit
EPP46 during October 2016.
Since 2011, various GAB exploration
permits have been held by Murphy Oil,
Santos Limited, Chevron, BP and Equinor
(formerly Statoil) with over 42,000 sq km of
3D marine seismic being acquired during
that time. During June 2017, BP exited the
GAB with Equinor becoming Operator and
100% owner of 2 exploration permits at
its
time. Equinor has re-affirmed
that
commitment
the Stromlo-1
exploration well prior to the end of its initial
permit term, which falls during April 2020.
to drilling
Karoon does not plan to commit any further
resources to EPP46 until there is a clear
pathway of support from NOPSEMA to
safely and commercially pursue exploration
drilling activities.
Due to the difficulties associated with
regulatory approvals to conduct operations,
Karoon has commenced discussions with
to surrender
the
exploration permit EPP46.
regulatory authorities
Key Statistics
Permit:
Karoon Equity Interest:
Operator:
Gross Acreage:
Water Depth:
Type:
EPP46
100%
Karoon
17,649 sq km
1,300 metres (average)
Oil and gas
BROWSE BASIN, AUSTRALIA
Exploration Permit WA-314-P
Over a 10 year period from 2004 to 2014,
the Browse Basin formed the cornerstone of
Karoon’s exploration efforts. Karoon farmed
out a 60% equity
(including
its original exploration
operatorship)
permits
to
ConocoPhillips during 2006, with the joint
operation making the multi-TCF Poseidon
gas discovery during 2009.
(WA-314-P and WA-315-P)
interest
in
During June 2014, Karoon sold its 40%
equity interest in Poseidon (exploration
permits WA-315-P and WA-398-P) to Origin
Energy Limited for US$600 million, and a
contingent milestone consideration of up to
US$200 million.
any
in
further
exploration
During the financial year G&G studies did
significant
identify
not
prospectivity
permit
WA-314-P and Karoon has decided to
relinquish it. The Company has submitted
its work program evaluation to NOPTA
together with an application to surrender
the permit in good standing.
Key Statistics
Permit:
Karoon Equity Interest:
Operator:
Gross Acreage:
Water Depth:
Type:
WA-314-P
100%
Karoon
998 sq km
500 metres (average)
Oil
17
Karoon Energy Ltd Annual Report 2019 18
Karoon Energy Ltd Annual Report 2019 SUSTAINABILITY REPORT
FOR THE FINANCIAL YEAR ENDED 30 JUNE 2019
In keeping with Karoon’s commitment to continuous improvement
it has sought to identify ways to improve efficiency and
effectiveness in its governance practices.
Karoon is focussed on creating a bright
future for its shareholders, employees and
the local communities where it operates.
As Karoon transitions to oil production in
Brazil, Karoon is more conscious than ever
of its responsibilities to employees, local
communities and the environment.
to
the
included
investigate
Karoon has been working toward acquiring
a production asset since 2015. Key due
diligence items for the Baúna acquisition
assessment undertaken during the financial
year
application,
implementation and performance of the
Health, Safety and Environment (‘HSE’)
management systems and compliance with
the approved Baúna Environmental Plan.
Independent technical consultants were
appointed
the Baúna
acquisition prior to Karoon signing the SPA
on 25 July 2019. This investigation is
ongoing and Karoon will be working closely
with the FPSO operator prior to reaching
transaction completion
that
Baúna continues to operate to a high
standard, and is aligned with Karoon’s
Operating Management System (‘OMS’)
and Karoon’s commitment to conduct its
business
responsibly,
encourage community initiatives, consider
the environment and ensure a safe,
equitable and supportive workplace.
to ensure
ethically
and
During the financial year, Karoon’s social
projects team was focussed on Peru in
preparation for the upcoming exploration
drilling campaign in the Tumbes Basin.
Karoon places a high priority on
local
communicating
communities on all relevant operational
activities. Karoon
implemented
strategies to maintain strong relationships
with local Tumbes stakeholders, fostering
trust over many years, in order to carry out
safe,
responsible
operations.
transparent
openly
with
and
has
Karoon’s Risk Management Team maintains
a Corporate Risk Register, which assists
strategic decision making and also helps
focus Karoon’s sustainability efforts. Karoon
regularly reviews its Corporate Risk Register
to ensure its risk mitigation strategies are
appropriate. The Risk and Governance
Committee reviews the Corporate Risk
Register at least annually to ensure material
risks have been identified and assessed,
that the assessment reflects the Board of
Directors’ risk appetite and to ensure that
adequate controls have been identified and
put in place.
In assessing potential acquisitions a
Project Risk Register, reflecting Karoon’s
specific risk assessment, was prepared for
each asset under consideration. This has
assisted Karoon in taking a coordinated,
consistent and efficient approach to its due
diligence, in line with its Board of Directors’
risk appetite and overall sustainability
obligations.
in
the
those
its people and
Health, Safety, Security and
Environment (‘HSSE’)
Karoon’s first priority is the health and safety
of
local
communities where it operates. The HSSE
team has actively engaged all staff
throughout the financial year to ensure this
undertaking
is both understood and
followed. Education and training programs
have included both internal and external
workshops and specific programs such as
First Aid training.
As
there were no drilling or seismic
acquisition programs during the financial
year, the HSSE metrics for the financial year
were all zero.
A
locally based website has been
established specifically in Peru to keep local
communities informed on the status of
Karoon’s upcoming exploration drilling
activities www.operacioneskaroon.com.pe.
In all of Karoon’s activities undertaken,
including both asset assessments and
operations planning, Karoon’s strategic
planning and risk management principles
and practices have ensured informed and
careful decision making. In keeping with
Karoon’s commitment
to continuous
improvement it has sought to identify ways
to improve efficiency and effectiveness in its
governance practices. A review was recently
undertaken in recognition of the ASX fourth
edition Corporate Governance Principles
and Recommendations and the ongoing
implementation of Karoon’s OMS, adopted
from the International Association of Oil and
Gas Producers (IOGP) 510 standards.
Karoon looks forward to finalising the review
and putting
into
practice during the financial year ending
30 June 2020.
the recommendations
A summary of Karoon’s sustainability
approach and achievements during the
financial year in the key areas of Health,
Safety, Security and Environment, Respect
for Communities, Climate Change and
People and Culture is provided below.
Philosophy and Management
Karoon’s approach to sustainability and the
environmental, social and governance
principles is developed and implemented
through
risk management
framework, currently overseen by the Risk
and Governance Committee of the Board
of Directors.
its broader
19
Karoon Energy Ltd Annual Report 2019 SUSTAINABILITY REPORT (CONTINUED)
FOR THE FINANCIAL YEAR ENDED 30 JUNE 2019
in
those
its people and
Respect for Communities
Karoon understands the importance of
fostering an ethical culture and operating
responsibly to protect the health and safety
of
local
communities where it operates. For several
years, Karoon’s social and environmental
team has been actively working to ensure
local communities have been kept informed
of Karoon’s activities and are provided with
opportunities to advance education and
health care in local communities where it is
most needed.
the
Local community communication and
engagement is particularly important in
preparing and implementing any operational
campaign, so Karoon’s primarily focus
during the financial year was the Tumbes
region in Peru. A locally based website has
been established
to ensure up-to-date
information is made available to relevant
local communities, while also keeping the
general public informed. This also provides
a convenient way for people to seek further
information or clarification from Karoon.
Karoon has been proud to support many
programs in the Tumbes region, which have
been successfully
implemented over
a number of years, providing tangible
long-term benefits in healthcare, education,
environmental stewardship and economic
independence.
this
During
year, Karoon
financial
commenced implementation of the social
initiatives
the government
in
environmental approval for the upcoming
Peru
campaign.
Social initiatives implemented included:
exploration
drilling
listed
• assistance with
licences and
training for local fisherman;
formalising
fishing
international maritime
“Connecting with Your Future”
This program is going to be implemented in
conjunction with Tumbes University and
local public schools and aims to ensure
students are well informed about courses
available at Tumbes University. The program
will be offered to 432 students from 8 public
schools from Tumbes and will include
guided visits to the faculties and university
facilities as well as a presentation
of potential career paths.
Karoon Educa Scholarship
Karoon Educa is a scholarship program
that aims to support tertiary students from
low socio-economic backgrounds to be
able to continue with their studies. Karoon is
to benefit
launching 25 scholarships
25 students that are currently studying
at Tumbes University. Each student will
receive a monthly scholarship of Peruvian
Sol 400,00 during one semester to fund
school materials,
transportation and/or
meals. The program has been developed in
conjunction with
is
particularly aimed at students with strong
academic records who may otherwise be
unable to continue with their studies.
the university and
Learn to Teach Scholarship
This program provides high school,
elementary and kindergarten teachers from
11 different communities in Tumbes the
opportunity to undertake mid-term training
courses in specialised education topics.
The program aims to broaden teachers’
knowledge and thereby improve the level of
education offered at
local schools.
The program, which Karoon will operate
over a period of 12 months, will provide
financial assistance to teachers interested
in the post-graduate degrees.
Since beginning operations in Peru, Karoon
has been able to assist:
200
1,180
Fishermen with licencing and
international maritime training
Women through the Mutumbi
micro-business program
Children, young people and
teachers with financial
scholarships and support
for vocational talks
49,142 Members of local Tumbes
546
communities with food and
other donations through school,
Christmas and Fisherman’s
Day campaigns
Karoon has also provided different levels
of support to communities in Brazil and
Australia during this financial year through:
• donations of school materials,
food
supplies, cleaning products and hygiene
products to children’s shelters and care
centres in Brazil;
• university sponsorships in both Brazil and
Australia; and
• sponsorship of the Great Australian Bight
(‘GABRWS’)
Study
Right Whale
in Australia.
Karoon is proud to be able to sponsor these
and other programs. Further details of
Karoon’s social and environmental projects
in Brazil are available at the Karoon Brazil
website at www.karoon.com.br.
Details of the GABRWS can be found at
www.gabrightwhales.com.
• donations of supplies to local schools; and
• food donations to recognise Fishermen’s
Day and Christmas.
In addition, Karoon sought to expand its
successful educational program, ‘Tumpis’,
which was originally introduced in Peru
during 2013. The program began with
supporting low income and disadvantaged
students to obtain a tertiary education and
has now seen 8 students complete their
studies in topics ranging from Tourism
and Hospitality
to Accounting and
Agroindustry. From 2019 the program will
now include:
20
Karoon Energy Ltd Annual Report 2019 to
reporting
Climate Change
is
Karoon’s climate change
aligned
four core elements of
the
disclosure recommended in the Task Force
on Climate-related Financial Disclosures
(TCFD) Report, namely governance,
strategy, risk management, and metrics
and targets.
to
Governance
The highest level of responsibility for climate
change within Karoon is delegated by the
the Risk and
Board of Directors
Governance Committee. The Risk and
Governance Committee is responsible for a
range of risk and governance matters,
including identifying material exposures to
social
economic, environmental and
sustainability
is
supported by the Risk Management Team,
which involves senior management from
different areas of the organisation, including
the Sustainability Manager.
risks. This Committee
Strategy
Karoon views energy as an imperative for
economic and social development but also
acknowledges that an energy transition to
low carbon fuels and renewable energy
sources is underway to reduce the impacts
of climate change. As an oil and gas industry
participant, successfully
identifying and
managing these challenges is paramount
and necessary for the long-term success
and sustainability of Karoon’s business.
Karoon will move
from a prolonged
period of very low carbon emissions, due to
limited or no operations, into a period of
continuous emissions generation, following
transaction close on the Baúna acquisition.
Karoon is aware of its responsibility to
endeavour to optimise efficient operations,
thereby
to reduced emissions,
leading
where possible.
Karoon will look to identify opportunities to
develop new and expand existing programs
that aim to increase operational efficiency
and/or reduce carbon emissions during the
transition planning process.
Risk Management
High level climate-related risks are identified
and assessed using Karoon’s Corporate
Risk Matrix, which includes several measures
of consequence relating to environmental,
safety, financial and reputational impacts.
relating
More detailed operational risks, including
to operational climate
those
change impacts, are assessed using the
Karoon HSSE Risk Matrix, and each
operated activity must be addressed and
reduced to an acceptable level of risk
before operations commence.
Detailed operational risk assessments have
been planned for both the upcoming Peru
exploration drilling campaign and the final
handover of Baúna from Petrobras following
completion. These processes include an
assessment of climate change related risks
and opportunities for each project, which
further carbon emissions
may enable
reductions measures to be identified.
Metrics and Targets
Karoon’s Scope 1 emissions for the financial
year were approximately 57 tonnes of
carbon dioxide equivalent and Scope 2
emissions were approximately 168 tonnes
of carbon dioxide equivalent. Scope 1
emissions were from transport fuels used
by fleet cars, while Scope 2 emissions were
from electricity consumed at office
locations. Karoon did not have any
emissions from exploration activities during
the financial year.
reduces
its corporate carbon
Karoon
emissions
low carbon energy
purchases to its Australian offices, using
GreenPower for a portion of its electricity.
through
Due to the very low carbon emissions
generated solely
through administrative
functions compared to operations, Karoon
has not set targets for emissions reductions
in recent years as the targets would not be
material. With Peru drilling operations
expected to commence during early 2020
calendar year Karoon will seek to assess
the carbon emissions generated during the
drilling campaign and will work with the
successful rig tenderer to ensure operations
are carried out responsibly with regard to all
aspects of HSSE.
21
As the specific requirements for carbon
emissions reporting in Brazil are different to
Australia, Karoon will seek to determine
what historic data is available for Baúna
during the transition process in order to
estimate
the existing carbon emission
levels. This will assist Karoon to identify
possible
improve
operations to potentially reduce carbon
emissions. Karoon will look to consider
measurable targets once existing carbon
emission levels are properly understood.
opportunities
to
People and Culture
Staff Engagement and Education
Karoon’s Social and HSSE teams, both
based in South America, actively sought
during the financial year to educate and
encourage Karoon employees to consider
ways to change their behaviour to be more
environmentally sustainable, both in the
workplace and at home.
World Environment Day, which Karoon
celebrates each year as part of Karoon’s
Environment Week, was acknowledged in
all offices.
This financial year, all employees were
encouraged to consider the ‘Air Pollution’
theme and look at what they could do
reduce their own carbon emissions that
contribute
to air pollution, particularly
through using more sustainable transport
methods to travel to and from work.
the Group, Karoon employees
Across
continued to be offered training in areas of
HSSE, including First Aid training, and anti-
bribery and no corruption refreshers. Staff
wellbeing was also supported
through
including
Karoon’s ongoing programs,
healthy snacking and support for regular
exercise.
Diversity
Karoon has a robust Diversity Policy,
applicable across all its offices and in all
jurisdictions, and is committed to promoting
a culture of diversity and acceptance.
Karoon has been reporting regularly on
its Corporate
gender diversity
Governance
has
consistently shown that female employees
make up more than 40% of all employees
across all Karoon offices, and almost 30%
of senior executives are female across
the Group.
Statement, which
through
Karoon Energy Ltd Annual Report 2019 DIRECTORS’ REPORT
At the 2018 Annual General Meeting, shareholders approved the change of name from Karoon Gas Australia Ltd to Karoon Energy Ltd.
The Board of Directors submits its Directors’ Report on Karoon Energy Ltd (the ‘Company’) and its subsidiaries (the ‘Group’) for the financial
year ended 30 June 2019 (the ‘financial year’).
Board of Directors
Under the Company’s Constitution, the minimum number of Directors that may comprise the Board of Directors is currently 3 and the maximum
number of Directors is 10. Directors are elected and re-elected at annual general meetings of the Company.
The names of the Directors of the Company during the financial year and up to the date of this Directors’ Report are set out below:
Mr Bruce Phillips
BSc. (Hons), (Geology)
Independent Non-Executive Chairman
Appointed 1 January 2019.
Mr Phillips has 43 years’ of technical, financial and commercial experience in the global energy industry,
encompassing a number of corporate entities. Bruce has extensive experience in upstream oil and gas exploration
and production via involvement in projects in Australasia, Africa, Europe and the Americas. He also has considerable
experience in governing publicly listed companies, including the chairmanship of four companies listed on the ASX.
Since founding AWE Limited in 1997, Mr Phillips has held positions as CEO, Chairman and Non-executive Director.
He is currently the Chairman of ALS Limited (ALQ: ASX), is the former Chairman of Platinum Capital and AWE
Limited (now part of Mitsui Corporation), and a former Non-Executive Director of AGL Energy Limited (AGL: ASX)
and Sunshine Gas Limited (formerly SHG: ASX: pre-merger with QGC). During Mr Phillips’ executive career he held
varied positions within the industry initially as a geophysicist for AMAX and Esso, graduating to a business
development role at Command Petroleum Limited and General Manager of Petroleum Securities Australia Limited.
Current directorships of other listed companies include: Chairman, ALS Limited.
He is a member of the Petroleum Society of Australia and the Australian Society of Exploration Geophysicists.
Member of the Nomination and Remuneration Committees from 8 March 2019.
Mr Robert Hosking
Managing Director
Appointed 11 November 2003.
Robert is the founding Director of the Company and has more than 35 years of commercial experience in the
management of several companies. Robert has been involved in the oil and gas industry for more than 20 years and
was a founding director/shareholder of Nexus Energy Limited.
Robert also has a background of more than 18 years commercial experience in the steel industry. He jointly owned
and managed businesses involved in the trans global sourcing, shipping and distribution of steel-related products,
with particular expertise gained in Europe and the Asia/Pacific Rim.
Mr Mark Smith
Dip. App. Geol, Bsc. (Geology)
Executive Director and Exploration Director
Appointed 20 November 2003.
Mark has more than 30 years’ experience as a geologist and exploration manager in petroleum exploration and
development in Australia, South East Asia, North and South America. His early experience was gained while working
with BHP Petroleum. Mark has been directly involved with 16 economic oil and gas discoveries.
Mark has geoscience skills in regional basin and tectonic studies, petroleum systems fairway assessments, prospect
evaluations, risking and volumetrics, fault seal prediction and well-site operations. His management skills cover
general and human resources management, acreage evaluation and acquisition projects, farm-ins/farm-outs, well
site operations management and management of onshore and offshore drilling operations.
22
Karoon Energy Ltd Annual Report 2019 Ms Luciana Bastos de Freitas Rachid
B Chem Eng. Post Grad Degree Corporate Finance
Independent Non-Executive Director
Appointed 26 August 2016.
Luciana has over 35 years’ experience in the oil and gas industry in both technical and senior leadership roles in
Brazil, including 20 years in the Exploration and Production Division of Petrobras. During this time she worked in senior
management roles, starting as a process engineer and completing her time in the corporate management team.
Luciana also has a number of years’ experience serving on Boards in Brazil. She has represented Petrobras as Chairperson
of Transportadora Brasileira Gasoduto Bolívia-Brasil SA, and Gás Brasiliano Distribuidora SA as well as a Director of
Transportadora Associada de Gás, Companhia de Gás de Minas Gerais and Companhia Paranaense de Gás.
Luciana’s technical experience covers a variety of project evaluation, development and management roles including
Marlim Leste Asset Manager, the design of the first offshore platforms in the Campos Basin, the production, handling
and processing of natural gas onshore and offshore, the coordination of the Petrobras E&P Deepwater Strategic
Project and a variety of technical and economic feasibility studies on major projects including participation in the first
Petrobras project finance deals.
Luciana has also held positions in the Petrobras financial team including Executive Manager of Investor Relations,
Executive Manager of Financial Planning and Risk Management. In the Gas & Energy Division she served as General
Manager of Marketing and Trading, Executive Manager of Corporate Affairs, Executive Manager for Logistics and
Investments in Natural Gas and Chief Executive Officer of Transportadora Brasileira Gasoduto Bolivia-Brasil SA and
most recently Chief Executive Officer of Transportadora Associada de Gás SA.
Member of the Nomination, and Risk and Governance Committees.
Mr Geoff Atkins
FIE Aust. CP Eng.
Independent Non-Executive Director
Appointed 22 February 2005.
Geoff has over 45 years’ experience in investigation, planning, design, documentation and project management of
numerous significant port, harbour and maritime projects. These include container terminals, LNG jetties, oil and gas
wharves, heavy lift facilities, cement, coal, bauxite, iron ore and other bulk terminals, shipping logistics and naval bases.
Geoff has gained substantial overseas experience completing marine projects in Indonesia, Malaysia, Thailand,
Vietnam, Sri Lanka, India, South Africa, Namibia, New Zealand and the United Kingdom. LNG, oil, gas, bulk ports
and other large maritime infrastructure projects that Geoff has been involved in have included the design of Woodside
Petroleum Limited’s LNG jetty, tender design of ConocoPhillips’ Darwin LNG jetty and concept designs for the
Sunrise LNG jetty. Geoff has also been involved in investigations of proposed LNG marine terminals in Taiwan, Iran
and Israel for BHP Petroleum and the West Kingfish and Cobia oil drilling platforms for ESSO/BHP in Bass Strait.
Chairman of the Nomination Committee.
Member of the Audit and Remuneration Committees.
23
Karoon Energy Ltd Annual Report 2019 DIRECTORS’ REPORT (CONTINUED)
Board of Directors (continued)
Mr Clark Davey
B. Commerce, FTIA, MAICD
Independent Non-Executive Director
Appointed 1 October 2010.
Clark is a professional independent Company Director with over 40 years of experience in the natural resources industry
as a taxation and strategy advisor. Clark was a partner at Price Waterhouse and PricewaterhouseCoopers for a number
of years with an oil and gas and natural resources specialty holding industry leadership roles in both firms. Clark is a
member of the Taxation Institute of Australia and the Australian Institute of Company Directors.
The wealth of taxation and business advisory experience Clark brings to Karoon includes input on international
company tax, Australian and overseas resource and indirect taxation and oversight of accounting, governance and
capital management procedures. Clark has advised many companies with both tax and management of joint venture
interests as well as merger and acquisition transactions. He has also assisted both listed and unlisted companies
expand their resource industry interests internationally.
Current directorships of other listed companies include Redflex Holdings Limited (appointed 6 January 2015).
Clark is Chairman of the Audit Committee.
Member of the Nomination, Remuneration, and Risk and Governance Committees.
Mr Peter Turnbull
B. Commerce, LLB, FGIA (Life), FAICD
Independent Non-Executive Director
Appointed an independent Non-Executive Director on 6 June 2014.
Peter is an ASX experienced independent non-executive director and chair with significant exposure to the global
mining, energy and technology sectors.
Peter brings to the board significant commercial, legal and governance experience gained from working with boards
and management to conceive, structure, fund and complete corporate transactions and to prioritise and maximise
the value of organic growth strategies for shareholders.
Peter has significant regulatory and public policy experience from prior executive roles including as a Director of the
Securities & Futures Commission of Hong Kong. Over time, Peter has held roles as a director or senior officer of
several global organisations which promote best practice governance and is a regular contributor and speaker in
Australia and overseas on corporate governance issues. Peter is a former President and current Life Member of the
Governance Institute of Australia.
Peter’s senior executive roles over 30 years involved significant experience in very large publicly listed organisations
with global operations, particularly South East Asia, Europe and the USA. This experience included over a decade
in energy markets and the resources sector including as Company Secretary of Newcrest Mining Limited,
Company Secretary and General Counsel of BTR Nylex Limited and General Manager, Legal and Corporate Affairs
with Energex Limited.
Current directorships of other listed companies include: Chair, Calix Limited, since its ASX listing on 20 July 2018.
Chairman of the Remuneration, and Risk and Governance Committees.
Member of the Audit and Nomination Committees.
24
Karoon Energy Ltd Annual Report 2019 Mr Jose Coutinho Barbosa
Bsc. (Geology), Msc. (Geophysics)
Non-Executive Director
Appointed 31 August 2011.
Jose Coutinho spent 38 years with Petrobras, beginning his career in a number of technical and management
positions, culminating in his appointment as Acting President and CEO of Petrobras, one of the world’s largest
petroleum exploration and production companies.
Earlier in his career, Jose Coutinho was Executive Vice-President and CEO of Petrobras Internacional SA (otherwise
known as Braspetro) and was Managing Director for Exploration and Production of Petrobras until his retirement
during February 2003. Since then, he has managed his own independent consulting firm, Net Pay Óleo & Gás
Consultoria Ltda, headquartered in Rio de Janeiro, Brazil, operating in areas of the petroleum industry. Jose Coutinho
brings knowledge and experience to the Company, including experience with geology, exploration and production
and local knowledge of the oil and gas industry in Brazil and internationally.
Jose Coutinho is also the Temasek Representative Director on the Board of Directors of Odebrecht Oleo e Gas (unlisted).
Company Secretary
Mr Scott Hosking
B. Commerce
Appointed on 10 March 2006.
Scott has a significant international financial and commercial management background and has been involved with
several commercial ventures over the past 20 years with experience in international trade, finance and corporate
management. He has previously held support positions to Company Secretaries of Australian listed companies,
worked as part of the finance and management teams of private international resource and industrial enterprises
and was involved in the listing of the Company.
Meetings
The number of Directors’ meetings (including meetings of committees of Directors) and attendance by each Director of the Company during
the financial year were:
Board Meetings
Audit Committee
Meetings
Remuneration
Committee
Meetings
Nomination
Committee
Meetings
Director
Mr Bruce Phillips
Dr David Klingner
Mr Robert Hosking
Mr Mark Smith
Ms Luciana Rachid
Mr Geoff Atkins
Mr Clark Davey
Mr Peter Turnbull
Mr Jose Coutinho Barbosa
A
5
1
11
11
11
11
11
11
11
B
5
–
11
10
11
11
11
11
11
A
–
–
–
–
–
5
5
5
–
B
–
–
–
–
–
5
5
5
–
A
1
1
–
–
–
3
6
6
–
B
1
–
–
–
–
3
6
6
–
A
–
–
–
–
3
3
3
3
–
B
–
–
–
–
3
3
3
3
–
A. The number of meetings held during the time the Director held office during the financial year.
B. The number of meetings attended during the time the Director held office during the financial year.
Risk and
Governance
Committee
Meetings
A
–
2
–
–
7
–
7
7
–
B
–
–
–
–
7
–
7
7
–
25
Karoon Energy Ltd Annual Report 2019 DIRECTORS’ REPORT (CONTINUED)
Directors’ Interests in the Company’s Shares, Share Options and Performance Rights
As at the date of this Directors’ Report, the Directors held the following number of ordinary shares, share options and performance rights
over unissued ordinary shares in the Company:
Director
Mr Robert Hosking
Mr Mark Smith
Mr Bruce Phillips
Ms Luciana Rachid
Mr Geoff Atkins
Mr Clark Davey
Mr Peter Turnbull
Mr Jose Coutinho Barbosa
Ordinary Shares,
Fully Paid
12,131,868
3,014,443
–
–
696,784
24,294
41,000
–
Unlisted Share
Options
574,172
574,172
–
–
–
–
–
–
Unlisted
Performance
Rights
202,903
202,903
–
–
–
–
–
–
Principal Activities
The principal activity of the Group during the course of the financial year continued to be investment in hydrocarbon exploration and evaluation
in Australia, Brazil and Peru.
Significant Changes in State of Affairs
There was no significant change in the state of affairs of the Company during the financial year.
Results
The consolidated result of the Group for the financial year was a loss after tax income of $28,417,537 (2018: $181,777,789).
The loss for the financial year included:
• write-off of capitalised exploration and evaluation expenditure associated with historical Australian exploration and evaluation activities
for exploration permit WA-482-P of $13,226,427 in relation to designated acreage relinquishment (2018: $5,892,079 in South America);
• write-down of the carrying value of inventory to net realisable value of $6,213,639 resulted from the consideration of utilising a particular
type of rig for the upcoming drilling of the Marina-1 exploration well in Block Z-38, offshore Peru, which would mean a portion of Karoon’s
existing Peru inventory may not be suitable for that generation of rig (2018: $6,679,549 in Peru);
• business development and other project activities of $5,214,563 (2018: $7,285,306) that included internal time allocation of employees
and consultants and associated office charges, geotechnical data and external advice relating to due diligence reviews on potential asset
acquisitions;
• exploration and evaluation expenditure expensed of $4,191,536 (2018: $5,569,500) from reviewing new exploration ventures predominantly
in South America; and
• net employee benefits expense of $11,100,470 (2018: $ 11,339,308), which included share-based payments expense of $3,996,372
(2018: $ 4,409,889).
Partially offsetting the loss for the financial year were net foreign currency gains of $17,486,787 (2018: $12,993,578), interest income of
$2,314,803 (2018: $710,652) and tax income of $1,160,404 (2018: $2,278,808) relating largely to the de-recognition of a deferred tax liability
in relation to capitalised Australian exploration and evaluation expenditure that was written-off during the financial year.
Interest income is earned on the Group’s USD cash holdings, which represents USD proceeds received from the sale of the Group’s Browse
Basin assets during August 2014. The Group made the decision to retain these proceeds in USD to provide a natural hedge against future
USD exploration expenditure and benefit from an appreciation in the USD to fund corporate overheads largely denominated in AUD, whilst
managing the income tax exposure arising from the movement of these funds. The USD proceeds were initially received at a value of
USD1:AUD1.07 which compares to USD1:AUD1.43 as at 30 June 2019, representing an appreciation of approximately $77 million or 34%
in AUD equivalent.
The net foreign currency gains were almost entirely attributable to the appreciation in the United States dollar against the Australian dollar
(from AUD1:USD0.7391 as at 30 June 2018 to AUD1:USD0.7013 as at 30 June 2019) on cash assets and security deposits held in United States
dollars by the Group during the financial year.
26
Karoon Energy Ltd Annual Report 2019 Cash Flows
Operating activities resulted in a cash outflow for the financial year of $21,964,059 (2018: $25,293,170), predominantly for payments to
suppliers and employees. Cash outflow from investing activities for the financial year were $2,864,425 (2018: $28,215,446) relating principally
to the payment for exploration and evaluation expenditure in Australia, Brazil and Peru; offset by recoupment of exploration and evaluation
expenditure and upfront payment on farm-out to Tullow of $5,591,334 and a net security deposit receipt for Peru (performance guarantee for
Block Z-38) of $2,553,281. Cash outflow from financing activities for the financial year was $94,081 related to payments for the finance lease
in Brazil (2018: $64,290).
The positive effect of exchange rate changes on the balance of cash and cash equivalents held in foreign currencies, primarily in United States
dollars, for the financial year was $17,540,743 (2018: $12,076,432).
Financial Position
At the end of June 2019, the Group had a cash and cash equivalents balance of $326,191,131 (30 June 2018: $333,572,953).
The Group’s working capital, being current assets less current liabilities, decreased from $329,000,556 as at 30 June 2018 to $323,978,091
as at 30 June 2019 predominantly as a result of expenditure on exploration and evaluation assets and expenditure on new business
development associated with the acquisition of Baúna; partially offset by the appreciation in the United States dollar against the Australian
dollar on cash assets and security deposits held in United States dollars during the financial year.
During the financial year, total assets decreased from $594,920,565 to $581,089,382, total liabilities increased from $39,694,851 to
$39,850,473 and total equity decreased by $13,986,805 to $541,238,909. The major changes in the consolidated statement of financial
position were largely due to the following:
• exploration and evaluation expenditure in Australia, Brazil and Peru;
• write-off of capitalised exploration and evaluation expenditure associated with historical Australian exploration and evaluation activities
for permit WA-482-P in relation to designated acreage relinquishment;
• write-down of inventory to net realisable value;
• appreciation in the United States dollar against the Australian dollar (from AUD1:USD0.7391 as at 30 June 2018 to AUD1:USD0.7013
as at 30 June 2019) on cash assets and security deposits held in United States dollars; and
• positive movement in the foreign currency translation reserve as a result of the appreciation of both the Brazilian REAL and United States
dollar against the Australian dollar.
There was no change in contributed equity of the Company during the financial year.
Exploration and evaluation expenditure of $11,411,205 was incurred during the financial year, in the following operating segments:
• Peru, with drill planning and logistics, G&G studies, at a total cost of $6,111,047;
• Brazil, continued work on the Neon light oil discovery and G&G studies, at a total cost of $4,551,542; and
• Australia, the Group and its joint operation partner in WA-482-P continued G&G studies, at a total cost of $748,616.
Review of Operations
Information on the operations of the Group is set out in the Operations Review on pages 10 to 17 of this Annual Report.
Business Strategies and Prospects, Likely Developments and Expected Results of Operations
The Operations Review sets out information on the business strategies and prospects for future financial years, refers to likely developments
in operations and the expected results of those operations in future financial years. Information in the Operations Review is provided to
enable shareholders to make an informed assessment about the business strategies and prospects for future financial years of the Group.
Details that could give rise to likely material detriment to Karoon, for example, information that is confidential, commercially sensitive or could
give a third party a commercial advantage has not been included. Other than the matters included in this Directors’ Report or elsewhere in
this Annual Report, information about other likely developments in the Group’s operations and the expected results of those operations have
not been included.
27
Karoon Energy Ltd Annual Report 2019 DIRECTORS’ REPORT (CONTINUED)
Dividends
No dividend has been paid or declared by the Company to shareholders since the end of the previous financial year. The Company intends
to pay future dividends during financial periods when appropriate to do so.
Share Options and Performance Rights
As at the date of this Directors’ Report, the details of share options over unissued ordinary shares in the Company were as follows:
Type of Share Option
ESOP options
ESOP options
ESOP options
ESOP options
ESOP options
ESOP options
Total ESOP options
Grant Date
6 October 2017
9 November 2017
14 November 2017
16 November 2017
21 September 2018
31 December 2018
Date of Expiry
30 June 2021
30 June 2021
30 June 2021
30 June 2021
30 June 2022
30 June 2022
Exercise Price
Per Share
Option
$1.73
$1.73
$1.73
$1.77
$1.40
$1.40
Number of
Share Options
1,547,619
421,647
59,709
1,148,344
3,297,603
1,069,686
7,544,608
As at the date of this Directors’ Report, the details of performance rights over unissued ordinary shares in the Company were as follows:
Type
Performance rights
Performance rights
Performance rights
Performance rights
Performance rights
Performance rights
Performance rights
Performance rights
Performance rights
Total performance rights
Grant Date
6 October 2017
6 October 2017
9 November 2017
14 November 2017
16 November 2017
21 September 2018
21 September 2018
31 December 2018
31 December 2018
Date of Expiry
30 June 2020
30 June 2021
30 June 2021
30 June 2021
30 June 2021
30 June 2021
30 June 2021
30 June 2022
30 June 2022
Exercise Price Per
Performance Right
$-
$-
$-
$-
$-
$-
$-
$-
$-
Number of
Performance
Rights
81,369
724,883
233,755
21,100
405,806
638,617
264,402
864,095
280,298
3,514,325
For details of share options and performance rights issued to Directors and other KMP of the Group as remuneration, refer to the
Remuneration Report in this Directors’ Report.
1,180,378 fully paid ordinary shares have been issued since 1 July 2019 as a result of the vesting and conversion of Karoon Gas Australia
Performance Rights Plan (‘PRP’) performance rights.
Information relating to the Company’s PRP and share options, including details of performance rights and share options granted, exercised,
vested and converted, cancelled, cash-settled, forfeited and expired during the financial year and performance rights and share options
outstanding at the end of the financial year, is set out in Note 27 of the consolidated financial statements.
No share option or performance right holder has any right under the share options or performance rights to participate in any other share
issue of the Company or any other entity.
28
Karoon Energy Ltd Annual Report 2019 Indemnification of Directors, Officers and External Auditor
An indemnity agreement has been entered into between an insurance company and the Directors of the Company named earlier in this
Directors’ Report and with the full-time executive officers, directors and secretaries of all Australian subsidiaries. Under this agreement, the
insurance company has agreed to indemnify these parties against any claim or for any expenses or costs which may arise as a result of
work performed in their respective capacities. The contract of insurance prohibits disclosure of the nature of the liability and the amount of
the premium.
As approved by shareholders at the 2009 Annual General Meeting, the Company will continue to pay those Director insurance premiums for
a period of ten years following termination of their directorships of the Company and will provide each Director with access, upon ceasing
for any reason to be a Director of the Company and for a period of ten years following cessation, to any Company records which are either
prepared or provided to the Director during the time period they were a Director of the Company.
The Company has not otherwise, during or since the end of the financial year, except to the extent permitted by law, indemnified or agreed
to indemnify an officer or external auditor of the Company or of any related body corporate against a liability incurred as such by an officer
or external auditor.
Proceedings on Behalf of the Company
No person has applied to the Court under Section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company,
or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all
or part of those proceedings.
The Company was not a party to any such proceeding during the financial year.
Corporate Governance
In recognising the need for the highest standards of corporate governance in order to drive performance and accountability, the Directors
support the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations. The Company’s Corporate
Governance Statement can be found under the Governance tab on the Company’s website at www.karoonenergy.com.
Environmental Regulation
The Company and its subsidiaries are subject to a range of relevant Commonwealth, State and International environmental laws.
The Board of Directors believes the Company has adequate systems in place for managing its environmental obligations and is not aware
of any breach of those environmental obligations as they apply to the Company and/or Group. No circumstances arose during the financial
year that required an incident to be reported by the Company and/or Group under environmental legislation.
Greenhouse Gas Emissions and Reporting Requirements
Relevant entities are required to report greenhouse gas emissions, energy consumption and energy under the National Greenhouse and
Energy Reporting Scheme. The Group was not required to register and report greenhouse gas emissions, energy consumption or energy
production under the scheme for this financial year, as it did not meet the relevant thresholds for the relevant period. However, the Group’s
global carbon footprint during the financial year was 225 tonnes of carbon dioxide equivalent based on equity share and including scope 1
and scope 2 emissions (2018: 227 tonnes).
As there was no exploration activity during this financial year, the total emissions are purely from the administration of global offices and
Karoon vehicles.
The Company continues to seek cost-effective, reliable and environmentally efficient methods for addressing future greenhouse gas emissions
and energy consumption. Further details of Karoon’s approach to Climate Change challenges can be found in the Sustainability Report
on page 21.
29
Karoon Energy Ltd Annual Report 2019 DIRECTORS’ REPORT (CONTINUED)
Non-Audit Services
The Company may decide to engage its external auditor, PricewaterhouseCoopers, on assignments additional to its statutory audit duties
where the external auditor’s expertise and experience with the Company and/or Group are important.
Details of the amounts paid or payable to the external auditor for audit and non-audit services provided during the financial year are set out
in Note 7 of the consolidated financial statements.
The Board of Directors has considered the position and, in accordance with written advice received from the Audit Committee, is satisfied
that the provision of non-audit services is compatible with the general standard of independence for external auditors imposed by the
Corporations Act 2001. The Board of Directors is satisfied that the provision of non-audit services by the external auditor did not compromise
the external auditor independence requirements of the Corporations Act 2001 for the following reasons:
(a) all non-audit services have been reviewed by the Audit Committee to ensure they do not impact the impartiality and objectivity of the
external auditor; and
(b) none of the services undermine the general principles relating to external auditor independence as set out in APES 110 ‘Code of Ethics
for Professional Accountants’, including reviewing or auditing the external auditor’s own work, acting in a management or a decision
making capacity for the Group, acting as advocate for the Group or jointly sharing economic risk and reward.
External Auditor’s Independence Declaration
A copy of the external Auditor’s Independence Declaration for the financial year, as required under Section 307C of the Corporations Act 2001,
is set out on page 55 of this Annual Report.
No officer of the Company has previously belonged to an audit practice auditing the Company during the financial year.
Matters Arising Subsequent to the End of the Financial Year
Other than the matter disclosed in Note 30 of the consolidated financial statements, no other matter or circumstance has arisen since
30 June 2019 that has significantly affected, or may significantly affect:
(a) the Group’s operations in future financial years;
(b) the results of those operations in future financial years; or
(c) the Group’s state of affairs in future financial years.
30
Karoon Energy Ltd Annual Report 2019 Remuneration Report (Audited)
25 September 2019
Dear Shareholders,
On behalf of the Board of Directors and the Remuneration Committee, I am pleased to present to you Karoon Energy Ltd’s Remuneration
Report for the financial year ended 30 June 2019.
1. Overview
Over the financial year significant strategic and operational progress has been achieved, including:
• as announced to the ASX on 25 July 2019, Karoon entered into a legally binding SPA to acquire the Baúna light oil field in the southern
Santos Basin, offshore Brazil, which was Karoon’s priority strategic goal of acquiring a high quality, cash generating production asset;
• farming-out the prospective exploration Block Z-38, offshore Peru, to Tullow and being operationally advanced and ready for drilling the
Marina-1 exploration well during early 2020 calendar year; and
• taking further steps to reduce the ongoing annual operating costs and progressing the development of a new corporate operating model
to cater for the transition to oil production and a higher proportion of the management structure being based in Brazil.
Notwithstanding this progress, as an overall guiding principle, the Board of Directors has again taken a conservative stance in relation to
remuneration during the 2018/2019 financial year. As the Baúna SPA was signed during July 2019, this achievement did not meet the precise
asset acquisition Short-term Incentive (‘STI’) milestone prescribed for the 2018/2019 financial year, so there will be no award of any STI to
executives for this outcome in the 2018/2019 financial year. Credit for achieving this milestone will be considered as part of the 2019/2020
financial year and its relevant milestones.
It is also noted that:
• executive base salaries have remained unchanged since 2015; and
• Board and Committee fees have not been increased since 2013.
During the financial year we continued to observe significant pressure on the retention and attraction of key people, in particular in the
South American region. While our human resourcing represents a blend of local nationals and globally sourced petroleum geologists,
engineers, rig operators and analysts at all levels, we have observed increasing competitive influences in retaining talent which we are in the
process of reviewing while also focusing on retaining our knowledgeable and long-serving Australian based professional staff. It is vital that
we attract and retain the right people as we transition to oil production in Brazil and commence exploration drilling offshore Peru, which is
currently a key objective. Karoon is not able to outbid salaries being offered by other international energy companies but aims to set salaries
at a competitive rate and provide a good working environment with associated conditions.
2. Remuneration Guiding Principles and Shareholder Alignment
Our overriding aim remains to ensure that executive performance outcomes are aligned with building asset value, preserving and prioritising
available capital and securing long-term cash flow in order to support share price growth for all shareholders over the longer term.
Karoon’s guiding principles for its remuneration framework have not significantly changed between financial years and are as follows:
• Safety, culture and ethics – ensuring that clear vesting gateways exist based on appropriate safety outcomes and the ethical and
culturally sound management of the business being achieved;
• Shareholder value is paramount:
– remuneration outcomes (particularly incentive-based outcomes) are designed to take account of share price movements across the
reporting period and therefore reflect the value delivered to shareholders through achievement of strategic objectives and/or total
shareholder return (‘TSR’) in a relative and/or absolute basis; and
– a close alignment is created between operational performance, reward and sustained growth in shareholder value. This is done through
achieving robust company building milestones year-on-year (via the STI Plan) and through aiming to outperform a select group of 17 industry
peer group companies in the longer term alongside the achievement of 14% in Absolute TSR terms via the individual hurdles under the
Long-term Incentive (‘LTI’) Plan;
31
Karoon Energy Ltd Annual Report 2019 DIRECTORS’ REPORT (CONTINUED)
Remuneration Report (Audited) (continued)
• People:
– our remuneration structures are designed to attract, motivate and retain the best people whilst remunerating them reasonably and
competitively; and
– we encourage our people, including Directors, to hold equity in the Company which builds a culture of viewing management decisions
as an owner, thereby helping to further align executives and shareholder’s interests;
• Transparency – remuneration measures, outcomes and reporting are as simple and transparent as possible for shareholders and other
stakeholders to review and understand; and
• Longer term focus – we aim to ensure that key decision making is always appropriately longer term in its nature and focus.
3. Future Remuneration Strategy
While Karoon commenced a review of its remuneration policies during the 2018/2019 financial year we have, after engagement with relevant
stakeholders, formed the view that our overall strategy remains relevant for the 2019/2020 financial year.
We have retained a relatively conservative and market sensitive approach to remuneration levels. However, improvements can always be made
to policy and procedure and the following will be implemented for the 2019/2020 financial year:
(a) Executive base salaries – while there have been no increases to key management personnel (‘KMP’) base salary for 5 years, it is the
Board’s intention to closely review the market competitiveness of these salaries in the different regions in which we operate, and the
proportion of reward ‘At’ Risk’ and the focus of ‘At’ Risk’ reward.
In making any changes, we remain committed to ensuring that our key staff remuneration outcomes remain firmly aligned with shareholders
as well as strategic and operational outcomes; and
(b) Board fees:
• the structure and size of the Board is currently under review, together with Board Committees. The aim is to ensure an appropriate
size, mix of skills and sharing of responsibilities across the Board and Board Committees as Karoon transitions to oil production.
Part of this review will assess Board and Board Committee fees against current market rates;
• the Board has implemented a minimum shareholding policy requirement for all Non-Executive Directors, whereby Directors must
acquire and hold a value of Karoon ordinary shares equivalent to 50% of their first years’ Director’s fee; and
• options are also being investigated to enable Non-Executive Directors to sacrifice cash-based Board fees for fully paid ordinary
shares in Karoon at prevailing market prices so as to encourage further share ownership by the Board of Directors.
4. 2018/2019 Financial Year STI and LTI Outcomes:
• no STI allocated to Company-wide Operational Objectives was awarded by the Remuneration Committee or the Board.
As noted above, whilst considerable strategic progress was made during the financial year, the specific 2018/2019 STI milestone(s) were
based on achieving final binding legal terms in relation to an acquisition (a position which was reached in the month after the testing date
of the STI) and reducing overall corporate overheads by 10% which was not achieved year-on-year (due to new venture workload and
essential acquisition expenditure relating to the resulting acquisition of Baúna).
For KMPs who are not Executive Directors, a component of their STI Role-specific Objectives was granted depending on individual
performance in accordance with pre-set proportions of STI; and
• confirming no LTI will be awarded for the 2018/2019 financial year, which is assessed over the prior 3 year period.
5. 2019/2020 Financial Year STI and LTI Hurdles and Goals:
• the STI hurdles for the 2019/2020 financial year have been targeted to provide incentives that support the overall strategic objectives of
the business which are: delivering on the southern Santos Basin Strategy (appraisal and development milestones); testing high value
Peruvian exploration targets within the current portfolio; re-structuring the corporate operating model to suit future operations; and
reducing overheads by 20% whilst preparing to complete the Baúna acquisition; and
• existing LTI awards retain their focus on peer-based relative TSR and in the more recent awards also on an Absolute TSR hurdle for 50%
of the LTI testing outcome.
32
Karoon Energy Ltd Annual Report 2019
The strategic STI goals for the 2019/2020 financial year are as follows:
• complete the funding, commercial and regulatory approvals for the Baúna acquisition and move to transaction completion;
• successfully drilling the first Peru exploration well (including satisfying all safety targets) in the prospective Tumbes Basin with Karoon’s
joint operation partners;
• re-structure the corporate operating model to align for the transition to oil production;
• continue the overhead reduction project which aims to reduce overhead costs by 20% year-on-year; and
• continue to restructure our corporate operating model, including the overall management structure and location of personnel to align with
the transition to oil production.
6. Summary
During the financial year, we made positive operational progress with our Neon and Goiá future development plans in the southern Santos
Basin, offshore Brazil, as well as with committing to a production acquisition and readying Karoon to drill its first exploration well in Peru.
We have also reduced the total costs of operating the business through reducing our overall operating footprint through office moves and
staff reductions in Australia and South America, better use of technology and reviewing the overall corporate model.
In summary, our corporate strategy and all remuneration related targets are designed and managed to improve shareholder value into the
future. In these circumstances, the Board and Remuneration Committee have exercised restraint by holding salaries and Non-Executive
Director’s fees steady, by providing no reward on the Company-wide Operational Objective STI outcome and confirming no LTI outcome will
be awarded for the 2018/2019 financial year.
Forward looking, the 2019/2020 STI milestones are designed to reward our people for achieving the funding and completion of the Baúna
acquisition, pursuing the drilling campaign offshore Peru, together with a range of other key milestones, which should aim to create share
price appreciation for our shareholders.
As always, we will continue to engage with our shareholders, proxy advisors and our own Remuneration Consultant to seek feedback to help
us continue to improve our remuneration framework design, outcomes, transparency and disclosures.
Mr Peter Turnbull
Chairman, Remuneration Committee
25 September 2019
33
Karoon Energy Ltd Annual Report 2019 DIRECTORS’ REPORT (CONTINUED)
Remuneration Report (Audited) (continued)
Contents
Section 1.
Section 2.
Section 3.
Section 4.
Section 5.
Introduction
Remuneration Committee Oversight
Executive Remuneration
A. Executive Remuneration Framework for the Financial Year Ended 30 June 2019
B. Executive Remuneration Outcomes
C. Executive Remuneration for the Financial Year Ending 30 June 2020
D. Executive Agreements
Independent Non-Executive Chairman and Non-Executive Directors
Statutory and Share-based Reporting
Page 34
Page 35
Page 36
Page 44
Page 45
Section 1. Introduction
The Board of Directors is pleased to provide Karoon’s Remuneration Report, which details the remuneration for its KMP, defined as those
persons having the authority and responsibility for planning, directing and controlling, directly or indirectly, the activities of the Group.
For the financial year ended 30 June 2019, KMP disclosed in the Remuneration Report are as follows:
Name
Executive Directors
Mr Robert Hosking
Mr Mark Smith
Position
Managing Director
Executive Director and Exploration Director
Term as KMP
Full financial year
Full financial year
Non-Executive Chairman
Mr Bruce Phillips
Independent Non-Executive Chairman
Dr David Klingner
Independent Non-Executive Chairman
Non-Executive Directors
Ms Luciana Rachid
Mr Geoff Atkins
Mr Clark Davey
Mr Peter Turnbull
Mr Jose Coutinho Barbosa
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Non-Executive Director
Appointed 1 January 2019
Ceased being a Director on
13 August 2018
Full financial year
Full financial year
Full financial year
Full financial year*
Full financial year
Other KMP
Mr Edward Munks
Mr Scott Hosking
Mr Tim Hosking
Full financial year
Chief Operating Officer
Full financial year
Company Secretary (Company) and Chief Financial Officer (Group)
South American General Manager and Chief Executive Officer Brazil Full financial year
* Appointed on 15 August 2018 as the Independent Interim Non-Executive Chairman; ceased 1 January 2019 on the appointment of Mr Bruce Phillips as the
new Independent Non-Executive Chairman.
For the purposes of the Remuneration Report, the term ‘executive’ refers to the Managing Director, the Executive Director/Exploration
Director and other KMP of the Group.
The Remuneration Report for the financial year ended 30 June 2019 outlines the remuneration arrangements of KMP of the Group in
accordance with the requirements of the Corporations Act 2001 and its regulations. The information provided in this Remuneration Report
has been audited by Karoon’s external auditor, as required by Section 308(3C) of the Corporations Act 2001. The Remuneration Report forms
part of this Directors’ Report.
34
Karoon Energy Ltd Annual Report 2019 Section 2. Remuneration Committee Oversight
To assist in ensuring good remuneration governance at Karoon, the Board of Directors has in place a Remuneration Committee that
provides oversight and recommendations on all aspects of the remuneration arrangements for executives and Non-Executive Directors.
The Remuneration Committee currently consists of majority of independent Non-Executive Directors and is responsible for reviewing
and making recommendations to the Board of Directors regarding:
• the quantum of executive remuneration;
• the executive remuneration framework, including the operation of and performance-based outcomes under Karoon’s share-based
incentive schemes;
• the recruitment, retention and termination policies and procedures for executives; and
• related party remuneration.
The Board of Directors, assisted by the Remuneration Committee, conducts annual remuneration reviews for its Non-Executive Chairman,
Non-Executive Directors, executives and all employees to ensure that remuneration remains market competitive, fair and aligned with both
market practice and the best interests of shareholders.
Further information on the role and responsibilities of the Remuneration Committee is contained in the Remuneration Committee Charter,
which can be found under the Governance tab on Karoon’s website at www.karoonenergy.com.
Use of Independent Remuneration Consultants
During the financial year ended 30 June 2019, the Remuneration Committee re-engaged Egan Associates as its independent Remuneration
Consultant. The Remuneration Consultant reported directly to the Remuneration Committee. In selecting the Remuneration Consultant, the
Remuneration Committee considered potential conflicts of interest and required the Remuneration Consultant’s independence from
management as part of Egan Associates’ terms of engagement. Egan Associates was asked to provide advice on remuneration structure
as well as a recommendation in relation to testing the performance milestones under the 2017 LTI conditions, which were tested during
July 2019. The recommendation was provided to, and discussed directly with, the Chairman of the Remuneration Committee.
2018 Remuneration Report Vote
At Karoon’s 2018 Annual General Meeting, Karoon’s 2018 Remuneration Report received a 62.95% vote AGAINST on a poll. This was the
Company’s second strike, however, shareholders voted against a Board spill. Feedback on the 2018 Remuneration Report was not received
during the 2018 Annual General Meeting. However, Karoon sought and received feedback from institutional shareholders, retail shareholders
and proxy advisory organisations during the 2018/2019 financial year. Views expressed during annual meetings have contributed to decision
making by the Remuneration Committee on Karoon’s 2019/2020 financial year reward practices. In reviewing reward arrangements,
assessing industry practices and the availability of global talent, the Board of Directors acknowledges that today, given the nature of
Karoon’s challenges and opportunities, it is fortunate to have a team of highly experienced and internationally regarded executives who have
a track record of success and who can execute the next value creating opportunities for Karoon.
Share Trading Policy
The trading of ordinary shares issued to Non-Executive Directors and executives under any of Karoon’s share-based remuneration schemes
is subject to, and conditional upon, compliance with Karoon’s Share Trading Policy.
Under Karoon’s Share Trading Policy, an individual may not limit his or her exposure to risk in relation to securities (including unlisted share
options and performance rights). Directors and executives are prohibited from entering into any hedging arrangements over unvested share
options or performance rights under Karoon’s share-based remuneration schemes. Any employee or Director wishing to trade in Karoon
securities must consult the Chairman or Company Secretary to gain approval to trade and ensure that trading restrictions are not in force.
All trades by Directors and executives during the financial year ended 30 June 2019 were conducted in compliance with Karoon’s Share
Trading Policy.
Karoon’s Share Trading Policy can be found under the Governance tab on Karoon’s website at www.karoonenergy.com.
35
Karoon Energy Ltd Annual Report 2019 DIRECTORS’ REPORT (CONTINUED)
Remuneration Report (Audited) (continued)
Section 3. Executive Remuneration
The Board of Directors and the Remuneration Committee have developed a remuneration policy that ensures executive remuneration
supports the current business strategy and needs of the business. In particular, the decision to use performance tested share-based grants
for its incentive plans reflects the Board of Directors’ belief that this best aligns executive and shareholder interests in the short and long-
term. Karoon’s success is measured by the delivery of its strategic objectives in the short-term and clear demonstration of shareholder value
creation on the long-term.
Broadly, the objectives of Karoon’s executive remuneration framework are to ensure:
• remuneration is reasonable and competitive in order to attract, retain and motivate talented and high calibre executives capable of managing
Karoon’s diverse international operations;
• remuneration is set at a level acceptable to shareholders, having regard to Karoon’s performance and rewards individual capability;
• remuneration structures create alignment between performance, reward and sustained growth in shareholder value;
• remuneration outcomes provide recognition of contribution to overall long-term growth in the value of Karoon’s asset portfolio and are
transparent to both participants and shareholders; and
• remuneration incentivises the best possible health and safety outcomes, along with best practice in preventing bribery and/or corruption.
A. Executive Remuneration Framework for the Financial Year Ended 30 June 2019
The following table summarises the remuneration mix for executives for the financial year ended 30 June 2019, based on maximum achievement
of incentive plan outcomes:
Remuneration Mix
Other KMP
Executive Directors
0
20
40
60
80
100
Fixed
‘At Risk’ STI
‘At Risk’ LTI
Fixed Remuneration
Fixed remuneration consists of cash salary, superannuation contributions and any salary sacrifice items or non-monetary benefits (including
health insurance, motor vehicles, expatriate travel, certain membership and associated fringe benefits tax, depending on each individual’s
respective employment arrangements).
Fixed remuneration is reviewed annually by the Remuneration Committee. Broadly, fixed remuneration is positioned within a range that
references the median of the relevant market for each role. In recognition of the current oil and gas industry market conditions, base salary
for Executive Directors and other KMP did not increase for the financial year ended 30 June 2019.
Superannuation
The Australian executives of the Company received statutory superannuation contributions of 9.5% of cash remuneration, up to the maximum
statutory contribution. Individuals may choose to sacrifice part of their salary to increase payments towards superannuation.
Social Security and Indemnity Fund Contributions
Karoon’s Brazilian based executive is subject to specific Brazilian employment regulations, whereby the Group is required to contribute
27.3% of Brazilian cash compensation as social security to fund Government pensions paid in retirement. However, the executive upon
retirement will only be entitled to a portion of this contribution. A further 8% of their cash remuneration is required to be contributed to a
Federal Severance Indemnity Fund (‘FGTS’). In the situation of unfair dismissal without just cause, the Group would have to pay a fine
equivalent to 50% of the accumulated balance of the individual’s FGTS account.
36
Karoon Energy Ltd Annual Report 2019 ‘At Risk’ Remuneration
Karoon aims to align the interests of executives with those of shareholders by having a significant proportion of executive remuneration
‘At Risk’. ‘At Risk’ remuneration represents the proportion of remuneration that requires pre-determined performance conditions to be met
before the remuneration is vested to the executive. Annually, the Remuneration Committee reviews the operational goals and targets,
looking broadly at where the building blocks for long-term value exist, then sets performance conditions that generate a link between
operating performance, remuneration received and value created for shareholders.
All executives received grants of share options and performance rights during the financial year ended 30 June 2019, under the Karoon Gas
Australia 2016 Employee Share Option Plan (‘2016 ESOP’) and 2016 Performance Rights Plan (‘2016 PRP’).
STI Plan
The key features of the STI award for the financial year ended 30 June 2019 (‘FY19 award’) are outlined in the table below:
Participation
All executives.
STI Opportunity
Participation in the STI Plan is at the discretion of the Board of Directors on the recommendation of the
Remuneration Committee. No employee has a contractual right to receive performance rights.
The STI opportunity level of each executive is a pre-determined proportion of an executives’ total remuneration.
The quantum of performance rights received is determined by dividing the STI opportunity for each employee
by Karoon’s weighted average share price in the 20 trading day period leading up to the first day of the
performance period.
The STI opportunity available to an executive is between 15%-30% of total remuneration dependant on seniority
in the Group.
Form of Award
The Remuneration Committee calculates the incentive value and establishes a maximum number of performance
rights ’At Risk’ at the beginning of the period.
Executives receive performance rights.
Performance Period
Deferral Period
Performance Conditions
Each performance right provides the participant with the right to receive one fully paid ordinary share in
Karoon, or its equivalent value, for no consideration. Under the rules of the PRP, ordinary shares issued as a
result of the exercise of vested and converted performance rights may be issued as new ordinary shares,
ordinary shares acquired on-market or an equivalent value in cash at Karoon’s discretion.
1 year.
Vested performance rights are subject to a retention period of 12 months, being the continuation of employment
with Karoon, immediately following the satisfaction of performance conditions.
As part of the 2019 remuneration review, for the financial year ended 30 June 2019 the Remuneration Committee
set out the FY19 award for short-term incentives based on a mix of the following performance hurdles:
Executive Directors
Other KMP
Company-wide Operational
Objectives
100%
80%
Role-specific
Objectives
Nil%
20%
Company-wide Operational Objectives
Company-wide Operational Objectives were set by the Remuneration Committee at the beginning of the
performance period.
The Company-wide Operational Objectives included strategic and operational targets, along with cost
management goals.
Role-specific Objectives
Role-specific Objectives were set at the beginning of the performance period and related directly to the
individual’s specific portfolio of responsibility.
All short-term performance outcomes are tempered by both a gateway for safety outcomes and a clawback
(negative discretion) provision in relation to bribery and/or corruption issues.
Further details on the performance conditions, targets and outcomes for the FY19 award are outlined below
in the STI outcomes within Section 3B on page 39.
37
Karoon Energy Ltd Annual Report 2019 DIRECTORS’ REPORT (CONTINUED)
Remuneration Report (Audited) (continued)
Section 3. Executive Remuneration (continued)
A. Executive Remuneration Framework for the Financial Year Ended 30 June 2019 (continued)
STI Plan (continued)
Grant Date
Maximum amount of performance rights available were determined following finalisation of the 30 June 2018
audited accounts and remained ’At Risk’ until tested during July 2019 and retention conditions are met
1 July 2020. Grant date occurs following the offer and acceptance of performance rights. However, any
performance rights offered and accepted by the Executive Directors will be subject to shareholder approval
at the next Annual General Meeting.
Termination of Employment Unvested performance rights will lapse upon cessation of employment with Karoon, subject to the discretion
Change of Control
Link Between Performance
and Reward
of the Board of Directors depending on the nature and circumstances of the termination.
Upon a change of control, the Board of Directors may determine that a portion of the individual’s unvested
performance rights will vest based on pro-rata achievement of the performance conditions.
The STI framework is based on a set of challenging Company building goals, granted on a rolling short-term
basis. Linking outcomes to operational performance develops an essential alignment between Karoon’s
year-to-year inherent value growth and rewards those who establish that value only when the goals are met.
The Remuneration Committee assess the goals for the performance period annually in light of the long-term
strategic building blocks and upcoming key value drivers within Karoon’s operations, allowing for transparent
measurement of performance against these objectives.
The Remuneration Committee recognises the risks associated with offshore drilling and considers safety
and anti-bribery and no corruption paramount to its operations. Safety is used as a gateway for vesting
conditions, while bribery and corruption can be utilised to clawback incentives.
LTI Plan
The key features of the LTI grant for the financial year ended 30 June 2019 are outlined in the table below:
Participation
All executives.
LTI Opportunity
Form of Grant
Participation in the LTI plan is at the discretion of the Board of Directors on the recommendation of the
Remuneration Committee. No executive has a contractual right to receive performance rights or ESOP options.
The LTI opportunity available to an executive is between 15%-30% of total remuneration dependant on seniority
in the Company.
The quantum of ESOP options and PRP performance rights received is determined by dividing the LTI
opportunity for each executive by the fair value of ESOP options under the ESOP, using the Black-Scholes
option pricing model and dividing by the 20 day weighted average share price at the beginning of the test
period for the PRP performance rights.
Each ESOP option provides the participant with the right to acquire one fully paid ordinary share in Karoon
at the exercise price determined upon grant, subject to the achievement of the relevant performance
conditions, or its equivalent value in cash at Karoon’s discretion, for no consideration.
Performance Period
Performance Conditions
ESOP options granted have a 30% premium strike price to the trading share price at the beginning of the
performance period. PRP performance rights do not have a strike price.
3 years.
For the financial year ended 30 June 2019, Karoon’s relative TSR performance was measured against
an extensive industry peer group of companies.
Vesting occurs in accordance with the pre-approved schedule of relative performance:
Performance Against Industry Peer Group
Less than 50th percentile
At 50th percentile
Between 50th and 75th percentile
At or above 75th percentile
At 100% percentile
38
Proportion of ESOP Options and/or
PRP Performance Rights Vesting
Nil%
50%
50% plus 2% for each additional percentile
ranking above the 50th percentile
100%
120%
Karoon Energy Ltd Annual Report 2019
Grant Date
Exercise Period
ESOP options and PRP performance rights were granted during the financial year ended 30 June 2019,
following finalisation of the 30 June 2018 audited accounts.
ESOP options and PRP performance rights will remain exercisable for a period of 1 year following vesting,
provided the individual remains an employee of Karoon during this period.
Change of Control
Termination of Employment Unvested (and unexercised) ESOP options and unvested (and unconverted) PRP performance rights will
lapse upon cessation of employment with Karoon, subject to the discretion of the Board of Directors
depending on the nature and circumstances of the termination.
Upon a change of control, the Board of Directors may determine that a portion of the individual’s unvested ESOP
options and PRP performance rights will vest, based on pro-rata achievement of the performance conditions.
The Board of Directors and Remuneration Committee consider it important to link remuneration to share
price performance relative to Karoon’s industry peer group companies and overall share price performance
over the long-term. In the case where performance does not reach the 50th percentile, no incentive will be paid.
Link Between Performance
and Reward
B. Executive Remuneration Outcomes
Relationship between the Executive Remuneration Framework and Company Performance
Karoon has a transparent performance-based remuneration structure in place that provides a direct link between Company performance
and remuneration in the short and long-term. As part of this structure, executive rewards are directly linked to operational, safety and
financial performance metrics along with relative market performance. ‘At Risk’ remuneration is only awarded if pre-determined Company
building milestones are achieved.
Whilst Karoon completed the Acquisition Strategy and Development Operations Hurdle in the period immediately after the performance
period, these items were not achieved in the performance period and therefore the STI did not vest. Likewise, the LTI testing failed to meet
minimum vesting requirements and therefore equally did not vest.
Performance Hurdles and STI Outcomes for the Financial Year Ended 30 June 2019
The table below outlines the Company-wide Operational Objectives for the financial year ended 30 June 2019:
Criteria
Safety
Acquisition Strategy
Hurdle
TRIR of < 2 required for any award to proceed.
Revenue and sustainability
Successfully complete the acquisition of a production (or near-production) asset as evidenced by:
• execution of a legally binding sale and purchase agreement; and
• value-accretion in the Karoon share price of not less than 20%, sustained for a period of not less than
30 days following the ASX announcement of the transaction.
Karoon’s discovered resources
Successfully progress the southern Santos Basin Strategy in Brazil to define development and production
options as evidenced by:
• FEED – completing the development application stage for the Neon light oil discovery in Brazil;
• strategic partner – reaching binding legal terms to introduce a strategic partner, who will jointly proceed
to FID on the Neon light oil discovery; or
• acquisition – reaching binding terms to purchase a production asset in the Santos Basin which
is complementary to the Neon light oil discovery and southern Santos Basin Strategy.
The budgeted corporate cost structure for the financial year ending 30 June 2019 is lowered by 10% or more
(this measure relates to corporate costs only not operational, appraisal, due diligence or development costs).
Negative discretion will be applied, if necessary, by the Board of Directors should any material event which
constitutes a breach of Karoon’s Anti-bribery and Corruption Policy occur.
Development
and Operations
Cost Structure
Anti-bribery
and Corruption
Based on actual results, a total of 0% of the available STI opportunity vested to Executive Directors against the STI performance targets outlined
above. For other KMP, a total of 20% of the available STI opportunity vested based on the results of Role-specific performance targets.
Vested STI have a 1 year retention period ending 30 June 2020 before they become exercisable and convertible into fully paid ordinary
shares or paid for the equivalent value in cash. These STI performance rights expire on 30 June 2020.
39
Karoon Energy Ltd Annual Report 2019 DIRECTORS’ REPORT (CONTINUED)
Remuneration Report (Audited) (continued)
Section 3. Executive Remuneration (continued)
B. Executive Remuneration Outcomes (continued)
LTI Outcomes
Karoon did not achieve the minimum 50th percentile tested over a 3 year period required to vest the LTI’s and therefore 0% of the LTI will vest.
Voluntary Information: 2019 ‘Remuneration Received’
The amounts disclosed below reflect the actual benefits received by each executive during the financial year ended 30 June 2019.
The amounts disclosed below include the actual value of any equity-settled and/or cash-settled award received from STI and/or LTI.
The amounts disclosed in the table below are not the same as the statutory remuneration expensed in relation to each executive in
accordance with Australian Accounting Standards shown in the statutory table in Section 5 of the Remuneration Report. The remuneration
values disclosed below have been determined as follows:
Fixed Remuneration
Fixed remuneration includes cash salary and fees, non-monetary benefits, superannuation contributions and paid long service leave.
Fixed remuneration excludes any accruals of annual or long service leave.
Short-term Incentives
Includes the equity-settled and/or cash-settled award received from STI incentives by executives. The value of STI equity-settled and
cash-settled awards received reflects the amounts disclosed to the relevant tax authorities during the financial year ended 30 June 2019.
Long-term Incentives
Includes the equity-settled and/or cash-settled award received from LTI incentives by executives. The value of LTI equity-settled awards and
cash-settled awards received reflects the amounts disclosed to the relevant tax authorities during the financial year ended 30 June 2019.
Name
Executive Directors
Mr Robert Hosking
Mr Mark Smith
Other KMP (Group)
Mr Scott Hosking
Mr Tim Hosking
Mr Edward Munks
Fixed
Remuneration
$
Short-term
Incentives
$
Long-term
Incentives
$
Total Remuneration
Received
$
704,887
625,061
457,028
480,691
554,815
–
–
62,372
65,227
–
–
–
–
–
–
704,887
625,061
519,400
545,918
554,815
The Board of Directors believes that ‘remuneration received’ is more relevant to shareholders for the following reasons:
• the statutory remuneration expensed through share-based payments (ESOP options and/or PRP performance rights) is based on historic
cost and does not reflect the value of equity-settled and/or cash-settled amounts when they are actually received;
• the statutory remuneration shows benefits before they are actually received by executives;
• where ESOP options or PRP performance rights do not vest because a market-based performance condition is not satisfied (for example,
an increase in Karoon’s share price), Karoon must still recognise the full amount of the share-based payments expense even though the
executives will never receive any benefits; and
• share-based payment awards are treated differently under Australian Accounting Standards depending on whether the performance
conditions are market conditions (no reversal of share-based payments expense) or non-market conditions (reversal of share-based
payments expense when ESOP options or PRP performance rights fail to vest), even though the benefit received by the executive is the
same ($Nil where the ESOP option or PRP performance right fail to vest).
The information in this section has been audited together with the rest of the Remuneration Report.
40
Karoon Energy Ltd Annual Report 2019 C. Executive Remuneration for the Financial Year Ending 30 June 2020
As part of the annual review of remuneration arrangements conducted on behalf of the Board of Directors, the Remuneration Committee
makes the following points for the financial year ending 30 June 2020:
• there is currently no proposed change to country base salary, however, the overall remuneration structure for executives has been
adjusted to create a greater proportion of overall remuneration as incentive based for the financial year ending 30 June 2020. It is the
Board of Directors’ intention to closely review the market competitiveness of salaries in which we operate given the change to our
business structure under a production operating model, and more closely align incentives with the market;
• STI will be delivered in the same manner as described in section 3A to executives in the form of ‘At Risk’ performance rights, to be tested
against appropriate Company-wide Operational Objectives and in some instances, Role-specific Objectives. Safety performance remains
a gateway, with express negative discretion to be applied by the Board of Directors to modify STI outcomes resulting from Anti-bribery
and Corruption Policy implementation and enforcement issues; and
• LTI will be delivered as PRP performance rights, to be tested using 50% relative TSR and 50% Absolute TSR performance conditions will
be tested independently.
‘At Risk’ Remuneration
Short-term incentives
The STI performance hurdles for the performance period from 1 July 2019 to 30 June 2020 are outlined in the table below. Vesting under
each objective will occur upon satisfaction of the Company-wide Operational Objectives, and in some cases Role-specific Objectives.
STI Performance Mix
Financial Year Ending 30 June 2020
Executive Directors
Other KMP
100%
80%
60%
40%
20%
0%
Asset
Acquistions
Cost
Structure
Development
& Operations
Role-specific
Objectives
Gateway
Karoon operates in a high-risk industry where Health, Safety, Security and Environment Management System procedures are paramount
and therefore a TRIR of < 2 is required for any grant to proceed.
Clawback
Karoon has zero tolerance for bribery and/or corruption and therefore negative discretion will be applied based on any incidence of bribery
or corruption, and management’s implementation and enforcement of the Anti-bribery and Corruption Policy.
41
Karoon Energy Ltd Annual Report 2019 DIRECTORS’ REPORT (CONTINUED)
Remuneration Report (Audited) (continued)
Section 3. Executive Remuneration (continued)
C. Executive Remuneration for the Financial Year Ending 30 June 2020 (continued)
Company-wide Operational Objectives
For the performance period from 1 July 2019 to 30 June 2020, the Company-wide Operational Objectives are outlined in the table below.
Vesting under each objective will occur upon satisfaction of the relative performance condition.
Criteria
Safety
Acquisition Strategy
Southern Santos Basin
Exploration
Corporate Operating Model
Anti-bribery and Corruption
Hurdle
TRIR of < 2 required for any award to proceed.
Complete the funding, commercial and regulatory approvals for the Baúna acquisition and move
to transaction completion.
Progress Karoon’s strategic goals at Neon and Goiá and a potential farm-out.
Marina-1 exploration well drilled safely, on time and within budget.
Corporate re-structure to move toward a more development and production centric business model.
Negative discretion will be applied, if necessary, by the Board of Directors should any material event
which constitutes a breach of Karoon’s Anti-bribery and Corruption Policy occur.
Role-specific Objectives
Role-specific Objectives are set at the beginning of the performance period and relate directly to the individual’s specific area of responsibility.
Long-term Incentive
The LTI performance hurdles for the period commencing 1 July 2019 and ending 30 June 2022 will be split 50% relative TSR performance
as assessed against a list of closely comparable and representative industry peer group companies, whose business models and/or
regions of operations are similar to those of Karoon; and 50% Absolute TSR, which is set at 14% (the Company’s weighted average cost of
capital plus 4%).
For the period commencing 1 July 2019 and ending 30 June 2022, the refined list of industry peer group companies will be as follows:
Australian Market Peers
Australis Oil & Gas Limited
Beach Energy Limited
Carnarvon Petroleum Limited
FAR Limited
Horizon Oil Limited
Oil Search Limited
Santos Limited
Senex Energy Limited
Woodside Petroleum Limited
Global Peers
Cairn Energy plc
GeoPark Limited
Gran Tierra Energy Inc
Kosmos Energy Ltd
New Zealand Oil & Gas Ltd
QGEP Participacoes SA
Premier Oil plc
SOCO International plc
Tullow Oil plc
In the event of delisting, merger or acquisition of any of the above industry peer group companies, the Remuneration Committee will apply
its discretion to assess the relative performance of that entity by normalising its performance over the testing period in the case of delisting
or substituting the performance of the new entity from the day of acquisition in the case of merger or acquisition.
Vesting consideration details for the industry peer group companies is outlined in the LTI Plan table above on page 38.
Karoon will no longer provide for vesting of 120% of the ‘At Risk’ component of the LTI. In the case where all relative TSR and Absolute TSR
hurdles are met, 100% of the LTI will vest.
42
Karoon Energy Ltd Annual Report 2019 D. Executive Agreements
Remuneration and other terms of employment for the executives are formalised in employment agreements. Each of these agreements may
provide for the provision of benefits such as health insurance, motor vehicles, one expatriate business class flight for an executive and his
family, and participation, when eligible, in the Company’s PRP and ESOP. Other major provisions of the agreements relating to remuneration
are set out below.
Termination payments for executives, if any, are agreed by the Remuneration Committee in advance of employment and stated in the
relevant employment agreements. Upon retirement, executives are paid employee benefit entitlements accrued to the date of retirement.
Details of existing employment agreements between the Company and the Executive Directors and other KMP are as follows:
Term
Name
Executive Directors
Mr Robert
Hosking
From 1 May
2011, ongoing
Expiry
Ongoing
Notice/
Termination
Period
In writing six
months
Mr Mark Smith From 1 May
Ongoing
2011, ongoing
In writing six
months
Termination Payments
Share Option
Eligible
Performance
Right Eligible
Fundamental change upon a
change of control: one year, two
weeks’ salary for each year of
service
Fundamental change upon a
change of control: one year, two
weeks’ salary for each year of
service
Yes
Yes
Yes
Yes
Other KMP
Mr Scott
Hosking
Ongoing
Ongoing
Mr Tim Hosking From
Ongoing
1 December
2010, ongoing
From 1 July
2011, ongoing
Ongoing
Mr Edward
Munks
In writing six
months
In writing one
month
In writing six
months
Fundamental change upon a
change of control: one year,
two weeks’ salary for each year
of service
Fundamental change upon a
change of control: one year
Redundancy: one year
Fundamental change upon a
change of control: one year
Yes
Yes
Yes
Yes
Yes
Yes
All termination payments are subject to the limits prescribed under Section 200B of the Corporations Act 2001.
The employment agreements of executives are on a continuing basis, the terms of which are not expected to change in the immediate
future.
43
Karoon Energy Ltd Annual Report 2019 DIRECTORS’ REPORT (CONTINUED)
Remuneration Report (Audited) (continued)
Section 4. Independent Non-Executive Chairman and Non-Executive Directors
Fees and payments to the independent Non-Executive Chairman and other Non-Executive Directors reflect the demands, which are placed on,
and the responsibilities of the Directors of Karoon. The Company reviews independent Non-Executive Chairman and other Non-Executive
Director remuneration annually and assesses the change to the Company’s activities and overall responsibilities of each Non-Executive Director.
There have been no changes to Non-Executive Directors’ base or Committee member fees for the financial year ended 30 June 2019.
The table at the end of this section provides a summary of Karoon’s Non-Executive Director fee policy for the financial year.
Non-Executive Directors’ fees are determined within an aggregate Directors’ fee pool limit, which is periodically approved by shareholders.
The maximum aggregate amount, including superannuation contribution, that may be paid to Non-Executive Directors of the Company as
remuneration for their services per annum is $1,200,000, as approved by shareholders at the Company’s 2015 Annual General Meeting. For the
financial year ended 30 June 2019, the total fees paid to Non-Executive Directors was $800,228 (excluding superannuation contributions).
Superannuation contributions are paid, in accordance with Australian superannuation guarantee legislation, on Directors’ fees paid to Australian
resident Non-Executive Directors.
Share-based Remuneration
Non-Executive Directors do not ordinarily receive performance-related remuneration. The Company has determined that it will not grant
bonus or incentive related share-based remuneration to Non-Executive Directors. Non-Executive Directors will continue to be encouraged
to purchase ordinary shares in the Company on-market.
Retirement Allowance for Directors
Karoon does not provide any Non-Executive Director with a retirement allowance.
Non-Executive Director Fees for the Financial Year Ending 30 June 2020
The Board of Directors is currently reviewing its Committee structure and membership for the financial year ending 30 June 2020. If changes
are made, there will no increase in the overall Non-Executive Directors’ fees paid.
Non-Executive Directors’ fees for the financial year ended 30 June 2019 (excluding superannuation contribution) are outlined in the
following table:
Base fee:
Non-Executive Chairman*
Non-Executive Directors
Committee member fees:
Audit Committee
Chairman
Member
Nomination Committee
Chairman
Member
Remuneration Committee
Chairman
Member
Risk and Governance Committee
Chairman
Member
* Non-Executive Chairman’s base fee includes compensation for appointment to relevant Committees.
44
$220,000
$100,000
$20,000
$15,000
$15,000
$12,000
$15,000
$12,000
$15,000
$12,000
Karoon Energy Ltd Annual Report 2019 Section 5. Statutory and Share-based Reporting
Details of the Remuneration of the Directors and Other KMP
Details of the remuneration of the Directors and other KMP of the Group for the financial year and previous financial year are set out in the
following tables:
Financial Year
Ended 30 June
2019
Name
Executive
Directors
Mr Robert Hosking
Mr Mark Smith
Non-Executive
Directors
Mr Bruce Phillips
(appointed
1 January 2019)
Dr David Klingner
(ceased being
a Director on
13 August 2018)
Ms Luciana Rachid
Mr Geoff Atkins
Mr Clark Davey
Mr Peter Turnbull
Mr Jose Coutinho
Barbosa
Total Directors’
remuneration
Other KMP
(Group)
Mr Scott Hosking
Mr Tim Hosking
Mr Edward Munks
Total other KMP
remuneration
(Group)
Total KMP
remuneration
(Group)
Short-term Benefits
Cash
Salary
and Fees
$
Non-
monetary
Benefits
$
Post-employment Benefits
Social
Security &
Indemnity
Fund
Contributions
$
Superannuation
Contributions
$
Long-term
Benefits
Long
Service
Leave
$
Share-based
Payments
Expense Remuneration
Consisting
of Share
Options and
Performance
Rights*
%
Share
Options/
Performance
Rights
$
Total
Remun-
eration
$
599,691
588,621
84,665
15,909
20,531
20,531
110,000
25,103
124,000
104,500
156,000
180,625
100,000
–
–
–
–
–
–
–
10,266
2,354
–
9,928
14,820
17,159
–
1,988,540
100,574
95,589
–
–
–
–
–
–
–
–
–
–
16,059
14,753
457,372
457,372
38.8% 1,178,318
41.7% 1,097,186
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
120,266
27,457
124,000
114,428
170,820
197,784
100,000
30,812
914,744
3,130,259
418,000
379,956
522,500
18,497
45,477
11,784
20,531
–
20,531
–
55,258
–
9,552
–
14,568
162,727
148,185
409,979
25.9%
23.6%
41.9%
629,307
628,876
979,362
1,320,456
75,758
41,062
55,258
24,120
720,891
2,237,545
3,308,996
176,332
136,651
55,258
54,932
1,635,635
5,367,804
* The percentage of total remuneration consisting of share options and performance rights, based on the value of share options and performance rights
expensed in the consolidated statement of profit or loss and other comprehensive income during the financial year.
45
Karoon Energy Ltd Annual Report 2019 DIRECTORS’ REPORT (CONTINUED)
Remuneration Report (Audited) (continued)
Section 5. Statutory and Share-based Reporting (continued)
Details of the Remuneration of the Directors and Other KMP (continued)
Financial Year
Ended 30 June
2018
Name
Executive
Directors
Mr Robert Hosking
Mr Mark Smith
Non-Executive
Directors
Dr David Klingner
Ms Luciana Rachid
Mr Geoff Atkins
Mr Clark Davey
Mr Peter Turnbull
Mr Jose Coutinho
Barbosa
Total Directors’
remuneration
Other KMP
(Group)
Mr Scott Hosking
Mr Tim Hosking
Mr Edward Munks
Total other KMP
remuneration
(Group)
Total KMP
remuneration
(Group)
Short-term Benefits
Cash
Salary
and Fees
$
Non-
monetary
Benefits
$
Post-employment Benefits
Social
Security &
Indemnity
Fund
Contributions
$
Superannuation
Contributions
$
Long-term
Benefits
Long
Service
Leave
$
Share-based
Payments
Expense Remuneration
Consisting
of Share
Options and
Performance
Rights*
%
Share
Options/
Performance
Rights**
$
Total
Remun-
eration
$
576,626
585,853
99,541
16,895
220,000
124,000
142,000
156,000
157,000
100,000
–
–
–
–
–
–
20,049
20,049
20,049
–
13,490
14,820
14,915
–
2,061,479
116,436
103,372
–
–
–
–
–
–
–
–
–
16,374
4,874
564,688
564,688
44.2% 1,277,278
47.4% 1,192,359
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
240,049
124,000
155,490
170,820
171,915
100,000
21,248
1,129,376
3,431,911
418,000
408,100
522,500
18,862
50,335
3,096
20,049
–
20,049
–
58,453
–
5,238
–
13,031
86,157
70,650
334,933
15.7%
12.0%
37.5%
548,306
587,538
893,609
1,348,600
72,293
40,098
58,453
18,269
491,740
2,029,453
3,410,079
188,729
143,470
58,453
39,517
1,621,116
5,461,364
* The percentage of total remuneration consisting of share options and performance rights, based on the value of share options and performance rights
expensed in the consolidated statement of profit or loss and other comprehensive income during the financial year.
** Included non-cash share-based payments expense of $34,223 relating to 2018 STI performance rights that were planned to be granted to Executive
Directors, which were subject to achievement of performance hurdles from 1 July 2017 to 30 June 2018. The share-based payments expense was based on
the achievement of 8% of the executive’s performance hurdles and an estimation of fair value at grant date, with a vesting period of 1 July 2017 to 30 June 2019.
The grant of these 2018 STI performance rights for each of the Executive Directors that required shareholder approval at the 2018 Annual General Meeting
was withdrawn before the meeting.
The amounts disclosed for the remuneration of Directors and other KMP include the assessed fair values of share options and performance
rights granted during the financial year, at the date they were granted. The value attributable to share options and performance rights is
allocated to particular financial periods in accordance with AASB 2 ‘Share-based Payment’, which requires the value of a share option and
performance right at grant date to be allocated equally over the period from grant date to vesting date, adjusted for not meeting the vesting
condition. For share options and performance rights that vest immediately, the value is disclosed as remuneration immediately, in accordance
with the accounting policy described in Note 1(p) of the consolidated financial statements.
Fair value of share options is assessed under the Black-Scholes option pricing model. The Black-Scholes option pricing model takes into
account the exercise price, the term of the share option, the share price at grant date and expected price volatility of the underlying share,
the expected dividend yield and the risk-free interest rate for the term of the share option.
Fair values of performance rights were based on the Company’s closing share price at grant date.
46
Karoon Energy Ltd Annual Report 2019 The relative percentage proportions of remuneration that are linked to performance conditions, those that are not and those that are fixed
are as follows:
Name
Executive Directors
Mr Robert Hosking
Mr Mark Smith
Non-Executive Directors
Mr Bruce Phillips
(appointed 1 January 2019)
Dr David Klingner (ceased being
a Director on 13 August 2018)
Ms Luciana Rachid
Mr Geoff Atkins
Mr Clark Davey
Mr Peter Turnbull
Mr Jose Coutinho Barbosa
Other KMP (Group)
Mr Scott Hosking
Mr Tim Hosking
Mr Edward Munks
Fixed
Remuneration
2018
2019
61.2% 55.7%
58.3% 52.6%
100%
–
100% 100%
100% 100%
100% 100%
100% 100%
100% 100%
100% 100%
Related to Performance Conditions
STI
(Performance
Rights)
2018
2019
LTI
(Performance
Rights)
2018
2019
LTI (Share
Options)
2018
2019
Remuneration
Consisting of
Share Options^
2018
2019
–
–
–
–
–
–
–
–
–
8.5% 21.4% 18.5% 17.4% 17.3% 17.4% 17.3%
9.1% 23.0% 19.8% 18.7% 18.5% 18.7% 18.5%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5.7%
74.1% 84.3% 13.3%
76.4% 88.0% 12.8%
3.1%
58.1% 62.5% 12.4% 11.5% 20.2% 19.2%
9.2% 12.3%
8.4% 10.8%
0.3%
0.0%
9.3%
0.8%
0.5%
6.8%
0.3%
0.0%
9.3%
0.8%
0.5%
6.8%
^ The percentage of total remuneration consisting of share options, based on the value of share options expensed in the consolidated statement of profit
or loss and other comprehensive income during the financial year and previous financial year.
Further information on share options and performance rights is set out in Note 27 of the consolidated financial statements.
Amounts disclosed for remuneration of Directors and other KMP exclude insurance premiums paid by the Company in respect of directors’
and officers’ liability insurance contracts, as the contracts do not specify premiums paid in respect of individual Directors and officers.
Information relating to insurance contracts is set out in this Directors’ Report.
47
Karoon Energy Ltd Annual Report 2019 DIRECTORS’ REPORT (CONTINUED)
Remuneration Report (Audited) (continued)
Section 5. Statutory and Share-based Reporting (continued)
Share-based Remuneration
The lowest exercise price of any share option on issuance is currently $1.40 and the highest exercise price is $1.77. There are currently
7,544,608 share options (7,544,608 remain unvested) and 3,514,325 performance rights issued under the 2016 ESOP and 2016 PRP
respectively, representing approximately 4.47% of the Company’s total number of ordinary shares issued.
The terms and conditions of each grant of share options and performance rights over unissued ordinary shares in the Company affecting
remuneration in the current or a future financial year are as follows:
Date Vested
and Exercisable Expiry Date
Grant Date
ESOP options
1 July 2019
30 November 2016
1 July 2019
2 December 2016
1 July 2020
6 October 2017
1 July 2020
9 November 2017
1 July 2020
14 November 2017
1 July 2020
16 November 2017
21 September 2018 1 July 2021
1 July 2021
31 December 2018
Performance rights
1 July 2019
30 November 2016
1 July 2019
2 December 2016
1 July 2019
6 October 2017
1 July 2019
9 November 2017
1 July 2019
14 November 2017
1 July 2020
6 October 2017
1 July 2020
9 November 2017
1 July 2020
14 November 2017
16 November 2017
1 July 2020
21 September 2018 1 July 2020
21 September 2018 1 July 2021
1 July 2020
31 December 2018
1 July 2021
31 December 2018
30 June 2020
30 June 2020
30 June 2021
30 June 2021
30 June 2021
30 June 2021
30 June 2022
30 June 2022
30 June 2020
30 June 2020
30 June 2020
30 June 2020
30 June 2020
30 June 2021
30 June 2021
30 June 2021
30 June 2021
30 June 2021
30 June 2022
30 June 2021
30 June 2022
Exercise
Price Per
Share
Option or
Performance
Right
Fair Value
Per Share
Option or
Performance
Right at
Grant Date
$1.82
$1.82
$1.73
$1.73
$1.73
$1.77
$1.40
$1.40
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$0.690
$0.780
$0.354
$0.361
$0.431
$0.353
$0.285
$0.100
$1.860
$1.965
$1.285
$1.360
$1.475
$1.285
$1.215
$1.475
$1.360
$1.150
$1.150
$0.850
$0.850
%
Vested
Performance Condition
Achieved
0% Performance conditions not met
0% Performance conditions not met
To be determined
To be determined
To be determined
To be determined
To be determined
To be determined
–
–
–
–
–
–
0% Performance conditions not met
0% Performance conditions not met
2018 Performance condition
2018 Performance condition
2018 Performance condition
To be determined
To be determined
To be determined
To be determined
37%
To be determined
47%
To be determined
40%
45%
42%
–
–
–
–
–
–
–
–
Share options and performance rights are granted for no consideration. Share options and performance rights granted carry no dividend
or voting rights.
48
Karoon Energy Ltd Annual Report 2019 Number of Share Options and Performance Rights Provided as Remuneration During the Financial Year
Details of share options and performance rights over unissued ordinary shares in the Company provided as remuneration to each Director
and each of the other KMP, including their personally related parties, are set out below:
Number
of Share
Options and
Performance
Rights Granted
During
Financial Year
Fair Value
Per Share
Options and
Performance
Rights at Grant
Date*
Value of Share
Options and
Performance
Rights at Grant
Date*
Number
of Share
Options and
Performance
Rights Vested
During
Financial Year
Number
of Share
Options and
Performance
Rights
Forfeited
Value of Share
Options and
Performance
Rights
Forfeited**
–
–
–
–
–
–
49,386
25,882
12,941
369,258
193,519
96,759
398,971
209,090
104,545
461,572
241,898
120,949
–
–
–
–
–
–
$0.100
$0.845
$0.845
$0.285
$1.15
$1.15
$0.285
$1.15
$1.15
$0.285
$1.15
$1.15
–
–
–
–
–
–
$4,939
$21,870
$10,935
$105,239
$222,547
$111,273
$113,707
$240,454
$120,227
$131,548
$278,183
$139,091
–
128,505
–
–
128,505
–
–
10,594
–
–
70,164
–
–
67,939
–
–
87,705
–
490,909
–
69,230
490,909
–
69,230
$571,909
–
$80,653
$571,909
–
$80,653
–
12,437
–
–
$14,489
–
136,192
159,900
–
131,873
164,220
–
102,144
222,205
–
$158,664
$186,284
–
$153,632
$191,316
–
$118,998
$258,869
–
1,279,187
1,005,583
$355,433
$1,144,580
–
493,412
1,352,027
697,222
$1,575,112
$812,264
Name
Executive Directors
Mr Robert Hosking
– ESOP options
– Performance rights (STI)
– Performance rights (LTI)
Mr Mark Smith
– ESOP options
– Performance rights (STI)
– Performance rights (LTI)
Non-Executive Director
Mr Jose Coutinho Barbosa
– ESOP options
– Performance rights (STI)
– Performance rights (LTI)
Other KMP (Group)
Mr Scott Hosking
– ESOP options
– Performance rights (STI)
– Performance rights (LTI)
Mr Tim Hosking
– ESOP options
– Performance rights (STI)
– Performance rights (LTI)
Mr Edward Munks
– ESOP options
– Performance rights (STI)
– Performance rights (LTI)
Total KMP
– Share options
– Performance rights
* The value at grant date, calculated in accordance with AASB 2, of share options and performance rights granted during the financial year as part of
their remuneration.
** The value of share options and performance rights forfeited during the financial year because a vesting condition was not satisfied was determined at the
time of forfeit (12 September 2018), but assuming the condition was satisfied, based on the intrinsic value of the share options or performance rights at that date.
No share options or performance rights over unissued ordinary shares in the Company, held by any Director or other KMP, lapsed during
the financial year, except for 1,352,027 share options and 697,222 performance rights that were forfeited.
49
Karoon Energy Ltd Annual Report 2019 DIRECTORS’ REPORT (CONTINUED)
Remuneration Report (Audited) (continued)
Section 5. Statutory and Share-based Reporting (continued)
Shares Issued on the Exercise of Share Options Provided as Remuneration
No share options were exercised by any Director or other KMP, including their personally related parties, during the financial year.
Shares Issued on the Conversion of Performance Rights Provided as Remuneration
No remuneration performance rights were exercised and/or converted by any Director or other KMP, including their personally related
parties, during the financial year.
Details of Remuneration – Share Options and Performance Rights
For each grant of share options or performance rights in current or previous financial years which resulted in a share-based payment
expense to Directors and other KMP, the percentage of the grant that vested and percentage that was forfeited because the individual did
not meet the service and/or pre-determined performance conditions is set out below:
Name
Executive Directors
Mr Robert Hosking
– ESOP options
– Performance rights (LTI)
– ESOP options
– Performance rights (LTI)
– Performance rights (STI)
– ESOP options
– Performance rights (LTI)
Mr Mark Smith
– ESOP options
– Performance rights (LTI)
– ESOP options
– Performance rights (LTI)
– Performance rights (STI)
– ESOP options
– Performance rights (LTI)
Financial Year
End Granted
Vested
%
Forfeited
%
Financial Year
in Which Share
Options or
Performance
Rights May Vest
Maximum Total
Value of Grant
Yet to Vest
30 June 2016
30 June 2016
30 June 2017
30 June 2017
30 June 2018
30 June 2018
30 June 2018
30 June 2016
30 June 2016
30 June 2017
30 June 2017
30 June 2018
30 June 2018
30 June 2018
–
–
–
–
40%
–
–
–
–
–
–
40%
–
–
100%
100%
–
–
60%
–
–
100%
100%
–
–
60%
–
–
30 June 2019
30 June 2019
30 June 2020
30 June 2020
30 June 2019
30 June 2021
30 June 2021
30 June 2019
30 June 2019
30 June 2020
30 June 2020
30 June 2019
30 June 2021
30 June 2021
$-
$-
$-
$-
$-
$77,223
$105,137
$-
$-
$-
$-
$-
$77,223
$105,137
50
Karoon Energy Ltd Annual Report 2019 Name
Other KMP (Group)
Mr Scott Hosking
– ESOP options
– Performance rights (LTI)
– ESOP options
– Performance rights (LTI)
– ESOP options
– Performance rights (STI)
– Performance rights (LTI)
– ESOP options
– Performance rights (STI)
– Performance rights (LTI)
Mr Tim Hosking
– ESOP options
– Performance rights (LTI)
– ESOP options
– Performance rights (LTI)
– ESOP options
– Performance rights (STI)
– Performance rights (LTI)
– ESOP options
– Performance rights (STI)
– Performance rights (LTI)
Mr Edward Munks
– ESOP options
– Performance rights (LTI)
– ESOP options
– Performance rights (LTI)
– ESOP options
– Performance rights (STI)
– Performance rights (LTI)
– ESOP options
– Performance rights (STI)
– Performance rights (LTI)
Financial Year
End Granted
Vested
%
Forfeited
%
Financial Year
in Which Share
Options or
Performance
Rights May Vest
Maximum Total
Value of Grant
Yet to Vest
30 June 2016
30 June 2016
30 June 2017
30 June 2017
30 June 2018
30 June 2018
30 June 2018
30 June 2019
30 June 2019
30 June 2019
30 June 2016
30 June 2016
30 June 2017
30 June 2017
30 June 2018
30 June 2018
30 June 2018
30 June 2019
30 June 2019
30 June 2019
30 June 2016
30 June 2016
30 June 2017
30 June 2017
30 June 2018
30 June 2018
30 June 2018
30 June 2019
30 June 2019
30 June 2019
–
–
–
–
–
27%
–
–
–
–
–
–
–
–
–
27%
–
–
–
–
–
–
–
–
–
27%
–
–
–
–
100%
100%
–
–
–
73%
–
–
–
–
100%
100%
–
–
–
73%
–
–
–
–
100%
100%
–
–
–
73%
–
–
–
–
30 June 2019
30 June 2019
30 June 2020
30 June 2020
30 June 2021
30 June 2020
30 June 2021
30 June 2022
30 June 2021
30 June 2022
30 June 2019
30 June 2019
30 June 2020
30 June 2020
30 June 2021
30 June 2020
30 June 2021
30 June 2022
30 June 2021
30 June 2022
30 June 2019
30 June 2019
30 June 2020
30 June 2020
30 June 2021
30 June 2020
30 June 2021
30 June 2022
30 June 2021
30 June 2022
$-
$-
$-
$-
$(2,501)
$-
$26,419
$20,410
$105,606
$67,204
$-
$-
$-
$-
$(2,422)
$-
$25,581
$19,763
$102,257
$65,073
$-
$-
$-
$-
$21,568
$-
$64,556
$94,704
$58,669
$100,135
No share options or performance rights will vest if the service and/or pre-determined performance conditions are not met, therefore the
minimum value of the share option or performance right yet to vest is $Nil.
The maximum value of share options and performance rights yet to vest was determined as the amount of the grant date fair value of the share
options or performance rights that is yet to be expensed in the consolidated statement of profit or loss and other comprehensive income.
Share Options and Performance Rights over Unissued Ordinary Shares in the Company as at 30 June 2019
During the financial year 1,279,187 share options over unissued ordinary shares in the Company were issued to Directors and other KMP,
including their personally related parties.
During the financial year 1,005,583 performance rights over unissued ordinary shares in the Company were issued to Directors and other
KMP, including their personally related parties.
51
Karoon Energy Ltd Annual Report 2019 DIRECTORS’ REPORT (CONTINUED)
Remuneration Report (Audited) (continued)
Section 5. Statutory and Share-based Reporting (continued)
Share Options and Performance Rights over Unissued Ordinary Shares in the Company as at 30 June 2019 (continued)
The movement of share options and performance rights over unissued ordinary shares in the Company held by Directors and other KMP,
including their personally related parties, during the financial year was as follows:
Exercised
(Share
Options)/
Vested and
Converted
(Performance
Rights)
Share
Options or
Performance
Rights
Forfeited
Cash-
settled
Total
Vested and
Exercisable
as at
30 June
2019
Total
Unvested
as at
30 June
2019
Balance
as at
30 June
2019
Balance
as at
1 July 2018
Granted as
Remuneration
–
–
–
–
–
–
–
–
–
–
Executive Directors
Mr Robert Hosking
– ESOP options
– Performance rights
Mr Mark Smith
– ESOP options
– Performance rights
1,488,457
593,396
1,488,457
593,396
Non-Executive Directors
Mr Bruce Phillips
(appointed
1 January 2019)
Dr David Klingner
(ceased being
a Director on
13 August 2018)
Ms Luciana Rachid
Mr Geoff Atkins
Mr Clark Davey
Mr Peter Turnbull
Mr Jose Coutinho
Barbosa
– ESOP options
– Performance rights
Other KMP
Mr Scott Hosking
– ESOP options
– Performance rights
Mr Tim Hosking
– ESOP options
– Performance rights
Mr Edward Munks
– ESOP options
– Performance rights
Total KMP
– Share options
– Performance rights
–
–
–
–
–
–
30,240
59,737
49,386
38,823
456,900
455,036
528,689
435,844
391,859
630,411
369,258
290,278
398,971
313,635
461,572
362,847
4,384,602
2,767,820
1,279,187
1,005,583
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(490,909)
(69,230)
997,548
524,166
–
128,505
997,548
395,661
(490,909)
(69,230)
997,548
524,166
–
128,505
997,548
395,661
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(12,437)
79,626
86,123
–
10,594
79,626
75,529
(136,192)
(159,900)
689,966
585,414
–
70,164
689,966
515,250
(131,873)
(164,220)
795,787
585,259
–
67,939
795,787
517,320
(102,144)
(222,205)
751,287
771,053
–
87,705
751,287
683,348
(1,352,027)
(697,222)
4,311,762
3,076,181
– 4,311,762
493,412 2,582,769
All ESOP options issued during the financial year were issued under the Karoon Gas Australia 2016 Employee Share Option Plan.
All performance rights issued during the financial year were issued under the Karoon Gas Australia 2016 PRP.
52
Karoon Energy Ltd Annual Report 2019 The number of ordinary shares held by Directors and other KMP, including their personally related parties, as at 30 June 2019 was as follows:
Exercised
(Share
Options)/
Vested and
Converted
(Performance
Rights)
Balance as at
1 July 2018
Received as
Remuneration
Ordinary
Shares
Purchased
Ordinary
Shares Sold
Balance as at
30 June 2019
Other
Executive Directors
Mr Robert Hosking
Mr Mark Smith
12,353,123
2,870,938
Non-Executive Directors
Mr Bruce Phillips
(appointed 1 January 2019)
Dr David Klingner
(ceased being a Director
on 13 August 2018)
Ms Luciana Rachid
Mr Geoff Atkins
Mr Clark Davey
Mr Peter Turnbull
Mr Jose Coutinho Barbosa
Other KMP
Mr Scott Hosking
Mr Tim Hosking
Mr Edward Munks
Total KMP
–
103,591
–
720,676
24,294
41,000
–
195,206
244,571
829,697
17,383,096
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(103,591)
–
–
–
–
–
12,353,123
2,870,938
–
–
–
720,676
24,294
41,000
–
–
–
–
(103,591)
195,206
244,571
829,697
17,279,505
None of the ordinary shares are held nominally by any Director or any of the other KMP. ‘Held nominally’ refers to the situation where the
ordinary shares are in the name of the Director or other KMP, but they are not the beneficial owner.
Other Transactions with Directors and Other KMP
A formal Related Party Protocol requires the approval by the Risk and Governance Committee and, thereafter, the Board of Directors of all new
related party transactions.
During the financial year, Mr Jose Coutinho Barbosa, a Non-Executive Director, had an interest in Net Pay Óleo & Gás Consultoria Ltda that
provided business and geology consulting services to the Group. The value of these transactions during the financial year in the Group was
$343,961 (2018: $321,395). Given Karoon’s relative size to other operators in Brazil, the consulting services provided by Net Pay Óleo & Gás
Consultoria Ltda are required for Karoon to operate effectively within the Brazilian oil industry.
During the financial year, Ms Flavia Barbosa, the daughter of a Non-Executive Director, was employed by the Group as the in-house Legal
Counsel in Brazil. The total value of her remuneration (including share-based payments expense) during the financial year was $235,487
(2018: $252,311), which includes social security and indemnity fund contributions of $36,588 (2018: $38,702). Ms Barbosa has been an
employee of the Company since 2011, and has a comprehensive understanding of the Brazilian legal and regulatory framework.
Ms Marina Sayao, the wife of Mr Tim Hosking (a KMP), was employed by the Group on a part-time basis as the Sustainability and
Communications Manager South America. The total value of her remuneration (including share-based payments expense) during the
financial year was $106,166 (2018: $115,488). Ms Sayao is a key member of the South American operations. The Brazilian and Peruvian
regulatory and business environments require transparent and clear communication on social and environmental issues with local and
federal governments.
53
Karoon Energy Ltd Annual Report 2019 DIRECTORS’ REPORT (CONTINUED)
Remuneration Report (Audited) (continued)
Section 5. Statutory and Share-based Reporting (continued)
Other Transactions with Directors and Other KMP (continued)
During the financial year, Mr Mark Smith, an Executive Director, had an interest in Quantiseal Pty Ltd which provided geophysical fault seal
analysis for the Group’s Santos Basin assets. The Risk and Governance Committee and then Karoon Board approved the transaction during
the financial year, prior to it being entered into, being on arm’s length terms. The value of this transaction during the financial year in the
Group was $64,000.
In addition, Mr Mark Smith has an interest in BNN Energy Limited (‘BNN’) which provides geological and engineering expertise and services
to Liberty Petroleum Corporation. Where BNN business involves any activity connected to the Group, Mr Smith maintains an arm’s length
relationship to BNN. Mr Mark Smith is also excluded from any Board of Director discussions and decisions regarding BNN and/or Liberty
Petroleum Corporation. Liberty Petroleum Corporation is entitled to: (a) certain milestone cash bonuses and an over-riding royalty in the
event of production on the Group’s exploration permit WA-482-P; and (b) an over-riding royalty in the event of production on the Group’s
exploration permit WA-314-P. BNN has a 1/3 share of Liberty Petroleum Corporation’s over-riding royalty, if a discovery is made for exploration
permits WA-482-P or WA-314-P and developed.
Loans to Directors and Other KMP
There were no loans to Directors or other KMP during the financial year.
This Directors’ Report, incorporating the Remuneration Report, is made in accordance with a resolution of the Directors.
On behalf of the Directors:
Mr Bruce Phillips
Independent Non-Executive Chairman
Mr Robert Hosking
Managing Director
25 September 2019
54
Karoon Energy Ltd Annual Report 2019 AUDITOR’S INDEPENDENCE DECLARATION
Auditor’s Independence Declaration
As lead auditor for the audit of Karoon Energy Ltd for the financial year ended 30 June 2019, I declare
that to the best of my knowledge and belief, there have been:
(a)
no contraventions of the auditor independence requirements of the Corporations Act 2001 in
relation to the audit; and
(b)
no contraventions of any applicable code of professional conduct in relation to the audit.
This declaration is in respect of Karoon Energy Ltd and the entities it controlled during the financial
year.
Charles Christie
Partner
PricewaterhouseCoopers
Melbourne
25 September 2019
PricewaterhouseCoopers, ABN 52 780 433 757
2 Riverside Quay, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001
T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au
Liability limited by a scheme approved under Professional Standards Legislation.
55
Karoon Energy Ltd Annual Report 2019
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FINANCIAL YEAR ENDED 30 JUNE 2019
The Company is a public company limited by shares and is listed on the ASX. It is incorporated and domiciled in Australia. The registered
office of Karoon Energy Ltd is Office 7A, 34-38 Lochiel Avenue, Mt Martha VIC 3934. The principal place of business is Level 25, 367 Collins
Street, Melbourne VIC 3000.
The consolidated financial statements are for the consolidated entity consisting the Company and its subsidiaries.
The consolidated financial statements are presented in Australian dollars.
Consolidated Statement of Profit or Loss and Other Comprehensive Income
Consolidated Statement of Financial Position
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
Notes to the Consolidated Financial Statements
Note 1.
Note 2.
Note 3.
Note 4.
Note 5.
Note 6.
Note 7.
Note 8.
Note 9.
Note 10.
Note 11.
Note 12.
Note 13.
Note 14.
Note 15.
Note 16.
Note 17.
Note 18.
Note 19.
Note 20.
Note 21.
Note 22.
Note 23.
Note 24.
Note 25.
Note 26.
Note 27.
Note 28.
Note 29.
Note 30.
Significant Accounting Policies
Significant Accounting Estimates, Assumptions and Judgements
Financial Risk Management
Revenue
Expenses
Income Tax
Remuneration of External Auditors
Dividends
Earnings Per Share
Cash and Cash Equivalents
Receivables
Inventories
Security Deposits
Other Assets
Plant and Equipment
Intangible Assets
Exploration and Evaluation Expenditure Carried Forward
Trade and Other Payables
Provisions
Contributed Equity and Reserves Within Equity
Subsidiaries
Segment Information
Joint Operations
Contingent Liabilities and Contingent Assets
Commitments
Reconciliation to the Consolidated Statement of Cash Flows
Share-based Payments
Related Party Transactions
Parent Company Financial Information
Subsequent Events
56
57
58
59
60
61
70
72
77
78
79
81
81
82
82
83
83
83
84
84
84
85
86
86
87
88
88
91
92
93
94
95
98
99
100
Karoon Energy Ltd Annual Report 2019 CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE FINANCIAL YEAR ENDED 30 JUNE 2019
Revenue
Other income
Total revenue and other income
Business development and other project costs
Computer support
Consulting fees
Depreciation and amortisation expense
Employee benefits expense (net)
Exploration and evaluation expenditure expensed, impaired or written-off
Farm-out costs
Finance costs
Insurance expense
Write-down of inventory to net realisable value
Legal fees
Property costs
Share registry and listing fees
Telephone and communication expenses
Travel and accommodation expenses
Other expenses
Total expenses
Loss before income tax
Tax income
Loss for financial year attributable to equity holders of the Company
Other comprehensive income, net of income tax:
Items that may be reclassified subsequently to profit or loss
Exchange differences arising from the translation of financial statements of foreign subsidiaries
Other comprehensive income (loss) for financial year, net of income tax
Total comprehensive loss for financial year attributable to equity holders
of the Company, net of income tax
Loss per share attributable to equity holders of the Company:
Basic loss per ordinary share
Diluted loss per ordinary share
Consolidated
2019
$
2,314,803
17,503,183
19,817,986
(5,214,563)
(1,375,903)
(783,544)
(692,957)
(11,100,470)
(19,058,902)
(339,023)
(180,122)
(390,048)
(6,213,639)
(246,156)
(1,322,108)
(196,411)
(240,495)
(372,303)
(1,669,283)
(49,395,927)
(29,577,941)
1,160,404
(28,417,537)
2018
$
710,652
12,993,578
13,704,230
(7,285,306)
(1,590,595)
(701,066)
(730,834)
(11,339,308)
(162,964,693)
(509,122)
(237,474)
(309,867)
(6,679,549)
(66,459)
(1,925,006)
(168,286)
(234,477)
(198,491)
(2,820,294)
(197,760,827)
(184,056,597)
2,278,808
(181,777,789)
10,765,446
10,765,446
(26,064,346)
(26,064,346)
(17,652,091)
(207,842,135)
(0.1156)
(0.1156)
(0.7403)
(0.7403)
Note
4
4
5
5
5
5
6
9
9
The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes.
57
Karoon Energy Ltd Annual Report 2019 CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 30 JUNE 2019
Current assets
Cash and cash equivalents
Receivables
Inventories
Security deposits
Current tax asset
Other assets
Total current assets
Non-current assets
Inventories
Plant and equipment
Intangible assets
Exploration and evaluation expenditure carried forward
Security deposits
Total non-current assets
Total assets
Current liabilities
Trade and other payables
Provisions
Total current liabilities
Non-current liabilities
Trade and other payables
Deferred tax liabilities
Provisions
Total non-current liabilities
Total liabilities
Net assets
Equity
Contributed equity
Accumulated losses
Share-based payments reserve
Foreign currency translation reserve
Total equity
Consolidated
2019
$
2018
$
Note
10
11
12
13
6
14
12
15
16
17
13
18
19
18
6
19
20
326,191,131
1,880,833
2,124,577
535,884
54,303
1,161,836
331,948,564
31,495,438
793,638
535,655
208,803,023
7,513,064
249,140,818
581,089,382
333,572,953
1,152,572
–
18,955
185,737
782,828
335,713,045
37,696,266
802,514
781,514
209,629,983
10,297,243
259,207,520
594,920,565
7,384,308
586,165
7,970,473
6,428,989
283,500
6,712,489
546,766
31,212,894
120,340
31,880,000
39,850,473
541,238,909
279,544
32,373,298
329,520
32,982,362
39,694,851
555,225,714
802,295,334
(243,144,230)
51,375,585
(69,287,780)
541,238,909
802,295,334
(214,726,693)
47,710,299
(80,053,226)
555,225,714
The above consolidated statement of financial position should be read in conjunction with the accompanying notes.
58
Karoon Energy Ltd Annual Report 2019 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE FINANCIAL YEAR ENDED 30 JUNE 2019
Balance as at 1 July 2017
Loss for financial year
Exchange differences arising from the translation
of financial statements of foreign subsidiaries
Total comprehensive loss for financial year
Transactions with owners in their capacity as owners:
Share-based payments expense
Balance as at 30 June 2018
Loss for financial year
Exchange differences arising from the translation
of financial statements of foreign subsidiaries
Total comprehensive loss for financial year
Contributed
Equity
$
802,295,334
Accumulated
Losses
$
(32,948,904)
Consolidated
Share-based
Payments
Reserve
$
43,534,615
–
–
–
(181,777,789)
–
(181,777,789)
–
–
–
Foreign
Currency
Translation
Reserve
$
Total Equity
$
(53,988,880) 758,892,165
–
(181,777,789)
(26,064,346)
(26,064,346)
(26,064,346)
(207,842,135)
–
–
802,295,334 (214,726,693)
–
–
4,175,684
4,175,684
47,710,299
4,175,684
4,175,684
(80,053,226) 555,225,714
–
–
–
–
–
(28,417,537)
–
(28,417,537)
–
–
–
–
(28,417,537)
10,765,446
10,765,446
10,765,446
(17,652,091)
Transactions with owners in their capacity as owners:
Share-based payments expense
Balance as at 30 June 2019
–
–
802,295,334 (243,144,230)
–
–
3,665,286
3,665,286
51,375,585
3,665,286
3,665,286
(69,287,780) 541,238,909
–
–
The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.
59
Karoon Energy Ltd Annual Report 2019 CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE FINANCIAL YEAR ENDED 30 JUNE 2019
Cash flows from operating activities
Receipts from customers (inclusive of GST refunds)
Payments to suppliers and employees (inclusive of GST)
Payments for exploration and evaluation expenditure expensed
Interest received
Interest and other costs of finance paid
Income taxes refund
Net cash flows used in operating activities
Cash flows from investing activities
Purchase of plant and equipment
Purchase of computer software
Payments for exploration and evaluation expenditure capitalised
Release/refund (payment) of security deposits
Recoupment of exploration and evaluation expenditure on Block Z-38 farm-out
Net cash flows used in investing activities
Cash flows from financing activities
Payments for finance lease
Net cash flows used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of financial year
Effect of exchange rate changes on the balance of cash and cash equivalents
held in foreign currencies
Cash and cash equivalents at end of financial year
Consolidated
2019
$
2018
$
Note
546,057
(20,909,866)
(3,640,144)
2,077,040
(180,122)
142,976
(21,964,059)
(319,617)
(47,768)
(10,641,655)
2,553,281
5,591,334
(2,864,425)
1,690,938
(21,965,953)
(5,569,499)
560,291
(237,474)
228,527
(25,293,170)
(197,791)
(52,173)
(25,542,883)
(2,422,599)
–
(28,215,446)
(94,081)
(94,081)
(64,290)
(64,290)
(24,922,565)
333,572,953
(53,572,906)
375,069,427
26(a)
17
26(b)
17,540,743
326,191,131
12,076,432
333,572,953
10
The above consolidated statement of cash flows should be read in conjunction with the accompanying notes.
60
Karoon Energy Ltd Annual Report 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FINANCIAL YEAR ENDED 30 JUNE 2019
Note 1. Significant Accounting Policies
The consolidated financial statements are for the consolidated entity consisting of the Company and its subsidiaries (the ‘Group’). Information
on the nature of the operations and principal activities of the Group are described in the Directors’ Report.
The following is a summary of significant accounting policies adopted by the Group in the preparation of these consolidated financial
statements. The accounting policies have been consistently applied to all the financial years presented, unless otherwise stated.
(a) Basis of Preparation
These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations
issued by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001. The Company is a for-profit entity for the
purpose of preparing financial statements.
The consolidated financial statements have been prepared using the going concern assumption which contemplates the realisation of
assets and settlement of liabilities in the ordinary course of business.
On 25 July 2019 Karoon advanced its top strategic priority of acquiring a quality, cash generating production asset by signing a binding SPA
with Petrobras for a 100% operating interest in Concession BM-S-40, which includes the producing Baúna light oil field located in the Santos
Basin, offshore Brazil. Headline consideration for the purchase was US$665 million and a non-refundable cash deposit of US$49.9 million
was paid to Petrobras.
As at 30 June 2019, Karoon had a cash balance of $326,191,131 (that included the above US$49.9 million cash deposit) which is sufficient
to meet the Group’s existing corporate and administrative activities and its exploration expenditure commitments as at 30 June 2019.
However, the cash balance is not sufficient to fund the entire Baúna acquisition price.
Karoon intends to use a portion of its existing cash balance to fund part of the Baúna acquisition, however, Karoon’s ability to complete the
acquisition is dependent upon:
• being successful in obtaining additional funding via debt;
• an equity raising to existing shareholders and new investors; and
• interim net cash inflows from Baúna which Karoon is entitled to under the SPA from 1 January 2019 through to closing expected during
the first half of calendar year 2020.
As at the date of this Annual Report, Karoon was well advanced in negotiations on the final documentation and confirmatory due diligence
for a US$250 million underwritten senior secured syndicated term loan facility from ING Bank N.V.
Furthermore, negotiations with potential equity underwriters had also commenced and were well advanced.
The interim net cash inflows generated from the acquisition (operational cash flows less income tax, capital expenditures and interest on
acquisition consideration from the acquisition’s effective date of 1 January 2019 through to closing) are dependent on a number of
operational and macro factors (e.g. crude oil price and foreign exchange risks). Karoon has internally modelled these cash flows to estimate
a range of probable outcomes and will adopt strategies to mitigate the associated financial risks where possible.
The Directors believe that Karoon will be successful in the above matters. Notwithstanding this belief, there is a risk that the Group may not
be successful in implementing some or all of these initiatives in order to complete the acquisition. In the event Karoon does not compete
the acquisition, Petrobras would retain the deposit.
Should the Company be unable to complete the transaction and forfeit the deposit, the Directors are satisfied that the Company will have
sufficient cash reserves to meet its firm corporate and administrative activities and exploration expenditure commitments for at least the next
12 months from the date of signing the Directors’ Declaration with the ability to defer or accelerate some of these commitments as required.
Based upon the details set out above, the Directors have prepared the consolidated financial statements on a going concern basis.
Where necessary, comparative information has been reclassified to achieve consistency in disclosure with financial year amounts
and other disclosures.
Currency of Presentation
The consolidated financial statements are presented in Australian dollars, which is the Company’s functional and presentation currency.
Historical Cost Convention
The consolidated financial statements have been prepared on an accrual basis under the historical cost convention as modified, when
relevant, by the revaluation of selected financial assets and financial liabilities for which the fair value basis of accounting has been applied.
61
Karoon Energy Ltd Annual Report 2019 Note 1. Significant Accounting Policies (continued)
(a) Basis of Preparation (continued)
Significant Accounting Estimates, Assumptions and Judgements
The preparation of financial statements requires the use of certain significant accounting estimates. It also requires management to exercise
its judgement in the process of applying Group accounting policies. The areas involving a high degree of judgement or complexity, or areas
where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 2.
Compliance with International Financial Reporting Standards
Compliance with Australian Accounting Standards ensures that the consolidated financial statements comply with International Financial
Reporting Standards as issued by the International Accounting Standards Board.
New or Revised Australian Accounting Standards and Interpretations that are First Effective in the Current Reporting Period
The Group has adopted all of the new and/or revised Australian Accounting Standards and Interpretations issued by the AASB that are relevant
to its operations and effective for the financial year ended 30 June 2019.
New and revised Australian Accounting Standards and amendments thereof and Interpretations effective for the financial year that are
relevant to the Group include:
(i) AASB 9 ‘Financial Instruments’;
(ii) AASB 15 ‘Revenue from Contracts with Customers’; and
(iii) AASB 2016-5 ‘Amendments to Australian Accounting Standards – Classification and Measurement of Share-based Payment Transactions’.
The adoption of AASB 9 and AASB 15 has resulted in changes in the Group’s: accounting policies for revenue (refer Note 1(d)), receivables
(refer Note 1(h)) and security deposits (refer Note 1(j)); credit risk disclosures and the nature of impairments for receivables and security
deposits (refer to Note 3(b)); and disclosures on significant judgement (refer Note 2(d)). The main change for the Group from AASB 9 relates
to a new model for the credit loss measurement of financial assets, a hybrid of expected and incurred loss (hereinafter referred to as the
‘expected credit loss’ model). The core principle in AASB 15 requires the Group to recognise revenue to depict when control over a good
or service is transferred to a customer in amounts that reflect the consideration (that is payment) to which the Group expects to be entitled
in exchange.
The initial adoption of each of the above new standards or revisions has had no effect on either the amounts reported for the current
or previous financial years but may affect the accounting for future transactions or arrangements.
Early Adoption of Australian Accounting Standards
The Group has not elected to apply any new or revised Australian Accounting Standards before their operative date in the financial year
beginning 1 July 2018.
(b) Basis of Consolidation
The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of the Company as at 30 June 2019 and the
results of all subsidiaries for the financial year then ended.
Subsidiaries are all entities (including special purpose entities) over which the Group has control. The Group controls an entity when the
Group 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 to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group.
They are deconsolidated from the date that control ceases.
Interests in subsidiaries are set out in Note 21.
All subsidiaries have a financial year end of 30 June, with the exception of: Karoon Petróleo & Gas Ltda; KEI Peru Pty Ltd, Sucursal del Peru;
and KEI (Peru Z38) Pty Ltd, Sucursal del Peru which have a financial year end of 31 December in accordance with relevant Brazilian and
Peruvian tax and accounting regulations respectively.
Accounting policies of subsidiaries have been changed, where necessary, to ensure consistency with the policies applied by the Group.
Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated on consolidation.
Unrealised losses are also eliminated, unless the transaction provides evidence of the impairment of the asset transferred.
62
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) (c) Segment Information
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief
operating decision maker, who is responsible for assessing performance and in determining the allocation of resources of the operating
segments, has been identified as the Managing Director and the Executive Director/Exploration Director.
(d) Revenue
Revenue from contracts with customers is recognised when the performance obligations are considered met, which is when control of the
products or services provided are transferred to the customer. Revenue is recognised at an amount that reflects the consideration the Group
expects to be entitled to, net of goods and services tax or similar taxes.
Interest Income
Interest income on financial assets at amortised cost calculated using the effective interest rate method is recognised in the
consolidated statement of profit or loss and other comprehensive income as revenue. Interest income is calculated by applying the effective
interest rate to the gross carrying amount of the relevant financial asset, except for financial assets that subsequently become
credit-impaired. For credit-impaired financial assets the effective interest rate is applied to the net carrying amount of the financial asset
(after deduction of the loss allowance).
(e) Foreign Currency Transactions and Balances
Functional and Presentation Currency
Items included in the financial statements of each of the Group’s subsidiaries are measured using the currency of the primary economic
environment in which the subsidiary or branch operates (the ‘functional currency’).
Transactions and Balances
Foreign currency transactions are translated into the functional currency using the foreign exchange rates prevailing at the dates of
the transactions. Foreign currency gains and losses resulting from the settlement of such transactions and from the translation at financial
year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement
of profit or loss and other comprehensive income, except when they are attributable to part of the net investment in a foreign operation.
Non-monetary items measured at historical cost continue to be carried at the foreign exchange rate at the date of transaction. Foreign
exchange differences arising on the translation of non-monetary items are recognised directly in equity to the extent that the gain or loss is
directly recognised in equity, otherwise foreign exchange differences are recognised in the consolidated statement of profit or loss and other
comprehensive income.
Foreign exchange gains and losses are presented in the consolidated statement of profit or loss and other comprehensive income on a net
basis within other income or expenses.
Group Companies
The results and financial position of foreign subsidiaries that have a functional currency different from the presentation currency are translated
into the presentation currency as follows:
• assets and liabilities are translated at end of reporting period foreign exchange rates prevailing at the end of each reporting period;
• income and expenses are translated at average foreign exchange rates for the financial period; and
• all resulting foreign exchange differences are recognised in other comprehensive income.
On consolidation, foreign exchange differences arising on translation of foreign subsidiary financial statements are transferred directly to the
foreign currency translation reserve in the consolidated statement of financial position. The relevant differences are recognised in the
consolidated statement of profit or loss and other comprehensive income during the financial period when the investment in a foreign
subsidiary is disposed.
63
Karoon Energy Ltd Annual Report 2019 Note 1. Significant Accounting Policies (continued)
(f) Income Taxes and Other Taxes
Current Tax
Current tax (expense) income is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit
or loss for the financial period. It is calculated using income tax rates that have been enacted or are substantively enacted by the end of
each reporting period. Current tax for current and previous financial periods is recognised as a liability (or asset) to the extent that it is unpaid
or (refundable).
Deferred Tax
Deferred tax is accounted for using the statement of financial position liability method in respect of temporary differences arising between
the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The tax base of an asset or liability is the
amount attributed to that asset or liability for income taxation purposes.
No deferred tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no
effect on accounting or taxable profit or loss.
Deferred tax is calculated at the tax rates that are enacted or substantively enacted by the end of the financial period and are expected to
apply to the financial period when the asset is realised or liability is settled. Deferred tax is credited in the consolidated statement of profit or
loss and other comprehensive income except where it relates to items that may be credited directly to equity, in which case the deferred tax
is adjusted directly against equity.
Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible
temporary tax differences or unused tax losses and tax offsets can be utilised.
Deferred tax assets and tax liabilities are offset when there is a legally enforceable right to offset current tax assets and tax liabilities and
when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the Group has
a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
The amount of benefits brought to account or which may be realised in the future is based on the assumption that no adverse change will
occur in income taxation legislation and the anticipation that the Group will derive sufficient future assessable income to enable the benefit
to be realised and comply with the conditions of deductibility imposed by law.
Tax Consolidation
The Company and its wholly owned Australian subsidiaries are part of an income tax-consolidated group under Australian taxation law. The
Company is the head entity in the income tax-consolidated group. Tax income (expense), deferred tax liabilities and deferred tax assets
arising from temporary tax differences of the members of the income tax-consolidated group are recognised in the separate financial
statements of the members of the income tax-consolidated group using the ‘stand-alone taxpayer’ approach by reference to the carrying
amounts in the separate financial statements of each company and the tax values applying under tax consolidation. Current tax liabilities
and tax assets and deferred tax assets arising from unused tax losses and tax credits of members of the income tax-consolidated group are
recognised by the Parent Company (as head entity of the income tax-consolidated group).
Due to the existence of a tax funding agreement between the companies in the income tax-consolidated group, each company contributes
to the income tax payable or receivable in proportion to their contribution to the income tax-consolidated group’s taxable income. Differences
between the amounts of net tax assets and tax liabilities derecognised and the net amounts recognised pursuant to the funding agreement
are recognised as either a contribution by, or distribution to, the head entity.
Goods and Services Tax (‘GST’)
Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from
the Australian Taxation Office (‘ATO’). In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or equity
or as part of an item of expense.
Receivables and payables in the consolidated statement of financial position are shown inclusive of GST.
The net amount of GST recoverable from, or payable to, the ATO is included as current receivables or payables respectively in the
consolidated statement of financial position.
Cash flows are included on a gross basis in the consolidated statement of cash flows. The GST components of cash flows arising from
investing and financing activities, which are recoverable from, or payable to, the ATO, are classified as operating cash flows.
Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the ATO.
Petroleum Resource Rent Tax (‘PRRT’)
PRRT is accounted for as income tax under AASB 112 ‘Income Taxes’.
64
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) (g) Cash and Cash Equivalents
Cash and cash equivalents in the consolidated statement of financial position and for presentation in the consolidated statement of cash
flows comprise cash at banks and on hand (including share of joint operation cash balances) and short-term bank deposits that are readily
convertible to known amounts of cash and are subject to insignificant risk of changes in value.
(h) Receivables
Receivables, which normally have 30 day terms, are generally non-interest bearing amounts. They are recognised initially at the amount of
the consideration that is unconditional unless they contain significant financing components, when they are recognised initially at fair value.
The Group holds receivables with the objective to collect the contractual cash flows. They are presented as current assets unless collection
is not expected for more than 12 months after reporting date. For receivables expected to be settled within 12 months, these are subsequently
measured at amortised cost using the effective interest method, less any loss allowance. For receivables expected to be settled later
than 12 months, these are subsequently measured at amortised cost based on discounted cash flows using an effective interest rate, less
any loss allowance.
Cash flows relating to non-current receivables are not discounted if the effect of discounting would be immaterial.
Refer Note 3(b) for a description of the Group’s receivable impairment policies.
(i) Inventories
Inventories are measured at the lower of cost and net realisable value. Inventories are represented by assets acquired from third parties,
in the form of casing and other drilling inventory to be consumed or used in exploration and evaluation activities. They are presented as
current assets unless inventories are not expected to be consumed or used in exploration and evaluation activities within 12 months.
The cost of casing and other drilling inventory includes direct materials, direct labour and transportation costs.
(j) Security Deposits
Certain financial assets have been pledged as security for performance guarantees, bank guarantees and bonds related to exploration
tenements and operating lease rental agreements. Their realisation may be restricted subject to terms and conditions attached to the
relevant exploration tenement agreements or operating lease rental agreements.
Security deposits are non-derivative financial assets that are not quoted in an active market. Security deposits are initially recognised at fair
value. Such assets are subsequently carried at amortised cost using the effective interest method, less any loss allowance. They are
included in current assets, except for those with maturities greater than 12 months after the end of the reporting period which are classified
as non-current assets.
Security deposits are derecognised when the terms and conditions attached to the relevant exploration tenement agreements or lease rental
agreements have expired or been transferred.
Refer Note 3(b) for a description of the Group’s security deposit impairment policies.
(k) Plant and Equipment
Plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Such cost includes the cost
of replacing parts that are eligible for capitalisation when the cost of replacing the parts is incurred. Similarly, when each major inspection is
performed, its cost is recognised in the carrying amount of the plant and equipment as a replacement only if it is eligible for capitalisation.
All other repairs and maintenance are recognised as an expense in the consolidated statement of profit or loss and other comprehensive
income as incurred.
Commencing from the time the plant and equipment is held ready for use, depreciation expense is calculated on a straight-line basis
to allocate their cost amount, net of their residual values, over their estimated useful lives ranging from 2 to 10 years.
Plant and equipment residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at the end of each
reporting period.
Gains and losses on disposals are determined by comparing proceeds with the net carrying amount. These gains and losses are included
in the consolidated statement of profit or loss and other comprehensive income.
Plant and equipment are tested for impairment in accordance with the accounting policy described in Note 1(n).
65
Karoon Energy Ltd Annual Report 2019 Note 1. Significant Accounting Policies (continued)
(l) Intangibles
Computer Software
Computer software is stated at cost less accumulated amortisation and any accumulated impairment losses. Computer software costs have
a finite life.
Commencing from the time the computer software is held ready for use, amortisation expense is calculated on a straight-line basis to allocate
their cost amount, net of their residual values, over their estimated useful lives ranging from 2 to 2.5 years.
The assets’ residual values, useful lives and amortisation methods are reviewed, and adjusted if appropriate, at the end of each reporting period.
Computer software is tested for impairment in accordance with the accounting policy described in Note 1(n).
(m) Exploration and Evaluation Expenditure
Exploration and evaluation expenditure for each ‘area of interest’ is fully capitalised at cost, as an intangible, provided the right to tenure
of the area of interest is current and either:
• the exploration and evaluation activities are expected to be recouped through successful development and exploitation of the area
of interest or, alternatively, by its sale; or
• exploration and evaluation activities in the area of interest have not at the end of the reporting period reached a stage that permits
a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in,
or in relation to, the area of interest are continuing.
Otherwise, exploration and evaluation expenditure is expensed as incurred.
Accumulated costs in relation to an abandoned area are written-off in full in the consolidated statement of profit or loss and other
comprehensive income during the financial period in which the decision to abandon the area of interest is made.
As capitalised exploration and evaluation expenditure is not available for use, it is not amortised.
Cash flows associated with exploration and evaluation expenditure (comprising amounts capitalised) are classified as investing activities in
the consolidated statement of cash flows. Whereas, cash flows associated with exploration and evaluation expenditure expensed are
classified as operating activities.
When the technical feasibility and commercial viability of extracting economically recoverable reserves have been demonstrated, any related
capitalised exploration and evaluation expenditure is reclassified as development expenditure in the consolidated statement of financial
position. Prior to reclassification, capitalised exploration and evaluation expenditure is assessed for impairment.
Farm-out
The Group does not record any exploration and evaluation expenditure made by a farmee. It also does not recognise any gain or loss on
its exploration and evaluation farm-out arrangements, but redesignates any exploration and evaluation expenditure previously capitalised in
relation to the whole area of interest as relating to the partial interest retained.
Any cash consideration received on sale or farm-out of an area within an exploration area of interest is offset against the carrying value of
the particular area involved. Where the total carrying value of an area of interest has been recouped in this manner, the balance of the
proceeds is brought to account in the consolidated statement of profit or loss and other comprehensive income as a gain on disposal.
Impairment of Capitalised Exploration and Evaluation Expenditure
The carrying value of capitalised exploration and evaluation expenditure is assessed for impairment at the asset or cash-generating unit
level whenever facts and circumstances (as defined in AASB 6 ‘Exploration for and Evaluation of Mineral Resources’) suggest that the
carrying amount of the asset may exceed its recoverable amount. If any indication of impairment exists, an estimate of the asset’s recoverable
amount is calculated.
An impairment loss exists when the carrying amount of an asset or cash-generating unit exceeds its estimated recoverable amount. The asset
or cash-generating unit is then written-down to its recoverable amount. Impairment losses are recognised as an expense in the consolidated
statement of profit or loss and other comprehensive income.
Capitalised exploration and evaluation expenditure that suffered impairment are tested for possible reversal of the impairment loss whenever
facts or changes in circumstances indicate that the impairment may have reversed.
66
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) (n) Impairment of Assets (Other than Capitalised Exploration and Evaluation Expenditure)
All other current and non-current assets (other than receivables, inventories, security deposits and deferred tax assets) are tested for impairment
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
At the end of each reporting period, the Group conducts an internal review of asset values, which is used as a source of information to assess
for any indicators of impairment. External factors, such as changes in economic conditions, are also monitored to assess for indicators of
impairment. If any indication of impairment exists, an estimate of the asset’s recoverable amount is calculated.
An impairment loss exists when the carrying amount of an asset or cash-generating unit exceeds its estimated recoverable amount. The asset
is then written-down to its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and value in use.
For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows
that are largely independent of the cash inflows from other assets or groups of assets (cash-generating units).
Impairment losses are recognised as an expense in the consolidated statement of profit or loss and other comprehensive income.
Assets that suffered impairment are tested for possible reversal of the impairment loss whenever events or changes in circumstances
indicate that the impairment may have reversed.
(o) Trade and Other Payables
Trade and other payables are initially recognised at their fair value and subsequently measured at amortised cost using the effective interest
method. These amounts represent liabilities for goods and services provided to the Group prior to the end of the reporting period that are
unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of goods and services. The amounts
are unsecured and are usually paid within 30 days of recognition. They are presented as current liabilities unless payment is not due within
12 months from the reporting date.
(p) Employee Benefits
Wages, Salaries, Annual Leave and Personal Leave
Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months after the end
of the reporting period in which the employees render the related services are recognised in respect of employees’ services up to the end
of the reporting period. They are measured at the amounts expected to be paid when the liabilities are settled plus related on-costs.
Expenses for non-vesting personal leave are recognised when the leave is taken and are measured at the rates paid or payable.
The obligations are presented as current liabilities in the consolidated statement of financial position if the Group does not have an
unconditional right to defer settlement for at least 12 months after the reporting date, regardless of when the actual settlement is expected
to occur.
Share-based Payments
Share-based remuneration benefits are provided to Executive Directors and employees via the Company’s PRP and ESOP (refer Note 27).
The Group issues equity-settled and cash-settled share-based payments to certain employees.
The fair value of share options and performance rights granted is recognised as a share-based payments expense in the consolidated
statement of profit or loss and other comprehensive income. The total amount to be expensed is determined by reference to the fair value
of the share options and performance rights granted, which includes any market performance conditions, but excludes the impact of any
service and non-market performance vesting conditions. Non-market performance vesting conditions are included in assumptions about
the number of share options or performance rights that are expected to vest.
The fair value is measured at grant date. For equity-settled share-based payments the corresponding credit is recognised directly in the
share-based payments reserve in equity. For cash-settled share-based payments a liability is recognised based on fair value of the payable
earned by the end of the reporting period. The liability is re-measured to fair value at each reporting date up to, and including the vesting
date, with changes in fair value recognised in share-based payments expense. The total expense is recognised over the vesting period,
which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the Group
revises its estimates of the number of share options and performance rights that are expected to vest based on the non-market performance
vesting conditions. It recognises the impact of the revision to original estimates, if any, in the consolidated statement of profit or loss and
other comprehensive income.
The fair value of share options at grant date is independently determined using a Black-Scholes option pricing model that takes into account
the exercise price, the term of the share option, the impact of dilution, the non-tradeable nature of the share option, the share price at
grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the
share option.
The fair value of performance rights, granted for $Nil consideration, at grant date is based on the Company’s closing share price at that date.
67
Karoon Energy Ltd Annual Report 2019 Note 1. Significant Accounting Policies (continued)
(q) Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an
outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the
amount of the obligation.
Long Service Leave
A provision has been recognised for employee entitlements relating to long service leave measured at the discounted value of estimated
future cash outflows. In determining the provision, consideration is given to employee wage increases and the probability that the employee
may satisfy vesting requirements. The cash outflows are discounted using market yields with terms of maturity that match the expect timing
of cash outflows.
Employee entitlements relating to long service leave are presented as a current provision in the consolidated statement of financial position
if the Group does not have an unconditional right to defer settlement for at least twelve months after the reporting period, regardless of when
the actual settlement is expected to occur.
(r) Contributed Equity
Ordinary shares are classified as equity.
Transaction costs directly attributable to the issue of new ordinary shares, share options or performance rights are shown in equity as a
deduction, net of any related income tax, from the proceeds. Transaction costs are the costs that are incurred directly in connection with the
issue of new ordinary shares and which would not have been incurred had those ordinary shares not been issued. These directly attributable
transaction costs include registration and other regulatory fees, amounts paid to legal, accounting and other professional advisers, printing
costs and marketing costs.
Where the Company acquires its own ordinary shares, as a result of a share buy-back, those ordinary shares are cancelled. No gain or loss
is recognised and the consideration paid to acquire the ordinary shares, including any transaction costs directly attributable, net of any
related income tax, is recognised directly as a reduction from equity.
(s) Interests in Joint Operations
A joint operation is a joint arrangement whereby the participants that have joint control of the arrangement (i.e. joint operators) have rights
to the assets, and obligations for the liabilities, relating to the arrangement.
The Group recognises assets, liabilities, revenues and expenses according to its share in the assets, liabilities, revenues and expenses of a
joint operation or similar as determined and specified in contractual arrangements (joint operating agreements). These have been incorporated
in the consolidated financial statements under the appropriate headings.
The Group’s share of assets, liabilities, revenues and expenses employed in joint operations is set out in Note 23.
(t) Leases
A lease is classified as finance lease whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee.
All other leases are classified as operating leases.
Group as a Lessee
Assets held under finance leases are initially recognised as an asset of the Group at the present value of the minimum lease payments.
The corresponding liability to the lessor is included in the consolidated statement of financial position. Lease payments are apportioned
between finance charges and reduction of the finance lease liability so as to achieve a constant rate of interest on the remaining balance of
the finance lease liability. Finance charges are recognised as finance costs in the consolidated statement of profit or loss and other
comprehensive income. Leased assets are amortised over the term of the finance lease.
Operating lease payments (net of any incentives received from the lessor) are recognised as an expense in the consolidated statement
of profit or loss and other comprehensive income on a straight-line basis over the financial period of the lease.
68
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) (u) Earnings Per Share
Basic Earnings Per Share
Basic earnings per ordinary share is calculated by dividing the profit or loss attributable to owners of the Company, excluding any costs of
servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year,
adjusted for any bonus elements in ordinary shares issued during the financial year.
Diluted Earnings Per Share
Diluted earnings per ordinary share adjusts the figures used in the determination of basic earnings per ordinary share to take into account
the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average
number of ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares.
(v) Parent Company Financial Information
The financial information for the Parent Company, Karoon Energy Ltd, disclosed in Note 29 has been prepared on the same basis as the
consolidated financial statements, except as set out below:
Investments in Subsidiaries
Investments in subsidiaries are accounted for at cost in the Parent Company’s financial statements.
The Parent Company does not designate any investments in subsidiaries as being subject to the requirements of Australian Accounting
Standards specifically applicable to financial instruments. They are held for strategic and not trading purposes.
Investments in subsidiaries and receivables from subsidiaries are tested for impairment in accordance with the accounting policy described
in Note 1(n).
Share-based Payments
The grant by the Company of equity-settled share options and performance rights over its ordinary shares to the employees of subsidiary
companies in the Group is treated as a capital contribution to that subsidiary company. The fair value of employee services received,
measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investments in subsidiaries, with
a corresponding credit to equity.
(w) New Australian Accounting Standards and Interpretations for Application in Future Financial Years
Certain new Australian Accounting Standards and Interpretations have been published that are not mandatory for this financial year. The Group’s
assessment of the impact of the relevant new Australian Accounting Standards and Interpretations is set out below:
(i) AASB 16 ‘Leases’
AASB 16 ‘Leases’ is the new standard for lease recognition, replacing AASB 117 ‘Leases’. Under AASB 16, distinctions of operating leases
(off-balance sheet) and finance leases (on balance sheet) are removed for lease accounting, replaced by a single model where a right-of-use
asset and a corresponding liability have to be recognised for all leases with a term of more than 12 months, unless the underlying asset is
of low value. Leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources are specifically excluded from
AASB 16.
The Group’s finance team has reviewed the Group’s lease arrangements to identify and quantify the impact of the new lease accounting
rules in AASB 16 as at 1 July 2019.
Whilst the Group only operates as a lessee, implementation of AASB 16 will have an impact on the consolidated financial statements from
1 July 2019. The Group will need to recognise lease liabilities in relation to leases which had previously been classified as operating leases
under the principles of AASB 117. In contrast, for the South American finance lease, where the Group is a lessee, the Group has already
recognised an asset and a related finance lease liability for that lease arrangement, as such implementation of AASB 16 will have no impact
on the amounts recognised in the consolidated financial statements as at 1 July 2019.
A right-of-use asset will initially be measured at cost, and subsequently measured at cost less accumulated depreciation and adjusted for
any remeasurement of the relevant lease liability. The lease liability will initially be measured at the present value of the lease payments that
are not paid at that date. Subsequently, the lease liability will be adjusted for interest and lease payments. Furthermore, the classification on
the consolidated statement of cash flows will also be affected as operating lease payments under AASB 117 are currently presented as
operating cash flows, whereas under AASB 16 the lease payments will be split into a principal and an interest portion which will then be
presented as financing and operating cash flows respectively.
69
Karoon Energy Ltd Annual Report 2019 Note 1. Significant Accounting Policies (continued)
(w) New Australian Accounting Standards and Interpretations for Application in Future Financial Years (continued)
(i) AASB 16 ‘Leases’ (continued)
The Group expects to apply the simplified transition approach available under AASB 16 and will therefore not be required to restate
comparative amounts for the financial year prior to first adoption. Right-of-use assets for non-cancellable operating lease commitments will
be measured on transition as if the new rules had always been applied. All other right-of-use assets will be measured at the amount of the
lease liability on transition. In applying the new standard for the first time, the Group intends to use the following transition practical expedients
permitted by AASB 16:
(a) the use of a single discount for operating leases, as they have reasonably similar characteristics (and it is not considered to have a
material effect);
(b) the accounting for operating leases with a remaining lease term of 12 months (or less) to be classified as short-term leases, which will continue
to be recognised on a straight-line basis as an expense in profit or loss; and
(c) the use of hindsight in determining the lease term where the lease agreement contains an option to extend the operating lease.
The Group will also elect under AASB 16 not to apply the new standard to contracts that were not identified as containing a lease under
AASB 117 and AASB Interpretation 4 ‘Determining whether an Arrangement contains a Lease’.
As at 1 July 2019, the Group expects to recognise right-of-use assets of $1,013,036 and a corresponding lease liability of $1,013,036.
Overall, net assets will be the same, but working capital is expected to be $286,291 lower due to the presentation of a portion of the lease
liability as a current liability. The Group estimates that there will be no change in accumulated losses as a result of applying AASB 16 from
1 July 2019. The depreciation of the right-of-use assets and interest on the lease liability will be recognised in the consolidated statement
of profit or loss and other comprehensive income during the financial year ending 30 June 2020.
The new standard is applicable to annual reporting periods beginning on or after 1 January 2019. This means that it would first be applied
by the Group for the financial year beginning 1 July 2019.
(ii) AASB Interpretation 23 ‘Uncertainty over Income Tax Treatments’
Interpretation 23 clarifies how to apply the recognition and measurement requirements in AASB 112 when there is uncertainty over income
tax treatments. The Group currently recognises provisions based on the most likely amount of the liability, if any, for each uncertain tax
position. The Interpretation requires a probability weighed average approach to be taken for tax issues for which there are a wide range of
possible outcomes. For tax issues with a binary outcome, the most likely amount method should continue to be used. The Group does not
anticipate that application of Interpretation 23, as currently assessed, will have a material impact on the consolidated financial statements.
Interpretation 23 is applicable to annual reporting periods beginning on or after 1 January 2019, but is available for early adoption. This means
that it would first be applied by the Group for the financial year beginning 1 July 2019.
(iii) AASB 2019-1 ‘Amendments to Australian Accounting Standards – References to the Conceptual Framework’
The AASB has issued the International Accounting Standards Board’s revised Conceptual Framework for Financial Reporting (‘revised
Conceptual Framework’) and made consequential amendments to various Australian Accounting Standards (AASB 2019-1).
As Karoon states compliance with International Financial Reporting Standards, during the financial year it needed to consider whether it
previously relied on the current Conceptual Framework. Karoon confirms that it has not relied on the current Conceptual Framework in
determining accounting policies for transactions, events or conditions that are not otherwise dealt with under the Australian Accounting
Standards. As such, it believes it will not need to apply the revised Conceptual Framework at this time.
The revised Conceptual Framework is applicable to annual reporting periods beginning on or after 1 January 2020, but is available for early
adoption. The Group has not adopted it before its operative date, which means that it would first be applied during the financial year ending
30 June 2021.
There are no other relevant new Australian Accounting Standards or Interpretations that are not yet effective and that are expected to have
a material impact on the Group in the current or future financial years and on foreseeable future transactions.
Note 2. Significant Accounting Estimates, Assumptions and Judgements
Revenues and expenses and the carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions
of future events. In applying the Group’s significant accounting policies, the Board of Directors and management evaluate estimates and
judgements based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future
events and are based on current trends and economic data obtained both externally and within the Group.
Significant estimates, assumptions and/or judgements made by the Board of Directors and management in the preparation of the consolidated
financial statements were:
70
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) (a) Capitalised Exploration and Evaluation Expenditure
Exploration and evaluation expenditure is carried forward on the basis that exploration and evaluation operations in the areas of interest have
not at the end of the reporting period reached a stage that permits a reasonable assessment of the existence or otherwise of economically
recoverable reserves, and active and significant operations in, or in relation to, the areas of interest are continuing.
The future recoverability of capitalised exploration and evaluation expenditure is dependent on a number of factors, including whether the
Group decides to exploit the related exploration tenement itself or, if not, whether it successfully recovers the related exploration and
evaluation asset through sale. Factors that could affect the future recoverability include the level of economically recoverable reserves, future
technological changes which could impact the cost of development, future legal changes (including changes to environmental and
restoration obligations) and changes to commodity prices. To the extent that capitalised exploration and evaluation expenditure is determined
not to be recoverable in the future, the relevant capitalised amount will be impaired in the consolidated statement of profit or loss and other
comprehensive income and net assets will be reduced during the financial period in which this determination is made.
Information on the reasonable existence or otherwise of economically recoverable reserves is progressively gained through geological
analysis and interpretation, drilling activity and prospect evaluation during a normal exploration tenement term. A reasonable assessment
of the existence or otherwise of economically recoverable reserves can generally only be made, therefore, at the conclusion of those
exploration and evaluation activities.
(b) Share-based Payments
The Group measures the cost of share-based payment transactions with Directors and employees by reference to the fair value of the share
options at the date they were granted. Fair value is ascertained using the Black-Scholes option pricing model taking into account the terms
and conditions upon which the share options were granted. The cumulative share-based payments expense recognised reflects the extent,
in the opinion of management, to which the vesting period has expired and the number of share options and performance rights granted
that will ultimately vest or be settled in cash. At the end of each reporting period, the unvested share options, performance rights and cash-settled
share-based payment liability are adjusted by the number forfeited during the reporting period to reflect the actual number of share options
and performance rights outstanding and cash liability to be settled. Management is of the opinion that this represents the most accurate
estimate of the number of share options and performance rights that will ultimately vest.
(c) Income Tax
The Group is subject to income taxes in Australia and jurisdictions where it has foreign operations. There are many transactions and
calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group estimates
its tax liabilities based on the Group’s understanding of the relevant tax laws. Where the final tax outcome of these matters is different from
the amounts that were initially recorded, such differences will impact the current and deferred tax balances in the financial period in which
such determination is made.
The Group has not recognised deferred tax assets in respect of Brazilian and Peruvian tax losses and temporary tax differences as the future
utilisation of these losses and temporary tax differences is not considered probable at this point in time. Assessing the future utilisation of
tax losses and temporary tax differences requires the Group to make significant estimates related to expectations of future taxable income.
Estimates of future taxable income are based on forecast cash flows from operations and the application of existing tax laws. To the extent
that future utilisation of these tax losses and temporary tax differences becomes probable, this could result in significant changes to deferred
tax assets recognised, which would in turn impact future financial results.
(d) Impairment of Financial Assets
The loss allowance for a financial asset is based on assumptions about risk of default and expected loss rates. The Group uses judgement
in making these assumptions and selecting the inputs to the impairment calculation, based on its assessment of available external credit
ratings, historical loss rates and days past due.
(e) Joint Arrangements
Exploration and evaluation activities of the Group are conducted primarily through arrangements with other participants. Each arrangement
has a contractual agreement (joint operating agreement) that provides the participants with rights to the assets and obligations for the
liabilities of the arrangement. Under certain agreements, more than one combination of participants can make decisions about the relevant
activities and therefore joint control does not exist. Where the arrangement has the same legal form as a joint operation, but is not subject
to joint control, the Group accounts for its interest in accordance with the contractual agreement by recognising its share of jointly held
assets, liabilities, revenues and expenses of the arrangement.
71
Karoon Energy Ltd Annual Report 2019 Note 3. Financial Risk Management
The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and interest rate risk); credit risk;
and liquidity risk. The Group’s overall financial risk management program focuses on the unpredictability of financial markets and seeks to
minimise potential adverse effects on the financial performance of the Group. The Group uses different methods to measure the different
types of financial risk to which it is exposed. These methods include sensitivity analysis in the case of foreign exchange and interest rates.
The overall financial risk management strategy of the Group is governed by the Board of Directors through the Risk and Governance
Committee and is primarily focused on ensuring that the Group is able to finance its business plans, while minimising potential adverse
effects on financial performance. The Board of Directors provides written principles for overall financial risk management, as well as written
policies covering specific areas, such as mitigating foreign exchange, interest rate and credit risks, use of derivative financial instruments
and investment of excess cash. Financial risk management is carried out by the Company’s finance function under policies approved by the
Board of Directors. The finance function identifies, evaluates and if necessary hedges financial risks in close co-operation with the Managing
Director. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and Group activities.
Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the
basis on which income and expenses are recognised in respect of each class of financial asset and financial liability are disclosed in Note 1.
The Group’s financial instruments consist of cash and cash equivalents, receivables, security deposits, trade and other payables.
The Group had no off-statement of financial position financial assets or financial liabilities at either 30 June 2019 or 30 June 2018.
The totals for each category of financial instruments in the consolidated statement of financial position are as follows:
Financial assets
Cash and cash equivalents
Receivables
Security deposits
Total financial assets
Financial liabilities
Trade and other payables (refer note (a) below)
Total financial liabilities
(a) Trade and other payables above exclude amounts relating to leave liabilities,
which are not considered a financial instrument. The reconciliation to the amount
in the consolidated statement of financial position is as follows:
Trade and other payables
Less: Leave liabilities
(a) Market Risk
Note
10
11
13
Consolidated
2019
$
2018
$
326,191,131
1,880,833
8,048,948
336,120,912
333,572,953
1,152,572
10,316,198
345,041,723
6,622,302
6,622,302
5,387,801
5,387,801
18
7,931,074
(1,308,772)
6,622,302
6,708,533
(1,320,732)
5,387,801
(i) Foreign Exchange Risk
Foreign exchange risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign
exchange rates. Foreign exchange risk arises when future commercial transactions and recognised financial assets and financial liabilities
are denominated in a currency that is not the Company’s functional currency.
The Group operates internationally and is exposed to foreign exchange risk arising from currency exposures predominantly to the United States
dollar and Brazilian REAL. The Group manages foreign exchange risk at the corporate level by monitoring forecast cash flows in currencies
other than Australian dollars and ensuring that adequate United States dollar and Brazilian REAL cash balances are maintained.
Foreign currencies are bought on the spot market in excess of immediate requirements. Where currencies are purchased in advance of
requirements, these balances do not usually exceed 3 months requirements. The appropriateness of United States dollar holdings are reviewed
regularly against future commitments and current Australian dollar market expectations.
Periodically, sensitivity analysis is conducted to evaluate the potential impact of unfavourable exchange rates on the Group’s future financial
position. The results of this evaluation are used to determine the most appropriate risk mitigation tool to be used. The Group will hedge when
it is deemed the most appropriate risk mitigation tool to be used.
72
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) Foreign currency hedging transactions were not entered into during the financial year or previous financial year.
An analysis of the Group’s exposure to foreign exchange risk for financial assets and liabilities, expressed in Australian dollars, at the end
of the financial year is set out below:
Consolidated
Financial assets
Cash and cash equivalents
Receivables
Security deposits
Total financial assets
Financial liabilities
Trade and other payables
Total financial liabilities
2019
2018
AUD
$
USD
$
REAL
$
Total
$
AUD
$
USD
$
REAL
$
Total
$
415,997 325,480,379
1,612,614
37,839
431,133
5,296,506
884,969 332,389,499
294,755 326,191,131
1,880,833
230,380
2,321,309
8,048,948
2,846,444 336,120,912
1,658,203 329,996,027
694,732
7,701,406
2,465,820 338,392,165
376,922
430,695
1,918,723 333,572,953
1,152,572
80,918
2,184,097
10,316,198
4,183,738 345,041,723
1,555,844
1,555,844
2,674,159
2,674,159
2,392,299
2,392,299
6,622,302
6,622,302
3,558,729
3,558,729
669,993
669,993
1,159,079
1,159,079
5,387,801
5,387,801
Foreign Exchange Sensitivity Analysis
The following table details the Group’s sensitivity to a 10.0% increase or decrease in the Australian dollar against the United States dollar
and Brazilian REAL respectively, with all other variables held constant. The sensitivity analysis includes only outstanding foreign currency
denominated amounts at the end of the financial year and adjusts their translation for a 10.0% change in the relevant foreign exchange rate.
The sensitivity analysis is not fully representative of the inherent foreign exchange risk, as the financial year end exposure does not necessarily
reflect the exposure during the course of a financial year. These sensitivities should not be used to forecast the future effect of movements
in United States dollar or Brazilian REAL exchange rates on future cash flows.
Change in profit (loss) before income tax
– Improvement in AUD by 10.0%
– Decline in AUD by 10.0%
Change in financial assets
– Improvement in AUD by 10.0%
– Decline in AUD by 10.0%
Change in financial liabilities
– Improvement in AUD by 10.0%
– Decline in AUD by 10.0%
Change in foreign currency translation reserve
– Improvement in AUD by 10.0%
– Decline in AUD by 10.0%
Consolidated
REAL Impact
2018
$
Consolidated
USD Impact
2018
$
2019
$
–
–
(29,467,759)
36,016,150
(30,686,098)
37,505,229
(380,340)
464,860
(30,217,227)
36,932,167
(30,762,924)
37,599,129
105,371
(128,787)
274,969
(336,073)
243,105
(297,129)
506,363
(618,888)
60,908
(74,444)
15,918
(19,456)
2019
$
–
–
(258,768)
316,272
217,482
(265,811)
41,286
(50,461)
(ii) Interest Rate Risk
Interest rate risk is the risk that the fair value of future cash flows of financial assets and financial liabilities will fluctuate because of changes
in market interest rates. Interest rate risk is managed on a Group basis at the corporate level.
As at 30 June 2019 and 30 June 2018, there was no interest rate hedging in place.
The Group’s interest rate risk arises from relevant financial assets, primarily cash and cash equivalents deposited at variable rates of interest
and security deposits related to Australia. As the majority of cash and cash equivalents is in United States dollars, the primary exposure is
to United States interest rates.
73
Karoon Energy Ltd Annual Report 2019 Note 3. Financial Risk Management (continued)
(a) Market Risk (continued)
(ii) Interest Rate Risk (continued)
An analysis of the Group’s exposure to interest rate risk for financial assets and financial liabilities at the end of the financial year is set out below:
2019
Financial assets
Cash and cash equivalents
Receivables
Security deposits
Total financial assets
Financial liabilities
Trade and other payables
Total financial liabilities
2018
Financial assets
Cash and cash equivalents
Receivables
Security deposits
Total financial assets
Financial liabilities
Trade and other payables
Total financial liabilities
Consolidated
Weighted
Average
Interest Rate
% p.a.
Floating
Interest Rate
$
Fixed Interest
Rate
$
Non-interest
Bearing
$
Fair Value
$
Carrying
Amount
$
1.55
–
3.31
8.45
Weighted
Average
Interest Rate
% p.a.
0.08
–
2.13
8.45
305,650,430
–
2,309,051
307,959,481
15,621,805
–
5,616,242
21,238,047
4,918,896
1,880,833
123,655
6,923,384
326,191,131
1,880,833
8,048,948
336,120,912
326,191,131
1,880,833
8,048,948
336,120,912
–
–
35,545
35,545
6,586,757
6,586,757
6,622,302
6,622,302
6,622,302
6,622,302
Consolidated
Floating
Interest Rate
$
Fixed Interest
Rate
$
Non-interest
Bearing
$
Fair Value
$
Carrying
Amount
$
326,019,829
–
4,813
326,024,642
6,863,024
–
8,110,455
14,973,479
690,100
1,152,572
2,200,930
4,043,602
333,572,953
1,152,572
10,316,198
345,041,723
333,572,953
1,152,572
10,316,198
345,041,723
–
–
122,043
122,043
5,265,758
5,265,758
5,387,801
5,387,801
5,387,801
5,387,801
Interest Rate Sensitivity Analysis
The following table details the Group’s sensitivity to a 1.0% p.a. increase or decrease in interest rates, with all other variables held constant.
The sensitivity analysis is based on the balance of floating interest rate amounts held at the end of the financial year.
The sensitivity analysis is not fully representative of the inherent interest rate risk, as the financial year end exposure does not necessarily
reflect the exposure during the course of a financial year. These sensitivities should not be used to forecast the future effect of movements
in interest rates on future cash flows.
Change in profit (loss) before income tax
– Increase of interest rate by 1.0% p.a.
– Decrease of interest rate by 1.0% p.a.
Change in financial assets
– Increase of interest rate by 1.0% p.a.
– Decrease of interest rate by 1.0% p.a.
74
Consolidated
2019
$
2018
$
3,079,595
(3,078,740)
3,079,595
(3,078,740)
3,260,246
(31,194)
3,260,246
(31,194)
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED)
(b) Credit Risk
The maximum exposure to credit risk at the end of the financial year is the carrying amount of the financial assets as disclosed in the
consolidated statement of financial position and notes to the consolidated financial statements.
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. Credit risk
arises from cash and cash equivalents and security deposits held with banks, financial institutions and joint operators, as well as credit
exposures to customers, including outstanding receivables.
Credit risk is managed on a Group basis at the corporate level. To minimise credit risk, the Group has adopted a policy of only dealing with
recognised and creditworthy third parties. Receivable balances are monitored on an ongoing basis with the result being the Group’s
exposure to bad debts is minimised. The Group does not currently hold collateral, nor does it securitise its receivables.
The Group has policies in place to ensure that services are made to customers with an appropriate credit history.
Cash and cash equivalents and security deposit counterparties are limited to credit quality banks and financial institutions. For banks and
financial institutions in Australia, only independently rated counterparties with a minimum rating of A/A2 are accepted. For banks and
financial institutions in Brazil and Peru, only independently rated counterparties with a minimum rating of BBB+/Baa1 are accepted.
For banks and financial institutions in Brazil and Peru with independently rated counterparties ratings below BBB+/Baa1, exposure cannot
exceed the short-term country specific cash requirements. The Group’s credit exposure and external credit ratings of its counterparties are
monitored on a periodic basis.
Where commercially practical, the Group seeks to limit the amount of credit exposure to any one bank or financial institution. The Group is
exposed to concentration of credit risk in relation to cash and cash equivalents and security deposits held with the National Australia Bank
Limited in Australia and the HSBC Group in Australia, the maximum amount of exposure as at 30 June 2019 was $305,705,084
(30 June 2018: $324,436,451) and $13,509,138 (30 June 2018: $8,222,145) respectively. The Group is also exposed to material concentration
of credit risk in relation to cash and cash equivalents and/or security deposits held with the Commonwealth Bank Limited in Australia,
Itau Unibanco SA in Brazil, Banco Bradesco SA in Brazil and Banco de Credito del in Peru, the maximum amount of exposure as at
30 June 2019 was $7,390,641 (30 June 2018: $6,863,024), $2,329,541 (30 June 2018: $2,248,792), $267,987 (30 June 2018: $1,837,989)
and $4,923,033 (30 June 2018: $183,906) respectively.
(i) Impairment of Financial Assets
The Group has 2 types of financial assets that are subject AASB 9’s new ‘expected credit loss’ model: receivables and security deposits.
The Group has applied the AASB 9 general model approach to measuring expected credit losses for all receivables and security deposits.
While cash and cash equivalents are also subject to the impairment requirements of AASB 9, the identified impairment loss was considered
not significant given the counterparties and/or the short maturity.
Expected Credit Loss
When required, the carrying amount of the relevant financial asset is reduced through the use of a loss allowance account and the amount
of any loss is recognised in the statement of profit or loss and other comprehensive income. When measuring expected credit losses,
balances are reviewed based on available external credit ratings, historical loss rates and the days past due.
Security Deposits
The Group’s security deposits relating to Australia and Peru are considered to have low credit risk on the basis that there is a low risk of
default with the relevant bank counterparty. Management considers ‘low credit risk’ for security deposits with banks and financial institutions
to be an investment grade credit rating with at least 1 major rating agency.
The Group is exposed to credit risk in relation to a security deposit of $2,303,797 (30 June 2018: $2,169,021) held with Itau Unibanco SA in
Brazil. The Group provided the ANP (the Brazilian oil and gas regulator) a letter of credit to carry out the minimum work program in relation
to exploration in Santos Basin Block S-M-1537. The letter of credit is fully funded by way of payment of a security deposit (refer Note 13(b)),
which will be released once the work program is met. The credit rating of Itau Unibanco SA is Ba2 (30 June 2018: Ba2), which is a
non-investment grade rating that carries substantial credit risk. The credit rating of Itau Unibanco SA in Brazil is monitored on a periodic
basis for credit deterioration. In addition, Management continually monitors Brazilian macro-economic factors for any deterioration which
directly impacts the credit ratings of Brazilian financial institutions. As there has not been an increase in credit risk since initial recognition of
this security deposit, any impairment test uses a 12 month expected credit loss model measure.
As at 30 June 2019, there were $Nil (30 June 2018: $Nil) security deposits past due. The loss allowance recognised during the financial year
for security deposits was $Nil. Accordingly, interest income revenue has been calculated on the gross carrying amount during the financial year.
75
Karoon Energy Ltd Annual Report 2019 Note 3. Financial Risk Management (continued)
(b) Credit Risk (continued)
(i) Impairment of Financial Assets (continued)
Receivables
The Group’s receivables relating to Australia and Peru are considered to have low credit risk on the basis that there is a low risk of default
and the debtor has a strong (robust) capacity to meet its obligations in the short-term. Accordingly, for receivables any impairment test uses
a 12 month expected credit loss model measure.
The Group is exposed to credit risk in relation to an interest receivable of $230,380 (30 June 2018: $180,902) predominantly related to the
security deposit held with Itau Unibanco SA in Brazil. As there has not been an increase in credit risk since initial recognition of the security
deposit, which is predominantly impacted by negative macro-economic factors in Brazil, any impairment test uses a 12 month expected
credit loss model measure.
As at 30 June 2019, there were $Nil (30 June 2018: $Nil) receivables past due. The loss allowance for receivables recognised during the
financial year was considered to be $Nil.
Previous Accounting Policy for Impairment of Receivables and Security Deposits
In the previous financial year, the impairment of receivables and security deposits were individually assessed based on the accounting
policy described in Note 1(n).
For receivables, an impairment would have been recognised when there was objective evidence that the Group would not be able to collect
the receivable. The amount of the impairment loss would have been the receivable’s carrying amount compared to the discounted value of
estimated future cash flows, discounted when material, at the original effective interest rate. Individual receivables known to be uncollectible
would have been written-off when identified.
(c) Liquidity Risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities.
At the end of the financial year, the Group held cash and cash equivalents at call of $310,569,326 (30 June 2018: $326,709,929) that are expected
to readily generate cash inflows for managing liquidity risk.
The Group manages liquidity risk by ensuring that there are sufficient funds available to meet financial obligations on a day-to-day basis and
to meet unexpected liquidity needs in the normal course of business. Emphasis is placed on ensuring there is sufficient funding in place to
meet the ongoing requirements of the Group’s exploration and evaluation activities.
The following mechanisms are utilised to manage liquidity risk:
• preparing and maintaining rolling forecast cash flows in relation to operational, investing and financing activities;
• comparing the maturity profile of financial liabilities with the realisation profile of financial assets;
• managing credit risk related to financial assets;
• when necessary, utilising short-term and long-term loan facilities;
• investing surplus cash only in credit quality banks and financial institutions; and
• maintaining a reputable credit profile.
76
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) An analysis of the Group’s financial liability maturities at the end of the financial year is set out below:
2019
Financial liabilities
Trade and other payables
Total financial liabilities
2018
Financial liabilities
Trade and other payables
Total financial liabilities
Less than
6 Months
$
6,075,536
6,075,536
Consolidated
6-12
Months
$
1-3
Years
$
Total
$
–
–
546,766
546,766
6,622,302
6,622,302
5,060,063
5,060,063
48,194
48,194
279,544
279,544
5,387,801
5,387,801
(d) Fair Value Estimation
For disclosure purposes only, the fair values of financial assets and financial liabilities as at 30 June 2019 and 30 June 2018 are presented
in the table under Note 3(a)(ii) and can be compared to their carrying values as presented in the consolidated statement of financial position.
Fair values are those amounts at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an
arm’s length transaction. Fair values estimated for disclosure purposes are based on information that is subject to judgement, where
changes in assumptions may have a material impact on the amounts estimated.
The following summarises the significant methods and assumptions used in estimating fair values of financial assets and financial liabilities
for disclosure purposes:
Cash and Cash Equivalents
The carrying amount is fair value due to the liquid nature of these assets.
Receivables
The carrying amounts of current receivables are assumed to approximate their fair values due to their short-term nature.
Security Deposits
The carrying amounts of security deposits are assumed to represent their fair values based on their likely realisability profile.
Trade and Other Payables
Due to the nature of these financial liabilities, their carrying amounts are a reasonable approximation of their fair values.
Note 4. Revenue
Interest income from unrelated entities
Total revenue
Net foreign currency gains
Services revenue from joint operations
Sundry income
Total other income
Consolidated
2019
$
2018
$
2,314,803
2,314,803
17,486,787
15,855
541
17,503,183
710,652
710,652
12,993,578
–
–
12,993,578
77
Karoon Energy Ltd Annual Report 2019 Note 5. Expenses
Loss before income tax includes the following specific expenses:
Depreciation and amortisation expense:
– depreciation of plant and equipment
– amortisation of computer software
Total depreciation and amortisation expense
Exploration and evaluation expenditure expensed, impaired or written-off:
– exploration and evaluation expenditure expensed
– exploration and evaluation expenditure written-off
– exploration and evaluation expenditure impaired
Total exploration and evaluation expenditure expensed, impaired or written-off
Finance costs:
– finance charges under finance lease
– bank charges
Total finance costs
Share-based payments expense
Rental expense on operating leases – minimum lease payments
Business development and other project costs (refer (a) below)
Write-down of inventory to net realisable value (refer (b) below)
Loss on disposal of inventory (refer (c) below)
Note
15
16
17
17
27(d)
Consolidated
2019
$
2018
$
363,842
329,115
692,957
371,394
359,440
730,834
4,191,536
13,226,427
1,640,939
19,058,902
5,569,500
5,892,079
151,503,114
162,964,693
5,881
174,241
180,122
3,996,372
957,619
5,214,563
6,213,639
–
14,300
223,174
237,474
4,409,889
1,583,097
7,285,306
6,679,549
1,157,407
(a) Reviewing new business development and other project activities predominantly in Brazil. Expenditure includes internal time allocation
of employees and consultants and associated office charges, geotechnical data and external advice relating to due diligence reviews
on potential asset acquisitions.
(b) The write-down of inventory during the financial year resulted from the consideration of utilising a particular type of rig for the upcoming
drilling of the Marina-1 exploration well in Block Z-38, offshore Peru, which would mean a portion of Karoon’s existing Peru inventory may
not be suitable for that generation of rig (30 June 2018: resulted predominantly from potential well design specifications, the number of
wells being considered as part of the ongoing Neon and Goiá work and the potential future development of the Neon light oil discovery,
which is distinct from inventory requirements for exploration drilling).
(c) Loss on disposal of inventory during the previous financial year related to the liquid mud inventory for Block Z-38 in Peru, following the
liquid mud plant demobilisation.
78
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) Note 6. Income Tax
(a) Income Tax Recognised in the Consolidated Statement
of Profit or Loss and Other Comprehensive Income
Tax income comprises:
Current tax
Adjustments in respect of current tax of previous financial years
Deferred tax
Total tax income
Consolidated
2019
$
2018
$
Note
(806,393)
(12,877)
1,979,674
1,160,404
264,780
(30,739)
2,044,767
2,278,808
The prima facie tax on loss before income tax is reconciled to tax income as follows:
Prima facie tax payable on loss before income tax, calculated at the Australian tax rate of 30%
8,873,383
55,216,980
Add the tax effect of:
Share-based payments expense (non-cash)
Other non-deductible items
Tax losses and temporary tax differences not previously recognised
Adjustment for current tax of previous financial years
Subtract the tax effect of:
Difference in overseas tax rates
Non-assessable income
Total tax income
(b) Current Tax Asset
Income tax receivable
Total current tax asset
(c) Deferred Tax Balances
Temporary differences
Exploration and evaluation expenditure
Provisions and accruals
Equity raising transaction costs
Unrealised foreign currency gains
Farm-out expenditures
Other
Total temporary differences
Unused tax losses
Tax losses
Total unused tax losses
Net deferred tax liabilities
(1,099,586)
(1,699,333)
(5,828,994)
(12,877)
(1,252,705)
(6,158,578)
(52,160,484)
(30,739)
422,413
505,398
1,160,404
5,947,964
716,370
2,278,808
54,303
54,303
185,737
185,737
Consolidated
Balance
as at
1 July 2018
$
Charged
(Credited) to
Profit or Loss
$
Charged
(Credited)
Directly
to Equity
$
Balance
as at
30 June 2019
$
(12,092,920)
579,781
8,301
(22,116,622)
178,739
10,873
(33,431,848)
1,058,550
1,058,550
(32,373,298)
3,906,078
40,931
(8,075)
(2,024,384)
72,097
(6,973)
1,979,674
(819,270)
(819,270)
1,160,404
–
–
–
–
–
–
–
–
–
–
(8,186,842)
620,712
226
(24,141,006)
250,836
3,900
(31,452,174)
239,280
239,280
(31,212,894)
Presented in the consolidated statement of financial position
as follows:
Deferred tax liabilities
(32,373,298)
(31,212,894)
79
Karoon Energy Ltd Annual Report 2019 Note 6. Income Tax (continued)
(c) Deferred Tax Balances (continued)
Deferred tax liabilities expected to be settled within 12 months
Deferred tax liabilities expected to be settled after more than 12 months
Deferred tax liabilities
(d) Unrecognised Deferred Tax Assets
Consolidated
2019
$
2018
$
(15,933,064)
(15,279,830)
(31,212,894)
(5,529,155)
(26,844,143)
(32,373,298)
A deferred tax asset has not been recognised in the consolidated statement of financial position as
the benefits of which will only be realised if the conditions for deductibility set out in Note 1(f) occur:
Unrecognised temporary tax differences relating to deferred tax assets at a tax rate of 34%
Tax losses: Brazilian operating losses at a tax rate of 34%
Tax losses: Peruvian operating losses at a tax rate of 32%
Potential tax income
34,668,912
44,872,132
11,782,401
91,323,445
31,983,685
39,524,231
8,923,638
80,431,554
(e) Unrecognised Taxable Temporary Differences
Temporary tax differences relating to deferred tax liabilities
Offset by deferred tax assets relating to operating losses
Total deferred tax liabilities (unrecognised)
(6,088,166)
6,088,166
–
(5,106,132)
5,106,132
–
PRRT
PRRT applies to all the Group’s Australian petroleum projects in offshore areas under the Petroleum Resource Rent Tax Assessment Act 1987,
other than some specific production licences. PRRT is assessed on a project basis or production licence area and will be levied on the
taxable profits of a relevant petroleum project at a rate of 40%. Certain specified undeducted expenditures are eligible for compounding.
The expenditures can be compounded annually at set rates and the compounded amount can be deducted against assessable receipts in
future financial years.
The Group estimates that it has incurred compounded carried forward undeducted PRRT expenditure in excess of accounting carrying
values as at 30 June 2019 of $145,898,630 (2018: $129,696,596). The resulting deferred tax asset calculated at an effective tax rate of 28%,
that has not been recognised in the consolidated statement of financial position, was $40,851,616 (2018: $36,315,047).
In order for the Group to utilise undeducted expenditures for PRRT purposes from previous financial years, it will be required to substantiate
eligible expenditure in relation to respective Australian offshore permits since the date of their granting to the Group. Any amount that the
Group is not able to substantiate will not be able to be utilised against assessable receipts in future financial years. Interests in undeducted
PRRT expenditure may be transferred, subject to satisfying certain conditions, between Australian projects within the Group or to other third
parties on acquisitions of interests in the Group’s Australian offshore permits.
80
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) Note 7. Remuneration of External Auditors
Remuneration received or due and receivable by the external auditor of the Company for:
(a) PricewaterhouseCoopers Australia
(i) Audit and other assurance services
Audit and review of financial statements
Total remuneration for audit and other assurance services
(ii) Other services
Australian tax advice
Due diligence services
Taxation services
Other non-audit services
Total remuneration of PricewaterhouseCoopers Australia
(b) Related Practices of PricewaterhouseCoopers Australia
(i) Audit and other assurance services
Audit and review of financial statements
Due diligence services
Other non-audit services
Total remuneration for audit and other assurance services of related practices
of PricewaterhouseCoopers Australia
(ii) Other services
Taxation services
Total remuneration of related practices of PricewaterhouseCoopers Australia
Total remuneration of external auditors
Consolidated
2019
$
2018
$
158,100
158,100
–
11,813
61,888
709
232,510
130,888
–
11,226
157,590
157,590
22,500
330,727
346,702
59,116
916,635
153,105
2,496
5,594
142,114
161,195
18,179
160,293
221,813
383,008
392,803
1,299,643
Note 8. Dividends
There were no ordinary dividends declared or paid during the financial year by the Group (2018: $Nil).
Balance of franking account available for subsequent reporting periods
13,164,770
13,164,770
The above amount is calculated from the balance of the Company’s franking account as at the end
of the financial year. Franking credits are based on the Australian tax rate of 30%.
81
Karoon Energy Ltd Annual Report 2019 Note 9. Earnings Per Share
Loss for the financial year used to calculate basic and diluted earnings per ordinary share:
(a) Basic loss per ordinary share
(b) Diluted loss per ordinary share*
* Diluted loss per ordinary share equates to basic loss per ordinary share in the current and previous financial
year because a loss per ordinary share is not considered dilutive for the purposes of calculating earnings
per share pursuant to AASB 133 ‘Earnings per Share’.
Weighted average number of ordinary shares on issue during the financial year used in calculating
basic earnings per ordinary share:
Weighted average number of potential ordinary shares:
Weighted average number of ordinary shares and potential ordinary shares used in calculating
diluted earnings per ordinary share (excluding anti-dilutive share options outstanding):
Weighted average number of anti-dilutive share options:
Potential ordinary shares
Share options and performance rights over unissued ordinary shares of the Company outstanding
at the end of the financial year are considered to be potential ordinary shares and have been
included in the determination of diluted earnings per ordinary share to the extent to which they are
dilutive. The share options and performance rights have not been included in the determination
of basic earnings per ordinary share.
Consolidated
2019
$
2018
$
(28,417,537)
(0.1156)
(0.1156)
(181,777,789)
(0.7403)
(0.7403)
245,854,993
245,560,596
7,461,809
5,842,566
253,316,802
251,403,162
9,121,960
7,075,268
Note 10. Cash and Cash Equivalents
Cash at banks and on hand (refer note (a) below)
Short-term bank deposits (refer note (b) below)
Total cash and cash equivalents
310,426,425
15,764,706
326,191,131
325,113,355
8,459,598
333,572,953
(a) Cash and Cash Equivalents of Joint Operations
Cash and cash equivalents includes share of joint operation cash and short-term bank deposit balances. Refer to Note 23 for further details.
(b) Short-term Bank Deposits
Short-term bank deposits are made for varying periods, depending on the immediate cash requirements of the Group, and earn interest
at the respective short-term bank deposit rates.
(c) Financial Risk Management
Information concerning the Group’s exposure to financial risks on cash and cash equivalents is set out in Note 3.
82
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) Note 11. Receivables
Current
Other receivables
Total current receivables
(a) Financial Risk Management
Information concerning the Group’s exposure to financial risks on receivables is set out in Note 3.
Note 12. Inventories
Current
Casing and other drilling inventory
Total current inventories
Non-current
Casing and other drilling inventory
Total non-current inventories
Note 13. Security Deposits
Current
KEI Peru Pty Ltd, Sucursal del Peru (refer note (a)(i) below)
Karoon Energy Ltd (refer note (c) below)
Karoon Petróleo & Gas Ltda, KEI (Peru Z38) Pty Ltd, Sucursal del Peru (refer note (d) below)
Total current security deposits
Non-current
Karoon Energy Ltd (refer note (a)(ii) below)
Karoon Petróleo & Gas Ltda (refer note (b) below)
Karoon Energy Ltd (refer note (c) below)
KEI (Peru Z38) Pty Ltd, Sucursal del Peru (refer note (d) below)
Total non-current security deposits
Consolidated
2019
$
2018
$
1,880,833
1,880,833
1,152,572
1,152,572
2,124,577
2,124,577
–
–
31,495,438
31,495,438
37,696,266
37,696,266
88,407
425,881
21,596
535,884
5,190,361
2,303,797
5,253
13,653
7,513,064
–
–
18,955
18,955
7,684,573
2,169,021
430,695
12,954
10,297,243
(a) Performance Guarantees
(i) Performance guarantee (via a letter of credit) provided to Perupetro SA (the Peruvian oil and gas regulator) for Area 73 by the Group
(refer Note 24) for work commitments and an obligation to submit reports. The letter of credit is fully funded by way of payment of a security
deposit, which will be released once the work commitments are met and relevant reports submitted to Perupetro SA.
(ii) Performance guarantee (via a letter of credit) provided to Perupetro SA for Block Z-38 by the Group (refer Note 24) for its share of third
period work commitments. The letter of credit is fully funded by way of payment of a security deposit, which will be released once the
work commitments are met.
(b) Guarantee Bond
The Group has provided the ANP a letter of credit (refer Note 24) to carry out the minimum work program in relation to exploration in
Santos Basin Block S-M-1537. The letter of credit is fully funded by way of payment of a security deposit, which will be released once the
work program is met.
(c) Bank Guarantees
Cash deposits are held as security against bank guarantee facilities for bank guarantees (refer Note 24) given to lessors for the Group’s
compliance with its obligations in respect of operating lease rental agreements for office premises.
(d) Bonds
Cash deposits are held as bonds for the Group’s compliance with its obligations in respect of agreements for the guarantee (refer Note 24)
of payment obligations for various accommodation in Brazil and Peru.
(e) Financial Risk Management
Information concerning the Group’s exposure to financial risks on security deposits is set out in Note 3.
83
Karoon Energy Ltd Annual Report 2019 Note 14. Other Assets
Current
Prepayments
Total current other assets
Note 15. Plant and Equipment
Plant and equipment
At cost
Accumulated depreciation
Total plant and equipment
Consolidated
2019
$
2018
$
Note
1,161,836
1,161,836
782,828
782,828
4,535,505
(3,741,867)
793,638
5,191,476
(4,388,962)
802,514
Reconciliation
The reconciliation of the carrying amount for plant and equipment is set out below:
Balance at beginning of financial year
Additions
Disposals
Net foreign currency difference on translation of financial statements of foreign subsidiaries
Depreciation expense
Carrying amount at end of financial year
22(c)
5
802,514
325,802
(4,434)
33,598
(363,842)
793,638
1,139,163
216,372
(144,527)
(37,100)
(371,394)
802,514
Note 16. Intangible Assets
Computer software
At cost
Accumulated amortisation
Total intangibles
2,693,711
(2,158,056)
535,655
3,077,235
(2,295,721)
781,514
Reconciliation
The reconciliation of the carrying amounts for computer software is set out below:
Balance at beginning of financial year
Additions
Net foreign currency difference on translation of financial statements of foreign subsidiaries
Amortisation expense
Carrying amount at end of financial year
22(c)
5
781,514
39,102
44,154
(329,115)
535,655
1,167,575
81,468
(108,089)
(359,440)
781,514
84
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) Note 17. Exploration and Evaluation Expenditure Carried Forward
Geological, geophysical, drilling and other exploration and evaluation expenditure,
including directly attributable general administrative costs
Reconciliation
The reconciliation of exploration and evaluation expenditure carried forward is set out below:
Balance at beginning of financial year
Additions
Exploration and evaluation expenditure written-off (refer note (a) below)
Exploration and evaluation expenditure impaired (refer note (b) below)
Recoupment of exploration and evaluation expenditure on Block Z-38 farm-out
Net foreign currency difference on translation of financial statements of foreign subsidiaries
Total exploration and evaluation expenditure carried forward
Intangible
Note
22(c)
5
5
Consolidated
2019
$
2018
$
208,803,023
209,629,983
209,629,983
11,411,205
(13,226,427)
(1,640,939)
(5,591,334)
8,220,535
208,803,023
208,803,023
371,029,112
19,175,698
(5,892,079)
(151,503,114)
–
(23,179,634)
209,629,983
209,629,983
(a) The write-off during the financial year relates to exploration and evaluation expenditure carried forward associated with designated
WA-482-P acreage relinquished by the joint operation as part of the successful renewal application submitted to NOPTA, prior to expiry
of the permit’s previous exploration term (30 June 2018: demobilisation of liquid mud plant for Block Z-38 as more cost effective
alternatives were considered whilst the Block was under force majeure).
(b) As part of the review of the Group’s non-current assets as at 30 June 2019, exploration and evaluation expenditure carried forward has
been impaired for:
(i) exploration permit EPP46 as active and significant exploration and evaluation operations in relation to the permit are no longer
continuing at the present time; and
(ii) continuing exploration and evaluation expenditure incurred for WA-314-P and Block S-M-1101 was impaired during the financial year.
The expenditure is carried forward on the basis that exploration and evaluation activities in the areas of interest have not reached a stage
that permits reasonable assessment of the existence or otherwise of economically recoverable reserves and active and significant operations
in, or in relation, to the areas is continuing. The future recoverability of the carrying amount of capitalised exploration and evaluation
expenditure is dependent on successful development and commercial exploitation or, alternatively, the sale of the respective areas of interest.
85
Karoon Energy Ltd Annual Report 2019 Note 18. Trade and Other Payables
Current (unsecured)
Trade payables
Sundry payables and accruals
Cash-settled share-based payments
Finance lease liability
Total current trade and other payables
Non-current (unsecured)
Cash-settled share-based payments
Finance lease liability
Total non-current trade and other payables
Note
28(d)
28(d)
Consolidated
2019
$
2018
$
3,169,116
3,954,191
225,456
35,545
7,384,308
546,766
–
546,766
2,011,915
4,029,890
290,796
96,388
6,428,989
253,889
25,655
279,544
(a) Financial Risk Management
Information concerning the Group’s exposure to financial risks on trade and other payables is set out in Note 3.
Note 19. Provisions
Current
Provision for long service leave (refer note (a) below)
Total current provisions
Non-current
Provision for long service leave (refer note (a) below)
Total non-current provisions
Consolidated
2019
$
2018
$
586,165
586,165
120,340
120,340
283,500
283,500
329,520
329,520
(a) Provision for Long Service Leave
A provision was recognised for employee entitlements relating to long service leave. The measurement and recognition criteria relating to
long service leave entitlements are as described in Note 1(q).
The current portion of this provision includes all the unconditional entitlements to long service leave where employees have completed
the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances.
86
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) Consolidated
Consolidated
2019
Number
2018
Number
2019
$
2018
$
Note 20. Contributed Equity and Reserves
Within Equity
(a) Contributed Equity
Ordinary shares, fully paid
Total contributed equity
246,216,477
245,721,153
802,295,334
802,295,334
802,295,334
802,295,334
Ordinary shares have no par value and the Company does not have a limited amount of authorised capital.
Voting rights of shareholders are governed by the Company’s Constitution. In summary, on a show of hands every holder of ordinary shares
present at a meeting in person or by proxy is entitled to one vote, and upon a poll each such attending shareholder is entitled to one vote
for every fully paid ordinary share held.
Ordinary shares participate in dividends as declared from time to time and the proceeds on winding up of the Company in proportion to the
number of fully paid ordinary shares held.
(b) Movement in Ordinary Shares
Date
1 July 2017
30 June 2018
30 June 2019
Details
Opening balance in previous financial year
Performance rights conversion
Balance at end of previous financial year
Performance rights conversion
Balance at end of financial year
Note
27(c)
27(c)
Number of
Ordinary
Shares
245,217,605
503,548
245,721,153
495,324
246,216,477
Issue Price
Per Ordinary
Share
–
–
$
802,295,334
–
802,295,334
–
802,295,334
(c) Capital Management
The Board of Directors controls the capital of the Company in order to ensure that the Group can fund its operations and continue as a going
concern. The aim is to maintain a capital structure that ensures the lowest cost of capital to the Company.
The Managing Director manages the Company’s capital by monitoring future rolling cash flows and adjusting its capital structure,
as required, in consultation with the Board of Directors to meet Group business objectives. As required, the Group will balance its overall
capital structure through the issue of new ordinary shares, share buy-backs and utilising short-term and long-term loan facilities when
necessary.
There were no externally imposed capital management restrictions on the Group during the financial year.
There is no current on-market share buy-back.
(d) Reserves Within Equity
(i) Share-based Payments Reserve
The share-based payments reserve is used to recognise the grant date fair value of equity-settled share-based payments to Directors,
other KMP and employees as part of their remuneration, as described in Note 1(p).
(ii) Foreign Currency Translation Reserve
The foreign currency translation reserve is used to recognise exchange differences arising from the translation of financial statements of foreign
subsidiaries, as described in Note 1(e). The relevant amounts included in the foreign currency translation reserve will be recognised in the
consolidated statement of profit or loss and other comprehensive income when each relevant investment in foreign subsidiary is disposed.
87
Karoon Energy Ltd Annual Report 2019 Note 21. Subsidiaries
The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting
policy described in Note 1(b):
Name
Parent Company:
Karoon Energy Ltd
Unlisted subsidiaries of Karoon Energy Ltd:
Karoon Energy International Pty Ltd
Karoon Gas Browse Basin Pty Ltd
Karoon Gas (FPSO) Pty Ltd
Unlisted subsidiaries of Karoon Energy International Pty Ltd:
KEI (Brazil Santos) Pty Ltd
KEI Peru Pty Ltd
KEI (Peru Z38) Pty Ltd
Jointly owned unlisted subsidiary of Karoon Energy
International Pty Ltd and KEI (Brazil Santos) Pty Ltd:
Karoon Petróleo & Gas Ltda
Branch of KEI Peru Pty Ltd:
KEI Peru Pty Ltd, Sucursal del Peru
Branch of KEI (Peru Z38) Pty Ltd:
KEI (Peru Z38) Pty Ltd, Sucursal del Peru
Note 22. Segment Information
Percentage of Equity and Voting
Interests Held by the Group
2019
%
2018
%
Country of
Incorporation
or Registration
Business
Activities
Carried on in
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Brazil
Brazil
Peru
Peru
Peru
Peru
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
(a) Description of Segments
The Group has identified its operating segments based on the internal reports that are reviewed and used by the Managing Director and
Executive Director/Exploration Director (identified as the ‘chief operating decision maker’) in assessing performance and in determining the
allocation of resources.
The operating segments are based on the Group’s geographical location of its operations.
The Group has identified operating segments based on the following three geographic locations:
• Australia – in which the Group is currently involved in the exploration and evaluation of hydrocarbons in 3 offshore exploration permit
areas: WA-314-P, WA-482-P and EPP46;
• Brazil – in which the Group is currently involved in the exploration and evaluation of hydrocarbons in 3 offshore exploration blocks:
Block S-M-1037, Block S-M-1101, and Block S-M-1537; and
• Peru – in which the Group is currently involved in the exploration and evaluation of hydrocarbons in offshore exploration Block Z-38 and
Area 73.
‘All other segments’ include amounts not specifically attributable to an operating segment.
The accounting policies of the reportable operating segments are the same as the Group’s accounting policies.
Segment revenue and results do not include transfers between segments as intercompany balances are eliminated on consolidation.
Employee benefits expense and other operating expenses, that are associated with exploration and evaluation activities and specifically
relate to an area of interest, are allocated to the area of interest and are capitalised as exploration and evaluation assets.
The amounts provided to the chief operating decision maker with respect to total assets and total liabilities are measured in a manner
consistent with that of the consolidated financial statements. Reportable segment assets and segment liabilities are equal to consolidated
total assets and total liabilities respectively. These assets and liabilities are allocated on the operations of the segment.
88
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) Peru
$
All Other
Segments
$
Consolidated
$
–
–
(1,916)
–
–
2,314,803
17,503,183
(5,214,563)
(692,957)
(11,100,470)
(53,564)
–
–
–
–
(55,480)
–
(55,480)
(19,058,902)
(180,122)
(6,213,639)
(1,322,108)
(5,613,166)
(29,577,941)
1,160,404
(28,417,537)
–
–
(742,055)
–
–
(181,835)
–
–
–
–
(923,890)
–
(923,890)
710,652
12,993,578
(7,285,306)
(730,834)
(11,339,308)
(162,964,693)
(237,474)
(6,679,549)
(1,925,006)
(6,598,657)
(184,056,597)
2,278,808
(181,777,789)
(b) Operating Segments
Segment Performance
Result for financial year ended 30 June 2019
Segment revenue (interest income from unrelated entities)
Other income
Business development and other project costs
Depreciation and amortisation expense
Employee benefits expense (net)^
Exploration and evaluation expenditure expensed,
impaired or written-off
Finance costs
Write-down of inventory to net realisable value
Property costs
Administration and other operating expenses
Loss before income tax
Tax income
Loss for financial year
Result for financial year ended 30 June 2018
Segment revenue (interest income from unrelated entities)
Other income
Business development and other project costs
Depreciation and amortisation expense
Employee benefits expense (net)^^
Exploration and evaluation expenditure expensed,
impaired or written-off
Finance costs
Write-down of inventory to net realisable value
Property costs
Administration and other operating expenses
Loss before income tax
Tax income
Loss for financial year
Australia
$
Brazil
$
2,101,618
17,509,652
–
(137,347)
(8,128,970)
211,693
10,723
(5,046,194)
(417,592)
(2,517,676)
(13,832,435)
(17,002)
–
(814,601)
(2,690,183)
(6,009,268)
1,160,404
(4,848,864)
(5,013,944)
(62,183)
–
(403,474)
(1,854,917)
(15,093,564)
–
(15,093,564)
1,492
(17,192)
(166,453)
(138,018)
(453,824)
(158,959)
(100,937)
(6,213,639)
(104,033)
(1,068,066)
(8,419,629)
–
(8,419,629)
242,403
12,955,238
(79,648)
(152,588)
(7,553,915)
455,079
50,752
(6,463,603)
(421,828)
(3,259,339)
13,170
(12,412)
–
(156,418)
(526,054)
(11,670,959)
(9,288)
(9,944)
(773,591)
(2,404,555)
(9,456,847)
2,278,808
(7,178,039)
(144,386,155)
(157,793)
(6,669,605)
(877,191)
(1,423,438)
(163,153,121)
–
(163,153,121)
(6,725,744)
(70,393)
–
(274,224)
(2,770,664)
(10,522,739)
–
(10,522,739)
^
Includes share-based payments expense of $3,115,040 (Australia) and $881,332 (Brazil) during the financial year.
^^ Includes share-based payments expense of $3,256,798 (Australia) and $1,153,091 (Brazil) during the previous financial year.
89
Karoon Energy Ltd Annual Report 2019 Note 22. Segment Information (continued)
(b) Operating Segments (continued)
Segment Assets
As at 30 June 2019
Segment asset information
Cash and cash equivalents
Exploration and evaluation expenditure carried forward
Security deposits
Inventories
Other
Segment assets
As at 30 June 2018
Segment asset information
Cash and cash equivalents
Exploration and evaluation expenditure carried forward
Security deposits
Inventories
Other
Segment assets
Segment Liabilities
As at 30 June 2019
Segment liability information
Trade and other payables
Deferred tax liabilities
Provisions
Segment liabilities
As at 30 June 2018
Segment liability information
Trade and other payables
Deferred tax liabilities
Provisions
Segment liabilities
Australia
$
Brazil
$
Peru
$
All Other
Segments
$
Consolidated
$
320,978,875
305,319
28,754,351 112,600,173
2,321,309
13,611,876
1,305,663
351,344,677 130,144,340
431,133
–
1,180,318
4,906,937
67,448,499
5,296,506
20,008,139
1,940,284
99,600,365
331,353,468
41,774,616
430,695
–
747,017
374,305,796
2,019,810
103,474,676
2,184,097
12,815,556
1,806,235
122,300,374
199,675
64,380,691
7,701,406
24,880,710
1,151,913
98,314,395
– 326,191,131
– 208,803,023
8,048,948
–
33,620,015
–
–
4,426,265
– 581,089,382
–
–
–
–
–
–
333,572,953
209,629,983
10,316,198
37,696,266
3,705,165
594,920,565
Australia
$
Brazil
$
Peru
$
All Other
Segments
$
Consolidated
$
2,956,909
31,212,894
706,505
34,876,308
3,844,560
–
–
3,844,560
1,129,605
–
–
1,129,605
3,321,249
32,373,298
613,020
36,307,567
2,759,038
–
–
2,759,038
628,246
–
–
628,246
–
–
–
–
–
–
–
–
7,931,074
31,212,894
706,505
39,850,473
6,708,533
32,373,298
613,020
39,694,851
(c) Other Segment Information
Additions to non-current assets, other than financial assets (refer Note 3), during the reporting periods were:
Financial year ended 30 June 2019
Plant and equipment
Intangible assets
Exploration and evaluation expenditure carried forward
Financial year ended 30 June 2018
Plant and equipment
Intangible assets
Exploration and evaluation expenditure carried forward
Australia
$
Brazil
$
Peru
$
All Other
Segments
$
Consolidated
$
23,949
14,290
748,616
255,067
23,743
4,551,542
46,786
1,069
6,111,047
2,038
42,305
808,269
18,030
37,404
14,669,756
196,304
1,759
3,697,673
90
–
–
–
–
–
–
325,802
39,102
11,411,205
216,372
81,468
19,175,698
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) Note 23. Joint Operations
The Group has an equity interest in the following joint operations as at 30 June 2019 as follows:
Unincorporated
Equity Interest (%)
Petroleum
Tenement
WA-482-P
Block Z-38
Business Activities Carried on in
Northern Carnarvon Basin, Australia
Tumbes Basin, Peru
2019
50
40^
2018 Principal Activities
50 Exploration and evaluation
40^ Exploration and evaluation
Operator of Joint Operation
Santos WA Northwest Pty Ltd
KEI (Peru Z38) Pty Ltd,
Sucursal del Peru
^ The Group’s farm-in obligations to Pitkin Petroleum Peru Z-38 SRL are still to be completed. During the previous financial year, Karoon funded 100% of
Block Z-38’s exploration expenditure.
The exploration and evaluation activities of both WA-482-P and Block Z-38 are ‘strategic’ to the Group’s activities.
The following amounts represented the Group’s share of assets, liabilities, revenues and expenses employed in joint operations. The amounts are
included in the consolidated financial statements, in accordance with the accounting policy described in Note 1(s), under the following classifications:
Cash and cash equivalents
Receivables (current)
Exploration and evaluation expenditure carried forward (non-current)
Trade and other payables (current)
Share of net assets employed in joint operations
Interest income from unrelated entities
Other income
Exploration and evaluation expenditure expensed, impaired or written-off
Loss on disposal of inventory
Write-down of inventory to net realisable value
Consolidated
2019
$
64,915
470,356
141,354,524
(26,085)
141,863,710
346
15,796
(13,226,427)
–
–
2018
$
52,529
1,106
105,733,673
(25,746)
105,761,562
1,500
2,465
(6,709,590)
(1,157,407)
(9,944)
Contingent liabilities in respect of joint operations are set out in Note 24. Exploration expenditure commitments in respect of joint operations
are set out in Note 25.
Parent Company guarantee has been provided to Tullow guaranteeing KEI (Peru Z38) Pty Ltd, Sucursal del Peru’s performance under the joint
operating agreement covering Block Z-38 in Peru.
91
Karoon Energy Ltd Annual Report 2019 Note 24. Contingent Liabilities and Contingent Assets
(a) Contingent Liabilities
The Group has contingent liabilities as at 30 June 2019 that may become payable in respect of:
(i) Performance guarantee (via a letter of credit) provided to Perupetro SA for Area 73 by the Group
(refer Note 13) for work commitments and an obligation to submit reports. The letter of credit
is fully funded by way of payment of a security deposit, which will be released once the work
commitments are met and relevant reports submitted to Perupetro SA.
(ii) Performance guarantee (via a letter of credit) provided to Perupetro SA for Block Z-38 by the
Group for its share of third period work commitments. The Directors are of the opinion that the work
commitments will be satisfied. The letter of credit is fully funded by way of payment of a security
deposit (refer Note 13), which will be released once the work commitments are met.
(iii) The Group has provided the ANP a letter of credit (refer Note 13) to carry out the minimum
work program in relation to exploration in Santos Basin Block S-M-1537. The Directors are of the
opinion that the work program commitments will be satisfied. The letter of credit is fully funded
by way of payment of a security deposit, which will be released once the work program is met.
(iv) Bank guarantees were provided in respect of operating lease rental agreements for office
premises of the Group. These guarantees may give rise to liabilities in the Group if obligations
are not met under these guarantees. The bank guarantees given to lessors are fully funded by
way of payment of security deposits (refer Note 13).
Consolidated
2019
$
2018
$
88,407
–
5,190,361
7,684,573
2,303,797
2,169,021
431,134
430,695
(v) Cash deposits (refer Note 13) are held as bonds for the Group’s compliance with its obligations
in respect of agreements for the guarantee of payment obligations for various accommodation in
Brazil and Peru.
35,249
31,909
(vi) Block Acquisition
As part of the acquisition of Pacific Exploration and Production Corp.’s equity interest of Santos Basin Blocks S-M-1037, S-M-1101,
S-M-1102, S-M-1165 and S-M-1166 during the 2017 financial year, the Group agreed to pay Pacific Exploration and Production Corp. a
deferred contingent consideration of US$5.0 million payable upon first production reaching a minimum of 1 million barrels of oil equivalent
from the Blocks. The deferred contingent obligation has not been provided for as at 30 June 2019, as it is dependent upon uncertain future
events.
(vii) Brazilian Local Content
The Concession Contracts for Santos Basin Blocks S-M-1037, S-M-1101, S-M-1102, S-M-1165, S-M-1537 and S-M-1166 require Karoon
Petróleo & Gas Ltda to acquire a minimum proportion of goods and services from Brazilian suppliers, with the objective to stimulate industrial
development, promote and diversify the Brazilian economy, encourage advanced technology and develop local capabilities. The minimum
Brazilian local content requirement under the Concession Contracts during the exploration and appraisal phase up to 55%. If Karoon
Petróleo & Gas Ltda fails to comply with this minimum requirement, Karoon Petróleo & Gas Ltda may be subject to a fine by the ANP.
It is not practical to estimate a potential shortfall in meeting the local content requirement as at 30 June 2019, nor the financial effect of any
potential fine by the ANP.
(viii) Other Matters
There are also legal claims and exposures, which arise from the Group’s ordinary course of business. No material loss to the Group
is expected to result.
(ix) Joint Operations
In accordance with normal industry practice, the Group has entered into joint operations with other parties for the purpose of exploring and
evaluating its exploration tenements. If a participant to a joint operation defaults and does not contribute its share of joint operation
obligations, then the remaining joint operation participants are jointly and severally liable to meet the obligations of the defaulting participant.
In this event, the equity interest in the exploration tenements held by the defaulting participant may be redistributed to the remaining joint
operation participants. In the event of a default, a contingent liability exists in respect of expenditure commitments due to be met by the
Group in respect of the defaulting joint operation participant.
(b) Contingent Assets
The Group has no contingent assets as at 30 June 2019 (30 June 2018: $Nil).
92
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) Note 25. Commitments
(a) Capital Expenditure Commitments
Contracts and/or signed Authorities for Expenditure for capital expenditure in relation to assets
not provided for in the consolidated financial statements and payable:
Drilling operations
Not later than one year
Later than one year but not later than five years
Total capital expenditure commitments
(b) Operating Lease Rental Commitments
Non-cancellable operating lease rentals not provided for in the consolidated financial statements
and payable:
Not later than one year
Later than one year but not later than five years
Total operating lease rental commitments
Consolidated
2019
$
2018
$
182,968
–
182,968
1,460,063
139,617
1,599,680
884,590
982,322
1,866,912
999,845
612,499
1,612,344
The Group leases various offices under non-cancellable operating leases expiring within 1 to 5 years. The leases have varying terms, escalation
clauses and, for some, renewal rights. On renewal, the terms of the leases are renegotiated.
Consolidated
2019
$
2018
$
(c) Exploration Expenditure Commitments
The Group has guaranteed commitments for exploration expenditure arising from obligations to
government to perform minimum exploration and evaluation work and expend minimum amounts
of money pursuant to the award of exploration tenements WA-482-P, EPP46, Block S-M-1537 and
Block Z-38 (30 June 2018: WA-314-P, WA-482-P, EPP46, Block S-M-1537 and Block Z-38) not
provided for in the consolidated financial statements and payable.
Not later than one year
Later than one year but not later than five years
Later than five years
Total guaranteed exploration expenditure commitments
79,668,351
1,375,000
2,303,797
83,347,148
166,301
101,246,335
2,169,021
103,581,657
In addition to the guaranteed exploration expenditure commitments shown above, the Group has
non-guaranteed government work commitments in relation to these exploration tenements due
later than one year but not later than five years of $225,716,234 (30 June 2018: $275,361,548).
These commitments will become firm commitments if the Group elects to retain the tenements
by proceeding into the unguaranteed work periods.
Exploration expenditure commitments, including farm-in obligations, in respect of joint operations
are set out below:
Not later than one year
Later than one year but not later than five years
Total joint operation guaranteed exploration expenditure commitments
51,363,848
109,591,234
160,955,082
166,301
189,522,796
189,689,097
Estimates for future exploration expenditure commitments to government are based on estimated well and seismic costs, which will change
as actual drilling locations and seismic surveys are completed and are calculated in current dollars on an undiscounted basis. The exploration
and evaluation obligations may vary significantly as a result of renegotiations with relevant parties. The commitments may also be reduced
by the Group entering into farm-out agreements, which are typical of the normal operating activities of the Group, or by relinquishing
exploration tenements.
Where exploration and evaluation expenditure included in this category relates to an existing contract for expenditure and/or signed
Authorities for Expenditure, the amount will be included in both categories (a) and (c) above.
93
Karoon Energy Ltd Annual Report 2019 Note 26. Reconciliation to the Consolidated Statement of Cash Flows
(a) Reconciliation of Loss for Financial Year to Net Cash Flows Used
in Operating Activities
Loss for financial year
(28,417,537)
(181,777,789)
Consolidated
2019
$
2018
$
Add (subtract)
Non-cash items included in loss for financial year:
Depreciation of plant and equipment and amortisation of computer software
Share-based payments expense
Loss on disposal of inventory
Net foreign currency gains
Items classified as investing/ financing activities:
Net loss on disposal of non-current assets
Exploration and evaluation expenditure impaired or written-off
Net foreign currency gains (losses)
Write-down of inventory to net realisable value
Change in operating assets and liabilities:
(Increase) decrease in assets
Receivables – current
Current tax asset
Other assets
Increase (decrease) in liabilities
Trade and other payables – current
Trade and other payables – non-current
Provisions – current
Provisions – non-current
Deferred tax liabilities
Net cash flows used in operating activities
(b) Total Liabilities from Financing Activities
Finance lease liability (current and non-current)
Total liabilities from financing activities
692,957
3,665,286
–
(17,540,743)
730,834
4,175,684
1,157,407
(12,076,432)
4,434
14,867,366
53,956
6,213,639
144,527
157,395,193
(917,146)
6,679,549
(222,722)
142,976
(460,271)
333,300
162,205
118,421
(181,788)
285,307
302,665
(209,180)
(1,160,404)
(21,964,059)
655,833
62,681
36,853
38,196
(2,212,486)
(25,293,170)
Balance as at
1 July 2018
122,043
122,043
Cash Flow:
Payments
for Finance
Lease Liability
(94,081)
(94,081)
Non-cash Change:
Foreign Currency
Translation Reserve
Movement
7,583
7,583
Balance as at
30 June 2019
35,545
35,545
94
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) Note 27. Share-based Payments
The share-based payment plans are described below. There has been no cancellation to a plan during the financial year.
(a) ESOP
The Company currently has one ESOP in place, the 2016 ESOP. ESOP options expire up to 4 years after they are granted. The exercise
price of ESOP options, issued during the financial year, is based on the volume weighted average price at which the Company’s ordinary
shares are traded on the ASX during the 20 days of trading before the ESOP options were offered plus a premium to the market price.
Each ESOP option provides eligible employees with the right to acquire one fully paid ordinary share of the Company at the exercise price
determined upon grant, or its equivalent value, subject to the achievement of the relevant performance conditions.
Share options granted under the ESOP carry no dividend or voting rights.
If there is a change of control of the Company, for all unexercised ESOP options, a percentage amount of unvested ESOP options may vest
on the basis of the pro-rata achievement of pre-determined performance conditions.
During the financial year, the Group did not grant any ESOP options (2018: 1,148,344) over unissued ordinary shares in the Company to
Executive Directors. Share options issued to Directors are approved on a case-by-case basis by shareholders at relevant general meetings.
The following summary reconciles the outstanding ESOP options over unissued ordinary shares in the Company at the beginning and end
of the financial year:
Balance at beginning of financial year
Granted during financial year
Exercised during financial year
Cancelled during financial year
Expired during financial year
Forfeited during financial year
Balance at end of financial year
Exercisable at end of financial year
Consolidated
Consolidated
2019 Weighted
Average
Exercise Price
$2.11
$1.40
–
–
–
$3.04
$1.61
–
2019 Number
7,623,938
4,367,289
–
–
–
(1,995,706)
9,995,521
–
2018
Number
7,266,932
3,177,319
–
–
–
(2,820,313)
7,623,938
–
2018 Weighted
Average
Exercise Price
$3.02
$1.74
–
–
–
$4.06
$2.11
–
All ESOP options issued during the financial year were issued under the Karoon Gas Australia 2016 Employee Share Option Plan.
There was no exercise of ESOP options during the financial year or previous financial year.
The weighted average fair value of ESOP options granted during the financial year was $0.24 (2018: $0.36).
ESOP options outstanding as at 30 June 2019 had a range of exercise prices from $1.40 to $1.82 (30 June 2018: range of exercise prices
from $1.73 to $3.04) with a weighted average remaining contractual life of 801 days (30 June 2018: 787 days).
95
Karoon Energy Ltd Annual Report 2019 Note 27. Share-based Payments (continued)
(a) ESOP (continued)
Details of ESOP options outstanding at the end of the financial year are:
Grant Date
30 November 2016
2 December 2016
2 December 2016
6 October 2017
9 November 2017
14 November 2017
16 November 2017
21 September 2018
31 December 2018
Total ESOP options
Date of Expiry
30 June 2020
30 June 2020
30 June 2020
30 June 2021
30 June 2021
30 June 2021
30 June 2021
30 June 2022
30 June 2022
Exercise Price Per
ESOP Option
$1.82
$1.82
$1.82
$1.73
$1.73
$1.73
$1.77
$1.40
$1.40
Number
1,100,476
846,752
503,685
1,547,619
421,647
59,709
1,148,344
3,297,603
1,069,686
9,995,521
(b) Fair Value of Share Options
The fair value of each share option issued during the financial year was estimated on grant date using the Black-Scholes option pricing model.
The Black-Scholes option pricing model takes into account the exercise price, the term of the share option, the share price at grant date and
expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the share option.
The Group applied the following assumptions and inputs in estimating the weighted average fair value:
Weighted average exercise price
Weighted average life of share options
Weighted average share price
Expected share price volatility
Risk free interest rate
Weighted average share option value
2019
$1.40
1,353 days
$1.08
45%
2.06%
$0.24
2018
$1.74
1,343 days
$1.33
54%
2.05%
$0.36
Historical volatility was the basis for determining expected share price volatility as it is assumed that this is indicative of future trends, which may
not eventuate.
(c) PRP
The Company currently has one PRP plan in place, the 2016 PRP.
Under the PRP, eligible employees are given performance rights to be issued and allotted fully paid ordinary shares in the Company, or its
equivalent value, for no consideration provided certain conditions have been met. Vesting of performance rights is conditional on the
achievement of performance measures, over a one-year performance period, and provided the employee remains employed by the
Company for an additional year. In each case, the Remuneration Committee will be responsible for assessing whether the performance
measures have been achieved. When vested, each performance right is convertible into one ordinary share of the Company.
Performance rights granted carry no dividend or voting rights.
If there is a change of control of the Company, for all unexercised performance rights issued pursuant to the Company’s PRP, a percentage
amount of unvested performance rights may vest on the basis of the pro-rata achievement of pre-determined performance conditions.
During the financial year, the Group granted Nil performance rights (2018: 662,816) over unissued ordinary shares in the Company to Executive
Directors. Performance rights issued to Directors are approved on a case-by-case basis by shareholders at relevant general meetings.
96
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) The following summary reconciles the outstanding performance rights over unissued ordinary shares in the Company at the beginning and
end of the financial year:
Balance at beginning of financial year
Granted during financial year
Vested and converted during financial year
Cancelled during financial year
Cash-settled during financial year
Forfeited during financial year
Balance at end of financial year
Consolidated
2019
Number
6,500,013
3,433,178
(495,324)
–
–
(1,675,730)
7,762,137
2018
Number
4,470,794
3,434,635
(503,548)
–
(112,512)
(789,356)
6,500,013
All performance rights issued during the financial year were issued under the 2016 PRP.
There were 1,360,907 (2018: 503,548) performance rights that vested during the financial year, of which 495,324 (2018: 503,548) were converted
into fully paid ordinary shares during the financial year.
The weighted average fair value of performance rights granted during the financial year was $1.08 (2018: $1.31). Fair values of performance
rights were based on the Company’s closing share price at grant date.
Performance rights outstanding as at 30 June 2019 had a weighted average remaining contractual life of 606 days (30 June 2018: 700 days).
Details of performance rights outstanding at the end of the financial year are:
Grant Date
30 November 2016
2 December 2016
30 November 2016
2 December 2016
2 December 2016
16 November 2017
6 October 2017
9 November 2017
14 November 2017
6 October 2017
9 November 2017
14 November 2017
16 November 2017
21 September 2018
21 September 2018
31 December 2018
31 December 2018
Total performance rights
Date of Expiry
30 June 2019
30 June 2019
30 June 2020
30 June 2020
30 June 2020
30 June 2019
30 June 2020
30 June 2020
30 June 2020
30 June 2021
30 June 2021
30 June 2021
30 June 2021
30 June 2021
30 June 2021
30 June 2022
30 June 2022
Number
479,485
129,088
636,546
385,516
362,289
257,010
506,311
169,587
17,583
724,883
233,755
21,100
405,806
1,728,190
560,595
864,095
280,298
7,762,137
(d) Share-based Payments Expense
Total expenses arising from share-based payment transactions recognised during the financial year, included as part of employee benefits
expense in the consolidated statement of profit or loss and other comprehensive income, were as follows:
Share options issued under ESOP
Performance rights issued under PRP
Share-based payments expense (non-cash)
Share-based payments expense (cash-settled)
Total share-based payments expense
97
Consolidated
2019
$
1,205,750
2,459,536
3,665,286
331,086
3,996,372
2018
$
1,048,956
3,126,728
4,175,684
234,205
4,409,889
Karoon Energy Ltd Annual Report 2019 Note 28. Related Party Transactions
Transactions between related parties are on normal commercial terms and conditions, no more favourable than those available to other parties,
unless otherwise stated.
(a) Subsidiaries
Interests in subsidiaries are set out in Note 21.
During the financial year, the Group provided accounting, administrative and technical services to subsidiaries at cost. This allocation was based
on costs recharged on a relevant time allocation of employees and consultants and associated office charges.
Other transactions that occurred were provision of funding by the Parent Company to its overseas subsidiaries via an increase in contributed
equity and intercompany loans to the Australian subsidiaries. The intercompany loans provided are at a Nil% interest rate (2018: Nil%) and
no fixed term for repayment and therefore will not be repaid within 12 months. Loans are unsecured and are repayable in cash.
Where equity-settled share options and performance rights are issued to employees of subsidiaries within the Group, the transaction is
recognised as an investment in the subsidiary by the Parent Company and in the subsidiary, a share-based payments expense and an equity
contribution by the Parent Company.
The above transactions are eliminated on consolidation.
(b) Remuneration of KMP
Directors and other KMP remuneration is summarised as follows:
Short-term employee benefits
Post-employment benefits
Long-term employee benefits (non-cash)
Share-based payments expense
Total KMP remuneration
Consolidated
2019
$
3,485,328
191,909
54,932
1,635,635
5,367,804
2018
$
3,598,808
201,923
39,517
1,621,116
5,461,364
Detailed remuneration disclosures for the Directors and other KMP are provided in Sections 5 of the audited Remuneration Report on pages
45 and 46.
In addition to the above, the Group is committed to pay the Executive Directors and other KMP up to $3,270,965 (2018: $3,208,556) in the
event their role is fundamentally reduced upon a change in control of the Group.
Apart from the details disclosed in this note, no Director or other KMP has entered into a material contract with the Group since the end of
the previous financial year and there were no material contracts involving Directors’ or other KMP interests subsisting as at 30 June 2019.
Total termination payments equal to the Executive Directors and other KMP average base salary, in accordance with Section 200B of the
Corporations Act 2001, is $2,544,357.
(c) Other Related Party Transactions Within the Group
During the financial year, Mr Jose Coutinho Barbosa, a Non-Executive Director, had an interest in Net Pay Óleo & Gás Consultoria Ltda that
provided business and geology consulting services to the Group. The value of these transactions during the financial year in the Group was
$343,961 (2018: $321,395). The balance outstanding included in current trade and other payables is $29,623 (2018: $28,486). Given Karoon’s
relative size to other operators in Brazil, the consulting services provided by Net Pay Óleo & Gás Consultoria Ltda are required for Karoon
to operate effectively within the Brazilian oil industry.
During the financial year, Ms Flavia Barbosa, the daughter of a Non-Executive Director, was employed by the Group as the in-house Legal
Counsel in Brazil. The total value of her remuneration (including share-based payments expense) during the financial year was $235,487
(2018: $252,311), which includes social security and indemnity fund contributions of $36,588 (2018: $38,702). Ms Barbosa has been an
employee of the Company since 2011, and has a comprehensive understanding of the Brazilian legal and regulatory framework.
Ms Marina Sayao, the wife of Mr Tim Hosking (a KMP), was employed by the Group on a full-time basis until August 2016 and then on a
part-time basis from September 2016 as the Sustainability and Communications Manager South America. The total value of her remuneration
(including share-based payments expense) during the financial year was $106,166 (2018: $115,488). Ms Sayao is a key member of the
South American operations. The Brazilian and Peruvian regulatory and business environments require transparent and clear communication
on social and environmental issues with local and federal governments.
98
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) During the financial year, Mr Mark Smith, an Executive Director, had an interest in Quantiseal Pty Ltd which provided geophysical fault seal
analysis for the Group’s Santos Basin assets. The Risk and Governance Committee and then Karoon Board approved the transaction during
the financial year, prior to it being entered into, being on arm’s length terms. The value of this transaction during the financial year in the
Group was $64,000 (2018: $Nil).
In addition, Mr Mark Smith has an interest in BNN which provides geological and engineering expertise and services to Liberty Petroleum
Corporation. Where BNN business involves any activity connected to the Group, Mr Smith maintains an arm’s length relationship to BNN.
Mr Mark Smith is also excluded from any Board of Director discussions and decisions regarding BNN and/or Liberty Petroleum Corporation.
Liberty Petroleum Corporation is entitled to: (a) certain milestone cash bonuses and an over-riding royalty in the event of production on the
Group’s exploration permit WA-482-P; and (b) an over-riding royalty in the event of production on the Group’s exploration permit WA-314-P.
BNN has a 1/3 share of Liberty Petroleum Corporation’s over-riding royalty, if a discovery is made for exploration permits WA-482-P or WA-
314-P and developed.
(d) Related Party Payables
As part of their ‘At Risk’ remuneration Mr Scott Hosking and Mr Tim Hosking, Ms Marina Sayao and Ms Flavia Barbosa were issued cash-
settled share-based payments for which a liability is recognised based on fair value earned by the end of the reporting period. The balance
outstanding included in current trade and other payables is $225,456 (2018: $290,796) and in non-current trade and other payables
$546,766 (2018: $253,889).
Note 29. Parent Company Financial Information
(a) Summary Financial Information
The individual financial statements for the Parent Company show the following aggregate amounts:
Statement of financial position
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net assets
Contributed equity
Accumulated losses
Share-based payments reserve
Total equity
Loss for financial year
Company
2019
$
2018
$
322,408,896
157,864,767
480,273,663
1,764,703
27,906,878
29,671,581
450,602,082
331,451,574
158,749,443
490,201,017
1,984,757
24,905,701
26,890,458
463,310,559
802,295,334
(403,068,837)
51,375,585
450,602,082
802,295,334
(386,695,074)
47,710,299
463,310,559
(16,373,763)
(199,974,180)
Total comprehensive loss for financial year
(16,373,763)
(199,974,180)
99
Karoon Energy Ltd Annual Report 2019 Note 29. Parent Company Financial Information (continued)
(b) Contingent Liabilities of Parent Company
(i) Bank guarantees were provided in respect of operating lease rental agreements. These
guarantees may give rise to liabilities in the Parent Company if obligations are not met under
these guarantees. The bank guarantees given to lessors are fully funded by way of payment
of security deposits (refer Note 13).
Company
2019
$
2018
$
431,134
430,695
(ii) Performance guarantee (via a letter of credit) was provided to Perupetro SA for Block Z-38 by
the Parent Company for its share of third period work commitments. The Directors are of the
opinion that the work commitments will be satisfied. The letter of credit is fully funded by way
of payment of a security deposit (refer Note 13), which will be released once the work
commitments are met.
7,684,573
(iii) The Company’s present intention is to provide the necessary financial support for all Australian incorporated subsidiaries, whilst
5,190,361
they remain wholly owned subsidiaries, as is necessary for each company to pay all debts as and when they become due.
(c) Guarantees Entered into by Parent Company
Parent Company guarantee provided to a third party during the financial year guaranteeing a subsidiary’s performance under a joint
operating agreement is set out in Note 23.
Parent Company guarantee has been provided to Perupetro SA guaranteeing a subsidiary’s obligations under a license agreement covering
Tumbes Basin Block Z-38 in Peru.
Parent Company guarantees have been provided to the ANP guaranteeing a subsidiary’s obligations under Concession Agreements
covering Santos Basin Blocks S-M-1037, S-M-1101, S-M-1102, S-M-1165, S-M-1537 and S-M-1166 in Brazil.
Note 30. Subsequent Events
This Annual Report was authorised for issue by the Board of Directors on 24 September 2019. The Board of Directors has the power to amend
and reissue the consolidated financial statements and notes.
Since 30 June 2019, the following material event has occurred:
(a) Baúna Sale and Purchase Agreement
On 25 July 2019, a wholly owned subsidiary of Karoon Energy Ltd (Karoon Petróleo & Gás Ltda) signed a binding SPA to acquire from
Petrobras a 100% operating interest in Concession BM-S-40, that includes the producing Baúna light oil field located in the Santos Basin,
offshore Brazil, for a headline consideration of US$665 million. On the same date, a deposit of US$49.9 million was paid to Petrobras.
The transaction is subject to Brazilian regulatory approval, which is expected during the first half of calendar year 2020.
Unless otherwise indicated, the financial effect of this event has not been recognised in either the consolidated financial statements or notes
for the financial year.
100
Karoon Energy Ltd Annual Report 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE FINANCIAL YEAR ENDED 30 JUNE 2019 (CONTINUED) DIRECTORS’ DECLARATION
The Directors’ declare that:
(a) in the Directors’ opinion, the consolidated financial statements and notes, set out on pages 57 to 100, are in accordance with the
Corporations Act 2001, including:
(i) complying with relevant Australian Accounting Standards and the Corporations Regulations 2001; and
(ii) giving a true and fair view of the Group’s financial position as at 30 June 2019 and of its performance for the financial year ended on
that date; and
(b) in the Directors’ opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they
become due and payable.
Note 1(a) confirms that the consolidated financial statements also comply with International Financial Reporting Standards as issued by the
International Accounting Standards Board.
The Directors have been given the declarations by the Managing Director and Chief Financial Officer required by Section 295A of the
Corporations Act 2001.
This Directors’ Declaration is made in accordance with a resolution of the Directors.
On behalf of the Directors:
Mr Bruce Phillips
Independent Non-Executive Chairman
Mr Robert Hosking
Managing Director
25 September 2019
101
Karoon Energy Ltd Annual Report 2019 INDEPENDENT AUDITOR’S REPORT
Independent auditor’s report
To the members of Karoon Energy Ltd
Report on the audit of the financial report
Our opinion
In our opinion:
The accompanying financial report of Karoon Energy Ltd (the Company) and its controlled entities
(together the Group) is in accordance with the Corporations Act 2001, including:
(a)
giving a true and fair view of the Group's financial position as at 30 June 2019 and of its
financial performance for the financial year then ended
(b)
complying with Australian Accounting Standards and the Corporations Regulations 2001.
What we have audited
The Group financial report comprises:
•
•
•
•
•
•
the consolidated statement of financial position as at 30 June 2019
the consolidated statement of changes in equity for the financial year then ended
the consolidated statement of cash flows for the financial year then ended
the consolidated statement of profit or loss and other comprehensive income for the financial
year then ended
the notes to the consolidated financial statements, which include a summary of significant
accounting policies
the Directors’ Declaration.
Basis for opinion
We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under
those standards are further described in the Auditor’s responsibilities for the audit of the financial
report section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
Independence
We are independent of the Group in accordance with the auditor independence requirements of the
Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical
Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence
Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also
fulfilled our other ethical responsibilities in accordance with the Code.
PricewaterhouseCoopers, ABN 52 780 433 757
2 Riverside Quay, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001
T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au
Liability limited by a scheme approved under Professional Standards Legislation.
102
Karoon Energy Ltd Annual Report 2019
Our audit approach
An audit is designed to provide reasonable assurance about whether the financial report is free from
material misstatement. Misstatements may arise due to fraud or error. They are considered material if
individually or in aggregate, they could reasonably be expected to influence the economic decisions of
users taken on the basis of the financial report.
We tailored the scope of our audit to ensure that we performed enough work to be able to give an
opinion on the financial report as a whole, taking into account the geographic and management
structure of the Group, its accounting processes and controls and the industry in which it operates.
Materiality
• For the purpose of our audit we used overall Group materiality of $5.88 million, which
represents approximately 1% of the Group’s total assets.
• We applied this threshold, together with qualitative considerations, to determine the scope of
our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of
misstatements on the financial report as a whole.
• We chose the Group's total assets because, in our view, it is a commonly accepted benchmark for
exploration companies in the oil and gas industry that do not currently have producing assets.
The Group did not have revenue from producing assets as at 30 June 2019, meaning profit and
revenue based thresholds were less relevant.
• We chose 1% based on our professional judgement, noting it is within the range of commonly
accepted thresholds.
Audit Scope
• Our audit focused on where the Group made subjective judgements; for example, significant
accounting estimates involving assumptions and inherently uncertain future events.
• The Group has three operating segments in Australia, Brazil and Peru. In establishing the
overall approach to the Group audit, we determined the type of work that needed to be
performed by us, as the Group engagement team, and by component auditors under our
instruction. Due to their financial significance, audit procedures were performed over the three
main operating segments’ financial information.
103
Karoon Energy Ltd Annual Report 2019
INDEPENDENT AUDITOR’S REPORT (CONTINUED)
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in
our audit of the financial report for the current period. The key audit matters were addressed in the
context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do
not provide a separate opinion on these matters. Further, any commentary on the outcomes of a
particular audit procedure is made in that context. We communicated the key audit matters to the
Audit Committee.
Key audit matter
Liquidity to fund future exploration
expenditure
(Refer to note 25)
As at June 30 2019, the Group has material
exploration expenditure commitments arising from its
obligations to perform minimum exploration and
evaluation work, which are not recorded as liabilities
in the consolidated statement of financial position.
The Group’s guaranteed exploration expenditure was
$83.3 million as at 30 June 2019 of which
$79.7 million are due during the financial year ending
30 June 2020. In addition, non-guaranteed work
commitments totalled $225.7 million at financial year
end. These commitments are not due during the
financial year ending 30 June 2020.
Subsequent to year end the Group has entered into a
binding Sale and Purchase Agreement (SPA) with
Petrobras for the acquisition of the Baúna light oil
field. The Group requires additional funding in order
to complete the acquisition. The Group has put in
place a number of initiatives to complete the
acquisition, however, should these be unsuccessful
Petrobras would retain the cash deposit of
US$49.9 million which was paid subsequent to year
end.
The Group holds cash and cash equivalents of
approximately $326.2 million and has no committed
external debt arrangements as at 30 June 2019. The
Group has no cash-generating assets in operation at
financial year end.
How our audit addressed the key audit
matter
We performed the following procedures, amongst
others, in evaluating the Group’s determination:
• Obtained the Group’s analysis of future
exploration expenditure commitments and
considered the guaranteed and non-
guaranteed classification of these amounts;
• Evaluated other additional non-guaranteed
exploration expenditure commitments and
operation cash outflows included in the
Group’s assessment;
• Compared the key underlying data and
assumptions in the Group’s cash flow
forecast to internal reporting and historical
cash outflows;
• Assessed written correspondence from
external legal counsel in respect of the
Group’s future obligations should the Baúna
transaction not be successfully completed;
and
• Obtained written representations from
management and the Board of Directors
regarding their plans for future action and
the feasibility of these plans.
104
Karoon Energy Ltd Annual Report 2019
Key audit matter
How our audit addressed the key audit
matter
To evaluate the Group’s carrying value assessment, we
performed the following procedures:
• Evaluated the Group’s assessment for
indicators of impairment;
• Considered the market data and industry
forecasts for the long-term commodity
prices;
• Considered approved budgets and business
plans, current drilling operations, permit
tenure and other evidence of future
intentions for individual exploration areas of
interest; and
• Compared the impairment charge recorded
against permits WA-482-P, EPP46,
WA-314-P and Block S-M-1101 respectively
against historical capitalised costs.
Our assessment of the Group’s determination that
there are sufficient funds available to allow Group to
continue as a going concern was a key audit matter.
Valuation of capitalised exploration and
evaluation assets
(Refer to note 17)
As at 30 June 2019, the Group has capitalised
exploration and evaluation expenditures of
$208.8 million, related primarily to geological,
geophysical, drilling and other exploration and
evaluation expenditure, across Australia, Brazil and
Peru.
Exploration and evaluation assets are assessed for
indicators of impairment by area of interest at each
period end. Where there are indicators of impairment,
the Group is required to assess whether the carrying
amount of the exploration and evaluation assets is
likely to be fully recovered from a successful
development or by sale, which requires the Group to
make a number of estimates and assumptions. These
estimates include the recoverability of reserves, cost
of development and production, legal and
environmental regulation changes, and long-term
commodity prices.
As discussed in Note 17, during the financial year an
expense of $14.9 million was recorded in the
consolidated statement of profit or loss and other
comprehensive income to reflect a write off and an
impairment charge recorded against the capitalised
exploration and evaluation expenditure associated
with permits WA-482-P, EPP46, WA-314-P and
Block S-M-1101.
We focused on this area due to the significant carrying
value of the capitalised exploration and evaluation
expenditure relative to the total assets of the Group,
along with the significant and complex judgements
and estimates required by the Group in determining
whether there are any impairment indicators.
105
Karoon Energy Ltd Annual Report 2019
INDEPENDENT AUDITOR’S REPORT (CONTINUED)
Other information
The Directors are responsible for the other information. The other information comprises the
information included in the annual report for the financial year ended 30 June 2019, but does not
include the financial report and our auditor’s report thereon.
Our opinion on the financial report does not cover the other information and accordingly we do not
express any form of assurance conclusion thereon.
In connection with our audit of the financial report, our responsibility is to read the other information
and, in doing so, consider whether the other information is materially inconsistent with the financial
report or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
If, based on the work we have performed on the other information that we obtained prior to the date of
this auditor’s report, we conclude that there is a material misstatement of this other information, we
are required to report that fact. We have nothing to report in this regard.
Responsibilities of the Directors for the financial report
The Directors of the Company are responsible for the preparation of the financial report that gives a
true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001
and for such internal control as the Directors determine is necessary to enable the preparation of the
financial report that gives a true and fair view and is free from material misstatement, whether due to
fraud or error.
In preparing the financial report, the Directors are responsible for assessing the ability of the Group to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease
operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial report
Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that
includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an
audit conducted in accordance with the Australian Auditing Standards will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material
if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial report.
A further description of our responsibilities for the audit of the financial report is located at the
Auditing and Assurance Standards Board website at:
http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our
auditor's report.
106
Karoon Energy Ltd Annual Report 2019
Report on the Remuneration Report
Our opinion on the Remuneration Report
We have audited the Remuneration Report included in pages 31 to 54 of the Directors’ Report for the
financial year ended 30 June 2019.
In our opinion, the Remuneration Report of Karoon Energy Ltd for the financial year ended 30 June
2019 complies with section 300A of the Corporations Act 2001.
Responsibilities
The Directors of the Company are responsible for the preparation and presentation of the
Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our
responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in
accordance with Australian Auditing Standards.
PricewaterhouseCoopers
Charles Christie
Partner
Melbourne
25 September 2019
107
Karoon Energy Ltd Annual Report 2019
ADDITIONAL SECURITIES EXCHANGE INFORMATION
Additional information required by the ASX Listing Rules and not disclosed elsewhere in the Annual Report is set out below. The information
was applicable for the Company as at 17 September 2019.
Distribution of Shareholding
The number of shareholders ranked by size of holding is set out below:
Size of Holding
Less than 1,000
1,001 to 5,000
5,001 to 10,000
10,001 to 100,000
More than 100,000
Total
Number
of Holders
2,328
2,545
1,044
1,281
189
7,387
Number
of Ordinary
Shares on Issue
1,005,357
7,043,793
7,934,574
37,594,248
193,818,883
247,396,855
There were 1,154 shareholders holding less than a marketable parcel of ordinary shares to the value of $500.
Substantial Shareholders
The number of ordinary shares held by substantial shareholders and their associates (who held 5% or more of total fully paid ordinary shares
on issue), as disclosed in substantial holder notices given to the Company, is set out below:
Shareholder
Talbot Group Holdings Pty Ltd
Wellington Management Group, LLP and its related bodies corporate
Total
Twenty Largest Shareholders
The names of the twenty largest shareholders of the Company’s ordinary shares are listed below:
Shareholder
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Total
HSBC Custody Nominees (Australia) Limited
J P Morgan Nominees Australia Pty Limited
Talbot Group Holdings Pty Ltd
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