SOCO International plc
48 Dover Street
London
W1S 4FF
United Kingdom
T +44 (0)20 7747 2000
F +44 (0)20 7747 2001
www.socointernational.com
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Annual Report
and Accounts
2011
We ARe An InteRnAtIOnAl
OIl And gAS explORAtIOn
And pROduCtIOn COmpAny,
lISted On tHe lOndOn StOCk
exCHAnge, emplOyIng A
StRAtegy FOR buIldIng
SHAReHOldeR vAlue
tHROugH A pORtFOlIO
OF OIl And gAS ASSetS
Financial Highlights
$48.4m
2010 revenue (continuing operations)
$69.3m
2009 revenue (continuing operations)
$234.2m
2011 revenue
$ millions
2011
2010 2009
Profit For The Year
Net Cash From Operating Activities
Cash, Cash Equivalents and Liquid Investments
Net Assets
51.1
88.6 101.4
90.2
77.0
36.7
160.1 260.4 307.6
1,098.0 1,013.2 763.3
disclaimer
This document includes certain forward-looking
statements regarding the SOCO Group. By their
nature, forward-looking statements involve a
number of risks, uncertainties or assumptions
that could cause actual results or events to differ
materially from those expressed or implied by
the forward-looking statements. These risks,
uncertainties or assumptions could adversely affect
the outcome and financial effects of the plans
and events described herein. Forward-looking
statements contained in this document regarding
past trends or activities should not be taken as a
representation that such trends or activities will
continue in the future. You should not place undue
reliance on forward-looking statements, which
speak as only of the date of this document. Except
as required by law, the Company is under no
obligation to publicly update or keep current the
forward-looking statements contained in this
document or to publicly correct any inaccuracies
which may become apparent in such forward-
looking statements.
Design and production
Wardour, London
www.wardour.co.uk
Photography
South East Asia:
John Hepler (cover and location)
Africa:
Jean Yves Brochec (location)
Board and Management:
Andy Lane and Jean Yves Brochec
Print
Royle Corporate Print
This report is printed on Heaven 42 which is
sourced from well managed forests independently
certified according to the rules of the Forest
Stewardship Council Disclaimer.
In this report
p02
Strategic Review
Following the success of the TGT
project, we continue to apply the
strategy that has made it possible.
We showcase our three Core Strategic
Objectives, and show how they work
in practice.
p20
Review of
Operations
Operations around our
portfolio for the year, including
production, appraisal and
exploration in all active fields
and blocks.
Our core
strategic
objectives
p14
Chairman and Chief
executive’s Statement
A summary of the past year in all of our projects
and fields, corporate events of note, changes to
the Board of Directors, and their view of the Group’s
evolution and outlook for the coming years.
p28
Financial
Review
The Group’s financial position at
year end, including an analysis
of the Group’s results, assets
and financial statements.
p31
p36
p42
Risk management
How we manage the risks
intrinsic in our industry directly
affects our success.
Sustainable
development
How we build sustainable value for host
countries and local communities, as well
as our own shareholders.
governance
44 Board of Directors
47 Annual Report of the Directors
51 Corporate Governance
59 Directors’ Remuneration Report
p68
Financial Statements
71 Independent Auditor’s Report
72 Consolidated Income Statement
73 Statements of Comprehensive Income
74 Balance Sheets
75 Statements of Changes in Equity
76 Cash Flow Statements
77 Notes to the Consolidated Financial
Statements
96 Five Year Summary
p98
Additional Information
98 Reserves Statistics
99 Company Information
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SOCO International plc
Annual Report and Accounts 2011 01
StRAtegIC
RevIeW
SOCO AROund tHe WORld
tHe COmpAny HAS InteReStS
In vIetnAm, tHe RepublIC OF
COngO (bRAzzAvIlle), tHe
demOCRAtIC RepublIC OF
COngO (kInSHASA) And
AngOlA, WItH pROduCtIOn
OpeRAtIOnS In vIetnAm
Africa
Congo (brazzaville)
democratic Republic of Congo (kinshasa)
marine xI block
Location:
North Congo Basin, offshore
Congo (Brazzaville)
Operational phase:
Exploration/appraisal
SOCO interest:
SOCO EPC (29% – Operator)
Project partners:
Lundin Petroleum (18.75%),
Raffia Oil (18.75%),
SNPC (15%), AOGC (10%),
Petrovietnam (8.5%)
nganzi block
Location:
North Congo Basin,
onshore western DRC
Operational phase:
Exploration
SOCO interest:
SOCO E&P DRC
(65% – Operator)
Project partners:
INPEX (20%), Cohydro (15%)
marine xIv block
Location:
North Congo Basin, offshore
Congo (Brazzaville)
Operational phase:
Exploration
SOCO interest:
SOCO EPC (29.4% – Operator)
Project partners:
Lundin Petroleum (21.55%),
Raffia Oil (21.55%), SNPC (15%),
PA Resources Congo (12.5%)
block v
Location:
Albertine Graben, onshore
eastern DRC
Operational phase:
Block evaluation
SOCO interest:
SOCO E&P DRC
(38.25% – Operator)
Project partners:
Ophir Energy (46.75%),
Cohydro (15%)
02
SOCO International plc
Annual Report and Accounts 2011
london
Corporate headquarters
Functions
Strategic direction
Operational support
Financial management
Public and investor relations
Angola
Cabinda Onshore north block
Location:
North Congo Basin,
onshore western Cabinda
SOCO interest:
SOCO Cabinda (17%)
Operational phase:
Block evaluation/exploration
Project partners:
Sonangol P&P (20% –
Operator), China Sonangol
(11%), Petropars (10%),
Teikoku Oil (17%), Angola
Consulting Resources (10%),
ENI Angola (15%)
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South east Asia
vietnam
1
block 9-2
Location:
Cuu Long Basin, offshore
south east Vietnam
Operational phase:
Field development/production
SOCO interest:
SOCO Vietnam (25%)
Project partners:
Petrovietnam (50%),
PTTEP (25%)
2
block 16-1
Location:
Cuu Long Basin, offshore
south east Vietnam
SOCO interest:
SOCO Vietnam (28.5%),
OPECO Vietnam (2%)
Operational phase:
Appraisal/field development /
production
Project partners:
Petrovietnam (41%),
PTTEP (28.5%)
1. Operated by the Hoan Vu Joint Operating Company
2. Operated by the Hoang Long Joint Operating Company
SOCO International plc
Annual Report and Accounts 2011 03
StRAtegIC
RevIeW
continued
We COntInue tO
Apply OuR tHRee
pARt StRAtegy
1.
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.
To find out how this works in
practice see page 07
2.
Capturing potential
By adding the Company’s managerial,
technical and commercial expertise
to progress activities through the
formative stages or through periods
of difficulty.
To find out how this works in
practice see page 08
3.
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.
To find out how this works in
practice see page 11
Our core
strategic
objectives
04
SOCO International plc
Annual Report and Accounts 2011
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StRAtegIC
RevIeW
continued
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.
Net Cash from Operating Activities
2009
$77.0 million
2010
$36.7 million
2011
$90.2 million
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How it works
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Our core
strategic
objectives
1Recognising
opportunity
2
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Vietnam
Formed strategic alliance
to gain early entry into
the region
Yemen
Recognised the potential for
increasing reserves through early
focus on Basement play at East
Shabwa Development Area
Africa
Built large acreage position
around an early focus on
the pre-salt play concept
SOCO International plc
Annual Report and Accounts 2011 07
StRAtegIC
RevIeW
continued
Capturing potential
by adding the Company’s managerial,
technical and commercial expertise
to progress activities through the
formative stages or through periods
of difficulty.
Capital Expenditure
2011
$152.2 million
2009
$73.9 million
2010
$151.9 million
How it works
1
Our core
strategic
objectives
2Capturing
potential
3
Vietnam
Managerial and technical
expertise applied through
the development of two
fields to first oil, on time
and on budget
DR Congo
Farm-down of interest
in the Nganzi Block to
spread risk and expand
the drilling programme
Yemen
Technical expertise led
to the development of
a significant Basement
play at East Shabwa
Development Area
08
SOCO International plc
Annual Report and Accounts 2011
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StRAtegIC
RevIeW
continued
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.
Oil and Gas Revenues
(from continuing operations)
2010
$48.4 million
2009
$69.3 million
2011
$234.2 million
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How it works
2
Realising
value
3
1
Our core
strategic
objectives
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Thailand
Disposal of Thailand
interest for $105 million
in 2010, following
demonstrated production
and after utilisation of
initial tax benefits
Yemen
Disposal of East Shabwa
Development Area interest
for $465 million in 2008,
following demonstrated
production history from
proven Basement reserves
Vietnam
Commencement of production at
TGT field in August 2011 leads to
a marked increase in revenues
and more opportunity to enhance
shareholder value than ever before
SOCO International plc
Annual Report and Accounts 2011 11
StRAtegIC
RevIeW
continued
AuguSt 2011:
tgt pROduCeS FIRSt
OIl On SCHedule
delivering a project as complex as te giac
trang on time and on budget is a credit
to our team, Hoang long Joint Operating
Company and to our industry partners.
1.8 km
between the wellhead
platform and the FPS0
620,000
barrels of oil storage capacity
12 SOCO International plc
Annual Report and Accounts 2011
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22
months to convert from
oil tanker to FPSO
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from bow to stern274 metres
SOCO International plc
Annual Report and Accounts 2011
13
CHAIRmAn And CHIeF
exeCutIve’S StAtement
We COntInue tO Apply
tHe StRAtegy tHAt
mAde OuR bIggeSt eveR
pROJeCt SuCH A SuCCeSS
million in 2010 to $88.6 million in 2011. These
historic figures reflect the onset of production from
the Group’s TGT field which produced first oil in
August 2011. The Group saw 2011 out with net
entitlement volumes of approximately 14,700 barrels
of oil equivalent per day (BOEPD) compared with
approximately 2,600 BOEPD at the end of 2010.
Working interest production net to SOCO averaged
5,437 BOEPD during 2011 compared with 2,257
BOEPD from continuing operations in 2010.
Additionally, the Company was able to benefit from
the record high average oil price during 2011
realising nearly $113 per barrel of oil sold compared
with approximately $84 per barrel in 2010.
Cash flows from operating activities were up from
$12.4 million on continuing operations in 2010 to
$90.2 million reflecting the increased oil production
and realised oil prices. Capital expenditures
remained near 2010 levels at $152.2 million in
2011 comprising the ongoing work offshore
Vietnam, where the second phase of the TGT
development continues into 2012, and the
exploration programme in the Group’s Africa region
where two wells were drilled offshore Congo
(Brazzaville). The Company took advantage of its
significant cash balances by buying 1.5 million of its
own shares into treasury at a cost of $6.8 million
and repurchasing convertible bonds at a cost of
$35.6 million.
Due to the following factors: the early stages of
production from TGT Phase I; continuing work on
the Phase II development and another extensive
exploitation cycle; extensive pre-drill expenditures
associated with continued exploration activities,
along with the expectation of adding several new
ventures during the year, the Board of Directors are
not recommending the payment of a dividend.
2011 Operations Review
South East Asia
Vietnam – Block 16-1
Our largest exploration and development project
evolved into a successful cash generating asset
almost exactly according to plan. The field has now
demonstrated performance in excess of 40,000
barrels of oil per day (BOPD) with no significant
impact on the main reservoir performance
parameters. Although there remain alignment
issues with Petrovietnam over the rapidity of raising
dear Shareholders
In August of 2011 we reached another significant
milestone in adding value to our portfolio as we
brought the Te Giac Trang (TGT) field, offshore
Vietnam, into production. Revenues, operating
cash flow and net profit from ongoing operations
have all reached record levels, providing the Group
with the financial capability to continue to self-fund
foreseeable development expenditures as well
as to progress and further enhance its
current portfolio.
Delivering a project as complex as TGT on time and
on budget is a credit to our team, the Hoang Long
Joint Operating Company (HLJOC), the project
operator, and to our industry partners. This
accomplishment enabled the partnership to agree
to accelerate the next phase of the development of
the field and Phase II development drilling on TGT
got underway from the H4 platform in the third
quarter of last year. It continues on track with a
further five development wells due on production
during the third quarter of 2012.
While the focus for 2011 was clearly on TGT, we
also continued with the primarily pre-salt focused
exploration programme offshore the Republic of
Congo (Brazzaville), onshore the Democratic
Republic of Congo (Kinshasa) and in Cabinda.
Financial and Operating Results
Revenue earned by the Group in 2011 set a record
at $234.2 million compared with revenue from
continuing operations in 2010 of $48.4 million. After
tax profit from continuing operations was also at
record levels with a dramatic increase from $12.3
Right:
Left:
Rui de Sousa,
Chairman
Ed Story,
President and Chief Executive Officer
4
Related sections and
more information
● Review of
Operations
● Our Board of
Directors
p20
p44
14
SOCO International plc
Annual Report and Accounts 2011
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Over the longer term, significant additional
potential remains yet to be confirmed in undrilled
and un-appraised fault blocks. We are seeking to
accelerate the drilling of these areas.
Vietnam – Block 9-2
Production net to the Company’s working interest
from the Ca Ngu Vang (CNV) field averaged
approximately 2,283 BOEPD during the year. SOCO
continues to champion the drilling of an additional
producing well in CNV in order to efficiently drain
the main producing area of the field.
To date sales from the CNV field have included
approximately 24,000 million standard cubic feet of
gas which is sold to PV Gas at effectively a dry gas
sales price for use at the Phu My power plant
onshore. However, the gas stream from CNV is rich
in natural gas liquids which presents an opportunity
to improve field revenues through the installation of
offshore separation facilities.
Work is underway to install a separator and
attendant metering facilities on the Bach Ho CPP-3
platform. The project is estimated to be complete
by the end of May 2012 and will improve allocation
of CNV hydrocarbons within the complex Bach Ho
production facilities. At that time, the CNV partners
will not only enhance their income stream, but also
have evidence to support attainment of fair value
for the gas liquids in the production stream.
Africa
Although we established a large exploration
footprint in the Congo Basin in order to exploit what
we felt was a lack of exploration below the salt
layer in the region as evidenced by the lack of
modern seismic, the results to date have not
supported this premise. It appears that although
imaging below the salt layer was limited, in this
area the pre-salt geology is more complex than
originally thought.
production levels, the evidence from the field is
compelling in support of that agreed by all partners
in the Government approved Field Development
Plan. Accordingly, we are confident that full Partner
concurrence of a field production rate of at least
55,000 BOPD will be achieved by Q3 2012.
TGT is a highly complex field with three main
reservoir horizons – the upper and lower Miocene
5.2 and the Oligocene “C” – with approximately 55
individual producing intervals. Well performance to
date has demonstrated the ability of all wells to
produce oil at high rates with minimal drawdown
and field productivity from the reservoir intervals
perforated to date has met or exceeded pre-
development model prognoses. Stable flowing
pressures of the initial producers indicate a strong
level of aquifer pressure support, importantly
deferring the need for water injection. Similarly,
initial interference tests confirm a high degree
of connectivity within the main sands.
Clearly we need information from
We have a strong balance
sheet and strong forward
financial position.
more than the seven intervals that
have been perforated to date in
the eight producing wells in
order to obtain the information
necessary to establish the
most efficient and effective
way to fully exploit the field.
Thus, 2012 will be about
accelerating the programme
in step changes in order to
establish the most efficient
rates at which to drain the field.
The Company’s net entitlements
production from TGT averaged
approximately 12,300 BOPD since it came
on production on 22 August 2011. Entitlements
production was over 40% higher than working
interest production as the contracting partners
recovered those pre-field certification costs
carried on behalf of Petrovietnam.
Phase II wells – being drilled from the H4 platform
in the southern part of the field – began in the third
quarter of 2011 and continues as at this date.
Production from the H4 platform is projected to
commence in July or August of 2012. The
additional capacity provides further confidence of
maintaining the plateau rate well into the future.
SOCO International plc
Annual Report and Accounts 2011 15
CHAIRmAn And CHIeF
exeCutIve’S StAtement
continued
Republic of Congo (Brazzaville)
Two exploration wells were drilled offshore during
2011, one targeting the pre-salt on Block Marine XI
and the other a commitment well with a post-salt
target on Block Marine XIV. Although neither was
successful, with the pre-salt well not encountering
suitable reservoir sands and the post-salt well
intersecting sub-commercial accumulations of
hydrocarbons, evaluation of the results is ongoing.
A third, post-salt well was postponed so results
from this drilling campaign could be factored into
the well plan. It is expected that the third
exploration well, a post-salt target on Block Marine
XI will be drilled at some future date as an add-on
to other exploration drilling programmes planned
in the region.
Democratic Republic of Congo
(Kinshasa) (DRC)
The final sub-salt well, one of three drilled in
the Nganzi concession onshore in the DRC, was
plugged and abandoned during the first quarter
of 2011. Although encountering good reservoir
and mature source rocks, none of the wells had
sufficient seal.
Additional 2D seismic is being acquired over
several post-salt prospects in the Nganzi
concession, including some of those prospects
previously drilled to test the sub-salt play. The
seismic programme should be complete by the
middle of the second quarter of 2012. Based on
the interpretation of the seismic data, the partners
will decide whether or not to engage on a
multi-well post-salt exploration drilling campaign,
which could commence as early as the fourth
quarter of 2012.
Angola
Acquisition of the extensive 2D seismic acquisition
programme over the Cabinda North Block A
concession was concluded in 2011. Interpretation
of the data is underway, with the expectation that
a drilling campaign could begin by the end of
this year.
Corporate
Bond Repurchase
During 2011 the Company bought back
convertible bonds with a par value of $35.4 million
representing 14.2% of the $250 million convertible
bonds that were issued in 2006. Previously, the
Company redeemed $165.9 million (66.4%)
following the exercise of bond put options on
16 May 2010. The remaining $48.7 million of
bonds mature in May 2013.
The Board of Directors
As stated in the Annual Report of the Directors
Mr Peter Kingston and Mr Martin Roberts retired
from the Board as Non-Executive Directors of the
Company following the Annual General Meeting
in June. Mr Kingston served as Chairman of the
Audit Committee, Chairman of the Remuneration
Committee and as the Company’s Senior
Independent Director. Mr Roberts served as
a member of the Audit and Remuneration
Committees. The Board thanks Mr Kingston and
Mr Roberts for their significant contributions to
SOCO. Mr John Norton has succeeded Mr
Kingston as Chairman of the Audit Committee.
Mr Michael Johns was appointed as a Non-
Executive Director in June 2011. Mr Johns serves
as the Senior Independent Director, the Chairman
of the Remuneration Committee and is a member
of the Audit and Nominations Committees. Mr
Johns has had a distinguished career in legal
practice with two international law firms and has
extensive experience in a broad range of practice
areas, including corporate, corporate finance and
energy law. Mr Johns graduated from Oxford
University in 1969 and qualified as a solicitor in
1972. He was a partner at Withers (as it then was)
from 1974 until 1987 and joined Ashurst LLP
(Ashurst) as a partner in 1987 where he was the
Head of the Energy, Transport & Infrastructure
Department from 2001 until 2005. Mr Johns
retired from Ashurst in April 2009 and remained
as a consultant to Ashurst until April 2010.
From August 2006 until February 2011,
Mr Johns served as a Non-Executive Director
of Aer Lingus Group plc.
Outlook
Commencement of production at TGT means that
we have more opportunity to enhance shareholder
value than we have ever had before. We are
confident that TGT is a world class field. There is
no doubt that it will be a significant contributor to
operating cash flow. Whilst geologically complex
and a multi-horizon reservoir, the field is
demonstrating excellent performance and recovery
characteristics. We are in discussions with our
partners over how best to further develop the field.
We are and will continue to take a very methodical
approach to determining the most efficient way to
exploit the TGT field.
Having significant cashflow does not mean that
we will abandon applying the methodology that
got us to this point – fiscal discipline in a
self-funded, predominantly in-house generated
exploration led strategy that results in a steadily
increasing valuation of the asset portfolio.
We will continue to be an exploration led company.
Our 2012 exploration drilling programme is light in
relation to our historic standards simply because
projects mature at different times. Our exploration
portfolio contains several high potential projects
and it is our intent to continue to add to this.
We have delivered the most significant project that
this Company has ever been involved in both on
time and in budget. We have a strong balance
sheet and strong forward financial position.
We will continue to execute the strategy that
made this possible.
Rui de Sousa
Chairman
ed Story
President and Chief Executive Officer
16
SOCO International plc
Annual Report and Accounts 2011
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Preparation for first production at
TGT was the primary focus for the
first half of 2011. The project was,
by far, the largest development
and production project in the
history of the Company.
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FIRSt OIl FROm tHe tgt FIeld
WAS tHe event OF 2011 tHAt
CHAnged tHe OpeRAtIOnAl And
FInAnCIAl pROFIle OF tHe COmpAny
Above:
Antony Maris,
Vice President –
Operations and Production
4
Related sections and
more information
● Risk Management
● Reserves
p31
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SOCO International plc
Annual Report and Accounts 2011
Te Giac Trang (TGT)’s Phase I production began
on schedule and on budget on 22 August 2011.
Current 2012 year-to-date average production is
30,424 barrels of oil per day (BOPD).
Total production net to the Group’s working interest
from continuing operations during 2011 was 5,437
barrels of oil equivalent per day (BOEPD) compared
with 2,257 BOEPD produced in 2010.
South east Asia
vietnam
SOCO’s Block 16-1 and Block 9-2 projects in
Vietnam are located offshore in the oil rich Cuu
Long Basin, which is a shallow water, near shore
area defined by several high profile producing oil
fields, the largest of which, Bach Ho, is located
between the two Blocks and has produced more
than one billion barrels of oil to date. The projects
are operated through non-profit Joint Operating
Companies (JOCs) wherein each participating party
owns shares equivalent to its respective interests in
the Petroleum Contracts governing the projects.
The Group’s interests are held through its 80%
owned subsidiary SOCO Vietnam Ltd and through
its 100% ownership of OPECO, Inc. SOCO Vietnam
Ltd holds a 25% working interest in Block 9-2,
which is operated by the Hoan Vu JOC (HVJOC)
and a 28.5% working interest in Block 16-1, which
is operated by the Hoang Long JOC (HLJOC).
OPECO, Inc. holds a 2% working interest in Block
16-1. SOCO’s partners on both Blocks are
Petrovietnam, the national oil company of Vietnam,
and PTTEP, the national oil company of Thailand.
Production
Te Giac Trang, Block 16-1
The TGT field extends over 15 kilometres along the
northeastern part of Block 16-1. The Block was
awarded to SOCO in December 1999 and the first
discovery on TGT was made in 2005.
Phase I:
Preparation for first production was the primary
focus for the first half of 2011. The project was,
by far, the largest development and production
project that the Company has ever been involved
in. First oil was achieved on 22 August 2011,
just days from the targeted date set two years
previously; a clear testament to the hard work
invested in the project by SOCO, its partners and
the staff of the HLJOC.
The first phase of the H1 platform development
drilling programme, which began in 2010, was
concluded in 2011 with the completion of five
remaining development wells, TGT-4P to -8P.
The TGT-4P well, drilled in the southwest area
of the northern fault block encountered the top of
the target reservoir horizon lower than expected
but encountered previously unmapped
hydrocarbons in the Oligocene “C” reservoir.
The TGT-5P well, drilled to the northern part of the
field encountered the main reservoir as expected,
while the TGT-6P, drilled to the southern part of
the northern fault block, encountered the main
reservoir high to prognosis. The TGT-7P well,
drilled to the central area, also encountered the
main reservoir horizon as predicted although it
encountered a thicker pay section than expected.
The TGT-8P well, targeting the central area of the
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Block: 9-2
Field development/
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Block: 16-1
Appraisal/field
development/
production
H1.2 fault block, near the TGT-1X discovery well,
was close to pre-drill prognosis.
The final stages of preparation for first oil included
the installation of the topsides on the jacket on the
wellhead platform on TGT’s H1 area and the
deployment of the Armada TGT 1, the floating
production storage and offloading vessel (FPSO),
which arrived on location in July 2011. The vessel
had undergone 22 months of conversion work by
BAB-VSP, a joint venture between Bumi Armada
Berhad and Vietsovpetro, in the Keppell Shipyard
in Singapore. At name plate capacity, the
double-hulled 274 metre vessel is capable of
processing 55,000 BOPD and 75,000 barrels of
water per day and storing 620,000 barrels of oil.
The TGT field is a complex, stacked sand reservoir
system that is vertically extensive with up to 55
reservoir subzones, each requiring individual
reservoir management to ensure that recovery
from the field is optimised. Prior to the start of
production, reservoir management plans were
agreed involving a sequence, over two to three
years, of selected perforation programmes of
specific limited subzones within each well. To date,
only the initial programme has been undertaken.
Baseline reservoir management information
continues to be gathered from these limited
reservoir intervals. Technical meetings, held at
the end of October with the Block 16-1 partners,
resulted in the decision to update and modify the
initial reservoir management plan following the
review of the well results and the initial performance
of the wells.
Initial production from wells with perforated
Miocene sands was as expected, as was production
from two of the three wells with perforations in the
Oligocene reservoir. However, to evaluate the
reservoir sweep within the Oligocene reservoir more
thoroughly, additional perforations within the
shallow, more productive Miocene reservoir were
not added immediately, which was a deviation from
the original agreed plan. A revised reservoir
management plan, including reviewing amendments
to the current 2012 development drilling
programme, which includes four wells from the H1
wellhead platform, and individual well management
plans to achieve plateau production of 55,000
BOPD is under review.
Well performance to date in the H1 fault block area
has demonstrated the ability of all wells to produce
oil at high rates with minimal drawdown and, with
the exception of wells perforated at or close to the
oil water contracts, without significant water
production. It has confirmed the presence of a local,
strong aquifer that provides support to the main
Miocene ILBH5.2 reservoir and the secondary
objective of the Oligocene “C”. Well flowing
pressures are very stable, indicating the strong
level of pressure support and the high degree of
connectivity within the main producing reservoirs.
Non-Financial Key Performance Indicators
(Continuing and Discontinued Operations)
Production (BOEPD)
2011
2010
2009
5,437
4,648
6,415
Total proven and probable reserve additions (mmboe)
–
–
3.4
Proven and probable reserves (mmboe)
130.3
132.6
142.5
See the Five Year Summary on page 96 for definitions
SOCO International plc
Annual Report and Accounts 2011 21
RevIeW OF
OpeRAtIOnS
continued
Ca Ngu Vang (CNV), Block 9-2
The CNV field is located in the western part of
Block 9-2, offshore Vietnam and is operated by
the HVJOC. First oil was in 2008 and the field is
currently producing at approximately 9,800
BOEPD, comprising approximately 6,800 BOPD
and 18.3 million standard cubic feet of gas and gas
liquids per day. During 2011, CNV production net to
the Company’s working interest has averaged
approximately 2,283 BOEPD.
In contrast to TGT, the CNV field produces highly
volatile oil from fractured Basement reservoir with
a high gas to oil ratio and exploitation is dependent
on the fracture interconnectivity to efficiently
deplete the reservoir. Hydrocarbons produced from
CNV are transported via subsea pipeline to the
Bach Ho central processing platform where the wet
gas is separated from crude oil and transported via
pipeline to an onshore gas facility for further
distribution. The crude oil is stored on a floating
storage and offloading vessel prior to sale.
During 2011, work commenced to design,
construct and install additional dedicated test
separation and metering facilities on the
processing platform in order to more accurately
measure liquid and gas production entering the
Bach Ho facilities from the CNV production
stream. The separator was installed in the fourth
Above:
Gordon Graham,
Group Exploration Manager
Gas export, through a pipeline to the nearby Bach
Ho Facilities for processing and transportation to
shore via the existing pipeline infrastructure for
further distribution, also commenced while the
gas-related process systems are fully tested and
commissioned. Peak gas production will be
approximately 30 million standard cubic feet per day.
Phase II:
The Field Development Plan for TGT was approved
by the Government of Vietnam on 30 March 2011
and incorporated the accelerated Phase II
development programme. Development drilling
operations for Phase II commenced in October with
the spudding of the first well at the H4 wellhead
platform by the Petrovietnam Drilling PVD-1 jack up
drilling rig. Batch drilling of the five wells is ongoing.
The wells are expected to be completed ahead of
the installation of the production deck and ready for
production start up in August 2012.
The TGT-9P well, drilled to the east of the TGT-6X
well, was planned to penetrate the main reservoir
horizons in the western part of the H4 fault block.
The TGT-10P well was planned to be drilled to the
H3N fault block north of the TGT-7X well and was
designed to also penetrate across a fault to the
southern part of the H2 fault block to establish the
existence of hydrocarbons in an area not currently
mapped as oil bearing in the mid-case. The third
well, TGT-11P, was the second well in the H4 fault
block and was to the southern part of the Block.
TGT-12P was drilled to the middle part of the H3N
fault block.
The Block 16-1 partners have recently agreed the
location of the fifth well, TGT-14P, which will be
drilled prior to releasing the rig to allow the
installation of the production deck, and final hook
up and completion prior to production start. The
well will be targeted to the southwest part of the
H4 fault block.
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Vincent Duignan,
Deputy General Manager
Hoang Long & Hoan Vu JOCs
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Proven and Probable Reserves
CNV
Vietnam
Congo
TGT
Vietnam
SOCO International plc
Annual Report and Accounts 2011 23
RevIeW OF
OpeRAtIOnS
continued
Above:
Jose Sangwa,
Country Manager,
Democratic Republic
of Congo
Above:
Serge Lescaut,
General Manager, Africa Region
quarter with the metering equipment expected to
be installed in the first quarter of 2012 with
commissioning expected to be completed by May
2012. The benefit to the Company will be a more
accurate allocation of CNV oil, gas and gas liquids
production within the Bach Ho production system,
which is expected to add up to approximately
2,000 BOEPD to the liquids stream.
Appraisal
Te Giac Den (TGD), Block 16-1
The TGD Appraisal Area encompasses 150 square
kilometres and includes the high pressure, high
temperature discovery well, TGD-1X-ST1, on the
previously designated Prospect “E”, and the
analogous “E” South Prospect. This area borders
the southern boundary of the TGT field.
An extension period for the TGD Appraisal Area
was approved by the Government of Vietnam in
May 2011. During the third quarter, approximately
140 km2 of full fold 3D seismic data was acquired
over the TGD Appraisal Area. The data has been
sent out for processing and interpretation is
ongoing to deliver prospectivity maps. While the
new seismic has improved the image across the
area, the reservoir risk is higher and may preclude
drilling. A decision to drill a well must be made by
the end of the initial extension period, which runs
from 1 January 2011 to 30 April 2012. An
additional six months’ extension will be in effect
(through 31 October 2012) in the event that the
Company elects to drill a well.
Africa
Congo (brazzaville)
SOCO holds its interests in the Republic of Congo
(Brazzaville), all offshore in the shallow water
Lower Congo Basin, through its 85% owned
subsidiary, SOCO Exploration and Production
Congo SA (SOCO EPC). SOCO EPC holds a 29%
participating interest in the Marine XI Block and a
29.4% participating interest in the Marine XIV
Block and is designated operator of the two Blocks.
Exploration
Marine XI
The ENSCO 5003 rig was contracted and
refurbished during the first half of 2011 before
being towed to the Lower Congo Basin to drill the
Mindou Marine 1 (MIM-1) exploration well, which
spudded on 5 September.
The MIM-1 well reached a total measured depth
of approximately 3,515 metres on 31 October
without encountering hydrocarbon bearing
reservoir. The target reservoirs were carbonates
and sandstone of the pre-salt TOCA and Djeno
formations. Palaeontology results from the well,
however, suggest that older-than-anticipated
sediments were below the salt. Thus, the basal
Vandji sand, producing elsewhere in the area but
previously thought to be too deep to be considered,
has become a viable reservoir target. A third,
post-salt well was postponed so results from this
drilling campaign could be factored into the well
plan. It is expected that the third exploration well, a
post-salt target on Block Marine XI will be drilled as
an add-on to other exploration drilling programmes
planned in the region.
Marine XIV
The Makouala Marine 1 (MKM-1) exploration well
spudded on 19 November 2011 in the Marine XIV
Block. The well encountered hydrocarbons in the
Chela, and in the Upper and Lower Sendji
formation horizons.
24
SOCO International plc
Annual Report and Accounts 2011
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continued
Above:
Mike Herron,
Finance Manager,
Africa Region
Above:
Lambert Mougani,
Deputy Finance Manager,
Africa Region
26
SOCO International plc
Annual Report and Accounts 2011
Block Evaluation
Block V
The security review over Block V in the Albertine
Rift in the DRC is ongoing. The Company’s initial
environmental and social impact assessment
(ESIA) was submitted to the Groupe d’Etudes
Environnementales du Congo in March 2011 and,
following a period of review and consultation with
stakeholders, including various departments within
the Government of DRC, a final ESIA was
submitted in May and was later approved. An
aeromagnetic and aerogravity survey is planned for
2012 with a seismic programme over Lake Edward
to follow. The exploration licence was granted by a
decree signed by the Hydrocarbons Minister on
26 October 2011.
Angola
Block Evaluation and Exploration
Cabinda Onshore North Block
SOCO Cabinda Limited, the Company’s 80%
owned subsidiary, holds a 17% participating
interest in the Production Sharing Agreement for
the Cabinda Onshore North Block in the Angolan
enclave of Cabinda. The Block, which is operated
by Sonangol, covers 1,400 square kilometres and
is bordered in the north by Congo (Brazzaville) and
in the south and east by the DRC.
The seismic acquisition programme that
recommenced in May 2010 was completed towards
the end of the first half of 2011. Processing of the
data is complete and a full interpretation has
commenced, with the expectation that a drilling
campaign could begin by the end of this year.
The MKM-1 well targeted the post-salt Sendji
Formation reservoir within a four-way dip closed
structure. The well encountered hydrocarbons in
both the primary and secondary reservoir targets.
However, analysis of the wireline logs indicated that
the reservoir sands at the location were not as well
developed as predicted and there was insufficient
overall pay thickness for commercial flow rates.
The well was subsequently plugged and
abandoned and the rig released. Information from
this drilling campaign will be factored into further
drilling decisions to be taken later this year.
democratic Republic of Congo
(kinshasa) (dRC)
SOCO holds its interests in the Democratic
Republic of Congo (Kinshasa) through its 85%
owned subsidiary SOCO Exploration and
Production DRC Sprl (SOCO E&P DRC). SOCO E&P
DRC holds a 65% participating interest in the
Nganzi Block, situated in the North Congo Basin
onshore western DRC, and a 38.25% participating
interest in Block V, in the southern Albertine
Graben onshore eastern DRC. SOCO E&P DRC is
designated operator of both Blocks.
Exploration
Nganzi Block
The wildcat exploration well, Bayingu-1 (BYU-1),
spudded in December 2010 on the prospect
previously designated as Prospect “H”, located in the
southern portion of the Nganzi Block. The well
encountered oil and gas shows in both the primary
and secondary reservoir targets. The reservoir sands
at the primary Lower Bucomazi target, however,
were poorly developed, whilst the residual nature of
the oil shows in the secondary Chela formation
indicates lack of closure at this location. The well
was plugged and abandoned in January 2011.
Further evaluation of the Nganzi Block incorporating
information gathered in the 2010/11 drilling
programme has been completed and indicates
remaining prospectivity in the Chela formation.
A follow-up 2D seismic acquisition programme
commenced in the first quarter of 2012. Should
seismic interpretation warrant, a second round of
exploration drilling could begin in late 2012 prior to
the end of the initial exploration period.
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Income Statement
Operating Results
Revenue from oil and gas production from the
Group’s South East Asia production assets in
Vietnam was $234.2 million compared with
$48.4 million from continuing operations in 2010.
This increase is mainly due to the addition of TGT
production which commenced on 22 August where
the take exceeded its net working interest through
cost recoupment entitlement barrels associated with
the Group’s cost carry of Petrovietnam on Block
16-1, which is expected to be fully recouped during
the first half of 2012. Working interest production
net to SOCO averaged 5,437 BOEPD during 2011
compared with 2,257 BOEPD in 2010. In addition,
the average realised oil price increased to $112.94
per barrel of oil sold in 2011, up from $84.32
derived from continuing operations in 2010.
Cost of sales in 2011 was $67.8 million arising
from the TGT and CNV fields compared with
$12.4 million on continuing operations in 2010
from CNV only. Of this increase $14.0 million is
associated with production operating expense of
the TGT field since its start up in August. With oil
inventory balances low at year end 2011 compared
with 2010, mainly due to the timing of liftings,
the charge to cost of sales in respect of inventory,
which is recorded at market value, was $6.2
million compared with a credit of $3.8 million
in 2010. This increase in inventory charge is net
of a reduction in opening oil inventory entitlement
since inception of $10.3 million. Royalties on oil
sales were $10.0 million higher in the year to 31
December 2011 compared with 2010 due to TGT
oil sales. As oil sold from the TGT field in 2011
was sold outside of Vietnam it incurred export duty
amounting to $6.4 million, while all CNV oil sales
in 2011 and 2010 were for the domestic Vietnam
market and therefore were not subject to export
duty. Finally, depreciation, depletion and
decommissioning costs (DD&A) were $19.3 million
in 2011 compared with $5.9 million in 2010,
primarily due to increased volumes associated
with the TGT field.
Operating costs on a per barrel basis (excluding
DD&A, inventory movements and sales related
duties and royalties) were approximately $9.40
per barrel versus approximately $6.90 per barrel
in 2010. The primary difference is related to higher
Financial and operating results for 2011 set
new benchmarks for the Company with record
production, revenue and profits. The material
difference from previous years is a result of the
commencement of production from the Group’s
Te Giac Trang (TGT) field offshore Vietnam.
The Group’s net entitlements production volume
in December 2011 was approximately 14,700
barrels of oil equivalent per day (BOEPD) compared
with 2,639 BOEPD for the same period last year
which was derived from the Group’s then only
producing asset the Ca Ngu Vang (CNV) field,
offshore Vietnam.
This marked increase in production, along with
the expectation that production is set to increase
further during 2012 as the second phase of the
TGT development comes on-stream and gas
separation facilities are installed at CNV, places
the Company in a very strong financial position
at a time of utmost importance in the prevailing
economic environment. This strength enabled
management to feel comfortable taking advantage
of the negative macro investor sentiment to further
build shareholder value by utilising surplus cash
balances to buy back financial instruments.
Convertible bonds with a par value of $35.4 million
were purchased and cancelled, recognising a gain
and reducing debt and future finance costs. The
Company additionally purchased approximately
1.5 million of its own shares in 2011. This share
buy back programme has continued into 2012,
bringing the total number of shares acquired to
approximately 2.5 million at the date of this report.
Above:
Roger Cagle,
Executive Vice President, Deputy
CEO and Chief Financial Officer
4
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more information
● Risk Management
● Financial
Statements
p31
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Annual Report and Accounts 2011
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(Continuing and Discontinued Operations)
Realised oil price per barrel ($)
Operating cost per barrel ($)
DD&A per barrel ($)
Basic earnings per share (cents)
Diluted earnings per share (cents)
See the Five Year Summary on page 96 for definitions
2011
2010
2009
112.94
75.66
55.70
9.42
7.86
26.4
26.3
12.41
6.68
30.9
28.4
9.82
5.44
17.3
15.4
per barrel operating costs on the TGT field with
dedicated production and processing facilities on
the floating production storage and offloading
vessel versus the CNV field where platform
facilities are shared with the Bach Ho field.
On a per barrel entitlement basis DD&A in 2011
was approximately $7.90 per barrel, up from
approximately $7.15 per barrel from continuing
operations in 2010 due to the impact of the higher
TGT DD&A charge due to the higher development
costs per barrel compared to CNV where the
existing facilities of Bach Ho are being utilised.
Administrative expenses increased to $9.4 million
for the 12 months to December 2011 up from $6.9
million in 2010. This increase is primarily due to
higher payroll obligations, including performance
based bonuses, and a higher proportion of
corporate resources being utilised on searching for
new opportunities.
The above factors result in an operating profit
arising from the Group’s continuing production
operations for 2011 of $156.9 million versus $29.1
million from continuing operations in 2010.
Non-Operating Results
The increase in other gains and losses in 2011
to $3.3 million from $0.9 million in 2010 was
primarily due to a higher gain in 2011 on the
change in fair value associated with the subsequent
payment amount tied to future oil production from
the Group’s divested Mongolia interest. A further
gain of $0.3 million arose on cancelling convertible
bonds that were repurchased in the year, being the
difference between the fair value of the
consideration paid and the carrying value of the
liability component of the cancelled bonds (see
below and Note 23 to the financial statements).
Although total interest charges have reduced
following the convertible bonds redemption in
2010, finance costs have increased from $0.5
million in 2010 to $2.7 million in 2011 as, prior to
start up of production operations in TGT, interest
charges associated with capital expenditure in
TGT were capitalised in accordance with IAS 23
Borrowing Costs (see Note 4 to the financial
statements). Subsequently all finance costs have
been expensed in the income statement.
Tax on continuing operations increased from $18.5
million in 2010 to $70.0 million in 2011 due to the
increased oil sales arising since the start up of
production from the TGT field. The effective tax
rate in Vietnam during 2011 was 44% compared
with a rate approximating the statutory rate in
Vietnam of 50% in 2010 as, in 2011 there was a
greater proportion of revenue arising from
non-taxable income relating to cost recoupment
from Petrovietnam associated with Block 16-1.
As a result of the above factors the Group’s profit
after tax in 2011 was $88.6 million, up from $12.3
million from continuing operations in 2010. Basic
and diluted earnings per share on continuing
operations increased from 3.8 cents in 2010 to
26.4 cents in 2011 and from 3.5 cents in 2010 to
26.3 cents in 2011, respectively.
Balance Sheet
Intangible assets increased by $48.8 million in the
year predominantly due to the Group’s exploration
activity in Africa and in particular drilling activity
offshore Republic of Congo (Brazzaville).
Property, plant and equipment increased by
$100.6 million mainly associated with the Group’s
South East Asia segment where capital expenditure
was focused on the TGT development. Further, a
decommissioning asset was established during the
year in relation to TGT, along with an associated
long term provision described below. These capital
additions were partially offset by DD&A charges in
the year.
The year end inventory balance decreased from
$16.4 million in 2010 to $10.2 million in 2011 due
to the reasons described above. Trade and other
receivables increased from $24.4 million at year
end 2010 to $79.9 million at 31 December 2011
primarily due to December TGT oil sales. SOCO’s
cash and cash equivalents decreased by the year
Contributions to Income
(based on net entitlement volumes)
CNV
2,283 BOEPD
TGT
4,446 BOEPD
Significant Components of Cash Outflow
Repurchase of
convertible bonds
$35.6 million
Purchase of
own shares
$6.8 million
Capital
expenditure
$152.2 million
SOCO International plc
Annual Report and Accounts 2011 29
FInAnCIAl RevIeW
continued
end 2011 to $160.1 million from $260.4 million at
the start of the year as the Group utilised surplus
cash balances in addition to excess cash generated
from operations to fund development capital
expenditure and to buy back convertible bonds
and shares.
The Group’s trade and other payables increased
from $45.9 million at the end of 2010 to $49.5
million at 31 December 2011 reflecting the
ongoing exploration and development programmes
in both Africa and Vietnam. Tax payables increased
from $2.0 million last year end to $13.5 million this
year end consistent with timing of liftings in
Vietnam where tax is paid on each cargo lifted.
As at 31 December 2011, the Group’s only debt
was the outstanding convertible bonds with a par
value of $48.7 million, the liability component
being $46.6 million (2010 – $78.0 million). The
convertible bonds were issued in 2006 at a par
value of $250.0 million. During 2011 the Company
repurchased convertible bonds in the market with a
par value of $35.4 million, at a cost of $35.6
million, representing 14.2% of the $250 million
convertible bonds that were issued in 2006. A gain
of $0.3 million was recognised on cancelling the
repurchased bonds (see above). Previously, the
Company redeemed $165.9 million (equivalent to
just over 66%) following the exercise of bond put
options on 16 May 2010. The remaining bonds
Financial and operating
Financial and operating
results for 2011 set new
results for 2011 set new
benchmarks for the Company
benchmarks for the Company
with record production,
with record production,
revenue and profits.
revenue and profits.
Own Shares
The SOCO Employee Benefit Trust (the Trust)
holds ordinary shares of the Company (Shares)
for the purpose of satisfying long term incentive
awards for senior management. At the end of
2011, the Trust held 4,156,922 (2010 –
4,156,922) Shares, representing 1.22% (2010 –
1.22%) of the issued share capital (see Note 26
to the financial statements).
Following the share placement in 2010 of
28,937,388 Shares at a price of £3.525 per Share,
the Company repurchased 1,497,852 Shares in
2011 at an average cost of £2.903 per Share and
a total cost of $6.8 million. As at 31 December
2011, the Company held 1,607,852 (2010 –
110,000) treasury Shares, representing 0.44%
of the issued share capital (see Note 26 to the
financial statements). As of the date of this report
a further 995,235 Shares at an average price of
£2.926 per Share had been repurchased by the
Company.
Going Concern
SOCO’s business activities, its financial position,
cash flows and liquidity position, together with an
outlook of factors likely to affect the Group’s future
development, performance and position are
discussed above and in the Chairman’s and Chief
Executive’s Statement and Business Review on
pages 14 to 16 and 18 to 41, respectively. The
Group has a strong financial position and based on
future cash flow projections should comfortably be
able to satisfy its debt obligations (as set out in
Note 23 to the financial statements) and continue
in operational existence for the foreseeable future.
Consequently, the Directors believe that the Group
is well placed to manage its financial and operating
risks successfully despite the current economic
environment and have prepared the accounts on a
going concern basis as described in the Annual
Report of the Directors on page 49.
mature in May 2013. See Note 23 to the financial
statements for further details.
Deferred tax liabilities increased to $37.5 million
at 31 December 2011 from $24.1 million year end
2010 mainly due to accelerated tax depreciation
and other timing differences associated with TGT.
Long term provisions related to the Group’s
decommissioning obligations in South East Asia
have increased from $13.1 million at the end of
2010 to $32.7 million due to increased provisions
reflecting the installation of facilities and
development well drilling activity on the TGT field
during 2011.
Cash Flow
The Group’s operating cash flow from continuing
operations increased from $12.4 million in 2010 to
$90.2 million in 2011 mainly due to the
contribution of production from the TGT field as
described above since start up of production
operations in August. Capital expenditures were
similar to last year at $152.2 million, arising
primarily on the TGT development and on
exploration activities in Africa with two wells drilled
offshore Congo (Brazzaville). Finally, the purchase
of own shares into treasury at a cost of $6.8 million
and the repurchase of convertible bonds at a cost
of $35.6 million meant that the Group’s cash
balance reduced by $100.4 million over 2011.
Dividend
Due to the continuing need to finance current and
future exploration, exploitation and development
projects, the Board of Directors are not
recommending the payment of a dividend.
However, as described above surplus cash
balances were utilised to further build
shareholder value by buying back the
Company’s own ordinary shares.
Key Performance Indicators
SOCO uses a number of financial and
non-financial Key Performance Indicators
(KPIs) against which it monitors its
performance. Reference is made to KPIs in
the appropriate section of this Annual Report
and in the Five Year Summary on page 96
where the KPIs are defined.
30
SOCO International plc
Annual Report and Accounts 2011
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HOW We mAnAge RISk
dIReCtly AFFeCtS
HOW We dO buSIneSS
there is an ongoing
process to identify,
monitor and mitigate risk
How it works
Board of
Directors
Audit
Committee
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Chief Financial
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Vice President
– Exploration and
Production
Group
Exploration
Manager
Operations
Local
Managers
Headquarters
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Long term shareholder value is dependent on
the success of the Group’s activities, which are
directed towards the search, evaluation and
development of oil and gas resources. Exploration
for, and development of, hydrocarbons is
speculative and involves a significant degree of risk
involving multiple factors. Critical to ensuring the
ongoing success of the Company in applying its
three core strategic objectives of recognising
opportunity, capturing potential and realising value
is the identification, assessment and mitigation of
the various risk factors.
Consequently, SOCO has a formal process in place
to identify and mitigate risks applicable to an
upstream oil and gas business. The Board of
Directors has ultimate responsibility for risk
management with the Audit Committee providing
detailed oversight. The Board has designated the
Chief Financial Officer as the executive responsible
for the Company’s risk management function. He is
supported in this task by the Vice President –
Operations and Production and the Group
Exploration Manager.
There is an ongoing process to identify, monitor
and mitigate risk throughout the year with any new
or changes to existing risks considered at each
Audit Committee meeting. Annually, the Audit
Committee undertakes a rigorous and detailed risk
assessment wherein the Group’s risk profile,
including the mitigation measures in place to
reduce risk to acceptable levels, is considered. This
risk assessment is then presented to the Directors
for full Board approval.
Risk management and the principal risks and
uncertainties facing the Group are discussed
below. Further commentary on these and additional
risks can be found in Notes 3 and 4 to the financial
statements. The Group’s risk management policies
and procedures are further discussed in the
Corporate Governance Report on page 54.
Operational Risk
There are inherent risks in conducting exploration,
drilling, and construction operations in the
upstream industry. The level of risk is potentially
impacted by harsh geographical conditions and
associated resource availability and costs. SOCO
SOCO International plc
Annual Report and Accounts 2011 31
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continued
seeks to mitigate its operational risks through the
application of industry best practice procedures
throughout its operations. Mitigation may also be
achieved by transferring risk, for example, by
entering into partnerships or farm-outs and by
maintaining minimum standard industry insurance.
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 believes that SOCO’s
comprehensive property, control of well, 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.
Empowerment Risk
The Group’s international portfolio comprises oil
and gas ventures in widespread, often remote
locations with government and industry partners.
Conduct of operations requires the delegation of a
degree of decision making to partners, contractors
and locally based personnel. As operator in a
project, SOCO can directly influence operations
and decision making. Where SOCO is a co-venturer
it seeks to maximise its influence through active
participation with management, including direct
secondments, and application of internal control
best practice under a procedural framework.
Reserves Risk
As discussed in Note 4 to the financial statements,
the Company uses standard recognised evaluation
techniques to estimate its proven and probable oil
and gas reserves. However, such techniques have
inherent uncertainties in their application. As the
Company has projects with booked reserves in the
early stages of production or development, upward
or downward revisions to reserve estimates will be
made when new and relevant information
becomes available.
or social instability and where local attitudes to risk
differ compared with nations with more established
or developed economies. Accordingly, the Group
may be exposed to specific risks in relation to
social and environmental factors as well as health
and safety matters, including security, and
attempts to mitigate such risks by actively
engaging with local communities and governments,
using specialist consultants and by maintaining
appropriate policies and procedures. Further
details of how SOCO addresses these risks can
be found in the Sustainable Development Report
on pages 36 to 41.
Political and Regional Risk
Many of the Group’s projects are in developing
countries or countries with emerging free market
systems where the regulatory environment may not
be as mature as in more developed countries.
There may be a high level of risk in relation to
compliance with and interpretation of emerging
hydrocarbon law, taxation and other regulations.
SOCO seeks to minimise such risks by using
in country professional advisors and by
engaging directly with the relevant
authorities where appropriate. Some
of the Group’s interests are in
regions identified as potentially
more susceptible to business
interruptions due to the
consequences of possible
unrest. 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
insurance or associated business
interruption insurance 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
insurance cover.
Critical to ensuring the
ongoing success of the
Company is the identification,
assessment and mitigation
of the various risk factors.
Health, Safety, Environment and Social Risks
The Group operates in an industry sector with
inherent high risks associated with health, safety
and the environment. Additionally, it operates in
regions where there is a greater risk of economic
Business Conduct and Bribery Risk
SOCO operates both in an industry sector and in
certain countries where the promotion of
transparent procurement and investment policies is
perceived as having a low priority and where
SOCO International plc
Annual Report and Accounts 2011 33
RISk
mAnAgement
continued
customary practice may fall short of the standards
expected by the UK Bribery Act. The Group seeks
to mitigate these risks by ensuring that it has
appropriate procedures in place to eliminate bribery
and that all employees, agents and other
associated persons are made fully aware of the
Group’s policies and procedures with regard to
ethical behaviour, business conduct and
transparency.
Running in parallel with the Group’s general risk
management process, the Audit Committee has
established a detailed bribery risk assessment and
mitigation reporting procedure. Bribery risks are
monitored throughout the year along with
implementation of procedures to mitigate any new
risks identified.
Reputational Risk
The Group operates in locations where social and
environmental matters may be highly sensitive both
on the ground and as perceived globally. This can
potentially lead to a reputational risk which may
influence various Group stakeholders. However,
SOCO works closely with all of its stakeholders
including local communities, governments and
non-governmental organisations to ensure that
during operations any disturbance is minimised
and that on completion of the Group’s activities the
local population and environment will be left in, at
least, as good a state as when SOCO first arrived.
See the Sustainable Development Report on
pages 36 to 41 for further information.
Over time, during periods when the Group sees
an opportunity to lock in attractive oil prices, it
may engage in limited price hedging.
Foreign Currency Risk
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 Company 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 Group’s convertible bonds are denominated
in US dollars.
Liquidity and Credit Risk
The Group carried significant cash balances
throughout the year thereby increasing its exposure
to liquidity and credit risk. To mitigate these risks
and to protect the Group’s financial position cash
balances are generally 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.
The Directors believe that
the Group is well placed to
manage its financial and
operating risks successfully.
Commodity Price Risk
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 an 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.
34
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Annual Report and Accounts 2011
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SuStAInAble
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SuStAInAble vAlue FOR HOSt
COuntRIeS, lOCAl COmmunItIeS
And OuR OWn SHAReHOldeRS
CeO’s statement
Oil and gas companies have a central role
in today’s global energy supply. SOCO
International can be a powerful force for
economic development. Through our business,
we create jobs, provide training and skills and
support local communities.
A successful project can transform not only a
company, but also the economic and social
wellbeing of a host country by contributing to its
ability to produce and supply its own natural
resources. We recognise that built into the
heart of this opportunity is the business
imperative to act responsibly.
SOCO is committed to conducting our business
in an honest and ethical manner and ensuring
that the health and safety of people and the
protection of the environment remain a
business priority.
Our goal is to be a positive presence whereby
we build sustainable value for the host
countries and local communities, as well as for
our own shareholders. That’s what we mean by
sustainable development.
ed Story
President and Chief Executive Officer
Our Company
SOCO International is an upstream, international
oil and gas exploration and production company.
We are a participating partner in seven oil licences
in Vietnam, the Republic of Congo (Brazzaville), the
Democratic Republic of Congo (Kinshasa) (DRC)
and Angola.
Our core business is to add shareholder value by:
• Gaining access to investment opportunities in
projects or regions early on in the project life
cycle where there is potential to create significant
upside through our participation.
• Applying our managerial, technical and commercial
expertise to progress the project through its
formative stages or through periods of difficulty.
• Locking in the investment returns once our
capacity to add value begins to diminish.
We currently have five projects in the early phases
of exploration and two projects in the production/
development phase.
In undertaking our activities we bring benefits to
society through investment in developing countries,
providing stimulus for emerging local economies,
the creation of jobs, training for local people,
support for local communities, payment of fees and
taxes to host governments and the protection of
the natural environment. We call this approach
sustainable development.
Because of our exploration activities, our projects
can vary substantially from year to year. Often
these can be at the earliest stages of exploration
prior to the onset of drilling or production activities.
We partner with other businesses and host
governments through their national oil companies.
This means that our portfolio varies by:
a) our degree of ownership
b) our level of operatorship
Our approach to sustainable development is
tailored to individual projects. Where we are the
operator, our influence is high. Where we are a
minority owner and non-operator, we seek to
influence our partners to integrate sustainable
development into a project.
Why sustainable development
is good for our business
There are two clear benefits for SOCO
from a carefully managed approach to
sustainable development:
1. Management of risks
Exploration and development of hydrocarbons
involves a significant degree of risk. We operate in
remote areas that are often under-developed; we
rely on collaboration with external partners; and we
may only invest for a short time period at a
particular location. A well-managed approach to
our social, environmental and economic
responsibilities is integral to good risk
management. SOCO has particular expertise in the
management of technical and commercial risks
and we apply these skills to our economic, social
and environmental responsibilities.
2. Realisation of new opportunities
We want to build strong relationships and a
reputation as a good corporate citizen so that
we are welcomed as the responsible partner of
choice. By harnessing our skills and capabilities
as a business, and sensitively managing our
operations, we can be a powerful force for
sustainable development in the communities in
which we operate. Sustainable development can
also provide a source of competitive advantage.
Our commitment to local economies and
investment in communities has helped
SOCO win business around the world.
36
SOCO International plc
Annual Report and Accounts 2011
SuStAInAble vAlue FOR HOSt
COuntRIeS, lOCAl COmmunItIeS
And OuR OWn SHAReHOldeRS
Our approach to sustainable development
is tailored to individual projects based on
our degree of influence
How it works
HIgH
Moderate degree
of influence
We seek to
influence others
High degree
of influence
We implement our
approach to sustainable
development
Block
Ownership
Operatorship
● Marine XI: Congo (Brazzaville)
29.00% Operator – SOCO
● Marine XIV: Congo (Brazzaville)
29.40% Operator – SOCO
● Nganzi Block: Western DRC
65.00% Operator – SOCO
● Block V: Eastern DRC
38.25% Operator – SOCO
p
i
h
s
r
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t
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p
O
f
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l
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v
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L
lOW
Low degree
of influence
We seek to make our
views heard and ensure
minimum standards
are met
Moderate degree
of influence
We seek to
influence others
● Block 9-2: Vietnam
25.00% Joint Operating Company
● Block 16-1: Vietnam
30.50% Joint Operating Company
● Cabinda North Block: Angola
17.00% Non-Operator
lOW
Degree of ownership
HIgH
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Our guiding principle:
A net positive Contribution
Our business is guided by an
overarching principle: to make a
net positive contribution through
balancing the needs for energy
security; economic development;
social improvement; and the
protection of the environment.
How we integrate sustainable
development into our business
Our Guiding Principle, which is set out adjacent,
is translated into our policies and systems, it
guides our selection of partners, and is realised
through our actions on the ground. The Company
has established standards for business conduct in
three performance areas – ethical, social and
environmental – as well as a comprehensive
Health, Safety, Environment, Social and Security
(HSESS) management system.
The Code of Business Conduct
and Ethics (The Code)
The Guiding Principle is implemented through
the Code, which was originally approved by the
Board of Directors in 2004 and was most
recently reviewed and updated in 2011.
The Code sets out our values of honesty and
fairness and promoting trust amongst those with
whom we work. Where we partner with others, we
seek to work with those who share the same
principles as us.
The Code applies across all our business
operations, including contractors, suppliers, agents
and joint venture partners. It is our policy to
consider environmental, ethical, health, security
and safety criteria in our selection of suppliers.
A summary of the Code is available on our website.
Sustainable development is managed day-to-day
through our HSESS system. This forms part of the
training provided for all staff.
SOCO International plc
Annual Report and Accounts 2011 37
SuStAInAble
develOpment
continued
Governance
Sustainable development at SOCO evolves from year
to year as our business grows and the individual
project cycles progress. We recognise that this is a
long journey that won’t be perfected overnight.
However, our governance structures ensure that we
constantly learn from our experiences and improve
our approach.
The Chief Executive Officer is responsible for our
sustainable development performance. Relevant issues
are considered by the Board through a specific item on
the agenda at each meeting.
Management of the day-to-day implementation is
through our country managers, led by the Vice
President – Operations and Production. The
effectiveness of our risk management and controls
over our sustainable development programme is
formally assessed annually and reviewed
periodically by the Audit Committee.
Creating economic
wealth, responsibly
Our Approach
Our aim is to ensure that all of our stakeholders
benefit from our operations and the wealth that we
create. We contribute to the economic development
of the countries where we operate, and by doing so
build a reputation as a reliable, fair and responsible
company.
We apply our technical, managerial and
commercial expertise to create jobs in local
communities; provide training and technical
assistance; stimulate the local economy; enhance
the capacity of host governments; pay relevant
taxes and governmental fees; generate revenues
from hydrocarbon production; and create returns
for our shareholders.
From the initial decision to invest, through to the
management and divestment of operations, we are
guided by an approach to bring economic rewards
to our stakeholders, safely and responsibly.
Safety and Security
Our primary responsibility is the safety of our
employees and those we work with.
Our HSESS Management System includes
procedures and guidelines to secure a planned
approach for identifying, analysing and managing
occupational risks and ensuring that our personnel
and our contractors have the appropriate
competency for the task at hand. HSESS objectives
are incorporated into new project activities along
with specific HSESS training to ensure that HSESS
disciplines are assimilated into day-to-day activities.
Contractors and suppliers are selected on the basis
of their HSESS competency and performance,
alongside commercial, technical quality, business
conduct and other considerations. Audits,
inspections and monitoring is applied to key
contractors on a risked based approach.
SOCO has adopted a security standard that
applies to all SOCO employees, their contractors,
and their families, while working or living at any of
the SOCO operational activities worldwide. The
standard calls for security risk assessments,
monitoring security status and developing
appropriate security procedures and plans for
each area and operation.
Creating Jobs and Training
One of the biggest benefits our business brings is
developing new skills, creating jobs and stimulating
the local job market in developing countries, often
some of the poorest parts of the world.
The Code is applied to set out how we:
• Create employment by staffing as many of
our jobs with the local population as possible,
including as contractors and suppliers.
• Provide training to equip locals with skills that
can be useful long after we have left an area.
• Assist host communities, local companies and
governments with technical cooperation and
capacity building.
Our primary responsibility is the
safety of our employees and those
with whom we work
During 2011, there were no Lost Time Injuries
(LTIs) to our staff in any of our operations
worldwide and the Lost Time Injury Frequency
was nil.
In Vietnam, the Te Giac Trang (TGT) development
project as a whole has accumulated 5.3 million
manhours with no LTIs.
The Hoang Long and Hoan Vu Joint Operating
Companies (JOCs), operators of Block 16-1 and
Block 9-2, respectively, conducted audits and
inspections over key contractors engaged in the
TGT construction, drilling and production operations.
As we reported last year, in February 2011, an
employee of a security company contracted by
SOCO was briefly taken hostage in DRC and
was released without harm after two days.
SOCO management was kept fully updated at
country and corporate level throughout the
incident and received a detailed debrief from
the contractor. Both SOCO and the contractor
carried out rigorous reviews of their respective
procedures after the incident and, with the
findings, we remain confident that the respective
procedures are sufficiently robust and adequate
to identify, reduce and respond to the
risk exposure.
5.3 million
manhours reported at TGT
without Lost Time Injuries (LTIs)
0 LTIs
during 2011 in our
operations worldwide
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Our three part core
strategy contributes to
sustainable development
How it works
Host country
revenue
3.
Realising
value
Social and
community
projects
Host country
revenue
Access to
investment
opportunities
Operating
revenue
Relationship
building
1.
Recognising
opportunity
economic
stimulation
taxes and
fees
early entry
into regions
Our core
strategic
objectives
Commitment
to local
economies
Capital
expenditure
Skills and
expertise
Operational
management
training
programmes
local
employment
economic
stimulation
2.
Capturing
potential
Commitment to Training
and Capacity Building
building sustainable
communities
our partners to ensure that communities in and
around the region of our operations are engaged.
During 2011, SOCO provided professional
training for 34 local staff from Congo
(Brazzaville) and DRC. Courses included geology,
finance management, geolocalisation, IT and
procurement. Sponsorship has also been
provided for industry through partnerships with
local drilling services providers.
In Vietnam, the partners of Blocks 16-1 and 9-2,
excluding Petrovietnam, have committed to
contribute an annual total of $300,000 to
training and capacity building within Vietnam. In
addition, the JOCs reported a total expenditure
of approximately $400,000 towards its staff
training programmes. Staff at all levels of the
organisations participated in training aimed at a
broad range of technical skills and professional
development.
Our Approach
Our success as an international business depends
on building and maintaining the support of the
local communities where we operate. We take a
long-term approach to listening and responding
to the needs of our stakeholders, and contributing
to the development of communities through
targeted investments.
Stakeholder engagement
Our stakeholders include local communities
where we operate; host governments and local
authorities; our employees, contractors and
business partners; and our shareholders and
the investment community.
We have a formal process of stakeholder
engagement in place to engage local communities
where we operate. This helps us to better
understand the needs of local people. Where we
don’t directly control an operation, we work with
Our stakeholder engagement process includes
a designated person responsible for local liaison;
setting shared goals and objectives with relevant
community representatives; and ensuring that we
get feedback to review and improve our approach.
Community Investment
We have sought to ensure that support for local
communities feature in all of our contracts with host
governments and joint venture companies. This
means that we can ensure we are directly involved
in how projects are implemented on the ground –
and remain accountable for their fulfilment.
We see this as an important mechanism to ensure
that the communities where we operate benefit
from our activities – because we believe that
building strong communities in and around our
operations is good for the long-term success of
our business. In addition, by investing directly in
these communities, we can target our contributions
SOCO International plc
Annual Report and Accounts 2011 39
SuStAInAble
develOpment
continued
Social programmes in Congo and DRC
Partner Commitment
In Congo, the Marine XI and Marine XIV partners
committed $1,350,000 towards social projects
in Congo during 2011. Of this, approximately
$383,000 of projects were carried out during
the year, including the provision of potable water
facilities, construction of a school buildings,
renovation of a maternity clinic and endowment
of medical equipment and the sponsorship of a
professional training programme for young
people with disabilities. Beyond this commitment,
SOCO donated a further $15,000 towards
charitable projects in Congo during 2011.
In western DRC, the Nganzi Block partners have
committed $150,000 annual spend towards
social projects. Social projects undertaken during
2011 include the provision of potable water wells
and the construction of school buildings in the
Bas Congo region.
Additional Community Donations
Beyond this commitment, SOCO donated an
additional $30,000 during 2011 towards
charitable projects in the DRC. Donations
included the provision of a “Hydraform” brick
fabrication machine along with training, which
has transformed the commonly observed activity
of making bricks by hand. Following the
programme’s success, SOCO has expanded the
training to further communities in the area
surrounding Kipholo in the Bas Congo.
On Block V, in eastern DRC, SOCO provided
emergency response assistance to local villagers
during an epidemic of cholera.
effectively to where they are needed most. Beyond
the social investments mandated in our contracts,
we make additional, voluntary contributions to local
and regional communities.
• Although there have been no major
environmental incidents in any of SOCO’s
operations, an Emergency Management Plan is
in place in the event that any incident does occur.
• Audits and inspections are carried out over all
protecting the environment
key contractors.
• Climate change is a key consideration in the
management of our environmental performance.
Although our impacts are low relative to our sector,
we seek to implement best practice standards to
reduce Scope 1 emissions.
Environmental Performance in 2011
There were no major environmental incidents at
any of our operations during 2011. The most
material change in our environmental impacts
during 2011 occurred when the TGT offshore field
in Vietnam came on-stream as planned in August.
Last year, we set out two of our targets for
environmental performance:
• Environmental certification for the TGT field
In November we achieved certification in EIA
Compliance issued by Vietnam’s Ministry of
Natural Resource and Environment for TGT
Production. Working with our partners, we
identified this as the most suitable, international
certification standard for the project.
Accordingly, the JOC is not pursuing the ISO
14000 environmental certification referred to in
last year’s targets. In addition, the floating
production storage and offloading vessel (the
Armada TGT) received its International Oil
Pollution Prevention Certificate in July 2011,
issued by the American Bureau of Shipping in
Singapore.
• Restoration of the Nganzi drilling sites
Two drilling sites (KNY-1 and BYU-1) in the
Nganzi Block have been fully restored with
engagement with local communities and
authorities regarding their final use.
Restoration at the third site is underway.
Our Approach
Managing the environmental impacts of our
operations is a key consideration wherever we do
business. We always seek to ensure that the local
environment is left in at least as good a state as
when we arrived.
We strive to ensure industry best practice
standards are achieved in our projects and we
utilise the expertise of industry specialists for this
purpose from early on in the project life cycle.
Detailed Environmental Impact Assessments (EIAs)
are undertaken at each new juncture of a project.
Because our degree of control varies between projects,
we tailor our approach to the situation on the ground.
Where our control is low and a partner operates the
project, SOCO insists that, at a minimum, we meet all
legal and regulatory requirements.
Managing our Environmental Performance
SOCO is committed to conducting all business
activities in a responsible manner to ensure the
protection of the environment. Our objective is for
the impact to remain low through continuous
monitoring and responsive action. Our
environmental management system ensures that
our potential impacts are identified and assessed
and the appropriate measures are taken so that
these impacts are mitigated and minimized. We
promote excellence in environmental management
across the project lifecycle.
• Our comprehensive Health, Safety, Environment,
Social and Security (HSESS) management
system identifies relevant risks, responsibilities,
measurements, monitoring and responses across
the whole lifecycle of a project, including with
suppliers and business partners.
• EIAs are carried out at all locations prior to
any exploration activities and at new junctures
of a project.
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Further information is available on our website:
www.socointernational.com
Environmental Processes in Vietnam
At Blocks 16-1 and 9-2, the JOCs have processes
whereby all wastewater and sewage is treated prior
to discharge. Solid waste is collected, segregated
and transported to shore in compliance with the
Vietnamese Hazardous Waste Management
legislation. We use an authorised contractor for
waste disposal services, including segregation
and recycling where possible.
block v, dRC and
virunga national
park (vinp)
By planning and conducting our
operations responsibly and by
engaging constructively and
transparently with our key
stakeholders, our aim
is to be a positive presence in
each region that we operate.
We can confirm confidently
we will never seek to have
operations in the Virunga
Volcanoes or the Virunga
equatorial rainforest.
Scope 1 Emissions
Notwithstanding two producing oil fields, the
JOCs seek to minimise Scope 1 emissions by the
technical processes involved. On the Ca Ngu
Vang field, a contained process is utilised which
transports hydrocarbons via a subsea pipeline to
a processing platform, enabling fugitive
emissions to the air and water to be minimised.
In the case of TGT, Scope 1 emissions are
minimised by recycling produced gas into the
production process as gas lift and through
exporting gas to a processing platform for
onward sale.
Block V was designated for oil
exploration by the Government of
DRC (DRC), and awarded to SOCO
in 2010. DRC retains a 15% interest
in the Block which is of high interest to
stakeholders as it encompasses a section of
ViNP, including principally Lake Edward and the
savannah area to its south, but specifically
excluding the entirety of the Mountain Gorilla
habitat. Impacts of war and civil conflict remain a
primary threat to ViNP and classify it as a site in
danger. We continue to believe that responsibly
conducted commercial activities can join the
conservation community in concerted efforts to
reduce these threats.
Any activity approved by DRC and ultimately
conducted must be designed to minimise any
effects on the species and habitats of the specific
area that may be impacted.
In 2011, environmental and social impact
assessments were completed and approved,
following a consultation process across a full
spectrum of concerned stakeholders which has
included as example:
• local villagers on the banks of Lake Edward,
where we are committed to a social programme
aimed at addressing specific needs identified in
consultation with the community;
• ViNP officials and rangers, where we have held
discussion forums, consulted with Groupe
d’Etudes Environnementales du Congo on
evaluation of the assessments and entered into a
cooperation agreement with the Congolese Wildlife
Authority (ICCN) to ensure ongoing monitoring and
support of ViNP during our involvement;
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• high level DRC Government officials, including
evaluation meetings with the Minister of
Environment and his cabinet, who granted an
environmental acceptability certificate for
proposed aerial surveys, as discussed below.
An Environmental Monitoring Committee has been
established for the specific purpose of monitoring
our activities. In addition to commitments under the
Block V license, SOCO has provided an official
commitment letter for rehabilitation.
Activities currently contemplated include scientific
research studies comprising aerial surveys over
Lake Edward. Depending on the results, and
following appropriate consultation, consideration
will be given, potentially in the third quarter of 2012
to the conduct of further scientific studies
comprising a compressed air, non-explosive
seismic acquisition on Lake Edward. Other
operators have conducted similar activities on Lake
Albert, as well as other portions of the Albertine
Rift. No operations have commenced and no
drilling has been planned at the time of writing.
SOCO International plc
Annual Report and Accounts 2011 41
gOveRnAnCe
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The Board’s role is to provide
entrepreneurial leadership and
develop strategy, values and
standards while maintaining
prudent and effective controls
to assess and manage risk.
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bOARd OF
dIReCtORS
A pROven tRACk
ReCORd WItH A
dIveRSIty OF
expeRIenCe And
InSIgHt
ed Story
Title, age: President and Chief
Executive Officer, 68
Appointment date: April 1997
Committee membership:
Nominations Committee
Background and relevant
experience: Ed Story has over
40 years’ experience in the oil
and gas industry, beginning with
Exxon Corporation, where he held various positions including seven
years resident in the Far East. He was formerly the Vice President
and CFO of Superior Oil Company, a co-founder and Vice Chairman
of Conquest Exploration Company and a co-founder and President
of Snyder Oil Corporation’s international subsidiary. Ed was a
non-executive director of Cairn Energy PLC until 2008 and is
currently a non-executive director of Cairn India Limited.
Rui de Sousa
Title, age: Non-Executive
Chairman, 56
Appointment date: July 1999
Committee membership:
Nominations Committee
(Chairman)
Background and relevant
experience: Rui de Sousa has
Roger Cagle
Title, age: Executive Vice
President, Deputy CEO and Chief
Financial Officer, 64
Appointment date: April 1997
Committee membership: None
Background and relevant
experience: Roger Cagle has
over 35 years of experience in
approximately 30 years’ experience in the energy sector. He is
currently a director of Quantic Limited and the President of
Quantic Mining.
the oil and gas industry including succeeding positions of
responsibility with Exxon Corporation and senior management roles
with Superior Oil Company. He was formerly the Chief Financial
Officer of Conquest Exploration Company and the Chief Financial
Officer of Snyder Oil Corporation’s international subsidiary. Roger is
also a non-executive director of Vostok Energy Limited.
michael Johns
Title, age: Non-Executive and
Senior Independent Director, 64
Appointment date: June 2011
Committee membership:
Remuneration (Chairman), Audit
and Nominations Committees
Background and relevant
experience: Michael Johns is a
solicitor by profession with over 35 years’ experience as partner at
international law firms. Until his retirement in 2009, he was a
partner at Ashurst LLP, where he specialised in a broad range of
practice areas including corporate, corporate finance and energy
law and was Head of Energy, Transport & Infrastructure. Michael
was previously a partner at Withers for 13 years and more recently
has served as a Director of Aer Lingus Group plc.
Olivier barbaroux
Title, age: Non-Executive
Director, 56
Appointment date: July 1999
Committee membership: None
Committee advisorship:
Remuneration and Nominations
Committees
Background and relevant
experience: Olivier Barbaroux has over 20 years’ experience in the
energy and utilities sector. He was the Chairman and CEO of Dalkia
and a member of the Executive Committee of Veolia Environment
until 2011. Formerly, he was the Managing Director of Compagnie
Générale des Eaux, President and Chief Operating Officer of Vivendi
Water S.A., the Head of the Energy Sector of Paribas and the Chief
Executive Officer of the oil and gas production and exploration
company Coparex International.
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Robert Cathery
Title, age: Non-Executive
Director, 67
Appointment date: June 2001
Committee membership: None
Committee advisorship:
Remuneration and Nominations
Committees
Background and relevant
John norton
Title, age: Non-Executive
Director, 74
Appointment date: April 1997
Committee membership: Audit
Committee (Chairman)
Committee advisorship:
Nominations Committee
Background and relevant
experience: Robert Cathery has over 40 years of City experience.
He was formerly the 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. Robert is also currently a non-executive
director of Vostok Energy Limited, Salamander Energy PLC and
Central Asia Metals Limited.
experience: John Norton is a Chartered Accountant by profession
and was a partner at Arthur Andersen, heading the oil and gas
practice in Europe, the Middle East and Africa, until his retirement in
1995. John was formerly also a member of the Oil Industry
Accounting Committee and a director of the Arab-British Chamber
of Commerce.
ettore Contini
mike Watts
Title, age: Non-Executive
Director, 56
Appointment date: August
2009
Committee membership: Audit,
Remuneration and Nominations
Committees
Background and relevant
experience: Dr Mike Watts is currently the Deputy Chief Executive
of Cairn Energy PLC and has over 30 years’ experience in the oil and
gas industry. He was formerly the CEO and Managing Director of the
Amsterdam listed Holland Sea Search, which was acquired by Cairn
Energy PLC in 1995, and has held senior technical and management
roles with Premier, Burmah and Shell.
Title, age: Non-Executive
Director, 37
Appointment date: December
2001
Committee membership: None
Background and relevant
experience: Ettore Contini was
formerly a director of Energia E
Servize SpA and an asset manager in the private banking division of
Banca del Gottardo. Ettore is currently also a director of Eurowatt-
Commerce.
António monteiro
Title, age: Non-Executive
Director, 68
Appointment date: June 2009
Committee membership: Audit,
Remuneration and Nominations
Committees
Background and relevant
experience: Ambassador
António Monteiro has over 40 years of experience with the
Portuguese Ministry of Foreign Affairs, including as Foreign Minister
of Portugal, and with international organisations, including as UN
High Representative for Elections in Côte d’Ivoire and as a member
of the UN Secretary-General’s Panel on the Referenda in the Sudan.
He was formerly the Ambassador of Portugal to France and the
Permanent Representative of Portugal to the United Nations, where
posts included being President of the Security Council and of the
Security Council’s Committee established by Resolution 661 (1990).
António is currently also Chairman of the Board of Directors of the
Portuguese Bank Millenium BCP (Banco Comercial Português), a
non-executive member of the Board of the Angolan Bank BPA
(Banco Privado Atlântico), President of the Luso-Brazilian
Foundation Curator’s Council and a member of the Faculty of
Human and Social Sciences’ General Council of the Universidade
Nova de Lisboa.
SOCO International plc
Annual Report and Accounts 2011 45
IntROduCtIOn
pOlICIeS, pROCeSSeS
And StRuCtuReS At
tHe HeARt OF SOCO
1
Annual Report of the directors
2
Corporate governance
3
directors’ Remuneration Report
Principal Activity and Business Review p47
A
b
C
d
Results and Dividends
Directors
Supplier Payment Policy
Contributions
e
Share Capital
Substantial Shareholdings
Auditors
Going Concern
F
g
H
I
p47
p47
p48
p48
p48
p49
p49
p49
p51
A
Board of Directors
• Chairman and Chief Executive
• Executive and Non-Executive Directors
• Company Secretary
• Board Balance and Independence
• Reappointment
• Succession and Appointments
b
C
d
Board Structure and Process
Conflicts of Interest
p53
p54
p54
Accountability and Audit
• Directors’ and Auditors’ Responsibilities
• Going Concern
• Risk Management and Internal Control
• Internal Audit Function
• Relations with Shareholders
Committees
e
p55
Remuneration Committee
Remuneration Policy
Executive Directors
Package Components
• Basic Salary
• Bonus
• Long Term Incentive Plan
• Share Option Plan
• Pension Contributions
Other Policies
Non-Executive Directors
Directors’ Contracts
Directors’ Transactions
Tables
A
b
C
d
e
F
g
H
I
p59
p60
p60
p60
p63
p63
p63
p64
p65
J
Directors’ Responsibilities for the
Financial Statements
p50
Directors’ Responsibility Statement p50
k
46
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AnnuAl RepORt
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HOW tHe dIReCtORS
enSuRe tHe COmpAny
OpeRAteS tO tHe
HIgHeSt StAndARdS
Above:
Cynthia Cagle,
Vice President – Finance
and Company Secretary
The Directors present their annual report, along
with the audited financial statements of the Group
for the year ended 31 December 2011. The
Corporate Governance Report on pages 51 to 58
forms part of this report.
Principal Activity and Business Review
The Group’s principal activity is oil and gas
A
exploration and production. The Group has its
headquarters in London and has oil and gas
interests in Vietnam, Republic of Congo
(Brazzaville), the Democratic Republic of Congo
(Kinshasa) and Angola. The subsidiary
undertakings principally affecting the profits or net
assets of the Group are listed in Note 17 to the
financial statements.
Information fulfilling the requirements of section
417 of the Companies Act 2006 (the 2006 Act)
and paragraph 4.1.8 of the Disclosure and
Transparency Rules of the Financial Services
Authority (DTRs) can be found within the reports
described below, which are incorporated into this
report by reference. A 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 and
Chief Executive’s Statement on pages 14 to 16; the
Review of Operations on pages 20 to 26; and the
Financial Review on pages 28 to 30. The principal
risks and uncertainties facing the Group are set out
in the Risk Management report on pages 31 to 34
and, in respect of the principal financial risks and
uncertainties, in Notes 3 and 4 to the financial
statements. As set out in the Sustainable
Development Report on pages 36 to 41, which also
forms part of this report, SOCO is committed to
high standards of corporate responsibility. The
financial and non-financial key performance
indicators (KPIs) used by management are set out
on pages 21 and 29, and are summarised along
with pertinent definitions in the Five Year Summary
on page 96. The KPIs adopted in respect of
personnel, health, safety and environmental
measures reflect the small staff size and relatively
small size and scope of projects directly operated
by the Company. Additional KPIs will be developed
for reporting on these areas at an appropriate time
in the evolution of SOCO’s operations. Information
about the use of financial instruments by the
Company and the Group is included in Note 2(n)
and Note 23 to the financial statements.
Results and Dividends
b
The audited financial statements for the year
ended 31 December 2011 are set out on pages 72
to 97. 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 (2010 – £nil).
Directors
C
The Directors who held office during the year,
and the dates of their current service contracts or
letters of appointment, which are available for
inspection, are listed in the table on page 48. All
Directors held office throughout the year except as
noted in the table. Relevant details of the Directors,
which include their Committee memberships, are
set out on pages 44 to 45. Further details of
Directors, their interests in the shares of the
Company, their interests in any contracts relating to
the Company’s business and Directors’ contracts
are included in the Directors’ Remuneration Report
on pages 59 to 67. Directors of the Company are
appointed either by the Board or by shareholders
under the terms of the Company’s Articles of
Association. The business of the Company is
SOCO International plc
Annual Report and Accounts 2011 47
AnnuAl RepORt
OF tHe dIReCtORS
continued
Directors Holding Office during 2011
Director
Date of Contract
Rui C de Sousa
Chairman
Peter E Kingston*
Deputy Chairman and Senior Independent Director
Retired 23.06.11
Michael C Johns*
Appointed Senior Independent Director 23.06.11
Olivier M G Barbaroux*
Roger D Cagle
Robert M Cathery*
Ettore P M Contini
António V Monteiro*
John C Norton*
Martin J D Roberts*
Retired 23.06.11
Edward T Story
Michael J Watts*
12.07.99
14.05.97
23.06.11
12.07.99
14.05.97
19.06.01
11.12.01
10.06.09
14.05.97
06.09.04
14.05.97
21.09.09
* Denotes those determined by the Board to be independent
Non-Executive Directors as described in the Corporate Governance
Report on pages 51 to 58.
48
SOCO International plc
Annual Report and Accounts 2011
managed by the Directors who may exercise all
powers of the Company subject to the Articles of
Association and law.
In accordance with the Company’s Articles of
Association, Directors are subject to reappointment
at the first Annual General Meeting of Shareholders
(AGM) following appointment by the Board, and at
least every three years. In accordance with the
provisions of the UK Corporate Governance Code,
all Directors will retire at the forthcoming AGM and
offer themselves for reappointment, being eligible
and having been recommended for reappointment
by the Nominations Committee.
The reappointment of each Director is
recommended by the Board in consideration
of the results of their individual evaluation and
demonstrated continued satisfactory performance,
commitment and effectiveness. The Nominations
Committee carefully considered its
recommendations regarding these reappointments
with regard to the policies and processes set out in
more detail in the Corporate Governance Report on
pages 51 to 58, and in particular in respect of each
Director’s continued independence and 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 Directors
contributes to that balance. In particular, the Board
has considered the value of continuity of
leadership, and 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 Non-Executive
Directors continue to demonstrate the commitment
level appropriate and to be effective in fulfilment of
the responsibilities of the role.
The Non-Executive Directors’ fees, and SOCO’s
process for setting those fees, are set out in the
Directors’ Remuneration Report on pages 59 to 67.
SOCO provides 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, which is a qualifying
indemnity provision for the purpose of section 233
of the 2006 Act.
Supplier Payment Policy
d
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.
Contributions
Information regarding the Company’s global
e
charitable programmes, which are principally
carried out in the countries where the Group has
operations, is contained in the Sustainable
Development Report on pages 36 to 41. The
Company’s policies prohibit political donations.
F Share Capital
Details of changes to share capital in the
period and details regarding purchase of the
Company’s own shares into treasury are set out in
Notes 26 and 33 to the financial statements,
respectively. The Directors believe that acquisition
of the Company’s shares represented good value to
shareholders, and will enhance earnings per share.
The Company currently has one class of share in
issue, ordinary shares of £0.05 each, all of which
are fully paid. Each ordinary share in issue carries
equal rights including one vote per share on a poll
at general meetings of the Company, subject to the
terms of the Company’s Articles of Association and
law. Shares held in treasury carry no such rights
for so long as they are held in treasury. Votes may
be exercised by shareholders attending or
otherwise duly represented at general meetings.
Deadlines for the exercise of voting rights by proxy
on a poll at a general meeting are detailed in the
notice of meeting and proxy cards issued in
connection with the relevant meeting. Voting rights
relating to the shares held by the SOCO Employee
Benefit Trust are not exercised. The Company’s
Articles of Association may only be amended by a
resolution of the shareholders.
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No shareholder, unless the Board decides
otherwise, is entitled to attend or to vote either
personally or by proxy at a general meeting or to
exercise any other right conferred by being a
shareholder if he or she or any person with an
interest in shares has been sent a notice under
section 793 of the 2006 Act (which confers upon
public companies the power to require information
with respect to interests in their voting shares) and
he or she or any interested person failed to supply
the Company with the information requested within
14 days after delivery of that notice. The Board
may also decide that no dividend is payable in
respect of those default shares and that no transfer
of any default shares shall be registered. These
restrictions end seven days after receipt by the
Company of a notice of an approved transfer of the
shares or all the information required by the
relevant section 793 notice, whichever is earlier.
The Directors may refuse to register any transfer of
any share which is not a fully-paid share, although
such discretion may not be exercised in a way
which the Financial Services Authority regards as
preventing dealings in shares of that class from
taking place on an open or proper basis. The
Directors may likewise refuse any transfer of a
share in favour of more than four persons jointly.
The Company is not aware of any other restrictions
on the transfer of ordinary shares in the Company
other than certain restrictions that may from time
to time be imposed by laws and regulations (for
example, insider trading laws); and pursuant to the
Listing Rules of the Financial Services Authority
whereby certain employees of the Company require
approval of the Company to deal in the Company’s
shares.
The Company is not aware of any agreements
between shareholders that may result in
restrictions on the transfer of securities or voting
rights. Resolutions will be proposed at the 2012
AGM, as is customary, to authorise the Directors to
exercise all powers to allot shares and approve a
limited disapplication of pre-emption rights. Further
information regarding these resolutions is set out in
the circular to shareholders accompanying this
Annual Report and Accounts. A resolution will also
be proposed at the 2012 AGM, as is also
customary, 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 34,069,945
ordinary shares of £0.05 each, representing up to
approximately 10% of the Company’s issued
ordinary share capital (excluding treasury shares)
at 13 March 2012. Shares purchased under this
authority may either be cancelled or held as
treasury shares.
g Substantial Shareholdings
As at 13 March 2012, the Company had been
notified, in accordance with the DTRs, of the interests
in the issued share capital of the Company as set out
in the table below.
H Auditors
A resolution to reappoint Deloitte 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. All non-audit services are approved by
the Audit Committee. 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 auditors. 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 duties 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
section 418 of the 2006 Act.
I Going Concern
It should be recognised that any consideration
of the foreseeable future involves making a
judgement, at a particular point in time, about
future events which are inherently uncertain.
Nevertheless, at the time of preparation of these
accounts and after making enquiries, the Directors
have a reasonable expectation that the Group has
adequate resources to continue operating for the
foreseeable future. For this reason, and taking into
consideration the additional factors in the Financial
Review on pages 28 to 30, they continue to adopt
the going concern basis in preparing the accounts.
Substantial Shareholdings
Name of Holder
Pontoil Intertrade Limited
BlackRock, Inc.
Chemsa Ltd
Edward T Story
Legal & General Group Plc
Number
80,862,132
34,022,486
24,378,600
12,856,794
11,892,856
Issued Shares
% Held
23.93
10.07
7.21
3.80
3.52
SOCO International plc
Annual Report and Accounts 2011 49
AnnuAl RepORt
OF tHe dIReCtORS
continued
Directors’ Responsibilities for
the Financial Statements
J
The Directors are responsible for preparing the
annual report and the financial statements in
accordance with applicable United Kingdom law
and International Financial Reporting Standards as
adopted by the European Union both for the Group
and the Company.
The Directors are required to prepare financial
statements for each financial year that give a true
and fair view of the financial position of the
Company and of the Group and the financial
performance and cash flows of the Group for that
period. In preparing those accounts the Directors
are required to select suitable accounting policies
and then apply them consistently; present
information and accounting policies in a manner
that provides relevant, reliable and comparable
information; and state that the Company and the
Group have complied with applicable accounting
standards, subject to any material departures
disclosed and explained in the accounts.
The Directors are responsible for keeping proper
accounting records which disclose with reasonable
accuracy at any time the financial position of the
Company and the Group and enable them to
ensure that the accounts comply with relevant
legislation. They are also responsible for
safeguarding the assets of the Company and the
Group and hence for taking reasonable steps for
the prevention and detection of fraud and other
irregularities.
The Directors are responsible for the maintenance
and integrity of the corporate and financial
information included on the Company’s website.
Information published on the internet is accessible
in many countries with different legal requirements.
Legislation in the United Kingdom governing the
preparation and dissemination of financial
statements may differ from legislation in other
jurisdictions.
Directors’ Responsibility Statement
The Directors confirm that, to the best of each
k
person’s knowledge:
(a) the financial statements set out on pages 72 to
95, which have been prepared in accordance with
applicable United Kingdom law and International
Financial Reporting Standards as adopted by the
European Union, give a true and fair view of the
assets, liabilities, financial position and profit of the
Company and of the Group taken as a whole; and
(b) this Directors’ Report, including each of the
management reports forming part of it, includes a
fair review of the development and performance of
the business and the position of the Company and
the Group taken as a whole, together with a
description of the principal risks and uncertainties
that they face.
By order of the Board
13 March 2012
Cynthia Cagle
Company Secretary
The Board seeks to
strike an appropriate
balance between
continuity of experience
and succession.
50
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Annual Report and Accounts 2011
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CORpORAte
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HOW We FulFIl OuR
COmmItment tO
tHe uk CORpORAte
gOveRnAnCe COde
Dear Shareholders
I am pleased to present this introduction to
our 2011 Corporate Governance Report (the
CG Report), which describes how we have
implemented and applied the principles of the
UK Corporate Governance Code (the Code).
SOCO is committed to the highest standards
of governance, and we welcome the
recommendations of the new Code. In particular,
the annual re-election of all Directors was
implemented at the last Annual General Meeting
of Shareholders (AGM), giving shareholders the
opportunity to examine the contributions and
continued effectiveness of each Director.
independence of their fellow Directors. This
included, in particular, the Board’s long tenured
Directors, who are believed to bring a valuable
quality and effectiveness to the Board as a
whole. The CG Report sets out full details of the
processes we undertake to ensure Director
independence is retained and how the Board
seeks to balance the benefits of experience and
refreshment. Additionally, the CG Report
describes changes to the Board’s Committee
memberships, which are intended to provide full
participation of its newest Directors and to allow
them to benefit from the experience of former
Committee members.
Our 2011 Board evaluation was externally
facilitated in this first year following the Code
recommendation for external facilitation at least
once every three years. The Directors expressed
an appreciation for the fresh perspective and
new insight brought about by the externally
facilitated process. The facilitator’s report
indicates that the Directors consider the Board
to be effective and are satisfied with the manner
in which the Board carries out its role. Being
attentive to self-criticism, the evaluation process
was utilised to identify areas where the
effectiveness of the Board might be improved.
The CG Report seeks to describe how we intend
to benefit from this process.
The 2011 Board evaluation additionally identified
diversity as a matter for increased scrutiny in
consideration of the announced intent to revise
Code provisions addressing this. The Board
recognises the benefits of diversity and has
established gender diversity in particular as
a priority for future recruitment, in addition
to the continued attention to individual merit,
experience, independence and complementary
Board skills.
The following pages provide further detail of how
we fulfil our commitment to good corporate
governance, and in particular those principles
related to the role and effectiveness of
the Board.
The independence of Directors was identified as
a matter against which the external facilitator
would apply particular scrutiny. The facilitator
reported that each Director expressed, in
confidence, the strong belief in the continued
Rui de Sousa
Chairman
The Company is committed to the principles
contained in the UK Corporate Governance Code
(the Code) that was issued in 2010 by the Financial
Reporting Council for which the Board is
accountable to shareholders.
The Company has applied the principles set out in
the Code, as described below and, in connection
with Directors’ remuneration, in the Directors’
Remuneration Report.
Statement of Compliance with the Code
Throughout the year ended 31 December 2011,
the Company has complied with the provisions set
out in the Code.
Board of Directors
The Board’s role is to provide entrepreneurial
A
leadership and develop strategy, values and
standards while maintaining prudent and effective
controls to assess and manage risk. The Board is
responsible for ensuring that the Company meets
its obligations to stakeholders and has adequate
resources to meet its strategic objectives. The
Board of Directors, whose names and biographical
details are set out on pages 44 to 45, comprises
nine Directors in addition to the Chairman. After
an assessment process set out in more detail
below, six of these nine, including the Senior
Independent Director, have been identified in the
Annual Report of the Directors on page 48 as
independent in character and judgement giving full
consideration to those circumstances that the
Code states may appear relevant. Notwithstanding
this, the Board is satisfied that 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.
Chairman and Chief Executive
The roles of the Chairman and Chief Executive
Officer are separated and their responsibilities are
clearly established, set out in writing and agreed
by the Board. The Chairman and the Chief
Executive collectively are responsible for the
leadership of the Company. The Chairman is
responsible for the leadership of the Board,
ensuring its effectiveness on all aspects of its role
SOCO International plc
Annual Report and Accounts 2011 51
CORpORAte
gOveRnAnCe
continued
and setting its agenda. The Chief Executive is
responsible for leading the executives and
ensuring their effectiveness in the running of the
Company’s business and implementing strategy
and policy. Together the Chairman and Chief
Executive Officer are responsible for promoting
the highest standards of integrity and probity.
Executive and Non-Executive Directors
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 division
of responsibilities between the Executive Directors
is set by 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,
safety and social 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 make
sound decisions.
The Non-Executive Directors, who undertake a
supervisory role, contribute to the development of
strategic proposals through constructive probing
based on review and analysis that brings to bear
the particular skills, experience and knowledge
each brings to the Board. The Non-Executive
Directors review management’s performance and
ensure that the systems in place provide adequate
and effective financial, operational and compliance
controls 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.
Company Secretary
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 with
management, in compliance with Board procedures
and governance guidelines. The Secretary
facilitates an induction programme for new
Directors on appointment, which 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
any individual professional training and
development needs agreed with each Director.
Additionally, briefing sessions are provided in the
course of regular Board meetings and Committee
meetings on relevant issues as deemed appropriate,
including in relation to corporate governance and
social responsibility as well as new and evolving
statutory and other compliance matters.
Board Balance and Independence
The Board embraces the underlying principles of
the Code provisions regarding tenure and
refreshing of the Board, and seeks to strike an
appropriate balance between continuity of
experience and succession. The findings of the
externally facilitated Board evaluation confirmed
the Board’s previously stated position concerning
independence, in that an individual’s
independence cannot be determined arbitrarily on
the basis of a set period of time, or by a set period
of concurrent tenure with an Executive Director.
Each of the Non-Executive Directors’ tenure has
run concurrently with the Company’s Executive
Directors, both of whom have been in office from
the Company’s initial listing. 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 seeks to
ensure its Directors are focused on a long term
approach, and does not impose fixed term limits
as this would result in a loss of experience and
knowledge without assurance of increased
independence. Accordingly, the Board’s
assessment of independence is of prime
importance to ensure that retention of experience
does not result in a failure to retain a sufficient
contingent of independent Directors.
The independence of each Non-Executive Director
is assessed at least annually. Independence was
additionally identified as a matter for increased
scrutiny in the externally facilitated Board
evaluation, as described more fully in the
Nominations Committee report. To be identified as
independent a Director must be determined
independent in character and judgement and free
from any relationships or circumstances which are
likely to affect, or could appear to affect, their
judgement including in particular those set out in
the Code. Particular scrutiny is applied in
assessing the continued independence of
Directors having served over nine years, with
attention to ensuring that interactions with
Executive Directors have not in any way eroded
their independence and that their allegiance
remains clearly aligned with shareholders. Board
refreshment and tenure are considered together,
and weighed for relevant benefit in the foreseeable
circumstances, given further that the Board should
not be enlarged to a size that is unwieldy.
In conducting its current assessment the Board
referred to guidance setting out criteria deemed
relevant to determining whether a Director
continues to exhibit those qualities and behaviours
it considers essential to be considered
independent. A specific set of focused criteria
was applied to the assessment of long
tenured Directors.
Consideration was also given to the results of
individual evaluation and continued satisfactory
performance as well as each Director’s ability
to allocate sufficient time to discharge their
respective Board and Committee responsibilities.
Following assessment, Ambassador António
Monteiro was determined to be independent.
Mr Michael Johns, the Senior Independent
Non-Executive Director, was determined to be
independent notwithstanding a former role as
partner for a legal advisor that has ceased to have
a material business relationship with the Company.
Dr Mike Watts was also determined to be
independent despite a former cross-directorship
with the Chief Executive. These relationships have
52
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ceased and are not relevant to the determination
of independence under the Code. Any current
outside links to other Directors are not considered
significant and in particular do not result in
reciprocal influence.
After particular scrutiny, Mr John Norton, Mr
Olivier Barbaroux and Mr Robert Cathery, each
having served on the Board for more than nine
years, were determined to be independent. Each
of these Directors continues to display an
appropriate independence from Executive
Directors. They each continue to express their
individual viewpoints, debate issues and
objectively scrutinise and challenge management.
Each seeks clarification and amplification as
deemed required, including through direct access
to the Group’s employees and external advisors.
After careful consideration of the relevant factors,
the Board has determined that the tenure of these
Directors has not affected their independence or
their ability to bring judgement to bear in the
discharge of their duties as Board and Committee
members. The Board considers that the varied and
relevant experience of its independent Directors
combined provide an exceptional balance of skills
and experience required for the business.
Reappointment
In accordance with the Code, all Directors are
subject to annual election by shareholders, which
was voluntarily adopted by the Company at the
2011 AGM. Reappointment of each Director is
recommended in consideration of the results of
individual evaluation and demonstrated continued
satisfactory performance, commitment and
effectiveness. Consideration is given to the broad
capabilities represented on the Board and the
ability of these to meet the unique challenges
facing the Company. Consideration is additionally
given to the balance of the Board’s composition
and the need for diversity and refreshment.
A Non-Executive Director term exceeding six years
is subject to particularly rigorous review. The
process for considering reappointments is
described more fully in the Nominations
Committee section below. Following this process
the Board recommends the reappointment of the
retiring Directors, who have each offered
themselves for reappointment.
Succession and Appointments
The Company’s process for succession seeks first
to ensure that the Board comprises an appropriate
balance of knowledge, skills, independence and
experience. The Company has an ongoing process
for assessing the specific competencies required
on the Board, giving consideration to relevant
factors arising from Board and individual Director
evaluations, including effectiveness and time
commitment. This assessment also considers
aspects of diversity and how this could contribute
to maximum Board effectiveness. After
assessment of the competencies required, the
Board is satisfied that the current Non-Executive
Directors comprise an appropriate balance of
knowledge, skills, independence and experience.
The Board benefits from gender diversity around
the Board table with participation by the Company
Secretary at formal and informal meetings of the
Board and its Committees. The Board additionally
identified gender diversity as a matter for
increased scrutiny in its externally facilitated Board
evaluation, and has established this as a priority
for future recruitment.
Succession which allows for refreshment while
maximising continuity of experience is considered
to be in the best interest of shareholders. SOCO
considers a Non-Executive Director’s most
appropriate term of office as generally longer than
that envisioned in Code guidelines. The Company
undertakes projects requiring long term life cycles
from licence negotiation through production
operations. Longstanding Directors who have
acquired, over a number of years, a sound and
detailed knowledge of the Company’s business are
highly valued as uniquely qualified to contribute to
the Company’s leadership. Excluding the
Chairman, the Board seats four long tenured
Non-Executive Directors, who serve on the Board
along with three newly appointed over the last
three years. The Company considers it has
achieved an appropriate balance between the
benefits of continuity and refreshment. The
Company has additionally sought to maximise the
benefits of independence, refreshment and
continuity in constituting each of its Committees.
Board appointments are made in consideration of
the process for succession, and against objective
criteria which are developed in consideration of
the assessment of Board competencies and
attributes. Appointments are made through a
formal process led by the Nominations Committee,
which is set out in more detail in the Nominations
Committee report and was applied in the
appointment of Mr Michael Johns in 2011.
Following an appointment, the Company Secretary
facilitates a process of induction and assimilation
determined appropriate to the appointee’s
particular role and experience.
Board Structure and Process
b
The Board typically has four scheduled
meetings a year and holds additional meetings as
necessary. During 2011, the Board held four
scheduled meetings as deemed required for the
effective discharge of its duties during the period.
Attendance of Directors at scheduled Board
meetings and attendance of members at the Audit,
Remuneration and Nominations Committees is set
out in the table on page 58. Although a scheduling
conflict prevented Dr Mike Watts from attending
the Board and Remuneration Committee meetings
held in March 2011, he however was fully
prepared and available for consultation and
participation by telephone. Mr Bob Cathery and Mr
Ettore Contini each missed a single meeting due to
unforeseen and unavoidable personal
circumstances. All members were otherwise in
attendance at all Board and Committee meetings.
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
SOCO International plc
Annual Report and Accounts 2011 53
CORpORAte
gOveRnAnCe
continued
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. 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.
Conflicts of Interest
C
Directors have power to authorise, where
appropriate, a situation where a Director has, or
can have, a direct or indirect interest that conflicts,
or possibly may conflict, with the Company’s
interests. Such authority is in accordance with
section 175 of the 2006 Companies Act.
Procedures are in place for ensuring that the
Board’s powers of authorisation are operated
effectively. Directors are required to notify the
Company of any conflicts of interest or potential
conflicts of interest that may arise, before they
arise either in relation to the Director concerned or
his connected persons. The decision to authorise
each situation is considered separately on its
particular facts. Only Directors who have no
interest in the matter are able to take the relevant
decision, and must act in a way they consider, in
good faith, will be most likely to promote the
Company’s success. The Directors will impose
such limits or conditions as they deem appropriate
when giving authorisation or when an actual
conflict arises. These may include provisions
relating to confidential information, attendance at
Board meetings and availability of Board papers,
along with other measures as determined
appropriate. The Board reviews its conflict
authorisations at least annually.
Accountability and Audit
d
Directors’ and Auditors’ Responsibilities
The responsibilities of the Directors and auditors
are set out in the Annual Report of the Directors
on pages 47 to 50 and in the Independent
Auditors’ Report on page 71.
Going Concern
The Group’s financial statements have been
prepared on a going concern basis as described in
the Financial Review on page 30 and the Annual
Report of the Directors on page 49.
Risk Management and 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 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 revised guidance on
internal control published by the Financial
Reporting Council 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 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. Particular scrutiny is applied to the
review of controls applicable to new or evolving
areas of risks as they are identified.
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
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. Each
54
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Annual Report and Accounts 2011
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member undertakes specific review processes in
their areas of financial and audit, technical and
operating, diplomatic and commercial and legal
expertise and reports the results of their work to
the full Committee and to the Board.
Internal Audit Function
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
outsources any internal audit requirements.
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 a 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 Half Year 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 including
the Chairmen of the Audit, Remuneration and
Nominations Committees are available to answer
shareholder questions and 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 half year and full year
results, between fund managers and Company
executive management. In 2011, the Company has
also actively sought an increased dialogue with
shareholders and other stakeholders regarding its
sustainable development policies and procedures.
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 Director
includes being available to shareholders if they
have concerns which cannot be fully or
appropriately addressed by the Chairman or the
Executive Directors.
Committees
The Board has established three
e
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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 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 44
and 45.
A review of each Committee’s membership was
completed in December 2011 in order to ensure
optimum utilisation of competencies on the Board
while maintaining a balance between the benefits
of refreshment and continuity. Certain committee
memberships have been realigned and advisory
roles created which the Board believes provides
for full participation of its newest Directors and
additionally allows them to benefit from the
experience of former committee members.
Attendance at scheduled committee meetings by
all members serving during the period is set out in
the table on page 58. Whilst only Committee
members are entitled to attend meetings and vote,
Directors in advisory roles are generally invited to
attend and other Directors may be 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.
Audit Committee
The Audit 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
Code, including its risk management and internal
control requirements, as well as compliance with
evolving guidance on corporate governance
issues generally.
Composition of the Audit Committee
The Audit Committee is chaired by Mr John Norton
and additionally comprises Mr Michael Johns, the
Senior Independent Non-Executive Director
(appointed 23 June 2011), and Ambassador
António Monteiro and Dr Mike Watts who are
independent Non-Executive Directors. The
qualifications of each of the members are set out
on pages 44 and 45. 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
SOCO International plc
Annual Report and Accounts 2011 55
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continued
Committee to discharge its functions effectively. In
particular, Mr Norton is a Chartered Accountant
and former member of the Oil Industry Accounting
Committee. Although Mr Norton is a longstanding
Director, his professional experience fully prepared
him for maintaining independence and objectivity
in this circumstance, and the Board is completely
satisfied that these attributes are diligently applied
in the discharge of his duties.
Meetings
The Audit 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 held three meetings in 2011 and
has conducted one meeting to date in 2012, 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.
Overview of Activities
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 were assessed,
giving consideration to the auditors’ confirmation
that their independence is not impaired, the overall
extent of non-audit services provided by the
external auditors (as described further below) and
the past service of the auditors who were first
appointed in 2002. During the period, the Senior
Audit Partner assigned to the Company was
changed in accordance with the external auditor’s
policy for rotation and relevant ethical guidance.
The Committee also considered the likelihood of a
withdrawal of the auditor from the market and
noted that there are no contractual obligations to
restrict the choice of external auditors. The Board
concurred with the Committee’s recommendation
for the reappointment of Deloitte LLP as the
Company’s auditors for 2012, which will be
proposed to shareholders at the forthcoming AGM.
The Committee undertook a detailed risk
assessment whereby it reviewed existing risks and
identified new risks as appropriate. The likelihood
and significance of each risk was considered
along with associated mitigating factors and was
reported to the Board. Any new, or changes to
existing, risks were monitored throughout the year
and considered at each Audit Committee meeting.
As part of this process, the Committee has
established a detailed bribery risk assessment and
mitigation procedure designed to ensure that the
Company has appropriate procedures in place to
eliminate bribery and that all employees, agents
and other associated persons are made fully
aware of the Group’s policies and procedures.
The Committee has reviewed, and is satisfied
with, the Company’s arrangements for
“whistleblowing”, 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 Risk
Management and Internal Control section of this
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 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
half year reports. 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 for
continued appropriateness.
External Auditors – Non-Audit Services
The external auditors are appointed primarily to
carry out the statutory audit and their continued
independence and objectivity is fundamental to
that role. In view of their knowledge of the
business, there may be occasions when the
external auditors are best placed to undertake
other services on behalf of the Group. The Audit
Committee has a policy which sets out those
non-audit services which the external auditors
may provide and those which are prohibited.
Within that policy, any non-audit service must be
pre-approved by the Committee. Before approving
a non-audit service, consideration is given to
whether the materiality of the fees, the nature of
the service, or the level of reliance to be placed on
it by SOCO would create, or appear to create, a
threat to independence. If it is determined that
such a threat might arise, approval will not be
granted unless the Audit Committee is satisfied
that appropriate safeguards are applied to ensure
independence and objectivity are not impaired.
The auditor is prohibited from providing any
services which result in certain circumstances that
have been deemed to present such a threat,
including auditing their own work, taking
management decisions for the Group or creating
either a mutuality or conflict of interest. The
Company has taken steps to develop resources
and relationships in order to establish availability
of alternate advisors for financial and other
matters. Additionally, the Committee closely
monitors the terms on which the Remuneration
Committee, with approval of the Audit Committee,
has independently appointed the Company’s
auditors 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.
56
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The Committee approved the non-audit services
provided by the external auditors in 2011, having
concluded such services were compatible with
auditor independence and were consistent with
relevant ethical guidance. Details of non-audit
services are set out in Note 9 to the financial
statements.
Nominations Committee
The Nominations Committee is chaired by Mr Rui
de Sousa, the Non-Executive Chairman of the
Company. Mr Ed Story, the Chief Executive Officer,
is a Committee member. Committee membership
additionally comprises independent Non-Executive
Directors Dr Mike Watts, who served throughout
2011, and Ambassador António Monteiro and Mr
Michael Johns, who were appointed following the
review conducted in December 2011. Messrs John
Norton, Olivier Barbaroux and Robert Cathery
stood down as members and were appointed as
Advisors in December 2011.
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. Further
details of the discharge of these responsibilities
are set out below in addition to sections above
regarding in particular board balance,
independence, succession and appointments.
The Committee held three meetings in 2011 and
has conducted one meeting to date in 2012. 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, experience and diversity
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 reflecting
the need for refreshment while taking into account
the skills, experience and diversity needed on the
Board to best meet the specific challenges and
opportunities facing the Company. The results of
these reviews were in turn utilised in developing
the Committee’s recommendations regarding
potential Board appointments as well as for
continuation in office and reappointment of
retiring Directors.
After giving consideration to Board structure and
composition, evaluations, time commitments,
length of service, individual contributions,
refreshment and the requirements of the Board,
the Committee recommended that each of the
retiring Directors offering to stand for
reappointment be proposed by the Board at the
forthcoming AGM.
Process for Board Appointments
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
and attributes 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, which are to be made on merit,
against objective criteria and with due regard for
the benefits of diversity, are submitted for full
Board approval. The Company Secretary facilitates
induction upon appointment.
The Committee successfully conducted a search
utilising this process in 2011 to identify
independent candidates who could refresh and
add value to the Board through complementary
skills and attributes following the retirement of Mr
Peter Kingston and Mr Martin Roberts at the 2011
AGM, which resulted in the appointment of Mr
Michael Johns in June 2011. Mr Johns not only
brings a wide range of valuable skills to the Board,
he additionally provides specific complementary
expertise in particular through his background as a
senior lawyer specialising in the oil and gas sector.
Mr Johns has been appointed Senior Independent
Director, Chairman of the Remuneration
Committee and a member of the Audit and
Nominations Committees. Following a period of
induction and assimilation the Board will continue
planning for succession, again seeking to benefit
from refreshment while maximising continuity
of experience.
Performance Evaluation
During 2011, the Committee led the Board in
evaluating its own performance and that of its
Committees and individual Directors. The
evaluation was externally facilitated in confidence
by a firm that has provided secretariat and
governance advice to the Company. The evaluation
entailed both detailed questionnaires and
interviews. The external facilitator sought
evaluation of the Board and its effectiveness as a
whole, but with an emphasis on the critical issues
the Board will face in the next three to five years
and with increased scrutiny in areas including
Director independence, the approach to gender
diversity, and Directors’ training. The Directors
expressed an appreciation for the fresh
perspective and new insight brought about by the
externally facilitated process.
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, and the Chairman led
discussions with the Committee and the full Board
regarding the results. The Senior Independent
Director facilitated relevant discussions regarding
the role of the Chairman. The results included a
commitment by the Board to continue its primary
focus on corporate strategy. The Board confirmed
its commitment to a rigorous process for the
SOCO International plc
Annual Report and Accounts 2011 57
CORpORAte
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continued
assessment of independence, and is satisfied it
has led to an appropriate designation of
independent Directors. The Board established a
focus on gender diversity as a matter of priority in
future recruitment, and management committed to
provide more detailed and regular reporting to the
Board on the Company’s extensive social
programmes. Actions for improvement are being
undertaken as deemed appropriate, with effect
from the March 2012 Board meeting. Additionally,
the evaluation results were utilised to assess
Director effectiveness, time commitments of
Non-Executive Directors and training and
development needs of each Director, which were
reviewed by the Chairman. The Committee
performed a review of its TOR as part of this
process.
Remuneration Committee
The Remuneration Committee is chaired by Mr
Michael Johns (appointed 23 June 2011), the
Senior Independent Non-Executive Director.
Remaining Committee membership comprises
independent Non-Executive Director Ambassador
António Monteiro, who served throughout 2011,
and Dr Mike Watts, who was appointed following
the review conducted in December 2011.
Messrs Olivier Barbaroux and Robert Cathery
stood down as members and were appointed as
Advisors in December 2011. The names and
qualifications of each of the members are set out
on pages 44 and 45. The Committee is
responsible for recommending for approval by the
full Board the remuneration of the Chairman, the
Executive Directors and the Company Secretary.
During 2011, the Committee conducted a review
of its TOR for continued effectiveness. Details of
the Committee’s policies and objectives are set
out in the Directors’ Remuneration Report on
pages 59 to 67.
Meeting Attendance by Directors
Board Meeting
Audit Committee
Meeting
Remuneration
Committee Meeting
Nominations
Committee Meeting
Annual General
Meeting
R de Sousa
M Johns
P Kingston
O Barbaroux
R Cagle
R Cathery
E Contini
A Monteiro
J Norton
M Roberts
E Story
M Watts
Denotes 2011 scheduled meeting attended
Denotes 2011 scheduled meeting not attended
Denotes 2011 no meeting scheduled or not a member
Denotes 2012 scheduled meeting attended
Denotes 2012 no meeting scheduled or not a member
58
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dIReCtORS’ RemuneRAtIOn
RepORt
HOW We ReWARd OuR
SenIOR mAnAgement
And bOARd OF
dIReCtORS
Dear Shareholders
On behalf of the Board, I am pleased to present
the remuneration report for the financial year
ended 31 December 2011.
During 2011, the Committee concluded that the
current arrangements continued to be effective
in achieving these aims. Key decisions regarding
remuneration policy were as follows:
Performance of the Company
2011 has been an exceptional year for SOCO,
having achieved the long term goal of
commercialising the TGT field through first oil in
August 2011. The Committee considers this to
be the most important event in the Company’s
history. It has transformed the financial position
(as shown in our results) and offers the prospect
of significant cash generation, from the
Company’s own exploration success, to fund
future exploration in accordance with SOCO’s
business strategy. Other key highlights are set
out within this report.
Incentive out-turns
• Annual bonus. The maximum amount (100%
of salary for Executive Directors) was awarded
for performance during 2011.
• Long term incentive plan. 53% of the
potential maximum has vested in respect of
LTIP awards made in January 2009. This
reflects TSR performance against the
comparator group of between median and
upper quartile in the three year period to
January 2012.
Executive remuneration policy
The Committee regularly reviews executive
remuneration arrangements to ensure that they
remain aligned with the interests of shareholders
and the overall business strategy. It also continues
to be mindful of the prevailing economic and
executive remuneration environment when
assessing the remuneration framework.
• Salary increases of 5%. Executive Directors’
salaries were frozen for 2011 and will be
increased by 5% for 2012. This increase takes
into account both inflation and increases
across the wider employee population.
• No increase in annual or long term
incentive opportunity. The Committee
believes it continues to have an appropriate
mix between fixed and variable remuneration,
and that the annual and long term incentive
maxima also remain appropriate.
• Introduction of shareholding guideline.
Executive Directors are now required to build
up a minimum shareholding equivalent to their
annual salary, to ensure further commitment
to shareholder alignment and long term
stewardship. Both Executive Directors hold,
and continue to build, significant shareholdings
in the Company.
The Committee continues to monitor corporate
governance and best practice developments in
the executive remuneration environment and will
incorporate further best practice features as
appropriate. The Committee also takes an active
interest in shareholder views and the voting on
the remuneration report, and looks forward to
receiving your support at the AGM.
Michael Johns
Remuneration Committee Chairman
The Directors’ Remuneration Report has been
prepared in accordance with Schedule 8 of the
Accounting Regulations under the Companies Act
2006 and the Listing Rules of the Financial Services
Authority. The disclosures contained in this report
that are specified for audit by the regulations and are
covered in the scope of the Independent Auditors’
Report on page 71, are separately identified below
and (where relevant) are presented in US dollars
consistent with the Group’s audited financial
statements. A resolution to approve the report will
be proposed at the forthcoming Annual General
Meeting (AGM).
The Company has complied throughout the period
with the provisions relating to Directors’
remuneration set out in the UK Corporate
Governance Code (the Code), and has applied the
principles set out in the Code as described below.
Remuneration Committee
A
The Remuneration Committee currently
comprises the following Non-Executive Directors:
• Chairman: Michael Johns (appointed 23 June
2011), who is also the Senior Independent
Non-Executive Director.
• Members: Ambassador António Monteiro (served
throughout 2011) and Dr Mike Watts (appointed
December 2011).
Peter Kingston served as Remuneration Committee
Chairman during the year until he retired from the
Board on 23 June 2011. In addition, Messrs Olivier
Barbaroux and Robert Cathery stood down as
members of the Committee during December 2011
but will still be invited to attend meetings and provide
guidance to the Committee where appropriate.
Mr Rui de Sousa (SOCO Chairman) also attends
meetings and provides guidance where appropriate.
The current composition of the Committee was
determined following a review in December 2011 of
each of the Company’s committees, which is more
fully described in the Corporate Governance Report
on pages 51 to 58 and was intended to ensure
optimum utilisation of competencies on the Board
while maintaining a balance between the benefits of
refreshment and continuity. Additional information
regarding the Committee is also contained in
that report.
SOCO International plc
Annual Report and Accounts 2011 59
dIReCtORS’ RemuneRAtIOn
RepORt
continued
The Board is keenly aware of its duty to ensure, on
behalf of shareholders, that the Committee is wholly
independent. All members and advisors 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 a shareholder, in the matters
delegated to the Committee. No Director plays a role
in deciding his own remuneration.
The Committee is responsible for determining and
agreeing with the full Board a Company-wide
remuneration policy that is aligned with the
Company’s business strategy and ultimately 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 the Company Secretary. The
Committee also monitors the remuneration practices
and trends throughout the Group’s internationally
based workforce, including 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,
with particular attention being given to the
challenges represented by the current economic
environment.
In discharging its duties during the year, the
Committee consulted with the other Non-Executive
Directors, and its proposals were approved by the
full Board. In particular, the Committee has sought
advice as it considers appropriate from Mr Rui de
Sousa. As a significant shareholder, he provides the
Committee with a valuable insight into likely
shareholder concerns around executive
remuneration. The Committee also consulted with
the Chief 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 LLP (Deloitte), who have voluntarily signed
up to the Remuneration Consultants’ Code of
Conduct, were independently retained by the
Committee as advisors following a tender process. In
the year they 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. 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 51 to 58. 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 to ensure it is not material to the assessment
of independence. 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. The Committee is satisfied that the
remuneration advice it receives from Deloitte
is independent.
Remuneration Policy
b
The policies described in this report have been
applied throughout 2011. The Committee monitors
remuneration policies on a continuing basis including
consideration of evolving market practice and
relevant guidance; shareholder views and results of
previous voting; policies applied to the wider
employee base; and with due regard to the current
economic climate. Any proposed change which is
material is only implemented following a full review
and approval process deemed appropriate to such
change. Where appropriate, shareholders would
also be consulted about any change in
remuneration policy.
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 for building
shareholder value. It is the Committee’s objective to
attract, motivate and retain high calibre executives
through market competitive remuneration that is
appropriate to those individuals’ positions,
experience and value to the Company.
The Committee aims to design remuneration
packages with significant performance related
elements 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. Within this broad framework,
the Committee takes particular care to ensure that
remuneration is designed to promote the long term
success of the Company and does not reward
excessive risk taking or failure.
Executive Directors
The Committee reviews all aspects of
C
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’ remuneration packages are
periodically benchmarked against competitive
market ranges. During this exercise, the Group’s size
and complexity and relative positioning within those
ranges are taken into account in the context of the
Executive Directors’ critical value to the Company
and demonstrated performance over time.
Benchmarking, which was previously conducted
annually, is generally conducted on a three year
cycle or upon an indication of a change in market
ranges. Results of benchmarking exercises are
monitored for indications of potential unwarranted
upward ratcheting. Pay conditions elsewhere in the
Company are taken into account to ensure the
relationship between the pay of the Company’s
Directors and its employees remains appropriate.
Similar benchmarking techniques are applied to
non-Board employees and the Committee monitors
senior staff remuneration packages during the
review of Executive Directors’ remuneration
packages.
Package Components
d
Executive remuneration comprises a fixed
basic salary and eligibility to receive an annual
performance based cash bonus. Individuals may
also be eligible to receive awards under long term
60
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targets. Portfolio objectives are set regarding
progress towards potential non-core asset
divestitures and new ventures. Corporate strategic
goals, safety and environmental measures and
financial measures against budgeted levels are
additionally established as deemed appropriate.
The performance measures for 2012, including both
financial and non-financial measures which are
compatible with risk policies, are intended to focus
behaviour and activity towards deploying the
Company’s strategy of progressing projects,
capturing their potential and realising value for
shareholders at an appropriate stage. This
emphasises achievements required to grow the
business over the longer term and avoids promoting
excess risk taking to achieve a short term bonus
opportunity. 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. The specific targets set
against these measures are considered to be
commercially sensitive and are therefore not set out
herein. However, we can broadly indicate that
performance measures in 2012 will include goals
associated with continued phases of Vietnam
development and exploitation, progressing the
portfolio and a focus on future implementation of
the corporate strategy. Goals targeting appropriate
stewardship of the Company’s resources in the
current economic environment will continue to be
emphasised. Additionally, objectives over safety
and environmental measures will naturally remain
a priority.
In the 2010 Annual Report, the Committee set out
three areas of emphasis in stating its broad
indication of 2011 performance measures including:
the Te Giac Trang (TGT) development project, being
of major significance to the Company; stewardship
of resources in the current economic environment;
and safety and environmental performance over the
expanding operations. First oil was achieved at TGT
on 22 August, within days of SOCO’s own target and
ahead of the plan approved by partners. Various
setbacks were naturally encountered throughout the
long term project, but were managed within the
SOCO International plc
Annual Report and Accounts 2011 61
incentive plans designed to provide reward linked to
the longer term performance of the Company. At
target performance the Executive Directors’
packages are structured to deliver 60% of the total
package in variable remuneration. At exceptional
performance levels this increases to 80% of the total
package.
Executive Directors are eligible for additional
benefits, including pension benefits, a permanent
health insurance scheme, medical insurance, life
assurance cover, critical illness cover, travel and
expatriate benefits and car benefits.
The table below provides a summary of the key
remuneration elements for Executive Directors.
Basic Salary
Basic salaries for the Executive Directors (who are
both US citizens) are denominated in US dollars,
consistent with the Group’s reporting currency and
the primary currency of Group operations. Basic
salary is fixed at appointment or in relation to
changes in responsibility, and is reviewed annually in
consideration of demonstrated performance.
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 additionally take into consideration
advice from remuneration consultants regarding
relevant current market practice for salary levels and
salary increases, and consideration of how these
have been applied to the wider employee base.
Following the annual review conducted in December
2011, and after considering pay increases for the
general employee population, inflation, the
outstanding contribution made by the individuals and
the exceptional performance of the Company, with
effect from 1 January 2012 each Executive
Director’s base salary has been increased by 5%
(2011 – nil%).
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. The
Remuneration Committee, however, reserves the
right to exercise its discretion and award a bonus
above this maximum amount in the event of truly
exceptional performance in the year, subject to prior
consultation with shareholders appropriate to the
circumstances. In the event of exercising such a
discretion, which to date has not occurred, careful
consideration will be given to how this will be
delivered to participants to ensure alignment with
shareholders. 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 monitored
measures for particular projects may include
specified timetables for seismic, drilling and
construction programmes, drilling success ratios,
discovery targets, reserve levels and production
Key Elements of Executive Remuneration
Element
Commentary
Salary
Bonus
Long term
incentive plan
(LTIP)
Shareholding
requirements
Service contracts
For 2012, Executive Director salary increases are 5% (2011: nil), in line with
inflation and increases for the general employee population.
Maximum annual opportunity of 100% of salary, target of 50% of salary, based on
individual and corporate targets related to the achievement of strategic objectives.
LTIP renewed at our 2011 AGM.
Annual awards of up to 200% of salary (2011: 190% of salary).
Performance based on relative TSR: 25% (2011: 30%) of award vests for median
performance and 100% vests for performance in the 84th percentile.
Shareholding requirement of one x salary for all Executive Directors.
Notice periods do not exceed 12 months and a policy of mitigation applies in
respect of any termination payments.
dIReCtORS’ RemuneRAtIOn
RepORt
continued
aggressive timetable. Project costs were stewarded
in line with partner budgets. The project was
administered under strict health and environmental
safety procedures, and no lost time injuries (LTIs)
were reported throughout the full life of the
multi-year project. A record of zero LTIs or
environmental incidents was additionally achieved on
all producing, drilling and development operations
undertaken on our projects worldwide during 2011.
Plateau production targets will only be tested
through implementation of an agreed field
production and reservoir management plan, but
will only be a consideration in future bonus awards if
not met.
Corporate goals focused on protecting a strong
financial standing and ensuring appropriate funding
for the Group’s programmes, in particular in the lead
up to first oil at TGT. The measure of performance is
evidenced by the year end cash position of over
$160 million, reflecting cash flows from operations,
net of capital expenditures and repurchases of the
Company’s own bonds and shares. Bonds with a par
value of $35.4 million were repurchased at a gain
and cancelled, reducing debt and related future
interest obligations. The repurchase of 1.5 million
treasury shares was deemed to be at favourable
market rates and will increase earnings per share. In
addition, an extension was obtained for the Te Giac
Den licence in Vietnam, and evaluation of that
licence as well as the Group’s Africa licences has
progressed through two seismic programmes and a
two well drilling programme. Although the drilling did
not result in a commercial discovery, the Committee
considered this to be far outweighed by the
significance of achieving first oil at TGT, which the
Committee considers the most significant event in
the history of the Company.
In two of the last three years the Committee has
reported that, despite its measured performance
against goals, actual bonus awards were scaled
back. While this practice was not applied to the
wider employee base, it was considered appropriate
to emphasise a commitment to the alignment of
Executive Directors with shareholders. The
Committee believes a 2011 bonus award at the
maximum policy opportunity of 100% is consistent
with this commitment, in consideration of the
performance reported above and in particular the
long term objective of first oil at TGT coming to
fruition, manifesting the creation of shareholder
value from the largest project in the Company’s
history, and thus ensuring financial stability during a
time of utmost importance.
Long Term Incentive Plans
SOCO’s long term incentive plan (LTIP) was
approved by shareholders at the 2011 AGM,
replacing a previous plan which terminated in May
2011 (without prejudice to the subsisting
participants). Participation in the Company’s LTIP is
discretionary and determined in consideration of
corporate and individual performance. Awards 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 generally not exceed 200% of the
executive’s base salary. The Committee has
discretion, which has not been exercised, to exceed
this limit if deemed justified in exceptional
circumstances up to 400% of base salary. The LTIP
is intended to provide a continued mechanism for
motivating and retaining Executive
Directors and senior staff members in a way that is
aligned with shareholders’ interests. In 2011, a
number of best practice features were introduced:
the threshold vesting level was reduced to ensure
that potential rewards are not excessive and targets
remain sufficiently stretching; and the plan now
contains a malus provision under which the
Committee may reduce the number of shares
subject to a participant’s subsisting awards.
An employee benefit trust currently holds sufficient
SOCO shares to satisfy all shares conditionally
awarded under the current and previous 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. In line with corporate governance
guidelines, the aggregate number of new issue
shares which may be subject to awards under all
relevant executive share schemes shall not exceed
5% of the ordinary share capital of the Company in
any rolling 10 year period. Accordingly, at 31
December 2011, 17.0 million new issue shares
(2010 – 17.0 million) may be subject to awards, of
which there is available capacity remaining of 11.6
million shares (2010 – 11.4 million).
At the date of grant of an award, the Committee sets
appropriate performance criteria and measures
these accordingly on the third anniversary of the
date of grant to determine the portion of the award
vesting. 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. When setting award
levels, the stretch of performance targets is taken
into account to ensure that projected total
compensation opportunity at assumed levels of
share price growth is market competitive. 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.
The Remuneration Committee’s selection of
performance criteria is kept under review to ensure
these measures remain appropriate to SOCO’s
circumstances and strategy, and most effectively
support the delivery of value creation over time.
While the Committee has taken into account the
potential impact of market volatility and other
potential shortcomings of a relative total shareholder
return (TSR) measure, it continues to provide the
primary basis for determining the value generated
for shareholders over the longer term. Furthermore,
it is the primary indicator of the Company’s overall
corporate performance. The Committee also
believes that underpinning TSR results by reference
to the Group’s oil and gas reserves, a key business
metric, provides an appropriate complement for
considering that relative TSR is a genuine reflection
of underlying performance. Accordingly, no change
to the performance measure is proposed, as the
Company’s long term goals remain unchanged and
the Committee considers it will continue to align
most closely the executives’ interests to those of
shareholders. Performance targets for awards to
date 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 achievement of actual
underlying financial and operational performance of
the Company will also be considered by the
Committee. For awards to date, this shall primarily
be assessed, on the basis of appropriate external
advice, in terms of the additions to and the
62
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Share Option Plan
The SOCO 2009 Discretionary Share Option Plan
(the Plan) is intended to provide flexibility in
motivating and retaining senior staff members. No
awards have been granted under the Plan. There is
no current intention for Executive Directors to
participate.
Pension Contributions
The Company contributes 15% of salary each year in
respect of the Executive Directors’ pension benefits,
which has been delivered as contributions to a
money purchase plan up to scheme limits and a
cash supplement. No changes in contribution levels
are currently contemplated.
Other Policies
With prior approval of the Board, Executive
e
Directors are allowed to accept non-executive
appointments on other boards and to retain the
associated directors’ fees. Under this policy Mr Ed
Story serves on the board of Cairn India Limited for
which he retained associated fees for 2011 in the
amount of $2,300. Mr Roger Cagle serves on the
board of Vostok Energy Limited and previously
served on the board of Dominion Petroleum Limited
and retained associated fees for 2011 in the amount
of £40,000.
Shareholding requirement
During 2011, the Board formalised a policy
requiring Executive Directors to build up a minimum
shareholding equivalent to their annual salary.
This is intended to emphasise a commitment to the
alignment of Executive Directors with shareholders
and a focus on long term stewardship. The current
Executive Directors have held, and continue to build,
a meaningful shareholding since founding the
Company in 1997.
Non-Executive Directors
F
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. After review of these
factors, the annual fees payable to the Senior
Independent Director and the Non-Executive
Directors were set at £50,000 from appointment
and £45,000 with effect from 1 January 2012,
respectively. Annual fees for services payable to the
Chairman remain unchanged from those rates
reflected in the table on page 65. 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
g
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 contracts do
not contain specific termination provisions. 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
management and quality of the Group’s oil and gas
reserves in view of goals set by the Board. The
Committee will continue to monitor whether TSR is
the measure which best aligns long term awards to
shareholder value.
In consideration of corporate and individual
performance, along with the intent to retain and
motivate with an appropriate level of reward clearly
focused on long term stability, discretionary awards in
2011 were granted over shares with a market value of
190% of base salary. The TSR comparator group for
awards made in respect of the periods between 2009
and 2011 is set out in the table below.
Measurement of the Company’s performance
criteria is carried out with reference to external data
sources provided by the Committee’s remuneration
advisors to ensure its independence. No award will
vest if the TSR ranking is the median. The vesting
schedule is set out in the table below.
Following measurement of the Company’s
performance against the comparator group for
awards granted in January 2009, 53% of the
awards have been declared vested. After careful
consideration, the Committee is satisfied that the
performance criteria measurement has resulted in a
vesting level appropriate to the underlying
performance of the Company over the performance
period. Those awards not declared vested
have lapsed.
Further details of incentive share awards are set out
in the table on page 66 and in Note 28 to the
financial statements. Charges which have been
reflected in the Group’s income statement in respect
of incentive schemes are set out in Note 28 to the
financial statements.
LTIP Comparator Group
Comparator Companies
LTIP Vesting Schedule
TSR Performance
Below median
Vesting
No vesting
Afren
Gulfsands Petroleum
Newfield Exploration ROC Oil
Bowleven
Hardy Oil and Gas
Nexen
Salamander Energy
Median (50th percentile)
25% of the award vests
Cairn Energy
Heritage Oil
Niko Resources
Santos
Coastal Energy
JKX Oil and Gas
Oil Search
SOCO
Dana Petroleum* Lundin Petroleum
Premier Oil
Sterling Energy
DNO International Maurel & Prom
Regal Petroleum
Talisman Energy
Pro-rating applies between these points and between ranking
positions, to more closely reflect SOCO’s TSR performance relative
to the next highest and lowest comparators.
Upper 16th (84th percentile)
100% of the award vests
Enquest**
*through 2010 **from 2011
Tullow Oil
SOCO International plc
Annual Report and Accounts 2011 63
dIReCtORS’ RemuneRAtIOn
RepORt
continued
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 Annual
Report of the Directors on page 48.
Directors’ Transactions
H
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 March 2008, the Company, through its Group
subsidiary, entered into a production sharing
contract over Block V, located in eastern DRC.
Mr Roger Cagle served as Non-Executive Chairman
of Dominion Petroleum Limited, one of the
co-venturers, until February 2012.
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 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 17 of
the financial statements. The Group has entered into
a consulting agreement, which is terminable by
either party on 30 days’ written notice, 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.
Pursuant to warrants to subscribe for the same
number of ordinary shares in the Company, which
had been acquired under the terms of the 1999
transaction described above (Warrants), during 2010
a connected party to Mr Rui de Sousa exercised
Warrants over 6,036,804 ordinary shares at a
weighted average market price of £3.99, resulting in
a gain of £23.2 million on exercise. During 2011, no
Warrants were held and no exercises were made.
Total Shareholder Return
SOCO Cumulative change
FTSE Oil & Gas Index Cumulative change
%
60
40
20
0
-20
2006
2007
2008
2009
2010
2011
Year End
Source: Datastream
Note: This graph illustrates five year TSR performance
against the FTSE Oil & Gas Index and therefore does not
represent either the comparator group or time period
against which performance is assessed under the LTIP.
64
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I Directors’ Remuneration Report Tables
Director’s Emoluments (Audited)
Executive Directors
E Story
R Cagle
Non-Executive Directors 2
R de Sousa
M Johns 3
P Kingston 3,4
O Barbaroux
R Cathery
E Contini
A Monteiro
J Norton
M Roberts 3
M Watts
Fees/basic
salary
$000’s
Benefits
in kind1
$000’s
Annual
bonus
$000’s
Total
2011
$000’s
838
629
289
42
50
64
64
64
64
64
31
64
56
99
838
629
1,732
1,357
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
289
42
50
64
64
64
64
64
31
64
Total
2010
$000’s
1,102
876
232
–
100
62
62
62
62
62
62
62
Aggregate emoluments
2,263
155
1,467
3,885
2,744
1 Benefits include medical insurance, permanent health insurance, life assurance cover, critical illness cover, travel and expatriate benefits and car benefits.
2 Non-Executive Directors’ fees are set in GB pounds and are reported in US dollars at the annual average exchange rate.
3 Emoluments paid to M Johns, P Kingston and M Roberts are in proportion to their dates of service.
4 Emoluments receivable by Mr Peter Kingston were paid to Peter Kingston & Associates.
No directors received amounts as compensation for loss of office as a Director during the year.
Directors’ Pension Entitlements (Audited)
Money purchase contributions or cash supplements where appropriate in respect of the Executive Directors were as follows:
E Story
R Cagle 1
1 In 2010, in addition to this, $0.5 million of Mr Roger Cagle’s basic salary was paid as an employer contribution to a retirement benefit plan.
2011
$000’s
2010
$000’s
126
94
220
126
94
220
SOCO International plc
Annual Report and Accounts 2011 65
dIReCtORS’ RemuneRAtIOn
RepORt
continued
Directors’ Incentive Share Awards (Audited)
Details of Directors’ options or rights to acquire ordinary shares in the Company are as follows:
E Story
LTIP1
R Cagle
LTIP1
As at
1 Jan 2011
Granted/
Awarded
Exercised
Lapsed
As at
31 Dec 2011
Date
potentially
exercisable 2
Expiry date
257,600
288,800
277,600
–
–
–
–
344,000
193,200
216,400
208,200
–
–
–
–
258,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
257,600
288,800
277,600
344,000
07.01.12
3
17.12.12
10.12.13
09.12.14
193,200
216,400
208,200
258,000
07.01.12
3
17.12.12
10.12.13
09.12.14
–
–
–
–
–
–
–
–
1 Additional details regarding the LTIP are set out within this report.
2 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
ordinary shares under option (or equivalent shareholding requirements).
3 Following measurement of the Company’s performance against the comparator group for awards potentially exercisable from 7 January 2012, 53% of the awards have been declared vested.
Those awards not declared vested have lapsed.
The market price of the ordinary shares at 31 December 2011 was £2.926 and the range during the year to 31 December 2011 was £2.78 to £4.00.
66
SOCO International plc
Annual Report and Accounts 2011
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Directors’ Interests
The Directors who held office at 31 December 2011 had the following interests (all of which were beneficial except as noted below) in the ordinary shares in
the Company and contingent rights or options to acquire ordinary shares (Options) at 31 December 2011:
Executive Director
E Story
R Cagle2
Non-Executive Director
R Sousa3
M Johns
O Barbaroux
R Cathery
E Contini
A Monteiro
J Norton
M Watts4
Number of Shares
Number of Options1
2011
2010
2011
2010
12,856,794
12,856,794
1,168,000
824,000
8,617,916
8,617,916
1,472,900
1,039,000
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9,008,820
8,908,820
10,000
88,000
400,000
220,000
–
–
88,000
400,000
220,000
–
460,000
460,000
77,291
72,670
–
–
–
–
–
–
–
–
S
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–
–
–
–
–
–
–
–
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 At 31 December 2011, Mr Roger Cagle’s interests included 3,139,439 ordinary shares (2010 – 3,139,439) and 597,100 Options (2010 – 421,200) held by Ms Cynthia Cagle, the Options
having been granted to her in respect of her services to the Group.
3 300,000 ordinary shares (2010 – 200,000) are held by Mr Rui de Sousa personally.
8,708,820 ordinary shares (2010 – 8,708,820) are held by Palamos Limited, a connected person to Mr de Sousa.
4 Subsequent to 31 December 2011, Dr Mike Watts bought 1,495 SOCO ordinary shares, which were acquired on the open market pursuant to a trading plan entered into on
29 September 2009.
Whilst the Executive Directors, as potential beneficiaries, are technically deemed to have an interest in all ordinary shares held by the SOCO Employee
Benefit Trust (Trust), the table above only includes those ordinary 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 26 to
the financial statements.
There have been no other changes in the interests of the Directors between 31 December 2011 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 13 March 2012 and signed on its behalf by:
Michael Johns
Remuneration Committee Chairman
SOCO International plc
Annual Report and Accounts 2011 67
FInAnCIAl
StAtementS
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Operating profit arising
from continuing production
operations for 2011 was
$156.9 million versus
$29.1 million in 2010.
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2011 FInAnCIAl
StAtementS
tHe FInAnCIAl StAtementS HAve
been pRepARed In ACCORdAnCe WItH
InteRnAtIOnAl FInAnCIAl RepORtIng
StAndARdS And On A gOIng COnCeRn bASIS
Left:
Right:
Neil Gibson,
Manager, Group Reporting,
Taxation & Treasury
Robert Harris,
Corporate Financial
Controller
Financial Statements
Independent Auditor’s Report
Consolidated Income Statement
Statements of Comprehensive Income
Balance Sheets
Statements of Changes in Equity
Cash Flow Statements
Notes to the Consolidated Financial Statements
Five Year Summary
p71
p72
p73
p74
p75
p76
p77
p96
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SOCO International plc
Annual Report and Accounts 2011
Independent AudItOR’S RepORt tO tHe
membeRS OF SOCO InteRnAtIOnAl plC
We have audited the financial statements
of SOCO International plc for the year ended
31 December 2011 which comprise the Group
Income Statement, the Group Statement of
Comprehensive Income, the Group and parent
Company Balance Sheets, the Group and parent
Company Statements of Changes in Equity
and the Group and parent Company Cash Flow
Statements and the related notes 1 to 33. The
financial reporting framework that has been
applied in their preparation is applicable law
and International Financial Reporting Standards
(IFRSs) as adopted by the European Union
and, as regards the parent Company financial
statements, as applied in accordance with
the provisions of the Companies Act 2006.
This report is made solely to the Company’s
members, as a body, in accordance with
Chapter 3 of Part 16 of the Companies Act 2006.
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
auditor’s report and for no other purpose. To the
fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than
the 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 Auditor
As explained more fully in the Directors’
Responsibilities Statement, the Directors are
responsible for the preparation of the financial
statements and for being satisfied that they
give a true and fair view. Our responsibility is
to audit and express an opinion on the financial
statements in accordance with applicable law
and International Standards on Auditing (UK and
Ireland). Those standards require us to comply
with the Auditing Practices Board’s Ethical
Standards for Auditors.
Scope of the Audit of the Financial Statements
An audit involves obtaining evidence about
the amounts and disclosures in the financial
statements sufficient to give reasonable
assurance that the financial statements are free
from material misstatement, whether caused by
fraud or error. This includes an assessment of:
whether the accounting policies are appropriate
to the Group’s and the parent Company’s
circumstances and have been consistently
applied and adequately disclosed; the
reasonableness of significant accounting
estimates made by the Directors; and the
overall presentation of the financial statements.
In addition, we read all the financial and
non-financial information in the annual report
to identify material inconsistencies with the
audited financial statements. If we become
aware of any apparent material misstatements
or inconsistencies we consider the implications
for our report.
Opinion on Financial Statements
In our opinion:
• the financial statements give a true and fair
view of the state of the Group’s and of the
parent Company’s affairs as at 31 December
2011 and of the Group’s profit for the year
then ended;
• the Group financial statements have been
properly prepared in accordance with IFRSs
as adopted by the European Union;
• the parent Company financial statements
have been properly prepared in accordance
with IFRSs as adopted by the European
Union and as applied in accordance with the
provisions of the Companies Act 2006; and
• the financial statements have been prepared
in accordance with the requirements of the
Companies Act 2006 and, as regards the
Group financial statements, Article 4 of the
IAS Regulation.
Opinion on Other Matters Prescribed
by the Companies Act 2006
In our opinion:
• the part of the Directors’ Remuneration
Report to be audited has been properly
prepared in accordance with the Companies
Act 2006; and
• the information given in the Directors’ Report
for the financial year for which the financial
statements are prepared is consistent with
the financial statements.
Matters on Which we are Required
to Report by Exception
We have nothing to report in respect of
the following:
Under the Companies Act 2006 we are required
to report to you if, in our opinion:
• adequate accounting records have not been
kept by the parent Company, or returns
adequate for our audit have not been received
from branches not visited by us; or
• the parent Company financial statements
and the part of the Directors’ Remuneration
Report to be audited are not in agreement
with the accounting records and returns; or
• certain disclosures of Directors’ remuneration
specified by law are not made; or
• we have not received all the information and
explanations we require for our audit.
Under the Listing Rules we are required to review:
• the Directors’ statement, contained within
the Annual Report of the Directors, in relation
to going concern;
• the part of the Corporate Governance
Statement relating to the Company’s
compliance with the nine provisions of the
UK Corporate Governance Code specified
for our review; and
• certain elements of the report to shareholders
by the Board on Directors’ remuneration.
Bevan Whitehead
(Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
13 March 2012
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SOCO International plc
Annual Report and Accounts 2011 71
COnSOlIdAted InCOme StAtement
for the year to 31 December 2011
Continuing operations
Revenue
Cost of sales
Gross profit
Administrative expenses
Operating profit
Investment revenue
Other gains and losses
Finance costs
Profit before tax
Tax
Profit for the year from continuing operations
Discontinued operations
Operating profit from discontinued operations
Other gains and losses on discontinued operations
Finance costs from discontinued operations
Profit on disposal
Profit before tax from discontinued operations
Tax
Profit for the year from discontinued operations
Profit for the year
Earnings per share (cents)
From continuing operations
From discontinued operations excluding profit on disposal
From profit on disposal
Basic
From continuing operations
From discontinued operations excluding profit on disposal
From profit on disposal
Diluted
72
SOCO International plc
Annual Report and Accounts 2011
Notes
2011
$000’s
2010
$000’s
5, 6
234,156
(67,789)
166,367
(9,422)
48,390
(12,395)
35,995
(6,858)
156,945
29,137
5
7
8
1,080
3,298
(2,684)
1,301
938
(525)
6
6, 11
158,639
(70,046)
30,851
(18,548)
88,593
12,303
12
7
8
6
6, 11
14
–
–
–
–
–
–
–
36,473
1,067
(53)
80,116
117,603
(28,474)
89,129
88,593
101,432
26.4
–
–
26.4
26.3
–
–
26.3
3.8
2.7
24.4
30.9
3.5
2.5
22.4
28.4
COnSOlIdAted StAtement OF COmpReHenSIve InCOme
for the year to 31 December 2011
Profit for the year
Unrealised currency translation differences
Total comprehensive income for the year
Notes
2011
$000’s
2010
$000’s
88,593
4,215
92,808
101,432
(5,538)
95,894
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SOCO International plc
Annual Report and Accounts 2011 73
bAlAnCe SHeetS
as at 31 December 2011
Non-current assets
Intangible assets
Property, plant and equipment
Investments
Financial asset
Current assets
Inventories
Trade and other receivables
Tax receivables
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Tax payable
Net current assets (liabilities)
Non-current liabilities
Convertible bonds
Deferred tax liabilities
Long term provisions
Total liabilities
Net assets
Equity
Share capital
Share premium account
Other reserves
Retained earnings
Total equity
Notes
2011
$000’s
Group
2010
$000’s
Company
2010
$000’s
2011
$000’s
15
16
17
18
20
21
22
23
19
24
25
26
27
193,102
793,565
–
40,617
144,256
692,979
–
37,448
–
44
627,152
–
–
116
532,460
–
1,027,284
874,683
627,196
532,576
10,230
79,859
467
160,075
16,405
24,377
334
260,438
250,631
301,554
–
530
241
2,637
3,408
–
503
134
114,362
114,999
1,277,915
1,176,237
630,604
647,575
(49,481)
(13,527)
(63,008)
187,623
(45,871)
(2,013)
(47,884)
253,670
(3,555)
(90)
(3,645)
(237)
(1,295)
(94)
(1,389)
113,610
(46,572)
(37,540)
(32,749)
(77,968)
(24,073)
(13,095)
–
–
–
–
–
–
(116,861)
(179,869)
(115,136)
(163,020)
–
(3,645)
–
(1,389)
1,098,046
1,013,217
626,959
646,186
27,544
72,721
140,747
857,034
27,534
72,622
149,205
763,856
27,544
72,721
93,762
432,932
27,534
72,622
100,592
445,438
1,098,046
1,013,217
626,959
646,186
The financial statements were approved by the Board of Directors on 13 March 2012 and signed on its behalf by:
Rui de Sousa
Chairman
Roger Cagle
Director
74
SOCO International plc
Annual Report and Accounts 2011
StAtementS OF CHAngeS In equIty
for the year to 31 December 2011
Called up
share capital
$000’s
Notes
Share
premium
account
$000’s
Other
reserves
(see Note 26)
$000’s
Retained
earnings
(see Note 27)
$000’s
As at 1 January 2010
New shares issued
Share-based payments
Transfer relating to share-based payments
Transfer relating to convertible bonds
Transfer relating to the unwinding of discount on redeemed bonds
Unrealised currency translation differences
Retained profit for the year
As at 1 January 2011
New shares issued
Purchase of own shares into treasury
Share-based payments
Transfer relating to convertible bonds
Equity component of repurchased and cancelled bonds
Unrealised currency translation differences
Retained profit for the year
As at 31 December 2011
24,451
3,083
–
–
–
–
–
–
27,534
10
–
–
–
–
–
–
27,544
25
28
23
71,077
1,545
–
–
–
–
–
–
72,622
99
–
–
–
–
–
–
11,317
159,047
(9,612)
(1,431)
(2,022)
(8,086)
(8)
–
149,205
–
(6,829)
975
(370)
(2,211)
(23)
–
656,423
–
–
1,431
2,022
8,086
(5,538)
101,432
763,856
–
–
–
370
–
4,215
88,593
72,721
140,747
857,034
1,098,046
Group
Total
$000’s
763,268
163,675
(9,612)
–
–
–
(5,546)
101,432
1,013,217
109
(6,829)
975
–
(2,211)
4,192
88,593
Called up
share capital
$000’s
Notes
Share
premium
account
$000’s
Other
reserves
(see Note 26)
$000’s
As at 1 January 2010
New shares issued
Unrealised currency translation differences
Retained loss for the year
As at 1 January 2011
New shares issued
Purchase of own shares into treasury
Unrealised currency translation differences
Retained loss for the year
As at 31 December 2011
24,451
3,083
–
–
27,534
10
–
–
–
27,544
71,077
1,545
–
–
72,622
99
–
–
–
72,721
25
13
(58,447)
159,047
(8)
–
100,592
–
(6,829)
(1)
–
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Total
$000’s
510,083
163,675
(21,694)
(5,878)
646,186
109
(6,829)
(4,572)
(7,935)
Retained
earnings
$000’s
473,002
–
(21,686)
(5,878)
445,438
–
–
(4,571)
(7,935)
93,762
432,932
626,959
SOCO International plc
Annual Report and Accounts 2011 75
CASH FlOW StAtementS
for the year to 31 December 2011
Net cash from (used in) operating activities
Investing activities
Purchase of intangible assets
Purchase of property, plant and equipment
Decrease in liquid investments
Investment in subsidiary undertakings
Proceeds on disposal of subsidiary
Net cash (used in) from investing activities
Financing activities
Purchase of own shares into treasury
Share-based payments
Repurchase of convertible bonds
Repayment of borrowings
Proceeds on issue of ordinary share capital
Net cash (used in) from financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of foreign exchange rate changes
Cash and cash equivalents at end of year
Notes
2011
$000’s
Group
2010
$000’s
Company
2010
$000’s
2011
$000’s
29
90,183
36,682
(5,697)
(7,191)
12
26
23
23
25
(51,242)
(100,954)
–
–
–
(29,438)
(122,452)
151,954
–
85,867
–
(1)
–
(102,703)
–
–
(77)
–
(25,732)
–
(152,196)
85,931
(102,704)
(25,809)
(6,829)
–
(35,629)
–
109
–
(10,477)
–
(165,949)
163,674
(6,829)
–
–
–
109
–
(10,477)
–
–
163,674
(42,349)
(12,752)
(6,720)
153,197
(104,362)
260,438
3,999
109,861
155,619
(5,042)
(115,121)
114,362
3,396
120,197
240
(6,075)
160,075
260,438
2,637
114,362
76
SOCO International plc
Annual Report and Accounts 2011
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nOteS tO tHe COnSOlIdAted FInAnCIAl StAtementS
01 general information
SOCO International plc is a company incorporated in the United Kingdom under the Companies Act. The address of the registered office is given on page
99. 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
20 to 26 and 28 to 30, respectively.
02 Significant accounting policies
(a) Basis of preparation
The financial statements have been prepared in accordance with, and comply with, International Financial Reporting Standards (IFRS) and on a going
concern basis of accounting for the reasons set out in the Annual Report of the Directors on page 49 and in the Financial Review on page 30. 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 2006 applicable to companies reporting under IFRS. The financial statements have been prepared
under the historical cost basis, except for the valuation of hydrocarbon inventory and the revaluation of certain financial instruments. The financial
statements are presented in US dollars as it is the functional currency of each of the Company’s subsidiary undertakings and is generally accepted
practice in the oil and gas sector. The functional currency of the Company remains GB pounds although its financial statements are presented in US
dollars to be consistent with the Group. The principal accounting policies adopted are set out below.
(b) Adoption of new and revised accounting standards
At the date of authorisation of these financial statements, the following IFRS, International Accounting Standards (IAS), which have not been applied
in these financial statements, were in issue but not yet effective (and in some cases had not yet been adopted by the European Union):
• IFRS 7 (amended) Disclosures – Transfers of Financial Assets
• IFRS 9 Financial Instruments
• IFRS 10 Consolidated Financial Statements
• IFRS 11 Joint Arrangements
• IFRS 13 Fair Value Measurement
• IAS 1 (amended) Presentation of Items of Other Comprehensive Income
The Directors do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the Group in future
periods, except as follows:
• IFRS 9 will impact both the measurement and disclosures of financial instruments
• IFRS 13 will impact the measurement of fair value for certain assets and liabilities as well as the associated disclosures.
Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of these standards until a detailed review has been completed.
(c) 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.
(d) Investments
Except as stated below, non-current investments are shown at cost less provision for impairment. Liquid investments comprise short term liquid investments
of between three to six months’ maturity.
(e) 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.
(f) 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.
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continued
02 Significant accounting policies continued
(g) Revenue
Revenue represents the fair value of the Group’s share of oil and gas sold during the year on an entitlement basis. 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.
(h) 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, interest payable and exchange differences directly
related to financing development projects, are capitalised in separate geographical cost pools.
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 a tangible non-current 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 of three to seven years.
Decommissioning
The decommissioning provision is calculated as the net present value of the Group’s share of the expenditure which is expected to 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.
(i) 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.
(j) Inventories
Inventories, except for inventories of hydrocarbons, are valued at the lower of cost and net realisable value.
Physical inventories of hydrocarbons, which are held for trading purposes, are valued at net realisable value and recorded as inventory. Underlifts and overlifts are
valued at market value and are included in prepayments and accrued income and accruals and deferred income, respectively. Changes in hydrocarbon inventories,
underlifts and overlifts are adjusted through cost of sales.
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(k) 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.
(l) Share-based payments
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.
(m) 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.
(n) 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. The classification of financial instruments as required by IFRS 7 is disclosed in Notes 18, 21, 22 and 23.
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. 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.
Upon redemption of convertible bonds, in accordance with their terms at inception, the carrying amount of the liability is adjusted through the income statement to
match the redemption amount. Where bonds are repurchased in the market, the repurchase cost is allocated between the repurchased liability and the
repurchased embedded option to convert, using the same method described above. The difference between the amount allocated to the liability and the carrying
amount of the liability is recorded in the income statement, and the amount allocated to the repurchase of the embedded option to convert is debited to equity.
SOCO International plc
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continued
02 Significant accounting policies continued
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Equity instruments repurchased are deducted
from equity at cost.
(o) Foreign currencies
The individual financial statements of each Group company are stated in the currency of the primary economic environment in which it operates (its
functional currency). Transactions in currencies other than the entity’s functional currency (foreign currency) are recorded at the rate of exchange at the
date of the transaction. Monetary assets and liabilities denominated in foreign currencies 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.
For the purpose of presenting consolidated financial statements 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.
(p) 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.
03 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 18). 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 and liquid investments over
more than one institution. The level of deposits held by different institutions is regularly reviewed. The Group’s maximum exposure to credit risk as at
31 December 2011 was $277.1 million (2010 – $319.4 million).
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. The impact of a 10% movement in foreign exchange rates on the Group’s net assets as at 31 December 2011 would not have been material
(2010 – $11.0 million) and would not have been material with respect to the Group’s profit in 2011 and 2010.
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’s
ability to satisfy its debt obligations and to pursue its operational objectives are discussed in the Risk Management Report. The Group seeks to minimise
the impact that any debt financings have on its balance sheet by negotiating borrowings in matching currencies (see Note 23). 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, cash equivalents and liquid investments at floating and fixed rates. Fixed rate interest is charged on the Group’s
convertible bonds (see Note 23). The fair value of the Group’s non-current financial asset (see Note 18) is also dependent on the discount rate used.
Management assesses the Group’s sensitivity to changes in interest rates. If interest rates had been 0.5% higher or lower and all other variables held
constant, the Group’s profit for the year ended, and its net assets at, 31 December 2011 would decrease or increase by $2.1 million (2010 – $2.7 million).
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Annual Report and Accounts 2011
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.
Regulatory risk
The Group operates in countries with emerging taxation and other regulatory regimes. The compliance with and interpretation of these taxation and other regulations
may expose the Group to risk. The Group seeks to minimise such risk by using in country professional advisors and by engaging directly with the relevant authorities
where appropriate.
Contractual risk
The Group enters into various contractual arrangements in the ordinary course of its business. Such contracts may rely on provisional information that is subject to
further negotiation at a later date. This may give rise to uncertainty regarding such information. In considering any financial impact on the Group’s financial statements,
income, expenses, assets and liabilities are recognised in accordance with applicable IFRS and IAS.
Capital risk management
The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to stakeholders through the
optimisation of the debt and equity balance. The capital structure of the Group consists of debt (see Note 23), cash and cash equivalents and equity attributable to
equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in Notes 25, 26 and 27 and in the Statement of Changes in Equity.
During the year the Company purchased 1,497,852 of its own ordinary shares, of £0.05 each, into treasury (see Note 26) and repurchased and cancelled convertible
bonds with a par value of $35.4 million (see Note 23).
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04 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:
Oil and gas assets
Note 2(h) describes the judgements necessary to implement the Group’s policy with respect to the carrying value of intangible exploration and evaluation assets and
tangible property, plant and equipment. Management considers these assets for impairment at least annually with reference to indicators in IFRS 6 and IAS 36,
respectively. In particular, capitalised expenditure relating to Block 16-1 in Vietnam is considered to be one cash generating unit due to the level of economic and
management interdependence. Note 15 discloses the carrying value of intangible exploration and evaluation assets and Note 16 discloses the carrying value of
property, plant and equipment. Further, Note 2(h) 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(n) 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 18 and are reviewed at least annually. The only market risk assumption
that has a significant impact on the fair value of this asset is the discount rate, as described in Note 3.
Convertible bonds
Note 2(n) 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(h) describes the nature of the costs that the Group capitalises which include 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 met the definition was that related to the Group’s interests in Vietnam. Consequently, the interest associated
with capital expenditure in Vietnam has been capitalised up to the date at which such qualifying assets entered into production.
(b) Key sources of estimation uncertainty
The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, other than those mentioned above, that may have
a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are discussed below:
Oil and gas reserves
Note 2(h) 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.
Decommissioning provision
The accounting policy for decommissioning is discussed in Note 2(h). The cost of decommissioning is estimated by reference to operators, where applicable, and
internal engineers. Further details are provided in Note 24.
SOCO International plc
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continued
05 total revenue
An analysis of the Group’s revenue is as follows:
Continuing operations
Oil and gas sales (see Note 6)
Investment revenue
Discontinued operations
Oil sales (see Note 6)
06 Segment information
2011
$000’s
2010
$000’s
234,156
1,080
235,236
48,390
1,301
49,691
–
64,660
235,236
114,351
The Group has one principal business activity being oil and gas exploration and production. The Group’s operations are located in South East Asia and
Africa (the Group’s operating segments) and form the basis on which the Group reports its segment information. There are no inter-segment sales.
Oil and gas sales (see Note 5)
Profit (loss) before tax1
Tax charge (see Note 11)
Depletion and depreciation
Oil and gas sales
Profit (loss) before tax1
Tax charge
Depletion and depreciation
Continuing operations
Discontinued
operations
SE Asia
$000’s
Africa3
$000’s
Unallocated
$000’s
Total
$000’s
$000’s
234,156
165,563
70,033
19,298
–
–
–
–
–
(6,924)
13
111
234,156
158,639
70,046
19,409
–
–
–
–
Continuing operations
Discontinued
operations2
SE Asia
$000’s
Africa3
$000’s
Unallocated
$000’s
Total
$000’s
$000’s
48,390
35,487
18,544
5,897
–
–
–
–
–
(4,636)
4
149
48,390
30,851
18,548
6,046
64,660
117,603
28,474
3,732
2011
Group
$000’s
234,156
158,639
70,046
19,409
2010
Group
$000’s
113,050
148,454
47,022
9,778
1 Unallocated amounts included in profit before tax comprise corporate costs not attributable to an operating segment, investment revenue, other gains and losses and finance costs.
2 In September 2010, the Group completed the sale of its Thailand interest which was included in the SE Asia segment and is classified as a discontinued operation. Profit before tax includes
the profit on disposal of $80.1 million (see Note 12).
3 Costs associated with the Africa segment are capitalised in accordance with the Group’s accounting policy.
The accounting policies of the reportable segments are the same as the Group’s accounting policies as described in Note 2.
Included in revenues arising from South East Asia (continuing and discontinued operations) are revenues of $84.5 million, $60.4 million and $29.6 million
(2010 – South East Asia $54.4 million, $34.2 million and $12.5 million) which arose from the Group’s largest individual customers.
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Geographical information
Group revenue and non-current assets (excluding the financial asset) by geographical location are separately detailed below where they exceed 10%
of total revenue or non-current assets, respectively, in any particular year:
Revenue
All of the Group’s revenue is derived from foreign countries. The Group’s revenue by geographical location is determined by reference to the final
destination of oil or gas sold.
Vietnam
China
Malaysia
Japan
South Korea
Thailand
Other
Non-current assets
United Kingdom
Vietnam
Other – Africa
07 Other gains and losses
Change in fair value of financial asset (see Note 18)
Gain on repurchased and cancelled convertible bonds (see Note 23)
Currency exchange loss
Currency exchange gain arising on discontinued operations
08 Finance costs
Interest payable in respect of convertible bonds (see Note 23)
Other interest payable and similar fees
Unwinding of discount on provisions (see Note 24)
Unwinding of discount on provisions arising on discontinued operations
Unwinding of discount on redeemed bonds (see Note 23)
Capitalised finance costs
2011
$000’s
2010
$000’s
61,959
54,885
44,195
25,923
15,934
–
31,260
48,389
–
–
–
19,560
35,922
9,179
234,156
113,050
2011
$000’s
2010
$000’s
44
793,446
193,177
116
692,760
144,359
986,667
837,235
2011
$000’s
2010
$000’s
3,169
270
(141)
–
3,298
1,202
–
(264)
1,067
2,005
2011
$000’s
2010
$000’s
5,958
75
771
–
–
(4,120)
2,684
9,724
64
393
53
8,086
(17,742)
578
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 7.91% (2010 – 13.27%) to the expenditures on the qualifying asset (see Notes 4 and 23).
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continued
09 Auditor’s remuneration
The analysis of the auditor’s remuneration is as follows:
Fees payable to the Company’s auditor and their associates for the audit of the Company’s annual accounts
Fees payable to the Company’s auditor and their associates for other services to the Group:
Audit of the Company’s subsidiaries
Total audit fees
Audit related assurance services
Other assurance services
Corporate finance services
Total non-audit fees
2011
$000’s
2010
$000’s
202
14
216
80
137
–
217
135
17
152
74
27
171
272
The amounts payable to Deloitte LLP by the Group in respect of audit related assurance services comprises $80,000 relating to the Group’s half year
review (2010 – $74,000). Other assurance services includes advisory services relating to remuneration, induction and the Company’s long term incentive
plan in the amount of $76,000 (2010 – $19,000) and agreed upon procedures relating to the Group’s Africa region in the amount of $55,000 (2010 – nil).
Details of the Company’s policy on the use of auditors for non-audit services are set out in the Corporate Governance Report on pages 51 to 58.
Fees payable to Deloitte LLP for non-audit services to the Company are not required to be disclosed separately 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 14 (2010 – 15), of which 12 (2010 – 12) were administrative
personnel and 2 (2010 – 3) were operations personnel. Their aggregate remuneration comprised:
Wages and salaries
Social security costs
Share-based payment expense (see Note 28)
Other pension costs under money purchase schemes
2011
$000’s
6,225
276
975
426
7,902
Group
2010
$000’s
4,474
215
865
421
5,975
In addition to the above, other benefits were provided to employees in the amount of $0.3 million (2010 – $0.3 million). In accordance with the Group’s
accounting policy $3.3 million of the Group’s staff costs above have been capitalised (2010 – $2.2 million).
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11 tax
Current tax
Deferred tax (see Note 19)
Continuing operations
Discontinued operations
2011
$000’s
2010
$000’s
2011
$000’s
2010
$000’s
2011
$000’s
56,579
13,467
70,046
10,531
8,017
18,548
–
–
–
25,622
2,852
28,474
56,579
13,467
70,046
Group
2010
$000’s
36,153
10,869
47,022
The Group’s corporation tax is calculated at 50% (2010 – 50%) of the estimated assessable profit for the year in Vietnam. During 2011 and 2010 both
current and deferred taxation have arisen in overseas jurisdictions only.
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
Profit before tax
Profit before tax at 50% (2010 – 50%)
Effects of:
Non-taxable income and non-deductible expenses
Tax losses not recognised
Non-taxable profit on disposal
Taxes not related to profit before tax
Adjustments to tax charge in respect of previous years
Tax charge for the year
2011
$000’s
2010
$000’s
158,639
–
30,851
117,603
158,639
148,454
79,320
74,227
(13,159)
3,967
–
–
(82)
(183)
2,939
(40,058)
7,979
2,118
70,046
47,022
The prevailing tax rate in the jurisdictions in which the Group produces oil and gas is 50%. The tax charge in future periods may also be affected by
the factors in the reconciliation.
12 discontinued operations
In July 2010, SOCO announced that it had entered into a conditional sale and purchase agreement, with an effective date of 1 January 2010, for the sale
of its wholly owned subsidiary SOCO Thailand LLC (SOCO Thailand) to Salamander Energy plc. The disposal completed in September 2010 for an initial
value of $105.0 million (subject to certain financial adjustments), plus contingent cash consideration of $1.0 million (the Disposal). SOCO Thailand was
the 99.9993% shareholder of SOCO Exploration (Thailand) Co Limited, the entity that held the Group’s interest in the Bualuang Field, offshore of Thailand
and which was a component of the Group’s South East Asia segment (see Note 6). The results of the Group’s discontinued Thailand interest is shown on
the consolidated income statement and in Note 6. Net operating cash flows from discontinued operations are shown in Note 29. Upon completion the
Group recognised a gain, excluding contingent consideration, of $80.1 million and cash inflow of $85.9 million reflecting the $105.0 million cash
consideration less the Group’s share of cash held by the Thailand interest of $16.3 million, transaction costs of $1.8 million and financial adjustments
of $1.0 million.
13 loss attributable to SOCO International plc
The loss for the financial year dealt with in the accounts of the Company was $7,935,000 (2010 – loss of $5,878,000 inclusive of dividends from
subsidiary undertakings). As provided by section 408 of the Companies Act 2006, no income statement or statement of comprehensive income
is presented in respect of the Company.
SOCO International plc
Annual Report and Accounts 2011 85
nOteS tO tHe COnSOlIdAted FInAnCIAl StAtementS
continued
14 earnings per share
The calculation of the basic and diluted earnings per share is based on the following data:
Earnings from continuing operations
Effect of dilutive potential ordinary shares: Interest on convertible bonds
Earnings for the purposes of diluted earnings per share on continuing operations
Earnings from discontinued operations
2011
$000’s
2010
$000’s
88,593
–
88,593
–
12,303
68
12,371
89,129
Earnings for the purposes of diluted earnings per share on continuing and discontinued operations
88,593
101,500
Weighted average number of ordinary shares for the purpose of basic earnings per share
Effect of dilutive potential ordinary shares:
Share awards, options and warrants
Convertible bonds (see Note 23)
Weighted average number of ordinary shares for the purpose of diluted earnings per share
Number of shares (’000)
2011
2010
336,072
328,459
1,348
–
14,046
14,560
337,420
357,065
At 31 December 2011, up to 4,859,552 potential ordinary shares in the Company that are underlying the Company’s convertible bonds (see Note 23)
and that may dilute earnings per share in the future were not included in the calculation of diluted earnings per share because they were antidilutive
for the year ended 31 December 2011.
15 Intangible assets
Exploration and evaluation expenditure
As at 1 January 2010
Additions
As at 1 January 2011
Additions
As at 31 December 2011
Intangible assets comprise the Group’s exploration and evaluation projects which are pending determination.
Group
$000’s
103,462
40,794
144,256
48,846
193,102
86
SOCO International plc
Annual Report and Accounts 2011
16 property, plant and equipment
Cost
As at 1 January 2010
Additions
Disposals (see Note 12)
Currency exchange
As at 1 January 2011
Additions
Currency exchange
As at 31 December 2011
Depreciation
As at 1 January 2010
Charge for the year
Disposals (see Note 12)
Currency exchange
As at 1 January 2011
Charge for the year
Currency exchange
As at 31 December 2011
Carrying amount
As at 31 December 2011
As at 31 December 2010
Other fixed assets comprise plant and machinery, computer equipment and fixtures and fittings.
Group
Company
Oil and gas
properties
$000’s
Other
$000’s
Total
$000’s
Other
$000’s
596,417
158,363
(39,076)
–
715,704
119,984
–
835,688
23,887
9,629
(10,572)
–
22,944
19,298
–
42,242
1,409
167
(40)
(31)
1,505
9
(8)
597,826
158,530
(39,116)
(31)
717,209
119,993
(8)
1,506
837,194
1,204
149
(40)
(27)
1,286
111
(10)
25,091
9,778
(10,612)
(27)
24,230
19,409
(10)
1,387
43,629
1,074
77
–
(31)
1,120
1
(8)
1,113
912
119
–
(27)
1,004
75
(10)
1,069
793,446
692,760
119
219
793,565
692,979
44
116
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SOCO International plc
Annual Report and Accounts 2011 87
nOteS tO tHe COnSOlIdAted FInAnCIAl StAtementS
continued
17 Fixed asset investments
Principal Group investments
The Company and the Group had investments in the following subsidiary undertakings as at 31 December 2011 which principally affected the profits or
net assets of the Group, all of which are indirectly held.
Country of incorporation
Country of operation
Principal activity
OPECO Vietnam Limited
SOCO Congo Limited1
SOCO DRC Limited2
SOCO Vietnam Ltd3
Cook Islands
Cayman Islands
Cayman Islands
Cayman Islands
Vietnam
Congo (Brazzaville)
Congo (Kinshasa)
Vietnam
Oil and gas exploration
Investment holding
Investment holding
Oil and gas exploration and production
Percentage
holding
100
85
85
80
1 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% non-controlling interest
is held by Quantic Limited.
2 SOCO DRC Limited (SOCO DRC) owns 99% of SOCO Exploration and Production DRC Sprl which holds the Group’s working interest in its Democratic Republic of Congo (Kinshasa) asset. The
Group funds 100% of SOCO DRC and is entitled to receive 100% of the distributions made by SOCO DRC until it has recovered such funding including a rate of return. The 15% non-controlling
interest is held by Quantic Limited.
3 The remaining 20% non-controlling 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
non-controlling interest including a rate of return on the non-controlling 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 26) and are otherwise
held in the form of share capital.
18 Financial asset
In 2005, the Group disposed of its Mongolia interest to Daqing Oilfield Limited Company. Under the terms of the transaction the Group will receive a
subsequent payment amount of up to $52.7 million, once cumulative production reaches 27.8 million barrels of oil, at the rate of 20% of the average
monthly posted marker price for Daqing crude multiplied by the aggregate production for that month. 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 (Level 3 as defined in IFRS 7). 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 2011 the fair value was $40.6 million
(2010 – $37.4 million) after accounting for the change in fair value (see Note 7).
88
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Annual Report and Accounts 2011
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19 deferred tax
The following are the major deferred tax liabilities recognised by the Group and movements thereon during the current and prior reporting period:
As at 1 January 2010
(Charge) credit to income
Disposal of subsidiary (see Note 12)
As at 1 January 2011
Charge to income (see Note 11)
As at 31 December 2011
(Accelerated)
decelerated tax
depreciation
$000’s
Other
temporary
differences
$000’s
(10,916)
(11,178)
6,212
(15,882)
(8,927)
(11,917)
309
3,405
(8,203)
(4,528)
Tax
losses
$000’s
12
–
–
12
(12)
Group
$000’s
(22,821)
(10,869)
9,617
(24,073)
(13,467)
(24,809)
(12,731)
–
(37,540)
There are no unprovided deferred taxation balances at either balance sheet date except in relation to gross losses that are not expected to be utilised
in the amount of $72.4 million (2010 – $51.7 million).
20 Inventories
Inventories comprise crude oil and condensate.
21 Other financial assets
Amounts falling due within one year
Trade receivables
Other receivables
Prepayments and accrued income
i
F
n
a
n
c
i
a
l
2011
$000’s
63,649
12,219
3,991
79,859
Group
2010
$000’s
Company
2010
$000’s
2011
$000’s
6,904
14,382
3,091
24,377
–
48
482
530
–
53
450
503
S
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There are no amounts overdue or allowances for doubtful debts in respect of trade or other receivables. There is no material difference between the
carrying amount of trade and other receivables and their fair value. The above financial assets are held at amortised cost.
22 Other financial liabilities
Trade payables
Other payables
Accruals and deferred income
2011
$000’s
17,114
12,967
19,400
49,481
Group
2010
$000’s
13,833
17,092
14,946
45,871
Company
2010
$000’s
–
614
681
1,295
2011
$000’s
–
334
3,221
3,555
There is no material difference between the carrying value of trade payables and their fair value. Accruals and deferred income includes interest payable
of $0.3 million (2010 – $0.5 million) in respect of convertible bonds (see Note 23). The above financial liabilities are held at amortised cost and are not
discounted as the impact would not be material.
SOCO International plc
Annual Report and Accounts 2011 89
nOteS tO tHe COnSOlIdAted FInAnCIAl StAtementS
continued
23 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, at the
option of the bondholder, from June 2006 until six days before their maturity date of 16 May 2013. At the initial conversion price of £5.46 per share there
were 24,952,000 ordinary shares of the Company underlying the bonds. On 16 May 2010, bonds with a par value of $165.9 million were redeemed at the
option of each bondholder. The accelerated unwinding of the discount relating to the redeemed bonds was charged to finance costs in 2010 in the amount
of $8.1 million and capitalised in accordance with IAS 23 Borrowing Costs.
During 2011, the Company repurchased and subsequently cancelled bonds with a par value of $35.4 million and a carrying value of $33.7 million for
a consideration of $35.6 million which was allocated between the repurchase of the liability component and the repurchase of the equity component,
being the embedded conversion option. In accordance with IAS 32 Financial Instruments, a gain of $0.3 million was recorded relating to the difference
between the fair value of the consideration allocated to the liability component and the carrying value of the liability component of the cancelled bonds.
The consideration allocated to the equity component was deducted in equity. If the bonds have not been previously purchased and cancelled, redeemed
or converted, the remaining bonds 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.
Liability component at 1 January
Bonds cancelled upon repurchase
Gain on cancelled bonds (see Note 7)
Equity component of cancelled bonds (see Note 26)
Redeemed bonds
Unwinding of discount on redeemed bonds (see Note 8)
Other interest charged (see Note 8)
Interest paid
Total liability component as at 31 December
Reported in:
Interest payable in current liabilities (see Note 22)
Non-current liabilities
Total liability component as at 31 December
2011
$000’s
2010
$000’s
78,449
(35,629)
(270)
2,211
–
–
5,958
(3,870)
234,104
–
–
–
(165,949)
8,086
9,724
(7,516)
46,849
78,449
277
46,572
46,849
481
77,968
78,449
The interest charged for the year is calculated by applying an effective interest rate of 7.91% (2010 – 13.27%) to the liability component for the
period which includes the 4.5% paid in cash semi-annually. There is no material difference between the carrying amount of the liability component
of the convertible bonds, which is carried at amortised cost, and their fair value. This fair value is calculated by discounting the future cash flows at
the market rate.
The Group’s remaining contractual liability comprising principal and interest, based on undiscounted cash flows at the earliest date on which the
Group is required to pay and assuming the bonds are not purchased and cancelled, redeemed or converted prior to 16 May 2013, is as follows:
2011
$000’s
2010
$000’s
2,191
49,785
51,976
3,782
89,724
93,506
Within one year
Within two – five years
Total as at 31 December
90
SOCO International plc
Annual Report and Accounts 2011
24 long term provisions
Decommissioning
As at 1 January 2011
New provisions and changes in estimates
Unwinding of discount (see Note 8)
As at 31 December 2011
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 17 – 19 years) in the removal and decommissioning of the facilities currently in place.
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Group
$000’s
13,095
18,883
771
32,749
25 Share capital
Issued and fully-paid
340,539,452 ordinary shares of £0.05 each (2010 – 340,419,452)
2011
$000’s
2010
$000’s
27,544
27,534
As at 31 December 2011 authorised share capital comprised 500 million (2010 – 500 million) ordinary shares of £0.05 each with a total nominal value
of £25 million (2010 – £25 million). The Company issued 120,000 new ordinary shares of £0.05 each during 2011 (2010 – 9,814,172) upon the exercise
of certain share options (see Note 28).
26 Other reserves
As at 1 January 2010
Shares issued
Share-based payments
Transfer relating to share-based payments
Transfer relating to convertible bonds
Unwinding of discount on redeemed bonds
Currency exchange translation differences
As at 1 January 2011
Purchase of own shares into treasury
Share-based payments
Transfer relating to convertible bonds
Equity component of cancelled bonds (see Note 23)
Currency exchange translation differences
Merger
reserve
$000’s
Own
shares
$000’s
Share-
based
payments
$000’s
Convertible
bonds
$000’s
56,882
159,047
–
–
–
–
–
215,929
–
–
–
–
–
(631)
–
–
–
–
–
–
(631)
(6,829)
–
–
–
–
(58,346)
–
(9,612)
(1,431)
–
–
(8)
(69,397)
–
975
–
–
(23)
13,412
–
–
–
(2,022)
(8,086)
–
3,304
–
–
(370)
(2,211)
–
Group
Total
$000’s
11,317
159,047
(9,612)
(1,431)
(2,022)
(8,086)
(8)
149,205
(6,829)
975
(370)
(2,211)
(23)
As at 31 December 2011
215,929
(7,460)
(68,445)
723
140,747
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SOCO International plc
Annual Report and Accounts 2011 91
nOteS tO tHe COnSOlIdAted FInAnCIAl StAtementS
continued
26 Other reserves continued
As at 1 January 2010
Shares issued
Currency exchange translation differences
As at 1 January 2011
Purchase of own shares into treasury
Currency exchange translation differences
As at 31 December 2011
Own
shares
$000’s
(631)
–
–
(631)
(6,829)
–
Share-
based
payments
$000’s
(57,816)
–
(8)
(57,824)
–
(1)
Company
Total
$000’s
(58,447)
159,047
(8)
100,592
(6,829)
(1)
Merger
reserve
$000’s
–
159,047
–
159,047
–
–
159,047
(7,460)
(57,825)
93,762
During the year the Company purchased 1,497,852 of its own ordinary shares (Shares) into treasury at a cost of $6.8 million (2010 – nil). The number
of treasury Shares held by the Group and the number of Shares held by the SOCO Employee Benefit Trust (Trust) at 31 December 2011 was 1,607,852
(2010 – 110,000) and 4,156,922 (2010 – 4,156,922), respectively. The market price of the Shares at 31 December 2011 was £2.926 (2010 – £3.696).
The Trust, a discretionary trust, holds Shares for the purpose of satisfying long term incentive awards for senior management of the Group, details of
which are set out in Note 28 and in the Directors’ Remuneration Report on pages 59 to 67. 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.
The Statement of Comprehensive Income for the year ended 31 December 2010 has been re-presented to exclude an amount of $11.5 million comprising
transfers into other reserves from retained earnings because they did not result in a change in equity.
27 Retained earnings
As at 1 January 2010
Profit for the year
Transfer relating to share-based payments
Transfer relating to convertible bonds
Unwinding of discount on redeemed bonds
Unrealised currency translation differences
As at 1 January 2011
Profit for the year
Transfer relating to convertible bonds
Unrealised currency translation differences
As at 31 December 2011
The retained profit for the Company is as set out in the Statement of Changes in Equity.
92
SOCO International plc
Annual Report and Accounts 2011
Unrealised
currency
translation
differences
$000’s
(2,267)
–
–
–
–
(5,538)
(7,805)
–
–
4,215
Retained
profit
$000’s
658,690
101,432
1,431
2,022
8,086
–
771,661
88,593
370
–
Group
Total
$000’s
656,423
101,432
1,431
2,022
8,086
(5,538)
763,856
88,593
370
4,215
860,624
(3,590)
857,034
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28 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 59 to 67. The Group recognised total expenses of $975,000 (2010 – $865,000) in respect of the schemes during the year, a proportion
of which was capitalised in accordance with the Group’s accounting policies.
Long Term Incentive Plan (LTIP)
The Company operates a LTIP for senior employees of the Group. Awards vest over a period of three 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. 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 SOCO
Employee Benefit Trust (Trust) (see Note 26). No awards were exercised during the year ended 31 December 2011. The Company has no legal or
constructive obligation to repurchase or settle awards in cash. Details of awards outstanding during the year are as follows:
As at 1 January
Granted
Exercised
Lapsed
As at 31 December
2011
No. of share
awards
2010
No. of share
awards
1,863,000
778,000
–
–
6,089,932
627,800
(4,629,804)
(224,928)
2,641,000
1,863,000
There were no awards exercisable at 31 December 2011 or 2010. Awards outstanding at the end of the year have a weighted average remaining
contractual life of 2.0 (2010 – 2.2) years. The weighted average market price and estimated fair value of the 2011 grants (at grant date) were £2.97
and £0.856, respectively.
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% was 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 operated a discretionary share option scheme for key employees of the Group which expired in April 2007 without prejudice to the subsisting
rights of participants. 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 three 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 seven or 10 year period, in accordance with the plan rules. Options are normally forfeited if the employee leaves the Group
before the options vest. During 2009, the Company established a new discretionary share option scheme. As at 31 December 2011, no awards had been
made under that scheme. Options would normally be equity-settled through newly issued Shares. 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:
2011
Weighted
average
No. of share exercise price
£
options
2010
Weighted
average
exercise price
£
No. of share
options
As at 1 January
Exercised
As at 31 December
1,000,000
(120,000)
1.20
0.56
1,200,000
(200,000)
880,000
1.29
1,000,000
Exercisable as at 31 December
680,000
0.61
918,000
1.10
0.56
1.20
0.53
The weighted average market price at the date of exercise during the year was £3.47 (2010 – £4.03). Options outstanding at the end of the year have
a weighted average remaining contractual life of 1.9 (2010 – 2.7) years.
SOCO International plc
Annual Report and Accounts 2011 93
nOteS tO tHe COnSOlIdAted FInAnCIAl StAtementS
continued
29 Reconciliation of operating profit to operating cash flows
Operating profit (loss) from continuing operations
Operating profit from discontinued operations
Share-based payments
Depletion and depreciation
Operating cash flows before movements in working capital
Decrease (increase) in inventories
(Increase) decrease in receivables
Increase (decrease) in payables
Cash generated by (used in) operations
Interest received
Interest paid
Income taxes paid
2011
$000’s
156,945
–
156,945
975
19,409
177,329
6,175
(57,610)
12,588
138,482
1,095
(3,943)
(45,451)
Group
2010
$000’s
29,137
36,473
65,610
865
9,778
76,253
(873)
(11,193)
5,412
69,599
1,364
(7,580)
(26,701)
Net cash from (used in) operating activities
90,183
36,682
Cash generated from operating activities comprises:
Continuing operating activities
Discontinued operating activities
90,183
–
90,183
12,419
24,263
36,682
Company
2010
$000’s
(6,608)
–
(6,608)
865
119
(5,624)
–
76
(2,322)
(7,870)
688
(9)
–
(7,191)
(7,191)
–
(7,191)
2011
$000’s
(8,298)
–
(8,298)
975
75
(7,248)
–
(198)
1,326
(6,120)
428
(5)
–
(5,697)
(5,697)
–
(5,697)
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.
30 Operating lease arrangements
Minimum lease payments under operating leases recognised in income for the year
2011
$000’s
2010
$000’s
9,118
499
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
After five years
2011
$000’s
2010
$000’s
29,040
146,359
19,144
194,543
470
–
–
470
Operating lease payments mainly represent rentals payable by the Group for floating, production, storage and offloading (FPSO) facilities and for certain of
its office properties. The FPSO lease is for a term of seven years with an option to extend for a further seven years.
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Annual Report and Accounts 2011
31 Capital commitments
At 31 December 2011 the Group had exploration licence and cost carry commitments not accrued of approximately $36.2 million (2010 – $29.9 million).
32 Related party transactions
During the year, the Company recorded a net credit in the amount of $0.1 million (2010 – $0.6 million) in respect of services rendered between Group
companies. There were no balances outstanding with Group undertakings as at 31 December 2011. Transactions between the Company and its subsidiaries
have been eliminated on consolidation.
Remuneration of key management personnel
The remuneration of the Directors of the Company, who are considered to be its key management personnel, is set out below in aggregate for each of the
categories specified in IAS 24 Related Party Disclosures. Further information about the remuneration of individual Directors is provided in the audited part
of the Directors’ Remuneration Report on pages 59 to 67.
Short term employee benefits
Post-employment benefits
Share-based payments
2011
$000’s
4,106
220
975
5,301
2010
$000’s
3,397
220
865
4,482
Directors’ transactions
Transactions with the Directors of the Company, who are considered to be its key management personnel, are disclosed in the Directors’ Remuneration
Report on pages 59 to 67.
33 events after the balance sheet date
Subsequent to 31 December 2011 the Company purchased a further 995,235 of its own ordinary shares into treasury at a cost of $4.5 million. Also see
Note 26.
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Annual Report and Accounts 2011 95
Year to
31 Dec 2011
$000’s
Year to
31 Dec 2010
$000’s
Year to
31 Dec 2009
$000’s
Year to
31 Dec 2008
$000’s
Year to
31 Dec 2007
$000’s
234,156
156,945
–
88,593
48,390
29,137
36,473
101,432
69,339
51,640
38,811
51,118
44,976
28,848
37,743
411,060
–
(7,858)
65,645
32,314
2011
$000’s
2010
$000’s
2009
$000’s
2008
$000’s
2007
$000’s
1,027,284
187,623
(116,861)
874,683
253,670
(115,136)
712,444
84,542
(33,718)
635,089
315,044
(239,747)
517,744
44,272
(233,049)
1,098,046
1,013,217
763,268
710,386
328,967
27,544
72,721
140,747
857,034
27,534
72,622
149,205
763,856
24,451
71,077
11,317
656,423
24,322
70,369
14,697
600,998
23,549
68,355
49,437
187,626
1,098,046
1,013,217
763,268
710,386
328,967
Year to
31 Dec 2011
$000’s
Year to
31 Dec 2010
$000’s
Year to
31 Dec 2009
$000’s
Year to
31 Dec 2008
$000’s
Year to
31 Dec 2007
$000’s
90,183
152,196
36,682
151,890
77,030
73,901
45,056
217,613
49,009
178,590
FIve yeAR SummARy
Consolidated income statement
Oil and gas revenues – continuing operations
Operating profit – continuing operations
Operating profit – discontinued operations1
Profit for the year
Consolidated balance sheet
Non-current assets
Net current assets
Non-current liabilities
Net assets
Share capital
Share premium
Other reserves
Retained earnings
Total equity
Consolidated cash flow statement
Net cash from operating activities
Capital expenditure
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Annual Report and Accounts 2011
Year to
31 Dec 2011
Year to
31 Dec 2010
Year to
31 Dec 2009
Year to
31 Dec 2008
Year to
31 Dec 2007
Financial key performance indicators (continuing and discontinued operations)
Realised oil price per barrel ($)2
Operating cost per barrel ($)3
DD&A per barrel ($)4
Basic earnings per share (cents)5
Diluted earnings per share (cents)5
112.94
9.42
7.86
26.4
26.3
75.66
12.41
6.68
30.9
28.4
55.70
9.82
5.44
17.3
15.4
66.62
10.30
4.25
143.8
124.3
70.69
6.93
5.32
11.5
10.2
Non-financial key performance indicators (continuing and discontinued operations)
Total shareholder return (%)6
Production (barrels of oil per day)7
Total proven and probable reserve additions (mmboe)8, 9
Proven and probable reserves (mmboe)9
Employee tenure (years)10
Professional development (days)11
Lost time injuries frequency (thousand man-hours)12
Emissions (tonnes)13
(20.8)
5,437
–
130.3
9
91
0.000
Negligible
10.3
4,648
–
132.6
8
89
0.000
Negligible
22.4
6,415
3.4
142.5
8
22
0.000
Negligible
(50.2)
4,464
25.0
144.1
7
20
0.001
Negligible
59.2
6,316
2.6
160.9
6
40
0.000
Negligible
1 Discontinued operations includes the results of all discontinued operations throughout the five years shown.
2 The realised oil price per barrel is the average proceeds received for each barrel of oil sold in the period.
3 Operating cost per barrel is the average cost incurred to produce a barrel of oil which exclude lifting imbalances and inventory effects.
4 DD&A per barrel includes depreciation, depletion and decommissioning costs for the period calculated over barrels of oil produced.
5 Earnings per share in prior years have been restated to reflect the 2010 share sub-division.
6 The total shareholder return is the percentage annual return to the Company’s shareholders.
7 Average barrels of oil produced per day net to the Group’s working interest.
8 Comprises additions, revisions to previous estimates and purchase of reserves.
9 Reserves are net to the Group’s working interest expressed in millions of barrels of oil equivalent (see Reserves Statistics on page 98).
10 Average length of UK based employee tenure.
11 Average number of days per year of job-related training undertaken by UK based administrative employees excluding Directors.
12 Number of lost time injuries to SOCO staff per thousand man-hours on projects operated by SOCO or joint operating companies.
13 Scope One emissions in tonnes of carbon dioxide produced by projects operated by SOCO.
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SOCO International plc
Annual Report and Accounts 2011 97
ReSeRve StAtIStICS
Unaudited, net working interest (mmboe)
Net proven oil and gas reserves
Reserves as at 31 December 2010
Changes in the year
Additions
Revision to previous estimates
Purchase of reserves
Change of interest
Sale of reserves
Production
Reserves as at 31 December 2011
Net proven and probable oil and gas reserves
Reserves as at 31 December 2010
Changes in the year
Additions
Revision to previous estimates
Purchase of reserves
Change of interest
Sale of reserves
Production
Reserves as at 31 December 2011
Total
Vietnam1
Congo1
73.6
69.9
3.7
–
–
–
–
–
(2.3)
–
–
–
–
–
(2.3)
–
–
–
–
–
–
71.3
67.6
3.7
Total
Vietnam1
Congo1
132.6
123.4
9.2
–
–
–
–
–
(2.3)
–
–
–
–
–
(2.3)
–
–
–
–
–
–
130.3
121.1
9.2
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
2011
2010
2009
2008
2007
132.6
142.5
144.1
160.9
160.6
–
–
–
–
–
(2.3)
–
–
–
–
(8.2)
(1.7)
–
3.4
–
(2.7)
–
(2.3)
7.0
18.0
–
(11.0)
(29.2)
(1.6)
–
2.6
–
–
–
(2.3)
130.3
132.6
142.5
144.1
160.9
Note: mmboe denotes millions of barrels oil equivalent.
1 Reserves are shown before deductions for non-controlling 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 non-controlling interest including a rate of return from the non-controlling interest’s pro rata portion of those cash flows.
98
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Annual Report and Accounts 2011
COmpAny InFORmAtIOn
Registered Office
Advisors
Auditors
Deloitte LLP
London, United Kingdom
Bankers
J.P. Morgan
125 London Wall
London
EC2Y 5AY
United Kingdom
SOCO International plc
48 Dover Street
London
W1S 4FF
United Kingdom
Registered in England
Company No. 3300821
Website
www.socointernational.com
Company Secretary
Cynthia B Cagle
Financial Calendar
Group results for the year to 31 December are
announced in March/April. The Annual General
Meeting is held during the second quarter.
Half year results to 30 June are announced
in August. Additionally, the Group will issue
an interim management statement between
ten weeks after the beginning and six weeks
before the end of each half year period.
Joint Financial Advisors
and Corporate Broker
Bank of America Merrill Lynch
Merrill Lynch Financial Centre
2 King Edward Street
London
EC1A 1HQ
United Kingdom
J.P. Morgan Cazenove
10 Aldermanbury
London
EC2V 7RF
United Kingdom
Registrar
Equiniti Limited
Aspect House
Spencer Road
Lancing
BN99 6DA
United Kingdom
Solicitors
Clifford Chance LLP
10 Upper Bank Street
London
E14 5JJ
United Kingdom
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SOCO International plc
Annual Report and Accounts 2011 99
100
SOCO International plc
Annual Report and Accounts 2011
We ARe An InteRnAtIOnAl
OIl And gAS explORAtIOn
And pROduCtIOn COmpAny,
lISted On tHe lOndOn StOCk
exCHAnge, emplOyIng A
StRAtegy FOR buIldIng
SHAReHOldeR vAlue
tHROugH A pORtFOlIO
OF OIl And gAS ASSetS
Financial Highlights
$48.4m
2010 revenue (continuing operations)
$69.3m
2009 revenue (continuing operations)
$234.2m
2011 revenue
$ millions
2011
2010 2009
Profit For The Year
Net Cash From Operating Activities
Cash, Cash Equivalents and Liquid Investments
Net Assets
51.1
88.6 101.4
90.2
77.0
36.7
160.1 260.4 307.6
1,098.0 1,013.2 763.3
disclaimer
This document includes certain forward-looking
statements regarding the SOCO Group. By their
nature, forward-looking statements involve a
number of risks, uncertainties or assumptions
that could cause actual results or events to differ
materially from those expressed or implied by
the forward-looking statements. These risks,
uncertainties or assumptions could adversely affect
the outcome and financial effects of the plans
and events described herein. Forward-looking
statements contained in this document regarding
past trends or activities should not be taken as a
representation that such trends or activities will
continue in the future. You should not place undue
reliance on forward-looking statements, which
speak as only of the date of this document. Except
as required by law, the Company is under no
obligation to publicly update or keep current the
forward-looking statements contained in this
document or to publicly correct any inaccuracies
which may become apparent in such forward-
looking statements.
Design and production
Wardour, London
www.wardour.co.uk
Photography
South East Asia:
John Hepler (cover and location)
Africa:
Jean Yves Brochec (location)
Board and Management:
Andy Lane and Jean Yves Brochec
Print
Royle Corporate Print
This report is printed on Heaven 42 which is
sourced from well managed forests independently
certified according to the rules of the Forest
Stewardship Council Disclaimer.
SOCO International plc
48 Dover Street
London
W1S 4FF
United Kingdom
T +44 (0)20 7747 2000
F +44 (0)20 7747 2001
www.socointernational.com
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