Pharming Group N.V.
Annual Report 2006

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2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
We are an international oil and gas exploration and produCtion 
Company headquartered in london and listed on the london 
stoCk exChange. the Company has designated Core areas in 
southeast asia, the middle east and West afriCa regions and 
employs a strategy for Building shareholder value through  
a portfolio of oil and gas assets By foCusing on:

Contents
01  at a glance
02  Chairman’s and Chief executive’s statement
08  review of operations
20  Corporate responsibility
24  financial review
28  Board of directors 
30  directors’ report
33  Corporate governance
41  directors’ remuneration report
48 
50  Consolidated income statement
51  Balance sheets
52 

independent auditors’ report

 Cash flow statements/statements of  
recognised income and expense

53  notes to the Consolidated financial statements
69  five year summary
70  reserve statistics
71  Company information

Recognising opportunity
By cultivating relationships and having early 
access into regions, projects or situations 
where there is potential to create significant 
upside through the Company’s participation.

Capturing potential
By adding the Company’s managerial, 
technical and commercial expertise to 
progress activities through the formative   
stages or through periods of difficulty.

Realising value
By locking in returns, regardless of the 
phase of the project life cycle, once the 
Company’s capability to add value begins  
to diminish.

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006 

0 _ 1

AT A GLANCE

Financial highlights

$m
Revenue from continuing operations 
Net cash inflow from operating activities
Net cash and deposits 
Net assets

SOCO around the world

2006
 76.5
33.2
 187.8
295.8

2005
57.2
30.5
51.0
266.2

2004
29.4
19.2
71.1
247.2

UNITED KINGDOM 
(CORPORATE HEADQUARTERS)

Location: London

REPUBLIC OF CONGO 
(BRAZZAVILLE)

Location: Congo Basin, 
offshore Republic of Congo (Brazzaville)
Operational phase: Block evaluation
Project partners: SNPC, 
Africa Oil & Gas, Lundin, Raffia Oil 
SOCO EPC interest: 37.5%

DEMOCRATIC REPUBLIC
OF CONGO (KINSHASA)

Location: Congo Basin, onshore 
Democratic Republic of Congo (Kinshasa)
Operational phase: Block evaluation
Project partner: Cohydro 
SOCO DRC interest: 85%

YEMEN

Location: Say’un-Al Masilah 
Basin, eastern Yemen
Operational phase: Production/
development/exploration
Project partners:
Total, Occidental, Kufpec
SOCO Yemen interest: 17%

THAILAND

Location: Western Basin, 
offshore Thailand
Operational phase: Field development
Farm-in partner: GFI
SOCO Thai interest: 100%

VIETNAM

Location: Cuu Long Basin, 
offshore southeast Vietnam
Operational phase: Exploration/
appraisal/field development
Project partners:
Petrovietnam, PTTEP Thailand
SOCO Vietnam interest:
Block 16-1: 25%; Block 9-2: 29%
OPECO Vietnam interest:
Block 16-1: 2%

rui de sousa
Chairman (left)

ed story
President and Chief Executive

CHAIRMAN’S AND CHIEF 
EXECUTIVE’S STATEMENT

dear shareholder, 
the past 12 months have been a 
watershed year for soCo. our hugely 
successful vietnam project has 
evolved from pure exploration to 
development, appraisal and 
exploration; the potential of our yemen 
project has been increasingly realised 
through Basement development 
drilling and increased facilities 
capacity and our West africa portfolio 
has been expanded to increase the 
potential to repeat these successes.

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006 

2 _ 3

after tax profit 
from Continuing 
operations hit a 
reCord high of 
$29.1 million in 
2006 exCeeding 
that of the 
previous year 
that totalled 
$20.3 million

The Company has successfully de-risked  
its chances of long term success whilst 
maintaining significant upside that offers plenty 
of opportunity for exponential future growth.

We have again been very successful with  
the drill bit with our exploration and appraisal 
drilling success in Vietnam exceeding 70%. 
This coupled with the successful infill/injector 
drilling in Yemen has led to an increase in  
2P reserves net to our working interest of  
32.4 million barrels and 9.4 million barrels  
in Vietnam and Yemen, respectively. Before 
factoring in the reserve reduction associated 
with farming out half of our Marine XI interest 
in the Republic of Congo (Brazzaville), 2P 
reserves increased to 172.5 million barrels in 
2006. Following the farm-out, 2P reserves at 
the end of 2006 equalled 160.6 million barrels.

FinanciaL and operating 
resuLts
After tax profit from continuing operations  
hit a record high of $29.1 million in 2006 
exceeding that of the previous year that 
totalled $20.3 million. Largely as a result  
of the ongoing facilities expansion and infill 
drilling programme at the Kharir field in 
Yemen, production net to the Company’s 
working interest increased, rising to 6,766 
barrels of oil per day (BOPD) in 2006 from 
5,684 BOPD the prior year. 

The Group had its highest ever capital 
expenditures during the year with an extensive 
exploration/appraisal drilling programme in 
Vietnam, significant facilities expansion and 
development drilling in Yemen and its initial  
3D seismic acquisition in Congo (Brazzaville). 
In order to bridge the period prior to 
translating its successes into operating cash 
flow, the Company guaranteed a convertible 
bonds issue of $250 million in May. Capital 

expenditure on operational activities rose  
to $114.3 million in 2006 from $76.2  
million in 2005. With net proceeds from the 
issue of convertible bonds equalling $243.0 
million and cash generated by operations of 
$53.0 million, the cash balance rose by 
$136.8 million to $187.8 million at year  
end 2006.

2006 operations reView 
Vietnam
The year got off to an impressive start when 
the second well drilled in the same fault block 
as the initial 2005 discovery well on the Te 
Giac Trang (TGT) structure, the TGT-2X, tested 
at a total combined flow rate of approximately 
17,500 barrels of oil equivalent per day 
(BOEPD) from the Miocene Lower Bach Ho 
5.2 (LBH 5.2) and Oligocene “C” intervals. 
The good news continued when the rig moved 
to a location on the fourth fault block on the 
TGT structure and the TGT-3X tested at a 
combined maximum rate of 9,908 BOEPD. 

Buoyed by so much early success on the  
TGT structure, the rig moved approximately 
30 kilometres south of the TGT-3X discovery 
to spud the initial well on the “L” prospect, 
the Te Giac Vang (TGV) 1X well. The TGV 
structure was a priority not only because  
of an apparent large shallow structure with 
good Miocene potential, but also because 
success here would hold the rights for the 
apparently even larger high potential 
Basement/Oligocene structure. Enthusiasm 
was tempered by realism as the TGV-1X 
intersected poorly developed reservoir sands 
in the primary targeted Clastic sequence at 
the LBH 5.2 horizon. The well did have good 
oil shows in several Oligocene sands when 
the well was deepened. However, after 
analysis of the logs, it appeared that these 
lacked sufficient permeability. 

CHAIRMAN’S AND CHIEF EXECUTIVE’S STATEMENT CONTINUED

Following the TGV well, the rig was moved to 
drill the sidetrack to the Ca Ngu Vang (CNV) 
4X well on Block 9-2 that was temporarily 
suspended late in 2005 after encountering 
unexpected high pressures in the Oligocene 
sequence above the Basement. We were back 
on track when the sidetrack of the appraisal 
well, CNV-4XST, tested at 7,050 BOEPD  
from Basement. This result provided final 
confirmation that CNV was ready to move into 
development. All regulatory approvals were 
received and the pilot development plan was 
approved in December 2006. From that point 
forward, Petrovietnam has funded its full 
share of costs on Block 9-2.

With a new rig, activity once again focused  
on Block 16-1. The third 2006 appraisal well 
on the TGT structure, the TGT-4X, was drilled 
on the H3 fault block between the initial 
discovery well, TGT-1X, and the TGT-3X. The 
primary target, a lower Miocene trap, was 
breached due to late movement on a fault 
located south of the TGT-4X well. The 
Oligocene “D” interval, a new reservoir on  
the TGT structure, flowed at a rate slightly 
over 600 BOPD on a short test. 

The rig then moved to drill the first exploration 
well on the Te Giac Xang (TGX) structure on 
Prospect “K”, approximately 15 kilometres 
west of the TGT structure. Although the TGX-
1X encountered reservoir sands, it was 
abandoned after initial analysis indicated that 
it was not drilled within structural closure. 

To close out the 2006 drilling campaign, the 
rig moved back to drill the fifth well on the 
TGT structure as a final prelude to seeking a 
declaration of commerciality on the field. The 
TGT-5X had a total combined maximum flow 
rate of approximately 16,430 BOEPD from 
the LBH 5.2 and Oligocene “C” intervals. 

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006 

4 _ 

drilling suCCess 
during the year  
has led to an 
inCrease in 2p 
reserves net to 
our Working 
interest of 32.4 
million Barrels 
and 9.4 million 
Barrels in 
vietnam and 
yemen, 
respeCtively

Thus, sandwiched between clear success with 
the TGT appraisal programme, there were 
inconclusive results when looking for 
repeatability on the Clastics fairway elsewhere 
on Block 16-1. The 3D seismic acquired 
during the year is expected to be a critical tool 
in leading to drilling success in 2007 outside 
the proven TGT structure.

yemen
During 2006, the East Shabwa Block 10 
consortium continued its programme to 
further appraise the Kharir field and increase 
production capacity from the Block. Drilling 
results and the addition of a self-contained 
production facility enabled the fields to exceed 
all previous production records averaging 
more than 40,000 BOPD.

A number of successful development wells 
were drilled in the Kharir field (KHA) during 
2006. These include the KHA-1-12 well in  
the western part of the structure, the KHA-1-
14 well in the southern flank of the structure, 
the KHA-1-07.G1 sidetrack, which was drilled 
as a water injection well but completed as a 
producer based on drilling results and the 
KHA-1-16 drilled on the last 3D line on the 
eastern extension of the field. These wells are 
all connected to the production facilities and 
were tested at rates between 5,500 and 
8,400 BOPD. Significantly, the highest rate 
was from the eastern extension well. This 
portends further extension of the field in  
that direction. 

The consortium also had a very active 
exploration programme in the northern part  
of the Block that yielded one discovery, but 
overall proved inconclusive as to the 
additional potential in that area.

west aFrica
The Group added to its West Africa portfolio 
when its 85% owned subsidiary acquired  
an 85% working interest in the 800 square 
kilometre Nganzi Block, onshore the 
Democratic Republic of Congo (Kinshasa).  
As operator, the Group carried out a 
reconnaissance aeromagnetic and gravity 
survey over the onshore extension of the 
coastal basin in order to delineate prospective 
areas for hydrocarbon generation and 
migration delineating several leads, 
interpreted as large horst blocks. 

In September, the Group’s 85% owned 
subsidiary signed an agreement to farm-out  
a 37.5% interest in the Marine XI Block, 
offshore the Republic of Congo (Brazzaville), 
whilst retaining a 37.5% working interest. 
Further details can be found in the Review  
of Operations. As operator, the Group began 
evaluation of the Marine XI Block when it 
acquired an approximate 1,200 square 
kilometre 3D seismic programme in the fourth 
quarter of 2006.

thaiLand
In April, the Group’s Thai subsidiary signed  
a Participation Agreement that could 
accelerate the development of the project  
in the Bualuang field in the Gulf of Thailand 
and provide meaningful production as early  
as the first half of 2008. 

The assignment of interest, predicated on 
meeting certain work requirements and subject 
to the appropriate regulatory approval by the 
Government of Thailand, enables the Farmee 
to earn up to a 60% working interest, whilst 
allowing the Group to focus resources on 
higher profile projects in Vietnam and Yemen. 
Further details of the Participation Agreement 
can be found in the Financial Review.

CHAIRMAN’S AND CHIEF EXECUTIVE’S STATEMENT CONTINUED

corporate
conVertiBLe Bonds
Primarily to fund the impending development  
of its Vietnam projects, in May of 2006, the 
Company was the guarantor of an offering of 
$250 million in guaranteed bonds convertible 
into preference shares of the issuing 
subsidiary (Bonds), which are exchangeable 
for fully paid ordinary shares of SOCO. The 
size of the offering was increased from $200 
million due to strong institutional demand, but 
was still six times oversubscribed upon issue. 
The Bonds will pay a coupon of 4.50% per 
annum and will initially be convertible into an 
aggregate of approximately 6.238 million 
ordinary shares. The initial conversion price  
is £21.847 per ordinary share, a premium  
of 42%. The Bonds will be repaid at 100%  
of their principal amount on 16 May 2013 
unless previously converted or redeemed 
(further details of the convertible bond issue 
can be found in the Financial Review). 

increase in Vietnam interests
In June, the Group seized the opportunity  
to increase its interest in the promising 
Clastics play in the Cuu Long Basin of Vietnam 
by acquiring OPECO Vietnam Ltd., which holds  
a direct 2% interest in Block 16-1. The 
purchase price was $22 million (further 
details of the acquisition can be found in  
the Financial Review).

Board changes 
In December, the Company’s Non-Executive 
Chairman, Patrick Maugein, died after a long 
illness. Patrick was a friend, a tireless worker 
on behalf of SOCO and a champion of the 
Company. The Company benefited significantly 
through its relationship with Patrick and he  
will be missed. At the December Directors’ 
meeting, the Board voted unanimously to 
accept the Nominations Committee 

recommendation to appoint Rui de Sousa  
to succeed Patrick.

outLook
As active as we were in 2006, we will be even 
busier on the operations front in 2007. The 
development programme on Block 9-2 in 
Vietnam will be in full swing leading up to 
expected first oil in 2008. With only the rest 
of this year before licence expiry to explore 
Block 16-1 in Vietnam, barring an extension, 
we expect to drill up to eight exploration wells. 
We have prioritised an exploration well on a 
TGT “look-a-like” structure, Prospect “S”, 
identified from the 2006 3D seismic 
programme. This is expected to be followed  
by a high potential Oligocene/Basement target 
in the deep “E” prospect that essentially 
underlies the shallower “L” prospect. A 
declaration of commerciality on the TGT field  
is imminent.

We should see the initial results from the 
water flooding that began last year in the 
Kharir field in Yemen. The combination of  
the water flood, additional infill drilling and 
expanded production capacity should allow 
considerable growth in oil sales in Yemen, 
albeit after an early 2007 cutback due to 
additional facilities installation. 

While evaluation of our West Africa portfolio  
is in its infancy, indeed, even the portfolio 
itself is evolving, 2007 will be a busy year  
in terms of pre-drilling activity. We are 
processing and will soon be interpreting the 
3D seismic acquired last year on Marine XI 
offshore Republic of Congo (Brazzaville). It is 
conceivable that we could be ready to drill in 
the latter part of the year, but more likely in 
2008. We expect to be acquiring 2D seismic 
on the Democratic Republic of Congo 
(Kinshasa) Nganzi Block. 

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006 

6 _ 

We know that not every well drilled in 2007 
will be a success. We understand that even  
on the highly prospective Vietnam Block 16-1 
Clastics play, the chances of drilling success 
are only in the 25% range. However, we have 
positive indications for further good news from 
the Vietnam exploration programme. There 
certainly will be an abundance of news. We 
trust that you share our enthusiasm for what 
is in store. 

Rui de Sousa 
Chairman 

Ed Story 
President and
Chief Executive

 
REVIEW OF 
OPERATIONS

the high impact drilling programme in 
vietnam continued apace throughout 2006 
whilst production in yemen experienced a 
major uplift and significant progress was 
made in the development of the kharir field. 
the drilling success ratio in vietnam 
exceeded 70% as five of seven exploration/
appraisal wells were discoveries. 

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006 

8 _ 

produCtion: 
barrels of oil per day

2006:

    6,766
2005:    5,684

Results from the Yemen appraisal programme 
and production capacity expansion translated 
into an immediate economic impact as 
production net to the Group’s working interest 
was up approximately 20% averaging 6,766 
barrels of oil per day (BOPD) versus 5,684 BOPD 
in 2005. 

Vietnam
SOCO holds its interests in Vietnam, all in the 
Cuu Long Basin offshore, through its 80% owned 
subsidiary SOCO Vietnam Ltd. (SOCO Vietnam) 
and through its 100% ownership of OPECO, Inc. 
(see the Financial Review for details of the 
OPECO acquisition that occurred in 2006). 
SOCO Vietnam holds a 25% working interest in 
Block 9-2, which is operated by the Hoan Vu 
Joint Operating Company (HVJOC) and holds  
a 28.5% working interest in Block 16-1, which  
is operated by the Hoang Long Joint Operating 
Company (HLJOC). OPECO, Inc. holds a 2% 
interest in Block 16-1.

Both Blocks are on trend with several major 
Basement and Tertiary discoveries in the Cuu 
Long Basin. Both are also contiguous to the 
Bach Ho field, where 2006 production reportedly 
averaged approximately 191,000 BOPD and 
150 million cubic feet of gas per day (MMCFD), 
and the Rang Dong field, where production 
reportedly averaged approximately 42,000 
BOPD, primarily from the Basement.

reView oF 2006 actiVities
Block 16-1
In March 2006, the TGT-2X appraisal well  
on the Te Giac Trang (TGT) structure, an  
up-dip follow-up well to the previous year’s TGT-
1X discovery well, tested with a total combined 
flow rate of approximately 17,500 BOEPD from 
the Miocene Lower Bach Ho 5.2 (LBH 5.2) and 
Oligocene “C” intervals.

Two main pay zones were tested within the LBH 
5.2 interval, one between 2,763 and 2,817 
metres and the other between 2,666 and 2,726 
metres. A total of 89 metres of pay was 
confirmed by log analysis in this reservoir horizon.

The combined stabilised flow rate from  
the two Miocene zones was 14,053 BOEPD 
comprising 12,615 BOPD of 38 degree API 
gravity crude and approximately 8.63 MMCFD 
through a one inch choke size. Flow rates were 
limited due to mechanical restrictions in the  
surface separation equipment.

The drill stem test over the Oligocene “C” interval 
tested water-free at a stabilised rate of 3,300 
BOPD of 37.5 degree API gravity crude and 
approximately 0.88 MMCFD through a 52/64 
inch choke size. 

As was expected from the log analysis, water 
was produced from the lower set of perforations 

key performanCe indiCators 

Production (barrels of oil per day) 

Total proven and probable reserve additions (millions of barrels of oil equivalent) 

Proven and probable reserves (millions of barrels of oil equivalent) 

See the Five Year Summary on page 69 for definitions

2006 

2005

6,766 

41.8 

160.6 

5,684

100.6

133.2

 
 
 
 
REVIEW OF OPERATIONS CONTINUED

With an 80% 
drilling suCCess 
rate on the tgt 
struCture and 
tests ranging 
from approx 
9,000 Boepd to 
approx 17,500 
Boepd, aCtivities 
are noW foCused 
on early 
approval for 
development  
of the field

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006 

10 _ 11

gordon graham
Group Exploration Manager

in the Miocene. The approximate 8% water cut 
provided evidence of the presence of an aquifer, 
which will be factored into plans for the field’s 
depletion management. A third reservoir horizon, 
the LBH 5.1 which is considered to be oil-
bearing and productive, was also identified, but 
not tested as this would limit the ability to retain 
the well as a future producer, as originally 
designed. This horizon had 18 metres of net pay 
and, from the analysis of logs and oil samples 
from wireline formation tests, is considered to  
be oil-bearing and productive.

Following the temporary suspension of the TGT-
2X well, the rig moved immediately to drill a 
follow-up appraisal well, the TGT-3X, 
approximately 10 kilometres to the south on a 
separate fault block on the structure. A drill stem 
test was conducted in the LBH 5.2. The tested 
interval, perforated between 2,827 and 2,887 
metres, flowed at a combined maximum rate of 
9,908 BOEPD comprising 9,008 BOPD of 40.5 
degree API gravity crude and approximately 5.4 
MMCFD through an 88/64 inch choke size. 

Log analysis of the well indicated approximately 
68 metres of net pay were present in the LBH 
5.2. Additionally, approximately six metres of net 
pay in the Lower Oligocene “C” interval were  
also identified but not tested. 

The LBH 5.2 reservoir sands encountered  
in the TGT-3X well are the same as those tested 
in the TGT-1X and TGT-2X wells. This proved the 
presence of a laterally extensive reservoir sand in 
the Block, further reducing the risk of the other 
prospects and leads along the play fairway.

The third well drilled on Block 16-1 during 2006 
was the first exploration well on the “L” prospect 
approximately 30 kilometres south of the TGT-3X 
discovery. The Te Giac Vang 1X (TGV-1X) spudded 
on 2 May and reached a total measured depth 

(MD) of 3,926 metres in the Upper Oligocene. 
The well was deepened from its original 
prognosis due to the presence of encouraging 
hydrocarbon shows continuing below the original 
target depth. It was primarily positioned to test a 
closure at the LBH 5.2 level, the main productive 
horizon at the TGT discoveries. 

The well intersected a clastic sequence at the 
LBH 5.2 horizon, however the reservoir sands 
were poorly developed at the location and no pay 
was encountered. The sediments encountered 
suggested that the well was located outside the 
LBH 5.2 play fairway and that this fairway is to 
the north and west of the TGV-1X location.

The well was also drilled into the Oligocene, 
however the location was down-dip on the  
flank of the structure. Despite being in a flank 
position, good oil shows were encountered in 
several sands. After analysis of the logs, 
although the sands were confirmed to be 
hydrocarbon bearing, it appeared that these 
lacked sufficient permeability to produce at 
commercial rates and were therefore not tested.

These overall encouraging well results are being 
evaluated and the seismic re-interpreted prior to 
drilling a follow-up well to fully test the Oligocene 
in a more prospective up-dip position. The well 
also penetrated the source rock section at the 
top of the Oligocene validating the geological 
interpretation and confirming the potential of  
the deep Oligocene and Basement prospect 
underlying the shallower closures. 

The 2006 drilling campaign continued on the 
Block 16-1 play fairway when the Transocean 
Trident 9 jack-up rig spudded the TGT-4X well on 
the “H3” fault block in the TGT structure on 31 
August. This third appraisal well on the TGT 
structure, was drilled on a separate fault block 
between the initial discovery well, TGT-1X and 

REVIEW OF OPERATIONS CONTINUED

the TGT-3X. The well intersected the 
hydrocarbon bearing Lower Miocene reservoir 
interval as predicted. However, the trap had been 
breached and only residual oil was encountered. 
The well also encountered hydrocarbons in the 
Oligocene “D” interval, a new reservoir on the 
Block, and flowed at a rate slightly over 600 
BOPD on a short test. 

Subsequent detailed review of the seismic 
identified that the breaching of the Lower Miocene 
trap was due to late movement on a fault located 
south of the TGT-4X well. This appears to be the 
only such fault on the TGT field and the effect is 
considered to be local to this well. 

The following well, in October, was a test of 
Prospect “K”, a subtle closure to the west of the 
higher amplitude TGT structure. After encountering 
reservoir sands, the first exploration well on the 

Te Giac Xang (TGX) structure on Prospect “K”  
was plugged and abandoned when initial analysis 
indicated that it was not drilled within structural 
closure. Located in a previously untested portion 
of the Clastics fairway on Block 16-1, the TGX-1X 
well was drilled to a depth of 3,506 metres. 
Finding reservoir is the main risk in drilling in this 
fairway, so the presence of reservoir in TGX-1X is 
a positive indicator for future success as drilling 
locations step out from the initial TGT discovery. 
The seismic over the area is being reprocessed 
and remapped to better define the structure for  
a possible second well. 

The final well drilled in 2006 and the fifth 
appraisal well on the TGT structure was drilled on 
the “H2” fault block. The TGT-5X had a total 
combined maximum flow rate of approximately 
16,430 BOEPD from the LBH 5.2 and Oligocene 
“C” intervals. 

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  12 _ 13
13 _ 13
SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006 

antony maris
Group Operations  
and Production Manager

The first drill stem test, over the 32 metre 
Oligocene “C” interval, tested water-free  
at a maximum rate of 7,098 BOPD of 36.5 
degree API gravity crude and approximately 2.07 
MMCFD through an 80/64 inch choke size. The 
most prolific interval in the other successful wells 
drilled on TGT, the LBH 5.2 pay zone, was 
perforated and tested separately between 2,841 
and 2,866 metres with a maximum flow rate of 
8,987 BOEPD comprising 8,104 BOPD of 41 
degree API gravity crude and approximately 5.3 
MMCFD through an 80/64 inch choke size.  

On the TGT structure, only the southern most 
fault block in the five fault block structure 
remains to be drilled. The LBH 5.2 and 
Oligocene “C” reservoirs encountered in the  
TGT-5X well appear to be the same as those 
tested in the previous TGT wells. With an 80% 
drilling success rate on the TGT structure  
and tests ranging from approximately 9,000 
BOEPD to approximately 17,500 BOEPD, 
activities are now focused on early approval  
for development of the field.

The rig was moved to Block 9-2 to drill  
the initial Clastics well on the Ca Ong Doi  
(COD) structure after a long delay due to 
inclement weather. 

Block 9-2
Drilling operations recommenced on 5 June 
2006 into the “D” fault block of the Ca Na  
Vang (CNV) structure to drill the sidetrack to the 
CNV-4X well on Block 9-2 that was temporarily 
suspended in 2005 after encountering 
unexpected high pressures in the Oligocene 
sequence above the Basement. The re-entry and 
sidetrack of the appraisal well, CNV-4XST, tested 
at a maximum combined rate of approximately 
7,050 BOEPD comprised of approximately 5,333 
BOPD and approximately 10.3 MMCFD. The 
open hole test was conducted over a 13 hour 

period from a Basement interval of approximately 
1,350 metres. 

Log analysis of the Oligocene “E”, penetrated  
by this well, indicated that the interval lacked 
permeability. The CNV-4XST was drilled to a MD 
of 6,330 metres making it the longest MD well 
to be drilled in Vietnam, exceeding the previous 
record set by the HVJOC when it drilled the  
CNV-3X appraisal well in 2005. The well was 
suspended as a producer.

Preparations for development of the CNV field 
picked up momentum in April of 2006 following 
the unanimous approval of the Declaration of 
Commerciality on the field by the shareholders  
of the HVJOC. Petrovietnam officially approved 
the Pilot Development Plan in December. 
Subsequent to this approval, Petrovietnam  
has become a full paying participant in its  
50% interest in Block 9-2.

Vietnam has become a participant in the  
World Trade Organization (WTO). Following its 
admission into the WTO, portions of the state 
operated enterprises, including Petrovietnam,  
are expected to be privatised. This portends  
a change in negotiating certain aspects of the 
development programme, particularly a gas  
sales agreement as the gas group is expected to 
be an early candidate for privatisation. However, 
discussions on the sales agreement for the 
associated gas produced from the CNV field 
have continued. Equipment and materials are 
being ordered and fabrication of various 
structures will begin soon in anticipation of 
having first oil in the first half of 2008. 

The rig, which had been conducting the Group’s 
Vietnam drilling programme since the beginning 
of 2005, moved out of Vietnamese waters after 
completion of the CNV-4XST. However, the  
drilling campaign continued uninterrupted with 

 
REVIEW OF OPERATIONS CONTINUED

george hepler
Group Technical/  
Engineering Manager

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  14 _ 1

drilling results 
and the 
addition of a 
self-Contained 
produCtion 
faCility in the 
esda have 
enaBled the 
fields to exCeed 
all previous 
produCtion 
reCords

the Trident 9 drilling rig, which the JOCs had 
contracted in 2005, commencing operations 
back on Block 16-1. A further two rigs were put 
under contract during the year to conduct an 
even more extensive 2007 drilling programme.

suBsequent eVents and  
2007 outLook
The drilling rig that began operations on Block 
16-1 in the third quarter of 2006 was delayed 
from moving to a Block 9-2 drilling location on 
the COD structure after completing the TGT-5X 
well due to inclement weather that prevented  
the rig from being safely towed. Accordingly, the 
COD-2X Clastics target well did not spud until 16 
February 2007. Although the well encountered 
sands in the Oligocene and Lower Miocene, there 
was no significant oil pay encountered and the 
well was subsequently plugged and abandoned 
and the rig moved back to Block 16-1. 

Although the rig currently working is only available 
into the second quarter of this year, the JOCs 
have already contracted two other rigs – one of 
which is expected to be available late in the first 
quarter or early in the second quarter and the 
other later in the second quarter. The prognosed 
drilling programme calls for eight wells on Block 
16-1 and three to five development injector/
producer wells on the Block 9-2 CNV field as  
it prepares for first oil in the first half of 2008. 

Efforts are underway to obtain a declaration of 
commerciality for the TGT structure. The front-
end work required to transition operations from 
the exploratory phase to the development phase 
is in progress with the hopes to allow first oil 
from Block 16-1 sometime in 2009.

The exploration phase on both blocks is set to 
expire at the end of 2007 unless further extended 
by agreement with the Vietnamese Government. 
Thus the 2007 drilling campaign is extremely 

important in terms of fully evaluating the blocks 
and securing areas for longer term development.

yemen
Throughout the year, the East Shabwa Block 10 
consortium continued its programme to further 
appraise the Kharir field and to increase 
production capacity from Block 10. The East 
Shabwa Block 10 consortium comprises Comeco 
Petroleum, Inc. (28.57% interest), in which 
SOCO holds a 58.75% interest, TOTAL E&P 
Yemen (28.57% interest and operator), 
Occidental Yemen Ltd. (28.57% interest) and 
Kuwait Foreign Petroleum Exploration Co. 
(14.29% interest). 

Drilling results and the addition of a self-
contained production facility have enabled the 
fields to exceed all previous production records. 
For the second consecutive year, production 
increases were significant – circa 40% and 22% 
for 2005 and 2006, respectively. During the 
year, production exceeded 40,300 BOPD, up 
almost 7,400 BOPD from the 32,937 BOPD 
year average the previous year, despite having to 
curtail production due to safety and production 
management reasons below the 45,000 BOPD 
plateau reached earlier in the year.

Production from the East Shabwa Development 
Area (ESDA), approximately 80% of which 
originates from the Kharir field, is transported  
by pipeline and commingled with production 
from the neighbouring Masila Block before 
transportation by pipeline to the coastal Ash 
Shihr export terminal. SOCO’s crude entitlement 
is sold under a 12-month spot market contract.

reView oF 2006 actiVities
A number of successful development wells were 
drilled in the Kharir field (KHA) during the first 
half of 2006. These include the KHA-1-12 well 
in the western part of the structure, the KHA-1-14 

REVIEW OF OPERATIONS CONTINUED

proven and 
proBaBle reserves 
 millions of barrels of  
oil equivalent

  2006:
    160.6
2005:    133.2

serge lesCaut
General Manager, West Africa 
(below, right)

well in the southern flank of the structure and 
the KHA-1-07.G1 sidetrack, which was drilled  
as a water injection well but completed as a 
producer based on drilling results. These wells 
are all connected to the production facilities  
and were tested at rates between 5,500 and 
8,000 BOPD.

The KHA-1-16 well, drilled on the eastern most  
3D seismic line as part of the continuing 
appraisal and development of the Basement 
reservoir in the Kharir field, tested at over 8,400 
BOPD. The implications of the results of this 
edge of field are that the field could have a 
substantial eastward expansion.

Most of the drilling activity in the Kharir field  
in the second half of 2006 was spent on the 
drilling of water injection wells to provide 
pressure support for the Basement production. 
These include the KHA-1-15, KHA-1-17, KHA-
1-19 and the KHA-2-18 wells. In addition, the 
gas injection well, KHA-1-11 was completed 
with two open hole sections to maximise the 
injection capacity of the well.

The appraisal of the Kharir North area has 
continued with the KHA-3-08 drilled to the very 

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006 

16 _ 1

northwest of the mapped area of the structure. 
Testing operations on this well are ongoing.

Activity to enhance the recovery of the Biyad 
reservoir horizons at both Atuf and Kharir are 
also ongoing. At Atuf the ANW-012 and ANW-
013 infill production wells encountered the 
reservoir horizons higher than expected. These 
have provided encouragement for more 
efficient reservoir recovery. 

The thrust of the exploration programme in 
2006 was in the northern part of Block 10 in 
the Jathma/Wadi Taribah area. The first Jathma 
exploration well, the JAT-01 that tested early in 
the year over 1,900 BOPD, was placed on long 
term production in the third quarter of the year. 
The oil produced is trucked to the existing 
Kharir facilities for processing and export.

Two other exploration wells in the Jathma area, 
the JAT-02-ST and the exploration well on the 
eastern side of the Jathma area, JAT-04, 
encountered significant oil columns, but did not 
flow commercial volumes of hydrocarbons when 
tested. An evaluation of the results of all the 
Jathma area wells drilled to date is underway. 

suBsequent eVents and 2007 outLook
Drilling of development and injector wells in the 
Kharir field to increase Basement productivity 
will continue throughout the year. In particular, 
delineation of the eastern end of the field will 
be a priority in 2007. Additionally, the KHA-1-
20 and KHA-1-22 Biyad oil production wells 
are being drilled currently to accelerate and 
improve the recovery from the Clastics horizon. 

The additional surface facilities required to 
provide injection capacity are being installed 
and the pre-drilled water injection wells will be 
connected during the middle of 2007. Currently, 
the final elements of the commissioning of the 
gas injection equipment are being completed 
prior to commencing gas injection to provide 
pressure maintenance in the crestal area of  
the Basement.

Production capacity is expected to continue  
to increase during the year as various initiatives 
progress. Together with adding water injection 
capability to improve pressure maintenance in 
the Basement reservoir, considerable productive 
capability should be added throughout the year, 
albeit after an early 2007 cutback pending the 
installation of these facilities.

Three drilling rigs are expected to continue 
operating throughout the year. As at the date of 
this publication three rigs are under contract on 
Block 10 and are drilling in the Kharir field. One rig 
is expected to be used for exploratory drilling in the 
southeast corner of the Block later in the year.

repuBLic oF congo (BrazzaViLLe)
SOCO Exploration and Production Congo (SOCO 
EPC), the Company’s 85% owned subsidiary was 
initially awarded a 75% interest in the Marine XI 
Block, offshore the Republic of Congo (Brazzaville) 
in 2005. The terms of the Production Sharing 
Agreement signed by the Société Nationale des 
Pétroles du Congo (SNPC) and SOCO EPC was 
approved during the Congolese Parliament and the 

REVIEW OF OPERATIONS CONTINUED

Senate extraordinary session in the first quarter of 
2006. The law became effective 30 March when 
signed by the President of the Republic. 

The Block, located in the Lower Congo Basin, is  
in shallow water adjacent to the coast with water 
depths ranging up to 110 metres and covers 
approximately 1,400 square kilometres. There 
has been previous exploration activity on the 
Block resulting in four oil discoveries, the largest 
of which has initial recoverable reserves estimated 
to be in the 30 to 60 million barrel range. 

reView oF 2006 actiVities
In September, SOCO EPC entered into an 
agreement to farm-out an 18.75% interest in 
the Marine XI Block, offshore the Republic of 
Congo (Brazzaville), to each of a subsidiary of 
Lundin Petroleum AB and to Raffia Oil SARL. 
SOCO EPC retained operatorship with a 37.5% 
working interest in the Block. The regulatory 
authorities of the Government of the Republic  
of Congo (Brazzaville) ratified the farm-out on  
4 January 2007.  

Acquisition of an approximate 1,200 square 
kilometre 3D seismic programme was completed 
in the fourth quarter. By employing the modern 
seismic techniques that the Company 
successfully applied in Vietnam to map the 
Basement reservoir, SOCO EPC expects to 
exploit the potential of the pre-salt section.

suBsequent eVents and 2007 outLook
Processing and interpreting the 3D seismic 
acquired in 2006 will be the priority. Although it 
is possible that SOCO EPC could be ready to drill 
in the latter half of this year, it is more likely that 
drilling will commence in the first half of 2008. 

democratic repuBLic oF  
congo (kinshasa)
In July, the Company’s 85% owned subsidiary,  
SOCO DRC Limited (SOCO DRC), signed subject  
to presidential decree, a Production Sharing 
Contract with the Government of the Democratic 
Republic of Congo (Kinshasa) and La Congolaise 
des Hydrocarbures (Cohydro), the state owned 
oil company, wherein it acquired an interest in 
the Nganzi Block. The Block, onshore the 
Democratic Republic of Congo (Kinshasa), 
comprises an area of approximately 800 square 
kilometres. SOCO is the designated operator 
with an 85% working interest in the Block. 

reView oF 2006 actiVities
Most of the activity during the year was focused 
on detailed analysis of a reconnaissance 
aeromagnetic and gravity survey over the onshore 
extension of the coastal basin in order to delineate 
prospective areas for hydrocarbon generation and 
migration. The survey indicated the presence of a 
deep pre-salt source graben in the northern part 
of the basin in the Nganzi Block. Regional 
mapping shows the graben to be on trend with 
the source basin for the M’Boundi field in the 
southern part of the Republic of Congo 
(Brazzaville). Several leads, interpreted as large 
horst blocks, have been identified on the Block.

survey to further define the prospectivity of 
various identified structures. Initially, the plan is 
to acquire some 300 to 500 kilometres of 2D 
seismic. Dependent upon the timing of the 
seismic acquisition, processing and interpretation 
could be substantially completed this year. Any 
meaningful work programme is conditional upon 
obtaining the presidential decree.  

thaiLand
SOCO’s 99.93% owned Thailand subsidiary,  
SOCO Exploration (Thailand) Co. Ltd. (SOCO 
Thai), holds a 100% interest in Block B8/38 
located offshore in the Gulf of Thailand. An 
application and development plan was approved 
in 2006 by the Thailand Department of Mineral 
Fuels to convert the concession into a 
production licence on the Bualuang discovery  
on the Block. 

reView oF 2006 actiVities
Upon securing approval from the Thailand 
Department of Mineral Fuels to convert the field 
from an exploration to a production licence in the 
first quarter of 2006, SOCO Thai signed an 
agreement to allow a two group consortium to 
earn up to a 60% working interest in the licence 
(details of the farm-out are in the Financial 
Review). If the earn-in terms of the agreement 
are fulfilled, SOCO Thai would retain a 40% 
working interest in the field. The assignment of 
interests in the agreement is subject to approval 
of the appropriate regulatory authorities of the 
Government of Thailand.

During the year, the farmee’s efforts were 
directed toward the planning and contracting of 
several front-end activities precluding the start-
up of development operations in 2007.

suBsequent eVents and 2007 outLook
Prior to acquiring a 2D seismic survey, the 
Company expects to conduct a geochemical 

suBsequent eVents and 2007 outLook
In January, the farmee group was consolidated 
with GFI Oil and Gas Corporation (GFI) becoming 

 
SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  18 _ 1

Accordingly, the Group will continue to assess  
its participation in the consortium in light of 
reasonable expectations of success. It is 
anticipated that ODEX will continue to be the 
vehicle through which the Group will explore 
various opportunities that may arise in Libya  
and certain parts of Africa as the consortium  
is well placed to take advantage of its strong 
regional relationships.

the sole farmee. GFI expects to conclude a high 
resolution 100 kilometre 2D seismic programme 
during the second quarter of 2007 in preparation 
for drilling the initial commitment well and 
completing the milestone to earn a 20% interest 
in the Bualuang field.

Further, GFI has already entered into a contract 
with a floating production, storage, and offloading 
vessel with the expectation of concluding the 
work programme to earn an additional 40% 
interest by funding 92% of the costs to take the 
project to first oil. GFI estimates first production 
would be achieved in the first half of 2008.

other areas oF interest
caBinda
In October, the Company was informed by 
Sonangol, the national oil company of Angola, 
that it would have a participating interest in the 
contractor group of the Cabinda Onshore North 
Petroleum Concession. The Group anticipates 
formal completion of the assignment in the first 
half of 2007. Preparation has begun for the 
acquisition of a high resolution aeromagnetic  
and gravity survey over the Block. 

LiBya
The Group maintains its shareholding in the 
ODEX Exploration Limited (ODEX) joint venture. 
The ODEX shareholding comprises SOCO North 
Africa Ltd. (34%), and subsidiaries of Oilinvest 
(Netherlands) B.V. (46%) and Joint Stock Bank  
of the Gas Industry Gazprombank (20%). From 
SOCO’s standpoint, the niche for ODEX was to 
participate with one or more indigenous Libyan 
companies in exploiting existing but problematic 
development opportunities. While the focus in 
the past two years of the Libyan National Oil 
Company has been on open exploration bid 
rounds, it announced in late 2006 an initiative  
to negotiate for participation in production and 
development projects.

CORPORATE 
RESPONSIBILITY

soCo’s commitment to high standards of corporate responsibility 
(Cr) is a core business priority. the Company supports the 
principle that whilst a Board has a primary responsibility to its 
shareholders, it should also take full account of other stakeholders’ 
interests. soCo believes that integrating Cr and sustainable 
development good practice into its management culture will lower 
the Company’s risk profile and promote new opportunities.

This report focuses on our CR management  
and explains how this supports SOCO’s overall 
business performance.

SOCO does not yet have an expansive set of policy 
documents and procedures, which is reflective of 
the relatively small scale and nature of the 
Company’s activities and size of organisation. 
Currently, the Company directly participates in the 
operation of two offshore exploration and appraisal 
ventures, in Vietnam and the Republic of Congo 
(Brazzaville). In these cases, environmental and 
social impacts are relatively minor. Environmental 
impact assessments are nevertheless carried out 
and independent performance monitoring is 
standard practice. Beginning in 2006, SOCO has 
begun onshore operations in the Democratic 
Republic of Congo (Kinshasa) and detailed 
procedures are being developed for this activity 
(see below).

Where SOCO participates as an operating interest 
holder or co-venturer in a project, we can directly 
influence operations and decision making. 

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  20 _ 21

However, where SOCO holds a minority interest, as 
an investor or participant in a project, our influence 
is less direct. In both cases, our expectations for 
CR are clearly established, communicated and 
monitored. The Company has had a health, safety 
and environment (HSE) policy conforming to best 
practice since the first year of its existence, and 
has tailored HSE management systems for its 
Vietnam operations. New operations in West Africa 
will be undertaken using bespoke management 
systems specific to the types of environment and 
operations. The Company also deploys external 
advisors to ensure that good practice is achieved.

The Company’s Code of Business Conduct and 
Ethics (the Code) was drawn up in response  
to rising expectations in the wider community, 
including among many institutional shareholders, 
regarding social, environmental and ethical 
management and is available to view on the 
Company’s website. Approved by the Board in 
June 2004, the Code documents and 
encapsulates the Company’s culture and 
objectives and addresses the three pillars of 
sustainable development: economic, 
environmental and social performance. It is 
designed to be a dynamic policy that will evolve  
as the Company expands its activities. SOCO will 
continue to communicate its CR activities using  
its annual report and corporate website to 
complementary effect.

SOCO’s approach to CR begins with the 
recruitment of key managers and operations 
personnel. It is a priority consideration that every 
relevant employee understands the importance  
of CR management and has knowledge of what 
constitutes best practice, which can foster 
informed decision making and an instinctive 
appreciation of the relevant business 
implications associated with each operation. 
There is no restriction on the use of external 
advisors to ensure that corporate objectives are 
met. This approach of utilising external, rather 
than dedicated internal resources can be highly 
effective in a company of SOCO’s size because 
corporate objectives are not compromised by 
management numbers and layers. Another  
core element of SOCO’s business culture,  
which is a source of potential benefit, is the 
practice of maximising local employment and 
contract outsourcing.

Local involvement is our policy in all operations 
that we control. Such an approach has 
significantly benefited operations and has been  
a major factor in SOCO winning access to 
opportunities on the strength of the relationships  
it has forged (for example,in Vietnam). A highly 
localised approach does, however, introduce 
additional risks. An ever-present risk is that 
contractors may not, in practice, share an 
operating company’s commitment to high CR 
standards. This can be critical where contractors 
have a large degree of control over day-to-day 
activities, and act as the main interface with 
members of government and local communities. 
This applies particularly to locally based contractors 
and subcontractors whose histories and cultures 
may have demanded different social and 
environmental standards. 

SOCO manages this area of risk carefully,  
both in its selection of contractors and the 

subsequent monitoring of their performance. This 
will become more of an issue for any development 
activities, where social and environmental impact 
would normally be much greater than that arising 
from SOCO’s current exploration focus.

With SOCO’s recent entry into West Africa,  
a new core area of operations, it has been 
important to review and clarify the Company’s 
approach to the implementation of community 
relations and related risk management practices  
to assure the following key objectives:

•   Preservation and enhancement of SOCO’s 

reputation and that of its existing and future joint 
venture partners

•   Reduction of corresponding operating risks  

in relation to the assets

•   Clarification of SOCO’s responsive risk 

management strategy

•   Positioning for reporting on social risks and 

responsive management practices.

As such, we have had an independent third party 
contractor, who specialises in this work, review our 
current approach and recommend improvements. 
Lessons from this assessment will be applied,  
with appropriate modifications, to all SOCO’s 
operations in West Africa, as well as elsewhere.

recent actiVity and outLook
west aFrica
In the last year, SOCO has agreed participation in 
offshore Republic of Congo (Brazzaville), onshore 
Democratic Republic of Congo (Kinshasa) and 
onshore Cabinda. SOCO is operator for the first 
two operations so has principal responsibility for 
management of CR issues.

SOCO’s new operations in West Africa are 
managed deploying the same approach to  
local involvement that the Company has taken 
elsewhere in the past, principally Mongolia, where 
our operations were always underpinned by the 
Company’s strong commitment to building skills 
among local communities. This has the effect of 
generating positive economic benefits, both locally 
and nationally. Virtually all of the people who work 
for us in the Republic of Congo (Brazzaville) and 
the Democratic Republic of Congo (Kinshasa), 
whether employees or contractors, are nationals. 
Their association with SOCO will give them access 
to training of a high international standard. This 
approach to local communities works both ways; 
as well as reducing SOCO’s costs and risk 
exposure, it will attract ongoing support from  
the local authorities.

repuBLic oF congo (BrazzaViLLe)
Already, even though SOCO only established  
an office in late 2006, the Company, together  
with the support and co-operation of the Ministry 
of Hydrocarbons in the Republic of Congo 
(Brazzaville) has supplied or commenced a 
number of projects aimed directly at providing 
support for the benefit of the local communities 
where we operate. These include the supply  
of 3,000 impregnated mosquito nets to the 
communities of Ngoyo and Lumumba, supply  
of drugs at the Polyclinic Kitoko in Pointe Noire, 
the drilling of a water well for the community of 
Madingo-Kayes, and the distribution of school 
stationery and Christmas presents to children  
in Pointe Noire.

it is a priority 
Consideration 
that every 
relevant 
employee 
understands 
the importanCe 
of Cr 
management 
and has 
knoWledge of 
What Constitutes 
Best praCtiCe

 
yemen
In Yemen, increased oil production has led  
to an increase in associated gas production which 
has resulted in increased gas flaring, rising to 
approximately 21 million cubic feet per day 
(MMCFD). SOCO has encouraged and supported 
the operator in addressing this issue and the first 
temporary gas injection facilities, having a capacity 
of 10 MMCFD, are now installed and are being 
commissioned. Additional permanent facilities 
have been designed and all the initial required 
activities commenced. At the same time, gas fired 
power generation and gas fuelled engines, which 
will utilise up to 3 MMCFD and displace existing 
diesel powered generators, are being installed.  
The diesel powered engines produce more harmful 
emissions than gas and the fuel requires 
transportation to site by road tankers.

mongoLia
Our operations in Mongolia, which have now  
been disposed of, had always been underpinned 
by a strong commitment to building skills among 
local communities. Virtually all of the people who 
worked for us in the country, whether employees 
or contractors were Mongolian nationals and  
their association with SOCO gave them access  
to training of the highest international standards. 
Even in the sale of its Mongolian assets, the 
Company worked with the government to preserve 
and enhance local involvement in order to make 
the most of the change in ownership of the asset. 
The new Chinese owners are committed to an 
even higher level of activity which will further 
benefit Mongolian and Chinese communities 
affected by the operations.

poLicy and Future  
management oF cr
SOCO is committed to applying widely accepted 
good practice in CR management. The detailed 
guidance set out by the World Bank Group and 
incorporated into the Equator Principles agreed  

CORPORATE RESPONSIBILITY CONTINUED

SOCO, through its wholly owned subsidiary  
SOCO Exploration and Production Congo, has 
already conducted seismic operations in the 
shallow water Marine XI licence area. Prior to this 
activity, the Company completed the required 
environmental assessments and impact studies. 
Exploration activity is likely to commence in 2008 
and this year will see the additional work needed 
to support the approval of drilling operations 
completed. This will include all the required 
environmental assessments.

democratic repuBLic oF congo (kinshasa)
SOCO is currently preparing to undertake a seismic 
programme in its Democratic Republic of Congo 
(Kinshasa) licence area. Part of the planning for 
this survey will involve environmental and social 
impact assessments. An important first step will 
be the identification of local social issues and this 
will require interaction with local communities to 
learn about their social priorities and to inform 
them about the nature of impending and future 
operations. Being onshore, active community 
liaison will be important as will deployment of  
local personnel to support operations.

Vietnam
The Company also continues to demonstrate its 
commitment in Vietnam. In 2006, as well as 
providing a donation and support for victims of the 
Typhoon Xangsane, we also contributed towards 
the construction of the Dang Thuy Tram hospital  
at Duc Pho, Quang Ngai province. Also, financial 
assistance for the construction of Ky Son Hospital 
in Hao Binh province was made. This project will 
benefit a community of over 4,200 people and  
will serve the community for at least the next 10 
years. Equally, financial support was given for the 
construction of a surgery for children with Delta 
Muscle Fibrosis in Ha Tinh Provice that deals with 
some 1,500 cases of the disease.

At the same time we have contributed towards  
the upgrading and provision of educational 
facilities, as well as scholarship for underprivileged 
pupils, in the Binh Thuan district of Ho Chi Minh 
City. We continue to support construction of a 
rehabilitation centre for Agent Orange victims in 
Vinh Phuc Province. After receiving the required 
approvals, the levelling of the surface and the 
commencement of construction has commenced. 
Support for this project will continue in 2007.

Successful exploration and appraisal offshore 
Vietnam has resulted in the formation of plans  
for development. With the approval of the first 
development full environmental and social impact 
assessments have been undertaken, although 
impacts are expected to be minor. Oil production 
will pass to existing onshore facilities, so the 
principal impact will be an extension of the useful 
life of these assets, thus having a beneficial 
sustainability influence. The most material 
environmental issue will be the production of 
significant quantities of associated gas. This 
represents an important economic asset for the 
Company and the Vietnamese people. Current 
plans are based on the successful sale of this gas 
for national use, passing through existing facilities. 
In the event that satisfactory arrangements cannot 
be achieved in the development timescale, the 
gas will be temporarily injected until commercial 
contracts can be agreed.

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  22 _ 23

by many international lending banks is the basic 
benchmark SOCO has adopted. As well as 
representing good international practice, this 
approach has two key advantages:

•   SOCO is involved in developing countries  

and, in conjunction with joint venture partners,  
would expect to raise loan finance from 
international aid donor agencies and Equator 
Principles banks

•   It should be more straightforward for SOCO  
to agree, with governments and other critical 
stakeholders, a set of standards with wide 
international recognition rather than standards 
with a proprietary component.

In this context, SOCO has, during the last two 
years, raised a credit facility from the International 
Finance Corporation (IFC), which is the private 
sector arm of the World Bank Group. As part of 
the due diligence process, IFC personnel visited 
all of SOCO’s sites to assess our environmental 
and social management practice. We intend to 
build on this relationship with the IFC, whose 
guidelines are in line with international best 
practice, to ensure that operations in all of our 
projects meet high standards of environmental 
and social management. This will demonstrate a 
commitment to sustainable development through 
the allocation of benefits to local communities in 
its area of operations in the form of the creation 
of jobs, the creation and expansion of local 
infrastructure, support for local primary education 
and support for training and capacity building for 
local personnel. 

The Company recognises the environmental 
impact of emissions from both its operated  
and non-operated activities. Currently, SOCO  
has nil operated emissions in terms of carbon 
dioxide equivalent. However, as part of its growth 
in operations, the Company is establishing a 
reporting mechanism through which the 

environmental impact of operations is measured 
and a means of reducing emissions of, in 
particular, greenhouse gases. The equity share  
of the Company’s non-operated emissions for 
2006 was approximately 0.02 million tonnes  
of carbon dioxide equivalent, all of which comes 
from its participation in Yemen.

SOCO is committed to transparency in its 
activities and would expect to set up project-
dedicated websites for any major operated 
activities. These would be designed to manage 
communication with stakeholders, particularly 
local communities, and to highlight employment 
and contractor opportunities arising from  
direct operations as well as any indirect socio-
economic activities.

While World Bank guidelines will be the operating 
benchmark, SOCO would expect to provide 
information to the wider public, either in public 
reports or on the Company website, in line with 
the guidance provided by the Global Reporting 
Initiative and other widely respected guidelines. 
The Chief Executive is responsible to the Board  
for HSE and other CR performance. He delegates 
day-to-day responsibility for managing such issues 
to the Group Operations and Production Manager, 
who is invited to all Board Meetings. These issues 
are reported to all Board Members in a monthly 
operations report and there is a Board agenda 
item which addresses all significant HSE and  
CR issues.

The Audit Committee is responsible for reviewing 
all areas of corporate risk assessment on an 
annual basis and HSE/CR is identified as a 
specific issue for assessment. The Senior 
Independent Director, who has experience in the 
relevant area, reviews HSE/CR performance in 
detail with senior managers annually and is kept 
routinely informed of any material performance 
issues as they arise.

FINANCIAL REVIEW

driven by another record high for 
average crude oil prices received 
during the year and record 
production from the group’s 
yemen project, after tax profits  
for the year jumped 42% from the 
previous year, rising to $29.1 
million from $20.5 million in 2005. 
this translates into basic and 
diluted earnings per share of 41.3 
cents and 36.9 cents, respectively, 
as compared to 29.0 cents and 
25.6 cents in the prior year from 
continuing operations.

income statement 
operating resuLts
Group oil and gas revenues in 2006 increased  
by 34% to $76.5 million from $57.2 million in 
2005. Of this increase $27.4 million was mainly 
due to a higher average realised oil price per 
barrel, which increased from $50.28 in 2005 to 
$62.73 for the reporting period and an increase 
in the Group’s net working interest production for 
its Yemen operations from 5,529 barrels of oil 
per day (BOPD) to 6,766 BOPD. Offsetting the 
higher price and production volumes was a 
variance of $8.1 million on adjustments of lifting 
imbalances arising in prior periods.

Cost of sales in 2006 were $21.2 million against 
$19.6 million in 2005 with the $8.1 million 

roger Cagle
Deputy Chief Executive 
and Chief Financial Officer

key performanCe indiCators 

Realised oil price per barrel ($) 

62.73 

 50.28

2006 

  2005

Operating cost per barrel ($) 

DD&A per barrel ($) 

Basic earnings per share (cents) 

Diluted earnings per share (cents) 

Total shareholder return (%) 

See the Five Year Summary on page 69 for definitions

5.91 

3.70 

41.3 

36.9 

75.8 

  4.55

  3.40

  29.3

  25.8

 102.6

 
 
 
 
SOCO INTERNATIONAL PLC  Annual Report & Accounts 2006  24 _ 2

realised oil priCe  
per barrel ($)

2006:

    62.73
2005:    50.28

variance on lifting imbalances reducing cost  
of sales in 2006 compared to 2005. Ignoring 
lifting imbalances the underlying increase in  
cost of sales has arisen due to higher production 
volumes, higher per barrel operating costs  
and higher depreciation, depletion and 
decommissioning costs (DD&A).

On a per barrel basis, excluding lifting 
imbalances and inventory effects, operating 
costs attributable to the Group’s sole producing 
asset increased from $4.55 per barrel in 2005 
to $5.91 per barrel in 2006. This was mainly 
due to higher production costs, equipment 
rentals and manpower costs associated with 
increased capacity and accelerated production 
along with higher diesel and transportation costs 
due to higher fees as the East Shabwa 
Development Area increases its proportionate 
use of shared facilities.

DD&A increased by $2.2 million from $7.1 
million in 2005 to $9.3 million in 2006  
due primarily to higher production. On a per 
barrel basis DD&A increased to $3.70 per 
barrel in 2006 from approximately $3.40  
per barrel in 2005 due to higher future 
development costs associated with extracting 
additional Basement reserves.

Administrative costs for the year increased from 
$5.3 million in 2005 to $8.8 million in 2006. 
This is primarily associated with higher payroll 
obligations, including taxation arising on share 
option gains following the significant increase  
in the Company’s share price and increased 
performance based bonuses along with 
administrative costs associated with the 
Company’s corporate activities.

Other operating expenses which comprise  
pre-licence exploration expenses decreased  
to $0.2 million in the reporting year from $1.0 

million in 2005. This reflects the Group’s 
continuing success in acquiring licences in  
its new core area of West Africa. 

The aforementioned effects led to a 48% 
increase in operating profit. Operating profit was 
$46.3 million in the year ending 31 December 
2006 rising from $31.3 million in 2005. 

non-operating resuLts
Following the issue of convertible bonds, 
discussed below, the Group had a significantly 
higher cash and cash equivalents balance, which 
was the main reason investment income 
increased from $2.0 million in 2005 to $9.3 
million in the current reporting period. 

The decrease in other gains and losses from 
$0.9 million in 2005 to $0.7 million in 2006  
was primarily due to an exchange gain of $0.5 
million in 2005, partially offset by a higher gain in 
2006 on the change in fair value of the financial 
asset associated with the subsequent payment 
amount tied to future oil production from the 
Group’s divested Mongolia interest. This figure 
includes a full year of unwinding of the discount 
in 2006 as compared to four months in 2005. 

Finance costs increased from $0.5 million in 
2005 to $8.1 million for the reporting year due  
to the interest expense on the liability component 
of the convertible bonds. 

The tax charge increased from $13.4 million  
in 2005 to $19.1 million in 2006 consistent  
with the increase in operating profit.

cash
SOCO’s cash and cash equivalents increased from 
the year end 2005 amount of $51.0 million to 
$187.8 million at 31 December 2006 mainly due 
to the proceeds of the convertible bonds issue 
supplemented by net income from the Group’s 

FINANCIAL REVIEW CONTINUED

Yemen operations. The increase was offset by  
the continuing investment in capital projects.

capitaL expenditure
Capital expenditure of $114.3 million in 2006 
compared to $76.2 million for 2005 reflects the 
Group’s continued drilling activity in both Vietnam 
and Yemen, facility upgrades in Yemen and the 
commencement of operational activity in the 
Group’s new core area of West Africa. Also, in 
June 2006, the Group acquired an additional 2% 
working interest in Block 16-1 offshore Vietnam 
for consideration paid of $22.0 million (see 
below for details of the transaction).

As discussed in the Review of Operations, the 
Hoan Vu Joint Operating Company (HVJOC) 
obtained approval from Petrovietnam for a Pilot 
Development Plan in December 2006 marking 
the successful conclusion of the appraisal 
programme. In accordance with the Group’s 
accounting policy set out in Note 2 to the 
financial statements, the intangible costs to  
31 December 2006 associated with the HVJOC 
have therefore been transferred to property,  
plant and equipment.

diVidend
Due to the continuing need to finance  
current and future exploration, appraisal and 
development projects, the Board of Directors are 
not recommending the payment of a dividend.

own shares
The SOCO Employee Benefit Trust (the Trust) was 
established in 2001 to administer a Long Term 
Incentive Plan. At the end of 2006, the Trust held 
2,273,300 of the Company’s ordinary shares 
(Shares), unchanged from 2005 and 
representing 3.12% of the issued share capital. 
Associated with the convertible bonds issue  
in May 2006, the Trust entered into a Global 
Master Securities Lending Agreement (GMSLA) 

with Merrill Lynch International. As at 31 
December 2006, 1,375,000 Shares were  
lent under the GMSLA.

During the year, the Company purchased 
608,000 treasury Shares at a cost of $13.6 
million. Of these, 580,500 plus brought forward 
treasury Shares of 150,000 were used to satisfy 
the obligation to issue Shares in settlement of 
certain share options. As at 31 December 2006, 
the Company held 27,500 treasury Shares.

corporate deVeLopments
thaiLand Farm-out
In April 2006, the Company’s subsidiary,  
SOCO Exploration (Thailand) Co. Ltd. (SOCO 
Thai), signed a Participation Agreement 
(Agreement) with GFI Oil and Gas Thailand Inc. 
(GFI) and TOPoil LTD, wherein they can earn up  
to a 60% working interest in the Bualuang field  
in the Gulf of Thailand. In January 2007, the 
farmee group was consolidated with GFI 
becoming the sole farmee (Farmee).

Under the terms of the Agreement, a 20% 
interest can be earned by the Farmee upon  
the conclusion of a Phase I work programme 
wherein the Farmee must conclude a high 
resolution 100 kilometre 2D seismic programme 
and drill one well in the Bualuang field. At the 
election of the Farmee, a further 40% working 
interest can be earned in the Phase II work 
programme. The Phase II work programme, 
during which SOCO Thai would fund only 8%  
of the cost, requires the Farmee to drill up to 
eight wells, install a platform and take the project 
to first oil. The assignment of interests  
in the Agreement is subject to approval of the 
appropriate regulatory authorities of the 
Government of Thailand.

After the end of the Phase II period, the Farmee 
shall be designated the operator of the project 

SOCO INTERNATIONAL PLC  Annual Report & Accounts 2006  26 _ 2

and shall engage an independent reservoir 
engineer to perform an analysis of the proven 
reserves contained in the Bualuang field. The 
Farmee shall pay SOCO Thai an amount equal  
to one dollar ($1.00) for each barrel over 10.4 
million barrels.

conVertiBLe Bonds
In May 2006, SOCO Finance (Jersey) Limited 
issued $250 million in guaranteed convertible 
bonds (Bonds). The Bonds will be convertible 
into the preference shares of the issuer, which 
are exchangeable for fully paid ordinary shares 
of SOCO. The Company is guarantor of the 
offering. The size of the offering was increased 
from $200 million due to strong institutional 
demand, but was still six times oversubscribed 
upon issue. 

The Bonds were priced at par and will pay  
a coupon of 4.50% per annum. The Bonds will 
initially be convertible into an aggregate of 
approximately 6.238 million ordinary shares. 
The conversion premium was set at 42.00%. 
The initial conversion price is £21.847 per 
ordinary share. The conversion price will be 
subject to adjustment from time to time upon 
the occurrence of certain events. Payment for, 
and settlement of, the Bonds occurred on 16 
May 2006. Unless previously converted or 
redeemed, the Bonds will be repaid at 100%  
of their principal amount on 16 May 2013.

The Bonds were admitted to the Official List  
of the UK Listing Authority and to trading on  
the London Stock Exchange’s Professional 
Securities Market. 

acquisition oF minority interest  
in Vietnam
In June 2006, the Company’s wholly owned 
subsidiary SOCO International (Cayman) Limited 
acquired the entirety of the shareholding of 
OPECO, Inc. for a total consideration of $22.0 
million. OPECO, Inc. in turn holds the entirety of 
the shareholding of OPECO Vietnam Ltd., which 
holds a direct 2% interest in Block 16-1 in the 
Cuu Long Basin offshore Vietnam. 

appointment oF corporate Broker
In August 2006, SOCO appointed Merrill Lynch 
International to be its joint Corporate Broker 
along with Bridgewell Limited.

risk management
FinanciaL
SOCO’s Board of Directors has designated  
the Chief Financial Officer as the executive 
responsible for the Company’s risk management 
function. The Audit Committee provides 
oversight while ultimate approval authority 
remains with the full Board.

Generally, it is the Company’s policy to conduct 
and manage its business in US dollars. Cash 
balances in Group subsidiaries are primarily held 
in US dollars, but smaller amounts may be held 
in GB pounds or local currencies to meet 
immediate operating or administrative expenses, 
or to comply with local currency regulations. The 
Group may take short term hedging positions to 
protect the value of any cash balances it holds 
in non-US dollar currencies.

The Group seeks to minimise the impact that 
debt financing has on its balance sheet by 
negotiating borrowings in matching currencies. 
The convertible bonds and the IFC facility are 
denominated in US dollars.

Company cash balances are invested in short 
term, non-equity instruments or liquidity funds, 
not exceeding three months forward. Investments 
are generally confined to money market or fixed 
term deposits in major financial institutions.

For further discussion of the Group’s financial  
risk management see Note 3 to the financial 
statements.

operationaL
The Board of Directors does not believe that  
it is practical or prudent to obtain third-party 
insurance to cover all adverse circumstances  
it may encounter as a result of its oil and gas 
activities. However, the Board of Directors 
believes that SOCO’s comprehensive property, 
casualty, liability and other policy cover conforms 
to industry best practice. As such, it provides 
substantial protection against typical industry 
operational risks. The Board believes it has  
struck an appropriate balance between exposure 
and coverage. 

The Group does not maintain any fixed price,  
long term marketing contracts. Production is  
sold on “spot” or near term contracts, with prices 
fixed at the time of a transfer of custody or on  
the basis of a monthly average market price. 
Although oil prices may fluctuate widely, it is the 
Group’s policy not to hedge crude oil sales unless 
hedging is required to mitigate financial risks 
associated with debt financing of its assets or  
to meet its commitments.

Accordingly, no price hedging mechanisms were 
in place during the year. Over time, during periods 
when the Group sees an opportunity to lock  
in attractive oil prices, it may engage in limited 
price hedging.

Many of the Group’s projects are in developing 
countries or countries with emerging free market 
systems. Generally, there is a greater risk of 
political, economic or social instability in these 
countries compared to nations with more 
established, developed economies.

Some of the Group’s interests are in regions 
identified as potentially more susceptible to 
business interruptions due to the consequences 
of possible subversive activity. The Group 
assesses such risks before beginning operations 
in any particular area and has deemed these 
risks commercially acceptable.

SOCO does not currently carry political risk  
or associated business interruption coverage  
to mitigate such risks. However, it periodically 
assesses the cost and benefit of both and future 
circumstances may lead the Group to acquire 
such cover.

BasiC earnings  
per share  
(cents)

2006:

    41.3
2005:    29.3

BOARD OF DIRECTORS

1

2

3

4

5

6

1. rui de sousa (51)
Non-Executive Chairman
•  A member of the Board of SOCO 

International since 1999 and Chairman 
of the Nominations Committee.
•  Chief Executive Officer of the Toro 

Group for over a decade.

  3. peter kingston (64)
Non-Executive Deputy Chairman and 
Senior Independent Director
•  A member of the Board of SOCO 

International since April 1997 and 
Chairman of the Remuneration and 
Audit Committees.

•  Currently, a director of Quantic Limited, 
a director of New Falcon Oil Limited 
and Chairman of Carbon Resource 
Management Ltd.

•   A petroleum engineer who has worked 
in the oil and gas industry since 1965 
in various roles.

•  Formerly, a founding director of 

2. ed story (63)
President and Chief Executive Officer
•  A member of the Board of SOCO 

International since April 1997 and  
a member of the Nominations Committee.

•  Formerly, President of Snyder Oil 

Corporation’s international subsidiary, 
Vice Chairman of Conquest Exploration 
Company, Vice President and CFO of 
Superior Oil Company and holder of 
various positions with Exxon Corporation, 
including seven years resident in the 
Far East.

•  Currently, a non-executive director of 

Cairn Energy PLC.

Enterprise Oil plc, going on to become 
Managing Director (Technical) and a 
director of Elf Enterprise Petroleum Ltd. 

•    Currently, Executive Chairman of Tower 
Resources plc, a non-executive director 
of Stratic Energy Corporation and a 
director of Plexus Energy Limited, a social 
and environmental advisory network. 

4. ettore contini (32)
Non-Executive Director
•  A member of the Board of SOCO 

International since December 2001.

•   Currently, a director of Eurowatt-

Commerce and a director of Italiana 
Energia e Servizi SpA.

5. roger cagLe (59)
Executive Vice President, Deputy CEO  
and Chief Financial Officer
•  A member of the Board of SOCO 
International since April 1997.

•  Over 30 years of experience in the oil 
and gas industry including succeeding 
positions of responsibility with Exxon 
Corporation and senior management 
roles with Superior Oil Company.
•  Formerly, Chief Financial Officer of 

Snyder Oil Corporation’s international 
subsidiary and of Conquest  
Exploration Company.

•  Currently, the non-executive  

Chairman of Dominion Petroleum plc 
and a non-executive director of Vostok 
Energy Limited.

6. martin roBerts (62)
Non-Executive Director
•  A member of the Board of SOCO 

International since September 2004  
and a member of the Audit and 
Remuneration Committees.

•   A Solicitor by profession and a partner  
of Slaughter and May, specialising in oil 
and gas and projects, until his retirement 
in 2002.

 
     
SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006 

28 _ 2

7

8

9

10

7. John norton (69)
Non-Executive Director
•  A member of the Board of SOCO 

International since April 1997 and  
a member of the Audit and 
Nominations Committees.

•  A Chartered Accountant by profession 
and a partner at Arthur Andersen, 
heading the oil and gas practice in 
Europe, the Middle East and Africa, 
until his retirement in 1995.

•   A former member of the Oil Industry 

Accounting Committee.

•  Currently, a director of the Arab-British 

Chamber of Commerce.

8. roBert cathery (62)
Non-Executive Director
•   A member of the Board of SOCO 
International since June 2001.
• Over 40 years of City experience.
•  Formerly, Managing Director and Head 
of Oil and Gas at Canaccord Capital 
(Europe) Limited, Head of Corporate 
Sales at SG Securities (London) Ltd., 
Director of Vickers da Costa and 
Director of Schroders Securities.

•  Currently, a non-executive director of 
Vostok Energy Limited, Salamander 
Energy Ltd and Indigovision plc.

9. oLiVier BarBaroux (51)
Non-Executive Director
•  A member of the Board of SOCO 

International since July 1999 and  
a member of the Remuneration and 
Nominations Committees.

•     Formerly, Managing Director of 
Compagnie Générale des Eaux, 
President and Chief Operating Officer of 
Vivendi Water S.A., Head of the Energy 
Sector of Paribas and Chairman and 
CEO of Coparex International.
•  Currently, Chairman and Chief 

Executive Officer of Dalkia and a 
member of the Executive Committee 
of Veolia Environnement.

10. John snyder (65)
Non-Executive Director
•  A member of the Board of SOCO 

International since April 1997 and a 
member of the Nominations Committee.

•   Formerly, Chairman of the Board of 
Santa Fe Snyder Corporation and 
founder of its predecessor company, 
Snyder Oil Corporation.

•   Currently, an advisory director for 4D 

Global Energy Advisors and a director  
of Texas Capital Bancshares.

THE ANNUAL REPORT  
OF THE DIRECTORS

Cynthia Cagle
Vice President and Company Secretary

the directors present their annual 
report, along with the audited 
financial statements of the group for 
the year ended 31 december 2006.

principaL actiVity and  
enhanced Business reView
The Group’s principal activity is oil and gas exploration 
and production. The Group has its headquarters in 
London and has oil and gas interests in Vietnam, 
Yemen, Thailand, the Republic of Congo (Brazzaville) 
and the Democratic Republic of Congo (Kinshasa).  
The subsidiary undertakings principally affecting the 
profits or net assets of the Group are listed in Note 16 
to the financial statements.

In compliance with requirements of the Companies Act, 
a fair review of the performance and development of 
the Group’s business during the year, its position at the 
end of the year and its future prospects is contained in 
the Chairman’s and Chief Executive’s Statement, the 
Review of Operations and the Financial Review on 
pages 2 to 19 and 24 to 27. The principal risks and 
uncertainties facing the Group are set out in the 
Financial Review on pages 24 to 27 and, in respect of 
the principal financial risks, in Note 3 to the financial 
statements. The key performance indicators (KPIs) 
used by management are set out on pages 9 and 24, 
and are summarised along with pertinent definitions in 
the 5 Year Summary on page 69. As set out in the 
Corporate Responsibility report on page 20, SOCO is 
committed to high standards of corporate responsibility. 
However, the size and scope of those projects which 

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  30 _ 31

2

the Company directly operates is small with a 
commensurately small organisation. While we closely 
monitor the health, safety and environmental matters 
of the full portfolio, the primary measures are relevant 
to the performance of third party operators. Additionally, 
at the current staff size, key personnel matters are 
measured through qualitative rather than statistical 
measures. KPIs will be developed in these areas at an 
appropriate time in the evolution of SOCO’s operations.

resuLts and diVidends
The audited financial statements for the year ended  
31 December 2006 are set out on pages 50 to 68.  
The Directors intend to devote the Group’s cash 
resources to its exploration and development activities 
and, accordingly, are not recommending the payment  
of a dividend (2005 – £nil).

directors
The Directors, who held office throughout the year 
except as noted, and the dates of their current service 
contracts or letters of appointment, which are available 
for inspection, are listed in the table below.

Relevant details of the Directors, which include  
their Committee memberships, are set out on pages 
28 and 29. Details of Directors’ interests and 
Directors’ transactions are included in the Directors’ 
Remuneration Report on pages 41 to 47. 

Mr Roger Cagle will retire by rotation at the forthcoming 
Annual General Meeting (AGM). Mr Peter Kingston, Mr 
John Norton and Mr John Snyder, having served on the 
Board for more than nine years, are subject to annual 
re-election and will also retire at the AGM. The Board 
appointed Mr Rui de Sousa as Chairman on 6 
December 2006 after considering all of the relevant 
factors, including his independence. Since Mr de Sousa 
was not independent on appointment, he will be 
proposed for reappointment at the AGM. Each of the 
retiring Directors offers themselves for reappointment, 
being eligible and having been recommended for 
reappointment by the Nominations Committee. 

 The Nominations Committee carefully considered  
its recommendations regarding the appointment  
of Chairman and the reappointment of retiring 
Directors with regard to the policies and processes set 
out in more detail in the Corporate Governance Report 
on pages 33 to 40. The independence of the retiring 
Chairman and Non-Executive Directors has been 
considered including the relevance of tenure. The 
Board has given full consideration to the balance of 
skills, knowledge and unique breadth of experience  
on the Board and the manner in which each of the 
retiring Directors contributes to that balance. These 
factors have been weighed in consideration of 
succession planning and the need to refresh Board 
and Committee membership. The Chairman, having 
given consideration to the results of the Board’s 
formal evaluation process and other relevant factors, 
is satisfied that the retiring Non-Executive Directors 
continue to demonstrate a commitment level 
appropriate to the effective fulfilment of the 
responsibilities of the role.

SOCO has provided liability insurance for its Directors 
and officers. The annual cost of the cover is not material 
to the Group. The Company’s Articles of Association 
allow it to provide an indemnity for the benefit of its 

direCtors holding offiCe in 2006
Director  
Rui C de Sousa (Chairman from 06.12.06) 
Patrick C J Maugein (Chairman until 05.12.06) (deceased) 
Peter E Kingston* (Deputy Chairman and Senior Independent Director) 
Olivier M G Barbaroux*  
Roger D Cagle  
Robert M Cathery  
Ettore P M Contini  
John C Norton*  
Martin J D Roberts*  
John C Snyder*  
Edward T Story 

Date of contract
12.07.99 
12.07.99 
14.05.97 
12.07.99 
14.05.97 
19.06.01 
11.12.01 
14.05.97 
06.09.04 
14.05.97 
14.05.97 

* Denotes those determined by the Board to be independent Non-Executive Directors  
as described in the Corporate Governance Report on page 33.

1

DIRECTORS’ REPORT CONTINUED

Directors which is a qualifying indemnity provision 
for the purpose of the Companies Act 1985.

suppLier payment poLicy
SOCO’s policy is to settle the terms of payment 
with suppliers when agreeing the terms of each 
transaction to ensure that suppliers are made 
aware of and abide by the terms of payment.  
As the Company is a holding company, it has  
no trade creditors and accordingly no disclosure 
can be made of the year end creditor days.

charitaBLe contriButions
Information regarding the Company’s charitable 
programmes, which are principally carried out in 
the countries where the Group has operations, is 
contained in the Corporate Responsibility Report 
on pages 20 to 23.

sharehoLder communications
Legislation was announced earlier this year 
making it easier for companies to communicate 
with shareholders electronically using, for 
example, emails and the internet. The Directors 
believe there are significant benefits to 
shareholders from introducing electronic 
communications consistent with this legislation, 
for documents such as annual and interim 
reports, and circulars. A resolution will be placed 
before the AGM which will allow the Company to 
take advantage of the new rules on electronic 
communications in the Companies Act 2006 on 
implied website usage and, as a listed company, 
to benefit from the rules on electronic and 
website communications in the Disclosure  
and Transparency Rules which came into force  
in January 2007.

share capitaL
Details of changes to share capital in the period 
are set out in Note 24 to the financial statements.
Details regarding purchases during the year of 
608,000 of the Company’s own ordinary shares 
into treasury can be found in Note 25 to the 
financial statements, along with details regarding 
the utilisation of treasury shares to satisfy certain 
share options. The shares were acquired to 
enhance earnings per share. A special resolution 
will be placed before the forthcoming AGM to 
renew the Directors’ existing authority to make 
market purchases of the Company’s ordinary 
share capital, and to limit such authority to 
purchases of up to 7,274,000 shares 
representing up to 10% of the Company’s 
issued share capital, excluding treasury shares. 
Shares purchased under this authority may 
either be cancelled or held as treasury shares. 

Two resolutions will be placed before the AGM to 
replace the Directors’ existing authorities to allot 
securities. One resolution will seek authority 
under Section 80 of the Companies Act 1985 
(the Act) to allot relevant securities up to a 

suBstantial shareholdings 

Name of Holder 

Pontoil Intertrade Limited 
Chemsa Ltd 
Lansdowne Partners Limited Partnership 
Legal & General Investment Management Limited 
Banca Akros 
SOCO Employee Benefit Trust 

maximum aggregate nominal value of 
£4,849,974 representing one third of the 
Company’s issued share capital, excluding 
treasury shares. If approved, an additional 
resolution will seek authority under Section 95 
of the Act to allot equity securities for cash and 
to sell treasury shares for cash without first 
offering them to existing shareholders on a pro 
rata basis, either in connection with a rights 
issue or, for other purposes, up to a maximum 
aggregate nominal value of £727,496 
representing 5% of the Company’s issued  
share capital, excluding treasury shares.

These authorities are intended to provide 
flexibility and would only be exercised if 
considered to be in the best interests of the 
Company generally and, for purchases of the 
Company’s share capital, if expected to result  
in an increase in earnings per share upon 
cancellation or while held in treasury.

suBstantiaL sharehoLdings
As at 13 March 2007, the Company had been 
notified, in accordance with Sections 198 to 208 
of the Act (now replaced by the Transparency and 
Disclosure Rules), of the interests in the issued 
share capital of the Company and warrants to 
subscribe for ordinary shares of the Company 
(Warrants) as set out in the table below.

auditors
A resolution to reappoint Deloitte & Touche LLP 
(Deloitte) as the Company’s auditors will be 
proposed by the Directors at the forthcoming AGM. 
Deloitte also provide non-audit services  
to the Group which are set out in Note 9 to the 
financial statements. The Directors are currently 
satisfied, and will continue to ensure, that this 
range of services is delivered in compliance with 
the relevant ethical guidance of the accountancy 
profession and does not impair the judgement or 
independence of the auditor.

Each of the Directors at the date of approval of this 
report confirms that, so far as he is aware, there is 
no relevant audit information, being information 
needed by the auditors in connection with 
preparing their report, of which the auditors are 
unaware. Each Director has taken all steps that he 
ought to have taken, having made such enquiries 
of his fellow Directors and the auditors and taken 
such other steps as are required under his duty as 
a Director, to make himself aware of any relevant 
audit information and to establish that the auditors 
are aware of that information. This confirmation is 
given and should be interpreted in accordance with 
the provisions of s234ZA of the Act. 

By order of the Board 14 March 2007

Cynthia Cagle 
Company Secretary

 Issued Shares 

Number 

14,733,313  
5,921,435  
5,063,224  
 2,542,771  
2,415,254  
2,273,300  

% Held 

20.25 
8.14 
6.96 
3.50 
3.32 
3.12 

Warrants 
Number

487,823
325,215
-
-
-
-

 
 
 
 
 
SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  32 _ 33

CORPORATE 
GOVERNANCE

the group has applied the principles set out in section 1  
of the July 2003 Combined Code on Corporate governance 
(the Combined Code or the Code), as described below and,  
in connection with directors’ remuneration, in the directors’ 
remuneration report.

Board composition and 
independence
The Board of Directors, whose names and 
biographical details are set out on pages 28 to 29, 
comprises nine Directors in addition to the 
Chairman. Five of these nine, including the Senior 
Independent Director, have been identified in the 
Directors’ Report on page 31 as independent Non-
Executive Directors in accordance with the Board’s 
responsibility for determining whether a director  
is independent in character and judgement. 
Notwithstanding this, each of the Company’s 
Directors strictly abides by their legal and ethical 
duties owed to the Company to act objectively  
and in the best interests of the Company and  
its shareholders as a whole.

The Board assesses the independence of  
each Non-Executive Director at least annually, 
giving full consideration to those circumstances  
that the Code states may appear relevant.  
In considering tenure exceeding nine years,  
the Board recognises that an individual’s 
independence cannot be determined arbitrarily 
on the basis of a set period of time. The 

Company manages a portfolio of long term, 
complex projects and benefits from long serving 
Directors with detailed knowledge of the 
Company’s operations and with the proven 
commitment, experience and competence to 
effectively advise and oversee the Company’s 
management on behalf of shareholders. The 
Company does not impose fixed term limits  
as this would assure a loss of experience and 
knowledge without assurance of increased 
independence. However, particular scrutiny is 
applied in assessing the continued independence 
of Directors having served over nine years, with 
attention to ensuring their allegiance remains 
clearly aligned with shareholders. 

In conducting its current assessment the Board 
has considered whether each Director continues 
to exhibit those qualities and behaviours it 
considers essential for Non-Executive Directors  
to be considered independent. Consideration  
was additionally given to the results of individual 
evaluation and continued satisfactory 
performance. Particular scrutiny was applied  
in assessing the continued independence of  

the Board 
emBraCes the 
underlying 
prinCiples of 
Code provisions 
regarding 
tenure and 
refreshing of 
the Board, and 
seeks to strike 
an appropriate 
BalanCe 
BetWeen 
Continuity of 
experienCe and 
suCCession

CORPORATE GOVERNANCE CONTINUED

Mr Peter Kingston, Mr John Norton, and  
Mr John Snyder, each having served on the 
Board since 1997. The Board has determined 
that each of these Directors, in addition to  
Mr Olivier Barbaroux and Mr Martin Roberts,  
is independent in character and judgement and 
free from any relationships or circumstances 
which are likely to affect, or could appear to 
affect, their judgement. 

reappointment and  
reFreshing oF the Board 
Directors are subject to reappointment at  
least every three years. Reappointment is 
recommended in consideration of the results  
of individual evaluation and demonstrated 
continued satisfactory performance, commitment 
and effectiveness. Consideration is additionally 
given to the balance of the Board’s composition 
and the need for refreshment. A Non-Executive 
Director term exceeding six years is subject to 
particularly rigorous review, and a term exceeding 
nine years is subject to annual reappointment.

The Board embraces the underlying principles 
of Code provisions regarding tenure and 
refreshing of the Board, and seeks to strike  
an appropriate balance between continuity  
of experience and succession. The Company 
undertakes projects requiring long term cycles 
from licence negotiation to first production.  
Its Vietnam programme is of major significance 
to the Company, with first production targeted 
in 2008. The current Non-Executive Directors 
comprise an appropriate balance of skills and 
experience. Additionally, they have acquired, 
over a number of years, a sound and detailed 
knowledge of the Company’s business and  
are uniquely qualified to contribute to the 
Company’s leadership at this critical stage. 
The continuity of their experience is 
considered to outweigh the potential benefits 
of refreshment at this time. The Company  
has planned for a phased succession to allow 
for both refreshment and a rebalance of the 
skills required on the Board as it enters the 
production phase in Vietnam. 

Board structure and process
The Board has four scheduled meetings a year 
and holds additional meetings as necessary.  
The Board determines the Company’s business 
strategy and provides the entrepreneurial 
leadership required to ensure its strategic aims 
can be achieved. The Board operates within a 
formal framework of decision making designed  
to reserve matters of establishing the strategy, 
business plan and nature or scope of the 
Company’s business to the Board. Under this 
framework, authority for implementing the strategy 
and decisions taken by the Board is largely 
delegated to the Executive Directors and 
management within a system of internal controls 
designed to enable the risks of the Group to be 
managed effectively. Additionally, the Board has 
established clear expectations for the Company’s 
economic, social and environmental conduct to 
promote the highest level of integrity and honesty 
in meeting its obligations to its stakeholders.

SOCO’s Board membership comprises  
a broad range of skills, knowledge and 
experience, which is critical to the success  

of the Company. The Board functions as a 
unitary body, within which Directors assume 
certain roles to ensure the Board as a whole 
fulfils its responsibilities. These roles, including 
Committee memberships, are designed to 
maximise the effective contribution of each  
of the Non-Executive Directors to the Board,  
its Committees and to the Executive Directors, 
while ensuring an appropriate balance is 
maintained. The composition of the Board  
and its Committees is in accordance with Code 
guidelines. No Director serves on more than  
two Committees. At least annually, the Non-
Executive Directors meet without the Executives 
present and, led by the Senior Independent 
Director, meet without the Chairman present. 
Such meetings are conducted in the spirit of 
good governance and process, and are intended 
to ensure a forum for open dialogue without 
disruption of Board unity. 

The Chairman and the Chief Executive 
collectively are responsible for the leadership  
of the Company. The Chairman’s primary 
responsibility is for leading the Board and 
ensuring its effectiveness. The Chief Executive 
is responsible for leading the executives and 
ensuring their effectiveness in the running  
of the Company’s business. Their division of 
responsibilities is set by the Board. Together 
they are responsible for promoting the highest 
standards of integrity and probity.

Executive Directors are responsible for 
implementing the Board’s agreed strategy 
through the development of an appropriate 
business plan and for executing actions 
approved by the Board in accordance with 
relevant authorities. The Non-Executive 
Directors contribute to the development  
of strategic proposals through constructive 
probing based on review and analysis  
that brings to bear the unique skills and 
knowledge each brings to the Board. 

The Executive Directors provide the leadership 
of the senior managers in the day to day 
running of the Group’s business and manage 
the Group’s risk programmes including the 
environmental, health and safety performance 
of the business. They must ensure the 
Company has adequate financial and human 
resources to meet its objectives. They are 
responsible for reporting the performance  
and strategic direction of the Group to the 
Board and for providing accurate, timely and 
clear information to enable the Board to take 
sound decisions. The Non-Executive Directors 
review management’s performance and ensure 
that the systems in place provide adequate  
and effective financial control and risk 
management. They must be satisfied that they 
have sufficient information for the discharge  
of their duties, which may be achieved through 
dialogue with management, training where 
appropriate to update their knowledge or skills 
and consultation with independent professional 
advisors as required.

The Company Secretary, who is appointed  
by the Board, is responsible for facilitating the 
communications and processes of the Board, 
both within the Board and its Committees and 

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  34 _ 3

Non-Executive Director, and additionally 
comprises Mr Olivier Barbaroux and Mr Martin 
Roberts, both of whom are independent  
Non-Executive Directors. The names and 
qualifications of each of the members are  
set out on pages 28 to 29. The Committee  
is responsible for recommending for approval 
by the full Board the remuneration of the 
Chairman, the Executive Directors and officers 
of the Company and Group. During 2006, the 
Committee conducted a review of its TOR and 
of the effectiveness of its own performance. 
Details of the Committee’s policies and 
objectives are set out in the Directors’ 
Remuneration Report on pages 41 to 47.

the audit committee report
The Audit Committee is chaired by Mr Peter 
Kingston, the Senior Independent Non-Executive 
Director, and additionally comprises Mr John 

Board and Committee meeting attendanCe
nominations 
committee

audit  remuneration  
committee  

committee 

Board 

no. of meetings 

no. attended 

R de Sousa   

P Kingston 

O Barbaroux 

R Cagle 

R Cathery 

E Contini 

J Norton 

M Roberts 

J Snyder 

E Story 

P Maugein (deceased)

with management, in compliance with Board 
procedures and governance guidelines. The 
Secretary facilitates an induction programme on 
appointment that is tailored to a new Director’s 
individual qualifications and experience. The 
Secretary provides advice and service as may  
be required in the ongoing discharge of the 
Directors’ duties, including ensuring that the 
Company provides the necessary resources for 
access to independent advice and individual 
professional development needs. Additionally, 
briefing sessions are provided in the course of 
regular Board meetings and Committee meetings 
on relevant issues as deemed appropriate.

The table below sets out the attendance of 
Directors at scheduled Board meetings and 
attendance of members at meetings of the Audit, 
Remuneration and Nominations Committees.

committees
The Board has established three Committees, 
as described below, each having formal terms  
of reference (TOR) approved by the Board which 
set out its delegated role and authority. The 
TORs, which are available for inspection, are  
set in consideration of the provisions of the 
Combined Code and are reviewed from time to 
time in the context of evolving guidance. Each 
Director’s specific Committee memberships, 
including as Chairmen, are set out on pages  
28 to 29. Whilst only Committee members are 
entitled to attend meetings, other Directors are 
invited to attend from time to time to ensure  
the Committees’ responsibilities are undertaken 
with access to the Board’s full breadth of 
knowledge and experience. The Company 
Secretary ensures that the Company additionally 
provides such resources as the Committees 
require in the discharge of their duties.

the remuneration committee
The Remuneration Committee is chaired by 
Mr Peter Kingston, the Senior Independent 

 
 
 
 
 
 
 
 
 
 
 
 
 
CORPORATE GOVERNANCE CONTINUED

Norton and Mr Martin Roberts, both of whom 
are independent Non-Executive Directors.  
The names and qualifications of each of the 
members are set out on pages 28 to 29.  
The Board is satisfied that the collective 
experience of the members includes relevant  
and recent financial experience and provides 
the complement of skills required for the 
Committee to discharge its functions 
effectively. In particular, Mr Norton is a 
Chartered Accountant and former member of 
the Oil Industry Accounting Committee. The 
Committee meets at least three times a year. 
The Chief Financial Officer and a representative 
of the external auditors are normally invited to 
attend meetings. Other Directors are invited to 
attend as determined appropriate or beneficial. 
At least once a year the Committee meets with 
the external auditors without executive Board 
members present.

The Committee’s primary responsibilities  
include reviewing the effectiveness of the 
Company’s and the Group’s systems of  
internal control, overseeing the selection  
of and relationship with external auditors  
and the review and monitoring of the integrity  
of financial statements. The Committee is 
responsible for review of the Group’s major 
financial, operational and corporate 
responsibility risk management processes.  
The effectiveness of these processes is 
monitored on a continuous basis and a  
formal assessment is conducted at least 
annually. The Committee has been delegated 

the responsibility for advising the full Board  
on compliance with the Combined Code, 
including its internal control requirements,  
as well as compliance with evolving guidance  
on corporate governance issues generally.

The Committee held three meetings in 2006 
and has conducted one meeting to date in 
2007, all of which were attended by executive 
management and external auditors. A private 
session, without executives present, was held 
during two of these meetings. Additionally,  
a number of other informal meetings and 
communications took place between the 
Chairman, various Committee members, 
external auditors and the Company’s executives 
and employees. The Committee reviewed and 
approved the terms and scope of the audit 
engagement, the audit plan and the results of 
the audit with the external auditors, including 
the scope of services associated with audit-
related regulatory reporting services. An 
assessment of the effectiveness of the audit 
process was made, giving consideration to 
reports from the auditors on their internal 
quality procedures. Additionally, auditor 
independence and objectivity was assessed, 
giving consideration to the rotation of  
audit partners during the year and the 
auditors’ confirmation that their 
independence is not impaired.

The Remuneration Committee, with approval  
of the Audit Committee, has independently 
appointed the Company’s auditor as advisors. 
The advisors’ terms of reference restrict the 
provision of certain services in order to maintain 
auditor independence, and the scope and value 
of services to the Group is under continuous 
review. Accordingly, any proposed non-audit 
service is submitted for Audit Committee review 
on a case by case basis, rather than by 
reference to preallowed or disallowed services, 
and regardless of size or scope. The Committee 
approved the non-audit services provided by  
the external auditor in 2006, having concluded 
such services were compatible with auditor 
independence and were consistent with relevant 
ethical guidance. Details of these services are 
set out in Note 9 to the financial statements.  
The Board concurred with the Committee’s 
recommendation for the reappointment of 
Deloitte & Touche LLP as the Company’s 
auditors for 2007.

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  36 _ 3

The Committee has reviewed, and is satisfied 
with, the Company’s arrangements whereby 
staff may raise concerns regarding improprieties 
in confidence, which would be addressed  
with appropriate follow-up action. On behalf  
of the Board, the Committee has reviewed the 
effectiveness of the Company’s internal controls 
and risk management systems, including 
consideration of an internal audit function, 
which is more fully described in the Internal 
Control section of the Corporate Governance 
Report. The Committee has reviewed and 
approved the related compliance statements  
set out therein. The Committee has additionally 
reviewed and approved the statements 
regarding compliance with the Combined Code.

The Committee reviewed and discussed  
with management and the auditors the 
Company’s relevant financial information prior 
to recommendation for Board approval. This 
included in particular the financial statements 
and other material information presented in  
the annual and interim reports and financial 
information related to the Company’s issue of 
convertible bonds. The Committee considered 
the significant financial reporting issues, 
accounting policies and judgements impacting 
the financial statements, and the clarity of 
disclosures. The Committee conducted a 
review of its TOR and of the effectiveness  
of its own performance.

the nominations committee report
The Nominations Committee is chaired by  
Mr Rui de Sousa, the Non-Executive Chairman 
of the Company, other than when convened  
to consider a successor as Chairman. It 
additionally comprises Mr Ed Story, the  
Chief Executive Officer, and Messrs. Olivier 
Barbaroux, John Norton and John Snyder,  
who are independent Non-Executive Directors. 
The Committee meets at least once a year.  
Its primary responsibilities include making 
recommendations to the Board regarding the 
appointment and reappointment of Directors 
and Committee memberships. It is responsible 
for review and recommendations regarding 
overall Board structure and composition, 
succession planning and establishing an 
ongoing process for evaluating the Board  
and its members.

The Committee held two meetings in 2006  
and has conducted one meeting to date in 
2007. Other Non-Executive Directors were  
in attendance at a portion of these meetings  
by invitation. Certain Committee functions  
were delegated to a Sub-Committee, which 
acted on behalf of the Committee after an 
appropriate dialogue among Committee 
members to ensure a consensus of views. 
Additionally, a number of other informal 
meetings and communications took place 
between the Chairman, various Committee 
members and the Company’s executives  
and employees.

During the year the Committee reviewed  
Board structure, size and composition,  
including a profile of the skills, knowledge  
and experience represented on the Board, 
which was utilised to facilitate the Board’s 

review of Director independence, including 
tenure in particular. The Committee made 
recommendations to the Board concerning  
plans for succession which were developed  
in consideration of the need for refreshment 
while taking into account the skills and 
experience needed on the Board to meet the 
specific challenges and opportunities facing  
the Company. The results of these reviews were 
in turn utilised in developing the Committee’s 
recommendations for continuation in office, 
reappointment of retiring Directors and 
appointment of the Chairman.

The Committee has a process in place for 
identifying and nominating candidates to  
fill vacancies which may arise from time to 
time, including ensuring Board membership  
is sufficiently refreshed and retains an 
appropriate balance of skills and experience. 
The Committee develops an appropriate 
description of the role, estimated time 
commitment and the capabilities which would 
complement the composition of the Board and 
its Committees. The Committee would expect 
to utilise an independent external advisor  
to facilitate any search. A diverse list of 
candidates is compiled and a rigorous review 
process undertaken, involving other Board 
members as deemed appropriate. Committee 
recommendations are submitted for full Board 
approval. The Company Secretary facilitates 
induction upon appointment.

The Senior Independent Director led the 
Committee’s process for appointing the 
Chairman following the death of Mr Patrick 
Maugein, after which Mr Rui de Sousa was 
recommended as the successor. It was 
determined that Mr de Sousa has the 
extensive knowledge and experience to  
meet the requirements set out in the job 
specification for the Chairman role. During  
his active role as a Non-Executive Director  
he demonstrated the time commitment and 
availability expected of a Chairman. Whilst  
he did not meet the independence criteria  
set out within the Code, he acts objectively 
and in the best interests of the Company and 
its shareholders as a whole. The Committee 
carefully considered his shareholding and 
business relationships, which are similar  
in nature to those of the former Chairman,  
and is satisfied these should not impede his 
ability to effectively fulfil the role. Following 
the appointment, the Board retains an 
appropriate balance of skills and experience, 
and the composition of the Board and its 
Committees remains in accordance with  
Code guidelines. As Mr de Sousa was an 
internal candidate, an independent external 
advisor was not utilised in this instance.  
In light of all the relevant factors, the Board 
determined the appointment of Mr de Sousa 
to be in the best interests of the Company 
and its shareholders. Mr de Sousa was 
additionally appointed to chair the 
Nominations Committee.

The Committee led the Board in evaluating its 
own performance and that of its Committees 
and individual Directors. The Company Secretary 
facilitated compilation of the results. The Senior 

CORPORATE GOVERNANCE CONTINUED

Independent Director facilitated relevant 
discussions regarding the role of the Chairman. 
The process was undertaken for the purpose of 
adding value to the quality of the Board and its 
procedures through identifying and addressing 
strengths and weaknesses. Additionally, it was 
utilised to assess Director effectiveness and the 
time commitments of Non-Executive Directors. 
Actions for improvement were undertaken as 
deemed appropriate. The Committee performed 
a review of its TOR and of its own performance 
as part of this process.

After giving consideration to Board structure and 
composition, evaluations, time commitments, 
length of service, individual contributions and 
the requirements of the Board, the Committee 
recommended that each of the retiring Directors 
be proposed by the Board for reappointment at 
the forthcoming AGM. Additional detail regarding 
the Board process in making this determination 
is set out within this report on pages 33 to 34.

reLations with sharehoLders
The Executive Directors are responsible for 
ensuring effective communication is maintained 
with key stakeholders and partners, including 
establishing an appropriate level of contact with 
major shareholders and ensuring that their views 
are communicated to the Board. The Non-
Executive Directors are responsible for taking 
sufficient steps to understand these views, 
including any issues or concerns.

SOCO maintains an open and active dialogue 
with shareholders. The Company maintains an 
internet website wherein important information 
can be posted and disseminated promptly to a 
wide audience and through which shareholders 
can electronically interface with executive 
management. At a minimum, the Company 
provides three personal communication forums 
annually – the AGM, the presentation of Annual 

Results and the presentation of Interim Results 
– whereby shareholders can directly interface 
with Company executive management. Notice 
of the AGM is circulated to all shareholders at 
least 20 working days prior to the meeting, and 
resolutions are proposed for each substantially 
separate issue. The result of proxy voting is 
announced after votes are taken on a show  
of hands. Directors are available to answer 
shareholder questions and, in particular, the 
Chairmen of the Audit, Remuneration and 
Nominations Committees are in attendance  
to respond to any specific queries.

The Company has assigned a senior executive 
the responsibility for investor relations and has 
employed an outside agency, both to provide 
assistance in the dissemination of information  
to shareholders and the general public and to 
actively solicit feedback as to the effectiveness of 
such efforts. Additionally, the Company maintains 
an ongoing, active dialogue with institutional 
shareholders, specifically and proactively seeking 
opportunities for face-to-face meetings at least 
twice a year, coincident with mid term and full 
year results, between fund managers and  
Company executive management.

Brokers’ reports are discussed at scheduled 
Board meetings and public relations and 
analysts’ reports are distributed to the full 
Board. A Non-Executive Director maintains 
regular communications with SOCO’s major 
institutional shareholders, reports feedback 
directly to the Board and advises the Board 
when additional communication from the 
Chairman, Senior Independent or other  
Non-Executive Directors has been requested. 
The Chairman regularly interfaces with other 
principal shareholders. The Board considers 
whether additional communication may be 
appropriate or desirable. In particular, the 
delegated role of the Senior Independent 

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006 

38 _ 3

Director includes being available to 
shareholders if they have concerns which 
cannot be fully or appropriately addressed  
by the Chairman or the Executive Directors.

internaL controL
The Directors are responsible for establishing, 
maintaining and reviewing the effectiveness  
of a sound system of internal control which  
is designed to provide reasonable assurance 
regarding the reliability of financial information 
and to safeguard the shareholders’ investment 
and the assets of the Company and Group. 
Given the inherent limitations in any system  
of internal control, even a sound system can 
only provide reasonable assurance, and not 
absolute assurance, that the Company will not 
be hindered in achieving its business objectives 
or be protected against material misstatement  
or loss.

The Board has put in place formally defined 
lines of responsibility and delegation of 
authority and has delegated to executive 
management the implementation of material 
internal control systems. Documented policies 
and procedures are in place for key systems 
and processes and the authority of the 
Directors is required for key matters.

A comprehensive budgeting process is in place 
for all items of expenditure and an annual 
budget is approved by the Board. Actual results 
are reported against budget on a regular basis. 
Revised forecasts for the year and longer term 
financial projections are produced regularly 
throughout the year. 

The Board has the primary responsibility for 
identifying the major business risks facing  
the Company and Group and developing 
appropriate policies to manage those risks. 
The risk management approach is used to 

focus attention on the Group’s most 
significant areas of risk and to determine  
key control objectives.

The Board has applied Principle C.2 of the 
Combined Code, by establishing a continuous 
process, which has been in place throughout 
the year to the date of this report and which  
is in accordance with Internal Control: Revised 
Guidance for Directors on the Combined Code 
published in October 2005, for identifying, 
evaluating and managing the significant risks 
the Group faces. The Board regularly reviews 
the process, which is constantly evolving to 
meet the demands of a dynamic environment.

In compliance with Provision C.2.1 of the 
Combined Code, the effectiveness of the 
Group’s system of internal control, including 
financial, operational and compliance controls 
and risk management, is regularly reviewed  
by the Directors. The review is based principally 
on discussions with management and on 
reviewing reports provided by management to 
consider whether significant risks are identified, 
evaluated, managed and controlled, but  
also may include independent interaction  
with employees or third parties. The Board 
considers whether appropriate actions are 
taken promptly to correct any significant 
weaknesses identified, and if more extensive 
monitoring may be required. The Board 
confirms that such actions as deemed 
necessary and appropriate have been or are 
being taken to remedy any significant failings 
or weaknesses identified in its review. The 
Board seeks to ensure that internal control and 
risk management processes, including dealing 
with any identified areas of improvement, are 
embedded within the business. 

The Board has performed a specific assessment 
for the purpose of this Annual Report and 

CORPORATE GOVERNANCE CONTINUED

Accounts, which considers all significant aspects 
of internal control arising during the period,  
and is satisfied with the process employed  
and the results thereof. The Audit Committee 
spearheads the Board in discharging its review 
responsibilities. Audit Committee membership 
comprises highly experienced professionals with 
complementary areas of expertise in the oil and 
gas sector and each Committee member makes 
an important contribution to the assurance 
process. Messrs. Peter Kingston, John Norton  
and Martin Roberts undertake specific review 
processes in the areas of technical and operating, 
financial and audit, and commercial and legal, 
respectively, and report the results of their work to 
the full Committee and to the Board. Although the 
Company does not currently have an internal audit 
function, the Directors review at least annually the 
need to establish such a function. The Company’s 
current staff size limits the ability to form an 
effective internal audit function and, accordingly, 
the Company expects to outsource any internal 
audit needs.

statement oF compLiance with 
code oF Best practice
The Company has complied throughout the  
year with the provisions set out in Section 1  
of the July 2003 Combined Code on Corporate 
Governance, except that upon appointment as 
Chairman Mr Rui de Sousa did not meet the 
independence criteria set out in Provision A.3.1. 
The Board, having given this full consideration, 
determined that the appointment of Mr de 
Sousa was in the best interests of the Company 
in a process more fully described in the 
Nominations Committee section of this report.

directors’ responsiBiLities
The Directors are responsible for preparing the 
Annual Report and the financial statements, 
including a Directors’ Report and Directors’ 
Remuneration Report in compliance with the 
requirements of the Companies Act 1985. 
Financial statements are prepared in accordance 
with IFRS both for the Group, as required, and for 
the Company, by election. Company law requires 
the Directors to prepare such financial statements 

in accordance with IFRS, the Companies Act 
1985, and Article 4 of the IAS Regulation.

IFRS requires that financial statements for 
each financial year fairly present the financial 
position, financial performance and cash flows 
of the Group. The Directors are required to 
faithfully represent the effects of transactions, 
other events and conditions in accordance  
with the definitions and recognition criteria  
for assets, liabilities, income and expenses  
in accordance with the relevant framework  
set out by the IAS Board. The Directors are 
also required to: properly select and apply 
accounting policies; present information in  
a manner that provides relevant, reliable, 
comparable and understandable information; 
and provide additional disclosures when 
compliance with IFRS requirements is 
insufficient to enable the user to fully 
understand the impacts on the entity’s 
financial position and financial performance.

The Directors are required to prepare financial 
statements on the going concern basis unless 
it is inappropriate to presume that the Group 
will continue in business. After making 
enquiries, the Directors have a reasonable 
expectation that the Company and Group have 
adequate resources to continue in operational 
existence for the foreseeable future. For this 
reason, they have adopted the going concern 
basis in preparing the financial statements.

The Directors are responsible for keeping 
proper accounting records, which disclose with 
reasonable accuracy at any time the financial 
position of the Company and Group. They are 
also responsible for safeguarding the assets  
of the Company and Group and hence for 
taking reasonable steps for the prevention and 
detection of fraud and other irregularities. The 
Directors are responsible for the maintenance 
and integrity of the Company website.

auditors’ responsiBiLities
The auditors’ responsibilities are set out in the 
Independent Auditors’ Report on pages 48 to 49.

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006 

40 _ 41

DIRECTORS’  
REMUNERATION REPORT

The Directors’ Remuneration Report has  
been prepared in accordance with the 
Directors’ Remuneration Report Regulations 
2002 and the relevant requirements of the 
Financial Services Authority (FSA). The 
disclosures contained in this report that  
are specified for audit by the Directors’ 
Remuneration Regulations are covered in  
the scope of the Independent Auditors’ Report 
on pages 48 to 49. A resolution to approve  
the report will be proposed at the forthcoming 
Annual General Meeting. The Company has 
complied throughout the period with the 
provisions relating to Directors’ remuneration 
as issued by the Financial Reporting Council in 
July 2003 and set out in the Combined Code 
(the Code). The Company has applied the 
principles set out in Code provisions and in 
Schedule A to the Code as described below.

remuneration committee
The independent Non-Executive Directors  
who serve on the Remuneration Committee  
are Mr Peter Kingston (Chairman), Mr Olivier 
Barbaroux and Mr Martin Roberts. Each 
member has been determined by the Board  
to be independent in character and judgement 
as described more fully in the Corporate 
Governance Report on pages 33 to 40. All 
members are independent of management and 
free from any conflicts of interest arising from 
cross-directorships or day-to-day involvement 
in running the Company’s business. No 
member has any personal financial interest, 
other than as shareholders, in the matters 
delegated to the Committee. No Director  
plays a role in deciding his own remuneration. 

Additional information regarding the Committee 
is contained in the Corporate Governance 
Report on pages 33 to 40.

The Committee is responsible for determining 
and agreeing with the full Board a broad 
remuneration policy that is aligned with the 
Company’s business strategy in the creation  
of shareholder value. Within the context of that 
policy, the Committee is responsible for setting 
the total remuneration packages of the 
Executive Directors and officers of the Group. 
The Committee also monitors the remuneration 
practices and trends throughout the Group’s 
internationally based workforce, including  
in particular for senior staff who contribute 
most significantly to achieving the Company’s 
strategic aims. Additionally, the Committee is 
responsible for setting the remuneration of  
the Non-Executive Chairman. The Committee’s 
recommendations and decisions are developed 
in full consideration of the Code, institutional 
guidelines and evolving market practice.

In discharging its duties during the year, the 
Committee consulted with the other Non-
Executive Directors, and received full Board 
approval for its proposals. In particular, the 
Committee has sought advice as it considers 
appropriate from Mr Rui de Sousa, who it 
considers offers the Committee a valuable 
perspective as a substantial shareholder,  
in ensuring the strategy to align executive 
interests with those of shareholders is properly 
weighed against the overall quantum of 
remuneration and the cost to shareholders. 
The Committee consulted with the Chief 

DIRECTORS’ REMUNERATION REPORT CONTINUED

Executive on its proposals for the other 
Executive Director and senior management, 
and received administrative assistance from 
the Company Secretary. The Audit Committee 
is consulted as deemed appropriate in setting 
and assessing the fulfilment of targets based 
on financial terms.

Deloitte & Touche LLP (Deloitte) was 
independently retained by the Committee  
as advisors and provided advice on executive 
remuneration in terms of relevant current 
market practice and developments in best 
practice guidance, and in particular on the 
testing and setting of performance criteria for 
incentive plans. The original appointment of 
advisors resulted from a tender process and 
alternate advisors are considered from time to 
time. Deloitte also provided audit services to  
the Group, as set out in Note 9 to the financial 
statements and described more fully in the 
Corporate Governance Report on pages 33  
to 40. The advisors’ terms of reference restrict 
the provision of certain services in order to 
maintain auditor independence, and the scope 
and value of services to the Group is under 
continuous review. Advice is developed with use 
of established methodologies and the advisors 
are not involved in the decision-making process. 
Advisory partners and staff have no involvement 
in audit, and are not involved in the preparation 
of audited information. 

remuneration poLicy
The policies described in this report have been 
applied throughout 2006. Whilst these policies 
are envisaged to be consistently applied in the 
following and subsequent years, the Committee 
has an ongoing process for monitoring its 
policies, including its arrangements for 
performance based pay, against evolving 
market practice and relevant guidance. Any 
proposed change would only be implemented 
following a consultation, review and approval 
process deemed appropriate to such change.

The Directors believe that a uniquely qualified 
and motivated executive management is vital  
to the effective management of the Company’s 
international portfolio and the successful 
execution of the Company’s stated strategy of 
building shareholder value. It is the Committee’s 
objective to attract and retain high calibre 
executives through remuneration which is 
competitive with that offered in comparable 
businesses and is appropriate to those 
individuals’ positions, experience and value to 
the Company. The Committee aims to design 
remuneration packages with a significant short 
and long term performance-related element 
linking appropriate, but significantly greater, 
rewards for greater achievements. The 
Committee seeks to ensure performance based 
pay is linked to its business strategy. To achieve 
this, shorter term performance is monitored 
against targets based on the Company’s 
strategic plan. In the longer term, performance 
targets are more closely linked to share price 
performance as an indicator of the Company’s 
success in building shareholder value.

executiVe directors
The Committee reviews all aspects of 
remuneration on an annual basis and  

with respect to individual and corporate 
performance during the year. These reviews  
are normally conducted in December. The 
projected value and structure of the Executive 
Directors’ packages are benchmarked against 
competitive market ranges, taking into 
consideration the Group’s size and complexity, 
and positioned within those ranges considering 
the Executive Directors’ critical value to the 
Company and demonstrated performance  
over time. Similar benchmarking techniques 
are applied to non-Board employees and the 
Committee monitors senior staff packages 
during the review of Executive Directors’ 
packages. Year on year results of benchmarking 
are monitored for indications of potential 
unwarranted upward ratcheting. 

package components
Executive remuneration comprises a fixed  
basic salary and eligibility to receive an annual 
performance based cash bonus and annual 
awards under incentive plans approved  
by shareholders and designed to provide 
appropriate longer term incentive opportunities. 
The annual cash bonus range is structured to 
provide an appropriate balance between basic 
salary and the performance related element of 
annual cash remuneration. Overall packages 
are structured to deliver 60% of the projected 
value of the Directors’ total compensation 
opportunity from performance related elements 
at performance levels in the middle of the 
target range, increasing to 80% at exceptional 
performance levels. Executive Directors are 
eligible for additional benefits, including money 
purchase pension scheme contributions, a 
permanent health insurance scheme, medical 
insurance, life assurance cover, critical illness 
cover, travel benefits and car benefits.

Basic saLary
Basic salary is fixed at appointment or in relation 
to changes in responsibility, and is reviewed 
annually. Particular care is given in fixing the 
appropriate salary level considering that cash 
bonus and incentive plan awards are generally 
set as a fraction or multiple of basic salary. 
Basic salary is the only element of a Director’s 
pay which is pensionable. Annual reviews take 
into consideration advice from remuneration 
consultants regarding relevant current market 
practice for salary levels and salary increases,  
as well as demonstrated performance. Following 
the annual review conducted in December 
2006, with effect from 1 January 2007 each 
Executive Director’s basic salary has been 
increased by 6%.

Bonus
Bonus awards are considered in two levels, 
wherein expected performance will result in 
awards in a target range of up to 50% of salary, 
with a stretch level providing a maximum 
annual cash bonus opportunity of up to 100%  
of salary for exceptional performance.

The annual cash bonus is awarded based on 
individual and corporate achievements during 
the year towards goals based on the Company’s 
strategic plan. Goals are set annually for each 
portion of the Company’s portfolio aimed at 
achieving the specific challenges the Company 
faces in meeting its strategic objectives. The 

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006 

42_ 43

monitored measures for particular projects may 
include specified timetables for seismic, drilling 
and construction programmes, drilling success 
ratios, discovery targets, reserve levels and 
production targets. Portfolio objectives are set 
regarding progress towards potential non-core 
asset divestitures and new ventures. Corporate 
goals, safety and environmental measures and 
financial measures against budgeted levels are 
additionally established as deemed appropriate. 
The specific targets set against these measures 
are considered to be commercially sensitive and 
are therefore not set out herein. The actual 
achievement of each goal is ranked against a 
scale of expectations. The Committee retains 
discretion over the amount of bonus paid out to 
ensure that appropriate consideration is given  
to the relative importance of the achievements 
in the year and the actual contribution of these 
towards furthering the Company’s strategic plan.

Achievements for the year have been 
exceptional when measured against the 
Group’s 2006 goals. Operational achievements 
were led by the Group’s drilling programmes  
in Vietnam and Yemen which exceeded 
aggressive targets for drilling success ratios 
and production tests. Significant results of the 
programme include a stepped increase in the 
estimated potential of the Te Giac Trang (TGT) 
field in Vietnam Block 16-1 and a marked 
increase in production capability in Yemen. 
Reserve additions resulting from the year’s 
drilling programmes in both Vietnam and 
Yemen have exceeded targets and provide  
a clear link between the success of these 
programmes and building shareholder value. 
Benchmarks set for progressing an accelerated 
development plan were achieved on Vietnam 
Block 9-2. Following the TGT drilling success  
in the first half of 2006, new benchmarks  
were set for undertaking a second Vietnam 
development which were achieved. Targeted 
infrastructure improvements in Yemen have 
resulted in increased production capacity, 
resulting in higher production rates in 2006 
and the capacity for further rises. Resources 
have been secured to continue an aggressive 
programme in a competitive environment.

Portfolio goals were met, in particular through 
the addition of a block in West Africa and 
success in the Group’s targeted farm-out 
programme. The Group was also successful  
in acquiring an additional 2% interest in 
Vietnam Block 16-1 on favourable terms. 

Corporate goals were exceeded, in particular 
through the highly successful convertible bonds 
issue. The Company has also seen dramatic 
share price growth during the year, increased 
sector analyst cover and gained exposure to  
a broader range of institutional investors.

Based on measurement of the year’s 
outstanding achievements against the targets 
set out, and in consideration of their individual 
contributions, bonuses were awarded to Mr 
Story and Mr Cagle at the policy’s maximum 
bonus rate of 100% of salary.

incentiVe pLans
The Committee currently operates a Long  
Term Incentive Plan (LTIP) and a share option 

scheme (the Plans). Participation in the 
Plans and the level of award made is 
discretionary and is set in consideration of 
both corporate and individual performance, 
taking into account awards made under both 
Plans. Awards under the Plans are subject to 
limits on individual participation whereby the 
market value, as measured at the date of 
grant, of shares subject to awards made in 
any financial year will not exceed 200% of 
the executive’s total earnings in that year, 
except in exceptional circumstances on 
appointment. The Committee, however, has  
a policy of operating the Plans within the 
more restrictive annual limit of 200% of  
the executive’s base salary. 

The aggregate number of new issue shares 
which may be subject to awards under  
the Plans shall not exceed 5% of the 
ordinary share capital of the Company in  
any rolling ten year period. Accordingly,  
at 31 December 2006, 3.6 million new 
issue shares (2005 – 3.6 million) may be 
subject to awards under the Plans, of  
which there is available capacity remaining 
of 0.5 million shares (2005 – 0.5 million). 
An employee benefit trust currently holds 
sufficient SOCO shares to satisfy all shares 
conditionally awarded under the LTIP, as 
more fully described in Note 26 to the 
financial statements. Decisions governing 
acquisitions of shares into the trust are 
considered and approved by the full  
Board. Charges which have been reflected  
in the Group’s income statement in respect 
of the Plans are set out in Note 27 to the 
financial statements. 

At the date of grant of an award, the 
Committee sets appropriate performance 
criteria which must be achieved before  
the award can be exercised or vest. Award 
levels will take into account the nature of 
performance targets to ensure that projected 
total compensation opportunity at assumed 
levels of share price growth is appropriate in 
the prevailing market. Measurement of the 
Company’s performance criteria is carried  
out with reference to external data sources 
by the Committee’s remuneration advisors  
to ensure its independence.

The Remuneration Committee considers  
that the Company’s relative total shareholder 
return (TSR) provides the primary basis  
for determining the value generated for 
shareholders over the longer term, and is  
also the primary indicator of the Company’s 
overall corporate performance. Accordingly, 
performance targets for awards under the 
Plans since their approvals have been set  
with reference to the Company’s relative TSR 
performance over a three year period against  
a range of comparator companies in the oil 
exploration and production sector. Prior to the 
vesting of an award, the Committee gives 
consideration to whether the results are 
consistent with the underlying performance  
of the Company. Once the Committee 
determines performance criteria have been 
met, there may additionally be a requirement 
that awards be held for a specified retention 
period prior to exercise or receipt.

DIRECTORS’ REMUNERATION REPORT CONTINUED

Further details of incentive share awards are 
set out in the table on page 46 and in Note  
27 to the financial statements.

FiVe year tsr perFormance
The performance graph below sets out SOCO’s 
TSR performance over the past five years. The 
FTSE Oil & Gas Index performance is similarly 
set out, being a broad market index which is 
sector specific.

total shareholder return %

700

600

500

400

300

200

100

0

Dec 01

Dec 02

Dec 03

Dec 04

Dec 05

Dec 06

SOCO 

FTSE Oil & Gas

Source: Datastream

Ltip
LTIP awards are considered in the course  
of the annual review in December, which is 
intended to put in place an opportunity for 
regular annual vesting based on performance 
targets achieved over successive three year 
periods. In consideration of exceptional 
corporate and individual performance during 
2006, as described in the Bonus section of 
this report, discretionary awards were granted 
to the Executive Directors over shares with a 
market value of 200% of salary. Shares 
awarded under the Plan are subject to 
performance criteria to be measured on the 
third anniversary of the date of grant, and 
deemed fulfilled to the satisfaction of the 
Committee. If the TSR ranking exceeds the 
median, 30% of the award will become 
capable of vesting , with full vesting only for 
performance in the top 17 percentile. The 
actual vesting percentage will be calculated  
on a pro rata basis between ranking positions 
to more closely reflect SOCO’s actual TSR 
performance relative to the next highest and 
lowest comparators. For awards granted prior 
to 2004, if the TSR exceeds the median, 40% 
of the award will become capable of vesting 
with full vesting for performance in the top  
20 percentile.

shall primarily be assessed, on the basis of 
appropriate external advice, in terms of the 
additions to and the management and quality 
of the Group’s oil and gas reserves in view of 
goals set by the Board. Following measurement 
of the Company’s performance against the 
comparator group for awards granted in 2003 
40% of the awards have been declared vested. 
The Committee is satisfied that the performance 
criteria measurement has resulted in a vesting 
level appropriate to the underlying performance 
of the Company. Those awards not declared 
vested have lapsed.

option scheme
The Committee currently operates one share 
option scheme for its employees, being the 
SOCO 1997 Company Share Option Plan.  
No options have been granted to the Directors 
since 1999, prior to introduction of the LTIP.  
All options held by Directors, having been 
measured against the relevant three year 
performance criteria set at the date of grant, 
are 100% vested and exercisable. Any future 
grants to Directors will be subject to vesting 
and performance criteria set with reference to 
best practice guidelines and fully disclosed to 
shareholders. The scheme will terminate on 25 
April 2007 without prejudice to the subsisting 
rights of participants. The Committee will give 
consideration to the introduction of a new 
scheme to be submitted for shareholder 
approval at the 2008 AGM. 

pre-FLoat option scheme
The Directors hold share options under the 
SOCO-sub Unapproved Share Option Plan 
which were granted prior to the 1997 listing  
of the Company’s shares on the London Stock 
Exchange and are fully vested and exercisable. 
No additional grants are available under the 
plan. These options are currently set to lapse  
in April 2007 under terms of the Plan as 
amended. The Options are fully vested and are 
currently exercisable at an attractive price to 
the option holder. They are therefore expected 
to be exercised, requiring disposition of 
sufficient shares to fund the resulting taxation, 
prior to any lapsing. The Board believes that an 
orderly disposition is in the best interests of the 
Company and shareholders generally, and may 
be impacted by frequent close periods and 
consideration of new legislation. Accordingly, 
the Board has exercised its power to make 
administrative amendments to the scheme by 
extending the exercise date to 15 March 2008. 

The comparator group comprises Aminex, 
Burren Energy, Cairn Energy, Dana Petroleum, 
Dragon Oil (through 2006), First Calgary (from 
2007), JKX Oil and Gas (from 2007), Paladin 
Resources (through 2004), Premier Oil, Ramco 
Energy (through 2006), Regal Petroleum, ROC 
Oil (from 2005), Salamander Energy (from 
2007), SOCO, Sterling Energy (from 2007), 
Tullow Oil and Venture Production.

pension contriButions
Contributions are paid into two money purchase 
pension schemes in respect of the Executive 
Directors. Annual contribution levels are set at 
15% of salary. The Company monitors its pension 
commitments, including Executive Directors’ 
arrangements, in light of pension legislation and 
taxation in the relevant jurisdictions. No changes 
are currently contemplated.

Additionally, the Committee may give 
consideration, in light of any exceptional 
circumstances during a relevant three  
year period, whether the recorded TSR is 
consistent with the achievement of actual 
underlying financial and operational 
performance which, for awards to date,  

other poLicies
With prior approval of the Board, Executive 
Directors are allowed to accept non-executive 
appointments to other boards and to retain  
the associated directors’ fees. Under this policy 
Mr Story has been released to serve on the 
board of Cairn Energy PLC and Mr Cagle has 

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006 

44_ 4

been released to serve on the boards of Vostok 
Energy Limited and Dominion Petroleum plc. 
Mr Story and Mr Cagle retained associated 
fees for 2006 in the amount of £50,000 and 
£3,000, respectively. The Executive Directors 
have held a meaningful shareholding in the 
Company which they have continued to build 
since its founding in 1997. Accordingly, and 
giving due respect to the Executives’ 
demonstrated actions, the Board has not set 
this requirement out in policy. An appropriate 
policy regarding shareholding targets will be 
given consideration upon any prospective 
Executive Director appointment. 

non-executiVe directors
The remuneration of the Non-Executive 
Chairman is set by the Committee and 
approved by the Board. The remuneration for 
other Non-Executive Directors is recommended 
by the Chief Executive and the Chairman  
and determined by the Board as a whole. 
Remuneration levels are set based on outside 
advice and the review of current practices in 
other companies, giving consideration to the 
time commitment and responsibilities of the 
role. In consideration of increasing demands 
and fee levels in recent years generally, SOCO 
has given particular attention to benchmarking 
data to ensure its fees remain appropriate. 
Based on these factors, the annual fees for 
services as Directors payable to the Chairman, 
the Deputy Chairman and the remaining 

Non-Executive Directors were set at 
£125,000, £65,000 and £36,000, 
respectively, with effect from 1 January 
2007. The fees have been set within the 
aggregate limits set out in the Company’s 
Articles of Association and approved by 
shareholders. Non-Executive Directors are 
not eligible for participation in the Company’s 
incentive schemes or pension schemes.

directors’ contracts
Executive Directors’ contracts are for an 
indefinite period and are terminable by either 
party on giving one year’s notice which may  
be satisfied with a payment in lieu of notice. 
The Committee has a duty to prevent the 
requirement to make payments that are not 
strictly merited, and endorses the principle of 
mitigation of damages on early termination  
of a service contract. Any payment on early 
termination will be assessed on the basis of 
the particular circumstances, but in any event 
will not be in respect of any period beyond  
the one year specified by contract. The  
Non-Executive Directors’ appointments  
are terminable at the will of the parties but  
are envisaged to establish an initial term of 
three years after which they will be reviewed 
annually. The dates of the Directors’ service 
contracts or letters of appointment, which  
may not coincide with their initial date of 
appointment, are set out in the Directors’ 
Report on page 31.

audited inFormation 
directors’ emoLuments

Executive Director 
E Story

R Cagle

Non-Executive Director

R de Sousa2

P Maugein2

P Kingston3

O Barbaroux

R Cathery 

E Contini 

J Norton 

M Roberts 

J Snyder 

Fees/basic 
salary 
£000’s

395

296

Benefits 
in kind1 
£000’s

20

30

Annual  
bonus 
£000’s

395

296

33

70

60

30

30

30

30

30

30

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

Total 
2006 
£000’s

810

622

33

70

60

30

30

30

30

30

30

total 
2005 
£000’s

671

486

29

70

59

29

29

29

29

29

29

Aggregate emoluments

1,034

50

691

1,775

1,489

1 Benefits include medical insurance, life assurance cover, critical illness cover and car benefits.

2  Emoluments paid to P Maugein and R de Sousa include Chairman fees in proportion to their dates of service in the role.

3 Emoluments receivable by Mr Peter Kingston are paid to Peter Kingston & Associates.

No Directors received amounts as compensation for loss of office as a Director during the year.

directors’ pension entitLements
Contributions paid into two money purchase schemes by the Company in respect of the Executive Directors were as follows:

Executive Director 
E Story

R Cagle

2006 
£000’s

59

44

103

2005 
£000’s

55

39

94

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DIRECTORS’ REMUNERATION REPORT CONTINUED

directors’ incentiVe share awards
Details of directors’ options or rights to acquire ordinary shares in the Company are as follows:

E Story

as at 
1 January 
2006

granted/ 
awarded

exercised

Lapsed

as at  
  31 december 
2006

excercise 
price 
£

date 
potentially 
  exercisable4

expiry 
date

–

–

–

–

–

  160,000

  175,140

  153,840

  111,400

75,600

55,600

  72,660

48,440

Pre-IPO share plan1

 1,973,954

SOCO share plan2

  695,195

Deferred bonus3

  160,000

LTIP3

  175,140

  153,840

  121,100

  111,400

75,600

–

–

–

–

–

–

–

–

–

  55,600

R Cagle

Pre-IPO share plan1 

  986,977

SOCO share plan2

  448,073

Deferred bonus3

  112,000

LTIP3

  122,580

  107,700

84,800

77,900

52,900

–

–

–

–

–

–

–

–

–

  41,700

–

  695,195

–

–

–

–

–

–

–

–

  448,073

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

  50,880

–

–

–

 1,973,954

0.750

 29.05.97

 15.03.08

–

0.590

 13.07.02

 13.07.06

–

–

–

–

–

–

–

 01.01.03

 21.03.11

 24.05.04

 23.05.11

 10.12.04

 09.12.11

 19.12.06

 18.12.13

 09.12.07

 08.12.14

 20.12.08

 19.12.15

 18.12.09

 17.12.16

  986,977

0.750

 29.05.97

 15.03.08

–

0.590

 13.07.02

 13.07.06

  112,000

  122,580

  107,700

33,920

77,900

52,900

41,700

–

–

–

–

–

–

–

 01.01.03

 21.03.11

 24.05.04

 23.05.11

 10.12.04

 09.12.11

 19.12.06

 18.12.13

 09.12.07

 08.12.14

 20.12.08

 19.12.15

 18.12.09

 17.12.16

1  Options held under the SOCO-sub Unapproved Company Share Plan were granted prior to the listing of the Company’s shares on the London 

Stock Exchange.

2   Based on TSR performance against a comparator group, all options conditionally exercisable under the 1997 Company Share Plan have been 
determined to be fully vested. Additional details regarding the plan are set out within this report. Options were exercised on 15 June 2006  
at a market price of £12.32, resulting in a gain of £8.2 million and £5.3 million on exercise by E Story and R Cagle, respectively.

3  These conditional awards are in the form of contingent rights or nil price options to acquire ordinary shares in the Company. Those awards set  

out as exercisable prior to 1 January 2007 have been tested against the relevant performance schedules attached to the awards and the balance 
held as at 31 December 2006 has been determined to be fully vested. Those awards set out as potentially exercisable from a date subsequent  
to 31 December 2006 remain conditional upon performance criteria. Additional details regarding the LTIP are set out within this report.

4  Options may not be exercised without appropriate Board consents, the Board having given consideration to any requirements on participants  

to maintain a specified minimum number of shares under option (or equivalent shareholding requirements).

The market price of the ordinary shares at 31 December 2006 was £13.82 and the range during the year to 31 December 2006 
was £7.69 to £16.10.

directors’ transactions
Pursuant to a lease dated 20 April 1997, Comfort Storyville (a company wholly owned by Mr Ed Story) has leased to the  
Group office and storage space in Comfort, Texas. The lease, which was negotiated on an arm’s length basis, has a fixed  
monthly rent of $1,000.

In January 2001, the Group entered into an agreement (the Option Agreement) with Mr Rui de Sousa wherein, in exchange  
for consideration in the amount of $400,000, the Group secured an option to acquire a 30% shareholding in a special purpose 
entity created by Mr de Sousa to pursue a specific field development and to hold any rights as may be acquired for  
such development. The Option Agreement, which was negotiated on an arm’s length basis, expired on 31 December 2006.

Under the terms of an acquisition approved by shareholders in 1999, the Company and its strategic shareholder group (Investor 
Group), including Quantic Limited (Quantic) in which Mr Rui de Sousa has a non-notifiable share interest, jointly participate in 
certain regions in which the Investor Group utilises its long established industry and government relationships to negotiate and 
secure commercial rights in oil and gas projects. In the 2004 Annual Report and Accounts the form of participation to be utilised 
was set out to be through equity shareholdings in which the Investor Group holds a minority interest in special purpose entities 
(SPEs) created to hold such projects. The shareholding terms have been modelled after the SOCO Vietnam Ltd arrangement which 
was negotiated with third parties. Quantic‘s minority holdings in the subsidiary undertakings which principally affected the profits  
or net assets of the Group are shown in Note 16 of the financial statements. The Group has entered into a consulting agreement, 
which the parties have agreed to extend through July 2008, wherein Quantic is entitled to a consulting fee in the amount of 
$50,000 per month in respect of such services as are required to review, assess and progress the realisation of oil and gas 
exploration and production opportunities in certain areas.

 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
directors’ interests
The Directors who held office at 31 December 2006 had the following interests (all of which were beneficial except as noted below) 
in the ordinary shares of the Company (Shares), warrants to subscribe for the same number of Shares (Warrants) and contingent 
rights or options to acquire Shares (Options) at 31 December 2006:

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006 

46_ 4

Executive Director 
E Story

R Cagle2

Non-Executive Director

Rui de Sousa3

Peter Kingston

Olivier Barbaroux

Robert Cathery

Ettore Contini

John Norton

Martin Roberts

John Snyder4

number of shares

number of options1

number of warrants

2006

2005

2006

2005

2006

2005

 1,596,893

 1,149,254

 2,753,974

 3,466,129

  716,246

  262,209

 2,401,086

 3,169,998

–

–

–

–

  728,924

 1,293,635

4,000

20,000

  100,000

60,000

4,000

20,000

70,000

60,000

  115,000

  115,000

5,000

5,000

  200,000

  500,000

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

 1,549,853

 1,549,853

–

–

–

–

–

–

–

–

–

–

–

–

–

–

1  Details of Options granted to or held by the Directors in respect of their services as a director, including any relevant conditions of exercise,  

are set out in the table of Directors’ incentive share awards.

2  Mr Roger Cagle’s interests include 266,773 Shares (2005 – 83,850) and 865,409 (2005 – 1,177,068) Options held by Cynthia Cagle,  

the Options having been granted to her in respect of her services to the Group.

3  In addition to 7,500 (2005 – nil) Shares held personally, Mr Rui de Sousa’s interest is held by Palamos Limited, which is owned by a trust 

company whose potential ultimate beneficiary is the family of Mr de Sousa, and by New Falcon Oil Limited, of which Mr de Sousa owns 100%  
of the issued ordinary share capital. 

 Palamos Limited holds 721,424 (2005 – 721,424) Shares, 528,678 (2005 – 528,678) Warrants at an exercise price of £0.65 per Share, 
925,187 (2005 – 925,187) Warrants at an exercise price of £0.60 per Share and 55,336 (2005 – 55,336) Warrants at an exercise price  
of £0.55 per Share. 

   New Falcon Oil Limited holds nil (2005 – 572,211) Shares and 40,652 (2005 – 40,652) Warrants at a price of £0.55 per Share. 

4   Mr John Snyder’s interest is held by Snyder Family Investments, L.P., which is owned by Mr Snyder, other family members and other partnerships 

and trusts of which Mr Snyder and members of his family are owners and/or beneficiaries.

Whilst the Executive Directors, as potential beneficiaries, are technically deemed to have an interest in all Shares held by the  
SOCO Employee Benefit Trust (Trust), the table above only includes those Shares which are potentially transferable to the Directors 
and their families pursuant to Options which have been granted to them under incentive schemes facilitated by the Trust. Details  
of the Trust and its holdings are set out in Note 25 to the financial statements.

There have been no other changes in the interests of the Directors between 31 December 2006 and the date of this report.  
No Director held any other interests in any Group companies.

approVaL
This report was approved by the Board of Directors on 14 March 2007 and signed on its behalf by: 

Peter Kingston  
Deputy Chairman and Senior Independent Director

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
InDePenDent AUDItoRs’ RePoRt

to the sharehoLders oF soco internationaL pLc
We have audited the Group and parent Company financial 
statements (the financial statements) of SOCO International 
plc for the year ended 31 December 2006 which comprise  
the consolidated income statement, the consolidated and 
parent Company balance sheets, the consolidated and parent 
Company cash flow statements, the consolidated and parent 
Company statements of recognised income and expenses,  
the statement of accounting policies and the related notes 1 
to 32. These financial statements have been prepared under 
the accounting policies set out therein. We have also audited 
the information in the Directors’ Remuneration Report that is 
described as having been audited.

This report is made solely to the Company’s members, as  
a body, in accordance with section 235 of the Companies  
Act 1985. Our audit work has been undertaken so that  
we might state to the Company’s members those matters  
we are required to state to them in an auditors’ 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 Company and the Company’s members as a body,  
for our audit work, for this report, or for the opinions  
we have formed.

respectiVe responsiBiLities oF directors  
and auditors
The Directors’ responsibilities for preparing the Annual Report, 
the Directors’ Remuneration Report and the financial statements 
in accordance with applicable law and International Financial 
Reporting Standards (IFRSs) as adopted by the European Union 
are set out in the Statement of Directors’ Responsibilities.

Our responsibility is to audit the financial statements and  
the part of the Directors’ Remuneration Report to be audited  
in accordance with relevant legal and regulatory requirements 
and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financial 
statements give a true and fair view and whether the financial 
statements and the part of the Directors’ Remuneration Report 
to be audited have been properly prepared in accordance with 
the Companies Act 1985 and, as regards the Group financial 
statements, Article 4 of the IAS Regulation. We also report  
to you whether in our opinion the information given in the 
Directors’ Report is consistent with the financial statements. 
The information given in the Directors’ Report includes that 
specific information presented in the Chairman’s and Chief 
Executive’s Statement, the Review of Operations and the 
Financial Review that is cross referred from the Principal 
Activity and Enhanced Business Review section of the 
Directors’ Report.

In addition we report to you if, in our opinion, the company has 
not kept proper accounting records, if we have not received  
all the information and explanations we require for our audit,  
or if information specified by law regarding directors’ 
remuneration and other transactions is not disclosed.

We review whether the Corporate Governance Statement 
reflects the company’s compliance with the nine provisions  
of the 2003 Combined Code specified for our review by the 
Listing Rules of the Financial Services Authority, and we report 
if it does not. We are not required to consider whether the 
board’s statements on internal control cover all risks and 
controls, or form an opinion on the effectiveness of the  
Group’s corporate governance procedures or its risk and  
control procedures.

We read the other information contained in the Annual Report 
as described in the contents section and consider whether  
it is consistent with the audited financial statements. We 
consider the implications for our report if we become aware  
of any apparent misstatements or material inconsistencies  
with the financial statements. Our responsibilities do not 
extend to any further information outside the Annual Report.

Basis oF audit opinion
We conducted our audit in accordance with International 
Standards on Auditing (UK and Ireland) issued by the Auditing 
Practices Board. An audit includes examination, on a test 
basis, of evidence relevant to the amounts and disclosures  
in the financial statements and the part of the Directors’ 
Remuneration Report to be audited. It also includes an 
assessment of the significant estimates and judgments  
made by the Directors in the preparation of the financial 
statements, and of whether the accounting policies are 
appropriate to the Group’s and Company’s circumstances, 
consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all  
the information and explanations which we considered 
necessary in order to provide us with sufficient evidence to  
give reasonable assurance that the financial statements and 
the part of the Directors’ Remuneration Report to be audited 
are free from material misstatement, whether caused by  
fraud or other irregularity or error. In forming our opinion  
we also evaluated the overall adequacy of the presentation  
of information in the financial statements and the part  
of the Directors’ Remuneration Report to be audited.

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  48 _ 4

opinion
In our opinion: 
•  the Group financial statements give a true and fair view,  

in accordance with IFRSs as adopted by the European Union, 
of the state of the Group’s affairs as at 31 December 2006 
and of its profit for the year then ended;

•  the parent Company financial statements give a true  

and fair view, in accordance with IFRSs as adopted by the 
European Union as applied in accordance with the provisions 
of the Companies Act 1985, of the state of the parent 
Company’s affairs as at 31 December 2006; 

•  the financial statements and the part of the Directors’ 

Remuneration Report to be audited have been properly 
prepared in accordance with the Companies Act 1985 and, 
as regards the Group financial statements, Article 4 of the 
IAS Regulation; and

•  the information given in the Directors’ Report is consistent 

with the financial statements.

separate opinion in reLation to iFrs 
As explained in Note 2 to the Group financial statements,  
the Group in addition to complying with its legal obligation  
to comply with IFRSs as adopted by the European Union,  
has also complied with the IFRSs as issued by the International 
Accounting Standards Board.

In our opinion the Group financial statements give a true and 
fair view, in accordance with IFRSs, of the state of the Group’s 
affairs as at 31 December 2006 and of its profit for the year 
then ended.

Deloitte & Touche LLP
Chartered Accountants and Registered Auditors
London
United Kingdom

14 March 2007

ConsolIDAteD InCome stAtement for the year to 31 deCemBer 2006

Continuing operations

Revenue 

Cost of sales 

Gross profit 

Administrative expenses

Other operating expenses 

notes 

2006 
$000’s

2005 
$000’s

5, 6

76,476

57,160

(21,162)

(19,588)

55,314

37,572

(8,772)

(231)

(5,295)

(1,013)

Operating profit from continuing operations 

 6, 9

46,311

31,264

Investment revenue 

Other gains and losses 

Finance costs 

Profit before tax from continuing operations 

Tax 

Profit for the year from continuing operations

5

7

8

9 

9,292

690

(8,136)

48,157

2,042

853

(497)

33,662

11

(19,094)

(13,366)

29,063

20,296

Profit for the year from discontinued operations 

6

–

181

Profit for the year 

Earnings per share (cents) 

Basic

From continuing operations

From discontinued operations

From continuing and discontinued operations 

Diluted

From continuing operations

From discontinued operations

From continuing and discontinued operations

 9 

29,063

20,477

13

41.3

–

41.3

36.9

–

36.9

29.0

0.3

29.3

25.6

0.2

25.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
BAlAnCe sheets as at 31 deCemBer 2006

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  0 _ 1

Non-current assets 

Intangible assets 

Property, plant and equipment 

Investments 

Financial asset 

Other receivable  

Deferred tax assets 

Current assets 

Inventories   

Trade and other receivables  

Tax receivables

Cash and cash equivalents 

notes 

2006 
$000’s

group

2005 
$000’s

14

  146,954

  151,213

15

  159,472

29,988

2006 
$000’s

–

680

company

2005 
$000’s

–

737

16

17

17

18 

–

32,571

–

1,530

–

  204,286

  179,690

31,882

10,134

2,591

–

–

–

–

–

–

  340,527

  225,808

  204,966

  180,427

19

88

17, 20

26,670

2,299

  187,791

  216,848

310

6,285

1,138

50,967

58,700

–

566

177

63

806

–

244

104

360

708

Total assets 

6 

  557,375

  284,508

  205,772

  181,135

Current liabilities

Trade and other payables 

Tax payables

Net current assets  

Non-current liabilities

Convertible bonds 

Long term provisions 

Total liabilities 

Net assets 

Equity

Share capital 

Share premium account 

Other reserves 

Retained earnings 

Total equity 

21

(35,029)

(15,233)

(22,161)

(134)

(446)

(68)

(974)

(446)

(35,163)

(15,679)

(22,229)

(1,420)

  181,685

43,021

(21,423)

(712)

22

  (220,233)

23

(6,187)

  (226,420)

–

(2,590)

(2,590)

–

–

–

–

–

–

6

  (261,583)

(18,269)

(22,229)

(1,420)

  295,792

  266,239

  183,543

  179,715

24

25

25

23,532

68,325

54,406

23,479

68,221

54,259

23,532

68,325

23,479

68,221

(25,839)

(658)

25

  149,529

  120,280

  117,525

88,673

26

  295,792

  266,239

  183,543

  179,715

The financial statements were approved by the Board of Directors on 14 March 2007 and signed on its behalf by:

Rui de Sousa  
Chairman 

Roger Cagle 
Director

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CAsh Flow stAtements for the year to 31 deCemBer 2006

Net cash from (used in) operating activities 

28

33,230

30,536

11,899

(5,409)

notes 

2006 
$000’s

group

2005 
$000’s

2006 
$000’s

company

2005 
$000’s

Investing activities 

Purchase of intangible assets, net 

Purchase of property, plant and equipment

Purchase of own shares into treasury 

Investment in subsidiary undertakings

Dividends received from subsidiary undertakings

Proceeds on disposal of subsidiary undertaking 

6

(82,148)

(65,268)

(32,191)

(10,907)

25

(13,634)

–

–

–

–

(30)

(13,634)

–

(150)

–

–

(12,883)

12,935

20,617

–

–

–

27,510

–

–

Net cash (used in) from investing activities 

  (127,973)

(48,665)

(729)

7,584

Financing activities 

Share-based payments 

Proceeds on issue of convertible bonds 

Proceeds on issue of ordinary share capital 

27

(11,372)

(1,837)

(11,372)

(1,837)

22

  242,966

–

–

14

–

–

–

14

Net cash from (used in) financing activities 

  231,594

(1,823)

(11,372)

(1,823)

Net increase (decrease) in cash and cash equivalents 

  136,851

(19,952)

(202)

Cash and cash equivalents at beginning of year

50,967

71,122

360

352

113

Effect of foreign exchange rate changes

(27)

(203)

(95)

(105)

Cash and cash equivalents at end of year

  187,791

50,967

63

360

stAtements oF ReCognIseD InCome AnD exPense  
for the year to 31 deCemBer 2006

notes

2006 
$000’s

group

2005 
$000’s

2006 
$000’s

company

2005 
$000’s

Profit for the year 

12, 25

29,063

20,477

4,350

15,372

Unrealised currency translation differences  

25

186

(363)

24,502

(20,351)

Total recognised income (loss) for the year 

29,249

20,114

28,852

(4,979)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
notes to the ConsolIDAteD FInAnCIAl stAtements

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  2 _ 3

1 generaL inFormation 
SOCO International plc is a company incorporated in Great Britain under the Companies Act 1985. The address of the registered 
office is given inside the back cover. The nature of the Group’s operations and its principal activities are set out in Note 6 and in 
the Review of Operations and Financial Review on pages 8 to 19 and 24 to 27, respectively.

2 signiFicant accounting poLicies
(a) Basis of preparation 
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). The financial 
statements have also been prepared in accordance with IFRSs adopted for use in the European Union and therefore comply with 
Article 4 of the EU IAS Regulation and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS. 
The financial statements have been prepared under the historical cost basis. The financial statements are presented in US dollars, 
which is the functional currency of each of the Company’s subsidiary undertakings. The functional currency of the Company 
remains GB pounds although its financial statements are presented in US dollars. The principal accounting policies adopted are 
set out below.

IFRS 6 Exploration for and Evaluation of Mineral Resouces was adopted early from 2005. At the date of approval of these financial 
statements the Group has not applied the following IFRSs and International Financial Reporting Interpretations Committee (IFRIC) 
interpretations which are in issue but not yet effective:

IFRS 7 Financial Instruments: Disclosures; and the related amendment to IAS 1 on capital disclosures  
IFRS 8 Operating Segments 
IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies
IFRIC 8 Scope of IFRS 2
IFRIC 9 Reassessment of Embedded Derivatives
IFRIC 11 IFRS 2 Group and Treasury Share Transactions
IFRIC 12 Service Concession Arrangements

The adoption of these IFRSs and IFRICs in future periods are not expected to have a material impact on the financial statements 
of the Group.

(b) Basis of consolidation
The Group financial statements consolidate the accounts of SOCO International plc and entities controlled by the Company (its 
subsidiary undertakings) drawn up to the balance sheet date. Control is achieved where the Company has the power to govern  
the financial and operating policies of an investee entity so as to obtain benefits from its activities. The results of subsidiaries 
acquired or sold are consolidated for the periods from or to the date on which control passed. Acquisitions are accounted for 
under the acquisition method whereby the assets, liabilities and contingent liabilities acquired and the consideration given are 
recognised in the Group accounts at their fair values as at the date of the acquisition. 

(c) Investments 
Except as stated below, non-current investments are shown at cost less provision for impairment. 

(d) Interests in joint ventures 
Jointly controlled entities are those for which the Group exercises joint control over the operating and financial policies.  
These investments are dealt with by proportionate consolidation whereby the consolidated financial statements include  
the appropriate share of these companies’ assets, liabilities, income and expenses on a line by line basis.

Where a consolidated member of the Group participates in unincorporated joint ventures, that member accounts directly  
for its share of the jointly controlled assets, liabilities and related income and expenses which are then similarly included  
in the consolidated financial statements of the Group. 

(e) Non-current assets held for sale 
Non-current assets classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell  
and no depreciation is charged.

(f) Revenue 
Revenue represents the fair value of the Group’s share of oil and gas sold during the year. To the extent revenue arises from  
test production during an evaluation programme, an amount is charged from evaluation costs to cost of sales so as to reflect  
a zero net margin. 

Investment revenue is accrued on a time basis, by reference to the principal outstanding and at the effective interest  
rate applicable.

(g) Tangible and intangible non-current assets 
oil and gas exploration, evaluation and development expenditure 
The Group uses the full cost method of accounting for exploration, evaluation and development expenditure, whereby all 
expenditures incurred in connection with the acquisition, exploration, evaluation and development of oil and gas assets,  
including directly attributable overheads, and interest payable and exchange differences directly related to financing  
development projects, are capitalised in separate geographical cost pools. 

notes to the ConsolIDAteD FInAnCIAl stAtements Continued

2 signiFicant accounting poLicies continued
Cost pools are established on the basis of geographical area having regard to the operational and financial organisation of the 
Group. Intangible acquisition, exploration and evaluation costs incurred in a geographical area where the Group has no established 
cost pool are initially capitalised as intangible non-current assets except where they fall outside the scope of IFRS 6 Exploration  
for and Evaluation of Mineral Resources whereby they are expensed as incurred subject to other guidance under IFRS. Tangible 
non-current assets used in acquisition, exploration and evaluation are classified with tangible non-current assets as property, plant 
and equipment. To the extent that such tangible assets are consumed in exploration and evaluation the amount reflecting that 
consumption is recorded as part of the cost of the intangible asset. Upon successful conclusion of the appraisal programme and 
determination that commercial reserves exist, such costs are transferred to tangible non-current assets as property, plant and 
equipment. Exploration and evaluation costs carried forward are assessed for impairment as described below.

Proceeds from the disposal of oil and gas assets are credited against the relevant cost centre. Any overall surplus arising in  
a cost centre is credited to the income statement. 

depreciation and depletion 
Depletion is provided on oil and gas assets in production using the unit of production method, based on proven and probable 
reserves, applied to the sum of the total capitalised exploration, evaluation and development costs, together with estimated future 
development costs at current prices. Oil and gas assets which have a similar economic life are aggregated for depreciation purposes.

impairment of value 
Where there has been a change in economic conditions or in the expected use of an asset that indicates a possible impairment  
in an asset, management tests the recoverability of the net book value of the asset by comparison with the estimated discounted 
future net cash flows based on management’s expectations of future oil prices and future costs. Any identified impairment is 
charged to the income statement. 

Intangible non-current assets are considered for impairment at least annually by reference to the indicators in IFRS 6. Where  
there is an indication of impairment of an exploration and evaluation asset which is within a geographic pool where the Group  
has tangible oil and gas assets with commercial reserves, the exploration asset is assessed for impairment together with all  
other cash generating units and related tangible and intangible assets in that geographic pool and any balance remaining after 
impairment is amortised over the proven and probable reserves of the pool. Where the exploration asset is in an area where the 
Group has no established pool, the exploration asset is tested for impairment separately and, where determined to be impaired,  
is written off.

other tangible non-current assets 
Other tangible non-current assets are stated at historical cost less accumulated depreciation. Depreciation is provided on a 
straight line basis at rates calculated to write off the cost of those assets, less residual value, over their expected useful lives.  

decommissioning 
The decommissioning provision is calculated as the net present value of the Group’s share of the expenditure which may  
be incurred at the end of the producing life of each field in the removal and decommissioning of the production, storage and 
transportation facilities currently in place. The cost of recognising the decommissioning provision is included as part of the cost  
of the relevant property, plant and equipment and is thus charged to the income statement on a unit of production basis in 
accordance with the Group’s policy for depletion and depreciation of tangible non-current assets. Period charges for changes  
in the net present value of the decommissioning provision arising from discounting are included in finance costs. 

(h) Changes in estimates 
The effects of changes in estimates on the unit of production calculations are accounted for prospectively over the estimated 
remaining proven and probable reserves of each pool. 

(i) Inventories 
Inventories are stated at the lower of weighted average cost and net realisable value. Overlifts, which are recorded to accruals and 
deferred income, and underlifts, which are recorded to prepayments and accrued income, of crude oil are recorded at market value. 

(j) Leases 
Rentals payable under operating leases are charged to the income statement on a straight line basis over the term of the lease. 
Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight line basis over the 
lease term. 

(k) Share-based payments 
In accordance with the transitional provisions, the Group has applied the requirements of IFRS 2 to all grants after 7 November 
2002 that were unvested as of 1 January 2005. Under these requirements, equity-settled awards under share-based incentive 
plans are measured at fair value at the date of grant and expensed on a straight line basis over the performance period along with 
a corresponding increase in equity. Fair value is measured using an option pricing model taking into consideration management’s 
best estimate of the expected life of the option and the estimated number of shares that will eventually vest. 

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  4 _ 

2 signiFicant accounting poLicies continued
(l) Taxation 
The tax expense represents the sum of the tax currently payable and deferred tax. 

The tax currently payable is based on taxable profit for the year. The Group’s liability for current tax is calculated using tax rates 
that have been enacted or substantively enacted by the balance sheet date. 

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities 
in the financial statements and the corresponding tax bases, and is accounted for using the balance sheet liability method. 
Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the 
extent that it is probable that sufficient taxable profits will be available to recover the asset. Deferred tax is not recognised where 
an asset or liability is acquired in a transaction which is not a business combination for an amount which differs from its tax value.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and 
interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that 
the temporary difference will not reverse in the foreseeable future. 

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is 
realised based on tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is charged  
or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the 
deferred tax is also dealt with in equity. 

(m) Financial instruments 
Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party  
to the contractual provisions of the instrument. The Group does not currently utilise derivative financial instruments.

Other than the convertible bonds, there are no material financial assets and liabilities for which differences between carrying 
amounts and fair values are required to be disclosed.

Financial asset at fair value through profit or loss
Where a financial instrument is classified as a financial asset at fair value through profit or loss it is initially recognised at  
fair value. At each balance sheet date the fair value is reviewed and any gain or loss arising is recognised in the income 
statement. Period credits for changes in the net present value of the financial asset arising from discounting are included  
in other gains and losses.

trade receivables 
Trade receivables are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. 

trade payables 
Trade payables are stated at their nominal value. 

convertible bonds
The net proceeds received from the issue of convertible bonds are split between a liability element and an equity component  
at the date of issue. The fair value of the liability component is estimated using the prevailing market interest rate for similar  
non-convertible debt. The difference between the proceeds of issue of the convertible bonds and the fair value assigned to  
the liability component, representing the embedded option to convert the liability into equity of the Group, is included in equity  
and is not remeasured. The liability component is carried at amortised cost.

Issue costs are apportioned between the liability and equity components of the convertible bonds based on their relative carrying 
amounts at the date of issue. The portion relating to the equity component is charged directly against equity.

The interest expense on the liability component is calculated by applying the prevailing market interest rate for similar  
non-convertible debt to the liability component of the instrument. The difference between this amount and the interest  
paid is added to the carrying amount of the convertible bonds.

equity instruments 
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. 

(n) Foreign currencies
Transactions in currencies other than US dollars are recorded in US dollars at the rate of exchange at the date of the transaction. 
Monetary assets and liabilities denominated in currencies other than US dollars at the balance sheet date are recorded at the 
rates of exchange prevailing at that date, or if appropriate, at the forward contract rate. Any resulting gains and losses are included 
in net profit or loss for the period.

notes to the ConsolIDAteD FInAnCIAl stAtements Continued

2 signiFicant accounting poLicies continued
The results of entities denominated in currencies other than US dollars are translated at the average rate of exchange during  
the period and their balance sheets at the rates ruling at the balance sheet date. Exchange differences arising on retranslation  
at the closing rate of the opening net assets and results of entities denominated in currencies other than US dollars are dealt  
with through equity and transferred to the Group’s retained earnings reserve. Other foreign exchange differences are taken to  
the income statement.

(o) Pension costs 
The contributions payable in the year in respect of pension costs for defined contribution schemes and other post-retirement 
benefits are charged to the income statement. Differences between contributions payable in the year and contributions actually 
paid are shown either as accruals or prepayments in the balance sheet. 

3 FinanciaL risk management
The Board reviews and agrees policies for managing financial risks that may affect the Group. In certain cases the Board  
delegates responsibility for such reviews and policy setting to the Audit Committee. The main financial risks affecting the  
Group are discussed below:

credit risk
The Group’s non-current financial asset that is subject to credit risk comprises a financial asset at fair value through profit or  
loss arising in respect of the Group’s disposal of its Mongolia interest (see Note 17). The Group’s and Company’s other financial 
assets comprise investments, trade receivables and cash and cash equivalents. The Group seeks to minimise credit risk by only 
maintaining balances with creditworthy third parties including major multi-national oil companies subject to contractual terms in 
respect of trade receivables. The credit risk on liquid funds is limited as the Board only selects institutions with high credit-ratings 
assigned by international credit-rating agencies and endeavours to spread cash balances over more than one institution. The level 
of deposits held by different institutions is regularly reviewed.

Foreign currency risk
The Group primarily conducts and manages its business in US dollars. Cash balances in Group subsidiaries are usually held in  
US dollars, but smaller amounts may be held in GB pounds or local currencies to meet immediate operating or administrative 
expenses, or to comply with local currency regulations. From time to time the Group may take short term hedging positions to 
protect the value of any cash balances it holds in non-US dollar currencies.

Liquidity risk
The Group’s cash requirements and balances are projected for the Group as a whole and for each country in which operations  
and capital expenditures are conducted. The Group meets these requirements through an appropriate mix of available funds, 
equity instruments and debt financing. The Group seeks to minimise the impact that any debt financings have on its balance  
sheet by negotiating borrowings in matching currencies (see Note 22). The Group further mitigates liquidity risk by entering into 
arrangements with industry partners thereby sharing costs and risks, and by maintaining an insurance programme to minimise 
exposure to insurable losses. 

interest rate risk 
The Group earns interest on its cash at bank and other short term highly liquid investments at a floating rate (see Note 28).  
Fixed rate interest is charged on the Group’s convertible bonds (see Note 22). In addition the Group has also agreed a reserve-
based revolving credit facility which is subject to a floating rate, however as at the balance sheet date no drawdown against this 
facility had been made (see Note 29).

commodity price risk
The Group’s production is usually sold on “spot” or near term contracts, with prices fixed at the time of a transfer of custody  
or on the basis of a monthly average market price. However the Board may give consideration in certain circumstances to the 
appropriateness of entering into fixed price, long term marketing contracts. Although oil prices may fluctuate widely, it is the 
Group’s policy not to hedge crude oil sales unless hedging is required to mitigate financial risks associated with debt financing  
of its assets or to meet its commitments. Over time, during periods when the Group sees an opportunity to lock in attractive  
oil prices, it may engage in limited price hedging.

4 criticaL Judgements and accounting estimates
(a) Critical judgements in applying the Group’s accounting policies
In the process of applying the Group’s accounting policies described in Note 2, management has made judgements that may  
have a significant effect on the amounts recognised in the financial statements. These are discussed below:

Basis of consolidation
Note 2(b) discusses the Group’s basis of consolidation of its parent and subsidiary undertakings. During 2006, the Group acquired 
OPECO, Inc. and its 100% owned subsidiary OPECO Vietnam Ltd whose only asset is a 2% working interest in Block 16-1 offshore 
Vietnam. Management have reviewed the transaction and have determined that it was not a business combination as defined in 
IFRS 3 Business Combinations.

 
 
 
SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  6 _ 

4 criticaL Judgements and accounting estimates continued
oil and gas assets
Note 2(g) describes the judgements necessary to implement the Group’s policy with respect to the carrying value of intangible 
exploration and evaluation assets. Management considers these assets for impairment at least annually with reference to 
indicators in IFRS 6. Note 14 discloses the carrying value of intangible exploration and evaluation assets. Further, Note 2(g) 
describes the Group’s policy regarding reclassification of intangible assets to tangible assets. Management considers the 
appropriateness of asset classification at least annually.

Financial asset
Note 2(m) describes the accounting policy with respect to financial assets at fair value through profit or loss. The key judgements 
that are used in calculating the fair value of the Group’s financial asset arising on the disposal of its Mongolia interest are 
described in Note 17 and are reviewed at least annually.

convertible bonds
Note 2(m) sets out the Group’s accounting policy on convertible bonds. Management assesses the fair value of the liability 
component at issue and reviews the appropriateness of the amortisation period at least annually. Note 2(g) describes the  
nature of the costs that the Group capitalises which includes applicable borrowing costs that are directly attributable to qualifying 
assets as defined in IAS 23 Borrowing Costs (IAS 23). Management has considered the definition of qualifying assets in IAS 23 
and has determined that the only expenditure that currently meets the definition is that related to the Group’s interest in Vietnam. 
Consequently the interest associated with capital expenditure in Vietnam has been capitalised.

(b) Key sources of estimation uncertainty
Note 2 also discusses the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance 
sheet date, that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities. 
These are discussed below:

oil and gas reserves
Note 2(g) sets out the Group’s accounting policy on depreciation and depletion. Proven and probable reserves are estimated  
using standard recognised evaluation techniques. The estimate is reviewed at least twice a year and is regularly reviewed by 
independent consultants. Future development costs are estimated taking into account the level of development required to 
produce the reserves by reference to operators, where applicable, and internal engineers.

Financial asset
Note 2(m) describes the accounting policy with respect to financial assets at fair value through profit or loss. The key sources  
of estimation uncertainty that impact the fair value of the Group’s financial asset arising on the disposal of its Mongolia interest 
are described in Note 17 and are reviewed at least annually. 

decommissioning provision
The accounting policy for decommissioning is discussed in Note 2(g). The cost of decommissioning is estimated by reference  
to operators, where applicable, and internal engineers. Further details are provided in Note 23.

5 totaL reVenue
An analysis of the Group’s revenue is as follows:

Continuing operations 
Oil sales

Investment revenue 

Discontinued operations   
Oil sales 

2006 
$000’s

2005 
$000’s

76,476

9,292

85,768

–

85,768

57,160

2,042 

59,202

1,498

60,700

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
notes to the ConsolIDAteD FInAnCIAl stAtements Continued

6 segment inFormation 
geographical segments
Geographical segments form the basis on which the Group reports its primary segment information.

continuing operations

discontinued  
operations1 

se asia 
$000’s

west africa 
$000’s

unallocated 
$000’s

total 
$000’s

central asia 
$000’s

Oil sales 

Operating profit 

Assets

Liabilities

–

–

–

–

–

(8,802)

76,476

46,311

64,872

  226,184

30,768

  235,551

  557,375

8,384

10,605

12,398

  230,196

  261,583

Capital additions, net2

35,888

  100,790

(2,050)

28

  134,656

Depletion and depreciation

9,318

–

–

208

9,526

se asia 
$000’s

west africa 
$000’s

unallocated 
$000’s

total 
$000’s

central asia 
$000’s

continuing operations

discontinued  
operations1 

middle east 
$000’s

 76,476

55,113

middle east 
$000’s

 57,160

37,263

Oil sales 

Operating profit 

Assets

Liabilities

Capital additions

Depletion and depreciation

–

–

–

–

–

(5,999)

57,160

31,264

39,950

  125,346

28,225

90,987

  284,508

8,696

11,845

7,149

5,498

41,825

–

27

4,048

28,067

–

183

176

18,269

81,920

7,325

2006

group 
$000’s

76,476

46,311

  557,375

  261,583

  134,656

9,526

2005

group 
$000’s

58,658

31,264

  284,508

18,269

81,290

7,325

–

–

–

–

–

–

1,498

–

–

–

(630)

–

1  In August 2005 the Group disposed of its Central Asia segment which comprised its Mongolia interest (see Note 17). The results of this segment are 
therefore included in discontinued operations. In 2005, the profit for the year from discontinued operations of $181,000 was the profit on disposal,  
net of other expenses, of the Mongolia interest.

2 Capital additions, together with the related figures for purchases in the cash flow statements, are net of certain farm-out proceeds.

Business segment
The Group has one principal business activity being oil and gas exploration and production. Revenue by destination does not 
materially differ from revenue by origin. There are no inter-segment sales.

7 other gains and Losses

Change in fair value of financial asset (see Note 17) 

Exchange gain 

8 Finance costs

Interest payable in respect of convertible bonds (see Note 22)  

Other interest payable and similar fees (see Note 29)

Capitalised finance costs

Unwinding of discount on provisions (see Note 23)  

2006 
$000’s

689

1

690

2006 
$000’s

9,359

354

(1,616)

39

8,136

2005 
$000’s

 382

471

853

2005 
$000’s

–

460

–

37

497

The amount of finance costs capitalised was determined by applying the weighted average rate of finance costs applicable to the 
borrowings of the Group of 6.55% to the expenditures on the qualifying asset (see Note 4).

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  8 _ 

9 proFit For the year
Profit for the year is also stated after charging fees payable to the Company’s auditors: 

Audit of the Company’s annual accounts

Audit of the Company’s subsidiaries pursuant to legislation

Other services pursuant to legislation

Recruitment and remuneration services

Corporate finance services

Other services: 
  Audit of the Company’s subsidiaries, not required by legislation

  Other 

Total fees

2006 
$000’s

108

33

65

59

87

25

33 

410

2005 
$000’s

225

16

171 

65

–

24

46 

547

The amounts payable to Deloitte & Touche LLP by the Group in respect of other services pursuant to legislation comprise $65,000 
relating to the Group’s interim review (2005 – $109,000 in respect of regulatory reporting relating to disposals and $62,000 
relating to the Group’s interim review). The amounts payable in respect of corporate finance services comprise $87,000 in respect 
of the convertible bonds issue.

Fees payable to Deloitte and Touche LLP for non-audit services to the Company are not required to be disclosed seperately because 
the consolidated financial statements disclose such fees on a consolidated basis. 

10 staFF costs
The average monthly number of employees of the Group including Executive Directors was 13 (2005 – 15), of which 10  
(2005 – 12) were administrative personnel and 3 (2005 – 3) were operations personnel. The average monthly number of 
employees directly contracted to the Company was 7 (2005 – 7) of which 6 (2005 – 6) were administrative personnel and  
1 (2005 – 1) was operations personnel. Their aggregate remuneration comprised: 

Wages and salaries 

Social security costs 

Share-based payment expense (see Note 27)

Other pension costs under money purchase schemes 

2006 
$000’s

5,484

1,640

560

 365 

group

2005 
$000’s

4,280

554

521

337 

2006 
$000’s

1,321

141

27

89 

company

2005 
$000’s

1,133

126

39

 87 

8,049

5,692

1,578

1,385

A proportion of the Group’s staff costs are capitalised in accordance with the Group’s accounting policy. 

11 tax

Current tax 

Deferred tax (see Note 18) 

2006 
$000’s

18,033

 1,061 

19,094

2005 
$000’s

13,839

(473) 

13,366

UK corporation tax is calculated at 30% (2005 – 30%) of the estimated assessable profit for the year. Taxation in other jurisdictions 
is calculated at the rates prevailing in the respective jurisdictions. During 2005 and 2006 both current and deferred taxation have 
arisen in overseas jurisdictions only.

 
 
  
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
notes to the ConsolIDAteD FInAnCIAl stAtements Continued

11 tax continued
The charge for the year can be reconciled to the profit per the income statement as follows: 

Profit before tax on continuing operations  

Profit before tax on discontinued operations 

2006 
$000’s

2005 
$000’s

48,157

33,662

–

181

48,157

33,843

Profit before tax multiplied by standard rate of corporation tax in the UK of 30% (2005 - 30%) 

14,447

10,153

Effects of:  

Expenses not expected to be utilised as a tax loss  

Non taxable profit on disposal  

Higher tax rates on overseas earnings  

Adjustments to tax charge in respect of previous years  

Tax charge for the year  

2,151

–

2,456

40

1,423

(58)

1,906

(58)

19,094

13,366

The tax charge in future periods may also be affected by these factors. The Group’s overseas tax rates are higher than those in the 
UK, primarily because the profits earned in Yemen are taxed at a rate of 35%.

12 proFit attriButaBLe to soco internationaL pLc 
The profit for the financial year, inclusive of dividends received from subsidiary undertakings, dealt with in the accounts of  
the Company was $4,350,000 (2005 – $15,372,000). As provided by Section 230 of the Companies Act 1985, no income 
statement is presented in respect of the Company.

13 earnings per share 
The calculation of the basic and diluted earnings per share is based on the following data:

Earnings from continuing operations 

Earnings from discontinued operations

2006 
$000’s

2005 
$000’s

29,063

20,296

–

181

29,063

20,477

number of shares

2006

2005

Weighted average number of ordinary shares for the purpose of basic earnings per share

  70,338,272

 70,003,067

Effect of dilutive potential ordinary shares: 

Share options and warrants 

Ordinary shares of the Company held by the Group (see Note 25) 

  6,021,356

  7,010,483

  2,300,800

  2,423,300

Weighted average number of ordinary shares for the purpose of diluted earnings per share

  78,660,428

 79,436,850

The denominators used for the purposes of calculating earnings per share on both continuing and discontinued operations are  
the same. At 31 December 2006 up to 6,238,000 (2005 – nil) potential ordinary shares in the Company that are underlying  
the Company’s convertible bonds (see Note 22) and that may dilute earnings per share in the future have not been included  
in the calculation of diluted earnings per share because they are antidilutive for the year to 31 December 2006.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14 intangiBLe assets

Exploration and evaluation expenditure 

As at 1 January 2005 

Additions

Disposals 

As at 1 January 2006 

Additions 

 Transfers to property, plant and equipment (see Note 15)

As at 31 December 2006

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  60 _ 61

group 
$000’s

  152,990

69,164

(70,941)

  151,213

98,740

  (102,999)

  146,954

Intangible assets comprise the Group’s exploration and evaluation projects which are pending determination. Additions are stated 
net of certain farm-out proceeds. As at 31 December 2006 an amount of $108.7 million (2005 – $111.8 million) remains in 
intangible assets in respect of the Vietnam project after $103.1 million was transferred to property, plant and equipment (see  
Note 15) following the successful conclusion of the appraisal programme in Block 9-2.

15 property, pLant and equipment

Cost 

As at 1 January 2005 

Additions 

Foreign exchange 

As at 1 January 2006 

Additions 

Disposals

oil and gas 
properties 
$000’s

63,980

11,845

–

75,825

35,888

–

group

company

other 
$000’s

total 
$000’s

other 
$000’s

2,005

281

(119)

2,167

28

(23)

65,985

12,126

(119)

77,992

35,916

(23)

Transfers from intangible assets (see Note 14)

  103,117

(118)

  102,999

Foreign exchange 

As at 31 December 2006 

Depreciation 

As at 1 January 2005 

Charge for the year 

Foreign exchange 

As at 1 January 2006 

Charge for the year 

Disposals 

Foreign exchange 

–

156

156

  214,830

2,210

  217,040

39,678

7,113

–

46,791

9,318

–

–

1,034

212

(33)

1,213

208

(23)

61

40,712

7,325

(33)

48,004

9,526

(23)

61

As at 31 December 2006 

56,109

1,459

57,568

Carrying amount 

As at 31 December 2006 

As at 31 December 2005 

  158,721

29,034

751

954

  159,472

29,988

Other fixed assets comprise plant and machinery, computer equipment and fixtures and fittings.

1,056

150

(119)

1,087

30

–

–

156

1,273

235

148

(33)

350

182

–

61

593

680

737

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
notes to the ConsolIDAteD FInAnCIAl stAtements Continued

16 Fixed asset inVestments
principal group investments 
The Company and the Group had investments in the following subsidiary undertakings as at 31 December 2006 which principally 
affected the profits or net assets of the Group, all of which are indirectly held.  

SOCO Yemen Pty Limited1 

OPECO Vietnam Ltd

country of  
incorporation

Australia

Cook Islands 

SOCO Exploration (Thailand) Co. Ltd 

Thailand

country of operation

principal activity

Yemen

Vietnam

Thailand

Investment holding

Oil and gas exploration

Oil and gas exploration

SOCO Congo Limited2

SOCO Vietnam Ltd3 

Cayman Islands 

Congo (Brazzaville)

Investment holding

Cayman Islands

Vietnam

Oil and gas exploration

percentage 
holding

100.0

100.0

99.9

85.0

80.0

1  The Yemen interest, which is in production, is held through Comeco Petroleum, Inc. (Comeco), a jointly controlled entity, in which SOCO Yemen Pty 
Limited held 58.75% of the ordinary share capital at 31 December 2006 (2005 – 58.75%). As at 31 December 2006 Comeco had non-current 
assets of $97.0 million (2005 – $53.5 million), current assets of $13.2 million (2005 – $14.5 million), current liabilities of $4.0 million (2005 – 
$10.6 million), non-current liabilities of $10.5 million (2005 – $4.4 million) and for the year to 31 December 2006 Comeco had revenue of 
$130.2 million (2005 – $97.3 million), operating and administration expenses of $36.1 million (2005 – $33.8 million) and a tax expense of 
$32.2 million (2005 – $22.7 million).

2  SOCO Congo Limited (SOCO Congo) owns 100% of SOCO Exploration and Production Congo SA which holds the Group’s working interest in its 
Congo (Brazzaville) asset. The Group funds 100% of SOCO Congo and is entitled to receive 100% of the distributions made by SOCO Congo until it 
has recovered such funding including a rate of return. The 15% minority interest is held by Quantic Limited. 

3  The remaining 20% minority interest is funded by the Group. The Group is entitled to receive 100% of the distributions made by SOCO Vietnam 
until it has recovered its funding of the minority interest plus accrued interest from the minority interest’s pro rata portion of those distributions.

The Company’s investments in subsidiary undertakings include contributions to the SOCO Employee Benefit Trust (see Note 25)  
and are otherwise held in the form of share capital. 

17 FinanciaL asset
In April 2005, the Group entered into a Sale and Purchase Agreement (Agreement) with an economic effective date of 1 January 
2005, to sell its 100% owned subsidiaries SOCO Tamtsag Mongolia, LLC (SOTAMO) and SOCO Mongolia Ltd (SOCO Mongolia)  
to Daqing Oilfield Limited Company (Daqing), a subsidiary of PetroChina. Together SOTAMO and SOCO Mongolia held the Group’s 
Mongolia interest. In August 2005 the Group completed the transaction. Under the terms of the Agreement the Group will receive 
consideration of up to approximately $93.0 million comprised of cash consideration of $40.0 million plus a subsequent payment 
based on total crude oil produced from the Mongolia interest after the effective date in excess of 27.8 million barrels of oil.

The $40.0 million cash consideration was payable in two tranches. The first $30.0 million was paid, less applicable settlement 
adjustments of $0.4 million, in August 2005 upon completion. The second tranche of $10.0 million was paid into an interest 
bearing escrow account by Daqing upon completion to be released to the Group 18 months later upon the satisfaction of the 
condition that no material undisclosed additional liabilities are discovered. In February 2007 the second tranche was released  
in full to the Group. An amount of $10.7 million (2005 – $10.1 million recorded within non-current assets other receivables)  
which includes accrued interest is included in the balance sheet under current assets as an other receivable (see Note 20).  
The remaining consideration is payable, once cumulative production reaches 27.8 million barrels of oil as described above, at  
the rate of 20% of the average monthly posted marker price for Daqing crude multiplied by the aggregate production for that 
month, up to a total of approximately $52.7 million based on the estimated recoverable costs incurred to 31 December 2004,  
as approved by the Mineral Resources and Petroleum Authority of Mongolia.

The subsequent payment amount is included in non-current assets as a financial asset at fair value through profit or loss. The 
timescale for the production of crude oil in excess of 27.8 million barrels and the price of Daqing marker crude oil are factors  
that cannot accurately be predicted. However, based upon the Directors’ current estimates of proven and probable reserves from 
the Mongolia interests and the development scenarios as discussed with the buyer, the Directors believe that the full subsequent 
payment amount will be payable. The fair value of the subsequent payment amount was determined using a valuation technique  
as there is no active market against which direct comparisons can be made. Assumptions made in calculating the fair value include 
the factors mentioned above, risked as appropriate, with the resultant cash flows discounted at a commercial risk free interest rate. 
The fair value of the financial asset at the date of completion of the sale was $31.5 million. As at 31 December 2006 the fair 
value was $32.6 million (2005 – $31.9 million) after accounting for the change in fair value (see Note 7). 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  62 _ 63

18 deFerred tax 
The following are the major deferred tax assets and liabilities recognised by the Group and movements thereon during the current 
and prior reporting period: 

At 1 January 2005 

Credit (charge) to income

As at 1 January 2006 

Credit (charge) to income (see Note 11) 

As at 31 December 2006

Foreign 
tax credits 
$000’s

  decelerated tax 
depreciation 
$000’s

tax losses 
$000’s

–

–

–

1,172

1,172

1,073

787

1,860

(1,691)

169

199

–

199

(80)

119

other 
$000’s

846

(314)

532

(462)

70

group

total 
$000’s

2,118

473

2,591

(1,061)

1,530

The deferred tax asset principally arises in respect of unutilised foreign tax credits, fixed asset timing differences and unutilised  
tax losses. The deferred tax asset is recognised to the extent that it is regarded as more likely than not that there will be suitable 
taxable profits against which the deferred taxation asset can be recovered in future periods based upon economic models of each 
operation. There is no unprovided deferred taxation at either balance sheet date except for an unprovided deferred tax asset arising 
in respect of tax losses of the Company that are not expected to be utilised in the amount of £5.1 million, being $10.0 million 
(2005 – £3.8 million, being $6.5 million).

19 inVentories
Inventories comprise crude oil and condensate.

20 other FinanciaL assets 

Amounts falling due within one year 

Trade receivables 

Other receivables 

Prepayments and accrued income

2006 
$000’s

5,153

15,110

6,407

26,670

group

2005 
$000’s

3,871

409

2,005

6,285

2006 
$000’s

–

20

546

566

company

2005 
$000’s

–

10

234

244

There is no material difference between the carrying amount of trade and other receivables and their fair value. Other receivables  
in respect of the Group includes $10.7 million (2005 – nil) relating to the sale of the Group’s Mongolia interest (see Note 17).

21 other FinanciaL LiaBiLities

Trade payables 

Amounts due to Group undertakings

Other payables 

Accruals and deferred income 

2006 
$000’s

group

2005 
$000’s

22,429

6,439

–

610

11,990

35,029

–

671

8,123

15,233

2006 
$000’s

–

20,744

234

1,183

22,161

company

2005 
$000’s

–

–

411

563

974

There is no material difference between the carrying value of trade payables and their fair value. Accruals and deferred income 
includes interest payable of $1.4 million (2005 – nil) in respect of convertible bonds (see Note 22).

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
notes to the ConsolIDAteD FInAnCIAl stAtements Continued

22 conVertiBLe Bonds 
In May 2006, the Group issued bonds at a par value of $250 million which will be convertible into ordinary shares of the Company 
at any time from June 2006 until six days before their maturity date of 16 May 2013. At the initial conversion price of £21.847  
per share there are 6,238,000 ordinary shares of the Company underlying the bonds. If the bonds have not been previously 
purchased and cancelled, redeemed or converted, they will be redeemed at par value on 16 May 2013. Interest of 4.5% per 
annum will be paid semi-annually up to that date.

Nominal value of convertible bonds issued net of issue costs  

Equity component (see Note 25) 

Liability component at date of issue

Interest charged

Interest paid

Total liability component as at 31 December 2006

Reported in:

Interest payable in current liabilities (see Note 21) 

Non-current liabilities

Total liability component as at 31 December 2006

$000’s

  242,966 

(25,037)

   217,929 

9,359 

(5,625)

  221,663 

 1,430 

   220,233

  221,663

The interest charged for the year is calculated by applying an effective interest rate of 6.55% to the liability component for the period 
since the bonds were issued. There is no material difference between the carrying amount of the liability component of the convertible 
bonds and their fair value. This fair value is calculated by discounting the future cash flows at the market rate.

23 Long term proVisions

Decommissioning 

As at 1 January 2006 

New provisions and changes in estimates 

Unwinding of discount (see Note 8) 

As at 31 December 2006 

group 
$000’s

2,590 

3,558 

39 

6,187 

The provision for decommissioning is based on the net present value of the Group’s share of the expenditure which may be incurred  
at the end of the producing life of each field (currently estimated to be 9 years) in the removal and decommissioning of the facilities 
currently in place. 

24 share capitaL 

Issued and fully-paid 

72,777,115 ordinary shares of £0.20 each (2005 – 72,632,939)

2006 
$000’s

2005 
$000’s

23,532

23,479

As at 31 December 2006 authorised share capital comprised 125 million (2005 – 125 million) ordinary shares of £0.20 each  
with a total nominal value of £25 million (2005 – £25 million). The Company issued 144,176 new ordinary shares of £0.20 each 
during 2006 (2005 – 356,007) upon the exercise of certain share options at a weighted average exercise price per share of £0.59  
(2005 – £0.726). Details of outstanding share options are set out in Note 27.

As at 31 December 2006 there were 2,825,307 (2005 – 2,825,307) warrants to subscribe for the same number of ordinary 
shares of £0.20 each, which are exercisable through 13 July 2010 at a weighted average subscription price per share of £0.59.

 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
25 reserVes

As at 1 January 2005

New shares issued (see Note 24)

Share-based payments (see Note 27)

Unrealised currency translation differences

Retained profit for the year

As at 1 January 2006

New shares issued (see Note 24)

 Treasury shares purchased 

Share-based payments (see Note 27)

Equity component of bonds issue (see Note 22)

Unrealised currency translation differences

Retained profit for the year

As at 31 December 2006

As at 1 January 2005

New shares issued (see Note 24)

Share-based payments (see Note 27)

Unrealised currency translation differences

Retained profit for the year (see Note 12)

As at 1 January 2006

New shares issued (see Note 24)

Treasury shares purchased

Share-based payments (see Note 27)

Unrealised currency translation differences

Retained profit for the year (see Note 12)

As at 31 December 2006

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  64 _ 6

  share premium  
account 
$000’s

other 
reserves 
$000’s

retained 
earnings 
$000’s

group

total 
$000’s

67,877

53,502

  102,460

  223,839

344

–

–

–

–

521

236

–

–

344

(2,294)

(1,773)

(363)

(127)

20,477

20,477

68,221

54,259

  120,280

  242,760

104

–

(13,634)

(10,969)

25,037

(287)

–

–

–

–

–

–

–

–

–

186

104

(13,634)

(10,969)

25,037

(101)

–

29,063

29,063

68,325

54,406

  149,529

  272,260

  share premium  
account 
$000’s

other 
reserves 
$000’s

retained 
earnings 
$000’s

company

total 
$000’s

67,877

344

–

–

–

68,221

104

–

–

–

–

(689)

95,946

  163,134

–

39

(8)

–

–

344

(2,294)

(2,255)

(20,351)

(20,359)

15,372

15,372

(658)

88,673

  156,236

–

(13,634)

(11,502)

–

–

–

(45)

–

24,502

4,350

104

(13,634)

(11,502)

24,457

4,350

68,325

(25,839)

  117,525

  160,011

The Group’s other reserves include reserves arising in respect of merger relief, upon the purchase of the Company’s own ordinary 
shares (Shares) held in treasury and held by the SOCO Employee Benefit Trust (Trust) and in respect of the equity component of  
the convertible bonds issue (see Note 22). Other reserves were reduced by share-based payments comprising the cash settlement 
of tax liabilities associated with the settlement of certain share options of $11.4 million offset by the expense recognised in respect 
of the incentive schemes of $560,000 (see Note 27).

During the year the Company purchased 608,000 Shares into treasury at a cost of $13.6 million (2005 – nil) and 730,500 were 
used to satisfy the obligation to issue Shares in settlement of certain share options. The number of treasury Shares held by the 
Group and the number of Shares held by the Trust at 31 December 2006 was 27,500 (2005 – 150,000) and 2,273,300 (2005 – 
2,273,300), respectively. The market price of the Shares at 31 December 2006 was £13.82 (2005 – £7.86). Associated with the 
convertible bonds issue the Trust entered into a Global Master Securities Lending Agreement (GMSLA) with Merrill LynchInternational. 
As at 31 December 2006 1,375,000 of the Shares held by the Trust were lent under the GMSLA. The Shares subject to the GMSLA 
have continued to be recognised as the Trust retains all risks and rewards of ownership. 

The Trust, a discretionary trust, was established to facilitate the administration of long term incentive awards for senior management  
of the Group, details of which are set out in Note 27 and in the Directors’ Remuneration Report on pages 45 to 47. The trustees 
purchase Shares in the open market which are recognised by the Company within investments and classified as other reserves by  
the Group as described above. When award conditions are met an unconditional transfer of Shares is made out of the Trust to plan 
participants. The Group has an obligation to make regular contributions to the Trust to enable it to meet its financing costs. Rights  
to dividends on the Shares held by the Trust have been waived by the trustees. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
notes to the ConsolIDAteD FInAnCIAl stAtements Continued

26 reconciLiation oF moVements in group totaL equity

As at 1 January

New shares issued (see Note 24)

Treasury shares purchased

Share-based payments (see Note 25)

Equity component of bonds issue

Unrealised currency translation differences

Retained profit for the year

As at 31 December

2006 
$000’s

2005 
$000’s

266,239

247,187

157

(13,634)

(10,969)

25,037

(101)

475

–

(1,773)

–

(127)

29,063

20,477

295,792

266,239

27 incentiVe pLans
Details of the Group’s employee incentive schemes are set out below. Additional information regarding the schemes is included in 
the Directors’ Remuneration Report on pages 45 to 47. The Group recognised total expenses of $560,000 (2005 – $521,000) in 
respect of the schemes during the year, a proportion of which was capitalised in accordance with the Group’s accounting policies.  

awards administered under the soco employment Benefit trust (trust)
The Company operates a long term incentive plan (LTIP) for senior employees of the Group. Awards vest over a period of 3 years, 
subject to performance criteria which have been set with reference to the Company’s total shareholder return (TSR) relative to a 
range of comparator companies. Consideration may also be given to assessment as to whether the TSR performance is consistent 
with underlying performance. Awards are normally forfeited if the employee leaves the Group before the award vests. Certain 
additional awards are outstanding and exercisable which were granted prior to the introduction of the LTIP. Awards normally expire  
at the end of 10 years following the date of grant, subject to the requirement to exercise certain awards prior to 15 March of the 
year following vesting.

Awards would normally be equity-settled through a transfer at nil consideration of the Company’s own ordinary shares (Shares) held by 
the Trust (see Note 25). The Company has no legal or constructive obligation to repurchase or settle awards in cash. At the beginning 
of the period 1,736,120 (2005 – 1,837,020) awards were outstanding. During the period 125,700 (2005 – 167,000) awards were 
granted, no awards were exercised (2005 – nil) and 161,220 (2005 – 267,900) awards lapsed. The market price and the estimated 
fair value of awards at date of grant were £14.400 (2005 – £8.180) and £4.153 (2005 – £2.610), respectively. Of the 1,700,600 
(2005 – 1,736,120) awards outstanding at the end of the period, 1,161,800 (2005 – 1,054,320) were exercisable. Awards 
outstanding at the end of the year have a weighted average remaining contractual life of 6.01 (2005 – 6.81) years.

The fair value of awards at date of grant has been estimated using a binomial option pricing model, based on the market price at 
date of grant set out above and a nil exercise price. The future vesting proportion of 28.9% (2005 – 31.9%) has been estimated by 
calculating the expected probability of the Company’s TSR ranking relative to its comparators based on modelling each company’s 
projected future share price growth.

share options
The Company operates a discretionary share option scheme for key employees of the Group. Options are exercisable at a price 
equal to the average quoted market price of the Company’s Shares on the date of grant. The vesting period is 3 years, subject to 
performance criteria based on the Company’s TSR relative to a range of comparator companies. Unexercised options expire at the 
end of a 7 or 10 year period, in accordance with the plan rules. Options are normally forfeited if the employee leaves the Group 
before the options vest. Additional share options are outstanding and exercisable that were granted under a previous plan.  

Options would normally be equity-settled through newly issued Shares. Options exercised during 2006 over 1,445,587 (2005 – 
646,201) Shares were partially satisfied by the issue of 144,176 (2005 – 356,007) Shares and by the transfer of 730,500 (2005 
– nil) treasury Shares. The remaining 570,911 (2005 – 290,194) options exercised, being the number of Shares that might 
otherwise be sold in the market, were satisfied by settlement of the option exercise price and cash settlement of the participants’ 
tax liabilities of $1.6 million (2005 – $0.8 million) and $11.4 million (2005 – $1.8 million), respectively. The Board decided in this 
instance it was in the best interest of the Company to agree this settlement method with the participants. The Company has no 
legal or constructive obligation to repurchase or settle options in cash. Details of options outstanding during the year are as follows:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  66 _ 6

27 incentiVe pLans continued

As at 1 January

Granted 

Exercised

As at 31 December

2006

2005

No. of share  
options 

Weighted average 
exercise price 
£

no. of share  
options 

weighted average 
exercise price 
£

  5,290,257

0.835

  5,936,458

50,000

  (1,445,587)

  3,894,670

14.400

0.590

–

(646,201)

1.101

  5,290,257

0.823

–

0.726

0.835

Exercisable as at 31 December

  3,464,670

0.750

  4,910,257

0.703

The weighted average market price at the date of exercise during the year was £12.320 (2005 – £5.058). The market price  
and the estimated fair value of options at the date of grant during 2006 were £14.40 and £1.91, respectively. Options outstanding 
at the end of the year have a weighted average remaining contractual life of 1.52 (2005 – 1.30) years.

The fair value of options granted in 2006 has been estimated using a binomial option pricing model, based on the market price  
at date of grant and exercise price set out above. An expected future share price volatility of 43% has been utilised based on  
the calculated historical volatility over the previous 5 years. Additional inputs to the model include a risk free discount rate of  
5%, a dividend yield of nil% and an expected average option life of 5.2 years based on the contractual life adjusted as deemed 
appropriate for the effects of non-transferability, exercise restrictions and behavioural considerations. The future vesting proportion 
of 28.9% has been estimated by calculating the expected probability of the Company’s TSR ranking relative to its comparators 
based on modelling each company’s projected future share price growth.

28 reconciLiation oF operating proFit to operating cash FLows

2006 
$000’s

group

2005 
$000’s

2006 
$000’s

company

2005 
$000’s

Operating profit 

46,311

31,264

(8,598)

(5,150)

Share-based payments 

Depletion and depreciation 

Operating cash flows before movements in working capital

Decrease (increase) in inventories

Increase in receivables 

(Decrease) increase in payables 

Cash generated by operations 

Interest received

Interest paid

Income taxes paid

560

9,526

56,397

221

(1,395)

(2,269)

52,954

4,944

(5,925)

521

7,325

560

182

521

148

39,110

(7,856)

(4,481)

(172)

(710)

4,754

42,982

1,943

(460)

–

(321)

20,055

11,878

38

(17)

–

–

(140)

(681)

(5,302)

12

(119)

–

(18,743)

(13,929)

Net cash from operating activities 

33,230

30,536

11,899

(5,409)

Cash is generated from continuing operating activities only.

Cash and cash equivalents (which are presented as a single class of asset on the balance sheet) comprise cash at bank and other 
short term highly liquid investments that are readily convertible to a known amount of cash and which are subject to an insignificant 
risk of change in value.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
notes to the ConsolIDAteD FInAnCIAl stAtements Continued

29 Financing FaciLity
In August 2005, SOCO agreed a credit facility with the International Finance Corporation, the private sector arm of the World Bank. 
The $45 million reserve-based, revolving credit facility has a seven year term. Following the issue of the convertible bonds (see 
Note 22) the whole facility is now a standby loan and is not immediately available. Standby fees paid are included under finance 
costs (see Note 8).

30 operating Lease arrangements

Minimum lease payments under operating leases recognised in income for the year

2006 
$000’s

432

2005 
$000’s

426

At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable 
operating leases, which fall due as follows:

Within one year 

In two to five years 

2006 
$000’s

505

381

886

2005 
$000’s

499

–

499

Operating lease payments mainly represent rentals payable by the Group for certain of its office properties. Leases are negotiated 
for an average term of eight years with break clauses every two years and rentals fixed for an average of four years. 

31 capitaL commitments
At 31 December 2006 the Group had exploration licence commitments not accrued of approximately $8.4 million  
(2005 – $0.6 million).

32 reLated party transactions 
During the year, Group undertakings rendered services to the Company in the amount of $2.3 million (2005 – Company rendered 
services to Group undertakings in the amount of $47,000). There were no balances outstanding with Group undertakings as at  
31 December 2006 except as disclosed in Note 21. Transactions between the Company and its subsidiaries have been eliminated 
on consolidation.

Transactions with the Directors of the Company are disclosed in the Directors’ Remuneration Report on pages 45 to 47.  

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FIve yeAR sUmmARy

consoLidated income statement 

Oil and gas revenues – continuing operations

Operating profit – continuing operations

Operating profit – discontinued operations1

Profit for the year

consoLidated BaLance sheet

Non-current assets

Net current assets

Non-current liabilities

Net assets

Share capital

Share premium

Other reserves

Retained earnings

Total equity

SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  68 _ 6

Year to  
31 Dec 2006 
$000’s

year to  
31 dec 2005 
$000’s

76,476

46,311

–

57,160

31,264

–

29,063

20,477

iFrs

(restated)2 
year to  
31 dec 2004 
$000’s

29,386

14,210

9,261

29,571

(restated)2  
year to 
31 dec 2003 
$000’s

28,413

9,914

4,865

9,354

uk gaap3

(restated)2  
year to  
31 dec 2002 
$000’s

  25,319

  8,092

  6,564

  7,963

2006 
$000’s

2005 
$000’s

2004 
$000’s

(restated)2  
2003 
$000’s

(restated)2  
2002 
$000’s

340,527

181,685

(226,420)

225,808

180,381

181,308

       141,088

43,021

(2,590)

70,003

(3,197)

52,119

(5,870)

82,018

(5,432)

295,792

266,239

247,187

227,557

217,674

23,532

68,325

54,406

149,529

295,792

23,479

68,221

54,259

120,280

266,239

23,348

67,877

53,502

102,460

247,187

23,241

67,323

54,045

82,948

23,030

66,118

54,774

73,752

227,557

217,674

consoLidated cash FLow statement 

Year to  
31 Dec 2006 
$000’s

year to  
31 dec 2005 
$000’s

year to  
31 dec 2004 
$000’s

year to   

31 dec 2003 
$000’s

year to   

31 dec 2002 
$000’s

Net cash from operating activities

Capital expenditure

33,230

114,339

30,536

76,175

19,157

27,583

27,341

27,767

 28,640

 15,898

FinanciaL and operating  
key perFormance indicators

Realised oil price per barrel ($)4

Operating cost per barrel ($)5

DD&A per barrel ($)6

Basic earnings per share (cents)

Diluted earnings per share (cents)

Total shareholder return (%)7

Production (barrels of oil per day)8

Total proven and probable reserve additions (mmboe)9

Proven and probable reserves (mmboe)9

Year to  

31 Dec 2006

Year to  

Year to  

Year to  

Year to  

31 Dec 2005

31 Dec 2004

31 Dec 2003

31 Dec 2002

62.73

50.28

37.18

27.40

24.00

5.91

3.70

41.3

36.9

75.8

6,766

41.8

160.6

4.55

3.40

29.3

25.8

102.6

5,684

100.6

133.2

6.70

3.20

42.4

37.5

41.3

5,533

6.0

90.7

6.76

3.78

13.5

11.8

(29.9)

5,409

9.9

92.5

5.15

4.25

11.5

10.3

131.0

6,203

0.6

75.4

1 Discontinued operations includes the results of all discontinued operations throughout the five years shown.
2  During 2004, the Group adopted UITF Abstract 38 “Accounting for ESOP Trusts” and related amendments to UITF Abstract 17 (revised 2003) 
“Employee Share Schemes”, which constituted a change in accounting policy for the way the Group presents and accounts for own shares.  
Prior year figures were restated to reflect the new policy.

3  The amounts disclosed for 2002 and 2003 are stated on the basis of UK GAAP and in GB pounds because it is not practicable to restate  

amounts for periods prior to the date of transition to IFRS.

4  The realised oil price per barrel is the average proceeds received for each barrel of oil sold in the period.
5  Operating cost per barrel is the average cost incurred to produce a barrel of oil which exclude lifting imbalances and inventory effects.
6  DD&A per barrel includes depreciation, depletion and decommissioning costs for the period calculated over barrels of oil produced.
7  The total shareholder return is the percentage annual return to the Company’s shareholders.
8  Average barrels of oil produced per day net to the Group’s working interest.
9 Reserves are net to the Group’s working interest expressed in millions of barrels of oil equivalent (see Reserves Statistics on Page 70).  

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ReseRve stAtIstICs unaudited, net Working interest (mmBoe)

net proVen oiL and gas reserVes

Reserves as at 31 December 2005

Changes in the year

Additions

Revision to previous estimates

Purchase of reserves

Change of interest

Sale of reserves

Production

Reserves as at 31 December 2006

total

59.7

–

23.5

1.1

(4.7)

–

(2.5)

77.1

thailand

Vietnam1

congo1,2

5.0

30.0

9.5

–

–

–

–

–

–

–

17.5

1.1

–

–

–

5.0

48.6

–

–

–

(4.7)

–

–

4.8

net proVen and proBaBLe oiL and gas reserVes

Reserves as at 31 December 2005

133.2

18.4

68.3

23.8

total

thailand

Vietnam1

congo1,2 

Changes in the year

Additions

Revision to previous estimates

Purchase of reserves

Change of interest

Sale of reserves

Production

Reserves as at 31 December 2006

–

38.8

3.0

(11.9)

–

(2.5)

160.6

–

–

–

–

–

–

–

29.4

3.0

–

–

–

–

–

–

(11.9)

–

–

18.4

100.7

11.9

net proVen and proBaBLe oiL and gas reserVes yearLy comparison

Reserves as at 1 January

Changes in the year

Additions

Revision to previous estimates

Purchase of reserves

Change of interest

Sale of reserves

Production

Reserves as at 31 December 

2006

133.2

–

38.8

3.0

(11.9)

–

(2.5)

160.6

2005

90.7

68.3

8.5

23.8

–

(56.0)

(2.1)

133.2

2004

92.5

–

6.0

–

–

(5.8)

(2.0)

90.7

2003

75.4

–

9.9

–

9.2

–

(2.0)

92.5

yemen3

15.2

–

6.0

–

–

–

(2.5)

18.7

yemen3

22.7

–

9.4

–

–

–

(2.5)

29.6

2002 

77.0

–

0.6

–

–

–

(2.2)

75.4

Note: mmboe denotes millions of barrels of oil equivalent

1  Reserves are shown before deductions for minority interests which are funded by the Group. The Group is entitled to receive 100% of the cash 

flows until it has recovered its funding of the minority interest plus accrued interest from the minority interests pro rata portion of those cash flows.

2  During 2006, the Group farmed out 50% of its working interest in Marine XI, Congo (Brazzaville).

3  The Group provides for depletion and depreciation on its Yemen reserves on an entitlement basis. On an entitlement basis as at 31 December 
2006 proven reserves were 7.3 mmboe (2005 – 6.1 mmboe) and proven and probable reserves were 10.1 mmboe (2005 – 8.4 mmboe).

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SOCO INTERNATIONAL PLC   Annual Report & Accounts 2006  0 _ 1

ComPAny InFoRmAtIon

registered oFFice

adVisors

annuaL report

designed and produced by
Wardour Publishing & Design

Location photography
John Hepler (Vietnam) 
Simon Townsley (Vietnam  
and West Africa region)

All location photography was taken  
in SOCO’s areas of interest in Vietnam 
and West Africa region.

printed by
Newnorth

soco international plc
St James’s House 
23 King Street 
London 
SW1Y 6QY 
United Kingdom 
Tel: 020 7747 2000 
Fax: 020 7747 2001 
Registered No: 3300821 
Website: www.socointernational.co.uk

company secretary
Cynthia Cagle

Financial calendar
Group results for the year to  
31 December are announced in March  
or April. The Annual General Meeting  
is held during Q2. Half year results  
to 30 June are announced in August  
or September.

auditors
Deloitte & Touche LLP 
London

Bankers
The Royal Bank of Scotland International 
PO Box 64 
Royal Bank House 
71 Bath Street 
St Helier 
Jersey
JE4 8PJ

JPMorgan 
125 London Wall 
London 
EC2Y 5AJ

Financial advisors and  
corporate Brokers
Merrill Lynch International 
Merrill Lynch Financial Centre 
2 King Edward Street 
London 
EC1A 1HQ

Bridgewell Limited 
Old Change House 
128 Queen Victoria Street 
London 
EC4V 4BJ

registrar
Lloyds TSB Registrars Scotland 
PO Box 28448 
Finance House 
Orchard Brae 
Edinburgh 
EH4 1WQ

solicitors
Ashurst 
Broadwalk House 
5 Appold Street 
London 
EC2A 2HA

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