ANNUAL REPORT 2019 EXPLORERS FROM NEW ZEALAND NEW ZEALAND OIL & GAS SINCE 1981 3 4 7 8 10 37 40 41 43 44 45 46 64 68 Contents Chairman and CEO’s Report Production and Reserves Reserves, Contingent & Prospective Resources Statement Sustainability Framework 2019 – Value Creation Process Corporate Governance Statement Shareholder Information Consolidated Financial Statements Consolidated Statement of Cash Flows Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Notes to the Financial Statements Independent Auditor’s Report Corporate Directory Signed on behalf of the Board of New Zealand Oil & Gas Limited on 26 August 2019. Samuel Kellner Chairman Alastair McGregor Director 2 New Zealand Oil & Gas Annual Report 2019 Chairman & CEO’s Report Tēnā koutou The financial accounts enclosed report steady financial performance, reflecting a year in which the company sought to implement a growth strategy. Our earnest efforts to grow through transformational deepwater exploration and by acquiring development and production have had to contend with an operating environment for oil and gas investment in New Zealand that deteriorated after April 2018, when the New Zealand government stopped awarding new offshore exploration permits. With major global companies ending their exploration efforts in New Zealand, the perception of New Zealand as an appealing place to invest has fundamentally changed. A year ago, we stated, “Our growth strategy will likely be capital intensive, and we are planning for acquisition and development costs considerably in excess of our current, substantial, cash reserves. When the time is right, we expect to return to the capital markets, both for debt and equity, to help fund acquisitions.” The information we have gathered over the past year has persuaded us that raising the additional capital required on reasonable terms would be a reach in the current environment. The board has responded to the changed environment by putting a scheme of arrangement to investors. If the scheme of arrangement is approved, OGOG will buy the 30 per cent of shares in New Zealand Oil & Gas that it does not already own. The scheme has been unanimously recommended to shareholders by the independent directors. If the scheme is approved, this will be the last annual report in a series that dates back to 1981. We would therefore like to close by acknowledging that the future, one way or another, will look different to the past. Ka kite anō au i a koutou Samuel Kellner Chairman Andrew Jefferies Chief Executive 3 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Production Actual and Forecast 2P Production millions of barrels of oil equivalent Kupe Maari Oyong Wortel 0.6 0.5 0.4 0.3 0.2 0.1 0.0 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Production New Zealand Oil & Gas share (net) Maari Kupe Sampang PSC Some rounding. The New Zealand Oil & Gas interest in Maari and Sampang is held through Cue Energy. New Zealand Oil & Gas has a 50.04% interest in Cue. Graphic shows Cue’s full interest. 4 201720182019120,000140,000160,000100,00080,00060,00040,00020,0000barrelsOilGasLPG1,8002,1002,4001,5001,2009006003000terajoulestonnes3,6004,2004,8003,0002,4001,8001,2006000152,201115,823130,2812017201820198981,0281,0222017201820193,1134,4033,9332017201820192,3501,5071,66220172018201945,84341,12246,32920172018201938,1213,0383,207New Zealand Oil & Gas Annual Report 2019 Reserves Taranaki Basin ¬ Maari - Cue Energy 5% ¬ Kupe - New Zealand Oil & Gas 4% Java ¬ Sampang PSC - Cue Energy 15% New Plymouth Madura Island Wortel Oyong Jeruk Sampang PSC East Java Maari Kupe Remaining Proven and Probable (2P) Oil & Gas Reserves as at 30 June 2019 Geographic area Oil & Condensate (million barrels) Natural Gas (Petajoules) LPG (Kilotonnes) Million Barrels of Oil Equivalent r i a a M 0.6 5 m m b o e New Zealand Maari Kupe Indonesia Sampang PSC Total 0.65 0.27 0.02 0.94 9.04 37.52 7.55 16.59 37.52 0.65 2.06 1.25 3.96 2.0 Kupe 6 m mboe S a 1.2 m p 5 a n m g m P b S o C e Some rounding. Includes 100 per cent of Cue’s reserves. New Zealand Oil & Gas has a 50.04% interest in Cue. Million barrels of oil equivalent have been calculated as the total oil equivalent of the oil, condensate/light oil, natural gas and LPG figures, using conversion factors consistent with the Society of Petroleum Engineers (SPE) guidelines. Conversion factors used were: 163.40 terajoules of natural gas per barrel of oil; 8.15 barrels of oil equivalent per tonne of LPG. 5 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Proved (1P) Reserves at 30 June 2019 Developed Undeveloped Total Gas (PJ) LPG (kt) Oil & Condensate (mmb) Total (mmboe) Gas (PJ) LPG (kt) Oil & Condensate (mmb) Total (mmboe) Gas (PJ) LPG (kt) Oil & Condensate (mmb) Total (mmboe) 2.63 11.10 0.30 0.09 0.30 0.61 2.65 10.86 0.00 0.11 0.00 0.63 0.00 0.00 5.28 21.96 0.30 0.20 0.30 1.24 Geographic area New Zealand Maari Kupe Indonesia Sampang PSC 2.61 0.01 0.43 1.59 0.00 0.26 4.20 0.00 0.01 0.70 e o b 0.3 0 m m m 0 . m 4 3 b o e m 0 . 2 m 6 b o e 0 . 3 0 m b o e m m 0 . 7 m 0 b o e m 0.61 mboe m 3 b o e m 0 . 6 m m 1.24 boe As at evaluation date 30/06/2019. Some rounding. Includes 100 per cent of Cue’s interests in Maari and Sampang. New Zealand Oil & Gas has a 50.04% interest in Cue. Maari Kupe Sampang PSC Proved + Probable (2P) Reserves at 30 June 2019 Developed Undeveloped Total Gas (PJ) LPG (kt) Oil & Condensate (mmb) Total (mmboe) Gas (PJ) LPG (kt) Oil & Condensate (mmb) Total (mmboe) Gas (PJ) LPG (kt) Oil & Condensate (mmb) Total (mmboe) 3.95 16.52 0.65 0.12 0.65 0.90 5.09 21.00 0.00 0.15 0.00 1.15 0.00 0.00 9.04 37.52 0.65 0.27 0.65 2.06 Geographic area New Zealand Maari Kupe Indonesia Sampang PSC 5.75 0.02 0.96 1.80 0.00 0.30 7.55 0.00 0.02 1.25 e 0.6 5 m b o m m 0 . m 9 b 6 o e m 0.90 mboe 0 b e o 0.3 m m 5 b o e 0. 6 m m m 1 . m 2 5 b o e 1 .1 5 m m boe m 2.06 mboe As at evaluation date 30/06/2019. Some rounding. Includes 100 per cent of Cue’s interests in Maari and Sampang. New Zealand Oil & Gas has a 50.04% interest in Cue. Maari Kupe Sampang PSC 6 New Zealand Oil & Gas Annual Report 2019 Reserves, Contingent & Prospective Resources Statement Known accumulations are reserves or contingent resources that have been discovered by drilling a well and testing, sampling or logging a significant quantity of recoverable hydrocarbons. Developed reserves are expected to be recoverable from existing wells and facilities. Undeveloped reserves will be recovered through future investments (e.g. through installation of compression, new wells into different but known reservoirs, or infill wells that will increase recovery). Total reserves are the sum of developed and undeveloped reserves at a given level of certainty. All reserves and resources reported refer to hydrocarbon volumes post-processing and immediately prior to point of sale. The volumes refer to standard conditions, defined as 14.7psia and 60°F. Some differences may be due to rounding. This resources statement is approved by, based on, and fairly represents information and supporting documentation prepared by New Zealand Oil & Gas Assets & Engineering Manager Daniel Leeman. Daniel is a Chartered Engineer with Engineering New Zealand and holds Masters degrees in Petroleum and Mechanical Engineering as well as a Diploma in Business Management and has over 10 years of experience. Daniel is also an active professional member of the Society of Petroleum Engineers and the Royal Society of New Zealand. New Zealand Oil & Gas reviews reserves holdings twice a year by reviewing data supplied from the field operator and comparing assessments at scheduled Technical Committee Meetings. Oil and gas reserves, and contingent and prospective resources, are reported as at 30 June 2019 and follow the SPE PRMS Guidelines (2011). The indicative Kupe reserves estimate is based on approximately ten years of production data and a full probabilistic uncertainty analysis of reservoir simulation models provided by the field operator, Beach Energy, with deterministic cases selected as appropriate. The Maari and Sampang reserves report is based on information provided by Cue Energy Resources. Maari is independently assessed using deterministic well-by- well decline curve analysis. The Sampang estimates are based on deterministic decline curve analysis. For the conversion to equivalent units, standard industry factors have been used of 6Bcf to 1mmboe, 1Bcf to 1.05PJ, 1 tonne of LPG to 8.15 boe and 1TJ of gas to 163.4 boe. Proven (1P) reserves are estimated quantities of oil and gas which geological and engineering data demonstrate with reasonable certainty (90% chance) to be recoverable in future years from known reservoirs, under existing economic and operating conditions. Probable (2P) reserves have a 50% chance or better of being technically and economically producible. Estimates of Kupe, non-operated reserves are based on their value in use with a discount rate of 10% applied. The oil price assumptions are based on the Bloomberg consensus mean, with contracted volumes of gas and LPG sold on current contract terms. For volumes in excess of current contracts, a future base market price of $6/ gigajoule is assumed for gas sales and LPG prices are linked to the Bloomberg consensus mean forecast for oil. 7 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Sustainability Framework 2019 NEW ZEALAND OIL & GAS – Value Creation Process SUSTAINABILITY FRAMEWORK 2019 – VALUE CREATION PROCESS FINANCIAL CAPITAL Our strong financial position, prudent financial management and ability to attract investment HUMAN CAPITAL Expertise, skills and engagement of our people FIXED CAPITAL Our physical infrastructure and assets, primarily owned and operated through joint venture or other commercial arrangements, are fundamental to the delivery of our purpose. INTELLECTUAL CAPITAL Our technical expertise, data, models, brand and reputation NATURAL CAPITAL Inputs from the natural world including access to oil and gas reserves, water, land and minerals/materials required to support infrastructure required in production SOCIAL & RELATIONSHIP CAPITAL Relationships are crucial to our success. Within NZOG, with our existing joint venture partners, with our communities, regulators and prospective commercial partners, our social license to operate is key. 8 Bringing Energy Helping to meet the world’s energy needs in a safe & responsible way Respect Collaboration & Communication People & Passion Commercial Focus Our team of technical and commer cial experts add value to exploration and production oppor tunities, to deliver energy under safe, environmentally sound and commercially successful terms, with long-term values-driven partnerships ENERGY SECURITY AND AFFORDABILITY We help deliver energy value through the supply of natural gas in New Zealand, which supports renewable energy electricity (especially in dry years), and internationally, by providing supply, price stability, and affordability. ∂ Leadership through industry, policy and regulatory forums ∂ Delivering gas to market, in NZ, Australia and beyond A CLEAN AND LOWER-CARBON ECONOMY We help deliver gas and light oil into the energy system, bringing health and lower carbon benefits. ∂ Reporting commercial and non-commercial value transparently WEALTH CREATION & PRODUCTIVITY Gas and light oil energy inputs help to produce goods and services society needs to prosper. We contribute to New Zealand’s wealth and productivity through royalties and tax contributions that help to fund hospitals, schools and other essential social services. ∂ Delivering commercial value via annual taxes and royalties, job creation, shareholder value COMMUNITY WELLBEING Through our support and actions, local environments and communities are strengthened through open ∂ Community and Iwi Engagement engagement, and contributions particularly relating to ∂ Community Partnerships STEM education, energy efficiency/low carbon behaviour change and conservation. and Investment $43.3 million revenue 2,535 TJ of NATURAL GAS tonnes of LPG 7 4,403 AWARDS for YOUNG SCIENTISTS $10,000 for CURTAINS for low income homes 1,800 Trees Planted A GREAT PLACE TO WORK We are a highly engaged, skilled, safe, sustainable, diverse and inclusive workplace ∂ Proactive diversity and inclusion practices ∂ Greater environmental contributions New Zealand Oil & Gas Annual Report 2019UN SustainableDevelopment Goals (UNSDGs)OUTPUTSOUR MAGICVALUETHROUGHOUTCOMESOURINPUTSOUR VALUES NEW ZEALAND OIL & GAS SUSTAINABILITY FRAMEWORK 2019 – VALUE CREATION PROCESS FINANCIAL CAPITAL Our strong financial position, prudent financial management and ability to attract investment HUMAN CAPITAL Expertise, skills and engagement of our people FIXED CAPITAL Our physical infrastructure and assets, primarily owned and operated through joint venture or other commercial arrangements, are fundamental to the delivery of our purpose. INTELLECTUAL CAPITAL Our technical expertise, data, models, brand and reputation NATURAL CAPITAL Inputs from the natural world including access to oil and gas reserves, water, land and minerals/materials required to support infrastructure required in production SOCIAL & RELATIONSHIP CAPITAL Relationships are crucial to our success. Within NZOG, with our existing joint venture partners, with our communities, regulators and prospective commercial partners, our social license to operate is key. Bringing Energy Helping to meet the world’s energy needs in a safe & responsible way Respect Collaboration & Communication People & Passion Commercial Focus Our team of technical and commer cial experts add value to exploration and production oppor tunities, to deliver energy under safe, environmentally sound and commercially successful terms, with long-term values-driven partnerships ENERGY SECURITY AND AFFORDABILITY We help deliver energy value through the supply of natural gas in New Zealand, which supports renewable energy electricity (especially in dry years), and internationally, by providing supply, price stability, and affordability. ∂ Leadership through industry, policy and regulatory forums ∂ Delivering gas to market, in NZ, Australia and beyond A CLEAN AND LOWER-CARBON ECONOMY We help deliver gas and light oil into the energy system, bringing health and lower carbon benefits. ∂ Reporting commercial and non-commercial value transparently WEALTH CREATION & PRODUCTIVITY Gas and light oil energy inputs help to produce goods and services society needs to prosper. We contribute to New Zealand’s wealth and productivity through royalties and tax contributions that help to fund hospitals, schools and other essential social services. ∂ Delivering commercial value via annual taxes and royalties, job creation, shareholder value COMMUNITY WELLBEING Through our support and actions, local environments and communities are strengthened through open ∂ Community and Iwi Engagement engagement, and contributions particularly relating to STEM education, energy efficiency/low carbon behaviour change and conservation. ∂ Community Partnerships and Investment $43.3 million revenue 2,535 TJ of NATURAL GAS 4,403 tonnes of LPG 7 $10,000 for CURTAINS for low income homes 1,800 Trees Planted A GREAT PLACE TO WORK We are a highly engaged, skilled, safe, sustainable, diverse and inclusive workplace AWARDS for YOUNG SCIENTISTS ∂ Proactive diversity and inclusion practices ∂ Greater environmental contributions 9 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019UN SustainableDevelopment Goals (UNSDGs)OUTPUTSOUR MAGICVALUETHROUGHOUTCOMESOURINPUTSOUR VALUES Corporate Governance Statement New Zealand Oil & Gas Limited (the Company) is a limited liability company registered under the New Zealand Companies Act 1993. The Company is listed and its shares quoted on the Main Board equity security market operated by NZX Limited (NZX) under the code “NZO”. This statement sets out the main corporate governance practices adopted by the Company. It is current to 30 June 2019 (unless a more recent date is expressly stated), and has been approved by the board. Corporate Governance Best Practice Codes The Company regularly reviews and assesses the Company’s governance processes and policies and monitors its compliance with corporate governance best practice. This includes assessing compliance with the NZX Listing Rules and Corporate Governance Code 1 January 2019 (NZX Code). This section of the report is structured to report performance against the principles of the NZX Code. Information presented under each principle is followed by the NZX Corporate Governance checklist. In complying with the NZX Code, the Company’s corporate governance outcomes also substantively meet the principles of the FMA Corporate Governance Handbook. The Company is compliant with these rules and guidelines except as otherwise noted in the following pages. Detail about the Company’s corporate governance, including the constitution, board and committee charters, policies and frameworks is available in the corporate governance section of our website at www.nzog.com/investor-information/shareholders-information/corporate-governance/ This statement was approved by the board on 26 August 2019. 10 New Zealand Oil & Gas Annual Report 2019 PRINCIPLE 1 Code of Ethical Behaviour “Directors should set high standards of ethical behaviour, model this behaviour and hold management accountable for these standards being followed throughout the organisation.” New Zealand Oil & Gas Limited is committed to the highest standards of corporate governance and aspires to continuous improvement in its governance performance. Code of Business Conduct and Ethics The Company’s Code of Business Conduct and Ethics sets out values and ethics expected of the Company’s directors, management, employees and dedicated contractors. The Company strives to create a strong culture of honesty, integrity, loyalty, fairness, forthrightness and ethical behaviour. Company representatives are required to: ¬ act with high standards of honesty, integrity, fairness, and equity in all aspects of their involvement with the Company; ¬ comply fully with the content and spirit of all laws and regulations which govern the operations of the Company, its business environment, and its employment practices; The board’s overarching governance objectives are: ¬ not knowingly participate in illegal or unethical activity; ¬ Ensure solid foundations for management and oversight. ¬ Deliver high standards of transparency and ethical and responsible decision-making. ¬ Structure itself to add value. ¬ Make timely and balanced disclosure. ¬ Respect the rights of shareholders. ¬ Safeguard integrity in financial reporting. ¬ Recognise and manage risks. ¬ Encourage enhanced performance. ¬ Promote a corporate culture that upholds agreed Company values. ¬ actively promote compliance with laws, rules, regulations, and the Company’s Code of Business Conduct and Ethics; and ¬ not do anything that would be likely to negatively affect the Company’s reputation. The Code addresses in detail issues such as: ¬ conflicts of interest and corporate opportunities; ¬ protection and proper use of Company assets; ¬ confidential and proprietary information; ¬ intellectual property; ¬ competition and fair dealing; ¬ business entertainment and gifts; ¬ anti-bribery and corruption; ¬ cash koha; ¬ insider trading or tipping, and ¬ reporting of Code violations. The Code of Business Conduct and Ethics is available in the corporate governance section of the Company’s website at www.nzog.com/dmsdocument/188 11 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Corporate Governance Statement Securities Trading Policies Protected Disclosures (Whistleblower) Policy The Company’s Securities Trading Policies set out procedures about when and how an employee, dedicated contractor or director can deal in Company securities. These policies are consistent with the Financial Markets Conduct Act 2013 and its insider trading procedures, and they comply with the NZX listing rules. The board ensures that these policies are up-to-date and compliant at all times with changes to the law and to NZX listing rules. The Securities Trading Policies are available on the Company’s website at: For directors www.nzog.com/dmsdocument/196 For employees and contractors www.nzog.com/dmsdocument/195 The Company has a Protected Disclosures (Whistleblower) Policy that provides a procedure for company employees and contractors to raise concerns or make disclosures about what they observe happening at work. The purpose is to facilitate disclosure and investigation of serious wrongdoing. It provides a mechanism for concerns being raised and dealt with at an early stage and in an appropriate manner. The person making the report is protected from any adverse consequences where the concern is raised in good faith. The Protected Disclosures (Whistleblower) Policy is available in the corporate governance section of the Company’s website at www.nzog.com/dmsdocument/194 12 New Zealand Oil & Gas Annual Report 2019 NZX Code Recommendation ✔ ❘ ✗ Explanation of non-compliance During the reporting period training was not specifically provided to employees on the Company’s Code of Business Conduct and Ethics policy, however the policy is readily available to all employees via the intranet system. The company’s values are incorporated into employees’ short term incentives and relate in nature to the policy. Staff are actively informed about trading blackouts, insider trading obligations and the company’s values expectations. 1.1 The board should document minimum standards of ethical behaviour to which the issuer’s directors and employees are expected to adhere (a code of ethics). The code of ethics and where to find it should be communicated to the issuer’s employees. Training should be provided regularly. The standards may be contained in a single policy document or more than one policy. The code of ethics should outline internal reporting procedures for any breach of ethics, and describe the issuer’s expectations about behaviour, namely that every director and employee: a) acts honestly and with personal integrity in all actions; b) c) d) e) f) g) declares conflicts of interest and proactively advises of any potential conflicts; undertakes proper receipt and use of corporate information, assets and property; in the case of directors, gives proper attention to the matters before them; acts honestly and in the best interests of the issuer, as required by law, and takes account of the interests of shareholders and other stakeholders; adheres to any procedures around giving and receiving gifts (for example, where gifts are given that are of value in order to influence employees and directors, such gifts should not be accepted); adheres to any procedures about whistle blowing (for example, where actions of a whistle blower have complied with the issuer’s procedures, an issuer should protect and support them, whether or not action is taken); and h) manages breaches of the code. 1.2 An issuer should have a financial product dealing policy which applies to employees and directors. ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 13 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Corporate Governance Statement PRINCIPLE 2 Board Composition and Performance “To ensure an effective board, there should be a balance of independence, skills, knowledge, experience and perspectives.” 14 Role of the Board The board is responsible for the overall corporate governance of the Company including strategic direction, determination of policy, and the approval of significant contracts, capital and operating costs, financial arrangements and investments. In addition to statutory and constitutional requirements, the board has a formal charter that sets out its functions and structure. The Board Charter is available in the corporate governance section of the Company’s website at www.nzog.com/dmsdocument/371 Composition of the Board The number of directors is specified in the constitution as a minimum of three and up to a maximum of seven. At least two directors must be persons ordinarily resident in New Zealand. Dr Archer, Mr Jefferies and Mr Ritchie are ordinarily resident in New Zealand. Currently, under the Company’s constitution, one third of the directors must retire by rotation each year. However, this is scheduled to be updated at the next Annual Meeting to align with new NZX Listing Rules, which require directors to retire at the third Annual Meeting since their last appointment, or every three years (whichever is longer). If eligible, each retiring director may offer themselves for re-election. Directors holding office during the accounting period Dr Rosalind Archer Elected 2 November 2018 Marco Argentieri Rebecca DeLaet Andrew Jefferies Samuel Kellner Elected 2 November 2018 Elected 2 November 2018 Elected 2 November 2018 Elected 2 November 2018 Alastair McGregor Elected 30 October 2017 Rod Ritchie Elected 28 October 2016 New Zealand Oil & Gas Annual Report 2019 Board of Directors Samuel Kellner Board Chair Samuel Kellner has held a variety of senior executive positions with the Ofer Global Group since joining the Group in 1980. He has been deeply involved in various Ofer Global Group’s business lines, with a particular emphasis on offshore oil and gas, shipping and real estate, and has advised the Ofer Global Group companies on investments in a variety of investment managers, hedge funds and private equity funds. Most recently, Mr Kellner served as president of Global Holdings Management Group (US) Inc where he led North American real estate acquisition, development and financing activities. Mr Kellner serves as a director of O.G. Energy, O.G. Oil & Gas and Cue Energy Resources. He is also an executive director of the main holding companies for the Zodiac shipping group and Omni Offshore Terminals, a leading provider of floating production, storage and offloading (FSO and FPSO) solutions to the offshore oil and gas industry. As a member of the O.G. Energy Senior Management Committee, he helps drive the strategy for the Ofer Global Group’s energy activities. Mr Kellner graduated with a BA degree from Hebrew University in Jerusalem. He has an MBA from the University of Toronto, and taught at the University of Toronto while working toward a PhD in Applied Economics. Mr Kellner was appointed in December 2017. He is the Chairman of the Board of Directors and a member of the Nomination and Remuneration Committee. Dr Rosalind Archer Independent Director Dr Rosalind Archer joined the board of New Zealand Oil & Gas in November 2014. Dr Archer graduated with a BE from University of Auckland. Dr Archer holds a PhD in Petroleum Engineering, and PhD minor in Geological and Environmental Studies from Stanford University. She is a professor at the University of Auckland, and head of its Department of Engineering Science. Dr Archer runs a consulting practice as a reservoir engineer with clients locally and internationally. She regularly speaks on reservoir engineering topics at international conferences. Dr Archer is also a Chartered Member of the Institute of Directors, a director of the University of Auckland Geothermal Institute, and Vice President of Engineering New Zealand. She chairs the Nomination and Remuneration Committee and is a member of the Audit Committee and the HSSE Committee. Marco Argentieri Director Marco Argentieri is Senior Vice President and General Counsel for O.G. Energy, and a member of the Board of Directors of both O.G. Energy and O.G. Oil & Gas. As a member of the O.G. Energy Senior Management Committee, he helps drive the strategy for the Ofer Global Group’s energy activities. Mr Argentieri serves as the chief legal counsel for the O.G. Energy Group, where he advises on financing activities, acquisitions, and other commercial and corporate matters. Mr Argentieri has worked for the Ofer Global Group since 2006, where he previously served as chief legal counsel responsible for Ofer Global Group finance activities, with a particular focus on the Group’s offshore oil services and shipping businesses. Prior to joining Ofer Global, Mr Argentieri was an attorney at the New York offices of Latham & Watkins LLP and Skadden, Arps, Slate, Meagher & Flom LLP. He holds a B.A. from the University of Rochester, a J.D. from New York University and an MBA from Columbia University. Mr Argentieri joined the board in July 2018. Rebecca DeLaet Director Rebecca DeLaet has worked for the Ofer Global Group of companies since 1990. For the last ten years she has overseen the Group’s finance activities, including debt and equity financing, treasury operations and risk management. Ms DeLaet was responsible for the initial structuring and capitalisation of Omni Offshore Terminals’ assets in 1994, establishing an independent oil and gas arm for the Ofer Global Group. Since then, she has been responsible for all of the financing activities for the Omni organisation. Ms DeLaet is a director of O.G. Energy, O.G. Oil & Gas and Cue Energy Resources, where she is the chair of the Audit Committee. As a member of the O.G. Energy Senior Management Committee, she helps drive the strategy for the Ofer Global Group’s energy activities. She has a Masters in Finance and Bachelor of Science from the Wharton School at the University of Pennsylvania. Rebecca DeLaet joined the board in December 2017. She chairs the Audit Committee. 15 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Corporate Governance Statement Andrew Jefferies Managing Director Rod Ritchie Independent Director Rod Ritchie joined the board of New Zealand Oil & Gas in 2013. He graduated with a BSc, from the University of Tulsa. He has 38 years of experience as a line manager and a Health, Safety, Security and Environment executive in the oil and gas industry – including being the corporate senior vice president of HSSE at OMV based in Vienna. He is a member of the Society of Petroleum Engineers. Mr Ritchie joined the board in October 2013. He chairs the HSSE committee and he is a member of the Audit Committee and the Nomination and Remuneration Committee. 7 6 5 4 3 2 1 0 Board Gender Composition 5 5 2 2 2019 2018 Male Female Mr Jefferies started his career with Shell in Australia after graduating with a BE Hons (Mechanical) from the University of Sydney in 1991, an MBA in technology management from Deakin University in Australia , and an MSc in petroleum engineering from Heriot - Watt University in Scotland. Andrew is also a graduate of the Australian Institute of Company Directors (GAICD), and a Certified Petroleum Engineer with the Society of Petroleum Engineers. He has worked in oil and gas in Australia, Germany, the United Kingdom, Thailand and Holland. He is a director of Cue Energy and the Petroleum Exploration and Production Association of New Zealand (PEPANZ). Andrew Jefferies joined New Zealand Oil & Gas in 2013 and became chief executive in 2016. He joined the board in December 2017. He is a member of the Commercial Committee and the HSSE Committee. Alastair McGregor Director Alastair McGregor has been actively involved in the oil & gas sector since 2003. He is currently chief executive of O.G. Energy, which holds the Ofer Global Group’s broader energy interests, and O.G. Oil & Gas Limited, a company that holds directly or indirectly oil & gas exploration and production interests onshore and offshore. He leads the O.G. Energy Senior Management Committee, driving the strategy for the Ofer Global Group’s energy activities. Mr McGregor is also the Chairman of the Board of Directors of Cue Energy Resources. p p oint m 2 0 1 7 2018 In addition, Mr McGregor is chief executive of Omni Offshore Terminals Limited, a leading integrated provider of floating production and storage and ent offloading (FPSO & FSO) solutions to the offshore oil & gas industry. Omni’s operations span the globe from New Zealand, Australia, South East Asia, Middle East and South America. Prior to entering the oil & gas industry Alastair spent 12 years as a banker with Citigroup and Salomon Smith Barney. Alastair holds a BEng from Imperial College, London and an MSc from Cranfield University in the UK. Mr McGregor joined the board in October 2017. He is a member of the Commercial Committee, the Nomination and Remuneration Committee and the HSSE Committee. 2 0 1 3 Y 2 0 e 1 4 a r o f F ir s t A 16 New Zealand Oil & Gas Annual Report 2019 Independent Directors Number of Directors with Specific Skillset Oil & Gas Finance & Economics In terms of the NZX Listing Rules and NZX Code as at 30 June 2019, Dr Archer and Mr Ritchie are independent directors as there is a complete absence of factors described in the NZX Code that may impact independence. Mr Kellner, Mr Argentieri, Ms DeLaet, and Mr McGregor are not independent because of their association with O.G. Oil & Gas Limited, which is a substantial shareholder in New Zealand Oil & Gas Ltd. Mr Jefferies is not independent because he is the managing director of New Zealand Oil & Gas. 7 6 5 4 3 2 1 3 2 1 4 2 0 1 3 Y 2 0 e 1 4 a r o f F ir s t A p p oint 2 0 1 7 m ent 2018 HSSE Executive Management Engineering & Operations Exploration M&A Legal 17 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Corporate Governance Statement Board Proceedings Responsibilities of the Board The board meets on a formal scheduled basis four times per year, and holds other meetings as required. The Commercial Committee establishes the agenda for each board meeting. The chief executive otherwise keeps the board informed of material or potentially material matters between meetings and provides a weekly update on all relevant matters to the board. A report is prepared for each meeting that includes: updates on exploration and production activities and financial management; summaries of new business opportunities; an update on human resources and facilities; an investor relations report; updates on stakeholder engagement, media and sustainability; and other reports as relevant. Key strategic issues and opportunities are also presented to the board by management as part of each meeting. To ensure that independent judgement is achieved and maintained in respect of its decision making, the board has adopted a number of processes which includes: The board is accountable for the performance of the Company. The specific responsibilities of the board include: ¬ approving corporate strategy and performance objectives; ¬ establishing policies appropriate for the Company; ¬ oversight of the Company, including its control and accountability systems ¬ approving major investments and monitoring the return of those investments; ¬ the overall risk management and control framework for the Company and ensuring appropriate risk management systems are established and applied; ¬ appointing, removing and evaluating the performance of the chief executive; ¬ reviewing the performance of senior management; ¬ appointing and removing the company secretary; ¬ any director may, with the prior consent of the ¬ setting broad remuneration policy; chair of the Audit Committee (or in the case of the Audit Committee chair’s absence, the prior consent of the chair of the board), obtain independent advice at the Company’s expense where the director considers it necessary to carry out their duties and responsibilities as a director. Such consent shall not unreasonably be withheld; and ¬ directors must comply with the Directors’ Interests Policy, which addresses disclosable interests, conflicts of interest, director information obligations, board review and determination obligations, and the rules for participation in board deliberations in the event of a conflict of interest. On appointment, each director has also acknowledged their individual disclosure obligations. 18 ¬ reviewing implementation of strategy and ensuring appropriate resources are available; ¬ nominating and appointing new directors to the board; ¬ evaluating the performance of the board, committees of the board, and individual directors; ¬ reviewing and ratifying systems of risk management, internal compliance and control, codes of conduct, and legal compliance; ¬ approving and monitoring the progress of any major capital expenditure, capital management and acquisitions and divestitures; ¬ reviewing and ratifying HSSE Sustainability and Operational Risk policies, the HSSE Sustainability and Operational Risk Management System and monitoring its implementation and performance; ¬ approving and monitoring financial and other reporting; ¬ ensuring that the Company provides continuous disclosure of information such that shareholders and the investment community have available all information to enable them to make informed assessments of the Company’s prospects; ¬ overall corporate governance of the consolidated entity; ¬ determining the key messages that the Company wishes to convey to the market from time to time; and ¬ monitoring information commitments and continuous disclosure obligations. New Zealand Oil & Gas Annual Report 2019 Delegation to Management Delegated Authorities Manual The board has established formal limits of authority to provide clarity to the chief executive and management so that they are in a position to carry out the business of the Company efficiently and effectively within the parameters of proper corporate governance. The Delegated Authorities Manual set limits to financial commitments and other decision-making, and is monitored by the board through the audit function. While the board has overall and final responsibility for the business of the Company, it has delegated substantial responsibility for the conduct and administration of the Company’s business and policy implementation to the chief executive and his management team. Board approved policies and procedures are in place to set parameters for the delegated responsibilities, including: ¬ Health and Safety Policy; ¬ Environment Policy; ¬ Capturing Local Economic Benefit Policy; ¬ Code of Business Conduct and Ethics; ¬ Communications, Market and Social Media Disclosure Policy; ¬ Securities Trading Policies for Directors, Employees and Dedicated Contractors; ¬ Directors’ Interests Policy; ¬ Protected Disclosure (Whistleblower) Policy; ¬ Diversity Policy; ¬ Delegated Authorities Manual; ¬ Remuneration and Performance Appraisal Policy; ¬ Treasury Policy; ¬ ETS Obligations and Carbon Liability: Transactions Policy; ¬ Email and Internet Use Policy; ¬ Anti-Harassment Policy; and ¬ Drugs and Alcohol Policy. These policies are reviewed regularly. The board may establish other policies and practices to ensure it fulfils its functions. 19 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Corporate Governance Statement Diversity Policy Diversity 2019 Through its Diversity Policy the company is committed to an inclusive workplace that embraces diversity. The Company values, respects and leverages the unique contributions of people with diverse backgrounds, experiences and perspectives. Diversity includes, but is not limited to, gender, age, disability, ethnicity, marital or family status, religion, sexual orientation, gender identity and cultural background. The board monitors the scope and currency of the Diversity Policy. The policy provides that the Company will recruit from a diverse pool of candidates, who will be considered with no conscious or unconscious bias that may discriminate against certain candidates. It takes into account the domestic responsibilities of employees and adopts flexible work practices. The board establishes measurable objectives for achieving gender diversity, may establish measurable objectives for other aspects of diversity, and will assess annually both the set objectives and the progress in achieving them. The Nomination and Remuneration Committee is to make an annual assessment of success in achieving and implementing the policy and the set objectives and report to the board with recommendations. The board has determined that the Company has complied with the Diversity Policy. The Diversity Policy is available in the corporate governance section of the Company’s website at www.nzog.com/dmsdocument/291 The following chart shows the number of men and women across the organisation (excluding contractors) as at 30 June 2019. 20 5 Board of Directors 2 2 Officers 4 8 Other Employees 6 Male Female New Zealand Oil & Gas Annual Report 2019 NZX Code Recommendation ✔ ❘ ✗ Explanation of non-compliance No. 2.1 2.2 2.3 2.4 2.5 2.6 2.7 The board of an issuer should operate under a written charter which sets out the roles and responsibilities of the board. The board charter should clearly distinguish and disclose the respective roles and responsibilities of the board and management. Every issuer should have a procedure for the nomination and appointment of directors to the board. An issuer should enter into written agreements with each newly appointed director establishing the terms of their appointment. Every issuer should disclose information about each director in its annual report or on its website, including a profile of experience, length of service, independence and ownership interests and director attendance at board meetings. An issuer should have a written diversity policy which includes requirements for the board or a relevant committee of the board to set measurable objectives for achieving diversity (which, at a minimum, should address gender diversity) and to assess annually both the objectives and the entity’s progress in achieving them. The issuer should disclose the policy or a summary of it. Directors should undertake appropriate training to remain current on how to best perform their duties as directors of an issuer. The board should have a procedure to regularly assess director, board and committee performance. ✔ ✔ ✗ ✔ ✔ ✗ Upon appointment directors are advised of salient requirements. Obligations such as disclosure of interests, managing conflicts, and share trading are managed through policies. A majority of the board are non-independent and governance arrangements reflect this. Training for directors was not facilitated by the Company during the reporting period, however the Company has robust policies around director duties. The Company’s ongoing skills assessment has determined the board’s skills are appropriate. ✔ The board charter states: The board shall undertake regular reviews of the operations and performance of the board, its committees and individual directors. Where appropriate, the board may engage external consultants to conduct this review. In addition to compliance with each committee’s individual charter, the review shall consider: ∫ the skills required by the board, including processes to satisfy any skill-gaps; ∫ how the required skills are best represented on the board; and ∫ the process for identifying suitable candidates for appointment to the board. Reviews are undertaken by way of a questionnaire submitted to directors. Responses are collated and reviewed by the chair of the Nominations and Remuneration Committee or delegated representative. The chair of the Nominations and Remuneration Committee (or delegated representative) then undertakes an overall review on the outcomes and produces a written report which is reviewed by the full board. Individual director performance is addressed by one-on-one review with the chair of the Nominations and Remuneration Committee (or delegated representative). The chair of the board will conduct the review of the chair of the Nominations and Remuneration Committee. For this financial year the above process has been followed, led by the chair of the Nominations and Remuneration Committee. Two out of seven directors are independent. The board composition is a consequence of the Company’s ownership structure. The chair is not independent but the chair and CEO are different people. 21 2.8 2.8 A majority of the board should be independent directors. An issuer should have an independent chair of the board. If the chair is not independent the chair and the CEO should be different people. ✗ ✔ NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Corporate Governance Statement PRINCIPLE 3 Board Committees “The board should use committees where this will enhance its effectiveness in key areas, while still retaining board responsibility.” Board Committees The board has four formally constituted committees to provide specialist assistance with defined aspects of governance: ¬ the Audit Committee; ¬ the Commercial Committee; ¬ the Health, Safety, Security, Environment, Sustainability and Operational Risk Committee (the HSSE Committee); and ¬ the Nomination and Remuneration Committee Each committee has a written charter setting out its roles and responsibilities, which is available from the Company’s website at www.nzog.com/investor-information/ corporate-governance 22 Audit Committee Rebecca DeLaet (Chair) Rod Ritchie What the Committee does Dr Rosalind Archer The Audit Committee, together with the chief executive, is responsible to the board for overseeing the financial and internal controls, financial and other reporting and audit practices of the Company. The chair of the Audit Committee also oversees and authorises any trading in securities by directors, employees or contractors. Restrictions on trading are outlined in the Securities Trading Policy and Guidelines for Directors, and in the Securities Trading Policy and Guidelines for Employees and Dedicated Contractors. Committee meetings Meetings of the Audit Committee are held at least twice a year. The chair of the board, directors, the chief executive and other staff may be invited by the Audit Committee to attend these meetings. The Audit Committee can meet with the external auditors and senior management in separate sessions. As outlined in the Audit Committee Charter, there is an annual process to consider engagement of auditors, having regard to the auditors’ independence and policies for rotation of partners. Requirements for the composition of the committee, and how the requirements are satisfied: Three non-executive directors Majority of members must be independent Chair of the board is not to also be the chair of the Audit Committee At least one member is to have an accounting or financial background. Ms DeLaet (Chair), Dr Archer and Mr Ritchie are non-executive directors Two of three members of the committee, Dr Archer and Mr Ritchie, are independent. Ms DeLaet is the chair and is not the chair of the board. Ms DeLaet has a finance background. Read the Audit Committee charter here www.nzog.com/dmsdocument/372 New Zealand Oil & Gas Annual Report 2019 The Nominations and Remuneration Committee Dr Rosalind Archer (Chair) Alastair McGregor What the Committee does Samuel Kellner Rod Ritchie The Nomination and Remuneration Committee is responsible to the board for: ¬ providing recommendations to the board in relation to the director selection and appointment practices of the Company; ¬ evaluation and remuneration of directors and board succession; ¬ Chief executive remuneration, appointment, performance criteria and review; Reviewing and providing recommendations to the board in relation to: ¬ senior executive and key staff succession plans; ¬ the Company’s remuneration, recruitment, retention and termination policies and procedures for all employees; ¬ implementing the Company’s Diversity Policy and achieving any associated measurable objectives; and ¬ other relevant matters identified from time to time by the board. Committee composition HSSE Committee Rod Ritchie (Chair) Andrew Jefferies What the Committee does Dr Rosalind Archer Alastair McGregor The HSSE Committee’s role is to advise and support the board in meeting its responsibilities in relation to health, safety, security, environment, sustainability, operational risk and community engagement matters arising out of the activities and operations of the Group. The committee’s responsibilities include: ¬ monitoring the performance and effectiveness of the Company’s Risk Management Framework and reviews the adequacy of risk controls. ¬ setting and reviewing Health, Safety Security, Sustainability and Operational Risk (HSSSOR) policies, practices, frameworks and targets, including sustainability, engagement, environmental policies and climate change responses. ¬ seeking assurance of the Company’s compliance with all HSSSOR legislative requirements, licence conditions and stakeholder commitments. ¬ defining the Company’s HSSSOR objectives and monitoring performance. ¬ supporting a culture of continuous improvement by reviewing significant incidents and system failures and monitoring actions and measures to minimise recurrence. The committee is to comprise at least three non- executive directors of the board. The chair is to be an independent director. The chair, Dr Archer, is independent. ¬ ensuring the necessary skills are obtained and maintained within the Group to achieve HSSSOR objectives. The committee meets as required, at least twice per year, and it may invite executive directors or management to participate in all or part of meetings. Read the committee’s charter here www.nzog.com/dmsdocument/373 ¬ providing leadership to the Board and support the Company in aspiring to proactively manage HSSSOR issues. ¬ and bringing significant issues to the attention of the full board. 23 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Corporate Governance Statement Company policies, frameworks and strategies relevant to this committee: ¬ Health and Safety Policy ¬ Environment Policy ¬ Capturing Local Economic Benefits Policy ¬ Community Engagement Policy ¬ HSSE Management Framework and Management System ¬ Risk Register ¬ Risk Management Procedure ¬ Sustainability Framework. Committee composition The Committee is to comprise at least three board members. The chair is to be a non-executive director, although interim arrangements may differ from time to time. Read the committee’s charter here www.nzog.com/dmsdocument/370 Commercial Committee Alastair McGregor Andrew Jefferies What the Committee does The committee exists to allow management to bring commercial opportunities to a state that they can be brought to the full board for final investment decision. The committee may approve routine budgets and contracts, including due diligence budgets, for such projects and opportunities. The committee includes, at a minimum, the chief executive and one director appointed by the board. Other directors may be invited to join the committee from time to time with the approval of the board. The committee meets as required, and generally resolves its business by email or teleconference. Read the committee’s charter here www.nzog.com/investor-information/shareholders- information/corporate-governance/ Board and Committee meeting attendance From 1 July 2018 to 30 June 2019. Director Samuel Kellner Dr Rosalind Archer Marco Argentieri Rebecca DeLaet Andrew Jefferies Alastair McGregor Rod Ritchie Board Meeting Audit Committee Nominations & Remuneration Committee HSSE Sustainability and Operational Risk Committee 4 / 4 4 / 4 4 / 4 4 / 4 4 / 4 4 / 4 4 / 4 2 / 2 2 / 2 2 / 2 2 / 2 3 / 3 3 / 3 3 / 3 3 / 3 1 / 1 1 / 1 1 / 1 1 / 1 The Commercial Committee generally met weekly or twice per week depending on travel arrangements. 24 New Zealand Oil & Gas Annual Report 2019 No. NZX Code Recommendation ✔ ❘ ✗ Explanation of non-compliance 3.1 3.2 3.3 3.4 3.5 3.6 An issuer’s audit committee should operate under a written charter. Membership on the audit committee should be majority independent and comprise solely of non-executive directors of the issuer. The chair of the audit committee should not also be the chair of the board. Employees should only attend audit committee meetings at the invitation of the audit committee. An issuer should have a remuneration committee which operates under a written charter (unless this is carried out by the whole board). At least a majority of the remuneration committee should be independent directors. Management should only attend remuneration committee meetings at the invitation of the remuneration committee. An issuer should establish a nomination committee to recommend director appointments to the board (unless this is carried out by the whole board), which should operate under a written charter. At least a majority of the nomination committee should be independent directors. An issuer should consider whether it is appropriate to have any other board committees as standing board committees. All committees should operate under written charters. An issuer should identify the members of each of its committees, and periodically report member attendance. The board should establish appropriate protocols that set out the procedure to be followed if there is a takeover offer for the issuer, including any communication between insiders and the bidder. The board should disclose the scope of independence advisory reports to shareholders. These protocols should include the option of establishing an independent takeover committee, and the likely composition and implementation of an independent takeover committee. ✔ ✔ ✔ ✗ ✔ ✗ Half of the committee is independent, and the committee is chaired by an independent director. A majority of the board is not independent and the composition of the committee also reflects this. Given the Company’s shareholder structure, the chance of further takeover proposals in respect of the Company is extremely low. The Company and its staff are highly familiar with the processes and appropriate protocols to follow. 25 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Corporate Governance Statement PRINCIPLE 4 Reporting & Disclosure “The board should demand integrity in financial and non- financial reporting, and in the timeliness and balance of corporate disclosures.” The Company is committed to maintaining a high standard of communication and to providing timely, full and accurate information to shareholders and other stakeholders. The Company is committed to compliance at all times with its obligations, as an NZX-listed Company, to provide continuous disclosure to the market and strives to make those disclosures in a way that is clear, concise and effective. 26 Communications, Market and Social Media Disclosure Policy The Communications, Market Disclosure and Social Media Policy’s purpose is to: ¬ reinforce the Company’s commitment to the continuous disclosure obligations imposed by law and stock exchange rules, ¬ describe the processes to ensure compliance, ¬ outline the Company’s general communications approach aimed at ensuring timely and accurate information is provided to shareholders, market participants and market observers, and ¬ provide ground rules for the use of social media. The Communications, Market and Social Media Disclosure Policy is available in the corporate governance section of the Company’s website at www.nzog.com/dmsdocument/189 See also Principle 8, Shareholders’ Rights, on Page 36 Reports and policies are easily available The Company publishes annual, interim, and quarterly reports. Security holders can elect to receive the annual and interim reports in printed or electronic format. Security holders can elect to receive quarterly reports in electronic format. These documents are also posted on the Company’s website in a clearly marked Company Reports section which is located within the investor section (www.nzog. today). A link to the latest quarterly and annual reports is provided prominently on the front page of the website. The company’s Code of Business Conduct and Ethics, board and committee charters and the policies recommended in the NZX Code are published in the Corporate Governance section of the website www.nzog.com/investor-information/shareholders- information/corporate-governance/ New Zealand Oil & Gas Annual Report 2019 Continuous Disclosure Non-financial reporting New Zealand Oil & Gas is committed to meeting the continuous disclosure obligations required by the Listing Rules. The Listing Rules contain general and continuous disclosure requirements based on principles which encompass investor protection, the need to protect the reputation of the market and the interests of listed entities. The Company immediately releases to the market information that a reasonable person would expect to have a material effect on the price of its securities. The only exceptions to this disclosure principle are those permitted under the Listing Rules. The board is responsible for monitoring commitments and continuous disclosure obligations and initiating action as warranted to ensure reporting is fair and reasonable. The chief executive is accountable for the release of information. The Company reports on sustainability once per year. Aspects of sustainability reported include: ¬ a summary of the Company’s values, including analysis of our performance living up to them; ¬ a summary of the Company’s approach to stakeholder engagement, including formal feedback from the Company’s Southern Community Panel; ¬ summary of the Company’s contribution to local communities; ¬ a materiality matrix. The Sustainability Framework is shown at page 8. Regular updates are made to the website with information about the Company’s sustainability activities. This is available at www.nzog.com/sustainability No. NZX Code Recommendation ✔ ❘ ✗ Explanation of non-compliance ✔ ✔ ✔ 4.1 4.2 4.3 An issuer’s board should have a written continuous disclosure policy. An issuer should make its code of ethics, board and committee charters and the policies recommended in the NZX Code, together with any other key governance documents, available on its website. Financial reporting should be balanced, clear and objective. An issuer should provide non financial disclosure at least annually, including considering material exposure to environmental, economic and social sustainability risks and other key risks. It should explain how it plans to manage those risks and how operational or non-financial targets are measured. Non-financial reporting should be informative, include forward-looking assessments, and align with key strategy and metrics monitored by the board. 27 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Corporate Governance Statement PRINCIPLE 5 Remuneration “The remuneration of directors and executives should be transparent, fair and reasonable.” New Zealand Oil & Gas aims to attract, retain and motivate professional staff capable of achieving the goals of the Company. The Company wants to encourage and reward its staff fairly and appropriately within the market to reflect performance and contribution. Remuneration and Performance Appraisal Policy The Remuneration Policy sets out a process to assess the competitiveness of remuneration level. The Nomination and Remuneration Committee is responsible for receiving and making recommendations on remuneration policies for the chief executive and senior managers based on assessment of relevant market conditions and linking remuneration to the Company’s financial and operational performance and individual performance. Executive remuneration may comprise salary and short- term incentive payments (as approved by shareholders). Director’s Remuneration At the 2008 Company Annual Meeting, shareholders approved a resolution that director’s fees be set at a maximum of $600,000 per annum, being the combined total for all non-executive directors. There has been no increase in the fee level since 2008 and in March 2016 the board and directors volunteered a reduction in their fees. Directors do not receive any performance-based remuneration. Mr Jefferies does not receive fees because he is the chief executive. 28 Directors’ Remuneration The total remuneration and other benefits to directors for services in all capacities during the year ended 30 June 2019 was: Dr R Archer Mr M Argentieri Ms R DeLaet Mr A Jefferies¹ Mr S Kellner Mr A McGregor Mr R Ritchie $70,000 - - $848,096 - - $70,000 Mr Kellner, Mr Argentieri, Ms DeLaet, and Mr McGregor have chosen not to accept payment. ¹ Includes remuneration as chief executive Directors’ Securities Interests The interests of directors in securities of the Company at 30 June 2019 were: Mr A Jefferies Direct Interest Indirect Interest - 1,130,000 (partly paid ESOP shares) Directors’ Interests Policy The directors are required to recognise that the possibility of conflict of interest exists, and are expected to declare potential conflict of interest situations to the board and manage conflicts of interest in accordance with the Directors’ Interests Policy, the Code of Business Conduct and Ethics, and the Company’s Constitution. The Company maintains an interests register in compliance with the Companies Act 1993, which records particulars of certain transactions and matters involving directors. The Director’s Interests Policy is available in the corporate governance section of the Company’s website at www.nzog.com/dmsdocument/190 New Zealand Oil & Gas Annual Report 2019 Directors’ Interests Register Mr S Kellner O.G. Oil & Gas Ltd Directors’ interests recorded in the Interests Register of the Company as at 30 June 2019 are detailed below. Each such director will be regarded as interested in all transactions between the Company and the disclosed entity. O.G. Energy Holdings Ltd Omni Holdings Ltd Cue Energy Resources Ltd Mr A McGregor Omni Offshore Terminals Pte Ltd Omni Offshore Terminals (Operations) Pte Ltd Omni Offshore Terminals (Manora) Pte Ltd Omni Offshore Terminals (Nong Yao) Pte Ltd Omni Offshore Terminals Malaysia Sdn Bhd Gading Megah Sdn Bhd Omni Offshore Terminals (Operations) (Thailand) Co Ltd Aurora FSO Ltd Manora FSO Ltd Omni Holdings Limited O.G. Oil & Gas (Singapore) Pte Ltd O.G. Oil & Gas Ltd O.G. Energy Holdings Ltd Cue Energy Resources Ltd Cue Kalimantan Pte Ltd OGOG (Kohatukai) Ltd Mr R Ritchie Cue Energy Resources Ltd SPARC NZ consulting Coromandel Pure Honey Sparc (Aust) Pty Ltd SacGasCo Dr R Archer Capricorn Solutions Ltd Director Engineering New Zealand Vice President University of Auckland Geothermal Institute Mr M Argentieri O.G. Energy Holdings Ltd O.G. Oil & Gas Ltd Director Director Director OGOG (Otway) Holdings Pty Ltd Director OGOG (Otway) Pty Ltd OGOG (Kohatukai) Ltd Ms R DeLaet O.G. Oil & Gas Ltd O.G. Energy Holdings Ltd Director Director Director Director OGOG (Otway) Holdings Pty Ltd Director Mr A Jefferies OGOG (Otway) Pty Ltd Cue Energy Resources Ltd Petroleum Exploration and Production Association of New Zealand CGX Energy PureVida Petrel SacGasCo Director Director Director Shareholder Shareholder Shareholder Shareholder First Australia Resources Shareholder Tuatara Energy Ltd Director Cue Energy Resources Ltd Director & Shareholder Cue (Ashmore Cartier) Pty Ltd Director Cue Exploration Pty Ltd Cue Mahakam Hilir Pty Ltd Cue Mahato Pty Ltd Cue Sampang Pty Ltd Cue Taranaki Pty Ltd Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Shareholder Shareholder 29 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Corporate Governance Statement Short Term Incentive Directors’ and Officers’ Liability Insurance Officers of the company may receive payments under a short term incentive scheme. 50% of the STI is based on company performance and 50% on personal performance. Half of the personal performance criteria is determined by behaviours, and half by performance measures agreed at periodic intervals throughout the year between the CEO and direct reports, and between the CEO and the Nominations and Remunerations committee for his performance. In 2018-19 the company factors affecting short term incentive payments were: Acquisitions Financial Performance Reserves Replacement Exploration HSSE 37.5% 7.5% 20.0% 15.0% 20.0% The Company and its subsidiaries have arranged policies of directors’ and officers’ liability insurance, which, together with a deed of indemnity, seek to ensure to the extent permitted by law that directors and officers will incur no monetary loss as a result of actions legitimately taken by them as directors and officers. Chief Executive’s Remuneration Salary paid Benefits4 Cash STI5 Total $587,446 $32,170 $228,480 $848,096 4 Benefits include Kiwisaver at 3%, health insurance and share based payment costs 5 STI for 2018-19 to be paid August 2019 Employees Remuneration During the year ended 30 June 2019, 16 New Zealand Oil & Gas employees (including the chief executive) received individual remuneration over $100,000. $100,001- $110,000 $150,001 - $160,000 $180,001 - $190,000 $190,001 - $200,000 $210,001 - $220,000 $220,001 - $230,000 $240,001 - $250,000 $260,001 - $270,000 $310,001 - $320,000 $450,001 - $460,000 $510,001 - $520,000 $840,000 - $850,000 2 3 1 1 1 1 1 1 2 1 1 1 30 New Zealand Oil & Gas Annual Report 2019 Officers’ Securities Interests ESOP The interests of the current Company Officers in securities of the Company at 30 June 2019 were: No. of shares at - 30 June 2018 30 June 2019 The Company formerly operated an Employee Share Option Plan (ESOP), under which options to purchase shares were granted to employees at the discretion of the board. Andrew Jefferies 30 ordinary shares and 1,507,000 unlisted partly paid shares 1,130,000 unlisted partly paid shares Since February 2017 the Company has not allocated any shares. Paris Bree 92,000 unlisted partly paid shares 48,000 unlisted partly paid shares Dr Chris McKeown 189,000 unlisted partly paid shares 95,000 unlisted partly paid shares Catherine McKelvey - John Pagani 355,000 unlisted partly paid shares 7,500 directly held ordinary shares 55,000 unlisted partly paid shares and 12,000 directly held ordinary shares Michael Wright 367,000 unlisted partly paid shares 84,000 unlisted partly paid shares No. NZX Code Recommendation ✔ ❘ ✗ Explanation of non-compliance 5.1 5.2 5.3 An issuer should recommend director remuneration to shareholders for approval in a transparent manner. Actual director remuneration should be clearly disclosed in the issuer’s annual report. An issuer should have a remuneration policy for remuneration of directors and officers, which outlines the relative weightings of remuneration components and relevant performance criteria. An issuer should disclose the remuneration arrangements in place for the CEO in its annual report. This should include disclosure of the base salary, short term incentives and long term incentives and the performance criteria used to determine performance based payments. ✔ ✔ ✔ 31 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Corporate Governance Statement PRINCIPLE 6 Risk Management “Directors should have a sound understanding of the material risks faced by the issuer and how to manage them. The Board should regularly verify that the issuer has appropriate processes that identify and manage potential and material risks.” Recognising and Managing Risk The Company has a risk management system framework, which outlines the Company’s approach to risk management. It provides a framework on how to apply consistent and comprehensive risk management practices across all functional areas of the Company’s business. The Risk Management System Framework is available in the corporate governance section of the Company’s website at www.nzog.com/dmsdocument/1 A central Company risk register, which considers the risks, reviews the controls, assigns ownership of a risk and tracks treatment plans, is maintained. Risk assurance is provided through a prioritised programme of audits and internal review. The board’s accountabilities include overseeing the effectiveness of the Risk Management System framework, monitoring compliance and approving polices and systems for the ongoing identification and management of risks. The board’s responsibilities include approving the Company’s risk capacity and appetite, reviewing material risks and reviewing the risk register. The board allocates oversight of risk management in relation to health, safety and environment and company operations to the HSSE Committee and oversight in relation to accounting standards and principles, financial statement compliance and reliability and the audit process to the Audit Committee. 32 Responsibility for identifying, documenting and managing risks and opportunities is delegated to the appropriate level of management. The chief executive is responsible for such things as integrating risk management into core business processes, managing the Company’s corporate strategic risks and opportunities, and regularly reviewing the Company’s risk profile. The chief executive has ultimate responsibility to the board for design, development and improvement of the risk management framework system and maintains the Company’s risk register. The Company does not have an internal audit function. The process employed for evaluating and improving the effectiveness of risk management and internal control processes is: ¬ risks are formally reviewed by risk owners; ¬ management regularly reviews the risk register to ensure adherence and continuous improvement; ¬ the HSSE Committee regularly reviews the risk register, with a particular emphasis on reducing key risks to as low as reasonably practicable; ¬ for specific operational activities (including seismic acquisition campaigns), the board reviews the intended operational activity against activities related to elements of the Company’s HSSE management framework to ensure a compliant work programme, achieving desired objectives safely; and ¬ after action reviews (AAR) of an operational phase of a project are undertaken by the HSSE Advisor and project team, to identify improvement in control processes. The AAR is then reviewed by the HSSE Committee. The HSSE Committee reviews specific risks at each meeting of the committee and, at least annually, reviews the risk register and framework document to satisfy itself that the system continues to be sound. The board HSSE Committee charter, is available in the corporate governance section of the Company’s website at www.nzog.com/dmsdocument/370 New Zealand Oil & Gas Annual Report 2019 Health and Safety Environment The Company values the environment and is committed to responsible management practices that minimise environmental impacts arising from our activities, using soundly-based science as the basis for all of our environmental decisions. All employees, contractors and joint venturers engaged in activities under the Company’s operational control are responsible for applying the Environment Policy. The Company’s managers are responsible for promoting the policy in non-operated joint ventures. The full Environment Policy is available in the corporate governance section of the Company’s website at www.nzog.com/dmsdocument/313 The Company is fully committed to the provision of a safe and healthy work environment. The Company aspires to a 'no one gets hurt plus no incidents' standard under its Health and Safety Policy. All employees, contractors and joint venture parties engaged in activities under the Company’s operational control are responsible for the application of the Health and Safety Policy. All employees are responsible for taking all practicable steps to avoid harm being caused to themselves or to others in the work place. They must report any potentially hazardous situations, maintain good housekeeping in all areas and comply with safe work practices and procedures. The Company’s managers are responsible for promoting the Health and Safety Policy in non-operated joint ventures. The full Health and Safety Policy is available in the corporate governance section of the Company’s website at www.nzog.com/dmsdocument/314 No. NZX Code Recommendation ✔ ❘ ✗ Explanation of non-compliance 6.1 6.2 An issuer should have a risk management framework for its business and the issuer’s board should receive and review regular reports. An issuer should report the material risks facing the business and how these are being managed. An issuer should disclose how it manages its health and safety risks and should report on its health and safety risks, performance and management. ✔ ✔ 33 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Corporate Governance Statement PRINCIPLE 7 Auditors “The board should ensure the quality and independence of the external audit process.” Oversight of the Company’s external audit is the responsibility of the Board Audit Committee, which also oversees financial and internal controls and financial reporting. The external auditor of New Zealand Oil & Gas is KPMG. The Audit Committee reviewed the appointment in 2018. A new External Auditor Independence Policy was adopted by Board in June 2018. Total fees paid to KPMG in its capacity as auditor in FY 2019 is $110,000. Total fees paid to KPMG for other professional services were $184,000. Other services included: ¬ Tax advice. ¬ Tax compliance. The NZX and New Zealand Oil & Gas require rotation of Lead Audit Partners every five years. In 2019 the lead partner is in his fifth year. KPMG has supplied the Company with a written statement confirming its independence, and systems used to ensure independence is maintained. 34 New Zealand Oil & Gas Annual Report 2019 No. NZX Code Recommendation ✔ ❘ ✗ Explanation of non-compliance 7.1 The board should establish a framework for the issuer’s relationship with its external auditors. This should include procedures: a) b) c) d) for sustaining communication with the issuer’s external auditors; to ensure that the ability of the external auditors to carry out their statutory audit role is not impaired, or could reasonably be perceived to be impaired; to address what, if any, services (whether by type or level) other than their statutory audit roles may be provided by the auditors to the issuer; and to provide for the monitoring and approval by the issuer’s audit committee of any service provided by the external auditors to the issuer other than in their statutory audit role. 7.2 The external auditor should attend the issuer’s Annual Meeting to answer questions from shareholders in relation to the audit. 7.3 Internal audit functions should be disclosed. ✔ ✔ ✔ ✔ ✔ ✔ ✗ The Company does not have an internal audit function. The process employed for evaluating and improving the effectiveness of risk management and internal control processes is: ∫ risks are formally reviewed by risk owners; ∫ management regularly reviews the risk register to ensure adherence and continuous improvement; ∫ the HSSE Committee regularly reviews the risk register, with a particular emphasis on reducing key risks to as low as reasonably practicable; ∫ for specific operational activities (including seismic acquisition campaigns), the board reviews the intended operational activity against activities related to elements of the Company’s HSSE management framework to ensure a compliant work programme, achieving desired objectives safely; and ∫ after action reviews (AAR) of an operational phase of a project are undertaken by the HSSE Advisor and project team, to identify improvement in control processes. The AAR is then reviewed by the HSSE Committee. 35 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Corporate Governance Statement PRINCIPLE 8 Shareholder Rights & Relations “The board should respect the rights of shareholders and foster constructive relationships with shareholders that encourage them to engage with the issuer.” New Zealand Oil & Gas welcomes shareholder participation, aims to provide regular updates of useful information about its activities and seeks opportunities to engage with shareholders directly. Shareholder participation The Company encourages shareholder participation at the annual meeting by inviting questions in advance and discussion from the floor. Materials are posted on the Company’s website. Shareholders who cannot be physically present can participate by following the meeting on a live webcast. Shareholders can directly message at any time through the website, and the Company aims to respond to queries within a single working day. For significant events the company operates a dedicated investor information line, which can be reached by phone or text message. Website The Company maintains a website, nzog.com, where comprehensive information about its activities is available. Shareholders and interested parties can subscribe via the website to receive notice of the Company’s market announcements by email. The dedicated investor relations section of the website makes available share price information, detail about shareholdings, statutory reports, corporate governance information and details about the Company’s activities. No. NZX Code Recommendation ✔ ❘ ✗ Explanation of non-compliance 8.1 8.2 8.3 8.4 An issuer should have a website where investors and interested stakeholders can access financial and operational information and key corporate governance information about the issuer. An issuer should allow investors the ability to easily communicate with the issuer, including providing the option to receive communications from the issuer electronically. Shareholders should have the right to vote on major decisions which may change the nature of the company in which they are invested. If seeking additional equity capital, issuers of quoted equity securities should offer further equity securities to shareholders of the same class on a pro rata basis, and on no less favourable terms, before further equity securities are offered to other investors. 8.5 The board should ensure that the annual shareholders notice of meeting is posted on the issuer’s website as soon as possible and at least 28 days prior to the meeting. ✔ ✔ ✔ ✔ ✔ 36 New Zealand Oil & Gas Annual Report 2019 Shareholder Information Stock Exchange Listing Securities On Issue The Company’s securities are listed on the Main Board equity security market operated by NZX Limited. As at 12 August 2019 New Zealand Oil & Gas Limited had the following securities: Listed Ordinary Shares Unlisted Partly Paid Shares 164,430,718 3,418,000 Top 20 Shareholders As at 12 August 2019 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Security Holder O.G. Oil And Gas Singapore Pte. Ltd Accident Compensation Corporation - NZCSDSik-On Chow Resource Nominees Limited Radford Associates Pty Limited Riuo Hauraki Limited Clinton John Trass + Kasturi Chitranjali Trass Amalgamated Dairies Limited ASB Nominees Limited <414354 ML - A/C> Moon Chul Choi + Keum Sook Choi Richard Bruce Lees Nicholas Theobald Sibley + Sally Gay Sibley Murray Ion Denholm ASB Nominees Limited New Zealand Oil & Gas Limited - GNA Trustee ANZ Custodial Services New Zealand Limited - NZCSD Chin-Yi Lin + Yu-Ching Lin-Chao JPMorgan Chase Bank NA NZ Branch-Segregated Clients ACCT - NZCSD HSBC Nominees (New Zealand) Limited - NZCSD Roy Anthony Radford Totals: Top 20 Holders Of Ordinary Shares Total Remaining Holders Balance Units 114,876,016 2,999,970 2,140,000 2,000,000 1,309,195 1,250,000 777,000 706,334 644,943 618,750 564,000 539,049 515,500 514,585 497,651 466,028 415,000 414,854 404,251 392,000 132,045,126 32,385,592 % 69.86 1.82 1.30 1.22 0.80 0.76 0.47 0.43 0.39 0.38 0.34 0.33 0.31 0.31 0.30 0.28 0.25 0.25 0.25 0.24 80.30 19.70 37 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Distribution of Security Holders As at 31 July 2019 Range 1 – 99 100 – 199 200 – 499 500 – 999 1,000 – 1,999 2,000 – 4,999 5,000 – 9,999 10,000 – 49,999 50,000 – 99,999 100,000 – 499,999 500,000 – 999,999 Over 1,000,000 Rounding Total Total holders Units % of Issued Capital 2 2 2 1,241 1,020 1,099 503 514 73 52 8 6 40 320 703 867,063 1,414,194 3,397,928 3.378,574 10,111,407 4,837,251 9,665,539 4,789,757 125,967,942 5,100 164,430,718 0.00 0.00 0.00 0.53 0.86 2.07 2.05 6.15 2.94 5.88 2.91 76.61 0.00 100.00 Substantial Shareholders Share Buy-backs No shares were bought back in the period. Substantial Product Holder Notices are received pursuant to the Financial Markets Conduct Act 2013. Shareholders are required to disclose their holding to the issuer and the issuer’s registered exchanges when: ¬ they have a substantial holding (5% of more of the listed voting securities); ¬ subsequent movements of 1% or more in a substantial holding from prior notification; ¬ any change is made in the nature of any relevant interest in the substantial holding; and ¬ they cease to have a substantial holding. According to the company’s records and Substantial Product Holding Notices previously released to NZX, as at 30 June 2019, no Substantial Product Holder Notices were received since the date of the last Annual Report, in respect of holdings of ordinary shares of New Zealand Oil & Gas Limited. 38 New Zealand Oil & Gas Annual Report 2019 Dividend Payments and Reinvestment Plan Dividend Payments Dividend Payments No dividend payments were made during the financial year. Dividend Reinvestment Plan The Dividend Reinvestment Plan will not apply to future dividends until advised otherwise. Direct Crediting of Dividends Payments To minimise the risk of fraud and misplacement of dividend cheques shareholders are strongly recommended to have all payments made by way of direct credit to their nominated New Zealand or Australian bank account. This can be done by simply giving written notice to the share registry, Computershare Investor Services Ltd, Private Bag 92119, Auckland, New Zealand. Email: enquiry@computershare.co.nz Donations The company made a donation of $1,100 to Victim Support following the mosque shootings in Christchurch in March 2019. The donation was a matched giving programme, where the company matched staff donations. NZX Waiver On 7 November 2018 the Company received an NZX waiver from NZX Main Board Listing Rule (Rule) 9.2.1 in relation to its farm in to exploration permit WA-359-P (Ironbark I): ¬ the associated entry into a joint operating agreement in respect of Ironbark I (JOA I) between New Zealand Oil & Gas, Cue, BP Developments Australia Pty Limited (BP) and Beach; ¬ the acquisition of a call option in relation to a 5.36% participating interest in exploration permit WA-409-P (Ironbark II); ¬ the option to enter a joint operating agreement in respect of Ironbark II. In the absence of a waiver, Rule 9.2.1(a) requires shareholder approval for the transactions because the Company and Beach Energy are likely to be "Associated Persons" because: (i) in terms of Rule 1.8.2, they have an historic relationship through the Clipper and Kupe joint ventures; and (ii) Rule 1.8.3(d) deems two persons to be "Associated Persons" if they are "acting jointly or in concert". Each of the Clipper and Kupe joint ventures could be considered an example of Beach and New Zealand Oil & Gas "acting jointly or in concert". The waiver was provided on conditions that: a) the directors of the Company who are not also directors of Cue certify, in a form acceptable to NZX, that: (i) they believe the terms of the transactions have been negotiated, agreed and are to be entered into on an arm's length and commercial basis; (ii) they believe the terms of the transactions represent fair value and are fair and reasonable to the Company and its shareholders; and (iii) Beach did not influence the final decision of the Company’s board to enter into the transactions. b) The waiver, its conditions and the implications of this waiver are disclosed in NZO’s next annual report. Receiving this waiver means the Company did not have to seek shareholder approval for the transaction with the related party, Beach. 39 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Consolidated Financial Statements For the year ended 30 June 2019 The Board of Directors of New Zealand Oil & Gas Limited authorise these consolidated Financial Statements for issue on 26 August 2019. For and on behalf of the Board. Samuel Kellner Chairman 26 August 2019 Rosalind Archer Director 26 August 2019 40 New Zealand Oil & Gas Annual Report 2019 Consolidated Statement of Cash Flows For the year ended 30 June 2019 $000 Notes 2019 2018 Cash flows from operating activities Receipts from customers Production and marketing expenditure Supplier and employee payments (inclusive of GST) Interest received Income taxes paid Royalties paid Other Net cash inflow from operating activities Cash flows from investing activities Purchase of oil and gas interest net of cash acquired Exploration and evaluation expenditure Oil and gas asset expenditure Purchase of property, plant and equipment Net cash outflow from investing activities Cash flows from financing activities Issue of shares Forfeited shares Dividends paid Net cash outflow from financing activities Net increase/(decrease) in cash, cash equivalents and funds held in escrow Cash and cash equivalents at the beginning of the year Exchange rate effects on cash, cash equivalents and funds held in escrow Cash, cash equivalents and funds held in escrow at end of the year 11 105,586 The notes to the financial statements are an integral part of these financial statements 46,570 (10,968) (11,744) 2,297 (4,131) (2,506) 1,787 21,305 36,519 (12,551) (11,501) 1,713 (3,214) (603) 200 10,563 - (29,654) (12,115) (1,740) (87) (5,420) (3,422) (306) (13,942) (38,802) 6 (17) - (11) 7,352 98,010 224 3,291 (4) (6,805) (3,518) (31,757) 125,103 4,664 98,010 41 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Consolidated Statement of Cash Flows For the year ended 30 June 2019 Reconciliation of profit for the year to net cash inflow from operating activities $000 (Loss)/Profit for the year Depreciation and amortisation Deferred tax Exploration expenditure included in investing activities Evaluation and exploration asset impairment Net foreign exchange differences Unwind of discount on provision Stock movement Carbon emission inventory Other Change in operating assets and liabilities Movement in trade debtors Movement in trade creditors Movement in tax payable Net cash inflow from operating activities Notes 2019 2018 (2,889) 8,818 559 8,224 7,202 4,830 8,724 (2,767) 4,650 - (1,217) (4,062) 221 (529) 215 364 3,777 (2,462) (977) 21,305 203 11 - (302) (4,705) 1,616 2,365 10,563 The notes to the financial statements are an integral part of these financial statements 42 New Zealand Oil & Gas Annual Report 2019 Consolidated Statement of Comprehensive Income For the year ended 30 June 2019 $000 Revenue Operating costs Exploration and evaluation expenditure Other income Other expenses Results from operating activities excluding amortisation, impairment and net finance costs Amortisation of production assets Exploration and evaluation asset impairment Net finance income Profit before income tax and royalties Income tax (expense)/credit Royalties expense (Loss)/profit for the year (Loss)/profit for the year attributable to: (Loss)/profit attributable to shareholders Profit attributable to non-controlling interest (Loss)/profit for the year Other comprehensive income: Items that may be classified to profit or loss Foreign currency translation reserve (FCTR) differences Total other comprehensive (loss)/income for the year Total comprehensive (loss)/income for the year is attributable to: Equity holders of the Group Non-controlling interest (NCI) Total comprehensive (loss)/income for the year (Loss)/Income per share Basic and diluted (cents per share) Notes 2019 2018 5 6 15 5 7 16 15 8 9 10 43,323 (9,305) (8,224) 2,450 (12,389) 15,855 (8,457) (7,202) 3,162 3,358 (3,674) (2,573) (2,889) (7,480) 4,591 (2,889) (5,262) (8,151) (12,517) 4,366 (8,151) 35,811 (12,625) (4,650) 542 (11,376) 7,702 (8,287) - 5,763 5,178 1,197 (1,545) 4,830 762 4,068 4,830 1,179 6,009 2,125 3,884 6,009 22 (4.5) 0.5 The notes to the financial statements are an integral part of these financial statements 43 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Consolidated Statement of Financial Position As at 30 June 2019 $000 ASSETS Current assets Cash and cash equivalents Funds held in escrow Receivables and prepayments Inventories Total current assets Non-current assets Exploration and evaluation assets Oil and gas assets Property, plant and equipment Other intangible assets Other financial assets Total non-current assets Total assets LIABILITIES Current liabilities Payables Current tax liabilities Total current liabilities Non-current liabilities Rehabilitation provision Deferred tax liability Total non-current liabilities Total liabilities Net assets EQUITY Share capital Reserves Retained earnings Attributable to shareholders of the Group Non-controlling interest in subsidiaries Total equity Net asset backing per share (cents per share) Net tangible asset backing per share (cents per share) The notes to the financial statements are an integral part of these financial statements 44 Notes 2019 2018 11 11 12 15 16 17 18 19 9 20 21 93,540 12,046 7,996 2,595 116,177 3,646 58,507 374 47 9 98,010 - 11,772 2,253 112,035 7,243 64,848 217 487 16 62,583 72,811 178,760 184,846 5,975 4,314 10,289 20,829 1,309 22,138 32,427 8,546 5,291 13,837 18,642 797 19,439 33,276 146,333 151,570 211,908 2,460 (79,071) 135,297 11,036 146,333 87 85 211,917 7,561 (74,578) 144,900 6,670 151,570 90 86 New Zealand Oil & Gas Annual Report 2019 Consolidated Statement of Changes in Equity For the year ended 30 June 2019 $000 Issued capital Reserves Retained earnings Non- controlling interest Total Total equity Balance as at 1 July 2017 208,630 6,198 (68,558) 146,270 2,786 149,056 Profit for the year Foreign currency translation differences Shares issued Partly paid shares issued Share based compensation expense Exercised and expired ESOP awards Dividends declared FCTR on disposals - - 3,313 (26) - - - - - 1,338 - - 47 (47) - 25 762 - - - - 47 762 1,338 3,313 (26) 47 - (6,804) (6,804) (25) - 4,068 (184) - - - - - - 4,830 1,154 3,313 (26) 47 - (6,804) - Balance as at 30 June 2018 211,917 7,561 (74,578) 144,900 6,670 151,570 (Loss)/profit for the year Foreign currency translation differences Shares issued Partly paid shares issued Share based compensation expense Exercised and expired ESOP awards FCTR on disposals - - 8 (17) - - - - (7,480) (2,132) - - 18 (82) (2,905) - - - - 82 2,905 (7,480) (2,132) 4,591 (225) (2,889) (2,357) 8 (17) 18 - - - - - - - 8 (17) 18 - - Balance as at 30 June 2019 211,908 2,460 (79,071) 135,297 11,036 146,333 The notes to the financial statements are an integral part of these financial statements 45 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Notes to Financial Statements 1 Basis of accounting Reporting entity New Zealand Oil & Gas Limited (the Group) is a company domiciled in New Zealand, registered under the Companies Act 1993 and listed on the New Zealand Stock Exchange (NZX). The Group is an FMC reporting entity for the purposes of the Financial Reporting Act 2013 and Financial Markets Conduct Act 2013. The financial statements presented are for New Zealand Oil & Gas Limited, its subsidiaries and interests in associates and jointly controlled operations (together referred to as the “Group”). The ultimate parent company is O.G. Oil & Gas (Singapore) Pte. Ltd. (OGOG), a company incorporated in Singapore and forms part of the Ofer Global Group. Basis of preparation The financial statements have been prepared in accordance with New Zealand Generally Accepted Accounting Practice (‘NZ GAAP’) and the Financial Reporting Act 2013. They comply with the NZ equivalents to International Financial Reporting Standards (‘NZ IFRS’) as appropriate for profit-oriented entities, and with International Financial Reporting Standards (‘IFRS’). The presentation and reporting currency used in the preparation of the financial statements is New Zealand dollars (NZD or $) rounded to the nearest thousand unless otherwise stated. The financial statements are prepared on a goods and services tax (GST) exclusive basis except billed receivables and payables which include GST. These financial statements are prepared on the basis of historical cost except where otherwise stated in specific accounting policies contained in the accompanying notes. Basis of consolidation Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that control ceases. Consistent accounting policies are employed in the preparation and presentation of the Group financial statements. Intra-group balances, transactions, unrealised income or expenses arising from intra-group transactions and dividends are eliminated in preparing the Group financial statements. A list of subsidiaries and associates is shown in notes 13 and 14. 46 Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in the statement of comprehensive income and held in equity reserves as qualifying cash flow hedges and qualifying net investment hedges. Translation differences on non-monetary items, such as equities classified as fair value through other comprehensive income, are included in the statement of comprehensive income and held in the fair value reserves in equity. 2 Critical accounting estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. The estimates and assumptions that have the most significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year relate to: ∫ ∫ ∫ recoverability of exploration and evaluation assets and oil and gas assets. Assessment includes future commodity prices, future cash flows, an estimated discount rate and estimates of reserves. Management performs an assessment of the carrying value of investments at each reporting date and considers objective evidence for impairment on each investment taking into account observable data on the investment, the fair value, the status or context of capital markets, its own view of investment value and its long term intentions (refer to notes 15, 16 and 23(a)(ii)). provision for rehabilitation obligations includes estimates of future costs, timing of required restoration and an estimated discount rate (refer to note 19). recoverability of deferred tax asset. Assessment of the ability of entities in the Group to generate future taxable income (refer to note 9). New Zealand Oil & Gas Annual Report 2019 3 Adoption status of relevant new financial reporting standards and interpretations NZ IFRS 9 Financial Instruments This standard includes revised guidance on the classification and measurement of financial instruments, a new expected credit loss model for calculating impairment on financial assets, and new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from NZ IAS 39 Financial Instruments: Recognition and Measurement, which NZ IFRS 9 replaces. The adoption of this accounting standard has had no impact on the financial statements. NZ IFRS 15 Revenue from Contracts with Customers This standard establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including NZ IAS 18 Revenue, NZ IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. The adoption of this accounting standard has had no impact on the financial statements. The accounting policies for revenue recognition are as follows: ∫ Production revenue The consolidated entity generates production revenue from its interest in producing crude oil and gas fields. Revenue from oil production is recognised at a point in time when crude oil is delivered to the buyer. Revenue from gas production is recognised during the month when gas is delivered to the buyer. Adoption status of relevant new financial reporting standards and interpretations The following new standard, amendment to standards and interpretations is issued but not yet effective and has not been applied in preparation of these financial statements. NZ IFRS 16 Leases This standard removes the classification of leases as either operating leases or finance leases – for the lessee – effectively treating all leases as finance leases. Lessor accounting remains similar to current practice – i.e. lessors continue to classify leases as finance and operating. The standard is effective for annual reporting periods beginning on or after 1 January 2019. The likely impact of this standard has not yet been assessed. 4 Segment information All operating segments’ operating results are reviewed regularly by the Group’s chief executive officer (CEO), the entity’s chief decision maker, and have discrete financial information available. Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets, office expenses, and income tax assets and liabilities. The following summaries describe the activities within each of the reportable operating segments: ∫ ∫ ∫ Kupe oil and gas field (Kupe): development, production and sale of natural gas, liquefied petroleum gas (LPG) and condensate (light oil) in the petroleum mining permit area of PML 38146 located in the offshore Taranaki basin, New Zealand. The Group purchased a 4% interest from Mitsui E&P Australia Pty Limited with an acquisition date of 8 December 2017. Oil & gas exploration: exploration and evaluation of hydrocarbons in the offshore Taranaki basin and offshore Canterbury basin, New Zealand, Australia and Indonesia. Cue Energy Resources Limited (Cue): the Group acquired a controlling interest in Cue during the 2015 financial year. Management have treated this as a separate operating segment. 47 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Notes to Financial Statements 4 Segment information (continued) 2019 $000 Sales to external customers - New Zealand Sales to external customers - other countries Total sales revenue Other income Total revenue and other income Segment result Other net finance income Profit before income tax and royalties Income tax and royalties expense Loss for the year Segment assets Unallocated assets Total assets Included in segment results: Depreciation and amortisation expense 2018 $000 Sales to external customers - New Zealand Sales to external customers - other countries Total sales revenue Other income Total revenue and other income Segment result Other net finance income Profit before income tax and royalties Income tax and royalties expense Profit for the year Segment assets Unallocated assets Total assets Kupe oil & gas Oil & gas exploration Other & unallocated Cue Energy Resources Ltd 11,933 3,928 15,861 58 15,919 - - - - - - - - 239 239 - 27,462 27,462 2,153 29,615 10,267 (12,960) (10,349) 13,238 32,712 90 - 29,351 Total 11,933 31,390 43,323 2,450 45,773 196 3,162 3,358 (6,247) (2,889) 62,153 116,607 178,760 3,798 - 351 4,669 8,818 Kupe oil & gas Oil & gas exploration Other & unallocated Cue Energy Resources Ltd 6,052 3,114 9,166 (22) 9,144 - - - - - - - - 282 282 - 26,645 26,645 282 Total 6,052 29,759 35,811 542 26,927 36,353 5,589 (1,649) (9,755) 5,229 35,432 7,243 - 29,416 (586) 5,764 5,178 (348) 4,830 72,091 112,755 184,846 Included in segment results: Depreciation and amortisation expense 2,144 - 422 6,158 8,724 48 New Zealand Oil & Gas Annual Report 2019 5 Revenue and other income 7 Other expenses Sales comprise revenue earned from the sale of petroleum products, when the significant risks and rewards of ownership of the petroleum products have been transferred to the buyer. Revenue is recognised at the fair value of the consideration received net of the amount of GST. $000 2019 2018 REVENUE Petroleum sales Total revenue OTHER INCOME Insurance proceeds Reimbursement of Ironbark back costs Other income Total other income 43,323 43,323 35,811 35,811 1,125 947 378 2,450 - - 542 542 $000 2019 2018 CLASSIFICATION OF OTHER EXPENSES BY NATURE Audit fees paid to the Group auditor - KPMG Audit fees paid to other auditors - BDO Directors’ fees Legal fees Consultants’ fees Employee expenses (i) Depreciation Amortisation of intangible assets Share based payment expense IT and software expenses Pre-permit expenditure Registry and stock exchange fees 110 124 294 878 1,515 6,229 120 241 17 557 - 143 105 113 476 821 999 5,142 71 366 47 628 127 261 Total income 45,773 36,353 Other Total other expenses 2,161 12,389 2,220 11,376 6 Operating costs $000 Production and sales marketing costs Carbon emission expenditure Insurance expenditure Movement in inventory Total operating costs 2019 2018 (i) Employee expenses are net of $0.1 million (2018: $0.2 million) recharged to exploration and evaluation expense and recharged to operated joint ventures. (8,965) (11,949) $000 2019 2018 (413) (456) 529 (391) (274) (11) (9,305) (12,625) FEES PAID TO THE GROUP AUDITOR Audit and review of financial statements Tax compliance services Tax advisory services Total fees paid to Group auditor FEES PAID TO THE OTHER AUDITORS (FOR THE YEAR) - BDO Audit and review of subsidiary financial statements Tax compliance services Total fees paid to other auditors 110 98 86 294 124 10 134 105 20 256 381 113 22 135 49 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Notes to Financial Statements 8 Net finance income and costs $000 2019 2018 $000 Bank fees Unwinding of discount on provisions Total finance costs 2019 2018 INCOME TAX EXPENSE (9) (4) (221) (230) (203) (207) Current tax Deferred tax a) Total income tax expense/(credit) Interest income 2,175 1,908 Exchange gains on foreign currency balances Total finance income 1,217 3,392 4,062 5,970 INCOME TAX EXPENSE CALCULATION Profit before income tax expense and royalties 3,115 559 1,570 (2,767) 3,674 (1,197) 3,358 5,178 Net finance income 3,162 5,763 9 Taxation Current and deferred tax is calculated on the basis of the laws enacted or substantively enacted at balance date. Current tax is the expected tax payable on the taxable income for the year and any adjustment to tax payable in respect of previous years. Current and deferred tax are recognised in profit or loss except when the tax relates to items recognised in other comprehensive income, in which case the tax is also recognised in other comprehensive income. Less: royalties expense (2,573) (1,545) Profit before income tax expense Tax at the New Zealand tax rate of 28% Tax effect of amounts which are not deductible/(taxable): Difference in overseas tax rate Non-deductible write off Foreign exchange adjustments Unrealised timing differences Unrecognised tax losses Other expenses 785 3,633 220 1,017 (445) 2,475 (198) 433 1,645 298 4,429 628 247 (182) (2,036) 1,591 328 1,593 Adjustment recognised for current tax in prior periods (i) (755) (2,790) b) Income tax expense/(credit) 3,674 (1,197) (i) During the prior year Cue had an Indonesian tax matter relating to a notice of amended assessment which was being disputed by Cue Kalimantan Pte Ltd on behalf of SPC E&P Ltd (SPC). Cue is indemnified by SPC for any losses arising from this dispute and has recognised a tax liability as well as a receivable in the Consolidated Statement of Financial Position. At 30 June 2019 no imputation credits were held for subsequent reporting periods (2018: nil). 50 New Zealand Oil & Gas Annual Report 2019 9 Taxation (continued) c) Deferred tax Deferred taxation is recognised in respect of temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets and future tax benefits are recognised where realisation of the asset is probable. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse. The utilisation of the deferred tax asset is dependent on future taxable profits in excess of the profits arising from the reversal of existing temporary differences. As at 30 June 2019 the Group have accumulated losses in New Zealand of $41.7 million (30 June 2018: $35.6 million), together with unclaimed tax deductions for production and development expenditure incurred previously. The Group has not recognised a New Zealand deferred tax asset as under current oil price assumptions it is not expected that sufficient future taxable profits will be generated. The future availability of accumulated tax losses remains subject to the Group satisfying the relevant business and shareholder continuity requirements for each jurisdiction. $000 2019 2018 THE BALANCE COMPRISES TEMPORARY DIFFERENCES ATTRIBUTABLE TO: Deferred Tax Assets Non-deductible provisions Deferred Tax Liabilities Oil & gas assets 5,645 5,645 5,329 5,329 (6,954) (6,954) (6,126) (6,126) Net deferred tax liabilities (1,309) (797) MOVEMENTS: Net deferred tax liability at 1 July Recognised in profit or loss Recognised in other comprehensive income (797) (559) (3,360) 2,767 47 (204) Closing balance at end of year (1,309) (797) 10 Royalties expense Royalty expenses incurred by the Group relate to petroleum royalty payments to the New Zealand Government in respect of the Kupe and Maari oil and gas fields, and are recognised on an accrual basis. 51 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Notes to Financial Statements 11 Cash and cash equivalents 12 Receivables and prepayments Cash and cash equivalents comprise cash on hand, cash at bank, short-term deposits and deposits on call with an original maturity of three months or less. $000 Cash at bank and in hand Deposits at call Short term deposits Share of oil and gas interests’ cash Funds held in escrow - WA-359-P Drilling Programme Account Total cash and cash equivalents at end of year 2019 12,006 4,590 76,602 342 2018 19,978 1,914 75,190 928 12,046 - $000 Trade receivables Provision for doubtful debts Share of oil and gas interests' receivables Prepayments Other Total receivables and prepayments at end of year 2019 6,492 - 2018 6,657 272 1,328 4,590 124 52 65 188 7,996 11,772 105,586 98,010 Receivables and prepayments denominated by currency $000 Base Currency NZD Equivalent 2019 NZ dollar US dollar AU dollar ID rupiah Total receivables and prepayments at end of year 2018 NZ dollar US dollar AU dollar ID rupiah Total receivables and prepayments at end of year 2,322 3,776 20 181,098 3,025 5,701 34 148,642 2,322 5,617 37 20 7,996 3,025 8,695 37 15 11,772 Cash and cash equivalents denominated by currency $000 Base Currency NZD Equivalent 2019 NZ dollar US dollar AU dollar ID rupiah Total cash and cash equivalents at end of year 2018 NZ dollar US dollar AU dollar ID rupiah Total cash and cash equivalents at end of year 32,439 45,635 4,774 1,187,789 33,489 40,868 3,755 84,822 32,439 68,032 4,990 125 105,586 33,489 60,412 4,100 9 98,010 Deposits at call and short-term deposits The deposits at call and short term deposits are currently bearing interest rates between 1.60% and 2.70% (2018: 1.00% and 2.85%). The WA-359-P Drilling Programme Account represents cash held under the Ironbark funding arrangement of the WA-359-P joint agreement and is not available as free cash for the purposes of the Group's operations until BP Developments Australia Pty Limited, as the operator, draws down on the balance for the purposes of the drilling work programme agreed by all parties. 52 New Zealand Oil & Gas Annual Report 2019 13 Investments in subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it has power over the entity, has exposure or rights to variable returns from this involvement and when it has the ability to use its power to affect the amount of the returns. At 30 June 2019 the Group holds a 50.04 per cent interest in Cue Energy Resources Limited (30 June 2018: 50.04 per cent). Cue entities below reflect the Group’s 50.04 per cent interest in Cue subsidiaries. Non-controlling interests in the results and equity of subsidiaries are shown separately in the Consolidated Statement of Comprehensive Income and Consolidated Statement of Financial Position respectively. The financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates ("the functional currency"). The functional currency of the subsidiaries within the Group are shown below. The consolidated financial statements incorporate the assets, liabilities and results of the following entities: Name of entity NEW ZEALAND OIL & GAS Australia and New Zealand Petroleum Limited NZOG Onshore Limited (i) NZOG Canterbury Limited (ii) NZOG 2013 O Limited NZOG Bohorok Pty Limited NZOG Devon Limited NZOG 2013T Limited NZOG Energy Limited NZOG Palmerah Baru Pty Limited (iii) NZOG Offshore Limited NZOG Pacific Holdings Pty Limited NZOG Pacific Limited NZOG Services Limited NZOG Taranaki Limited Petroleum Resources Limited NZOG MNK Bohorok Pty Limited NZOG Asia Pty Limited (iv) Pacific Oil & Gas (North Sumatera) Limited (iv) CUE ENERGY RESOURCES Cue Energy Resources Limited Cue Mahakam Hilir Pty Limited Cue (Ashmore Cartier) Pty Ltd Cue Sampang Pty Limited Cue Taranaki Pty Limited Cue Kalimantan Pte Ltd Cue Mahato Pty Ltd Cue Exploration Pty Limited Country of incorporation Equity Holding 2019 2018 Functional Currency New Zealand New Zealand New Zealand New Zealand Australia New Zealand New Zealand New Zealand Australia New Zealand Australia New Zealand New Zealand New Zealand New Zealand Australia Australia Bermuda Australia Australia Australia Australia Australia Singapore Australia Australia 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 90% 50.04% 50.04% 50.04% 50.04% 50.04% 50.04% 50.04% 50.04% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 90% 50.04% 50.04% 50.04% 50.04% 50.04% 50.04% 50.04% 50.04% NZD NZD NZD NZD USD NZD NZD NZD USD NZD USD NZD NZD NZD NZD USD USD USD AUD AUD AUD AUD AUD USD AUD AUD (i) Company name changed from "NZOG 54867 Limited" during the year. (ii) Company name changed from "NZOG 54857 Limited" during the year. (iii) This company was sold during the 2018 financial year subject to regulatory approval. (iv) These companies are consolidated to 18 March 2019 after which control was relinquished (see note 15). All subsidiary companies have a balance date of 30 June with the exception of Pacific Oil & Gas (North Sumatera) Limited which has a 31 December balance date. All subsidiaries are predominantly involved in the petroleum exploration and production industry. 53 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Notes to Financial Statements 14 Oil and gas interests The Group has interests in a number of joint arrangements which are classified as joint operations. The Group financial statements include a proportional share of the oil and gas interests’ assets, liabilities, revenue and expenses with items of a similar nature on a line by line basis, from the date that joint control commences until the date that joint control ceases. The Group held the following oil and gas production, exploration, evaluation and appraisal interests at the end of the year. Name Type Country 2019 2018 Ownership NEW ZEALAND OIL & GAS PML 38146 – Kupe PEP 52717 – Clipper PEP 55794 - Toroa Palmerah Baru PSC (i) Kisaran PSC (ii) Bohorok PSC (iii) MNK Bohorok WA-359-P CUE ENERGY RESOURCES * WA-359-P WA-389-P WA-409-P Mahakam Hilir PSC PMP 38160 – Maari Sampang PSC Mahato PSC Mining Licence Exploration Permit Exploration Permit New Zealand New Zealand 4.0% 50.0% New Zealand 100.0% Production Sharing Contract Indonesia Production Sharing Contract Indonesia Production Sharing Contract Indonesia Joint Study Agreement Exploration Permit Indonesia Australia 36.0% 22.5% 25.0% 0.0% 15.0% 4.0% 50.0% 30.0% 36.0% 22.5% 25.0% 20.3% 0.0% Exploration Permit Exploration Permit Exploration Permit Australia Australia Australia 21.5% 100.0% 100.0% 20.0% 40.0% 20.0% Production Sharing Contract Indonesia 100.0% 100.0% Mining Permit New Zealand Production Sharing Contract Indonesia Production Sharing Contract Indonesia 5.0% 15.0% 12.5% 5.0% 15.0% 12.5% (i) (ii) (iii) On 12 December 2018 an agreement was signed to sell the entity which held the Palmerah Baru PSC to Bow Energy Limited replacing a prior agreement of 23 April 2018. The sale remains subject to regulatory approval. On 18 March 2019 an option agreement was signed which in effect relinquished control of the interests in the Kisaran PSC to Pacific Oil & Gas (Kisaran) Limited (refer to note 15). On 12 December 2018 an option agreement was signed to sell the Group's interest in the Bohorok PSC to Bukit Energy Bohorok Pte Ltd (an entity now owned by Bow Energy) (refer to note 15). * represents the percentage interest held by Cue Energy Resources Limited. The Group interest is 50.04% (2018: 50.04%) of the Cue interest. 54 New Zealand Oil & Gas Annual Report 2019 15 Exploration and evaluation The Group uses the successful efforts method of accounting for oil and gas exploration costs. All general exploration and evaluation costs are expensed as incurred except the direct costs of acquiring the rights to explore, drilling exploratory wells and evaluating the results of drilling. These direct costs are capitalised as exploration and evaluation assets pending the determination of the success of the well. If a well does not result in a successful discovery, the previously capitalised costs are immediately expensed. Key judgement: recoverability of exploration and evaluation assets Assessment of the recoverability of capitalised exploration and evaluation expenditure requires certain estimates and assumptions to be made as to future events and circumstances, particularly in relation to whether economic quantities of reserves have been discovered. Therefore, such estimates and assumptions may change as new information becomes available. If it is concluded that the carrying value of an exploration and evaluation asset is unlikely to be recovered by future development or sale, the relevant amount will then be expensed in the profit and loss. Capitalised exploration and evaluation assets, including expenditure to acquire mineral interests in oil and gas properties, related to wells that find proven reserves are classified as development assets within oil and gas assets at the time of sanctioning the development project. Exploration and evaluation expenditure includes the drilling costs associated with the Kohatukai well. On 15 November 2018 the Group announced that the well was to be plugged and abandoned as the joint venture's view was that no economically viable gas reserves had been encountered in the well. The Group's policy is to expense costs at this point. Paus Biru-1 (Sampang PSC) drilling costs have been capitalised as an exploration and evaluation asset pending the determination of the success of the well. If the well does not result in a successful commercial discovery, the previously capitalised costs will be immediately expensed. In December 2018 a sales and purchase agreement was signed to dispose of the Group's interest in the Bohorok PSC, to Bukit Energy Bohorok Pte Limited an entity owned by Bow Energy. This agreement remains subject to regulatory approval. The terms will see the Group receive a cash payment of US$2 million if production commences following the first well, with a further US$1 million from production from a second well. The Group will not contribute any further to the costs of the PSC. At the half year the Kisaran exploration and evaluation asset (US$4.9 million) was fully impaired following an assessment that the carrying value was unlikely to be recovered by future development or sale. NZ$7.2 million has been expensed in the profit and loss. On 18 March 2019 the Group entered into an option agreement with Pacific Oil & Gas Ltd (PO&G) providing PO&G with an option to acquire the holding company of the Indonesian Kisaran PSC interests. Sales prices ranging from US$1.0 million to US$2.5 million were agreed and depend on the timing of the option being called by PO&G. The agreement also includes a put option for the Group to elect to sell the holding company of the Kisaran PSC for US$1. The terms of the agreement include an immediate transfer of liabilities and assets to PO&G which has been determined to constitute a loss of control of the asset. As such the Kisaran legal entities are no longer consolidated in the Group financial statements. The impact on the financial statements is not material other than the derecognition of the Foreign currency translation reserve of $2.9 million. The Group is not exposed to any further costs relating to the Kisaran PSC. On 23 May 2019, Cue announced that approval was received for the title transfers of exploration permit WA- 359-P, which contains the Ironbark gas prospect, to new joint venture partners BP Developments Australia Pty Ltd (BP), Beach Energy Limited (Beach) and New Zealand Oil & Gas (NZO). Completion of the agreements occurred in June 2019 and included A$1.54 million of past cost reimbursement to Cue from Beach and NZO. The A$0.6 million payment from NZO is considered an inter company transaction and is eliminated on consolidation. Under the agreements, NZO has a participating interest of 15% and Cue has a participating interest of 21.5%. Cue will be carried by NZO up to 2.85% of US$90 million well cost spend. BP is operator and continues with planning and execution of the Ironbark-1 exploration well, which will be drilled late 2020. 55 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Notes to Financial Statements 15 Exploration and evaluation (continued) $000 Opening balance Impairment of exploration asset Capitalised exploration costs Revaluation of USD exploration and evaluation assets Closing balance at end of year 2019 7,243 (7,202) 3,646 (41) 3,646 2018 6,692 - - 551 7,243 16 Oil and gas assets Development Development assets include construction, installation and completion of infrastructure facilities such as pipelines and development wells. No amortisation is provided in respect of development assets until they are reclassified as production assets. Production assets Production assets capitalised represent the accumulation of all development expenditure incurred by the Group in relation to areas of interest in which petroleum production has commenced. Expenditure on production areas of interest and any future estimated expenditure necessary to develop proven and probable reserves are amortised using the units of production method or on a basis consistent with the recognition of revenue. Subsequent costs Subsequent costs are included in the assets carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the asset will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are expensed in the income statement during the financial period in which they are incurred. Impairment The carrying value is assessed for impairment each reporting date. An impairment loss is recognised if the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. A cash generating unit is the smallest identifiable asset group that generates cash 56 flows that are largely independent from other assets and groups. Impairment losses are recognised in the profit or loss and in respect of cash generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. The recoverable amount of an asset or cash generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a post-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses recognised in prior periods are reassessed at each reporting date and the loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised previously. $000 Opening balance Acquisition Expenditure capitalised 2019 64,848 - 1,702 2018 31,957 29,379 3,272 Amortisation for the year (8,475) (8,308) Revaluation of USD production assets Abandonment provision (1,204) 1,636 1,254 7,294 Closing balance at end of year 58,507 64,848 At 30 June 2019 the Group assessed each asset to determine whether an indicator of impairment existed. Indicators of impairment include changes in future selling prices, future costs and reserves. The recoverable amount of each oil and gas asset was estimated and compared to its carrying amount, which has resulted in no impairment (30 June 2018: nil). Estimates of recoverable amounts of oil and gas assets are based on their value in use with a discount rate of 10% applied. The oil price assumptions used are based on forward prices, rising to consensus mean after 4 years. New Zealand Oil & Gas Annual Report 2019 17 Other financial assets 19 Rehabilitation Provision Provisions for restoration have been recognised where the Group has an obligation, as a result of its operating activities, to restore certain sites to their original condition. There is uncertainty in estimating the timing and amount of the future expenditure. The provision is estimated based on the present value of the expected expenditure. The discount rate used is the risk-free interest rate obtained from the country related to the currency of the expected expenditure. In the current year, the discount rate used to determine the provision was 2.16% from the United States. The initial provision and subsequent re-measurement are recognised as part of the cost of the related asset. The unwinding of the discount is recognised as finance costs in profit or loss. $000 2019 2018 Carrying amount at start of year 18,642 10,304 Addition/(Reduction) in provision recognised Foreign currency revaluation of provisions Unwinding of discount 1,643 7,095 130 414 712 531 Carrying amount at end of year 20,829 18,642 $000 Security deposits Total other financial assets at end of year 18 Payables $000 Trade payables Kisaran borrowings Royalties payable Share of oil and gas interests’ payable Other payables Total payables at end of year 2019 2018 9 9 16 16 2019 1,573 - 909 2,568 925 5,975 2018 2,697 1,274 - 3,822 753 8,546 Payables denominated by currency $000 Base Currency NZD Equivalent 2019 NZ dollar US dollar AU dollar ID rupiah Total payables at end of year 2018 NZ dollar US dollar AU dollar GB pound ID rupiah Total payables at end of year 4,627 4,627 695 346 100,035 4,471 2,421 400 8 439,231 977 361 10 5,975 4,471 3,578 437 15 45 8,546 57 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Notes to Financial Statements 20 Share capital 21 Reserves a) Reserves $000 $000 Number of shares 000s Balance at 30 June 2017 167,849 208,630 Shares issued during the year 4,992 3,313 Forfeited partly paid ESOP shares converted and sold Partly paid ESOP shares exercised (2,081) (2,911) - (26) Share based payments reserve Foreign currency translation reserve Total reserves at end of year Movements: 2019 83 2,377 2,460 2018 147 7,414 7,561 Balance at 30 June 2018 167,849 211,917 $000 2019 2018 Shares issued during the year Partly paid ESOP shares exercised Partly paid ESOP shares expired 10 (10) - 8 - (17) Balance at 30 June 2019 167,849 211,908 Composed of: Fully paid shares Partly paid shares 164,431 211,925 3,418 (17) Balance at 30 June 2019 167,849 211,908 During the year 10,000 partly paid shares were exercised and converted to ordinary shares (2018: 2.9 million partly paid shares converted to fully paid shares and sold for the benefit of ESOP participants). Partly paid shares are entitled to a vote in proportion to the amount paid up. Information relating to the ESOP, including details of shares issued under the scheme, is set out in note 25. All fully paid shares have equal voting rights and share equally in dividends and equity. SHARE-BASED PAYMENTS RESERVE Opening balance at 1 July Share based payment expense for the year Exercised and expired ESOP awards Closing balance at end of year FOREIGN CURRENCY TRANSLATION RESERVE 147 18 (82) 83 147 47 (47) 147 Opening balance at 1 July 7,414 6,051 Impact on foreign currency translation reserve of disposals (2,905) 25 Other foreign currency translation differences for the year Closing balance at end of year (2,132) 2,377 1,338 7,414 b) Nature and purpose of reserves i) Foreign currency translation reserve Exchange differences arising on translation of companies within the Group with a different functional currency to the Group are taken to the foreign currency translation reserve. The reserve is recognised in other comprehensive income when the net investment is disposed of. 58 New Zealand Oil & Gas Annual Report 2019 22 Income per share b) Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with credit worthy counterparties and obtaining sufficient collateral where appropriate as a means of minimising the risk of financial defaults. Financial instruments which potentially subject the Group to credit risk consist primarily of securities and short-term cash deposits, trade receivables and short-term funding arrangements. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings, with funds required to be invested with a range of separate counterparties. The Group’s maximum exposure to credit risk for trade and other receivables is its carrying value. The Group may be exposed to financial risk if one or more of their joint venture partners is unable to meet their obligation in relation to the abandonment costs for jointly owned oil and gas assets. Under the joint venture operating agreement if one or more partners fails to meet their financial obligation, the other partners may become proportionately liable for their share of the financial obligations but would have contractual rights of recovery against the defaulting party. c) Liquidity risk Liquidity risk represents the Group’s ability to meet its contractual obligations. The Group evaluates its liquidity requirements on an ongoing basis. In general, the Group generates sufficient cash flows from its operating activities to meet its obligations arising from its financial liabilities and has liquid funds to cover potential shortfalls. Profit attributable to shareholders ($000) Weighted average number of ordinary shares (000) Basic and diluted earnings per share (cents) 2019 2018 (7,479) 762 167,849 167,849 (4.5) 0.5 23 Financial risk management Exposure to credit, interest rate, foreign currency, equity price, commodity price and liquidity risk arises in the normal course of the Group’s business. a) Market risk i) Foreign exchange risk The Group is exposed to foreign currency risk on cash and cash equivalents, oil sales, recoverable value of oil and gas assets and capital commitments that are denominated in foreign currencies. The Group manages its foreign currency risk by monitoring its foreign currency cash balances and future foreign currency cash requirements. The Group may enter into foreign currency hedge transactions in circumstances where the risk-adjusted returns to shareholders are enhanced as a consequence. ii) Commodity price risk Commodity price risk is the risk that the Group’s sales revenue and recoverable value of oil and gas assets will be impacted by fluctuations in world commodity prices. The Group is exposed to commodity prices through its petroleum interests. The Group may enter into oil price hedge transactions in circumstances where the risk-adjusted returns to shareholders are enhanced as a consequence. The Group had no call option contracts at 30 June 2019 (2018: nil). iii) Concentrations of interest rate exposure The Group has no external bank debt and therefore its main interest rate risk arises from short-term deposits held. 59 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Notes to Financial Statements 23 Financial risk management (continued) The following table sets out the contractual cash flows for all non-derivative financial liabilities and for derivatives that are settled on a gross cash flow basis: $000 30 JUNE 2019 Payables Total non-derivative liabilities 30 JUNE 2018 Payables Total non-derivative liabilities 6 months or less 6–12 months 1–2 years 2–5 years More than 5 years Contractual cash flows 5,975 5,975 8,546 8,546 - - - - - - - - - - - - - - - - 5,975 5,975 8,546 8,546 At 30 June 2019 the Group had no derivatives to settle (2018: Nil). d) Capital management f) Recognised assets and liabilities The Group manages its capital through the use of cash flow and corporate forecasting models to determine its future capital requirements and maintains a flexible capital structure which allows access to debt and equity markets to draw upon and repay capital as required. In July 2009 the Group established a Dividend Reinvestment Plan which applies to dividends declared after 29 July 2009. The Group has an adequate capital base and significant cash reserves. e) Sensitivity analysis The Group’s reporting result at the end of each year is sensitive to financial risks from fluctuations in interest rates, commodity prices and foreign currency exchange rates. The sensitivity table below shows the impact of exchange rate changes on current assets and liabilities and the impact of interest rate changes on current cash balances. The fair value of financial assets and financial liabilities must be estimated for recognition and measurement for disclosure purposes. g) Financial instruments by category $000 ASSETS 2019 Carrying value 2018 Carrying value Cash and cash equivalents Funds held in escrow 93,540 12,046 98,010 - Trade and other receivables 7,871 11,435 LIABILITIES Payables 113,457 109,445 5,975 5,975 8,546 8,546 Risk area Sensitivity 2019 (2.1) 2.4 (1.5) 2018 (2.2) 2.2 (1.2) The fair value and amortised cost of financial instruments is equivalent to their carrying value. +5% -5% +5% Impact on Group profit before tax Impact on foreign currency translation reserves in equity Exchange rate Exchange rate -5% 1.7 1.2 Impact on interest income Interest rate +1% -1% 0.5 (0.5) 0.5 (0.5) 60 New Zealand Oil & Gas Annual Report 2019 24 Related party transactions 25 Share-based payments Related parties of the Group include those entities identified in notes 13 and 14 as subsidiaries and oil and gas interests. All transactions and outstanding balances with these related parties are in the ordinary course of business on normal trading terms. During the year certain activities were undertaken between the Group and OGOG. On 21 June 2019, an inter-group services agreement was entered into by the independent directors of the Group and OGOG for certain services to be provided by the Group to OGOG. For the year ended 30 June 2019 $0.03 million of income has been included in the profit and loss. No other transactions for services have occurred. On 23 May 2019 NZO farmed into the WA-359-P permit forming a joint venture with Cue, BP and Beach (refer to note 15). NZO immediately reimbursed Cue for back costs totalling $0.7 million and will carry Cue up to $3.7 million. Transactions related to Cue have been eliminated from the Group financial statements. A number of directors are also directors of other companies and any transactions undertaken with these entities have been entered into as part of the ordinary business of the Group. No directors fees are charged for the four representatives of OGOG who are directors of the Group. Key management personnel have been defined as the directors, the chief executive and the executive team for the Group. Cue management personnel have been included. $000 Short term employee benefits Share based payments Post employment benefits Total 2019 3,516 11 45 3,572 2018 3,317 308 - 3,625 The Employee Share Ownership Plan (ESOP) was terminated in 2017. No allocations of new ESOP shares were made in the financial year ending 30 June 2019 (2018: nil). The details below relate to the old scheme which will end as final dates are reached and shares expire. A new long term incentive plan is in the process of being finalised. The Group's ESOP was open to nominated employees. Under the plan there are currently 3.4 million (2018: 3.4 million) partly paid shares for which employees have paid $0.01 per share. After 2 years, and under certain conditions, the employee has the option to fully pay for the shares. This option lasts for 3 years. The cost of the ESOP to the Group is calculated using the Black Scholes option pricing model and in the year ended June 2019 $0.02 million (2018: $0.05 million) was expensed through the Consolidated Statement of Comprehensive Income. 10,000 shares were exercised in the year ending June 2019 (2018: 2.9 million) and no expired/forfeited shares were converted to ordinary shares and sold (2018: 2.1 million converted to ordinary shares and sold). Participation in the ESOP was open to any employee (including a non-executive director) of the Group to whom an offer to participate was made by the Nomination and Remuneration Committee. The Nomination and Remuneration Committee, in its discretion, was responsible for determining which employees were to be offered the right to participate in the ESOP, and the number of partly paid shares that could be offered to each participating employee. Under the ESOP partly paid shares were issued on the following terms: Restriction periods - each partly paid share was issued on terms that require an escrow period to pass before the holder can complete payment for, and thereafter transfer, the shares. This was usually 2 years. There was also a date 5 years after the offer date by which the issue price for the shares must be paid (this is called the "Final Date"). 61 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 A share based payment expense is recognised based on the fair value of partly paid shares offered to employees at the issue date. The fair value at issue date is determined using a Black Scholes option pricing model that takes into account the exercise price, the term of the partly paid shares, the vesting criteria, the non-tradable nature of the partly paid shares, the share price at issue date and expected price volatility of the underlying share (based on weighted average historic volatility adjusted for changes expected due to publicly available information), the expected dividend yield and the risk free interest rate for the term of the issued partly paid share. This value is amortised over the escrow period of the plan, or sooner if the escrow period is reduced. The fair value of partly paid shares issued to employees is recognised as an employee expense, with a corresponding increase in equity over the period in which the employees become unconditionally entitled to the partly paid shares. The amount recognised as an expense is adjusted to reflect the actual number of partly paid shares that vest. As there was no allocation of ESOP shares during the year, no new valuation took place. During the year 10,000 ESOP shares were exercised (2018: 2.9 million) resulting in no payments to management and staff (2018: $0.5 million). Notes to Financial Statements 25 Share-based payments (continued) Issue price - this was set for each partly paid share at the time the offer was made to the participant and was the lesser of: i) 20% premium to the average market price on the date of the offer (being the volume weighted average market price over the previous 20 business days); and ii) The last sale price of the Group's ordinary shares on the business day prior to the Final Date (or such greater amount that represents 90% of the weighted average price of the Group's ordinary shares over the 20 Business Days prior to the Final Date). The pricing model ensures that the participant does not receive a share at a discount to market price at the time the final payment is made but does provide some protection if the market price reduces after the original offer date. Rights - the rights attached to partly paid shares issued under the ESOP are the same as those attached to ordinary shares in the Group. The partly paid shares rank equally with the ordinary shares in the Group. However, the rights of each partly paid share to vote on a poll, and to dividends or other distributions of the Group, are a fraction, equal to the proportion represented by the amount paid up in respect of the share as against the issue price set under the ESOP. The table below provides a reconciliation of outstanding ESOP shares and their weighted average price. Balance at 30 June 2017 Exercised Forfeited and sold Number outstanding Weighted average issue price 8,420 (2,911) (2,081) $0.74 $0.58 $0.66 Balance at 30 June 2018 3,428 $0.94 Exercised (10) $0.57 Balance at 30 June 2019 3,418 $0.91 62 New Zealand Oil & Gas Annual Report 2019 27 Events occurring after balance date On 9 July 2019 the Group and O.G. Oil & Gas (Singapore) Pte. Ltd. (OGOG) entered into a scheme implementation agreement under which OGOG is seeking, via a scheme of arrangement, to acquire all of the fully paid ordinary shares of New Zealand Oil & Gas that it does not already own for NZ$0.62 per share. 26 Commitments and contingent assets and liabilities a) Exploration expenditure commitments In order to maintain the various permits in which the Group is involved the Group has ongoing operational expenditure as part of its normal operations. The actual costs will be dependent on a number of factors such as joint venture decisions including final scope and timing of operations. Commitments relating to Australian permit WA-359-P, which contains the Ironbark prospect, consist of $19.8 million from NZO and $28.3 million from Cue. Of Cue's commitment, approximately $16.4 million will be funded by a free carry arrangement, including $3.7 million from NZO. The remaining $11.9 million will be funded from Cue's cash reserves which have been escrowed for this purpose (refer to note 11). b) Operating leases and commitments The Group leases premises, plant and equipment. Operating leases held over properties give the Group the right to renew the lease subject to a redetermination of the lease rental by the lessor. $000 Within one year Later than one year and not later than five years 2019 232 242 474 2018 271 2 273 Operating leases relate to property leases for the Group. c) Contingent assets and liabilities Cue Energy Resources Limited and Cue Resources Inc. were named as defendants, along with a number of other companies, in litigation pending in Texas, USA in relation to the Pine Mills oilfield. On March 27, 2019 the court dismissed the claims against Cue in their entirety. On April 26, 2019, the plaintiff filed an amended lawsuit against Cue and the other defendants. Cue has filed a motion to dismiss, which is now pending in U.S. court. 63 NEW ZEALAND OIL & GASNew Zealand Oil & Gas Annual Report 2019 Independent Auditor’s Report To the shareholders of New Zealand Oil and Gas Limited Basis for opinion Report on the audit of the consolidated financial statements Opinion In our opinion, the accompanying consolidated financial statements of New Zealand Oil and Gas Limited (the ’company’) and its subsidiaries (the 'group') on pages 41 to 63: i. ii. present fairly in all material respects the Group’s financial position as at 30 June 2019 and its financial performance and cash flows for the year ended on that date; and comply with New Zealand Equivalents to International Financial Reporting Standards and International Financial Reporting Standards. We have audited the accompanying consolidated financial statements which comprise: — — the consolidated statement of financial position as at 30 June 2019; the consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended; and — notes, including a summary of significant accounting policies and other explanatory information. We conducted our audit in accordance with International Standards on Auditing (New Zealand) (‘ISAs (NZ)’). We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. We are independent of the group in accordance with Professional and Ethical Standard 1 (Revised) Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (‘IESBA Code’), and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. Our responsibilities under ISAs (NZ) are further described in the auditor’s responsibilities for the audit of the consolidated financial statements section of our report. Our firm has also provided other services to the group in relation to tax compliance and advisory services. Subject to certain restrictions, partners and employees of our firm may also deal with the group on normal terms within the ordinary course of trading activities of the business of the group. These matters have not impaired our independence as auditor of the group. The firm has no other relationship with, or interest in, the group. Scoping The consolidated financial statements includes the 50.04% shareholding in Cue Energy Limited (‘Cue’) and its two production assets, Sampang PSC in Indonesia and Maari oil in New Zealand, in addition to the Kupe asset held by the parent company. The scope of our audit is designed to ensure that we perform adequate work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group, the financial reporting systems, processes and controls, and the industry in which it operates. © 2018 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 64 New Zealand Oil & Gas Annual Report 2018 In establishing the scope of audit work to be performed by the Component auditor for Group consolidation purposes, we determined the nature and extent of work to be performed would be a full scope audit. We kept in regular communication with component audit team throughout the year with discussions and formal instructions, including review of work performed, where appropriate. We also ensured that the component audit team had the appropriate skills and competencies which are needed for the audit. Materiality The scope of our audit was influenced by our application of materiality. Materiality helped us to determine the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the consolidated financial statements as a whole. The materiality for the consolidated financial statements as a whole was set at $1.3 million (2018: $1.3 million determined with reference to a benchmark of group total assets. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements in the current period. We summarise below those matters and our key audit procedures to address those matters in order that the shareholders as a body may better understand the process by which we arrived at our audit opinion. Our procedures were undertaken in the context of and solely for the purpose of our statutory audit opinion on the consolidated financial statements as a whole and we do not express discrete opinions on separate elements of the consolidated financial statements The key audit matter RECOVERABILITY OF OIL AND GAS ASSETS Refer to Note 16 to the Financial Report. The recoverability of oil and gas assets is a key audit matter due to the judgement involved in the assessing the recoverable value of the oil and gas assets. Key judgements include; — future oil and gas prices; — oil and gas reserves and forecast production levels; — discount rate; and — future operating costs and capital costs How the matter was addressed in our audit The procedures performed to assess the reasonableness of the recoverable value of the oil and gas assets included: — comparing future oil price assumptions with third party forecasts and publicly available forward price curves; — comparing future gas price assumptions to either contracted gas or third party forecasts; — comparing the production profiles and proved and probable reserves to third party reserve reports. Reviewing the reserve report to determine if the assumptions were reasonable and in line with our understanding and expectations; — challenging the discount rate used by comparing it to market participants and industry research; and — assessing estimated future costs by comparing to approved budgets and where applicable, third party data and historical trends. 65 New Zealand Oil & Gas Annual Report 2018 Independent Auditor's Report Other information The Directors, on behalf of the group, are responsible for the other information included in the entity’s Annual Report. Other information may include the Chairman’s review, Chief Executive’s report, disclosures relating to production and reserves, corporate governance and statutory information. Our opinion on the consolidated financial statements does not cover any other information and we do not express any form of assurance conclusion thereon. The Annual Report is expected to be made available to us after the date of this Independent Auditor's Report. Our responsibility is to read the Annual Report when it becomes available and consider whether the other information it contains is materially inconsistent with the consolidated financial statements, or our knowledge obtained in the audit, or otherwise appear misstated. If so, we are required to report such matters to the Directors. Use of this independent auditor's report This independent auditor’s report is made solely to the shareholders as a body. Our audit work has been undertaken so that we might state to the shareholders those matters we are required to state to them in the independent auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the shareholders as a body for our audit work, this independent auditor’s report, or any of the opinions we have formed. 66 Responsibilities of the Directors for the consolidated financial statements The Directors, on behalf of the company, are responsible for: — — — the preparation and fair presentation of the consolidated financial statements in accordance with generally accepted accounting practice in New Zealand (being New Zealand Equivalents to International Financial Reporting Standards) and International Financial Reporting Standards; implementing necessary internal control to enable the preparation of a consolidated set of financial statements that is fairly presented and free from material misstatement, whether due to fraud or error; and assessing the ability to continue as a going concern. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the consolidated financial statements Our objective is: — to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error; and — to issue an independent 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 ISAs NZ will always detect a material misstatement when it exists. New Zealand Oil & Gas Annual Report 2018 Misstatements can arise from fraud or error. They 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 these consolidated financial statements. A further description of our responsibilities for the audit of these consolidated financial statements is located at the External Reporting Board (XRB) website at: http://www.xrb.govt.nz/standards-for-assurance- practitioners/auditors-responsibilities/audit-report-1/ This description forms part of our independent auditor’s report. The engagement partner on the audit resulting in this independent auditor's report is David Gates. For and on behalf of KPMG Wellington 26 August 2019 67 New Zealand Oil & Gas Annual Report 2018 Get the latest investor news at nzog.today Auditors KPMG KPMG Centre, 10 Customhouse Quay PO Box 996 Wellington, New Zealand Corporate Directory Registered and Head Office Level 1, 36 Tennyson Street Wellington 6011, New Zealand Telephone Email +64 4 495 2424 enquiries@nzog.com Share Registrar Computershare Investor Services Ltd Level 2, 159 Hurstmere Road Takapuna Private Bag 92119 Auckland 1142 New Zealand Telephone Freephone Facsimile Email +64 9 488 8777 0800 467 335 (within NZ) +64 9 488 8787 enquiry@computershare.co.nz New Zealand Oil & Gas Ltd Level 1, 36 Tennyson Street Wellington 6011, New Zealand +64 4 495 2424 www.nzog.com