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8
Annual Report
and Accounts
2018
Repositioned
for growth
Repositioned for growth
Our future is one of new and
exciting growth opportunities.
We are repositioning to enhance
our existing strengths. We are
building new relationships and
are on a positive course for
business growth.
We are an oil and gas exploration and production company.
Headquartered in London and listed on the main market of the
London Stock Exchange, we have exploration, development
and production interests in Vietnam.
socointernational.com
Strategic Report
Company overview
Chair’s welcome
Investment case
Market overview
CEO’s statement
Core strategic objectives
Our strategy in action
Business model
Key metrics
Operations review
Financial review
Risk management
Risks
Corporate Responsibility
Governance Report
Chair’s Introduction to Governance
Board of Directors
Corporate Governance Report
Nominations Committee Report
Audit and Risk Committee Report
Remuneration Report
Directors’ Report
02
02
04
08
10
12
16
18
20
22
24
32
36
38
44
61
62
66
68
72
76
82
97
Financial Statements
Independent Auditor’s Report
Consolidated Income Statement
101
102
109
Consolidated Statement of Comprehensive Income 109
Balance Sheets
Statements of Changes in Equity
Cash Flow Statements
110
111
112
Notes to the Consolidated Financial Statements 113
Additional Information
Non-IFRS Measures
Five Year Summary
Reserves Statistics
Report on Payments to Governments
Glossary of Terms
Company Information
135
136
137
137
138
140
IBC
02 Strategic
Report
61 Governance
Report
101 Financial
Statements
135 Additional
Information
01
Strategic Report Company overview
A significant
step forward
for SOCO
2018 has seen SOCO
focus on delivering our
strategy through planned
divestments, capital
structure and expanding
and diversifying the
resource base beyond
Vietnam with the proposed
acquisition of assets in
Egypt. Our culture of
capital discipline and a
commitment to building
value for shareholders
through dividends and
growth of the Company
remains as strong as ever.
02
Group highlights
Lost Time Injury Frequency (LTIF)
(Per million man-hours worked)
Net production
(boepd)
0
7, 274
Cash operating costs
($/boe)
$13.63/boe
Return to shareholders
(Pence per ordinary share)
5.25p
Cash, cash equivalents and
liquid investments ($m)
Revenue
($m)
$240.1
$175.1
SOCO International plc Annual Report and Accounts 2018 Vietnam portfolio
Block 16-1
SOCO interest
30.5% working interest
Block 9-2
SOCO interest
25% working interest
Operator
Hoang Long
Joint Operating Company
Operator
Hoan Vu
Joint Operating Company
Operational phase
Production/field
development
Operational phase
Production/field
development
Blocks 125 & 126
SOCO interest
70% working interest
Operator
SOCO Exploration
(Vietnam)
Operational phase
Exploration
Block 125
Block 126
Block 9-2
Block 16-1
2018 Vietnam production (net)
CNV
TGT
1,588 boepd
5,686 boepd
Egypt portfolio
Cairo
El Fayum
On 25 September 2018, SOCO announced the proposed acquisition of Merlon Petroleum El Fayum Company. Shareholder
approval was gained on the 21 December 2018. Completion remains subject to the satisfaction or, where permitted, waiver of
certain Conditions under the Share Purchase Agreement. SOCO expects the completion of the acquisition will occur in 1H 2019.
Operations review
page 24
SOCO interest
100% participating interest
Operator
Petrosilah
Location
Western Desert, Egypt
Operational phase
Production/
field development/
exploration
24 (2P)
mmbbls
37 (2C)
mmbbls
Operations review
page 24
03
Strategic Report
Chair’s welcome
Repositioned
for growth
Last year I reported that the Company
had renewed its focus and commitment
to the pursuit of growth opportunities,
supported by the establishment of an
experienced business development team.
In September 2018, SOCO announced
that it had signed a sale and purchase
agreement for the acquisition of Merlon
Petroleum El Fayum Company (“Merlon”),
which has onshore oil assets in Egypt.
The transaction was approved by
shareholders in December 2018 and
is on track for completion in 1H 2019.
The proposed acquisition of Merlon
complements and diversifies SOCO’s
existing Vietnam-focused portfolio, builds
scale through doubling of our reserves
and resources, increases SOCO’s financial
resilience through the low cost resource
base and provides tangible production
growth, re-setting SOCO’s growth
trajectory. This acquisition is a significant
step forward for SOCO in our vision to
become a full-cycle, growth orientated
E&P company of scale.
Safety remains the highest priority
within the business and on the Board
agenda. We are proud to report that
SOCO’s Joint Operations continue to
achieve a high record of safety and
have maintained commitment to local
sourcing, employment, training and
industry upskilling. In Vietnam, we are
pleased by HLHVJOCs’ high level of safe
operations, with zero LTIs in over 24 million
man-hours worked since project inception,
representing seven production years
on TGT and 10 production years on CNV.
SOCO aims to have a positive presence
in the countries where it operates. Our
purpose is the responsible development
of energy from natural resources for global
economic prosperity and to deliver value
for all our stakeholders.
SOCO is also committed to responsible
and sustainable development, resulting
in value for the host countries and local
communities as well as for our staff and
shareholders. In Vietnam, community
projects are selected by HLHVJOC and
during 2018, the HLHVJOC Charitable
Donation programme focused on long
term goals to assist in the development
of poor rural areas especially in healthcare,
education and assistance to flood victims.
Financial discipline
Capital discipline and financial stability
have been SOCO hallmarks from inception
and continue to underpin the business.
Capital investment and divestment
decisions are taken to allocate capital
where it will provide the best risk adjusted
returns. It is this approach that has allowed
us to return significant amounts of capital
to shareholders. SOCO continues to have
a stable financial base. The balance sheet
remained strong throughout 2018 and the
Company had solid cash flows and low
cash operating costs. To improve the
efficiency of the balance sheet and
provide financial flexibility, SOCO signed
a $125m Reserved Base Lending facility
(“RBL”) secured against the Group’s
producing assets in Vietnam with a further
$125m available on an uncommitted
accordion basis. In December 2018 SOCO
drew down $100m from the RBL facility.
The Group finished the year with
$240.1m in cash, after returning $23.3m
to shareholders through a 5.25 pence per
share final dividend for the 2017 financial
year and bringing the total return to
shareholders since 2006 to $0.5 bn.
Prudent planning and risk management
Risk Management has always been
a primary focus of the Board but, in these
highly volatile commodity markets, we are
giving the matter even more attention.
Effective risk management is integral
to SOCO achieving its corporate strategy
to further strengthen the business through
growth. On pages 36 to 43 of the 2018
Annual Report and Accounts, we set out
our assessment of the principal risks
facing the business and the mitigation
measures we have adopted, whilst
focusing on maintaining a business that
remains robust and competitive.
Board engagement and changes
Olivier Barbaroux, a long standing
non-executive director, retired from the
Board of SOCO following conclusion
of last year’s AGM on 7 June 2018.
SOCO would like to thank Olivier for his
contribution to the Company and to wish
him all the best for the future. On the same
date, John Martin was appointed as an
Independent non-executive director,
Chair of the Audit and Risk Committee
and a member of the Remuneration
Committee and the Nominations
Committee. John has more than 30 years’
experience in international banking in
the oil and gas industry. Ambassador
António Monteiro, non-executive director,
will retire from the Board of SOCO at the
conclusion of the Company’s forthcoming
AGM. SOCO would like to thank António
for his service to the Company and wish
him all the very best in his retirement.
Marianne Daryabegui has been appointed
as an Independent non-executive director
with effect from 15 March 2019 and will
also serve as a member of the Audit and
Risk Committee, the Remuneration
04
SOCO International plc Annual Report and Accounts 2018 Rui de Sousa
Chair
Committee and the Nominations
Committee. Marianne has extensive
experience in oil and gas corporate
transactions and capital markets.
Both John and Marianne bring a wealth
of oil and gas experience and expertise
which will complement and enhance
the experience of the Board. Each of
them will offer themselves for election
by shareholders for the first time at the
forthcoming AGM.
The Board looks to foster a genuine
two-way dialogue between the Company
and its stakeholders and welcomes the
requirements of the 2018 Corporate
Governance Code on engaging with the
workforce and other stakeholders. In line
with this John Martin has been appointed
as the designated non-executive director
for workforce engagement and we are
hugely committed to this engagement
and look forward to hearing the views
of our employees.
Outlook and future opportunities
There is much for SOCO to look forward
to in 2019 as the Company returns
to growth. In Egypt, upon completion
of the Merlon acquisition, we will seek
to implement an increased drilling
programme as we further develop the
discovered resource base and test new
exploration play concepts. In Vietnam
we will look to pro-actively manage
the production decline of TGT and
CNV. On Blocks 125 & 126 2D seismic
acquisition will commence mid-2019
in a new and exciting exploration
basin. Upon completion of the Merlon
acquisition and the implementation of
the drilling programme in Egypt, our
portfolio of Egyptian and Vietnam assets
has the potential to offer one of the
most competitive low operating cost
production bases.
Since inception SOCO has been
committed to shareholder value creation
through the growth of the business and
cash returns to shareholders. In line with
this, the Board proposes a final dividend
for 2018 of 5.5 pence per share.
We would like to thank our shareholders
for their continued support. It is the
firm belief of your Board, that with our
competitive low-cost development
projects, our strong financial stability,
our culture of financial discipline and our
talented and committed staff, SOCO is
well placed to grow the business. The
Board remains committed to delivering
total shareholder returns through both
dividends and capital growth. We continue
to pursue new business opportunities
where they are determined by the Board to
be in the best interest of our shareholders.
Rui de Sousa
Chair
05
Strategic Report Chair’s welcome
A focus on
future
growth
On completion, the Merlon acquisition will be the first
significant step forward to a full cycle growth orientated
E&P company of scale delivering growth year on year
through diversification and organisational strength.
Multiple identified prospects in proven petroleum systems
deliver low risk upside from near field activity and
increased acreage delivering good long term prospects.
06
SOCO International plc Annual Report and Accounts 2018
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Building scale
Incremental 2P (net WI) of 24 mmbbls
and 2C (net WI) of 37 mmbbls
Growth from discovered resources supports production
profile through scalable and efficient development
+ Stronger organisation
Operational, commercial and technical capabilities
in Egypt
Enhanced exploration
optionality
1,570km2 exploration acreage (of which c.70%
covered by 3D seismic)
Inventory of identified exploration prospects
Historic exploration success rate of 50% in concession
Portfolio diversification
Bridgehead to further organic and inorganic growth
in Egypt and the broader MENA region
New onshore production hub with 10 oil fields
in an established hydrocarbon province
Complements existing offshore Vietnam production
from TGT and CNV
Extension of SOCO portfolio across field life cycle
into development and exploration
07
Investment case
Enhancing
our strengths
SOCO has always been committed to capital discipline. It differentiates
itself from its peers through its consistently strong balance sheet,
steady cash flows, a portfolio of assets with a competitive low
operating cost, recurring cash dividends, a strong safety record and
a highly experienced management team with a demonstrable track
record of creating and delivering value to shareholders.
Our history of shareholder returns
Purchase of own shares
Purchase of own shares
Purchase of own shares
Cash return
Cash return
Dividend
Dividends
Dividend
Dividend
$13.6m
$6.8m
$32.9m
$213.0m
$119.0m
$51.0m
$17.5m
$21.0m
$23.3m
2006
2011
2012
2013
2014
2015
2016
2017
2018
08
Our people and experience
A strong team is at the heart of our business,
they bring a unique skill set to SOCO.
SOCO’s head office is located in London, where
we have an established finance team. During
2018 we enhanced the corporate functions with
the recruitment of a Head of Legal and Head of
Commercial. In addition the Investor Relations
department was established with the recruitment
of a full time Group Investor Relations Manager.
The highly experienced and capable teams bring
additional strength to our capability to manage an
expanded portfolio and deliver our growth plans.
Local management teams
As we acquire business assets as part of our strategy
for transformational growth, we work closely with the
existing management teams to utilise their regional
knowledge and expertise to improve and grow the
assets to their full potential. We have a small regional
office in Ho Chi Minh City and we look forward
to welcoming the team in Cairo once the Merlon
deal completes.
SOCO International plc Annual Report and Accounts 2018 Cumulative returns to shareholders
to date since inception ($)
$0.5bn
Responsible operations
and strong safety record
We continue to work with our partners in Vietnam
to maintain a high level of safety. We have worked
to build and contribute to improvements in the safety
culture in Vietnam and we are proud of our record
of achievement.
Lost time injury frequency rate
0
Our vision
To create a full cycle, growth orientated
E&P company of scale focused on
maximising total shareholder returns.
rate responsibility
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Yield
Corporate go v e r n a n
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Production and steady cash flow: platform for growth
Financial stability
Steady revenues with low operating costs and good
capital discipline provide a platform for growth.
Our strong cash position
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$m
300
250
200
150
100
50
0
$95.6m $23.3m
Return to
Shareholders
$240.1m
$3.4m
Other
cash
outflows
Proceeds
from
borrowings
Cash at 31
December
2018
$55.9m
$22.4m
Investments
in Assets
$137.7m
Cash from
continuing
operating
activities
Cash at 31
December
2017
M&A focus
We continue to target both organic and
M&A led growth opportunities. Our strategic
focus on growth will be achieved organically
and through further M&A activity. Our key
considerations that will enable us to identify
the right deals are:
+ Geography (Asia/MENA)
+ Value accretive
+ Governance and Corporate Responsibility
+ Materiality/scale
+ Quality producing assets
+ Do-ability
+ Growth potential
Core strategic objectives
page 16
09
Market overview
Understanding
the rebalanced
oil market
Brent oil prices averaged $73/bbl in 2018, an increase of 35% over 2017. Although
demand for oil was relatively stable and continued to grow in 2018, changes in
elements of the supply side continued to be the main cause of short-term volatility
in oil prices. The United States’ (“US”) share of global oil supply continued to grow
at the expense of declining market share for both OPEC and non-US producers,
and contributed to the ongoing rebalancing of the global oil market.
Economics and political
2018 witnessed significant disruption in
global politics, with the political landscape
changing in several major countries.
Parliamentary elections took place in a
number of countries, including Colombia
and Italy, and in the US mid-term elections
the ruling Republican party lost control of
the House of Representatives. Populism
continued its global ascent as evidenced
by the election victories of Presidents
Andres Manuel Lopez Obrdor in Mexico
and Jair Bolsonaro in Brazil. Trade disputes
were a persistent theme, notably in terms
of ongoing negotiations between the US
and both China and the EU. In the UK,
Brexit negotiations continued without any
firm resolution.
Global growth in 2018 is estimated by the
World Bank to have been 3%, slightly lower
than forecast at the start of the year1.
In terms of advanced economics, growth in
the US during 2018 remained strong at 2.9%,
supported by fiscal stimulus. The Wall Street
Journal (“WSJ”) Dollar index, which measures
the US currency’s performance against
a basket of 16 other major currencies,
increased 4.3% in 2018 consistent with
the US dollar’s appreciation over the year2.
In contrast, activity in the euro area slowed
from 2.4% in 2017 to 1.9% in 2018 on the
back of lower net exports. GDP growth in
emerging market and developing economies
in 2018 was also lower than projected at
4.2%, a decrease of 0.1% from 2017.
Oil price
Although Brent oil prices dipped in Q4
2018, they averaged $73/bbl over the year,
an increase of 35% over 2017.
The International Energy Agency (“IEA”)
reported global oil demand increased by
1.3mmbpd (1.3%) in 2018 and in parallel,
global inventories declined over the year3.
Although global economic growth is
expected to moderate in 2019, and there are
signs of oil substitution in some countries,
notably in China, oil demand growth is still
expected to continue, suggesting that peak
oil demand may still be some years away4.
Demand for oil has been relatively stable, but
elements of the supply-side continue to be
the main cause of short-term volatility in the
oil price. Brent touched a 2018 high of $86 per
bbl in October and a low of $50 in December.
OPEC’s share of global oil production fell
below 40% in 2018, in part attributable
to diminishing Venezuelan oil supplies
and Iran sanctions5. Excluding the US,
non-OPEC supplies continued to decline
in 2018, consistent with the trend seen in
recent years. In contrast, as the economics
of US oil shale production once more
benefited from a strengthening oil price,
the US share of global oil production
increased to almost 16% by the end of 2018.
1 World Bank – January 2019 Global Economic Prospects; http://www.worldbank.org/en/publication/global-economic-prospects
2 WSJ January 1 2019 “U.S. Dollar posted 4.3% gain in 2018, but don’t expect that in 2019”. https://www.wsj.com/articles/
u-s-dollar-posted-4-3-gain-in-2018-but-dont-expect-that-in-2019-11546365600
3 IEA Oil Market Report February 2018 https://www.iea.org/oilmarketreport/omrpublic/
10
SOCO International plc Annual Report and Accounts 2018 These continuing trends are anticipated
to contribute to further rebalancing of the
global oil market in the future.
SOCO has adopted strategic principles,
and put policies and procedures in place
aimed at protecting its business, and
“future-proofing” it against the potential
impact of short-term volatility in prices.
SOCO’s strategy to mitigate this risk is set
out on pages 36 to 38 in our discussion
on principal risks.
SOCO regularly evaluates whether the
benefit of hedging of its production is
in the best interest of shareholders,
by considering the balance between
protecting the Group in low oil price
scenarios against the opportunity cost
of being unhedged. In addition, SOCO
continues to manage its overall portfolio
to ensure a low break-even oil price,
regardless of actual oil prices.
In terms of portfolio discipline, SOCO
undertakes regular assessment of its assets
and seeks to dispose of those that do not
meet our commercial viability criteria. Our
strong ethos of capital discipline ensures
that cost efficiencies are maintained, even in
higher oil price environments. SOCO ensures
all operational decisions – including new
country entry, production optimisation and
acquisitions and divestments – are reviewed
through the lens of full-cycle project
economics in a range of oil price scenarios.
Climate change regulation
Growth in global energy consumption is
expected to continue to 2040. There is
increasing demand for natural gas and
renewables and, although demand for oil
is expected to continue, it will likely make
up a smaller percentage of the energy
mix in the future6.
Climate change regulation and measures
to limit greenhouse gas (“GHG”) emissions
continued to be introduced across the
globe in 2018, but related policy choices
and legislative responses by individual
governments remained varied. As a
business SOCO continues to review its
emissions with the objective of reducing
them. We seek to be transparent in
our emissions performance reporting
and in 2018 we continued to monitor
our emissions and disclose them in
accordance with UK industry requirements
and standards. We participated in the
Carbon Disclosure Project (“CDP”) and
we set an objective to continue to work to
improve GHG emissions management by
identifying realistic initiatives and targets
for emissions reduction. We work to
ensure that our business is responsive to
legal and regulatory developments. More
information on SOCO’s emissions can
be found in the Corporate Responsibility
Report on page 44.
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E&P M&A
In 2018, IHS Herold reported that the value
of oil and gas deals globally in 2018 totalled
$115bn. Through the Merlon acquisition,
SOCO will be repositioned to support further
growth not only in Egypt, but also in the
wider Middle East and North Africa region,
both organically and through additional
mergers and acquisitions. We will continue
to pursue new business opportunities in
2019 that add value for our shareholders.
Brent oil price 2014-2018 ($/bbl)
2018
2017
2016
2015
2014
73
44
54
52
0
20
40
60
80
Source: REUTERS
Global crude oil consumption 2010-2019E
99
100
d
p
b
m
m
100
98
96
94
92
90
88
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019E
Source: EIA
Global E&P M&A Total Deal Value 2010-2018 ($bn)
2018
2017
2016
2015
2014
2013
2012
2011
2010
114.6
124.4
98.3
135.8
154.9
125.2
125.3
166.2
0
50
100
150
Source: IHS Herold
193.5
200
4 IEA Oil 2018 https://www.iea.org/oil2018/
5 European Central Bank Economic Bulletin, Issue /2019 https://www.ecb.europa.eu/pub/economic-bulletin/focus/2019/html/ecb.ebbox201901_01~dd4b3e4eb2.en.html
6 BP Statistical Review of World Energy 2018: Two steps forward, one step back, 13 June 2018. https://www.bp.com/en_br/brazil/sala-de-imprensa/noticias/
bp-statistical-review-of-world-energy-2018.html
11
Chief Executive Officer’s statement
Expanding
horizons with
strength and
agility
2018 was a year of achievements, opportunities and
challenges for SOCO. Our objective is to expand and
diversify the resource base to create a full-cycle,
growth orientated E&P company of scale. Our strategy
is to do that through M&A activity, capital structure,
portfolio optimisation and organic growth. The team
focused on implementing and execution of our
strategy and made good progress in 2018.
12
SOCO International plc Annual Report and Accounts 2018 Ed Story
President and
Chief Executive
Officer
Q: With SOCO’s strategy for achieving
growth now in place, can you tell us more
about the decision to acquire Merlon?
A: A key step forward for SOCO this year was the proposed
acquisition of Merlon Petroleum El Fayum Company (“Merlon”),
which has low-cost oil production assets in the prolific Western
Desert region of Egypt, close to local energy infrastructure.
The consideration will be satisfied through the payment of
approximately $136m in cash and the issue of c.66 million new
SOCO shares. The acquisition will add proven and probable (2P)
reserves of 24 million barrels and contingent (2C) resources
of 37 million barrels. In addition to providing a high quality oil
concession with significant development upside and exploration
optionality, Merlon creates a new hub for our business in Egypt.
We plan to utilise this platform to support further growth not
only in Egypt but also the wider Middle East and North Africa
region, both organically and through additional mergers and
acquisitions. We have a high regard for the business that Merlon
has established in Egypt and look forward to working with our
new colleagues.
Egypt proven and
probable (2P) reserves
24 mmbbls
Egypt estimated
contingent (2C) resources
37mmbbls
13
Strategic Report Chief Executive Officer’s statement
continued
A: SOCO’s balance sheet remained strong throughout 2018 and
the Company had solid cash flows and low cash operating costs.
In September we announced that we had put in place a new RBL
facility and we were pleased to have received such strong interest
in the bank market and firm support from our new lenders. The
facility provides balance sheet efficiency and financial flexibility.
The Group finished the year with cash balances of $240.1m, which
includes the $100m drawn down from the RBL, after fully funding
its operating and capital expenditure programmes and returning
$23.3m to shareholders through a 5.25 pence per share dividend.
Revenues were $175.1m. The average realised oil price per
barrel achieved for the same period was approximately $74/bbl,
representing a premium of over $3/bbl to Brent.
A: Operations in Vietnam were not without challenges in 2018
and production was affected by the late arrival of a drilling rig
and equipment, operational issues and further weather related
rig delays. In addition, gas compressor inefficiencies and the
third-party production through the FPSO also had an impact
on TGT’s 2018 production performance. Actions are being taken
to help mitigate the impact of these issues and delays, including
acceleration of key workovers, upgrade of the gas compressors
and optimised management of the third party FPSO throughput.
Group production was 7,274 boepd (2017: 8,276 boepd) net
to SOCO’s working interest. Group 2018 year-end Vietnam
commercial (2P) reserves are 23.0 mmboe (2017: 28.1 mmboe).
TGT and CNV reserves were re-evaluated in February 2019
and revised following 2018 production from 25.4 mmboe
to 23.0 mmboe. TGT reserves were revised downwards due
to operational delays causing recovery of some production
volumes to slip beyond the licence expiry date. CNV reserves
were revised upwards following successful execution of the 2018
work programme, the impact of which had not been reflected
in year end 2017 reported volumes. Production guidance for
2019 remains at 6,500-7,500 boepd.
Significant cost savings for the TGT field were secured in 2018,
through the extension of two key operational contracts; the Bare
Boat Charter for the FPSO Armada TGT 1, which applies to the
period 27 August 2018 to 14 November 2024, and the revised
FPSO Operations and Maintenance Agreement. Overall, these
two contract extensions have resulted in significant operating cost
savings of over $40m (gross and pre-tax) over the extension period
relative to extension of the original contract with no changes.
A: We are constantly evaluating new business opportunities.
We make no promises about securing another transaction
in 2019 but what I can say is that we consider new business
opportunities carefully and will only ever do a deal if it is in the
best interest of our shareholders. We are keen to do the right
deals not just any deals.
Q: SOCO has a history of financial stability
and a strong balance sheet did this
continue in 2018?
Q: Can you tell us about the assets
in Vietnam and the change in Vietnam
reserves?
Q: Are you looking at more M&A activity?
14
SOCO International plc Annual Report and Accounts 2018 Q: What is the situation regarding
your presence in West Africa?
Q: What has been the strategic
focus for 2018?
Q: What are the priorities for SOCO
going forward?
Q: What about your duty to be a socially
responsible business and a positive
presence in the areas you operate in?
Q: For potential investors what would you
say are the key differentiators that make
SOCO such an attractive proposition?
A: In line with our strategy to optimise the SOCO portfolio, and our
announced plans to exit from our West African positions, SOCO
completed the sale of its former interests in Congo (Brazzaville)
and in the Cabinda North Block, Angola in 2018. The combination
of existing cash, the new credit facility and the cash flow from our
producing assets in Vietnam ensures that we are funded to take
advantage of acquisition opportunities in line with our strategy
of creating a full-cycle exploration and production company with
a diversified portfolio.
A: During 2018, SOCO’s focus has been to further strengthen the
business through growth opportunities and to build scale, all the
while underpinned by our relentless focus on financial discipline
and shareholder return. These strong foundations have been built
as a result of a great deal of hard work and I would like to thank all our
staff for their effort and contribution to our achievements this year.
A: Upon completion, the Merlon acquisition will mark a significant
turning point for SOCO, doubling its production and opening up
a whole new region of potential future opportunities. We look to
deliver on increased production in Egypt and on our exploration
plans in both Egypt and Vietnam. Activity in 2019 is expected to
include implementing an increased drilling programme in Egypt
as we further develop the discovered resource base and test new
exploration play concepts. Our portfolio of Egyptian and Vietnam
assets has the potential to offer one of the most competitive
low operating cost production bases. In Vietnam we will look
to pro-actively manage the production decline of TGT and CNV.
On Blocks 125 & 126, 2D seismic acquisition will commence
mid-2019 in a new and exciting exploration basin.
A: We aim to build a business fostering and developing good
relationships with host countries so that we are partner of
choice. Safety will always be of the highest priority within the
business and, just as SOCO’s Joint Operations have achieved an
outstanding record of safety in Vietnam, we will work to continue
this success in Egypt. Our goal is to have a responsible and
positive presence in the regions in which we operate, resulting
in value for the host countries, local communities, employees,
contractors and shareholders.
A: SOCO has always been committed to capital discipline and
differentiates itself amongst its peers by having a consistently
strong and efficient balance sheet, a portfolio of assets with
a competitive low operating cost, steady cash flows, recurring
cash dividends and a highly experienced management team
with a demonstrable track record of creating and delivering value
to shareholders. This year has sown the seeds of an important
return to growth for the business and I am confident in the
outlook for the Company.
Ed Story
President and Chief Executive Officer
15
Strategic Report Core strategic objectives
Our strategy
for growth
Our strategy is to deliver value for shareholders
both through dividends and growth; by building a
balanced and diverse portfolio of cash generative
and development assets which provide robust risk
adjusted returns through the oil and gas lifecycle.
All underpinned by production and steady cash
flows and encompassing corporate responsibility,
corporate governance and financial discipline.
16
SOCO International plc Annual Report and Accounts 2018 01 Growth
orientated
Identifying inorganic and organic growth opportunities to build scale.
Targeting growth opportunities, actively managing portfolio through investments and
divestments. Seeking low cost, cash flow accretive assets with a focus on production
and near term developments, where we can create value for shareholders and that
we manage safely, to high operational and safety standards, using local staff and suppliers.
02 Focus on
stakeholders
Dialogue with shareholders, local communities, host governments, employees,
contractors and others in the supply chain. We seek to have engagement through
formal and informal processes and an open dialogue with our stakeholders,
considering matters that are important to our stakeholders and to the successful
delivery of our corporate objectives.
03 Stewards
of capital
A culture of prudent financial management, capital allocation and capital return.
Capital discipline focuses on controlling and managing costs. Capital allocation
decisions are taken to make investments where they will provide risk adjusted full
cycle returns. It is this approach that has allowed us to return significant amounts
of capital to shareholders. We have looked to add another strand to the story –
capital growth – to underpin the sustainability of dividends over the longer term.
17
Strategic Report Our strategy in action
A year
in review
Progress
Portfolio optimisation is where we
actively manage the asset portfolio
through divestments and acquisitions.
During 2017 we reviewed our strategic
priorities and the Board decided our
assets in Congo (Brazzaville) and Angola
were no longer a core priority for the Group.
SOCO sold these assets during 2018.
Future priorities
We continue to look for new business
opportunities of scale, that will deliver
shareholder returns through dividends
and capital growth.
01
Portfolio optimisation
Investment case
page 08
18
SOCO International plc Annual Report and Accounts 2018 02
M&A activity
& organic growth
Principal risks
page 38
Key metrics
page 22
Progress
During the year SOCO refreshed its pursuit of growth
opportunities, supported by the establishment of a business
development team. In September 2018, SOCO announced that
it had agreed the acquisition of Merlon El Fayum’s onshore oil
assets in Egypt. The acquisition complements and diversifies
SOCO’s existing Vietnam-focused portfolio, builds scale through
the doubling of our reserves and resources, increases SOCO’s
through-cycle financial resilience through the low cost resource
base, and provides tangible production growth, re-setting
SOCO’s growth trajectory.
Future priorities
In Egypt we will seek to implement an increased drilling
programme as we further develop the discovered resource base
and test new exploration play concepts. In Vietnam we will look
to manage the production decline of TGT and CNV. On Blocks
125 & 126, 2D seismic acquisition will commence mid 2019
in a new and exciting exploration basin.
Operations review
page 24
03 Capital structure
discipline
Progress
SOCO always had a strong financial base and balance
sheet. In 2018 we put in place a new debt facility of
$125m with an accordion feature of a further $125m
available for additional investments. This leverage
remains conservative but increases the efficiency
of the balance sheet.
Future priorities
The debt facility provides us with an efficient
balance sheet and financial flexibility for funding
further acquisitions.
Our pursuit of growth opportunities will always
be positioned within our long standing strategy
of building value for shareholders.
Finance review
page 32
19
Strategic Report
Business model
Our business
model is to build
for the future
Acquire
Inputs
Our people
+ Extensive industry experience
+ Technical abilities
+ Commercial experience
+ Relationships
Produce
Develop
Invest
Our investment strategy
+ Investment in assets
+ Mergers and acquisitions
+ Organic growth
Our capital
+ Low operating cost
+ Balance sheet efficiency
+ Debt capacity
20
SOCO International plc Annual Report and Accounts 2018 We aim to build a business focused on sustainable
cash flow generation, maximising value creation and
total shareholder return. We have the right people
and the financial strength to unlock opportunities,
create value and to grow the business.
Experienced management team identifying established
high margin, low risk producing assets enabling
geographical asset diversification and increase in
exploration acreage growth leading to value growth.
Value outputs
Growth through acquisition
+ Merlon acquisition
+ Reserves addition 24 mmbbls (2P) and reserves growth
37 mmbbls (2C)
+ Conventional and unconventional exploration potential
Production increase through acquisitions and
through development of existing discovered resource.
Maximising margins through optimising production and
low operating costs. Responsible operations; operating
safely at all times.
Group production metrics
+ Group production increase through M&A activity
+ Low cost per barrel
+ Continued development of Vietnam assets
+ Responsible and safe operations
Capital growth from operations and portfolio
optimisation leading to M&A activity and future
production growth resulting in greater value and
returns from capital growth and yield.
Stakeholders
+ NAV growth and share price
+ Dividend payments
+ Free cash flow; value return into business to drive
organic and inorganic growth
+ In country economic contribution and social investment
+ Employment and training
21
Produce
Develop
Invest
Strategic Report Key metrics
Monitoring
our progress
to deliver
performance
Lost Time Injury Frequency (“LTIF”)
(Per Million Man-Hours Worked)
Net production
(boepd)
0
2018
2017
2016
0
0
0
Description:
We are committed to operating safely and responsibly
at all times. Having a positive impact on the wellbeing
of our employees, our contractors and the local
communities in which we operate is a priority.
Objective:
SOCO’s key safety target is zero LTIF.
Performance:
Zero LTIF in the year.
Outlook:
Continue to work with the JOC’s to maintain the high
safety standards with the aim of driving continuous
improvement year-on-year and look to replicate this
in Egypt.
Links to strategy:
– Focus on
Stakeholders
Associated risks:
– Health, Safety,
Environmental
and Social risk
– Stakeholder risk
7,274
Low cash operating cost
($/boe)
13.63
2018
2017
2016
7,274
8,276
9,883
2018
2017
2016
13.63
13.73
11.70
Description:
Production revenues generate cash flow which is
re-invested in our portfolio of assets, new business
opportunities, and in returns to shareholders.
Objective:
Optimise production from SOCO’s asset base.
Performance:
2018 production rate was adversely affected by
operational, weather and equipment and rig delays.
Outlook:
2019 work programme includes two firm wells to be
drilled by the end of 2019, and an increased drilling
programme in Egypt upon completion.
Description:
Our low operating expenditure helps deliver high
margin production revenues. The cost of producing
a single barrel of oil is influenced by industry costs,
inflation, fixed costs and production output.
Objective:
To be profitable at lower oil prices.
Performance:
SOCO achieved an operating cost of $13.63/boe
in 2018, a slight improvement over 2017.
Outlook:
We have low operating cost base which we plan
to maintain in 2019.
Links to strategy:
– Deliver value
through growth
Associated risks:
– Reserve risk
Links to strategy:
– Deliver value
through growth
Associated risks:
– Partner alignment risk
– Political and regional risk
Links to remuneration report (See page 82)
Links to remuneration report (See page 82)
Links to remuneration report (See page 82)
22
SOCO International plc Annual Report and Accounts 2018 The financial and non-financial metrics facilitate
better management of long-term performance and
delivering on our sustainable responsible business
plans. They are kept under periodic review and
regularly tested for relevance against our strategies
and policies.
Returns to shareholders
(Pence per ordinary share)
Cash, cash equivalents
and liquid investments ($m)
Capital expenditure
(Cash $m)*includes abandonment funding
5.25p
240.1
22.4
2018
2017
2016
5.25p
5p
4p
2018
2017
2016
240.1
137.7
100.3
2018
2017
2016
22.4
29.3
40.1
Description:
Since 2006 SOCO has paid a regular dividend
to shareholders.
Objective:
Sustainable cash returns to shareholders.
Performance:
SOCO’s business model continues to deliver
cash returns to shareholders and during the year
paid a 5.25 pence per ordinary share, an increase
from 2017.
Outlook:
An annual dividend is a key aspect of our capital
discipline and investment thesis.
Description:
SOCO has a history of stable finances and a strong
balance sheet due to prudent management of its
producing assets.
Description:
Investment in our asset base required to maintain
and grow the business and is directed to our assets
in Vietnam currently.
Objective:
Maintain financial strength through a strong cash
balance, ensuring we can meet obligations as they
become due, invest in the future of the business
and maintain our commitment to return cash
to shareholders.
Performance:
SOCO has a cash balance of $240.1m whilst also
returning cash to shareholders.
Outlook:
SOCO has a culture of capital discipline, capital
allocation and capital returns and this remains the
key focus as we grow the business.
Objective:
Allocate capital to achieve high and feasible returns.
Performance:
The 2018 cash capital expenditure was lower
than anticipated reflecting the delay in the drilling
campaign and the deferral to 2019 of seismic
acquisition on exploration Blocks 125 & 126
in Vietnam.
Outlook:
Our cash capital expenditure budget for 2019 is
$33.8m and is substantially the TGT drilling campaign
and 2D seismic acquisition of Blocks 125&126.
Links to strategy:
– Return to
shareholders
Associated risks:
– Commodity price risk
Links to strategy:
– Deliver values
through growth
– Return to
shareholders
Associated risks:
– Commodity price risk
– Financial discipline
and governance risk
Links to strategy:
– Deliver value
through growth
– Investment growth
Associated risks:
– Commodity price risk
– Partner alignment risk
23
Strategic Report Operations review
Review of
operations
Antony Maris
Chief Operating Officer
We have existing producing assets in Vietnam,
the Merlon acquisition will help us achieve
increased production and reserves growth.
Block 125
Block 126
Block 9-2
Block 16-1
24
SOCO International plc Annual Report and Accounts 2018 Vietnam
an established
asset
In Vietnam we have two producing fields
and two exploration blocks.
Blocks
16-1 The TGT field is situated in Block 16-1, offshore Vietnam in the
shallow water Cuu Long Basin, approximately 100km from
Vung Tau. Block 16-1 was awarded to SOCO in 1999. Production
from TGT began in 2011 and to date 41 wells have been
drilled and an estimated 78 mmboe produced. Oil from TGT is
transported by a sub-sea pipeline to a nearby leased Floating
Production Storage and offloading vessel where it is processed
and then exported by tanker. Gas from TGT is processed at
nearby facilities and transported by pipeline to shore to supply
the Vietnamese domestic market.
SOCO interest
30.5% working interest
Operator
Hoang Long Joint Operating Company
Location
Cuu Long Basin, offshore Vietnam
Operational phase
Production/ field development
9-2 The CNV field is located in Block 9-2, offshore Vietnam, in the
shallow water Cuu Long Basin. Block 9-2 was awarded to
SOCO in 2000. The CNV field was first discovered in 2002 by
the CNV-1X well and production began in July 2008. The oil and
gas produced from CNV are transported by sub-sea pipeline to
a nearby central processing platform operated by Vietsovpetro.
Here the oil and gas are separated and gas is transported via
pipeline to an onshore gas facility. The oil is held in a storage
vessel prior to sale.
SOCO interest
25% working interest
Operator
Hoan Vu Joint Operating Company
Location
Cuu Long Basin, offshore Vietnam
Operational phase
Production/ field development
n
o
i
t
c
u
d
o
r
P
125
126
n
o
i
t
a
r
o
p
x
E
l
Blocks 125 & 126, awarded in 2017, are in moderate to deep
waters in the Phu Khanh Basin, north east of the Cuu Long
Basin. Multiple structural and stratigraphic plays are observed
on the existing 2D seismic data. Interpretation of the available
data indicates there is good potential for source, expulsion and
migration of oil with numerous reservoir and seal intervals likely.
SOCO interest
70% working interest
Operator
SOCO Exploration (Vietnam)
Location
Phu Khanh basin, offshore Vietnam
Operational phase
Exploration
25
Strategic Report
Operations review
continued
Vietnam
Blocks 16-1 and 9-2, which contain
the TGT and CNV fields respectively,
are located in shallow water in the
hydrocarbon-rich Cuu Long Basin, near
the Bach Ho field, the largest in the region
with production already in excess of
one billion barrels of oil equivalent. The
Blocks are operated through non-profit
Joint Operating companies in which each
partner holds an interest equivalent to
its share in the respective Petroleum
Contract. The Group holds a 30.5%
working interest in Block 16-1 and a 25%
working interest in Block 9-2 and its
partners in both blocks are PetroVietnam
Exploration and Production, a subsidiary
of the national oil company of Vietnam
and PTTEP, the national oil company
of Thailand.
Production summary
Production in 2018 from the TGT and
CNV fields net to the Group’s working
interest average was 7,274 boepd
(2017: 8,276 boepd). This is in line with
the production guidance of 7,000 to
7,400 boepd given on 20 September
2018. TGT 2018 production averaged
18,857 boepd gross and 5,686 boepd
net to SOCO (2017: 22,300 boepd
gross and 6,724 boepd net). CNV
production averaged 6,352 boepd
gross and 1,588 boepd net to SOCO
(2017: 6,206 boepd gross and
1,552 boepd net).
The Group’s Vietnam production guidance
for 2019 remains 6,500-7,500 boepd.
Actual production at the higher end of this
range will depend on several operational
factors, including the timing of the drilling,
completion and hook-up of the two firm
TGT wells in the approved 2019 work
programme.
The average realised crude oil price for
2018 was approximately $74 per bbl,
a premium to Brent of over $3 per bbl.
Vietnam development and operations
Block/9-2
CNV field
25% interest
Operated by HVJOC
CNV production averaged 6,352
boepd gross and 1,588 boepd net to
SOCO’s working interest in 2018 (2017:
6,206 boepd gross and 1,552 boepd,
respectively).
The CNV field is located in the western
part of Block 9-2, offshore southern
Vietnam and is operated by the HVJOC.
In contrast to the geology of TGT, the
CNV field reservoir is fractured granitic
Basement which produces a volatile oil
with a high gas to oil ratio.
Exploitation is dependent on the
fracture interconnectivity to deplete
the reservoir efficiently. Accordingly,
traditional reservoir properties and STOIIP
calculations are not straightforward
but, managed properly, the fractured
Basement reservoir declines at a much
slower rate than commonly seen in clastic
reservoirs. Hydrocarbons produced from
CNV are transported via subsea pipeline
to the BHCPP, where wet gas is separated
from 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,
realising a premium to Brent.
CNV Production wells
The Japan Drilling Company Hakuryu-II
jack-up rig drilled drilling the CNV-5PST3
side-track well, finishing in mid-October.
As a result of mechanical and operational
difficulties completion of the well took
longer than anticipated and consequently
the excessive volume of sea-water losses
in the fractured reservoir were beyond
the original coiled tubing nitrogen lift
specification. The water injection pipeline
was subsequently converted to transport
gas and lift operations commenced.
Operations are now running normally
with CNV-5PST3 and, although flowing
naturally, the well continues to clean-up
and oil flow may further improve as
the well stabilises. Following the well
completion, the rig was moved to the
TGT H5-WHP.
Oil and gas production by field (figures in boepd)
TGT production
Oil
Gas1
CNV production
Oil
Gas1
Total production
Oil
Gas1
FY 2018
FY 2017
5,686
5,346
340
1,588
1,052
536
7,274
6,398
6,724
6,299
425
1,552
1,037
515
8,276
7,336
940
1 Assumes oil equivalent conversion factor of 6,000 standard cubic feet per
barrel of oil equivalent.
26
SOCO International plc Annual Report and Accounts 2018 Block/16-1
TGT field
30.5% interest
Operated by HLJOC
TGT production averaged 18,857 boepd
gross and 5,686 boepd net to SOCO’s
working interest in 2018 (2017: 22,300
boepd gross and 6,724 boepd net,
respectively).
The TGT field is located in the north
eastern part of Block 16-1, offshore
southern Vietnam and is operated by the
HLJOC. The Block 16-1 petroleum contract
was originally signed in December 1999,
with the first commercial discovery
made in 2005. TGT is a simple structure,
with a series of stacked producing
intervals, extending over 16km and with
hydrocarbons located in at least five major
fault blocks. The producing reservoirs
comprise a complex series of over 80
clastic reservoir intervals of Miocene and
Oligocene age. Each interval requires
individual reservoir management to
optimise field recovery. The TGT field
continues to be a rewarding investment for
SOCO, with its attractive fiscal terms, low
operating costs and an oil quality which
realises a premium to Brent.
The first platform, H1-WHP, came on
stream in August 2011, followed by the
H4-WHP in July 2012 and the H5-WHP
in August 2015. Crude oil from TGT is
transported via subsea pipeline to the
FPSO, where it is processed, stored
and exported by tankers to regional oil
refineries. Gas produced from the field is
exported by pipeline to the nearby Bach
Ho facilities for processing and onward
transportation to shore by pipeline to
supply the Vietnamese domestic market.
TGT Production wells
The PetroVietnam Drilling rig, PVD-1,
successfully completed TGT-16AP
and the rig was released in Q3 2018.
The Hakuryu-II jack-up rig arrived at
the H5-WHP on 19 October 2018 and
successfully drilled the TGT-14XST3 well.
This well was a re-drill of the reservoir
section of the H5 South prospect, to
the south of the main H5 area. The
well operations were completed on
2 December 2018 and the rig was moved
to the TGT-31P location.
The TGT-31P well was drilled through the
main reservoir sections to total target
depth on 16 January 2019 targeting the
deeper high temperature, high pressure
section below the main producing
horizons at the H5-WHP. The deep section
encountered hydrocarbons in the D1 and
E Oligocene targets. A single DST was
conducted and oil flowed to surface under
controlled conditions. Evaluation of this
data to appraise the possible additional
potential in the equivalent deeper sections
of the wider TGT area is ongoing to
establish if this new high pressure, high
temperature play continues in the up-dip
TGT fault blocks to the north.
FPSO Contract
Significant cost savings for the TGT
field were secured in 2018, through
the extension of two key operational
contracts; the Bare Boat Charter for the
FPSO Armada TGT 1, which applies to the
period 27 August 2018 to 14 November
2024, and the revised FPSO Operations
and Maintenance Agreement. Overall,
these two contract extensions have
resulted in significant operating cost
savings of over $40m (gross and pre-tax)
over the contracts’ extension period
relative to extension of the original
contract with no changes.
TGT Compressors and FPSO Tie-in
Agreement (“TIA”) Compressors
As announced on 14 February 2019, tests
to evaluate solutions for inefficiencies
in the gas compressors have confirmed
that the gas from a third party well was
the main cause of the gas compressors
suffering unplanned outages and
delivering lower gas lift, which impacted
on TGT oil production. Production from
the third-party well is currently being
managed to reduce the gas flare and the
effect on TGT production. Upgrade work
to the compressors is scheduled to begin
Q4 2019.
The existing TIA for the FPSO between
the HLJOC and the third-party, the Thang
Long Joint Operating Company (“TLJOC”),
expired on 30 August 2018, and an interim
agreement has been put in place while
new terms for the third-party production
are being negotiated. The interim
agreement between the HLJOC and the
TLJOC includes a cost sharing mechanism
that has resulted in a reduction in
operating costs to the HLJOC.
2019 work programme
On TGT, the 2019 work programme
and budget was formally approved by
the HLJOC on 22 January 2019. The
programme includes two firm and
two contingent in-field wells, 18 well
interventions and the upgrade of the gas
compressors. Due to likely timing of the rig
tendering process, the HLJOC anticipates
that the wells in the approved 2019 TGT
work programme will not be drilled before
late 2019.
27
Strategic Report Operations review
continued
Vietnam Exploration
Blocks/ 125&126
70% interest
SOCO-operated
Exploration Blocks 125 & 126 are in
moderate to deep waters in the Phu
Khanh Basin, north of the Cuu Long Basin,
and multiple structural and stratigraphic
plays are interpreted on the available 2D
seismic data. There is good potential for
source, expulsion and migration of oil in
the basin with numerous reservoir and seal
intervals likely.
Acquisition of new 2D seismic acquisition
is targeted to commence mid-year 2019.
Divestments
Marine XI Block, offshore Congo
(Brazzaville) (40.39% working interest,
SOCO-operated) and Cabinda North
Block, onshore Angola (non-operated,
22% working interest)
As announced on 25 June 2018, SOCO
signed and completed a sale and
purchase agreement with Coastal Energy
Congo Limited (“Coastal”), to sell its entire
shareholding in SOCO Congo Limited, the
entity indirectly holding the Group’s former
interests in Congo (Brazzaville). Under
the agreement Coastal acquired SOCO
Congo Limited for a cash consideration
of up to US$10m and an overriding royalty
on all future gross oil and condensate
production sold from those interests.
On 5 October 2018, SOCO announced
completion of the sale of the Group’s
entire 80 per cent. shareholding in SOCO
Cabinda Limited and the receipt of the
cash consideration of US$5 million
plus a small working capital adjustment
for the period between 30 June 2018
and completion.
Group reserves and
contingent resources
In accordance with the requirements of
its new Reserve Base Lending Facility
announced on 17 September 2018, SOCO
commissioned an independent audit of
gross (100% field) reserves for TGT and
CNV, as of 31 December 2018, by RISC
Advisory Pty Ltd (“RISC”). The numbers
in the table below are SOCO’s revisions
to Vietnam reserves, based on SOCO’s
unitised working interest of the gross
reserves. The gross reserves have been
independently agreed by RISC.
SOCO working interest reserves and resources TGT field
at 31 December 2018 (Figures in mmboe)
SOCO working interest reserves and contingent resources
CNV field at 31 December 2018 (Figures in mmboe)
Reserves
Oil
Gas1
Total
Contingent Resources
Oil
Gas1
Total
1P
11.6
0.5
12.1
1C
5.3
0.2
5.5
2P
3P
Reserves
15.3
0.9
16.2
19.5
Oil
1.4
Gas1
20.9
Total
2C
3C
Contingent Resources
11.5
0.7
12.2
18.1
Oil
1.2
Gas1
19.3
Total
1P
3.3
1.6
4.9
1C
1.1
0.6
1.7
2P
4.5
2.3
6.8
2C
2.8
1.4
4.2
3P
5.8
2.9
8.7
3C
4.5
2.2
6.7
Sum of Reserves and Contingent Resources2
1P & 1C
2P & 2C
3P & 3C
Sum of Reserves and Contingent Resources2
1P & 1C
2P & 2C
3P & 3C
Oil
Gas1
Total
16.9
0.7
17.6
26.8
1.6
28.4
37.6
Oil
2.6
Gas1
40.2
Total
4.4
2.2
6.6
7.3
3.7
11.0
10.3
5.1
15.4
1 Assumes oil equivalent conversion factor of 6,000 standard cubic feet
1 Assumes oil equivalent conversion factor of 6,000 standard cubic feet
per barrel of oil equivalent.
per barrel of oil equivalent.
2 The summation of Reserves and Contingent Resources has been prepared
2 The summation of Reserves and Contingent Resources has been prepared
by the Company
by the Company.
28
SOCO International plc Annual Report and Accounts 2018 On TGT, reserves were revised
downwards due to operational delays
causing recovery of some production
volumes to slip beyond the licence
expiry date.
On CNV, the reported reserves position
at 31 December 2017 did not include
the potential impact of the 2018 work
programme, as this had not yet been
approved by the Hoan Vu Joint Operating
Company. The execution of the 2018
work programme, although delayed,
has resulted in successful production
performance which has now been taken
into account, resulting in an improvement
in the field’s reserves.
SOCO’s acquisition of Merlon Petroleum
El Fayum Company (“Merlon”), anticipated
to complete in 1H 2019, is expected to
add 24 mmbbl 2P reserves as at 30 June
2018, consistent with LR Senergy’s CPR
included in the Circular for the transaction.
New business
The period saw SOCO enter into the
proposed acquisition of Merlon. This
marked a significant turning point for
the Group, providing a high quality, oil
concession with significant development
upside and exploration optionality. The
acquisition will create a new hub for SOCO
in Egypt, which the Group will utilise to
support further growth not only in Egypt
but also the wider MENA region, both
organically and through additional M&A.
The SOCO team has a track record of
delivering shareholder value through asset
acquisition and monetisation, delivering
large scale developments, and returning
capital to shareholders. We evaluate M&A
opportunities by reference to our strategic,
financial and operational criteria and only
pursue transactions if they are determined
by the Board to be in the best interest of
shareholders. The Board continues to
evaluate a number of opportunities in
accordance with these criteria.
2018 Production
2017: 8,276 BOEPD
7,274
BOEPD
29
Strategic Report Operations review
continued
Egypt
opportunities
growth
Block
El Fayum
The El Fayum concession is located in
the low-cost and highly prolific Western
Desert, c.80km south west of Cairo and
in proximity to local energy infrastructure.
It consists of 10 oil fields and builds
scale by doubling our production, adding
incremental 2P (net) working interest
reserves of 24 mmbbls and 2C (net)
working interest resources of 37 mmbbls.
Merlon El Fayum produced 7,859 bopd
(net) in 2017, with the potential to
increase production levels to a target
in excess of 15,000 bopd (net) by 2023
through the recovery of its discovered
2P reserves and 2C resources.
In addition, the El Fayum concession
will provide SOCO with nearly 1,570km2
of exploration acreage, of which c.70%
is covered by existing 3D seismic, with
multiple, identified exploration prospects
in proven petroleum systems, as well
as a large under explored area in the
northern portion of the concession. It is
a platform to enable future organic and
inorganic growth in Egypt and the wider
Middle East and North Africa region.
Our new colleagues have a proven ability
to create and realise value and have
evolved the assets into a production
and development business.
On 25 September 2018, SOCO announced the proposed acquisition of Merlon Petroleum El Fayum Company. Shareholder
approval was gained on the 21 December 2018. Completion remains subject to the satisfaction or, where permitted, waiver of
certain Conditions under the Share Purchase Agreement. SOCO expects the completion of the acquisition will occur in 1H 2019.
30
SOCO interest
100% – participating interest
Operator
Petrosilah
Location
Western Desert, Egypt
Operational phase
Production/field development/exploration
Reserves and Resources
mmbbls (net WI) (2P)
24
37
mmbbls (net WI) (2C)
SOCO International plc Annual Report and Accounts 2018 Cairo
El Fayum
Egypt
operations
El Fayum
c. 80km SW Cairo
1,826km2
31
Strategic Report
Financial review
Jann Brown
Managing Director and
Chief Financial Officer
32
Building
on financial
strength
SOCO’s financial strength is founded on our long term
approach to managing capital. The finance strategy
is founded on three core areas of focus – capital
discipline, capital allocation and capital return.
Finance strategy
Our finance strategy underpins the
Group’s business model and goes hand
in hand with our commitment to building
shareholder value through capital growth
and dividends.
The finance strategy is founded on three
core areas– capital discipline, capital
allocation and capital return.
During 2018, we generated operating
cash flow from continuing operations of
$55.9m (2017: $45.0m). In addition, we
entered into an Reserves Based Lending
facility (“RBL”). The facility has been
arranged and underwritten by BNP Paribas,
Crédit Agricole Corporate and Investment
Bank and Standard Chartered Bank.
The RBL has $125m secured over the
Vietnam assets, of which $100m was
drawn in December 2018 to part fund
the cash consideration element of the
proposed Merlon El Fayum Company
acquisition. The RBL facility also includes
an uncommitted accordion feature of a
further $125m, which can be activated
by bringing new assets in to the
borrowing base.
We have a low cost asset base and
our operating cash flows plus the
accordion feature of the RBL facility
provide us with the financial flexibility
and capacity to support the right projects
and growth opportunities.
SOCO International plc Annual Report and Accounts 2018 Operating performance
The Group continued to deliver robust
revenue of $175.1m representing a 12%
increase over the prior year (2017: $156.2m).
The increase year on year is the result of
the higher average realised crude oil price
of $74.34/bbl (2017: $56.43/bbl), a $3/bbl
premium to Brent, offset by the decline
in production levels from 8,276 boepd
to 7,274 boepd.
Cash operating costs decreased to $36.2m
(2017: $41.5m), mainly as result of the
improved terms of the extended FPSO and
bareboat charter contracts. DD&A reduced
to $51.8m (2017: $56.5m), largely as a
function of the number of barrels produced.
Administrative expenses for the year
totalled $28.4m (2017: $18.3m) and
included $12.0m (2017: $4.7m) on new
venture third party costs, reflecting the
renewed effort on portfolio rationalisation
and capturing new business.
During 2019, the underlying staff cost will
reduce following an internal restructuring
and streamlining of the Head Office function.
Operating profit from continuing
operations, for the year, was $79.9m
(2017: $22.9m), which included $37.8m
reversal of the impairment charge in CNV.
Taxation
The tax expense for the year increased
to $56.0m (2017: $27.7m) in line with profit
and the impact of the reversal of the
impairment charge ($13.9m). The Group’s
effective tax rate approximates to the
statutory tax rate in Vietnam of 50%, after
adjusting for non-deductible expenditure.
Profit post tax
Profit post tax for the period from
continuing operations was $24.1m
(2017: loss $5m). Following our sale
of the interests in Congo (Brazzaville)
and Angola, results from these assets
have been classified as discontinued
operations for all periods shown,
with a resulting post-tax profit from
discontinued operations of $3.6m
(2017: loss $152.3m). This profit reflects
the $5.0m of proceeds from the sale
of Angola, which had a $nil carrying
value following the impairment of the
exploration assets in prior years, offset
by costs of exit from both these positions.
Cash flow
Net cash flow from operations in Vietnam
amounted to $55.9m (2017: $45.0m).
Revenue
$175.1m
2017: $156.2m
This reduction year on year is in part due
to deferral of acquisition of seismic data
on Blocks 125 & 126 and delay of the TGT
drilling programme into 2019.
Net cash flows from investing activities
included a cash outflow from the disposal
of a subsidiary Congo (Brazzaville) of
$4.5m, to match the transfer of accrued
liabilities, offset by a cash inflow for the
sale of the Angolan assets of $5m.
Net operating cash flow for the year
(before working capital movements) was
$96.7m (2017: $81.7m). Capital expenditure
on continuing operations for the year was
$22.4m (2017: $25.2m).
A final dividend for the year of $23.3m
(2017: $21.0m) was paid to shareholders
in June 2018 following approval of a final
dividend of 5.25p (2017: 5.00p) per share
at the 2018 AGM.
Cash operating cost per barrel*
Cost of sales
Less:
Depreciation, depletion and amortisation
Production based taxes
Inventories
Other cost of sales
Cash operating costs
Production (BOEPD)
Cash operating cost per BOE ($)
DD&A per barrel*
Depreciation, depletion and amortisation
Production (BOEPD)
DD&A per BOE ($)
2018
$m
104.6
(51.8)
(15.1)
(0.1)
(1.4)
36.20
7,274
13.63
2017
$m
115.0
(56.5)
(13.6)
(1.5)
(1.9)
41.5
8,276
13.73
2018
$m
51.8
7,274
19.51
2017
$m
56.5
8,276
18.72
*
Cash operating cost per barrel and DD&A per barrel are alternative
performance measure. See page 136.
33
Strategic Report Financial review
continued
Tax strategy and total tax contribution
Tax is managed proactively and
responsibly with the goal of ensuring that
the Group is compliant in all countries in
which it holds interests. Any tax planning
undertaken is commercially driven and
within the spirit as well as the letter of the
law. This approach forms an integral part
of SOCO’s sustainable business model.
The Group’s Code of Business Conduct
& Ethics seeks to build open, cooperative
and constructive relationships with tax
authorities and governmental bodies in all
territories in which it operates. The Group
supports greater transparency in tax
reporting to build and maintain stakeholder
trust. We have a number of overseas
subsidiaries, set up some time ago and
the Group is now proactively planning to
bring these into the UK tax net to ensure
greater transparency and comparability.
No additional taxes are expected to be due
as a result of this exercise.
During 2018, the total payments to
governments for the Group amounted to
$202.4m, of which $196.5m or 97% was
related to the Vietnam producing licence
areas, of which $133.0m (2017: $117.8m)
was for indirect taxes based on production
entitlement. The breakdown of the other
contributions, including payroll taxes
and other taxes is contained within the
additional information in the 2018 Annual
Report and Accounts.
34
Movements in the Property, Plant and Equipment
As at 1 Jan 2018
Capital spend
DD&A
Reversal of impairment
As at 31 Dec 2018
2018 $m
505.9
15.5
(52.0)
37.8
507.2
Cash and cash equivalents, including
liquid investments, prior to the drawdown
of $100m from the RBL facility, were
steady at $140.1m. (2017: $137.7m).
The drawdown is included in the balance
sheet as cash. There were no liquid
investments at 31 December 2018
(2017: $25.3m) as these were moved
to liquid investments of less than three
months’ maturity and so classified as
Cash and cash equivalents.
Trade and other payables were almost flat
at $22.9m (2017: $23.1m). Tax payable was
$5.2m (2017: $6.8m)
Long term provisions comprise the
Group’s decommissioning obligations
in Vietnam which has decreased from
$52.7m at 2017 year-end to $51.7m at 2018
due to a decrease in the inflation rate
used from 2.5% to 2%, offset by unwinding
of the discount $1.4m.
Balance sheet
The $2.0m incurred on Blocks 125 & 126 in
Vietnam was booked to Intangible assets,
which now stand at $5.8m (2017: $3.8m).
The movements in the Property, Plant and
Equipment asset class are shown above.
In 2014 an impairment of the Group’s CNV
asset of $60.5m and associated $22.3m
deferred tax was charged to the Income
Statement. The 2018 upward revision in
the 2P reserves of this asset has resulted
in a reversal of the impairment of $37.8m
in the period and $13.9m reversal of the
tax asset.
Cash is set aside for abandonment on both
TGT and CNV in the form of abandonment
funds for each field. These abandonment
funds are operated by PetroVietnam
and, as the Group retains the legal rights
to the funds pending commencement
of abandonment operations, they are
treated as other non-current assets in our
financial statements.
Oil inventory was $4.1m at 31 December
2018 (2017: $4.2m). Trade and other
receivables decreased to $19.6m
(2017: $20.7m) largely due to the timing
of crude oil cargos.
SOCO International plc Annual Report and Accounts 2018 Revenue
2017: $156.2m
Operating cash flow
2017: $45.0m
$175.1m
$55.9m
Own shares
The SOCO EBT holds ordinary shares
of the Company for the purposes of
satisfying long term incentive awards
for senior management. During the
year the EBT bought 1,139,861 shares
at an average cost of £0.8712 per share.
Following this acquisition, the EBT held
2,897,094 (2017: 2,114,596) shares as at
31 December 2018, representing 0.85%
(2017: 0.64%) of the issued share capital.
In addition, as at 31 December 2018, the
Company held 9,122,268 (2017: 9,122,268)
treasury shares, representing 2.67%
(2017: 2.67%) of the issued share capital.
Going concern
SOCO regularly monitors its business
activities, financial position, cash flows
and liquidity. Scenarios and sensitivities
are included in the forecasts, including
changes in commodity prices and in
production levels from the existing assets
in Vietnam and the proposed acquisition
of Merlon El Fayum Company, plus other
factors which could affect the Group’s
future performance and position.
These forecasts show that the Group
will have sufficient financial headroom
for the 12 months from the date of approval
of the 2018 Accounts. Based on this
analysis, the directors have a reasonable
expectation that the Group has adequate
resources to continue in operational
existence for the foreseeable future.
Therefore, they continue to use the going
concern basis of accounting in preparing
the annual Financial Statements.
Annual dividend and company
distributable reserves
SOCO remains committed to paying a
dividend. During the year the Company
paid a final dividend to shareholders
in respect of the financial year ended
31 December 2017 of 5.25 pence per
Ordinary Share (2017: 5 pence), at a cost
to the company of $23.3m (2017: $21.0m).
The directors are recommending a
final dividend of 5.5 pence per Ordinary
Share, subject to approval at the AGM
on 23 May 2019.
The distributable reserves of the parent
company of the group amount to $269.9m
(2017: $157.3m)
Financial outlook
SOCO’s financial strength is founded on our
long term approach to managing capital.
Capital discipline focuses on controlling and
managing costs. Capital investment and
divestment decisions are taken to allocate
capital where it will provide risk adjusted
full cycle returns. It is this approach that has
allowed us to return significant amounts
of capital to shareholders. We have looked
to add another strand to the story – capital
growth – to underpin the sustainability of
the dividends over the longer term. This
year we have made a first significant step
towards this with the Merlon El Fayum
Company acquisition and we will continue
to look for growth opportunities in 2019
and beyond.
Jann Brown
Managing Director and
Chief Financial Officer
35
Strategic Report Risk management
Risk
Management
Report 2018
Effective risk management is integral to SOCO achieving
its corporate strategy to further strengthen the business
through growth in line with our financial strategy of
capital discipline, capital allocation and capital return
while protecting our personnel, assets, the communities
in which we operate, and our corporate reputation.
The Board is responsible for:
+ Setting business strategy and risk
appetite that determine the overall
context for the management of risk
in the Company
+ Establishing values to articulate
expected standards of conduct,
behaviour and ways of working
+ Identifying the nature and extent of
the principal risks and determining
the Company’s appetite for each
of these risks
+ Monitoring the Company’s risk
management and internal control
systems and annually reviewing
their effectiveness
The Group’s Risk Management policies
and procedures are further discussed
in the Corporate Governance Report
on page 68 and in the Audit and Risk
Committee Report on page 76, where
the significant issues related to the
2018 Financial Statements are also
reported. The SOCO Health, Safety,
Environmental and Social Responsibility
(“HSES”) Management System (“MS”),
which comprises the Company’s internal
controls mechanisms of policies,
procedures and guidelines through which
it assesses, manages and mitigates its
HSES risks and impacts, is described
more fully in the Corporate Responsibility
Report on page 44.
The Board has designated the Managing
Director and Chief Financial Officer
as the executive responsible for the
Company’s Risk Management function.
She is supported in this task by the Chief
Operating Officer, the Group Exploration
Manager, the Managing Director and the
Group Heads of Finance and Legal.
A bottom up approach to identifying and
assessing risks has been adopted by the
Company with risk registers developed
at asset and functional level. There is an
ongoing process to identify, monitor and
mitigate risk throughout the year with
any new risks or changes to existing risks
assessed quarterly and at each Audit and
Risk Committee meeting. Annually, the
Audit and Risk 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.
36
SOCO International plc Annual Report and Accounts 2018 SOCO’s risk management process
Set Strategic Objectives
Define Risk Appetite
Identify Principal Risks
Apply Risk Assessment Process Deliver Strategic Objectives
SOOC’s Risk Management Framework
Top-down
Oversight
Accountability
Monitoring
Deep-dive
Risk Governance Framework
The Board
Audit and Risk Committee
Senior Management Team
Asset/Project/Function
Each risk is categorised into the one
or more of the four impact areas:
Strategic – impact on Group’s ability
to progress growth plans due to lack of
attractive or affordable opportunities.
Financial – impact on financial
position, access to debt or equity
markets, inability to execute projects,
cost and schedule overruns, volatile
oil price conditions.
Operations – means an immediate
impact on exploration, development
and production activity.
Reputation – means an impact on the
perception of the Group with markets,
partners and stakeholders.
Bottom-up
Reviews and escalation
Risk identification
and mitigations
Maintain risk registers
Risk owners
The Board has considered the
uncertainties which exist around Brexit
and has concluded that the potential
impact on SOCO is likely to be low, even
in the case of a “no deal” Brexit in the
near term. Our principal operations are
conducted in territories outside the EU,
our cash flows are linked to the US Dollar,
and we do not rely on large numbers of
EU staff members being able to work in
the UK. We will continue to monitor the
situation as it develops, but for now we
have not had reason to include it amongst
our principal risks.
The transaction to acquire Merlon
El Fayum has not yet completed and
we have therefore prepared this report,
including the Risk Management Report,
without setting out the principal risks and
uncertainties relating to the ownership
of that business and the underlying
assets. A full analysis of the material
risks and uncertainties associated with
the acquisition and related matters was
set out in Part II of (Risk Factors) the
Circular dated 5 December 2018 sent
to shareholders in connection with the
transaction. Following completion of
the acquisition we will update our risk
reporting accordingly.
37
Strategic Report Risks
Principal Risks
and mitigations
A summary of the key risks affecting SOCO and how these risks are mitigated
to enable the Company to achieve its strategic objectives is as follows.
Key to change in likelihood
Increase
No Change
Decrease N New Risk
Strategic
N
1 Lack of acquisitions
Inability to complete further acquisitions in line with growth strategy
Causes
+ Social Issues (relationships)
+ Lack of opportunities (sector downturns)
+ Fluctuating oil prices/economic conditions:
+ Target governance
+ Industry competition (higher for “good” assets)
+ Issues exposed by due diligence including technical risks/uncertainties,
+ Resourcing limitations
+ Political risks
+ Inability to access suitable funding
disputes
Risk mitigation
+ Regular review of funding options
+ Proactive dialogue with banks and other lenders
+ Quality and number of advisors
+ Intensify Opportunity Screening
+ Implement focused due diligence processes
+ Build on relationships/industry intelligence
+ Effective project management and resourcing
N
2 Our proposed transaction to acquire Merlon does not complete
Delay in progress of SOCO growth strategy
Funds allocated to this acquisition will be released to allow further deals
Causes
+ Egyptian regulatory approvals not received in a timely manner
Risk mitigation
+ Clear plan agreed with Egyptian authorities
+ Frequent in country visits by senior personnel to monitor progress
and remove roadblocks
3 Health, Safety, Environmental and Social Risk
Reputational
Operational outages leading to lower production
Causes
+ Face oil and gas high risk operating conditions and HSES risks
+ Regional risks of economic and social instability
+ Non-alignment of new acquisitions HSES practices with SOCO
Corporate standards
+ Adverse weather conditions
38
SOCO ventures
Risk mitigation
+ Implement SOCO HSES Management System on all
+ Promote and facilitate best practice international standards
+ Ongoing personnel training, including running numerous
Emergency Response Drills and HSE training sessions
+ Integrate the Egyptian acquisition of Merlon Petroleum El Fayum
+ Effective Contractor Management system in place
+ Business Interruption (“BI”) insurance in place
Company and update and align with SOCO HSES MS
SOCO International plc Annual Report and Accounts 2018
4 Climate change risk
Reputational
Increased operating costs
Causes
+ Global transition to a lower carbon intensity economy
+ Increased climate regulation
+ Increase in carbon taxes
+ Investors driving business transition to tackle climate change
Financial
5 Commodity price risk
Uncertainty on planning
Inability to fund work programme / dividend
Causes
+ Geo-political factors
+ Supply and demand imbalances
+ Market speculations and trading in futures
Risk mitigation
+ Continuous monitoring and application of the most current and
evolving information on trends and factors which may impact
on current, future projects
business operations / directions
+ Evaluate “strategic fit” of climate change decisions on key
+ Transparent reporting and participation in Carbon Disclosure
+ Continuous improvement of GHG emissions management and
Project (“CDP”)
trigger initiatives to help emissions reduction
Risk mitigation
+ Hedging
+ Close monitoring of business activities, financial position
+ Stress test scenarios and sensitivities via principal compound
risks analysis to ensure a level of robustness to downside
price scenarios
cash flows
+ Capital discipline with focus on controlling and managing costs
6 Financial discipline and governance risk
Insufficient funds to finance growth plans and maintain dividends
Causes
+ Restrictions imposed in RBL covenants limit flexibility
+ Equity and/or debt markets no longer investing in oil and gas activities
+ Financial fraud
Risk mitigation
+ Strong financial discipline
+ Robust systems processes and Delegation of Authority
+ Discretionary spend actively managed
+ Continued engagement with lenders
Operational
7 Reserves risk
Future cash flows and value depend on producing our reserves
Causes
+ Earlier impairment triggers due to low commodity price and / or capital
constraints jeopardise planned exploration / development initiatives
+ Inherent uncertainties in the evaluation techniques to estimate
the 2P reserves
+ Increased DD&A costs
consultants
Risk mitigation
+ Ongoing evaluation of projects in existing and potential new areas
of interest and pursue development opportunities
+ Regular reviews of reserves estimates by independent
+ Ensure continuing adherence to industry best practice regarding
+ Ensuring peer and independent verification of future production
+ RBL compliance – Vietnam reserves are audited independently
technical estimates and judgements
profiles and reserve recovery
by reserves consultants approved by lenders
39
Strategic Report Risks
continued
N
8 Partner alignment risk
Misalignment at JV/JOC level can delay investment
Adverse impact on production and cash flow
Causes
+ Co-venturers divergent views on drilling and upgrade programme 2019/20
+ FPSO Tie-In Agreement (“TIA”) from other Operator
9 Cyber risk
Risk mitigation
+ Active Participation in JOC management
+ Direct secondment
+ Agree on more equitable alignment of interest with Thang Long
+ Application of internal control best practice under
+ 2019 TGT work programme agreed in principle and preliminary
JOC regarding the FPSO TIA
a procedural framework
preparation of bid packages
Major cyber security breach may result in loss of key confidential data
Causes
+ Sophistication and frequency of cyber attacks increasing
+ Disruption to critical business systems
Plan in place
Risk mitigation
+ Offsite installation of back-up system and Business Recovery
+ Prevention & detection of cyber threats via a programme
+ Plan for staged integration (new acquisition) and upgrade
of effective continuous monitoring
of IT systems
10 Human resource risk
Good skilled people are essential to ensure success
Causes
+ Failure to recruit and retain high calibre personnel to deliver
+ Challenges in the recruitment and integration of additional
on and implement strategy
technical expertise for the new acquisition
Risk mitigation
+ Remuneration Committee retains independent advisors
to test the competitiveness of compensation packages
+ Ongoing succession planning
+ Maintain a competitive remuneration mix regarding bonus,
long-term incentive and share option plans
40
SOCO International plc Annual Report and Accounts 2018 Reputation
11 Stakeholder risk
Adverse reaction from current / future stakeholders
Causes
+ Extractive industry image can be easily tarnished with adverse “flash events”
+ Operations in foreign countries / locations where social and environmental
matters may be highly sensitive
12 Political and regional risk
Risk mitigation
+ Operated joint ventures – SOCO always conforms
to international best practice regarding health, safety,
environmental and social policies
its influence to promote best practice
+ Non-operated ventures – SOCO always seeks to maximize
+ Garners the views of its stakeholders through direct
+ Active commitment to Corporate Responsibility reporting
+ Carry out extensive risk screening and due diligence
and indirect engagement
assessments prior to new country entry
Energy sector exposed to a wide range of political developments which
may impact adversely on operating costs, compliance and taxation
Causes
Risk mitigation
+ Canvass support in risk management by using both
+ Operations in challenging regulatory and political environments
international and in-country professional advisors
+ Fiscal regimes can be subject to sudden change
+ Engage directly with the relevant authorities on a regular basis
+ Approval processes can be protracted causing delays
+ Thoroughly assess the risks of operating in specific areas
+ No deal Brexit
+ Ongoing consideration of taking political risk insurance
+ All our operations are located outside of the EU and USD
and the commercial acceptability
is the main currency of our business
13 Business conduct and bribery
Reputational damage and exposure to criminal charges
Causes
+ Present in countries with below average score on the Transparency
+ Lack of transparent procurement and investment policies
+ Compliance with Criminal Crime Offences (“CCO”) and UK Bribery Act
International Corruption Index
associated persons
Risk mitigation
+ Ensure adequate due diligence prior to on-boarding with a risk
based approach, including independent “Red flags” checks
+ Annual training and compliance certifications by all
+ Increase awareness of SOCO’s anti-bribery and corruption
+ Whistleblowing facility in place
+ CCO risk assessment and on-going implementation of adequate
policies for all employees and associated persons
procedures to prevent facilitation of tax evasion across
all operations
+ Active commitment to the principles of the Extractive Industries
Transparency Initiative
41
Strategic Report Risks
continued
Viability statement
In accordance with the UK Corporate
Governance code, the Board has
assessed the prospects of the company
over a period longer than the twelve
months required to support the Going
Concern Statement on page 100 of the
Annual Report of Directors.
In undertaking this assessment the Board
has carried out a robust review of the risks
facing the Group, including those that
would threaten its business model, future
performance, solvency or liquidity, giving
particular attention to the principal risks.
Our strategy and associated principal risks
underpin both the Group’s three year base
forecast and scenario testing, plus our
longer term prospects and position.
The forecasts and testing has been done
on the basis that our acquisition of Merlon
El Fayum Company has completed. This
is because the cash flows are expected
to be more challenged over the three year
period given the investment to be made
in the acquisition.
Our longer term prospects and position
Group’s current position
+ Production assets in Vietnam with
low cash cost base
+ Oil sales command a premium
to Brent pricing; all payments
received promptly
+ Strong operating cash flows
+ Focus on capital discipline and
avoiding capital commitments
in operations
+ Excellent HSES standards
Strategy and business model
+ Strategy focused on acquisition of
further cash flow accretive assets to
extend sustainability of the business
over a longer period
+ Merlon transaction, due to complete
in 1H 2019, brings in production,
development and exploration assets
in low cost onshore environment
+ Business model drawing on
geoscience, engineering, financial
and commercial talent
+ Access to capital, balanced by a focus
on strict management of leverage levels
42
The principal risks which are relevant to
the assessment of the Group’s prospects
are the same as those used to stress test
our viability over the three year period and
set out below, with one addition, which
is not relevant to the viability period and
would only impact over the longer term:
+ Inability to find or acquire additional
cash flow generative assets
How we assess our viability
Our forecast is built on an asset by
asset basis using a bottom up model
and is stress tested by compounding
downward scenarios.
The three year period selected for testing
covers the Groups medium term capital
plans and projections, in particular oil
price projections, a fundamental driver
of the groups operating cash flows, where
market consensus data becomes less
reliable for periods further ahead than
three years.
Although individual assets are often
modelled for periods longer than three
years, to reflect the return on investments
being considered over the life of field,
the three year period has been selected
by the Board as most appropriate for the
group as a whole. It provides management
and the Board with sufficient and realistic
visibility of the future industry environment
whilst capturing the Groups future
expenditure commitments on its licences.
In assessing the Groups viability over
the next three years, it is recognised that
all future assessments are subject to a
level of uncertainty which increases with
time and that future outcomes cannot
be guaranteed.
Key assumptions
During the three year period the Group
is expected to be dependent on its two
cash generating assets in Vietnam and,
when the transaction to acquire them
completes, the cash generated by the
El Fayum asset in Egypt. The transaction
to acquire the Egyptian assets is expected
to do so in H1 2019 and the contribution
from these assets is included in assessing
viability. The likelihood of non completion
is considered to be low. The impact if the
transaction did not complete would be to
release the allocated capital to invest in
other suitable opportunities, when these
could be identified.
The oil and gas reserves in both
Vietnam and Egypt have been certified
by Reserves Auditors, RISC (for Vietnam)
and LR Senergy (for Egypt). The base
forecast models include the group’s
latest life of field production models and
expenditure forecasts, in line with the
profiles included in the Reserves reports
and, where guidance to the market has
been given for the near term, in line with
that guidance.
In our models we have used
management’s best estimate of future
commodity prices (based on recent
forward curves), resulting in a base oil
price of $65 prior to scenario testing.
The base price is also adjusted for
hedging instruments already in place,
The company has a Reserves Based
Lending facility (“RBL”) of $125m over
its Vietnam producing assets taken out
in September 2018. The loan also has
an accordion feature of a further $125m
which can be accessed by including
further assets in the borrowing base.
It is the intention to include the Merlon
assets as soon as practicable after the
transaction has completed. This additional
financing will provide further liquidity for
investment into the company’s asset base,
including the Egyptian assets, plus funding
for further acquisitions
SOCO International plc Annual Report and Accounts 2018 Stress testing linked to Principal risks
As well as the base model, the Board
also considers several scenarios and has
stress tested the forecast for combination
of a number of severe but plausible
events that could impact its ability to fund
planned activities and/or comply with the
covenants and undertakings within its
Reserves Based Lending (“RBL”) facility
agreement. These events include:
+ A material and sustained reduction
in the oil price putting pressure
on the Group’s capital available
for investment
+ A material reduction in production
+ A material increase on capex
+ An unfavourable event resulting
in lost production and increased
capital costs
+ A delay in payment for oil sold
to EGPC in Egypt
In all combinations tested the Group had
access to mitigating actions, including
hedging and insurance claims, which
allowed us to meet all covenant levels
in the RBL. The forecast cash flows are
regularly monitored and reviewed to
provide early warnings of any issues
and to give sufficient time to take any
necessary mitigating actions.
In considering the impact of these scenarios,
the Directors have reviewed realistic
mitigating actions that could be taken to
reduce the impact of the underlying risk.
These include reducing operating and
administration costs, deferring capital
expenditure, hedging activities and
adjusting the level of dividends.
The potential impact of each of the other
principal risks on the viability of the group
during the assessment period has also
been considered. Such risks include the
inability to attract and retain appropriately
skilled people and climate change.
The Board has considered the risk
mitigation strategy for each of these risks
and believes that the mitigation strategies
are sufficient to reduce the impact of
each risk to make it unlikely to jeopardise
the Group’s viability during the three
year period.
The Directors have also reviewed the
Group’s funding plan considering additional
financing to fund growth strategies.
Based on all of these assessments,
including the availability of actions
which could be taken in the event of
plausible negative scenarios occurring,
the Directors confirm that they have
a reasonable expectation that the Group
will continue to operate and meet its
liabilities as they fall due for the three
year period to 31 December 2021.
Base Forecast flexed
for combinations of the
following scenarios
Severe and sustained drop
in oil price
Reduction in production
Increase in capex
Delay in payments from EGPC
Link to Principal risks
and uncertainties
5, 6
3, 7, 8
2, 6
*
Level of severity tested
Conclusion
10% drop in oil price over period
of testing
Company remains viable
with mitigating actions
10% reduction in production
over period of testing
Company remains viable
with mitigating actions
10% increase in capex over period
of testing
Company remains viable
with mitigating actions
Delay of 120 days
Company remains viable
with mitigating actions
Company remains viable based
on the levels of the tests provided
mitigating actions are swiftly and
comprehensively implemented
Unfavourable event leading to lost
production and increased capex
3, 7, 8, 11, 12, 13
Combination of four tests above
* As explained in the Risk Mangement Report page 36, the risks and uncertainties relating to the ownership of that business have not been included as the
transaction has not yet completed. These forecasts and scenarios have been prepared including ownership of the Egyptian assets as the cash flows are more
challenged over the three year period.
43
Strategic Report Corporate Responsibility
Adding value
in everything
we do
business
ethics
people
environment
society
Our people – staff in
our London office
Local community – HSE day
tree planting at Can Gio,
Ho Chi Minh City
44
44 SOCO International plc Annual Report and Accounts 2018
SOCO International plc Annual Report and Accounts 2018
Antony Maris
Chief Operating Officer
Business
Ethics
People
Environment
Society
Our goal is to be a positive presence in the regions
in which we operate, by providing responsible and
sustainable development, resulting in value for host
countries and local communities as well as for our
own shareholders and employees. We are committed
to operating honestly and ethically. We contribute
to host country development goals, such as access
to energy. Doing business ethically and safely is our
priority. We manage our risks and seek to minimise
any potential adverse impacts we may have.
100%
CNV oil
71%
TGT oil
Contributing to host country development goals and access to energy
$202.4m
Taxes and royalties paid
to host governments
100%
Percentage of staff receiving
anti-bribery and corruption training
0
Fatal accident frequency rate
(number of fatal accidents per
hundred million man-hours)
273
Tonnes CO2e per 1000 tonnes
of hydrocarbon produced
0
Lost time injury frequency rate
(number of lost time injuries per million
man-hours)
0
Oil/chemical spills
(quantities greater than 100 litres)
$300,000
Training levy in Vietnam for investment
in industry capacity building
$209,408
Community and charitable investments
supporting 12 partnerships and projects
in Vietnam
45
Strategic Report Corporate Responsibility
continued
Corporate Responsibility (“CR”)
governance & management
Our goal is to be a positive presence in the
regions in which we operate, by providing
responsible and sustainable development,
resulting in value for host countries and
local communities as well as for our own
shareholders. Our Code of Business
Conduct and Ethics (“our Code”) sets out
our expectations for how we do business,
clarifying our commitments to ethical,
social and environmental performance.
Our CR Policies support our Code.
Our Corporate Standards, Procedures and
Guidelines support the Policies. Project
specific Operational Plans, Programmes
and Procedures provide the specifics of
how things are done within each project.
The SOCO Health, Safety Environment
and Society Management System
(“HSES MS”) describes the Group’s
internal processes to manage risks and
is consistent with the requirements of
internationally recognised standards
(ISO 14001, OHSAS 18001) and aligned
with the World Bank’s International
Finance Corporation (“IFC”) Environmental
and Social Performance Standards.
The Chief Executive Officer is accountable
to the Board for implementation of CR
Policies and Health, Safety, Environment
and Social (“HSES”) Performance. The
Audit and Risk Committee oversees
the adequacy and effectiveness of our
policies, standards and management
system for HSES.
CR Objectives are defined annually
and reviewed quarterly in relation to:
our business; our ethics; our people;
environment and society.
Hierarchy of CR/HSE key policies
1. Code of business ethics
2. Key CR policies
Health, Safety and Environment Policy
Social Policy
Security Policy
Human Rights Policy
Biodiversity and Conservation Policy
3. Standards, procedures and
guidance support the policies
See: www.socointernational.com/hses-policies
for the full text of the current versions of each
of these CR policies.
Stakeholder groups and CR topics
Stakeholder group
Local communities
How we engage with them
and understand any concerns
Key areas of concern
for stakeholder groups
Environmental and social impact assessments
and grievance mechanisms at project level
National and host governments
Regular dialogue
Employees and contractors
Regular dialogue and grievance mechanisms
Shareholders
Regular dialogue
International community
Responding to inquiries and media scanning
46
Community investment
Effluents and waste management
Biodiversity
Transparency
Payments to governments
Local content
Environmental management
Health and safety
Local capacity building
Contractor management
HSES Management System
Preventing corruption
Health and safety
Climate risk / energy transition
Preventing corruption
Human rights
New country entry
Climate risk/energy transition
GHG emissions
SOCO International plc Annual Report and Accounts 2018 Stakeholder engagement
In determining our CR strategy,
we consider issues that are important
to the successful delivery of our
corporate objectives and the matters
that are important to our stakeholders.
Our Communication and Stakeholder
Guidance sets out the controls and
arrangements for effective, timely and
transparent processes. We receive
feedback from stakeholders through a
range of formal and informal processes.
This takes place at a project and
at a corporate level.
CR issues in 2018
Through risk management and stakeholder
engagement, issues for inclusion in
reporting are pulled together.
Our approach on environmental and
social reporting in 2018 has taken into
account the current guidance issued
by IPIECA, the global not-for-profit oil and
gas industry association for environmental
and social issues, being the Oil and
Gas Industry Guidance on Voluntary
Sustainability Reporting (3rd edition,
published September 2015). In 2019 we are
reviewing best practice to further guide
our reporting. We include data for where
we have operational control and also
report on the Jointly Operated Companies.
Issues linked to business risk and stakeholder interest in 2018
Important issues in 2018
Business
influence
+ Climate risk
+ Energy transition
+ Business partners and
+ New country entry
+ HSE management
system
+ Contractor
management
Ethics
+ Preventing corruption
+ Payments to host
governments
+ Transparency
People
+ Occupational health
and safety
+ Major accident
prevention
+ Equal opportunities
+ Local capacity building
Environment
+ GHG emissions
+ Effluents and waste
+ Biodiversity
Society
+ Human Rights
(and Modern Slavery)
+ Community investment
+ Local content
47
Strategic Report Corporate Responsibility
continued
Our
business
Our objective is to provide responsible
and sustainable development. In 2018,
key issues in this area included those
related to: global climate risk and
energy transition; business partners and
influence; new country entry; our HSES
Management System (“HSES MS”) and
contractor management.
Climate risk and global energy transition
Climate change is considered a principal
risk to SOCO and its business over
the medium and long term, and this
is discussed in more detail in the Risk
Management Report on page 36.
Global energy transition is a factor that
impacts many of the Group’s principal
risks including those associated with
commodity price, reserves, operations,
political, stakeholder and reputational.
We recognise that a global transition
to a lower carbon intensity economy in
response to climate change could result in
reduced demand and increased operating
cost, capital cost, regulation and taxation.
Our overall risk management integrates
climate change and carbon related risks.
Established management processes
include any physical risks associated
with climate change.
We report transparently and participate
in the Carbon Disclosure Project (“CDP”).
Our greenhouse gas emissions are
reported in the Environment section
on page 55.
Business partners and influence
Relationships with business partners,
host governments and local communities
where we operate are critical for
our business. Our Code sets out our
commitment to doing business honestly
and ethically and to complying with all
applicable laws and regulations. It sets
out our expectations to take steps to
only do business with others who share
our values.
Our ability to influence our business
partners depends on our degree
of ownership and operatorship. Where
we are the designated operator, we fully
apply the SOCO HSES MS. Where we
are a joint operating partner, we seek
to influence and ensure alignment with
our systems. Where we have a minority
interest, we seek to make our views heard
and ensure that minimum standards are
met in accordance with our commitment
to the IFC Performance Standards.
Vietnam interests and operations
Degree of influence
Block
Country
SOCO ownership
SOCO role
2018 activity
Target HSES outcome
High
Blocks 125&126
Vietnam
70%
Operator
No field activity
Moderate
Block 16-1
Vietnam
30.5%
Moderate
Block 9-2
Vietnam
25%
Joint Operating Partner
(in Hoang Long Joint
Operating Company)
Joint Operating Partner
(in Hoan Vu Joint
Operating Company)
Field Development – drilling
and completing production
wells. Production of oil
and gas
Production of oil and gas
Full application
of the HSES MS
Influence to bring
alignment to the
SOCO HSES MS
Africa interests and operations sold in 2018
Degree of influence
Block
Country
SOCO ownership
SOCO role
2018 activity
Target HSES outcome
Lidongo, Viodo,
Lideka and
Loubana
Exploration
Permits
Cabinda North
Block
Congo
(Brazzaville)
40.39%
Operator
No field activity*
Divested in June 2018
Angola
22%
Non-operator
No field activity*
Divested in October 2018
Full application of
HSES MS during
ownership
Ensure minimum
standards during
ownership
High
Low
48
SOCO International plc Annual Report and Accounts 2018
New country entry
For SOCO, any new business, investment
or venture must identify, analyse, assess,
address and monitor environmental, social
and governance (“ESG”) related issues
and risks (alongside commercial, legal,
technical and political constraints).
Our new country entry procedure sets out
our process for risk screening and due
diligence. The process applies to: new
country entry; transactions (acquisitions,
divestment); expansion of existing
projects; and operated and non-operated
Joint Venture farm-ins.
In 2018, a key new business assessment
for SOCO was the proposed acquisition
of the Merlon Petroleum El Fayum
Company (“Merlon”), which holds a 100%
participating interest in the onshore
El Fayum concession in the Western
Desert, Egypt, operated in conjunction
with the Egyptian state oil and gas
company, EGPC, through the 50/50 joint
operating company Petrosilah.
Following a preliminary assessment of
Environmental, Social and Human Rights
issues, we undertook further due diligence
commensurate with risk.
There is an opportunity for expansion
of the El Fayum concession in Egypt
contributing to the country’s energy
requirements and development goals.
In considering the opportunity we looked
at the range of ESG issues locally.
Potential risks and impacts we reviewed
included those related to: biodiversity;
road safety; emissions; security and human
rights; and anti-bribery and corruption.
Neither Merlon nor the joint operating
company Petrosilah had a written
comprehensive anti-corruption
compliance programme in place on
signature of the sale and purchase
agreement (“SPA”) by SOCO.
Merlon has, before completion and
pursuant to an obligation in the SPA,
adopted an anti-corruption compliance
programme substantially in the terms of
SOCO’s current programme. Merlon has
in addition undertaken to use reasonable
endeavours to ensure Petrosilah adopts
a similar programme.
ESG issues identified have been reviewed
based on our policies and commitments
and the Company’s risk appetite using
our Procedure.
Following the planned acquisition we will
carry out an audit of SOCO’s New Entry
Procedure in 2019.
100%
Potential new investments screened for
CR issues using new country procedure
in 2018.
New entry procedure Merlon El Fayum Concession
Preliminary assessment of ESG risks. Identify and prioritise
any actual or potential issues and risks along with management strategies.
Confirm whether the project is ‘go’ or ‘no go’.
Go Follow up for key ESG issues
Due diligence commensurate with risk. Assessment of potential ESG and
business risk. Legal review. Screening workshop. Further investigation of issues.
Due diligence questionnaire to all potential partners or participants.
Go Recommendation for approval
Project closure decision gate for final ‘go’ or ‘no go’.
Go Final recommendation to Board
Project approval based on acceptability of any ESG risk.
No go
is an option
at this stage
No go
is an option
at this stage
No go
is an option
at this stage
49
Strategic Report Corporate Responsibility
continued
HSE Management System
We undertake a range of activities to
continuously improve our HSE MS to ensure
that the Company’s policy commitments
are applied. We may work in countries that
have different standards and we review
any potential gaps to ensure adherence to
our policies in dialogue with our business
partners. Routine monitoring is undertaken
to assess and improve performance and
periodic audits are conducted.
In 2018 we continued with a roll out
of HSES training for employees and
contractors. Over 275 HSE training
sessions took place across the UK, Vietnam
and in the Congo throughout the year.
Key Performance Indicators
KPI
Target
2018 2017 2016
HSE regulatory
non-compliances
Zero
0
0
0
Contractor management
Contractors are used throughout all
aspects of our business. Our Contractor
Management Procedure sets out
requirements through all stages from
selection through to management and
service delivery. In HSES critical activities,
bridging documents are put in place to
ensure SOCO and contractor alignment
with our requirements.
In 2018 we undertook further work to
update our contractor and supply chain
management procedures, building
additional requirements into our contracts.
We have introduced additional screening
and induction steps to ensure that
contractors meet our standards. Training
is also being rolled out as part of our
supplier due diligence programme.
Hours worked
Percentage of total
Company staff: 156,273
Contractors: 1,137,130
12%
88%
Overall objective:
To provide responsible and sustainable development
2018 Objectives
2018 Outcomes
Apply the SOCO HSES MS to any operated
projects that arise
Applied where we were operator. Alignment where
joint operator
Conduct a programme of HSES training for
employees and contractors. Carry out final
awareness training session and ensure changes
to the SOCO HSES MS are communicated
through the organisation
Training in Q1 with additional awareness raising
sessions through the year
Assess the HSES Policies relevant to non-
operated projects before any activity scheduled
Applied to Angola, objective was no longer required
after divestment
Complete Corporate HSE audit programme
according to the 2018 Audit plan
Postponed to 2019 until completion of newly
acquired asset
Review efficacy of New Entry Procedure
Postponed to 2019 until completion of newly
acquired asset
Update contractor and supply chain
management procedures and questionnaires
based on lesson learned following roll out
In progress
Continue supplier due diligence programme,
including training
On target
50
100%
New suppliers screened in accordance
with updated HSES requirements in 2018.
2019 Objectives
+ Conduct a continuing programme of HSES
training for employees and contractors
+ Conduct a gap analysis of new acquisition
against SOCO international HSES
MS requirements
+ Complete Corporate HSE audit programme
+ Update contractor and supply chain
management procedures and questionnaires
+ Continue supplier due diligence programme,
including training
+ Update and streamline New Entry Procedure
+ Undertake due diligence with potential and
existing partners
SOCO International plc Annual Report and Accounts 2018
Our
ethics
Our objective is to conduct our business
in an honest and ethical manner. In 2018,
key issues in this area included those
related to: preventing corruption and
payments to host governments.
Preventing corruption
SOCO currently operates in Vietnam,
which is allocated a low score on
Transparency International’s most
recently published Corruption Perception
Index (“CPI”), featuring at number 107
out of 180 countries in the 2017 CPI.
Egypt, where SOCO expects to operate
following completion of the acquisition
of Merlon, is ranked at 117 on the same
CPI. We recognise that, with both areas
of operation having a reputation for a lack
of transparency and relatively high risk
of corruption, it is vital that the Group’s
policies, procedures and working practices
are fit for purpose. SOCO maintains internal
control systems to guide and ensure
that our ethical business standards for
relationships with others are achieved.
Bribery is prohibited throughout the
organisation, both by our employees
and by those performing work on our
behalf. The Business Conduct Procedure
supports the implementation across
the organisation. Our Anti-Bribery
and Corruption (“ABC”) programme is
designed to prevent corruption and ensure
systems are in place to detect, remediate
and learn from any potential violations.
This includes due diligence on new
vendors, annual training for all personnel,
requisite compliance declarations from all
associated persons and comprehensive
‘whistleblowing’ arrangements.
Our Whistleblowing Policy and Procedure
ensures that employees are protected
from possible reprisals when raising
concerns in the public interest. In addition
to internal reporting channels, we have
a confidential ethics hotline provided
by Expolink with numbers displayed
in local offices available 24 hours a day
all year round. No calls to the Expolink
hotline were logged in 2018, and there
were no other whistleblowing reports
received or logged within the Group
during the year. After the reporting year
end, in early 2019, a report was received
about one member of staff using company
assets for personal use. The staff member
has since left the organisation.
100%
Employees and relevant contractors
undertook anti-bribery and corruption
training in 2018.
Payments to host governments
Wealth generated by natural resources
plays an important part in the growth
and development of countries in which
we operate. Revenues to governments
become payable by the Group due
to oil production entitlements, taxes,
royalties, licence fees and infrastructure
improvements. SOCO supports the
principles of the Extractive Industries
Transparency Initiative (“EITI”) and
participates in EITI active countries.
During 2018, the total payments to
governments for the Group amounted to
$202.4m, of which $196.5m or 97% was
related to the Vietnam producing licence
areas, of which $135.1m was for indirect
taxes based on production entitlement.
The breakdown of the contributions,
including payroll taxes and other taxes
will be contained within the additional
information in the 2018 Annual Report
and Accounts page 135.
Our Code prohibits contributions to
political parties, candidates or other
political organisations.
Overall objective:
To conduct our business in an honest and ethical manner
2018 Objectives
All personnel to complete the annual ABC
programme including training, testing and
self-declaration statement
2018 Outcomes
Completed
Review ABC programme and update as required.
In progress
2019 Objectives
+ All personnel to complete the annual ABC
programme including training, testing and
self-declaration statement
+ Continue to review ABC programme and update
as required
51
Strategic Report
Occupational health and safety
Safety is the highest priority in our
business and we are committed to
operating safely and responsibly at all
times and to providing a safe and healthy
working environment for staff and
contractors. Following from our Code
and HSE Policy, our HSES MS provides
the framework for our approach and is
implemented at each stage of a project
supported by Occupational Health and
Safety Guidance and Standard Operating
Procedures. While SOCO had no field
activity in 2018 in which we were the
operator, we continued to work with our
partners in Vietnam where the Hoang
Long and Hoan Vu Joint Operating
Companies (“HLHVJOC”) continued to
maintain an extremely high level of safety.
We have worked to build and contribute
to improvements in the safety culture in
Vietnam and we are proud of that record
of achievement. HSE training, drills,
workshops and inspections are conducted
on an annual basis to ensure that the zero
target is maintained. We are able to share
our practices and lessons learned with
others in the industry and are contributing
to further capacity building.
Safety indicators
Indicator
Lost Time Injury (“LTI”)
Fatal Accidents
First Aid Cases
HSE Near Miss
HSE Inspections
HSE Audits
HSE Toolbox Talks
HSE Meetings
Safety Observations
(Hazard STOP Cards)
2018
0
0
3
5
808
1,112
5,797
937
23,734
0LTIs in 24.19 million man hours since
the project inception.
Corporate Responsibility
continued
Our
people
Our objective is to ensure the health,
safety, security and welfare of our
employees and those with whom
we work. Our Code commits us to
protecting the health and safety of our
workforce, to providing a workplace
free of discrimination where diversity
is valued and to ensure that we consult
and engage with our employees.
Key issues for us in 2018 included:
occupational health and safety; major
accident prevention; diversity and local
capacity building.
Outstanding safety record Vietnam
Target
Zero
Zero
KPI
Lost Time Injury (“LTI”)
Frequency Rate
Fatal Accident
Frequency Rate
Total Recordable
Injury Rate***
Million Man Hours Worked
0
0
0.83
1.29
2018
2017
SOCO
IOGP**
SOCO
IOGP*
0.27
1.10
0.96
2016
SOCO
0
0
–
IOGP
0.27
1.72
1.03
0
0
–
1.42
0.98
International Association of Oil and Gas Producers (“IOGP”) Benchmark
*
** Not yet available for 2018
*** 2018 is first year of including this indicator in Annual Report.
52
SOCO International plc Annual Report and Accounts 2018
Case Study
Vietnam – Anthony Roche,
Deputy General Manager, HLHVJOC
Throughout the whole of the HLHVJOC
the highest safety standards are
maintained.
Safety programmes build and maintain
workforce participation encouraging
people to be open about any potential
risks or hazards and to take action.
Safety observation cards are used by
all staff and contractors and we have a
meeting every morning to go through
these. We had over 23,000 Hazard /
STOP cards during the year.
We are able to identify higher risks
and whether there are any trends.
We provide incentives for the best
observation cards and/or contractors
with excellent HSE performance on
a monthly and yearly basis.
We undertake regular toolbox talks,
ensure permits to work and all standard
systems in place. In 2018 we conducted
HSE audits of our main contractors. 1,112
audits and 648 inspections were carried
out in the JOC. Every year HLHVJOC
organise a contractor safety seminar,
where experiences are shared in an open
manner to highlight safety awareness.
Major accident prevention
SOCO has emergency response plans
in place for all projects. The plans are
communicated to the workforce and
response personnel receive training
to ensure they are competent to carry
out their emergency roles. This is
supplemented by periodic refresher
training. Drills and training exercises
are carried out. On CNV we had 62
Emergency Response Drills and 30 HSE
training sessions and on TGT we had
63 Emergency Response Drills and 241
HSE training sessions. We ensure asset
integrity and control operations in order
to effectively manage all significant risk
during all stages of the operations.
We had no Tier 1 or Tier 2 Process Safety
Events in 2018. The HLJOC had one minor
event take place at the TGT-H5-WHP
where one fishing boat tied a rope to the
jacket. The standby vessel approached
the fishing boat and the fishing boat
moved on. We maintain and regularly
test procedures to ensure incidents are
effectively dealt with and ensure any
lessons are learned.
Safety indicators
Indicator
Emergency Response Drills
Process Safety Events
(Tier 1 or Tier 2)
Other events
2018
125
0
1
(minor event)
53
Strategic Report Corporate Responsibility
continued
Equal opportunities
Our Code and Policies commit us
to providing a workplace free of
discrimination where all employees can
fulfil their potential based on merit and
ability. We value a diverse workforce.
We currently have a team based in our
corporate head office in London of 24 staff.
In 2018 we had a team of over 10 based
in Congo (Brazzaville) and team of three in
Vietnam (three additional people seconded
into the HLHVJOC). Our size of direct
employees facilitates daily direct interaction
and multidisciplinary dialogue amongst
personnel and Executive Directors.
Average Number of Corporate Personnel
by Gender
2018
2017
2016
Non-Executive
Directors
Executive
Directors
Senior
Management
Other
Employees
Male
Female
Male
Female
Male
Female
Male
Female
5
0
2
1
2
2
6
10
5
0
2
1
2
1
5
8
7
1
2
1
1
0
5
8
Local capacity building
We are committed to providing meaningful
opportunities for technical cooperation,
training and capacity building in host
countries.
In Vietnam, as part of the HLHVJOC ,
we contribute to local capacity building.
Out of 110 people, only seven are
international staff. In addition, every
position that is held by an expatriate
staff has a Vietnamese staff member as
a deputy, or as the manager. A training
levy of $150,000 for each JOC goes into
a fund which is ringfenced to support the
development of future talent in Vietnam
in the industry. HLHVJOC also invests in
staff development and training.
While operating in the Congo (Brazzaville),
we invested in training and upskilling
of employees and ensuring a workplace
which met with international standards.
Overall objective:
To ensure the health, safety, security and welfare of our employees and those with whom we work
2018 Objective
2018 Outcomes
Identify and conduct additional HSES training
requirements
On target
2019 Objectives
+ Conduct a continuing programme of HSES
training for employees and contractors
Activate a project level grievance mechanism
for all SOCO-operated projects when activity
is scheduled
SOCO had no field activity in 2018 in which we were
the operator
54
SOCO International plc Annual Report and Accounts 2018 Environment
We recognise the potential impacts of
our business on the environment. Our
Health, Safety and Environment Policy
sets out our commitment to conduct
all business activities in a responsible
manner. In setting our CR priorities, our
objective is to protect the environment
and conserve biodiversity. In 2018
key issues in this area included those
related to: Greenhouse Gas Emissions;
Effluents and Waste and Biodiversity.
Greenhouse Gas Emissions (“GHGs”)
GHGs associated with energy use and with
flaring are a key area of potential impact.
In 2018, we continued to monitor
our emissions and disclose them in
accordance with industry requirements
and standards and participated in the
Carbon Disclosure Project (“CDP”).
GHGs reported
SOCO counts emissions of carbon dioxide
(CO2), methane (CH4) and nitrous oxide
(N2O), all of which are produced during
consumption. For simplicity, the results
of all three have been reported as a single
parameter – carbon dioxide equivalent
(CO2e). The other three greenhouse gases
categorised under Section 92 of the UK
Climate Change Act, hydrofluorocarbons
(HFC), perfluorcarbons (PFC) and
sulphur hexafluoride (SF6), are not closely
associated with the petroleum industry.
The total emission of these gases is
therefore expected to be small and has
not been calculated.
Emissions scope
Reported Scope One direct emissions
comprise direct GHG releases from
combustion activities (for example,
gas flaring operations and fuel gas/diesel
use to generate power or for vehicle use).
Reported Scope Two indirect emissions
comprise those arising from generation
of electricity supplied by the national
grid in the UK and Congo (Brazzaville).
No Scope Three emissions (indirect
emissions created in the value chain)
are reported.
Reporting boundary
SOCO reports GHG emissions from its
operated projects, joint operated projects
and associated corporate/administrative
activities on an overall and equity share
basis. The former is the total emissions
generated by those projects. The latter is
calculated pro-rata to SOCO’s ownership
and interest (equity share). Verified
emissions from 2013, reported in 2014,
form the base year against which emission
trends over time are reported.
Tonnes (t) of CO2e equivalent for 2018 Operations
Country
UK
Congo (Brazzaville)
(offshore)
Angola
(onshore)
Vietnam
Cuu Long Basin
(offshore)
Reported operations
Office
Office
Operational phase
Administration (office – electricity usage)
Administration support for exploration
CO2e (t)
Based
on equity
share1,2
20
8
Overall1
20
23
Cabinda North Block
Block evaluation / Exploration – no activity in 2018
–
–
Office
Block 9-2 – Ca Ngu Vang
(CNV) field
Block 16-1 – Te Giac Trang
(TGT) field
Administration (electricity usage)
Production
Field development
Production
Field development
Total
1
20,063
12,003
313,907
10,944
356,962
1.02
5,016
3,001
95,742
3,338
107,126
1 Figures include rounding to the nearest whole number.
2 Under equity share, SOCO reports a share of the emissions from the partnerships pro-rata its ownership interest.
3 Normalised emission is calculated, per field, and at country level, based on equity share, and gross/net boepd produced in 2018 in the CNV and TGT fields.
CO2e (t) per 1000 tonnes
of oil produced
by equity share3
Per
field
–
–
–
–
62
–
332
–
–
Per
country
–
–
–
–
273
–
55
Strategic Report
Corporate Responsibility
continued
Methodology
SOCO applies the expectations set by
the ISO 14064-1 standards in terms of
Relevance, Completeness, Consistency,
Transparency and Accuracy which
are endorsed by IPIECA and the
Greenhouse Gas Protocol Initiative and
the Part 7 of The Companies Act 2006
(Strategic Report and Directors’ Report)
Regulations 2013. Emission factors for
GHG calculations were taken from UK
Government GHG Conversion Factors
for Company Reporting (BEIS, 2018) and
EEMS, 2008, Atmospheric Emissions
Calculations; and for the calculation of fuel
gas consumed and flared in Vietnam, the
emission factors were calculated based
on the carbon content of gas analysed
at TGT field (TGT, 2014) and CNV field
(Vietnam Petroleum Institute, 2016).
CO2 equivalent is based on the 100-year
Global Warming Potential of Carbon
Dioxide (CO2), methane (CH4), nitrous
oxide (N2O) emitted. Factors used
are those of the 2007 IPCC Fourth
Assessment Report (AR4).
For 2018 we have used the normalised
figure to be tonnes of GHG per 1,000
tonnes of oil produced by equity share
in order to align with the International
Association of Oil and Gas Producers
(“IOGP”) benchmarks.
Key sources of our emissions are from the
gas fuel used to generate power on our
offshore production sites and for flaring in
Vietnam. The level of CO2e emissions for
2018 represents a 12.5% increase against
the overall emissions reported in 2017
and a 12.5% increase of those attributable
to SOCO, based on their equity share.
There has been no operational activity in
Congo (Brazzaville) this year, emissions in
Vietnam have increased in particular due
to compressor issues at TGT in Block 16-1.
During 2018, an increase in flaring
occurred in Vietnam due to inefficiencies
in the gas compressors located on the
FPSO on TGT. Tests have identified an
increase in low specific gravity gas being
produced primarily by a third party well,
that access the FPSO through the TIA.
Tests continue and the results are being
used to design the most effective solution
to both reduce the current flaring to
previous levels and to minimise future
compressor outages. Engineering studies
have commenced to develop a solution
and reduce the flaring.
In 2018, 29 tonnes were flared for every
1,000 tonnes of production on a gross
basis (not equity share adjusted).
Activity data pertaining to GHG emissions
by the HLHVJOC is reported to SOCO.
RPS Energy assisted with data collation
and GHG emissions calculations.
Verification was undertaken by a different
division of RPS (RPS Planning and
Development) which has maintained
appropriate independence from SOCO
and RPS Energy during verification using
its established approach to conflict of
interest management.
Energy use from grid electricity was
100,638 kWh in 2018. SOCO’s 2015 Energy
Saving Opportunities Scheme (“ESOS”)
Audit in compliance with the UK ESOS
Regulations 2014 remains valid and SOCO
has arrangements in place to meet the
new 2019 ESOS deadline.
Total CO2e Emissions generated by SOCO’s reported operations in 2018
(’000 GHG Emission in CO2e (t))
0
80
160
240
320
400
2018
2017
2016
56
Gross
Net (based on equity share)
SOCO International plc Annual Report and Accounts 2018 Effluents and waste
In 2018 we maintained our record of
zero oil and chemical spills throughout
our operations.
Water is extracted offshore when we
extract oil and gas. In Vietnam, the
(produced) water is separated and
cleaned and discharged to the sea.
In 2018 we had 4,928,679 cubic metres
of produced water. In Vietnam, the
produced water oil content average over
12 months was 31.45 ppm in Block 16-1
and 31.95 ppm in Block 9-2. We meet
or exceed national standards and seek to
use our influence to ensure alignment with
international standards.
Waste is generated from offshore drilling
including cuttings, used oil and other
materials. We work to recycle as much
non-hazardous waste as possible.
We have a third party contract for the
disposal of hazardous waste, with
a reporting system into the specific
Vietnamese authorities for checking,
audit, and approval.
Some freshwater is used in operations.
In 2018 this amounted to 23,209 cubic
metres. It is used to provide potable water
supporting operations.
Non-Financial KPIs (HSES)
KPI
Oil spills*
Target
0
2018
0
2017
0
2016
0
* Number of spills for which total volume spilt was greater than 100 litres.
KPI
Solid non-hazardous waste produced (tonnes)
Percentage of non-hazardous
waste reused or recycled
Solid hazardous waste (tonnes)
Percentage of hazardous waste reused
or recycled
Target
Set per project
Set per project
2018
102.08
19.52
2017
147.95
2016
91.97
Set per project
Set per project
95.89
9.97
245.81
83.03
Biodiversity
Our Biodiversity and Conservation Policy
commits us to meet the objectives of the
Convention on Biological Diversity (1992).
We identify whether a project is located
in modified, natural or critical habitats,
or a legally protected or internationally
recognised area; and whether the
project may potentially impact on, or be
dependent on, ecosystems services over
which SOCO has direct management
control or significant influence. In Egypt,
the El Fayum concession borders the
multiple use management area and the
natural protectorate area of Lake Qarun
which includes important bird areas.
It is adjacent to the Wadi El Rayan
protected area which includes the Wadi
Al-Hitan World Heritage Site. In Vietnam,
Blocks 125 & 126 are approximately 50km
off shore to the Nha Trang Bay Protected
Area and the Thuy Trieu Marine Protected
Area. As per our policy, SOCO does not
operate in any UNESCO designated
World Heritage Site and ensures that
activities in buffer zones around these
sites do not jeopardise the Outstanding
Universal Value of these sites.
Comprehensive Environmental and
Social Impact Assessments (“ESIAs”)
are undertaken for any new project prior
to any operational activities using
international standards and in consultation
with local stakeholders. We are committed
to developing site-specific biodiversity
action plans (“BAPs”) in the event that
operational sites are within sensitive
areas, incorporating country-specific
strategies and action plans and working
in association with external advisers to
ensure that best practice conservation
priorities are achieved.
Overall objective:
To protect the environment and conserve biodiversity
2018 Objectives
Implementation of the Biodiversity and
Conservation Policy for all SOCO-operated
projects
Implementation of the New Entry Procedure
when a new project arises, including an
assessment of the risk of impact on the
environment
Continue the work to improve GHG emissions
management by identifying realistic initiatives
and targets for emissions reduction across
all operations
2018 Outcomes
On target
On target
Pending
2019 Objectives
+ Implementation of the Biodiversity and
Conservation Policy for the permitting of the
Vietnam offshore seismic ESIA
+ Review of the Merlon ESIA against SOCO
standards ahead of activities
+ Update ESOS Compliance Assessment
+ Continue implementation of the New Entry
Procedure when a new project arises, including
an assessment of risk of impact on the
environment
+ Solving of the TGT compressor issues to reduce
TGT emissions to base levels or under
57
Strategic Report Corporate Responsibility
continued
Society
Following from our Code, our Social
Policy and our Human Rights Policy
set our requirements for social
responsibility, community engagement
and human rights. In 2018, key
issues in this area included: human
rights; community investment;
and local content.
Human rights
SOCO’s Human Rights Policy was adopted
by the Board in September 2018, and
a copy is available on the Company’s
website at https://www.socointernational.
com/hses-policies/. The Policy commits
SOCO to conducting its business in
accordance with the fundamental
principles of human rights set out in the
Universal Declaration of Human Rights,
and reflects the terms of both the OECD
Guidelines for Multinational Enterprises
and the UN Guiding Principles on
Business and Human Rights. Together
with our Security Policy, it sets out our
commitments to align with the Voluntary
Principles on Security and Human Rights.
We respect indigenous rights and cultures
of the communities where we operate.
Our human rights due diligence
includes processes to address, monitor
and communicate actual or potential
impacts. In 2018, we undertook a Human
Rights Review and developed an Action
Plan for future operations in Vietnam
Blocks 125 & 126 to aid in identification,
prevention, and mitigation of actual
and potential impacts that could result
from SOCO’s operations. The review
acknowledged the provision of safe
and healthy working facilities for all
workers, the requirement to engage
with stakeholders to understand any local
concerns as well as security practices
and to put in place any mitigation
strategies. Community Feedback
Mechanisms are required in all our
projects. We take steps to ensure our
agents, contractors and suppliers are
aware of and comply with our policies
and seek to use our influence with Joint
Venture partners.
In accordance with the UK Modern
Slavery Act, SOCO reports annually on
the steps it has taken to mitigate the risk
of modern slavery occurring in any part
of its business. SOCO’s Statement on
Modern Slavery for 2019 is available on
the Company’s website at https://www.
socointernational.com/modern-slavery-
statement
100%
New suppliers screened in accordance
with updated HSES requirements in 2018.
Community and social investment
We understand that our success is reliant
upon building strong relationships and
being welcomed as a responsible partner
in our host communities. We invest in
social projects for the long term benefit.
In 2018, our social investment in Vietnam
was through the HLHVJOC Charitable
Donation programme which we contribute
into as set out in our licence terms.
Local content
We support local capacity building during
the exploration or development phases
of a project to ensure a positive imprint
and legacy. All our licence agreements
include a high degree of local content,
which commits us to hire locally where
possible and provide training to develop
new skills. Our policy commits us to
provide meaningful opportunities for
technical co-operation, training and
capacity building within any host country
in which we operate.
Community projects 2018
Education
Community projects 2018
Da Bac District Kindergarten, Saigon Children’s Charity;
School for Hearing Impaired; support for autistic children;
scholarships for poor children and the HCM Polytechnic
University; Na Kieng Village Kindergarten
Budget US$
84,171
Health care
Medical Clinic in Nghe An
Rural livelihoods
Cho Lach District Road enhancement;
matching fund for staff donations for Lai Chau Province
Other charitable projects
Including Nursing Home and Orphanage
99,714
21,106
4,416
58
SOCO International plc Annual Report and Accounts 2018
t
r
o
p
e
R
c
g
e
t
a
r
t
S
i
Case Study
Education Support for Hearing
Impaired Children
Founded and managed by the
Hanoi Red Cross, the Hanoi Private
School for hearing-impaired children
provides education for 93 students
with hearing impairments and autism
from low income families in Hanoi.
This builds on work supported in 2017
which provided upgrades to school
infrastructure as well as teacher
training and capacity building.
Case Study
Medical Clinic in Nghe An Province
In 2018 the HLHVJOC supported the construction of a medical clinic in Nghe
An Province of Vietnam. Located in an impoverished part of the Thanh Chuong
District, this clinic will improve the diagnosis and treatment of diseases. The area is
a mountainous part of the country relying mostly on agriculture and forestry with a
large proportion of the population below national poverty and healthcare standards.
The HLHVJOC has invested $99,714 for the construction with staffing to be provided
by local and national agencies. This builds on previous work and partnerships
in Nghe An.
Overall objective:
To consult with and contribute into our host communities
2018 Objectives
2018 Outcomes
Review outcome of internal audit of the
implementation of the Communications and
Stakeholder Engagement Guidance and
implement actions as required
Objective was set in relation to Congo Asset
which is now divested
Carry out human rights due diligence exercise
for countries where we have a continued
presence
On target
Develop an action plan to manage human rights
risk during activities related to Blocks 125 & 126
On target
Implement Modern Slavery Prevention
Programme. Conduct process training, raise
awareness and implement contractor/vendor
requalification due diligence
Honour previously agreed financial
commitments and continue social investment
in local communities according to the project
specific selection processes
In progress
On target
2019 Objectives
+ Carry out human rights due diligence exercise for
countries where we have a continued presence
+ Honour previously agreed financial commitments
and continue social investment in local
communities according to the project specific
selection processes
+ Implement a Human Rights Action Plan prior
to seismic survey
+ Continue to implement Modern Slavery
Prevention Programme. Conduct process
training, raise awareness and implement
contractor/ vendor requalification due diligence
59
Corporate Responsibility
continued
Corporate Responsibility
Non-Financial Indicators
Hours worked (million)
Lost Time Injury Frequency Rate (number of lost time injuries per million man-hours)
Fatal Accident Frequency Rate (number of fatal accidents per hundred million man-hours)
Total Recordable Injury Rate (number of recordable injuries per million hours worked)
Total GHG emissions (tCO2e) by equity
Scope 1 total GHG emissions (tCO2e) by equity
Scope 2 total GHG emissions (tCO2e) by equity
Scope 3 total GHG emissions (tCO2e) by equity
Normalised emissions by production (tonnes of CO2e per 1000 tonnes of oil produced by equity share)
Total hydrocarbons flared (Tonnes of hydrocarbons flared for every 1,000 tonnes of production
on a gross basis)
Energy use (grid electricity kWh)
Non-hazardous waste (tonnes)
Hazardous waste (tonnes)
Percentage non-hazardous waste recycled
Percentage hazardous waste recycled
Oil and chemical spills (>100 litres)
Oil in produced water content (Blocks 16-1/9-2)
Freshwater use (cubic metres)
HSE regulatory non-compliance
Community investment spend ($)
2018
1.29
0
0
0.83
107,126
107,103
23
Not measured
273
29
100,638
102.08
95.89
19.52
9.97
0
31.45 / 31.95
23,209
0
209,408
2017
1.42
0
0
95,253
95,232
21
2016
0.98
0
0
97,543
97,523
20
216.2
177.9
147.95
245.81
91.97
83.03
0
0
0
0
Approval of the Strategic Report
This report was approved by the Board of Directors on 5 March 2019 and is signed on its behalf by
Jann Brown
Managing Director and
Chief Financial Officer
60
SOCO International plc Annual Report and Accounts 2018 Governance Report
Chair’s Introduction to Governance
Board of Directors
Corporate Governance Report
Nominations Committee Report
Audit and Risk Committee Report
Remuneration Report
Directors’ Report
62
66
68
72
76
82
97
61 Governance
Report
61
Governance Chair’s Introduction to Governance
During the year, the Board has
made significant progress in
implementing the strategy
to reposition the Company,
including a number of important
developments on governance
Board members
Diversity of skills, backgrounds and experience
The Board places importance on the
diversity of approach, experience,
knowledge, skills, and professional,
educational and cultural backgrounds.
This diversity has brought an
international and global outlook which
has been particularly beneficial to
the Board’s discussions about the
strategic positioning of its current
and new business ventures.
At at 5 March 2019, the SOCO
had a Board of eight Directors.
NED
Executive†
Access to strategic relationships
Industry contacts
4
City contacts
2
Entrepreneurial
5
3
3
3
3
Commercial knowledge
3
3
3
Accounting/disclosure/reporting
2
1
Regulatory/governance
3
Banking/finance/market
1
5
3
Rui de Sousa
Non-Executive Chair
Nominations Committee Chair
Ed Story
President and Chief
Executive Officer
Nominations Committee Member
Jann Brown
Managing Director and
Chief Financial Officer
Dr Mike Watts
Managing Director
Rob Gray *
Deputy Chair, Non-executive director
and Senior independent director
Audit and Risk Committee member
Remuneration Committee member
Nominations Committee member
John Martin*
Independent non-executive director
Audit and Risk Committee Chair
Remuneration Committee member
Nominations Committee member
Ettore Contini *
Non-executive director
António Monteiro*
Non-executive director
Remuneration Committee Chair
Audit and Risk Committee member
Nominations Committee member
Marianne Daryabegui*
(from 15 March 2019)
Non-executive director
Audit and Risk Committee member
Remuneration Committee member
Nominations Committee member
*
Independent non-executive directors
† The annual assessment of diversity doesn’t include the Executives
62
SOCO International plc Annual Report and Accounts 2018
By the end of the year, the Group had closed
a $125m Reserve Based Lending Facility
(“RBL”) secured against the Group’s
production assets in Vietnam, together
with potential access to a further $125m
on an uncommitted “accordion” basis, and
received overwhelming approval from
shareholders (over 97% on each
resolution) to acquire Merlon Petroleum
El Fayum Company (“Merlon”), a private
oil and gas company with an interest in the
onshore El Fayum concession in Egypt.
During the year, the Board’s discussions
revolved around strategic positioning,
portfolio rationalisation, M&A and
corporate financing. The Board received
regular updates from the Executive team
and time was dedicated to in-depth
discussion involving all Directors. This led
to a further seven Board meetings being
convened in addition to the four regularly
scheduled meetings.
In pursuit of the best interests of
shareholders, the non-executive directors
(“NEDs”) brought constructive and
supportive inquiry in our challenge of
the Executive’s proposals and direction.
Key areas of focus for the NED’s
discussions in 2018 were risk profiling
and management, change and integration
management, Board and corporate
culture, remuneration, Board balance
and succession planning.
The appointment of John Martin to
the Board in June 2018 increased the
independent representation. John brought
to the Board an extensive knowledge of
international banking in the oil and gas
industry at a crucial time for the Group
as it pursued and successfully secured
the RBL through a consortium of banks.
John was also appointed as Chair of the
Audit and Risk Committee and a member
of the Nominations and Remuneration
Committees. His experience and
independent appreciation of non-financial
stakeholder priorities, risk management
and global positioning have already
impacted the Board’s thinking.
Dear shareholders
2018 was a year of strategic progress
for SOCO, as the Board set out and
implemented the initial stages of delivering
diversification of the asset base and
transformational growth. The year began
with the Board reviewing the potential
of a possible corporate transaction with
Kuwait Energy Public Limited Company
SOCO terminated discussions with the
counterparty in March 2018, having been
unable to reach agreement with the
board of directors of Kuwait Energy Public
Limited Company on the basis for an
acceptable transaction.
Meeting attendance
During each Director’s respective term of office during 2018
+ Attended
+ Not attended
Director
Rui de Sousa
Ed Story
Jann Brown
Dr Mike Watts
Rob Gray
Olivier Barbaroux
(retired 7 June 2018)
Ettore Contini
António Monteiro
John Martin
(appointed 7 June 2018)
Board meeting
(scheduled quarterly)
Board meeting
(additional)
Audit and Risk
Committee meeting
Reumuneration
Committee meeting
Nominations
Committee meeting
Annual General
meeting
++++
++++
++++
++++
++++
+
++++
++++
+++
+++++++
+++++++
+++++++
+++++++
+++++++
++++
+++++++
+++++++
+++
+++
+++
++++++
+++++
+++
++++++
++
+++++
++
+++
++
+
+
+
+
+
+
+
+
During the year, the high costs of M&A activity required additional unscheduled Board meetings. If any Director was unable to atttend, full comments on papers were
received from that Director in advance of the meeting.
63
Governance Chair’s Introduction to Governance
continued
Key areas of focus in 2018
Objectives for 2019
The Board focused on the following areas in 2018:
Overseeing steps to mitigate risks arising from
events in Vietnam
Overseeing evaluations and acquisition of Merlon
Overseeing further measures to protect the
Company’s balance sheet and cash position
Overseeing steps to protect the Company’s rights,
including international arbitration proceedings
Overseeing appointments to key executive positions
and management of change in those positions
The Board’s focus areas for 2019 include:
+ Continuing focus on enhancing the efficiency
of the balance sheet and investing for growth
+ Continuing to assess all options available to
maintain production levels in Vietnam
+ Ongoing implementation of Group strategy
+ Reviewing growth opportunities
+ Assessing on-going composition of the Board
+ Overseeing operational, financial and exploration
project performance
+ Integration of Merlon
+ Ongoing review of risk
Conducting risk reviews
Conducting performance evaluations
+ Enhanced focus on shareholder and
stakeholder engagement, including;
– The appointment of a full-time
dedicated Group Investor Relations
Manager role in early 2018, for the
first time in the Group’s history.
– Active engagement with the
UK workforce, including regular
“Lunch and Learn” sessions
and responsibility for workforce
representation assigned to an
independent NED.
– A section of the agenda for each
regularly scheduled meeting of the
Board being dedicated to investor
and stakeholder considerations.
Safety has remained a top priority for
the Group. We are pleased that SOCO
has achieved another year with no LTI.
We intend to ensure this excellent track
record is sustained by staying current with
international performance standards.
In July 2018 the UK Financial Reporting
Council (“FRC”) published a revised and
updated version of the UK Corporate
Governance Code, to have effect for
reporting years commencing on or
after 1 January 2019 (the “2018 Code”).
Although we are reporting against the
previous version of the UK Corporate
Governance Code published in April 2016
(the “2016 Code”) in this annual report, we
have undertaken a variety of measures
in terms of developing governance in
response to the new provisions of the 2018
Code in preparation for the application of
the 2018 Code for the current and future
financial years. We have also continued
to consult with, and take account of,
the views of our investors and other
stakeholders on governance throughout
the reporting year.
Through these initiatives, key developments
on governance in 2018 included:
+ Preparation for further Board
refreshment and increased
independence, including the initiation
of succession planning for a suitably
qualified, experienced and independent
candidate to succeed me as Chair.
+ Board review extended to include
senior management remuneration
and succession planning.
+ Increased time set aside for the
independent NEDs to meet without
the Executives and Chair present.
+ A re-launch of the Group’s system
of risk management including
the redefining of internal policy
and procedures.
+ Increased emphasis in Board
discussions on section 172 of the UK
Companies Act 2006 (setting out the
statutory duty of directors to promote
the business of the company for the
benefit of members as a whole).
64
SOCO International plc Annual Report and Accounts 2018 Management
Principal Committees of the Board Committees
Board of Directors
Audit and Risk Committee
J Martin (Chair) (from 7 June 2018)
R Gray
A Monteiro
+ Responsible for the integrity of the
financial statements and narrative
reporting, including annual and
half year reports.
Management Committees
Further support the Board and
comprise the following key committees:
+ Disclosure
+ Treasury
+ Defence
Executive leadership team
Responsible for day-to-day
management of our business
and operations and for monitoring
detailed performance of all
aspects of our business.
Remuneration Committee
A Monteiro (Chair)
R Gray
J Martin (from 7 June 2018)
+ Responsible for the design,
development and implementation of
the Company’s remuneration policy.
Nominations Committee
Rui de Sousa (Chair)
E Story
R Gray
A Monteiro
J Martin (from 7 June 2018)
+ Ensures the leadership needs
of the Company are sufficiently
appropriate to ensure continued
ability to compete effectively in
the marketplace.
We will continue building on these
developments in 2019 with the objective
of full compliance with the new 2018 Code
by the end of the current financial year.
Our priorities will be on further increasing
independence on the Board, expanding
stakeholder engagement and establishing
our risk management processes as we
focus on the completion of the Merlon
transaction, the integration of the Egyptian
business and the pursuit of further value
accretive growth.
Rui de Sousa
Chair
65
Governance Board of Directors
Rui de Sousa
Non-Executive Chair
Appointed: July 1999
N
Rui has approximately 40 years’
experience in the energy sector.
He was formerly a director of
Gazprombank-Invest (Lebanon) SAL,
the Chairman of Carbon Resource
Management Ltd. and the President
of Quantic Mining. Rui is currently a
Director of Quantic Limited, Midus
Global Limited and Chairman of
Blackdown Resources.
Jann Brown
Managing Director and
Chief Financial Officer
Appointed: November 2017
Dr Mike Watts
Managing Director
Appointed: November 2017
Jann served as co-head of SOCO’s
Business Development group between
February 2017 and November 2017
before her appointment to the
board. Jann currently serves as an
Independent Non-executive Director
and Chair of the Audit Committee
of Wood., of Troy Income and Growth
Trust plc and of Scottish Ballet.
She was formerly the Managing
Director, Chief Financial Officer and
Executive Director of Cairn Energy plc
where she had responsibility for
project managing Cairn India Limited’s
initial public offering, and previously
served as the Joint Chief Executive
Officer and Chief Financial Officer at
Magna Energy Limited, of which she
was also co-founder. Jann is a past
president of the Institute of Chartered
Accountants of Scotland.
Mike served as co-head of SOCO’s
Business Development group between
February 2017 and November 2017,
and as an independent Non-Executive
Director of the SOCO Board between
August 2009 and January 2017. Mike
has over 35 years of experience in the
oil and gas industry. He was formerly
the Deputy Chief Executive of Cairn
Energy plc and the Chief Executive
Officer and Managing Director of the
Amsterdam listed Holland Sea Search
Holding NV. Mike has held senior
technical and management roles with
Premier Oil, Burmah and Shell and
as Joint Chief Executive Officer and
co-founder of Magna Energy Limited.
Ed Story
President and Chief
Executive Officer
Appointed: April 1997
N
Ed was a founding Director of SOCO
International plc. Under his leadership,
SOCO acquired its principal assets in
Vietnam and progressed the assets
from initial exploration through to
being one of the largest producing
fields in Vietnam.
Ed has over 50 years’ experience in
the oil and gas industry, beginning
with various roles at Exxon
Corporation, including seven years
resident in the Far East. He was
formerly the Vice President and
CFO of The 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, which merged its
Australian-controlled entity,
Command Petroleum, into Cairn
Energy. Ed was a Non-Executive
Director of Cairn Energy plc until 2008
and Cairn India Limited until 2017.
Ed is currently a Non-Executive
Director of Vedanta Resources plc
and a founder and member of
the Cleveland Clinic International
Leadership Board.
Experienced
leaders guiding
our future
66
SOCO International plc Annual Report and Accounts 2018 Committee position key
e
c
n
a
n
r
e
v
o
G
X Committee Chair
X Committee member
A
R
N
Audit and Risk
Remuneration
Nominations
John Martin
Non-Executive Director
Appointed: June 2018
Ambassador António Monteiro
Non-Executive Director
Appointed: June 2009
A R N
A R N
John has more than 30 years’
experience in international banking
in the oil and gas industry and was a
Senior Managing Director in the Oil
and Gas team at Standard Chartered
Bank. Prior to joining Standard
Chartered in 2007, John worked for
ABN Amro for 26 years, specialising
in the energy sector. John has served
as the Senior Vice President of the
World Petroleum Council, and as an
Independent Non-Executive Director
of Rockhopper Exploration plc. He
was previously Chairman of Falkland
Oil and Gas Limited, an Independent
Non-Executive Director on the board
of Bowleven plc and, an Independent
Non-Executive Director and Chair
of the Audit Committee of Total E&P
UK Limited.
António has more than 45 years
of experience in diplomatic service
with the Portuguese Ministry of
Foreign Affairs. He served twice as
Portuguese Ambassador to France
and as Permanent Representative
of Portugal to the UN. He was UN
High Representative for Elections
in Côte d’Ivoire and member of the
UN Secretary General Panel for the
referendum in Sudan. Antonio was
Chairman of the Portuguese Bank
Millennium BCP and a non executive
member of the Board of the Angolan
Bank BPA and of the Spanish Bank
Sabadell. He is currently President of
the Millennium BCP Foundation and
a Member of the Millenium BCP’s
Strategic Council.
Rob Gray
Deputy Chair, Non-Executive
Director and Senior
Independent Director
Appointed: December 2013
A R N
Rob has been an adviser to the natural
resources sector for more than 30
years. Rob qualified as a solicitor in
1981 at Allen & Overy and then went
on to help establish James Capel &
Co. Petroleum Services, a successful
advisory and Mergers & Acquisitions
practice. Rob’s experience includes
13 years at Deutsche Bank where he
was latterly a Senior Advisor having
been Chairman of UK Investment
Banking for five years and formerly
Global Head of Natural Resources.
Rob was previously a Director and
Head of the Natural Resource Group
at Robert Fleming & Co. Ltd. for four
years, a group which he established.
Between 2000 and 2010, Rob was an
Advisory Board Member for Heerema
Marine Contractors. Rob was a
co-founder of RegEnersys, a natural
resources investment entity and is
currently the principal of ReVysion
LLP. In 2018 Rob was appointed an
adviser to the T2 Energy Transition
Fund of Tikehau Capital.
Ettore Contini
Non-Executive Director
Appointed: December 2001
Ettore was formerly a Director of
Energia E Servize SpA and Eurowatt-
Commerce. He was previously an
asset manager in the private banking
division of Banca del Gottardo.
Marianne Daryabegui
Non-Executive Director
Appointed: 15 March 2019
A R N
Marianne is currently a Managing
Director at Natixis, and was previously
the Head of Natural Resources at
BNP Paribas in Paris, France. She has
extensive experience in oil and gas
corporate transactions and capital
markets and has advised oil majors,
independent E&Ps and national oil
companies. Prior to leading the Oil
and Gas Corporate Finance Team in
2006, Marianne worked for eight years
in BNP Paribas’ Energy Commodities
Export Project Department where
she headed the Commodity Structure
Finance team for the Middle East and
Africa. Before joining the banking
sector Marianne spent eight years
at TOTAL. Marianne has a Master’s
degree in Finance and Capital Markets
from Sciences Po University, Paris and
a Masters in Tax and Corporate Law.
67
Corporate Governance Report
2016 UK Corporate Governance Code
(The ‘2016 Code’)
Statement of compliance with the
2016 Code
As stated in the Chair’s introduction above,
the Company is reporting compliance
in this document against the 2016 Code.
In respect of the annual report for the
next financial year, ended 31 December
2019, the Company will report compliance
against the 2018 Code. A summary of
certain key differences between the 2016
Code and the 2018 Code are set out at
the end of this Corporate Governance
Report, together with an indication of any
action taken or to be taken by the Board
to address those changes.
Throughout the year ended 31 December
2018, the Board considers that the
Company has complied with the
provisions set out in the 2016 Code as
described in this report. This is with
the exception of the composition of the
Nominations Committee where Rule B.2.1
of the 2016 Code provides that a majority
of the members of this Committee should
be Independent NEDs, for the period from
1 January 2018 to 6 June 2018. During that
time, Independent NEDs comprised 50%
of the Nominations Committee, or two
Directors from four. Only one Nominations
Committee meeting was convened during
that period, to consider the appointment
of John Martin to the Board and to discuss
Board refreshment and independence
in light of the forthcoming 2018 Code. On
7 June 2018 John Martin was appointed as
a Director and, in addition, as a member
of the Nominations Committee. From that
date until the end of 2018 the Nominations
Committee was majority independent
and accordingly compliant with the 2016
Code. This position will be maintained and
reinforced with Marianne Daryabegui, an
Independent NED, joining the Board and
serving as a member of the Remuneration
Committee, Nominations Committee and
the Audit and Risk Committee with effect
from 15 March 2019.
Division of responsibilities
Roles
The statutory duty of the Directors is to
act in what they consider to be in the
best interests of the Company and, as a
unitary Board, they are responsible for
the long term success of the Company.
68
The Board determines and develops the
strategy for the business and provides
it with the necessary entrepreneurial
leadership. It ensures the Company is
adequately resourced to meet its strategic
objectives and can meet its obligations
to its stakeholders. The Board sets the
values, standards and controls necessary
for risk to be effectively assessed and
managed. Some of its responsibilities
have been delegated to the Audit and
Risk, Remuneration and Nominations
Committees.
The roles of the Chair and Chief
Executive Officer are separated and their
responsibilities are clearly established,
set out in writing and agreed by the
Board. Both are collectively responsible
for the leadership of the Company. The
Chair chairs the Board meetings, leads
the NEDs in the constructive challenge
of the Executives’ strategy and is
accountable for the Board’s effectiveness.
This includes encouraging an open and
frank Boardroom culture, setting the
Board’s agenda, facilitating the NEDs’
contribution and ensuring sufficient time
and information to promote effective and
challenging discussions.
The CEO is responsible for the everyday
management of the Company. He leads
the Executives and management team in
the implementation of the Board’s strategy
and management’s performance in
running the business.
The NEDs have a supervisory role
that contributes to the development of
the strategy through supportive and
challenging inquiry. They scrutinise the
Executives’ performance in meeting their
agreed goals and objectives, and play a
key role in their appointment or removal.
The Company Secretary is appointed
by the Board. He facilitates the
communications and processes of the
Board, the induction programme for new
Directors and provides advice through the
Chair as may be required in the ongoing
discharge of the Directors’ duties. This
includes 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.
Matters reserved for the Board
The Board operates within a framework
that distinguishes the types of decisions
to be taken by the Board, including
determination of strategy, setting the
principal operating policies and standards
of conduct, approval of overall financial
budgets and financing agreements,
approval for establishing key corporate
relationships and approval of any actions
or matters requiring the approval of
shareholders. Within this framework,
while the Board has largely delegated the
authority for implementing its strategy
and decisions to the Executives and
management, there is a formal schedule
of matters specifically reserved to for the
Board’s decision or determination.
Committees
There are three principal Committees
of the Board, on which all current
independent NEDs sit:
+ The Audit and Risk Committee –
responsible for the integrity of the
Financial Statements and narrative
reporting, including annual and half
year reports.
+ The Remuneration Committee
– responsible for the design,
development and implementation of
the Company’s remuneration policy.
+ The Nominations Committee –
ensures the leadership needs of the
Company are sufficiently appropriate
to ensure continued ability to compete
effectively in the marketplace.
Each principal Board Committee has a
formal terms of reference (“TOR”), which
sets out the Committee’s delegated role and
authority and is approved by the Board. A full
and comprehensive review of the TORs for
each Committee was carried out in early
2018. The revised TOR are available on the
Company’s website (www.socointernational.
com/corporate-governance).
Attendance
The Board has four scheduled meetings
a year. At each scheduled meeting in 2018,
the Directors received a report from each
of the three principal Board Committees,
the Chief Executive Officer, Chief Financial
Officer, the joint Managing Directors,
the Chief Operating Officer and Group
Investor Relations Manager. Discussions
SOCO International plc Annual Report and Accounts 2018 around M&A activity, asset disposals and
strategic corporate finance were regular
agenda items throughout the year.
Due to M&A and corporate financing
discussions throughout the year,
additional full Board meetings, seven in
all, were convened in 2018. Accordingly,
there were a total of 11 Board meetings
during the year. On the occasions that a
Director was unable to attend one of these
meetings, they received a full briefing in
advance and were able to have their view
represented to the meeting.
Only Committee members are entitled
to attend their respective meetings.
Other Directors were invited to attend,
as determined appropriate or beneficial
and committee chairs provide an update
at the full Board meeting. There was full
attendance of committee members at
the Audit and Risk, Remuneration and
Nominations Committees in 2018.
See page 63 for a full overview of meeting
attendance by each Director.
Board composition
The Nominations Committee ensures the
leadership needs of the Company are met
and maintained appropriately to allow it
to compete effectively in the marketplace.
The Directors’ roles, including those
of the principal Board committees, are
established in writing and approved by the
Board. Biographical details are provided
on pages 66 to 67.
Throughout the year, the board comprised
eight Directors including the Chair, made
up of three Executives and five NEDs.
Until the 2018 AGM held on 7 June 2018,
the Board comprised two independent
NEDs, Rob Gray and António Monteiro,
and immediately following the 2018 AGM,
a third independent NED, John Martin,
was appointed.
Simultaneously with John’s appointment as
a Director, Olivier Barbaroux retired from
the Board, having not presented himself
to shareholders for re-election. This
maintained the total number of Directors
at eight. Since his appointment, John has
served as a member of the Nominations
Committee and the Remuneration
Committee, and as the Chair of the Audit
and Risk Committee. Rob Gray, Deputy
chair and Senior Independent Director,
stood down as chair of the Audit and Risk
Changes during the year
2018
2017
The Board
Members
Execs
NEDs
Independent NEDs
8
3
5
8
3
5
Rob Gray
John Martin (from 7 June 2018)
António Monteiro (until June 2018)
Rob Gray
António Monteiro
Appointed
John Martin (7 June 2018)
Retired
Olivier Barbaroux (7 June 2018)
Jann Brown (12 November 2017)
Dr. Mike Watts (as Executive,
12 November 2017)
Dr. Mike Watts (as NED, 31 January 2017)
Cynthia Cagle (12 November 2017)
Roger Cagle (12 November 2017)
Audit and Risk Committee
Members
Appointed
Retired
Remuneration Committee
Members
Appointed
Retired
Nominations Committee
Members
Appointed
Retired
2 (1 January to 7 June 2018)
3 (7 June to December 2018)
3 (1 January to 31 January 2017)
2 (1 February to 31 December 2017)
John Martin (7 June 2018)
–
–
Dr. Mike Watts (as NED, 31 January 2017)
2 (January to 7 June 2018)
3 (7 June to 31 December 2018)
3 (1 January to 31 January 2017)
2 (1 February to 31 December 2017)
John Martin (7 June 2018)
–
–
Dr. Mike Watts (as NED, 31 January 2018)
4 (1 January to 7 June 2018)
5 (7 June to 31 December 2018
4
John Martin (7 June 2018)
Rob Gray (October)
–
Dr. Mike Watts (31 January 2017)
Committee but continues to serve as a
member of that Committee. Rob will also
replace António Monteiro as the Chair of
the Remuneration Committee from the
date of the 2019 AGM, following Antonio’s
resignation. Rob’s appointment as Chair
is compliant with the new provision
of the 2018 Code requiring chairs of
remuneration committees to have served
for at least 12 months on a remuneration
committee before appointment.
Tony Hunter was Company Secretary
throughout the year and his appointment
was approved by the Board as a whole.
As announced on 19 February 2019,
Marianne Daryabegui has been appointed
as an Independent NED with effect from
15 March 2019. Marianne will serve as a
member of the Remuneration Committee,
Nominations Committee and the Audit
and Risk Committee.
António Monteiro will retire from the
Board of SOCO at the conclusion of the
2019 AGM, following ten years of service
and nine years since his initial election by
shareholders at the 2010 AGM. António
was considered by the Board to be
independent throughout 2018, taking into
account all relevant circumstances and
the application of the 2016 Code. António
has been a valued member of the Board
and highly-regarded colleague since his
appointment, and his fellow Directors wish
him all the very best in his retirement.
More information on Board composition,
including independence, balance,
diversity, succession planning and
evaluation is provided in the Nominations
Committee report on pages 72 to 75.
69
Governance Corporate Governance Report
continued
Audit, risk and internal control
The Audit and Risk Committee has
responsibility for the integrity of the Financial
Statements and narrative reporting, including
annual and half year reports. The Committee
also oversees the adequacy and effectiveness
of the internal financial controls and internal
controls and risk management systems,
and relationship with the external auditor.
The Company’s risk profile is assessed and
updated at least annually by the Committee.
At each scheduled meeting of the Committee,
it considers the Group’s internal control
framework and receives an environmental,
social and governance report (“ESG Report”).
During 2018, ESG Reports submitted to the
Committee included updates on policies
and procedures, climate change reporting
and a quarterly health, safety, environment
and social performance report.
More information, including the
Committee’s composition and activities
during the year, is provided in the Audit
and Risk Committee report on pages 76
to 81. As stated above, the TORs of the
Audit and Risk Committee were reviewed
and updated in early 2018, and the revised
TORs are available on the Company’s
website at www.socointernational.
com/corporate-governance.
Remuneration
The Remuneration Committee is
responsible for the design, development
and implementation of the Company’s
remuneration policy.
In determining the remuneration packages
awarded to management, the Board and the
Remuneration Committee have continued
to aim at providing incentive schemes that
reflect the characteristics of attractive
rewards, fairness and restraint.
Our overarching aim is to operate a
remuneration policy which rewards senior
management at an appropriate level for
delivering against the Company’s annual and
longer term strategic objectives. The policy is
intended to create strong alignment between
Executive Directors and shareholders.
SOCO’s remuneration policy was presented
to shareholders for approval at the
Company’s AGM held in 2017 and was
passed by a majority, with 99.15% votes
cast in favour. Further details of how the
policy was applied during 2018 are provided
in the Directors’ Remuneration Report.
70
In line with normal practice and regulatory
requirements, it is intended that the
remuneration policy will next be put to
shareholders for approval at the 2020 AGM.
More information, including the
Committee’s composition and activities
during the year, is provided in the
Directors’ Remuneration Report on pages
82 to 96. As stated above, the TORs of the
Remuneration Committee were reviewed
and updated in early 2018, and the revised
TORs are available on the Company’s
website at www.socointernational.
com/corporate-governance.
Relations with stakeholders
Investors
The Board as a whole has responsibility for
ensuring that a satisfactory dialogue with
shareholders takes place. The Executives
are responsible for ensuring that effective
communication is maintained with key
stakeholders and partners, including an
appropriate level of contact with major
shareholders and ensuring that their views
are communicated to the Board. The
Managing Director and Chief Financial
Officer has management responsibility
for investor relations.
To maintain a clear understanding of the
views of shareholders, all Directors receive
a quarterly investors relations report which
includes market updates, brokerage and
communications reports, share register
and share performance analysis and
comments and notes from research
analysts and proxy agencies. During 2018,
this included feedback on results, the
annual dividend recommended to the 2018
AGM, the proposed acquisition of Merlon
Petroleum El Fayum Company, including
the proposed issue of new shares in
partial consideration for the acquisition,
shareholder voting and feedback from
non-financial stakeholders.
SOCO had an open and active dialogue with
its institutional, private and retail shareholders
throughout the year. In early 2018, and for the
first time in SOCO’s history, a dedicated and
full-time Group Investor Relations Manager
was appointed, increasing the focus on
shareholder engagement. Management met
with investors on more than 50 occasions
during the year, including meetings with
institutional shareholders after each
results announcement.
Many of the Company’s retail shareholders
engaged with management throughout the
year and attended the AGM in June and the
general meeting in December 2018 to vote
upon the proposed acquisition of Merlon
Petroleum El Fayum Company.
The Company uses its online presence
to post and disseminate key information
promptly to a wide audience. The
Company’s website is regularly used by
shareholders and stakeholders for email
communication with management. During
2018, SOCO also established official Twitter
and Linked-in accounts. The Company
uses a PR agency to provide assistance
in the dissemination of information to
shareholders and the general public and
also to solicit active feedback as to the
effectiveness of such efforts.
The NEDs are each responsible for taking
sufficient steps to understand shareholder
views, including any issues or concerns.
This includes being available to SOCO’s
major institutional shareholders and
responding to requests for additional
communication with the Chair, Senior
Independent Director or other NED. 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 Chair or the Executives. Upon
the appointment of John Martin as an
Independent NED, he, along with the Deputy
Chair and Senior Independent Director,
Rob Gray, had their first meeting with proxy
advisers to gain a greater understanding
of their voting recommendation policy.
AGMs
Both before and after the formal
proceedings of each AGM, all Directors
and senior management, including the
chairs of the Audit and Risk, Remuneration
and Nominations Committees, make
themselves available to meet and chat with
shareholders, answer shareholder questions
and respond to any specific queries.
Notice of the AGM is circulated to all
shareholders at least 20 working days,
and for other general meetings at least
14 working days, prior to the meeting,
and resolutions are proposed for each
substantially separate issue. The result
of AGM proxy voting is announced after
votes are taken on a show of hands.
SOCO International plc Annual Report and Accounts 2018 Accountability statement page references
Accountability statements
Business Model and Strategy
Directors’ Responsibility Statement
Auditor’s Statement
Going Concern Statement
Report
Strategic Report
Annual Report of the Directors
Independent Auditor’s Report
Financial Review
Annual Report of the Directors
Viability Statement
Risk Management Report
Critical Judgements and Accounting Estimates
Note 4 to the Financial Statements
Risk Management and Internal Control
Risk Management Report
Audit and Risk Committee
Nominations Committee
Corporate Governance Report
Audit and Risk Committee Report
Corporate Governance Report
Audit and Risk Committee Report
Corporate Governance Report
Nominations Committee Report
Pages
20
100
102
35
100
42
118
36
70
80
70
76 to 81
69
72 to 75
Corporate culture
It has been important to the Board, in
particular following a number of Board
and Senior Management changes since
2017, to preserve and enhance a corporate
culture of honesty, fairness, transparency,
engagement and respect. The Board
schedule format has been adjusted to give
space for increased engagement amongst
the NEDs, including the Senior Independent
Director and the Chair, without the presence
of the Executives, and to provide further
opportunity to raise and discuss concerns.
For the workforce, this has been
approached in a variety of forms including
extending participation in the Company’s
share schemes, lunch and learn sessions
with management and other feedback
channels, including through the Group’s
whistleblowing policy and access to a
dedicated and anonymous hotline.
One of the provisions of the 2018 Code,
which takes effect for SOCO from 1 January
2019, is employee engagement at a Board
level. Given the size and location of SOCO’s
workforce (23 employees with the majority
UK based), it was proposed that a UK based
independent NED be nominated as the
Director to represent the employee voice at
Board level. In December 2018, John Martin
was appointed to the role and proposes
meeting with the head office staff at least
twice annually without executive colleagues
present. Staff based outside head office
will also be provided with a forum to
communicate directly with the appointed
Director representative.
The 2018 Corporate Governance Code
The 2018 Code, which will apply to the
current and future financial years, is
shorter than the 2016 Code, but contains
changes to the 2016 Code in certain key
areas that will affect the Company and
the Board. These include:
+ Workforce and stakeholder voice and
employee engagement, including
representation of staff in Board-
level discussion through either
an employee-appointed director,
a workforce advisory panel or a
designated non-executive director.
+ The requirement to consult with
shareholders following shareholder
voting opposition of more than 20%
to a board recommendation.
+ The requirement when making new
director appointments, to take into
account other demands on directors’
time, and make suitable disclosure.
+ Board evaluations, and the requirement
for the Nominations Committee to
record the nature and extent of an
external evaluator’s contact with the
board and individual directors.
+ The promotion of gender, social and
ethnic diversity.
+ Broader responsibilities for
remuneration committees to review
workforce remuneration and related
policies and alignment of incentives
and rewards with culture.
+ The requirement that Chairs of
remuneration committees should
have served for at least 12 months
on a remuneration committee
before appointment.
+ Vesting periods for share awards,
including development of a formal
policy for post-employment
shareholding requirements.
+ The requirement that the chair should
not remain in the post beyond nine
years from the date of their first
appointment to the board, and that the
chair should demonstrate objective
judgement throughout their tenure.
+ The requirement for the board to assess
and monitor culture so that policy,
practices or behaviour throughout the
business are aligned with the company’s
purpose, values and strategy.
+ The requirement for a means by which
the workforce can raise concerns in
confidence and anonymously, with
the board routinely reviewing this and
the reports arising from its operation,
including making arrangements
for proportionate and independent
investigation and for follow-up action.
The 2018 Code also removes certain
exemptions for “smaller companies”,
meaning companies outside the FTSE 350,
that are available to the Company under the
2016 Code. The principal “smaller company”
exemption relied upon by the Company
under the 2016 Code is from the requirement
that at least half the board, excluding the
chair, should comprise Independent NEDs.
With this exemption no longer available
to the Company in the 2018 Code, and
with the requirement in the 2018 Code
that the chair remain in place for no longer
than nine years, the Board will seek to
rebalance its composition during 2019
by initiating an external search process for:
+ a new independent Chair
to succeed me; and
+ a further Independent NED.
Subject to this, the Board is satisfied
that it is either already compliant with
the new or revised provisions of the 2018
Code, or considered it is well positioned
to achieve such compliance during the
current financial year.
71
Governance
Nominations Committee Report
Nominations Committee
Meeting membership and attendance
Role of the committee
Rui de Sousa
Nominations Committee Chair
+ Ensuring the composition of the Company’s
leadership remains effective and competitive.
+ Leading the process for Board and Committee
appointments and making recommendations
to the Board.
+ Annually reviewing the Board balance, structure,
composition, diversity and succession planning.
+ Establishing an ongoing process for evaluating
the Board’s performance and effectiveness.
Committee member
2018 attendance
Rui de Sousa (Chair)
Ed Story (President and
CEO)
Rob Gray*
(Deputy Chair and Senior
Independent Director)
+++
+++
+++
John Martin*
(appointed 7 June 2018)
++
António Monteiro*
+++
+ Attended * Independent NED
The Committee led a process to ensure that Board
independence increased during 2018 and will
continue into 2019 taking into account the Board
composition requirements of the new 2018 UK
Corporate Governance Code.
Membership
+ During the year, the Committee
comprised the Chair, the Chief
Executive Officer and the three
Independent Non-Executive Directors
(‘NEDs’), Rob Gray, António Monteiro
and, following his appointment as a
Director on 7 June 2018, John Martin.
+ The qualifications of each of the Chair
and members are set out on pages 72
to 75.
Board changes
John Martin joined the Board on 7 June
2018 and was appointed as Chair of the
Audit and Risk Committee and a member
of the Remuneration and Nominations
Committees. Rob Gray who chaired the
Audit and Risk Committee until John’s
appointment remained on that Committee
as a member. Olivier Barbaroux retired
from the Board as a Non-Executive
Director on 7 June 2018 at the conclusion
of the Company’s AGM.
72
SOCO International plc Annual Report and Accounts 2018 Meetings
The Committee conducted its duties through three meetings held during 2018. The Chair additionally led discussions before the full
Board on certain matters within the Committee’s terms of reference. Other Directors were invited to attend Committee meetings, where
determined to be appropriate or beneficial. The first meeting of the year, held in Q2 2018, was attended by all four members appointed
to the Committee at the time. John Martin joined the Committee upon his appointment on 7 June 2018 and attended both meetings held
in the second half of the year. During the year the following areas were discussed at the Committee meetings:
Meeting matter
Discussions and outcomes
Q2
Board changes and ongoing refreshment
John Martin was recommended to the Board for appointment as a Director.
Board refreshment and independence were discussed in light of the forthcoming 2018 Corporate
Governance Code, applicable to financial years commencing on or from 1 January 2019. Plans were
put in place to ensure full compliance as soon as practicable.
Q3
Q4
Board refreshment
Board refreshment was considered in relation to NED independence.
Board refreshment and succession planning
Workforce engagement
Recommendations for NED appointments were considered. Succession planning was discussed
in relation to senior management at Board level and reporting into Board level.
Compliance with the new Corporate Governance Code requirements for workforce engagement
was discussed. A UK-based Independent NED was nominated to engage with and represent the
employee voice in the Boardroom.
Annual Board, Committee and Director evaluations
The Committee reviewed the Board Evaluation Report and considered proposed actions including
training and development needs.
Annual review of Board balance, structure,
independence and composition
Board balance and the current Board profile, including structure, independence, time commitments,
diversity and conflicts of interest were considered.
Annual review of Committee terms of reference
The TOR were recommended to the Board.
As at 31 December 2018, the Board
comprised three Executives and five
NEDs, including the Chair. Three of those
NEDs were considered independent for
the purposes of the 2016 UK Corporate
Governance Code (‘2016 Code’). As stated
below under “Independence”, one of those
NEDs, António Monteiro, will cease to be
considered independent by the Board at
the expiry of nine years’ service since his
initial election at the 2010 AGM. António
has informed the Board that he will not
submit himself for re-election at the 2019
AGM, and will retire at the conclusion
of that meeting. Rob Gray will assume
the role of Chair of the Remuneration
Committee following António’s retirement.
Board refreshment and
succession planning
Board refreshment and succession
planning continue as ongoing processes.
With the Board changes in 2017 focusing
on the Executives, in 2018 the priority
was to increase the independent
component of the Board and to begin
preparations for the new requirements
on board composition introduced by the
2018 UK Corporate Governance Code
(“2018 Code”) to apply to financial years
commencing on or after 1 January 2019.
The year began with the Company in
discussions on a potential corporate
transaction. This transaction, had it been
consummated, would have resulted
in significant changes to the composition
of the Board, including the appointment
of new Independent NEDs. However,
SOCO withdrew from the discussions in
March 2018, after which the Committee
commenced a programme to identify
and recommend suitable candidates
for Independent NEDs. John Martin was
appointed as an Independent NED on 7 June
2018, and was at the same time appointed
as Chair of the Audit and Risk Committee
and member of the Remuneration and
Nominations Committees.
As announced on 19 February 2019,
Marianne Daryabegui, an Independent
NED, has been appointed to the Board
with effect from 15 March 2019. Marianne,
who had previously been an Independent
NED of the Company between October
2013 and October 2016, will also serve as a
member of the Remuneration, Nominations
and Audit and Risk Committees.
The Committee will continue to pursue
suitable candidates for Independent
NEDs and a new Chair in 2019, with the
objective of full compliance with the 2018
Code by the end of the year. The search
consultancy firm, Korn Ferry, has been
appointed to assist the Board and the
Committee in this process during 2019.
Succession planning for the roles within
senior management reporting into Board
level has also been given consideration.
Appointments Process
Board appointments are made through
a formal process led by the Nominations
Committee. In relation to the recruitment
and appointment of non-executive
directors, the Committee recognises the
emphasis placed by the 2016 Code on
the engagement of an external search
consultancy or the open advertising
of vacancies. Although John Martin’s
appointment in 2018 resulted from an
informal introduction rather than through
an external search consultancy or from
an open advertisement, the Committee
ensured that appropriate steps were
taken to establish John’s objectivity and
independence. These steps included
personal meetings with each member of
the Committee before recommendation of
the appointment. The Committee also took
into account John’s extensive experience
in international banking in the oil and gas
industry considered to be particularly
relevant to the Company’s strategic
outlook and positioning.
73
Governance Nominations Committee Report
continued
New director induction for John Martin
was facilitated by the Company Secretary
upon his appointment. The appointment
letter for John Martin and the other NEDs,
together with the service contracts for
the Executive Directors, are available for
inspection under standard conditions.
More recently, the Committee assessed
the suitability of Marianne Daryabegui for
reappointment as an Independent NED,
taking into account her previous three year
service on the Board, and concluded that
her expertise and track record in oil and
gas and corporate finance, with particular
experience in the Group’s new region of
focus in the Middle East and North Africa,
would complement and enhance the skills
and experience of the current Board.
Independence
As stated above, increasing the balance
of independence of the Board has been
a priority for the Committee during 2018.
At the start of 2018, and as a “smaller
company” under the 2016 Code, SOCO
had two Independent NEDs Rob Gray
(Senior Independent Director and
Deputy Chair) and António Monteiro.
A further Independent NED, John
Martin, was appointed on 7 June 2018
with effect from conclusion of the AGM.
The independence of these three NEDs
was further assessed and accepted
in December 2018.
António Monteiro will reach nine
years service since his first election
by shareholders at the 2010 AGM and,
consistent with paragraph B.1.1 of the
2016 Code, will cease to be considered
to be independent by the Board at that
point. António will not submit himself
for re-election at the 2019 AGM and
will accordingly will step down from the
Board at the conclusion of the meeting.
Notwithstanding António’s retirement,
the independent presence on the Board
will be maintained and reinforced with the
appointment of Marianne Daryabegui to
the Board with effect from 15 March 2019.
The Committee recognises that, under
the new provisions of the 2018 Code
applicable to the current financial year
commencing 1 January 2019:
74
+ SOCO will no longer have the ability
to rely on the “smaller company”
exemption from the general
requirement that at least half of the
Board, excluding the Chair, must be
Independent NEDs; and
+ The Chair should not remain in
place beyond nine years from the
date of first appointment, save
that the period can be extended
for a limited time to “facilitate
effective succession planning”.
The implications of the changes to board
composition introduced by the 2018
Code will be central to the Committee’s
discussions and work in 2019.
Board balance
The Committee assesses the
Board’s balance of skills, experience,
independence, diversity, tenure and
knowledge of the Company and
the industry on an annual basis.
The assessment in 2018 included
consideration of the Company’s leadership
needs within the context of growth,
portfolio diversification and long term
strategy. The discussions determined that
the current balance remains appropriate
and sufficient to effectively promote the
long term success of the Company and
would be further enhanced through the
process already underway to increase the
number of Independent NEDs and prepare
for compliance with the 2018 Code.
The Board’s current balance and
composition are shown on page 62.
Diversity
SOCO’s approach to diversity and
inclusiveness is embedded within the
Group’s Human Rights Policy available
on the Company’s website at www.
socointernational.com/hses-policies.
A key aim of the Policy is a workplace that
is inclusive and free from discrimination.
In applying the Human Rights Policy
to Board composition, the Committee
pursues diversity of approach,
experience, knowledge, skills, and
professional, educational and cultural
backgrounds. The international and
global perspective achieved has
enhanced the Board’s discussions
on business development, M&A and
operational and financial integration.
In its annual review of diversity,
the Committee noted diversity of
gender, age, demographics, skills,
professional backgrounds, experience
and education amongst the Board
and senior management.
Board evaluation
In 2018, the Board carried out its annual
evaluation of its own performance and
effectiveness and that of its principal
Committees and individual Directors.
The Committee led the process and
shared the results with the full Board.
The Committee was assisted in this
process by the Company Secretary.
Annual Board evaluations had been
conducted externally until 2017 when
Tony Hunter, who had previously led the
external process on behalf of Nautilus
Management Limited, was appointed
as Company Secretary.
As in 2017, the 2018 evaluation was the
first to be conducted with the current
complement of Directors. It was conducted
through confidential questionnaires that
solicited an evaluation of the Board’s
performance in regards to the following:
+ Strategy and risk, including how
the Board has handled risk and
opportunities
+ Corporate Responsibility
+ Succession planning
+ The performance of the Chair,
Deputy Chair and Independent NEDs
+ Board effectiveness and operation
+ The operation of the principal
Board committees
+ Board training and development needs
+ Time commitment
Following the evaluation process,
a number of areas were identified for
ongoing focus in 2018 including:
+ Continuation of the programme
to increase Board independence,
particularly in light of the new
2018 Code
+ The importance of maintaining an
atmosphere of open discussion and
challenge and informal discussion
between meetings
SOCO International plc Annual Report and Accounts 2018 Only Directors who have no interest
in the matter are able to take the
relevant decision to authorise a
conflict 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.
Each Director has notified the Board
of their conflicts or in some cases, the
potential for conflicts or the absence
of conflicts. The Board assesses each
notification on its own merits, including
the implementation of appropriate
limits and conditions, prior to giving
authorisation for any specific conflict
or potential conflict to exist.
The Board assesses its conflict
authorisations on an ongoing basis
throughout the year and additionally
performs a scheduled review
in December.
Rui de Sousa
Nominations Committee Chair
The results were discussed by the
Committee, led by the Committee Chair,
and shared with the whole Board. The
results of the Chair’s performance review
were discussed with the other NEDs,
led by the Deputy Chair and Senior
Independent Director, and communicated
to the Committee Chair.
Re-election
All Directors annually retire and seek
re-election by shareholders at the
Company’s AGM. The Committee makes
its recommendation to the Board on each
re-election resolution. Pending the Chair
confirming his satisfaction that each
Director continues to perform effectively
and with the appropriate commitment to
the role, the full Board then determines
its own recommendation to shareholders
in relation to those resolutions.
The full Board retired and offered itself
for re-election by shareholders at the
Company’s AGM in June 2018, with
the exception of Olivier Barbaroux who
stepped down from the Board with effect
from close of that meeting. All Directors
were duly re-elected at the 2018 AGM,
each receiving more than 95% of the proxy
votes lodged in advance of the meeting.
All Directors will retire and, other than
António Monteiro, will offer themselves
for re-election at the 2019 AGM. This will
include Marianne Daryabegui, appointed as
a Director with effect from 15 March 2019.
The Committee is satisfied that each
individual Director’s performance
continues to be effective and
demonstrates commitment to the role
and, accordingly, has recommended
to the Board that each such Director
remains in office subject to re-election
by shareholders at the AGM.
The Committee formed its
recommendations regarding re-election
following assessments of Board balance,
composition and independence.
Workforce engagement
During the year, the Committee
discussed the requirements of the
new 2018 UK Corporate Governance
Code, applicable for financial years
commencing on or after 1 January 2019,
in relation to proposals for workforce
engagement. The 2018 Code proposes
three alternative means of achieving this:
a director appointed from the workforce;
a formal workforce advisory panel; or a
designated non-executive director (or a
combination of more than one of these).
It determined that due to the size and
culture of the Company, the most effective
means of ensuring representation of the
workforce in the Boardroom would be
to designate responsibility for workforce
engagement to an Independent NED.
John Martin was appointed by the
Committee in this role in December 2018
and proposes meeting with the head office
staff at least twice annually. Staff based
outside head office will also be provided
with a forum to communicate directly with
the appointed director representative.
Board development, information
and support
Throughout 2018, all Directors received
ongoing access to resources for the update
of their skills and knowledge; both on an
individual and a full Board basis. Comments
are solicited in the annual Board evaluation
and discussed with the Chair.
Conflicts of interest
The Board has the power, subject to
certain conditions, 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 Companies Act
2006 and the Company’s articles of
association. Procedures are in place
for ensuring that the Board’s powers to
authorise conflicts is used effectively and
appropriately. 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
their connected persons. The decision
to authorise each situation is considered
separately on its particular facts.
75
Governance Audit and Risk Committee Report
Audit and Risk Committee
Meeting attendance
Committee member
2018 attendance
++++++
++++++
++
Rob Gray*
António Monteiro*
John Martin*,1
Attended
*
Independent NED
1 Appointed as Director and Chair of Audit and Risk
Committee on 7 June 2018.
John Martin
Audit and Risk Committee Chair
The Group’s stated growth strategy will necessitate
continued focus by the Audit and Risk Committee on
robust governance over financial controls, prudent
financial management including risk management
and mitigation.
Dear shareholders,
Membership and responsibilities:
During 2017 and the first half of 2018,
the Audit and Risk Committee comprised
Rob Gray (Chair) and António Montiero,
both of whom were considered by the
Board to be independent throughout
the year. In June 2018, I joined the Board
as another Independent non-executive
Director and having recent and relevant
financial experience was appointed Chair
of the Committee replacing Rob as the
then existing Chair, Rob and António
continued as members of the Committee.
As Chair of the Committee I convene
meetings on a regular basis and report
to the Board throughout the year.
The Audit and Risk Committee has
a formal document outlining its
responsibilities, which is reviewed
by the Board on an annual basis.
The Audit and Risk Committee Terms of
Reference are available on our website,
socointernational.com.
Key responsibilities:
+ Reviewing and testing the integrity
of the Group’s financial statements
to ensure full compliance with
international financial reporting
standards and requirements.
+ Overseeing the planning and
execution of the on-going audit
programme including review
of audit quality and results.
+ Reviewing the effectiveness of internal
control processes and systems,
including IT control platforms.
+ Reviewing key financial, operational
and corporate responsibility
risk management processes,
including environmental, social and
governance risks.
Allocation of Audit and Risk Committee
time (%)
10
42
18
18
13
Financials
42%
Internal Controls 13%
18%
Risks
18%
10%
ESG
Governance
76
SOCO International plc Annual Report and Accounts 2018
Audit and Risk Committee meetings
in 2018:
The Committee met six times during 2018.
Of those, four were regularly scheduled
Committee meetings held in March, June,
September and December, and two were
special meetings held in January and
March. The two special meetings of the
Committee were convened to recommend
to the Board the full impairment of
certain exploration assets, following the
Board’s decision not to invest further in
the Group’s Africa portfolio (which was
subsequently divested in 2018), and to
recommend to the Board to approve
the change in accounting policy from
modified full costs to successful efforts.
The Committee examines and discusses
at each regularly scheduled meeting:
+ Detailed internal controls reports
+ Updated risk register and risk
management reports
+ Review of environmental, social
and governance matters
In addition to members of the Committee,
all members of the Board, the finance
management team and the external
auditors, Deloitte’s, attended all Audit
and Risk Committee meetings.
During 2018 the following additional
areas were discussed at meetings of
the Committee:
January:
+ Special meeting to review and
recommend for Board approval the
proposed impairment of the Group’s
African exploration assets, for the
financial year ended 31 December 2017.
March (two meetings):
+ Special meeting to review and
evaluation of revised accounting policy
from modified full costs method to
successful efforts, for adoption in the
Group’s financial statements for the
year ended 31 December 2017, with
recommendation for Board approval.
+ Regular meeting to review Health,
Safety, Environment and Social
Report, including an update on
Human Rights policy and Anti-Slavery
statement for approval.
+ Review and Approval of 2017
financial statements, including
reviews of Going Concern, Fair,
Balanced and Understandable
and Viability Statements.
+ Review of the 2017 external audit
status, including analyses of
findings of the external audit and
key judgemental areas.
+ Update of Audit and Risk Committee
Governance matters, with focus
on internal controls processes
and systems, and review of risk
management and mitigation.
+ Review and approval of the
updated Group Anti-Bribery and
Corruption programme and policies
and process for implementation
of approved changes.
June:
+ Review of Health, Safety, Environment
and Social Report.
+ Review of Internal Controls Report:
– Cost recovery audits of joint
– Update on Criminal Finance Bill (2017)
– Review of Governance structure,
Risk Management issues and
Internal Control Processes
– Review and testing of Exploration
and Producing Asset Valuations
and Impairments.
– Review of Going Concern Report
– Review and approval of 2018 Interim
Accounts, including presentation by
external auditor Deloitte, and Audit
and Risk Committee Comments
– Review and approval of the Treasury
Committee Report, including
financing terms and covenant
compliance monitoring
December:
+ Review of Health, Safety, Environment
and Social Report, including updates
on policies and procedures.
+ Review of Internal Controls and
Risk Report:
– Update on Policies, Procedures
operations in Africa and Vietnam
and Controls
– Update of Finance System
– Review of draft revised 2018 Business
enhancements including IT platforms
Risk Profile and Mitigation Report
– Update of policies, procedures
and controls
– Non-audit services
+ Review and assessment
of risks including:
– Anti-bribery and corruption profile
– Significant risk matters and
mitigation actions
+ Update on GDPR actions and
IT systems.
+ Review and approval of calendar
checklist of duties for Audit and Risk
Committee Meetings for 2018.
September:
+ Review of Health, Safety, Environment
and Social Report.
+ Update on Internal Controls
and Risk Report:
– Review of Internal Controls
and Risk Report
– Updated Delegation of Authorities
– Approval of non-audit services
+ Annual Review of Terms of Reference
of the Audit and Risk Committee
+ Year end planning review and approval
of 2019 Audit Plan, taking into account
the acquisition of Merlon Petroleum
El Fayum Company.
+ Review and Discussion
of significant risks.
+ Review and testing of exploration
and producing asset valuations
and impairments.
+ External audit scope and quality review
+ Update on the evaluation of the impact
of the planned implementation of new
accounting standards IFRS 9, 15 and
16, including presentations by Deloitte.
+ Review of recent developments
in relation to various FRC
requirements and other regulatory
and compliance matters.
77
Governance Audit and Risk Committee Report
continued
During the year the Committee focused
on the following matters:
Financial reporting and significant
accounting issues
During the first half of 2018, the Group’s
accounting policies, in accordance
with best practice, were reviewed by
management and the Committee to
ensure that they remained appropriate for
the Group’s activities. As a consequence
of that review, the Board approved the
conversion from modified full cost basis to
successful efforts to bring the Group more
in line with UK-listed E&P industry players.
This change was adopted in the Group’s
financial statements for the year ended
31 December 2017.
The Group adopted IFRS 9 – “Accounting
for financial instruments” and IFRS 15 –
“Revenue from contracts with customers”
from 1 January 2018. The impact of these
adaptions is disclosed in Note 2 of the
financial statements.
Following the extension of the FPSO Bare
Boat Charter in Vietnam during the period,
IFRS 16 – “Accounting for leases” has been
discussed by the Committee and with
Deloitte. Management have identified all
lease agreements across the Group and the
preliminary impact of IFRS 16 is considered
in note 2(c) of the Financial Statements.
Significant issues related to the 2018
Financial Statements
The Committee identified the significant
issues that should be considered in
relation to the Financial Statements for
the year ended 31 December 2018, being
areas which may be subject to heightened
risk of material mis-statement.
New country entry – Egypt
Following detailed analysis and input from
the Group’s advisers and lending banks,
the Committee reviewed and approved
the proposal to invest in Egypt, in order to
enable the Company to proceed with the
acquisition of Merlon El Fayum Company.
Fair, balanced and clear and concise
The Committee advised the Board
whether the annual report and accounts
are taken as a whole, fair, balanced, clear
and concise and provide the information
necessary for shareholders to assess
the Group’s performance, business
model and strategy. The Directors have
confirmed this in their Responsibility
Statement set out on page 100 of
the Annual Report of Directors.
Change from modified full cost
to successful efforts
In the year to 2017, the Group moved from
a modified full cost basis to successful
efforts in order to become comparable
with our UK-listed E&P industry peers.
The effect of the new policy was reported
in the Group’s financial statements for the
year ended 31 December, 2017.
Exploration and evaluation assets
and impairment review
The Committee considered the Group’s
intangible Exploration and Evaluation
assets individually for any indications
of impairment, including the various
indicators specified in paragraphs 18 to 20
as set out in IFRS 6 – “Exploration for and
Evaluation of Mineral Resources”.
At both the half year and year end 2018,
the Committee considered whether
various indicators of impairment
existed and also the results arising from
impairment reviews. Such reviews are
carried out in relation to both Exploration
and Evaluation assets, with the role of the
Committee being focussed on challenging
management’s underlying assumptions
and estimates and to judge whether they
are realistic and justified. Deloitte also
performed similar tests and tested the
economic models to validate the integrity
of the process and results. Following
the impairment testing, the Committee
recommended to the Board that no
additional impairments be made for the
current period.
Producing Assets, Property, Plant and
Equipment (“PP&E”) and impairment review
The Committee reviewed individually
the Group’s oil and gas producing assets
classified as PP&E on the balance sheet
for impairment with reference to IAS 36
Impairment of Assets. During 2018, the
Group’s PP&E oil and gas assets comprised
its two Vietnam producing licences, TGT
and CNV, which are described in the
Operations review on page 24.
Following operational delays in both
the 2018 and 2019 work programmes in
Vietnam, the 2P reserves were revised
to reflect the fact that some production
would now most likely be deferred to a
period beyond the term of the licence. This
reserves downgrade was a trigger for the
Committee to review the revised Net Asset
Value (“NAV”) of the assets compared to
their carrying value in the accounts. If the
NAV had dropped below the carrying value,
there would have been an impairment
charge to bring the carrying value down.
There are a number of assumptions which
need to be made in assessing the NAV,
including oil prices, production rates
and discount rates. Using the Group’s
agreed economic assumptions, there
is no impairment.
Both assets have been rigorously tested
through economic modelling using a
range of assumptions, and both were
determined to have a fair value equal
to, or in excess of, their book carrying
value. The CNV asset was also assessed
for any potential impairment reversal,
as in 2014 an impairment provision was
made. Management concluded, and the
Committee agreed, that testing supported
a reversal of the previous impairment.
An impairment reversal of $37.8m has
been booked in the period to the income
statement with a deferred tax charge of
$13.9m, increasing net profit by $23.9m.
The Committee has discussed the Group’s
PP&E assets and associated impairment
testing with both management and
Deloitte and agree with the treatment
adopted, as detailed in Note 15 to the
Financial Statements. Such approach
has been approved by the Board.
78
SOCO International plc Annual Report and Accounts 2018 Risk assessment
The Committee carried out a detailed
risk assessment in which it reviewed
existing risks and identified new risks
as appropriate. The likelihood and
significance of each risk was evaluated
along with proposed mitigating factors
and was reported to the Board. All
new risks or changes to existing risks
were monitored throughout the year
and discussed at each Committee
meeting. The Committee maintains a
comprehensive bribery risk assessment
and mitigation procedure to ensure that
the Group has procedures in place to
eliminate bribery, and that all employees,
agents, contractors, and other associated
persons are made fully aware of the
Group’s robust policies and procedures
on a regular basis.
Whistleblowing procedure
The Committee has reviewed and is
satisfied with the Company’s procedures
for “whistleblowing”, enabling employees
to raise issues in confidence concerning
improprieties which would be addressed
with appropriate follow-up action. The
Group has in place an Ethics Hotline
using an independent confidential
telephone service available to staff to
report a suspected breach of the Group’s
Code of Business Conduct and Ethics.
No calls to the telephone service were
logged in 2018, and there were no other
whistleblowing reports received or logged
within the Group during the reporting
period. After the financial year end, in early
2019, a report was received about one
member of staff using Company assets for
personal use. The staff member has since
left the organisation.
Oil and Gas reserves
The Group’s estimates of oil and gas
reserves have a critical impact on
the financial statements, especially
in relation to DD&A and impairment
of Exploration and evaluation assets.
Oil and gas reserves, as discussed in
Risk Management Report on page 36
are calculated using best practice and
industry evaluation techniques which
have uncertainties in their application.
The Committee reviewed, with
management and Deloitte, results of third
party reserve assessments conducted by
ERCE during 2018 and the reserves audit
conducted by our reserves auditor, the
engineering and reserves consultancy
RISC Advisory Pty Ltd (“RISC”), which
are discussed further in the review of
operations on page 24. These results have
also been scrutinised by management,
taking into account the status of the
field’s development, to be satisfied that
reserve estimates are appropriate, that
the related DD&A calculations are correct
and that rigorous impairment testing
has been conducted. Management also
reviewed its estimate of future costs
(including decommissioning costs)
associated with producing reserves.
Reserves estimates are inherently
uncertain, and are regularly revised over
the producing lives of oil and gas fields
as new reserves estimates become
available and economic conditions evolve.
The Committee acknowledged that such
revision may impact the Group’s future
financial position and results, in particular
in relation to DD&A and impairment
testing of oil and gas PP&E assets.
An independent audit and review of the
Group’s producing assets in Vietnam,
including certification of gross 2P
reserves, was completed in February 2019
by RISC. As announced on 14 February
2019, and consistent with the RISC work,
TGT and CNV 2P reserves were revised
following 2018 production from 25.4mmboe
to 23.0 mmboe due to operational delays
and some production volumes being
delayed beyond the licence expiry date.
Notwithstanding this reduction to 2P
reserves, the Group’s 2019 production
guidance for Vietnam was maintained
at 6,500-7,500 boepd net to SOCO.
Sale of SOCO Congo Limited: Valuation
In June 2018, the Group sold its shares
in the company SOCO Congo Limited,
which in turn owned the entire issued
share capital of SOCO Exploration
and Production Congo SA (“EPC”), the
operator and holder of a participating
interest in the Marine XI PSC, offshore
Congo (Brazzaville) and the four
exploitation permits under that PSC.
Legal transfer of the Group’s shares
in SOCO Congo Limited took effect
immediately following signature of the
sale and purchase agreement under
Cayman law, the law applicable to the
transfer of shares in SOCO Congo
Limited as a Cayman incorporated
company. The purchaser of SOCO Congo
Limited assumed all post-completion
risks associated with the transfer of
the shares, including any implications
for EPC in discussions with the
Congolese authorities.
The consideration for the sale of
shares was structured in tranches,
with each tranche contingent on one
or more triggers related to operational
or commercial progress on the permit.
More details of the consideration
structure and triggers were set out in the
Company’s announcement on 25 June
2018 and are described in note 34 of the
Financial Statements. We have evaluated
carefully the chance of success of each
of these triggers and, whilst this is a very
difficult area to judge, have made our best
estimates and provided full disclosure
of the percentage chance of success
we allocate to each of these triggers.
We understand there has been limited
progress on the first trigger (signature
of the special agreement documenting
the first exploitation permit bonus) since
completion, while the purchaser has taken
time to establish themselves in country as
the ultimate owner of EPC. There is there
is no formal or reliable evidence available
to us which suggests our initial estimates,
originally published in the Company’s
interim results statement on 20 September
2018, should be changed.
79
Governance Audit and Risk Committee Report
continued
Key judgements and estimates in financial reporting
Key judgements
and estimates in
financial reporting
New IFRS Accounting
Standards
Audit and Risk Committee review
+ IFRS 15 – revenue from contracts
Outcomes
+ $nil quantitative effect
with customers
+ IFRS 9 – “Accounting for Financial
Instruments” – depends on timing
of implementation of oil price and/
or interest hedging activities
+ IFRS 16 – “Accounting for Leases” –
all lease contracts across the Group
being assessed
+ Immaterial quantitative effect
+ Estimates included in
Note 2 to the Fnancial Statements
+ Reviewed the Group’s oil price
+ The Group’s long term price
assumptions
assumptions are broadly consistent
with 2017
+ Reviewed the Group’s discount
rates for impairment testing
+ The Group’s discount rates
remained unchanged from 2017
+ Upstream impairment charges,
reversals were reviewed twice
during the year
+ Reviewed fair valuation of all assets
+ Reviewed DD&A estimates, based
on reserves reports, units of
production and future development
costs
+ There was a post tax reversal of
$23.9m of CNV asset – see Note 15
of the financial statements
+ Management’s assessment of fair
value judged as “reasonable and in
compliance with IFRS 13”– fair value
assessments
+ Management’s asessments of
DD&A judged to be reasonable
based on prudent assumptions
+ Reviewed override of management
+ Under ISA 240 Management
controls
Asset carrying
values and impairment
testing – including
judgements on future
oil pricing, discount
rates, production
profiles, reserves and
cost estimates
Significant risks that
could potentially
impact on financial
statements – including
fair valuation of assets,
reversal of impairment
of CNV producing
assets, DD&A
estimates, override
management controls
Oil reserves
accounting – including
management’s
assumptions for future
oil prices which have
a direct impact on the
estimate of the
recoverability of asset
values reported in the
financial statements
+ Reviewed the Group’s guidelines
and policy for compliance with oil
reserves disclosure regulations;
including governance and controls
+ Reviewed exploration charges
+ Reviewed at each Committee
meeting an update on the status of
all ups
override of controls os presumed
significant risk. No breaches were
found. Strenghtening of internal
controls is in progress
+ Following consideration changes
were made to the Groups oil
reserves guidelines policy
+ $5.8m Vietnam Block 125 & 126
+ Updated third party estimates
and independent audit completed,
with results disclosed in financial
statements for year end 2018
Internal controls and risk
management systems
The Board is primarily responsible for
the effectiveness of the Group’s internal
control systems. The Committee has been
delegated the responsibility to monitor
and assess the effectiveness of the control
systems operated by management. The
External auditor, Deloitte, also provides
feedback and recommendations on
controls which are brought to the attention
of the Committee.
Internal controls and risk management
issues are discussed in detail and
reviewed for effectiveness at each
Committee meeting, with a report being
provided to the Board for approval.
Internal controls focus for 2019
will be on the Merlon integration,
GDPR, and cyber security.
Given the size and scale of the Group’s
current activities, a formal Internal Audit
function has not been considered to
be appropriate at this time. However,
as the Group’s stated growth strategy
is achieved, an internal audit will play
a role in supporting our work on the
internal control environment and a full
Internal Audit function may be put in
place at an appropriate time in the future.
This function remains under review
by management and the Committee,
and is more fully described in the Risk
Management Report on page 36.
The Treasury Committee meets regularly
to reviews the RBL covenants compliance
and review the Group’s liquidity, hedging
requirements and investment strategy.
The Committee reviewed and approved
the related compliance statements set
out in the Risk Management Report.
The Committee has also reviewed and
approved the statements regarding
compliance with the 2016 UK Corporate
Governance Code (the “Code”), in the
Corporate Governance Report on page 68.
The Committee reviewed and discussed
with management and the auditor the
Company’s relevant financial information
prior to recommendation for Board
approval. This included the Financial
Statements and other material information
presented in the annual and half year
reports. The Committee considered the
significant financial reporting issues,
80
SOCO International plc Annual Report and Accounts 2018 in order to establish availability of alternate
advisors for financial and other matters.
Total audit and non-audit fees in 2018,
were $196k and $651k respectively.
The Committee approved all non-audit
services provided by the external auditor
in 2018. The principal non-audit fees
during 2018 were $583k in relation to
due diligence related corporate finance
services and other assurance services
associated primarily with reporting
accountant services on two transactions.
The Committee reviewed the scope of
the services and concluded that such
services did not affect the auditor’s
independence and were consistent with
relevant ethical guidance in place. Details
of non-audit services are set out in Note 9
to the Financial Statements.
The Committee reviews its non-audit
services policy on an annual basis and
current policy requires all non-audit
services to be pre-approved by the
Committee. It is noted that the Group’s
policy sets out the permitted services
and those that are prohibited.
Review of the effectiveness of
the Audit and Risk Committee
During the year, the Committee has
undergone an independent review of its
effectiveness and results reported to the
Board. The Committee was considered to
be operating effectively and in compliance
with the 2016 UK Corporate Governance
Code and associated guidance. In the next
financial year ending 31 December 2019
the effectiveness of the Committee will
be assessed in light of the new 2018 UK
Corporate Governance Code.
John Martin
Audit and Risk Committee Chair
accounting policies and judgements
impacting the Financial Statements, and
the clarity of disclosures. The Committee
conducted a review of its Terms of
Reference for best practice, which were
approved by the Board in early 2018.
These will be reviewed again during 2019.
External auditor
In accordance with the Code’s guidance
concerning external audit tendering and
rotation, a competitive tender process
is required at least once every 10 years.
Under the Statutory Auditors and Third
Country Auditors Regulations 2016 the
Group will conduct a competitive tender
process no later than for the 2023 year-
end audit. The Committee will continue
to consider the appropriate timeframe in
which to conduct such a tender process,
in light of the regulatory requirements as
well as auditor performance, audit quality,
and independence.
External auditor – non-audit services
The external auditor is appointed primarily
to carry out the statutory audit and their
continued independence and objectivity
is crucial. In view of their knowledge of
the business, there may be occasions
when the external auditor is best placed to
undertake other services on behalf of the
Group. The Committee has a policy which
sets out those non-audit services which
the external auditor may provide and those
which are prohibited. Within that policy,
any non-audit service must be approved
by the Committee.
Before approving a non-audit service,
consideration is given to whether the
nature of the service, materiality of the
fees, 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 Committee is satisfied that
appropriate safeguards are applied to
ensure independence and that objectivity
is 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
81
Governance Remuneration Report
Directors’ Remuneration Report
Table A: Remuneration Committee meeting
attendance during 2018
Role of the Committee
+ The Remuneration Committee is responsible
for setting the remuneration of the Chair and the
Executives, and is responsible for appointing any
consultants it may engage in carrying out its duties.
+ Annual bonus awards were considered
in light of the continued impact of the
challenging oil price environment.
Bonuses for all Executive Directors
in respect of 2018 were awarded
at 70% of maximum (2017: 65%)
which was felt to be reflective of
the significant work undertaken
during the year in particular through
broadening the asset base of the
Group, exiting non value add positions
with a potential draw on funds and
repositioning the Company as a
full-cycle and growth oriented.
Committee member
2018 attendance
+++++
+++++
++
Rob Gray*
António Monteiro*
John Martin*1
Attended
*
Independent NED
1 Appointed as Director and member of
Remuneration Committee on 7 June 2018
How performance was reflected in the
pay of our Executive Directors
As reported throughout the Strategic
Report, 2018 has seen significant steps
made in repositioning the Company
to a full-cycle and growth-oriented
E&P company of scale. The proposed
acquisition of Merlon Petroleum El Fayum
Company highlights the robust financial,
operational and strategic strength of
the Company. The Committee intends for
its pay packages to strike an appropriate
balance between incentivising and
rewarding these efforts, while maximising
shareholder alignment and preserving
resource in a highly stressed economic
climate. We have sought to achieve this
in our Executive Director pay packages
in 2018, whereby:
+ Salaries remain frozen (from
the 2013 level for the CEO and
from appointment for the other
Executive Directors).
+ Annual bonus performance measures
covered a broad range of performance
indicators, including strategic,
operational, financial, business
development and CR measures.
This was intended to ensure balanced
performance is delivered which
would reflect success in meeting our
current challenges. The Committee
has sought to provide a clear link
between these measures and our core
strategic objectives in its disclosure
of the bonus measures, assessment
and pay-out.
António Monteiro
Remuneration Committee Chair
Dear shareholders,
On behalf of the Board, we are pleased
to present the Directors’ Remuneration
Report for the financial year ended
31 December 2018. This report has been
prepared in accordance with section 421
of the Companies Act 2006 and
Schedule 8 of the Large and Medium-sized
Companies and Groups (Accounts and
Reports) Regulations 2008 (as amended).
Our Directors’ remuneration policy was
renewed at the 2017 AGM with 99%
support from our shareholders. In line
with the requirements of applicable law,
we intend to put the policy to a binding
shareholder vote at least once every
three years. Accordingly, and unless
changes to the current policy are proposed
before then, we expect to next propose
the Directors’ remuneration policy to
shareholders for approval at the 2020 AGM.
82
SOCO International plc Annual Report and Accounts 2018 Whilst the Committee has applied bonus
deferral on a voluntary basis for a number
of years, it has now formalised this policy
to require that one-third of any bonus is
delivered under the Deferred Share Bonus
Plan. This ensures Directors’ interests
remain closely aligned with shareholders.
+ Long term incentive awards granted
in 2016 did not meet the performance
threshold and lapsed, based on
relative total shareholder return
measured over three years.
+ Long term incentive awards will be
made in 2019 on the same basis as in
prior years, vesting over a three year
performance period but additionally
subject to a further two year holding
period. As a result, any potential
value will only be realised after a five
year period and will be significantly
impacted by success in delivering the
long term business strategy to create
value for shareholders.
Full details on incentive payments for
performance achieved to December
2018 are provided in the annual report
on remuneration immediately following
this letter.
Key decisions around remuneration
for 2018
The revised 2018 UK Corporate
Governance Code (the “2018” Code) will
come into effect for the Company for the
financial year ending 31 December 2019.
Further information on the key changes
to be introduced by the 2018 Code, and
the Company’s preparation for compliance
with the revised 2018 Code, are set out
in the Corporate Governance Report
on page 68.
As part of its responsibility for setting
Executive Directors’ pay, the Committee
already reviews and monitors the pay
arrangements for other senior executives.
We also now have oversight of the pay
policy across the wider workforce.
John Martin has been appointed as the
designated Non-Executive Director for
Employee Affairs and will attend at least
two employee meetings per year, at which
a range of employment issues can be
discussed. During the course of 2019, we
will be developing our reporting processes
so that the Committee is better informed
of key employment information across the
enlarged group and has the ability to better
understand employees’ views.
Our pension policy for Executive Directors
is already consistent with that for all
employees (as a percentage of salary).
The structure of pay, albeit with different
quantum limits, is also aligned across
the wider workforce. The Company is
undertaking a comprehensive review of
employment benefits to better understand
what our employees most value and how
best to provide it to them in a meaningful
way. The Committee will be involved in any
material changes as a result of this review.
continue to be measured against relative
TSR. The Committee considered what
other measures could be used and has
concluded that TSR is the only metric
which is relevant for an E&P Company
at this stage of maturity. It applies a
more demanding relative TSR scale than
general market practice, thus ensuring
alignment with shareholder value creation.
As I mentioned at the start of this letter,
the directors’ remuneration policy is
scheduled to be proposed to shareholders
at the 2020 AGM. The Committee will be
spending time during 2019 considering
if any changes to the current policy
are required, particularly in light of the
new business structure. Any material
changes proposed will be the subject of
consultation with our major shareholders.
The Committee retains discretion to
override annual bonus and LTIP outcomes
if the formulaic result is not considered
to reflect the overall performance of the
business. The decision to reduce part
of the 2016 annual bonus demonstrates
that the Committee is willing and able
to enact this discretion when it feels
it is appropriate.
For the first time since 2014, the fees payable
to the Chair and other Non-Executive
Directors were increased with effect from
1 January 2019. The increases are set
out in the section of this report headed
“Non-Executive Director remuneration”
and reflect the additional responsibilities
and time commitment associated with the
roles of the non-executives.
In implementing the remuneration policy,
the Committee focused its attention on
improving the disclosure of annual bonus
performance measures, and has sought
to improve its reporting by providing
additional detail in both retrospective and
prospective disclosures. The Committee
takes into account pay conditions
elsewhere in the Company and actively
considers ESG factors in assessing the
bonus out turn.
Outlook for 2019
The current policy is considered to be
working effectively and therefore no
substantial changes are proposed. There
will be no salary increases for Executive
Directors. Annual bonus measures
will continue to promote performance
against broad criteria which reflect
the key priorities of the business over
the next year, including the timely and
efficient integration of Merlon into the
Group. Long-term performance will
We look forward to receiving your support
again for this year’s report at the
upcoming AGM.
I will retire as a Director at the conclusion
of this year’s AGM. I will be succeeded as
Chair of the Committee by Rob Gray, who
has served as a member of the Committee
since 2017. The recently appointed
independent NED Marianne Daryabegui
will join the Committee with effect from
15 March 2019, and I wish Rob, Marianne
and John, together with my other Board
colleagues, all the best for the future
success of the business.
António Monteiro
Remuneration Committee Chair
83
Governance Remuneration Report
continued
Annual Report on Remuneration (Audited section)
Single total figure of remuneration
The table below sets out the total remuneration in respect of qualifying services for both Executive and Non-Executive Directors
for the financial year 2018. It also provides comparative figures for 2017:
Transparency disclosure 2018 (unaudited)
Fees/salary
$000’s
Benefits1
$000’s
Bonus
$000’s
LTIP
$000’s
Pension
$000’s
Executive
E Story
J Brown 2
M Watts 2
Non-Executives
R de Sousa
O Barbaroux *
E Contini
R Gray
A Monteiro
J Martin *
Total
924
601
601
254
29
67
133
73
41
228
81
218
–
1
–
–
4
–
971
620
620
–
–
–
–
–
–
2,723
532
2,211
–
–
–
–
–
–
–
–
–
–
The benefits receivable by Executive Directors include private medical insurance, permanent health insurance, life assurance cover, critical illness cover, travel and
expatriate benefits and car benefits. The benefits column for Non-Executive Directors includes taxable travel and accommodation expenses to attend Board
functions in the year, and the tax payable thereon, in accordance with HMRC guidance.
1 The near term average exchange rate at the end of the performance period of 1.26 has been used to convert share price from GB pounds to US dollars.
2 Executive Directors’ fees and the salaries of Jann Brown and Dr Mike Watts are set in GB pounds and are reported in US dollars at the annual average exchange rate.
* Fees paid to the Executive and Non-Executive Directors are in proportion with their dates of service.
319
5,785
Fees/salary
$000’s
Benefits
$000’s
Bonus
$000’s
LTIP
$000’s
Pension
$000’s
Executive
E Story
R Cagle *
C Cagle *
J Brown *
M Watts *
Non-Executives
R de Sousa
O Barbaroux
E Contini
R Gray
A Monteiro
M Watts *
Total
924
599
408
79
79
245
64
64
86
71
6
158
92
80
7
10
2
2
–
–
7
–
901
584
398
518
518
–
–
–
–
–
–
2,625
358
2,919
–
–
–
–
–
–
–
–
–
–
–
–
314
6,216
The benefits receivable by Executive Directors include private medical insurance, permanent health insurance, life assurance cover, critical illness cover, travel and
expatriate benefits and car benefits. The benefits column for Non-Executive Directors has been updated to include taxable travel and accommodation expenses to
attend Board functions in the year, and the tax payable thereon, in accordance with changes in HMRC guidance.
* Fees paid to the Executive and Non-Executive Directors are in proportion with their dates of service with the exception of the bonuses for Jann Brown and Mike Watts
which are shown from the original date of their employment in February before taking up their appointment as Executive Directors on 12 November 2017.
The aggregate emoluments of all Directors during the year was $5.8m.
84
2018
Total
$000’s
2,262
1,392
1,529
254
30
67
133
77
41
2017
Total
$000’s
2,122
1,365
947
616
619
247
66
64
86
78
6
139
90
90
–
–
–
–
–
–
139
90
61
12
12
–
–
–
–
–
–
SOCO International plc Annual Report and Accounts 2018 Notes to the single figure table
Annual bonus
Setting measures
The Company seeks to set challenging, yet achievable,
performance measures designed to link pay to performance
against its core strategic objectives.
The performance measures were chosen to ensure that
Executive Directors are focused on the near term objectives
that build the long term delivery of value to shareholders,
which results in a combination of measures being used
covering strategic, operational, financial, business development
and CR goals. While we monitor SOCO’s performance with a
broader mix of financial and non-financial KPIs, the measures
impacting the annual bonus emphasise those deemed most
relevant to management performance and take into account
the annual budget and the prevailing economic environment.
2018 Annual bonus measures and outturns
The table below sets out the performance assessed against the weighted measures described in last year’s Remuneration Report,
and identifies the link from each of these measures to our core strategy.
Metric
Business development
Diversification of asset base
Weight
40%
40%
Performance
Bonus awarded
Threshold
Target
Maximum
35%
35%
Target
+ Acquire other cash
generative asset(s) base.
+ Maintain a pipeline
of opportunities.
Link to strategy
Taking advantage
of early access into
regions, projects or
situations where there
is potential to create
significant upside
through the Company’s
participation.
Performance
SOCO announced the acquisition of Merlon Petroleum
El Fayum Company for approximately $215m. This
transaction would acquire a 100% operated working
interest in the onshore El Fayum concession in Egypt
which is expected to be immediately cash generative.
Merlon produced 7,859 boepd (net) in 2017 and has
potential to increase production levels to a target
in excess of 15,000 boepd (net) by 2023. The purchase
is to be funded through a combination of existing cash
facilities and the issue of shares.
Outcome
On track for completion in H1.
Metric
Financial/Operational
Production
Weight
25%
15%
Performance
Bonus awarded
Threshold
Target
Maximum
15%
7.5%
Link to strategy
optimising the
production efficiencies
in our core business
area.
Target
+ Optimise TGT and CNV
performance to meet
budget targets. The target
range was agreed as
7,000 – 7,400 boepd.
Performance
Overall production turnout was 7,274 boepd.
Outcome
The Committee considered the production outturn
was good, both in absolute terms but particularly
in the context of the headwinds faced by the
Company and therefore a performance of ‘target’
was assessed as appropriate.
85
Governance Remuneration Report
continued
Metric
Financial/Operational continued
South East Asian
development programme
Link to strategy
Maximising production
levels from current
operating activities.
Weight
5%
Performance
Bonus awarded
Threshold
Target
Maximum
2.5%
Target
Execute TGT/CNV drilling
programme successfully,
measured against pre-drill
expectations and budget,
schedule and target
HSSE performance.
Performance
TGT:
+ Two of three planned wells completed in time
period, third well still operating.
+ Completed wells drilled in line with expectation
and within budget.
+ HSSE targets met.
Outcome
Forced bidding of rig, equipment and services
forced delays to timetable, but management
actions minimised impact and resulted in
acceptable outcomes, hence target was
achieved for this element.
TGT:
+ Predrill production
performance was
targeted as 1-2,500 boepd
per well.
+ Plan schedule was
140 days.
CNV:
+ Adjusted for the second side-track the well was
delivered in line with a revised budget of 100-day
and at a gross cost of $20m.
+ The well hit the main target fracture on depth.
Well performed in line with expectations and
continues to clean up.
+ HSSE targets met
CNV:
+ Predrill production
performance
was targeted as
1-5,000 boepd.
+ Plan schedule was
50 days.
Metric
African rationalisation
Link to strategy
Maintaining capital
discipline through the
sharp focus on core
areas where we can
maximise value.
Metric
Corporate
HSSE Performance
Weight
5%
Performance
Bonus awarded
Threshold
Target
Maximum
5%
Target
+ Reduce annual carrying
cost of African Assets.
Performance
+ Both African positions were divested of during
the year.
+ 80% stake in SOCO Cabinda Ltd was divested
for a cash consideration of $5m.
+ 85% stake in SOCO Congo Ltd was divested
for a cash consideration of up to $10m and an
overriding royalty on all future gross oil and
condensate production sold from the interest.
Outcome
Exits from non-core African business was
achieved on time and within budget.
Weight
35%
10%
Performance
Bonus awarded
Threshold
Target
Maximum
20%
7.5%
Link to strategy
Ensuring our technical
expertise is used to
manage health and
safety risks in a pro-
active manner and
maintain our current
excellent safety
standards throughout
the portfolio.
Target
+ No lost time incidents.
+ No environmental
spillage.
+ Successful roll out
of HSSE systems
for new operating
office in Vietnam for
Blocks 125 & 126.
+ Ensure appropriate
training programmes for
all layers in company.
Performance
+ No lost time incidents on SOCO operated assets
or within HLHVJOC operations.
+ No environmental spillages on SOCO operated
assets or within HLHVJOC operations.
+ HSSE systems fully in place in HCMC office.
All team members participated in corporate training
and processes have been embedded into practice.
+ Effective training programmes have been
established and implemented for new
hires, including Non-Executive Directors,
management and staff.
Outcome
A substantial part of the HSSE programme
has been delivered effectively during the
year. The delay in implementing the full
training programme to all executives has
meant this element of the bonus is assessed
as between Target and Maximum.
86
SOCO International plc Annual Report and Accounts 2018 Weight
10%
Performance
Bonus awarded
Threshold
Target
Maximum
7.5%
Performance
+ Programme delivered on a timely basis.
Processes have been embedded.
+ Ensure appropriate awareness training programmes
are implemented and working effectively.
Outcome
A substantial part of the CR and Business Ethics
programme has been delivered effectively during
the year. The delay in implementing the full
training programme to all executives has meant
this element of the bonus is assessed as between
Target and Maximum.
Weight
10%
Performance
Bonus awarded
Threshold
Target
Maximum
2.5%
Performance
+ Succession plans in place for top nine executive
roles. Relevant training programmes in place for
identified potential successors.
Outcome
Clear direction for talent management agreed and
training programmes already starting to deliver
positive results.
Target
+ Successful roll out
of Group programme
and systems for new
operating office in
Vietnam for Blocks
125 & 126.
+ Effective training
programmes have
been established and
implemented for new
hires, including Non-
Executive Directors,
management and staff.
Target
+ Identify successors for
each key management
position over 1,3 and
5-year time horizons.
+ Ensure that appropriate
and relevant training
programmes are in place
for potential internal
successors.
Metric
Corporate continued
CR and Business Ethics
Link to strategy
Demonstrating that
we live our values,
conduct business in the
right way and actively
manage risk.
Metric
Succession Planning
Link to strategy
Active talent
management to ensure
we attract and retain
high calibre individuals
who can execute the
Company’s strategy.
Metric
Process improvement
Link to strategy
A small management
team needs to focus on
clear value added items:
efficient processes and
controls to support this.
Weight
5%
Performance
Bonus awarded
Threshold
Target
Maximum
2.5%
Target
+ Identify and map top
twelve processes for
improvement.
+ Detailed analysis and
target efficiency savings
to be made in four such
processes.
Performance
+ Processes have been identified and mapped
with potential improvements identified
in treasury/payment procedures, Group
Reporting and joint venture accounting.
+ Implemented a new streamlined and
automated payment process.
Outcome
Significant efficiencies and cost savings
and a better platform into which
acquisitions can be integrated.
The Committee has formalised past practice to require all
Executive Directors to receive one-third of any bonus as awards
under the Deferred Share Bonus Plan. This ensures their
interests remain closely aligned with shareholders.
LTIP Vesting in Respect of January 2016 awards
The LTIP awards granted in January 2016, which would have
vested in January 2019, did not achieve the threshold level
of vesting and therefore lapsed. The table below sets out an
overview of SOCO’s relative TSR performance during that period.
E Story
M Watts
J Brown
$000s
971
620
620
% of
maximum
105%
105%
105%
Vesting schedule
Actual vesting
25% vesting
100% vesting
0%
Performance against
comparator group
Median (50th percentile)
Upper 16th
60th percentile
In all material respects, the same performance targets apply to all
subsequent awards.
87
Governance Remuneration Report
continued
LTIP award grants
The LTIP awards granted in 2018 were set out in last year’s report. It is anticipated that future grants, including the grant to be made
in 2019, will be made following the announcement of the annual results in March. These will be made on a similar basis to prior years,
with awards to Executive Directors over shares worth two times salary and subject to the same TSR measure (subject to confirmation
of the precise list of comparators immediately prior to grant).
Directors’ interests as at 31 December 2018
The Board has a policy requiring Executive Directors to build a minimum shareholding of 200% of their annual salary. Additionally, LTIP
awards require a two–year holding period following vesting. J Brown and M Watts have voluntarily invested 50% of their after tax salary
into Company shares on a monthly basis since their appointment. This is intended to emphasise a commitment to the alignment of
Executive Directors with shareholders and a focus on long term stewardship.
The table below sets out the Directors’ interests as at 31 December 2018:
Shareholding requirement
(% of salary)
Achieved
(Yes/No)
Beneficially
owned shares
Awards subject
to performance
conditions1,2
Awards
vested
Awards subject
to service
conditions
Executive
E Story 3
J Brown 5,10
M Watts 6,10
Non-Executive
R de Sousa 7
O Barbaroux 9
E Contini 8
R Gray
A Monteiro
J Martin 4
3,416,516
2,314,208
2,314,208
521,557
–
–
227,175
141,254
141,254
200%
200%
200%
–
–
–
–
–
–
Yes
No
No
–
–
–
–
–
–
14,073,747
356,556
490,453
9,178,572
–
29,000,000
–
–
30,000
1 LTIP awards potentially vesting in January 2019 in respect of awards made in 2016 lapsed and are excluded from the above table.
2 DSBP awards made in January 2019 in respect of the 2018 annual bonus are excluded from the above table.
3 12,398,747 Shares are held personally by E Story. 1,675,000 Shares are held through The Story Family Trust, a closely associated person to E Story.
4 Appointed to the Board on 7 June 2018.
5 At the date of this report, J Brown was interested in 382,080 Shares.
6 At the date of this report, M Watts was interested in 515,474 Shares.
7 469,752 Shares are held personally by R de Sousa and 8,708,820 Shares are held through Palamos Ltd a closely associated persons to R de Sousa.
8 220,000 Shares are held personally by E Contini. 28,780,000 Shares are held through Liquid Business Ltd, a closely associated person to E Contini.
9 Retired as a Director on 7 June 2018.
10 At the date of this report, J Brown and M Watts are yet to reach the 200% shareholding requirement and are building up their interest through monthly investment
of a portion of salary.
While the Executive Directors, as potential beneficiaries, are technically deemed to have an interest in all ordinary shares held by the
SOCO EBT, the table above only includes those ordinary shares held by the EBT which are potentially transferable to the Directors
pursuant to Options granted to them under the Company’s incentive schemes. Details of the EBT and its holdings are set out in
Note 26 to the Financial Statements.
There have been no changes to the Directors’ interests subsequent to 31 December 2018 other than as described in the notes to the
table above.
88
SOCO International plc Annual Report and Accounts 2018 Annual Report on Remuneration (Unaudited section)
Share awards outstanding at 31 December 2018
e
c
n
a
n
r
e
v
o
G
E Story 6
J Brown 6
M Watts 6
Type of
award 7
LTIP
LTIP
LTIP
DSBP
DSBP
Type of
award 7
LTIP
LTIP
DSBP
LTIP
LTIP
DSBP
As at
1 Jan 2018
880,857
1,003,235
Granted/
awarded 1
–
–
–
1,380,247
521,557
–
–
216,692
As at
1 Jan 2018
1,258,169
–
–
1,258,169
Granted/
awarded 1
–
951,374
134,736
–
–
951,374
134,736
Adjusted 2
Lapsed
Released
As at
31 Dec 2018
Date
potentially
vested 3,4,5
Expiry date
38,647
46,757
66,773
–
10,483
–
–
–
–
–
–
–
–
521,557
919,504
8.01.19
1,049,992
25.01.20
1,447,020
–
–
227,175
23.3.21
8.01.18
26.4.20
–
–
–
–
–
Adjusted 2
Lapsed
Released
58,640
46,025
6,518
58,640
46,025
6,518
–
–
–
–
–
–
–
–
–
–
–
–
As at
31 Dec 2018
Date
potentially
vested 3
1,316,809
06.02.20
997,399
141,254
1,316,809
997,399
141,254
23.03.21
26.04.20
06.02.20
23.03.21
26.04.20
Expiry date
06.02.27
23.03.28
26.04.28
06.02.27
23.03.28
26.04.28
1 The face value of awards granted to E Story, J Brown and M Watts in the year was 2 times’ salary.
2 Outstanding awards under the Company’s share schemes were adjusted for dividend equivalents in accordance with plan rules (see Note 29 to the
Financial Statements).
3 LTIP awards vest subject to SOCO’s relative TSR performance against a group of comparator companies and subject to a further holding requirement.
DSBP awards vest subject to continued service over a two year vesting period.
4 LTIP awards with a potential vest date in January 2019 did not achieve the performance threshold and lapsed.
5 In accordance with market regulation, DSBP awards potentially vesting in January 2019 were determined to not be capable of vesting before 06 March 2019,
subsequent to the date of this report.
6 Awards to E Story were structured as conditional awards. Awards to M Watts and J Brown were structured as nil cost options.
7 LTIP awards vest at 25% when the threshold is met.
Payments for loss of office and payments to former directors
There have been no payments for loss of office during the year.
As stated in last year’s report, Roger Cagle and Cynthia Cagle
each stepped down from the Board on 12 November 2017 and
remained employed by the Group until 1 September 2018. The
single figure table for 2017 includes their emoluments to the date
they stepped down from the Board. They continued to receive
their salary and fixed benefits until 1 September 2018. They retain
all DSBP awards and LTIP awards to their normal maturity with
the LTIP awards being pro-rated to the date they cease to be
employed. Such vestings will be reported in subsequent reports.
The Cagles were eligible to receive the 2016 LTIP in the same
manner as other participants, but as the performance condition
was not achieved, this award lapsed. The Company also made
a contribution of £3,500 plus VAT to each of their legal fees
incurred in agreeing to their retirement terms and reimbursed
the costs of shipping personal belongings to the US. Roger Cagle
and Cynthia Cagle benefit from certain historic tax equalisation
arrangements under which they may continue to receive
payments related to historic earnings.
Historical TSR performance and CEO outcomes
TSR performance
The chart below illustrates SOCO’s ten year TSR performance
against the FTSE Oil & Gas Index, being a broad market index
which is sector specific. Note that this does not represent either
the comparator group or time period against which performance
is assessed under the LTIP.
300
250
200
150
100
50
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Year end
FTSE All Share Oil & Gas
SOCO International
TSR Comparator Group
89
Remuneration Report
continued
CEO outcomes
The table below shows the total remuneration paid to the CEO over the same ten year period. In addition, the annual bonus and LTIP
awards vesting are set out in respect of each year as a percentage of the maximum:
CEO single figure of
remuneration ($000s) 1
Annual bonus payout
(% of maximum)
LTIP vesting
(% of maximum)
2009
1,930
50%
59%
2010
1,466
25%
34%
2011
2,362
2012
2,992
2013
3,154
2014
3,659
100%
100%
100%
80%
53%
71%
66%
100%
2015
2,875
75%
96%
2016
2,018
35%2
46%
2017
2,122
2018
2,262
65%
105%
0%
0%
1 Included a discretionary downward adjustment of 7.5%.
Percentage change in remuneration of the CEO
The table below illustrates the percentage change in salary,
benefits and annual bonus for the CEO and all other employees.
CEO
All other employees
% change in
salary bonus
(2018/2017)
% change in
benefits
(2018/2017) 1
% change in
annual bonus
(2018/2017) 2
0%
4%
44%
8%
8%
10%
1 There have been no changes to the Company’s benefits packages during the
year. Variances reflect other factors, including increased programme costs,
employee demographics and the level to which available allowances are
applicable and taken up in a given year.
2 Bonuses are awarded in respect of the calendar year.
Relative importance of spend on pay
The chart below illustrates the year on year change in total
remuneration as per Note 10 to the Financial Statements
compared to the change in shareholder returns, which would
include capital returns, dividends and share buybacks.
Wages and
salaries
Shareholder
distributions
0
5
2018
2017
10
$millions
15
20
25
External appointments
With prior approval of the Board, Executive Directors are allowed
to accept non-executive appointments on other boards and to
retain the associated directors’ fees. Under this policy:
+ Ed Story serves on the board of Vedanta Resources PLC,
for which he retained associated fees for 2018 in the amount
of $95,000 (2017: $80,000); and
+ Jann Brown serves on the boards of Wood. and Troy Income
and Growth Trust, for which she retained associated fees
for 2018 in the amount of £82,580 (2017: £85,800).
90
SOCO International plc Annual Report and Accounts 2018 Implementation for 2019
Base salary
Executive Directors’ salaries have not been increased for 2019.
E Story
J Brown
M Watts
2019
Base salary
000s
2018
Base salary
000s
Increase
from 2018
%
$924
£450
£450
$924
£450
£450
0%
0%
0%
Benefits
For 2019, benefits available to Executive Directors will be
consistent with those set out in the directors’ remuneration policy
approved at the 2017 AGM and as summarised further below.
Pension
For 2019, a pension benefit at 15% of salary will be provided
to each Executive Director through contributions to SOCO’s
money purchase plan up to plan limits or a cash supplement.
Our pension policy for Executive Directors is already consistent
with that for all employees (as a percentage of salary).
Annual bonus
It is intended that annual bonus awards will be considered for
Executive Directors in December 2019. The maximum total
bonus opportunity for an Executive Director in each year is 150%
of salary, including cash and deferred components in accordance
with the approved policy. The table below sets out the weighted
performance measures which will be applied in determining
annual bonus awards for 2019, and identifies the link from each
of these measures to our core strategy of:
2019 KPIs
Metric
Strategy / portfolio management
Complete Merlon transaction ahead
of schedule
Maintain pipeline of value accretive
projects
Announce one acquisition
Maintain a self funding business plan
HSSE & CR
Indicators for Vietnam as last year
Indicators for Egypt to be agreed post
completion
Operational & Financial
Vietnam production
Merlon production
Cash opex per bbl Vietnam
Cash opex per bbl Egypt
Deliver operating cash flow per share
Net debt Ebidtdax
Weight Measurement
30%
Milestone
20%
35%
Projects under review
Milestone
Programme objectives and budgets
Maintain industry standards
Raise to industry standards
Actual production
Exit rate boepd
Programme objectives and budgets
TBC post completion
Programme objectives and budgets
Actual
Integration of Merlon and
Egyptian assets
Move from private standards to public
Add Egyptian assets in borrowing base
15%
Milestone
Milestone
Details of how the Committee assessed performance against
these weighted measures will be set out in next year’s report.
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 Group’s
strategy, as well as the prevailing economic environment.
LTIP
It is intended that annual LTIP awards will be made to Executive
Directors in early 2019 following announcement of the
preliminary results for the year to 31 December 2018, in line
with the director’s remuneration policy approved at the 2017
AGM. The Committee’s selection of performance criteria is kept
under review to ensure the long term measures used remain
appropriate to SOCO’s circumstances and strategy, and most
effectively support the delivery of value creation over time.
For awards to be made in respect of 2019, the same performance
measures will apply as for prior awards. The Committee
considers that relative TSR remains the most appropriate
measure for the LTIP at this time, particularly given the nature and
cyclicality of the industry. Such a measure requires the Company
to outperform other industry peers and is therefore less
influenced by macroeconomic factors outside of management
control. The relative TSR performance is also subject to a further
underpin, which requires the Committee to be satisfied that the
formulaic outcome is consistent with actual underlying financial
and operational performance. The combination of the measure
and underpin are considered to provide a balanced assessment
of performance and value creation. As the Company’s
strategy develops the Committee will continue to consider the
appropriateness of additional performance measures.
Malus and clawback provisions
All variable pay arrangements for Executive Directors are subject
to provisions which enable the Committee to reduce vesting,
or recover value delivered if certain circumstances occur.
These circumstances include serious misconduct, an error in
calculation, misstatement of the Company’s financial results or
serious reputational damage to the Company. In each case the
occurrence of those circumstances and the effect on variable pay
arrangements will be determined by the Committee.
Non-Executive Director remuneration
Non-Executive Director fees, which have been set within the
aggregate limits set out in the Company’s articles of association
and approved by shareholders and are set out in the table below:
Chair of the Company
Deputy Chair & Senior Independent Director*
Non-Executive Director
Additional fee: Chair of Audit and Risk Committee
Additional fee: Chair of Remuneration Committee
Additional fee: Workforce Engagement Nominated
Director
*Includes Fees for any Committee role
Fee from
1 January
2019
Fee from
1 January
2018
£200,000
£190,000
£120,000
£100,000
£60,000
£15,000
£15,000
£5,000
£50,000
£5,000
£5,000
N/A
91
Governance Remuneration Report
continued
The Chair fees were reviewed and approved by the Remuneration
Committee. The Non-Executive Director fees were reviewed and
approved by the Board, excluding the Non-Executive Directors.
The fee increases proposed for 2019 are considered a reflection
that there have been no increases since 2014, during which
time there have been additional responsibilities and time
commitments associated with the roles.
For 2019, benefits available to Non-Executive Directors will be
consistent with those set out in the policy approved at the 2017
AGM. Non-Executive Directors are not eligible for participation
in the Company’s incentive or pension schemes.
Service Contracts
Executive Directors’ contracts are for an indefinite period and are
terminable by either party on giving one year’s notice, which may
be satisfied with a payment in lieu of notice.
The Committee has a duty to prevent the requirement to make
payments that are not strictly merited, and endorses the principle
of mitigation of damages on early termination of a service
contract. Any payment on early termination will be assessed
on the basis of the particular circumstances, but in any event
will not be in respect of any period beyond the notice period
specified by the 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 Executive Directors’ service contracts and the Non-Executive
Directors’ letters of appointment are available at the Company’s
registered office and will also be available at the location of the
2019 AGM from at least 15 minutes before the start of the meeting
and for the duration of the meeting. The dates of each director’s
service contract or letter of appointment, together with the
corresponding notice period where applicable, are set out
on page 97.
Consideration by committee of matters relating
to Executive Directors’ remuneration
The Directors who were members of the Remuneration
Committee when matters relating to Directors’ remuneration
for the year were being considered were Ambassador António
Monteiro, Rob Gray and John Martin (from the 7 June 2018).
The Committee received assistance from Ed Story (President
and CEO) and Jann Brown (Managing Director and CFO)
subsequently, except when matters relating to their own
remuneration were being discussed. The Committee additionally
received assistance from other Non-Executives Directors
when required.
The Committee has appointed FIT Remuneration Consultants
LLP (“FIT”) as its remuneration advisors, and fees of £26,845
were paid in 2018 for their advisory services. FIT is a member
of the Remuneration Consultants Group and complies with
their professional code of conduct. FIT do not provide any other
services to the Group which, along with FIT’s credentials and
proven performance, contributes to the Committee’s view that the
advice received has been appropriate, objective and independent.
92
The Committee reviews all aspects of remuneration on an annual
basis and with respect to individual and corporate performance
during the year. The review is aided by comparison to published
data on executive pay in the sector and in similar sized
companies. More detailed benchmarking may be conducted,
such as upon an indication of a change in market ranges, with
results being monitored for indications of potential unwarranted
upward ratcheting. The Committee receives regular updates on
evolving regulatory and market practice including market trends,
key developments, and a broad range of published principles and
guidelines. The Committee takes into account pay conditions
elsewhere in the Company, and considered matters related to
Group remuneration.
Shareholder voting
The binding resolution on the directors’ remuneration policy
and the advisory resolution on the annual report on Directors’
remuneration proposed and passed at last year’s AGM received
the following votes from shareholders:
Remuneration policy
(2017 AGM)
Remuneration report
(2018 AGM)
Votes in favour
211,638,153
99.15%
178,389,045
Votes
%
Votes
Votes against
Total Votes
Votes Withheld
1,807,216
0.85%
12,443,905
213,445,369
100.00%
190,832,950
100.00%
2,500
–
21,549,300
–
%
93.48%
6.52%
Shareholder dilution
SOCO monitors the number of shares issued under employee
share plans and their impact on dilution limits. These will not
exceed the limits set by The Investment Association Principles
of Remuneration currently in force, in respect of all share plans
(10% in any rolling ten year period) and executive share plans
(5% in any rolling ten year period).
This report was approved by the Board of Directors and signed
on its behalf by:
António Monteiro
Remuneration Committee Chair
5 March 2019
SOCO International plc Annual Report and Accounts 2018 Policy Report
Consistent with good practice, we set out extracts from the directors’ remuneration policy approved at the 2017 AGM.
The full policy is available in the 2016 annual report and on the Company’s website.
Policy table for Executive Directors
The table below summarises our policy for each component of Executive Directors’ remuneration:
Base salary
Purpose and link to strategy
Core element of remuneration set at a sufficient level to attract and retain people of the necessary calibre to shape and execute the Company’s strategy.
Operation
Maximum
Performance criteria
+ Any salary adjustments will normally be in line
N/A
with those of the wider workforce.
+ The Committee retains discretion to award
higher increases in certain circumstances such
as increased scope and responsibility of the role,
or in the case of new Executive Directors who are
positioned on a lower salary initially, as they gain
experience over time. In these circumstances
a base salary increase will not exceed 20% p.a.
+ Contractual fixed cash amount paid monthly.
+ Particular care is given in fixing the appropriate
salary level considering that incentive pay is
generally set at a fraction or multiple of base salary.
+ The Committee takes into account a number
of factors when setting salaries, including
(but not limited to):
– Size and scope of individual’s responsibilities
– Skills and experience of the individual
– Performance of the Company and the individual
– Appropriate market data
– Pay and conditions elsewhere in SOCO
+ Base salaries are normally reviewed annually.
+ Results of benchmarking exercises are monitored
for indications of potential unwarranted
upward ratcheting.
Benefits
Purpose and link to strategy
To provide Executive Directors with market competitive benefits consistent with the role.
Operation
Maximum
+ Executive Directors receive benefits which
may include (but are not limited to) medical care
and insurance, permanent health insurance,
life assurance cover, critical illness cover,
travel benefits, expatriate benefits, car benefits
and relocation expenses.
+ Reasonable business related expenses will be
reimbursed (including any tax payable thereon).
+ Benefits are positioned at an appropriate market
level for the nature and location of the role. Whilst
the actual value of benefits may vary from year to
year based on third party costs, it is intended that
the maximum annual value will not exceed $250k
or £200k, per Directors’ base currency.
+ In addition to the above cap, the Company may
contribute to relocation expenses up to 100%
of salary.
Pension
Purpose and link to strategy
To provide retirement benefits consistent with the role.
Performance criteria
N/A
Operation
Maximum
Performance criteria
+ Pension benefits are delivered through contributions
to SOCO’s money purchase plan up to relevant plan
limits and/or a cash supplement.
+ 20% of base salary per annum.
N/A
93
Governance Remuneration Report
continued
Annual bonus
Purpose and link to strategy
Incentivises and rewards for the delivery of the strategic plan on an annual basis.
Operation
Maximum
Performance criteria
+ Payments are based on performance in the relevant
financial year.
+ At the beginning of the year, the Committee sets
objectives which it considers are critical to the
delivery of the business strategy.
+ Performance against these key strategic objectives
is assessed by the Committee at the end of the year.
+ The Committee retains the discretion to amend the
bonus payout (negatively or positively) to ensure
it reflects the performance of either the individual
or the Company.
+ Bonus payouts are subject to deferral into SOCO
shares which vest after a period of not less than
2 years. At a minimum, deferral will apply to any
bonus exceeding 100% of salary. The Committee
may require higher levels including deferral of up
to 100% of the bonus payout.
LTIP
+ 150% of base salary per annum, including cash
and deferred components at the discretion of
the Committee.
+ The annual bonus is based on individual and
corporate performance during the year.
+ Corporate goals are set annually and may
include monitored measures for particular
projects; portfolio objectives; corporate
strategic goals; safety, social and environmental
measures; financial measures and other
measures as may be deemed appropriate
and relevant to the period for delivery of the
business strategy.
+ If the Committee determines that a minimum
level of performance has not been achieved,
no bonus will be payable.
+ Thereafter the bonus will begin paying out,
up to the maximum of 150% of salary.
+ The Committee determines the appropriate
weighting of the metrics each year.
Purpose and link to strategy
Incentivises and rewards for the Company’s strategic plan of building shareholder value.
Operation
Maximum
Performance criteria
+ Typically a conditional award of shares or a nil
price option is made annually, normally in December,
in the course of the annual review cycle.
+ Vesting of the awards is dependent on the
+ Usually 200% of base salary per annum.
+ In circumstances which the Committee determines
to be exceptional, annual awards of up to 400% of
base salary per annum may be made.
achievement of performance targets, which are
typically measured over a three year performance
period.
+ Awards (post of tax) will also be subject to a two-
year post-vesting holding period during which they
cannot be sold (accept in exceptional circumstances
and with the Committee’s prior approval).
Shareholding guidelines
Purpose and link to strategy
Further increases alignment between Executive Directors and shareholders.
Operation
+ The Board has a policy of requiring Executive
Directors to build a minimum shareholding in
SOCO shares equivalent to 200% of salary.
Maximum
N/A
+ Awards vest based on performance against
financial, operational and / or share price
measures, as set by the Committee, which are
aligned with the long term strategic objectives
of SOCO.
+ No less than 50% of the award will be based
on share price measures. The remainder will
be based on financial, operational measures.
+ For ‘threshold’ levels of performance, 25% of
the award vests. 100% of the award will vest
for maximum performance. Pro-rating applies
between these points and between ranking
positions.
Performance criteria
N/A
Policy Table for Non-Executive Directors
Component
Chair fees
Non-Executive Director
Other
SOCO’s approach
+ Comprises an all-inclusive fee for Board and Committee positions.
+ Determined by the Remuneration Committee and approved by the Board.
+ Comprises a basic fee in respect of their Board duties.
+ Further fees may be paid in respect of additional Board or Committee roles.
Recommended by the Chair and Chief Executive Officer and approved by the Board.
+ In the event of a temporary but material increase in the time commitment required,
fees may be increased on a pro-rata basis to reflect the additional workload.
+ Reasonable business related expenses will be reimbursed (including any tax payable thereon).
94
SOCO International plc Annual Report and Accounts 2018 Approach to remuneration on recruitment
Principles
On the appointment of a new Executive Director, we seek to apply
the following principles when determining the remuneration
arrangements:
+ The package should be competitive to facilitate the
recruitment of individuals of the calibre needed to shape
and execute SOCO’s strategy and build shareholder value.
+ The Committee reserves the right not to apply the
caps contained within the policy table for fixed pay,
either on joining or for any subsequent review within
the policy period, although, in practice, the Committee
does not envisage exceeding these caps.
+ The Committee will consider all relevant factors
as appropriate. This may include, but is not limited
to, the calibre and experience of the individual,
market practice and the current remuneration policy.
The Committee will be mindful that any arrangements
must be structured in the interests of SOCO’s
shareholders without paying more than is necessary.
+ Typically, a new appointment will have (or be transitioned
onto) the same framework that applies to other Executive
Directors as set out in the policy table on page 93. Salaries
would reflect the skills and experience of the individual,
and may be set at a level to allow future salary progression
to reflect development and performance in the role.
+ An Executive Director may initially be hired on a contract
requiring up to 24 months’ notice which then reduces
pro-rata over the course of the first year of the contract,
to requiring not more than 12 months’ notice.
+ It would be expected that the structure and quantum of the
variable pay elements would reflect those set out in the
Policy Table on page 93.
+ Depending on the timing of appointment it may be necessary
to set different performance measures and targets to those
used for existing Executive Directors, although this would
only be expected to operate for the remainder of the first
financial year of appointment.
In the remuneration report following appointment, the Committee
will explain the rationale for any such relevant arrangements.
The Committee retains discretion to make appropriate
remuneration decisions outside the standard policy to meet the
individual circumstances of recruitment when:
+ An interim appointment is made to fill an Executive Director
role on a short term basis.
+ Exceptional circumstances require that the Chair
or a Non-Executive Director takes on an executive function
on a short term basis.
Buy-outs
To facilitate recruitment, the Committee may make compensatory
payments and/or awards for any remuneration arrangements
subject to forfeit on leaving a previous employer. Such payments
or awards could include cash as well as performance and non-
performance related share awards, and would be in such form
as the Committee considers appropriate taking into account all
relevant factors such as the form, expected value, timing, impact
of any performance conditions and the anticipated vesting of
the forfeited remuneration. There is not a specified limit on the
value of such awards, but the estimated value awarded would be
equivalent to the value forfeited.
Recruitment of Non-Executive Directors
On the appointment of a new Chair or Non-Executive Director,
remuneration arrangements will be consistent with the
directors’ remuneration policy approved at last year’s AGM
and summarised in this report.
Policy on payment for loss of office
Where an Executive Director leaves employment, the
Committee’s approach to determining any payment for loss
of office will normally be based on the following principles:
+ The Committee’s objective is to find an outcome which is
in the best interests of both SOCO and its shareholders while
taking into account the specific circumstances of cessation
of employment.
+ The Committee must satisfy any contractual obligations
agreed with the Executive Director. This is dependent on
the contractual obligations (i) not being in contradiction with
the policy set out in this report, or (ii) if so, not having been
entered into on a date later than 27 June 2012, in accordance
with the relevant legislation.
+ The Committee may seek to compromise any claims
made against the Company in relation to a termination
and reserves the right to pay reasonable legal fees and/or
for outplacement services if considered necessary.
+ The Committee may make an annual bonus payment for
the year of cessation depending on the reason for leaving.
Typically, the Committee will take into consideration
the period served during the year and the individual’s
performance up to cessation. Any such payment is at the
discretion of the Committee.
+ The treatment of outstanding share awards will be governed
by the relevant plan rules as set out in the table overleaf:
95
Governance Remuneration Report
continued
Plan
Deferred bonus
Automatic good
leaver categories
Treatment for
good leavers
Treatment for
all other reasons for leaving
+ Death.
+ Ill-health, injury or disability.
+ Redundancy.
+ Retirement with agreement
of the employer.
+ Any other reason as determined
at the discretion of the Committee.
+ Awards will usually vest on the normal
vesting date.
+ The Committee retains the discretion to
accelerate vesting so that awards vest as
soon as practicable following cessation.
+ Awards will normally lapse in full (unless
otherwise determined by the Committee).
LTIP and share
option plan
+ Death.
+ Ill-health, injury or disability.
+ Redundancy.
+ Retirement with agreement
of the employer.
+ Any other reason as determined
at the discretion of the Committee.
+ For grants under the share option plan,
vested options will remain exercisable
for six months.
+ All other awards will normally lapse
in full (unless otherwise determined
by the Committee).
+ The Committee will determine the
proportion of the award that will vest,
normally taking into account the
achievement of the relevant performance
conditions at the vesting date and the time
elapsed between the date of grant and
cessation of employment.
+ The vesting date for such award will
normally be the original vesting date,
although the Committee has the flexibility
to determine that awards can vest upon
cessation of employment.
+ Where options are granted, vesting
options will be exercisable within a period
of six months, or twelve months in the
event of death, commencing on the date
on which such options vest (being either
the date of cessation or the original vesting
date as determined by the Committee
as per above).
+ The Committee has the discretion to
vary the period in which vested options
are exercisable.
96
SOCO International plc Annual Report and Accounts 2018 Directors’ Report
Annual Report of the Directors
The Directors present their annual report, along with the
audited Financial Statements of the Group for the year ended
31 December 2018.
The following sections of this report are incorporated herein
by reference and forms part of this Directors’ report.
Strategic report
Board of Directors
Corporate Governance report
Nominations Committee report
Audit and Risk Committee report
Directors’ Remuneration report
Financial Statements
Additional Information
p2 – p60
p66 – p67
p68 – p71
p72 – p75
p76 – p81
p82 – p96
p109 – p134
p135 – IBC
SOCO provides liability insurance for its Directors and Officers.
The annual cost of the cover is not material to the Group.
The Articles 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 Companies Act 2006 (“2006 Act”).
The Company has made such provisions for the benefit of its
Directors in relation to certain losses and liabilities that they
may incur in the course of acting as Directors of the Company,
its subsidiaries or associates, which remain in force at the date
of this report.
No member of the Board had a material interest in any contract
of significance with the Company or any of its subsidiaries at
any time during the year, except for their interests in shares and
in share awards and under their service agreements and letters
of appointment disclosed in the Directors’ Remuneration report
commencing on page 82.
Table A: Directors holding office during 2018
Developments following the 2018 reporting period
An indication of the likely future developments in the business
of the Group is included in the Strategic Report on pages 2 to 60.
There were no significant events after the balance sheet date.
Results and dividends
The audited Financial Statements for the year ended
31 December 2018 are set out on pages 109 to 134. The Board
has recommended a final dividend of 5.5 pence per Ordinary
Share, which amounts to approximately $28.9m and which,
if approved at the 2019 Annual General Meeting (“AGM”), will be
paid on 31 May 2019 to shareholders on the register at the close
of business on 10 May 2019. In 2018, the Company announced
a final dividend for 2017 of 5.25 pence per Ordinary Share
amounting to $23.3m, which was approved by shareholders
on 7 June 2018 and paid on 15 June 2018 to shareholders on the
register at the close of business on 25 May 2018.
Directors
The business of the Company is managed by the Directors who
may exercise all powers of the Company subject to the articles
of association of the Company (“Articles”) and applicable law.
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 Table A of this report.
All Directors held office throughout the year except as noted
in the table. The NEDs’ appointments are terminable at the
will of the parties. Executive Directors’ contracts are terminable
by either party on giving one year’s notice.
In accordance with the provisions of the UK Corporate
Governance Code, all Directors will retire at the 2019 AGM and,
being eligible, offer themselves for reappointment. António
Monteiro will not offer himself for reappointment and will retire
from the Board at the conclusion of the AGM. Relevant details
of the Directors, which include their Committee memberships,
are set out in the section headed ‘Board of Directors’
on pages 66 to 67.
Director
Rui de Sousa
Chair
Edward Story
President and Chief Executive Officer
Jann Brown
Managing Director and Chief Financial Officer
Mike Watts
Managing Director
Rob Gray*
Deputy Chair and Senior Independent Director
António Monteiro*
John Martin*
Appointed to the Board 07.06.18
Ettore Contini
Olivier Barbaroux
Retired from the Board 07.06.18
Date of contract
12.07.99
14.05.97
06.12.17
06.12.17
09.12.13
10.06.09
07.06.18
11.12.01
12.07.99
* Denotes those determined by the Board to be Independent Non-Executive
Directors as described in the Corporate Governance report on pages 68 to 71.
Contributions
The Group’s policies prohibit political donations.
AGM
An explanation of the resolutions to be proposed at the 2019
AGM, and the recommendation of Directors in relation to these,
is included in the circular to shareholders which is available
on the Company’s website (www.socointernational.com).
Resolutions regarding the authority to issue shares are
commented upon in this report under share capital.
The Company’s AGM will be held at the offices of
Clifford Chance LLP, 10 Upper Bank Street, London, E14 5JJ
on 23 May 2019 at 12.30pm.
97
Governance Directors’ Report
continued
Share capital
Details of changes to share capital in the period are set out in
Note 25 to the Financial Statements. The Company currently
has one class of shares 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 Articles
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 ordinary shares held by the SOCO
EBT are not exercised. The Articles may only be amended by
a resolution of the shareholders.
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 ordinary
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 Conduct 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 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
2019 AGM, as is customary, to authorise the Directors to exercise
all powers to allot shares and approve a limited disapplication
of pre-emption rights. This authority will be sought in line with
institutional shareholder guidance, and in particular with the
Pre-Emption Group’s Statement of Principles published on
12 March 2015 (the “Pre-Emption Principles”), the authority
sought for disapplication of pre-emption rights will be 10%
on the basis that 5% of this is only intended to be used in
accordance with the Pre-Emption Principles. Further information
regarding these resolutions, which are based on template
resolutions published by the Pre-Emption Group in May 2016,
is set out in the circular to shareholders. A resolution will also be
proposed at the 2019 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 approximately 10% of the Company’s issued
ordinary share capital. Shares purchased under this authority
may either be cancelled or held as treasury shares.
Auditor
A resolution to reappoint Deloitte LLP as the Company’s auditor
will be proposed by the Directors at the 2019 AGM. Deloitte also
provide non-audit services to the Group, and details of the non-
audit services provided in the year to 31 December 2018 are set
out in Note 9 to the Financial Statements. All non-audit services
are approved by the Audit and Risk 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 auditor. Further details of the
Group policy on non-audit services are set out in the Audit and
Risk Committee Report on pages 76 to 81.
The Directors at the date of approval of this report confirm
that, so far as they are each aware, there is no relevant audit
information, being information needed by the auditor in
connection with preparing its report, of which the auditor are
unaware. Each Director has taken all steps that they ought to
have taken as a Director, having made such enquiries of fellow
Directors and the auditor and taken such other steps as are
required under their duties as a Director, to make themselves
aware of any relevant audit information and to establish that the
auditor is aware of that information. This confirmation is given
and should be interpreted in accordance with the provisions
of section 418 of the 2006 Act.
Greenhouse gas emissions reporting
Reporting on emission sources, as required under the
Companies Act 2006 (Strategic and Directors’ Reports)
Regulations 2013, is included in the Corporate Responsibility
report on pages 44 to 60.
Tax governance
The Company is committed to high standards of tax governance
and strives to meet its tax obligations. Tax contributions benefit
the communities in which we operate by providing a framework
within which the Company can grow. SOCO’s Tax Strategy
Statement, which the Board has approved, defines the key
tax objectives of the Group and is available on the Company’s
website (www.socointernational.com).
Risk management
The Directors carried out a robust review of the principal risks
facing the Group that could threaten the Company’s business
model, future performance, solvency and liquidity. The Risk
Management report on pages 36 to 43 details how we manage
and mitigate these risks.
98
SOCO International plc Annual Report and Accounts 2018 Substantial shareholdings
As at 31 December 2018, the Company had been notified, in accordance with Chapter 5 of the Disclosure and Transparency Rules,
of the voting rights as a shareholder of the Company shown in Table B of this report.
Table B: Substantial shareholdings in the company
Name of Holder
Ettore Contini2
Blue Albacore Business Ltd
Globe Deals Ltd
Chemsa Ltd
Ed Story3
Number of Ordinary Shares
31-Dec-18
Nature of holding
% of voting rights1
29,000,000
27,615,840
27,444,382
24,336,925
14,073,747
8.74
8.32
8.27
7.33
4.24
Direct and indirect
Direct
Direct
Direct
Direct and indirect
1 As at 31 December 2018, the total voting rights attached to the share capital in issue comprised 331,954,643 Ordinary Shares each of £0.05 nominal value,
being 341,076,911 Ordinary Shares in issue, less 9,122,268 Ordinary Shares currently held in treasury.
2 Ettore Contini holds 29,000,000 Shares, representing 8.74% of the total voting rights of the Company, of which 220,000 Shares (0.07%) are held personally
by Ettore Contini and 28,780,000 Shares (8.67%) are held through Liquid Business Ltd, a closely associated person to Ettore Contini.
4 Ed Story holds 14,073,747 Shares, representing 4.24% of the total voting rights of the Company, of which 12,398,747 (3.74%) Shares are held personally by Ed Story
and 1,675,000 (0.50%) Shares are held through The Story Family Trust, a closely associated person to Ed Story.
During the period between 31 December 2018 and 5 March 2019, the Company did not receive any notifications under chapter 5
of the Disclosure and Transparency Rules. For further information on Directors’ interests, please see page 88.
Requirements of the UK Listing Rules
Table C of this report provides references to where the information required by Listing Rule 9.8.4R is disclosed within this
Annual Report:
Table C: Listing Rules requirements
Listing Rule requirement
Details of any long term incentive schemes as required by Listing Rule 9.4.3 R.
Details of any arrangements under which a director of the company has waived or agreed to waive any emoluments from the company
or any subsidiary undertaking. Where a director has agreed to waive future emoluments, details of such waiver together with those relating
to emoluments which were waived during the period under review.
Directors’ Remuneration
Report page 82 to 96
No such waivers
Details required in the case of any allotment for cash of equity securities made during the period under review otherwise than to the holders
of the company’s equity shares in proportion to their holdings of such equity shares and which has not been specifically authorised by the
company’s shareholders.
No such share allotments
Details of any contract of significance subsisting during the period under review: (a) to which the listed company, or one of its subsidiary
undertakings, is a party and in which a director of the listed company is or was materially interested; and (b) between the listed company,
or one of its subsidiary undertakings, and a controlling shareholder.
Note 33 page 132
Details of any arrangement under which a shareholder has waived or agreed to waive any dividends, where a shareholder has agreed to
waive future dividends, details of such waiver together with those relating to dividends which are payable during the period under review.
Note 27 page 129
99
Governance Directors’ responsibility statement
The Directors confirm that, to the best of each person’s knowledge:
a) the Financial Statements set out on pages 109 to 134,
which have been prepared in accordance with applicable
United Kingdom law and IFRS as adopted by the European Union,
give a true and fair view of the assets, liabilities, financial position
and loss of the Company and the Group taken as a whole;
b) this Directors’ Report along with the Strategic Report, including
each of the management reports forming part of these reports,
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 and how these are being managed
and mitigated as set out in the Risk Management Report on
pages 36 to 43; and
c) the annual report and the Financial Statements, taken as a
whole, are fair, balanced and understandable and provide the
information necessary for the shareholders to assess the Group’s
performance, business model and strategy.
Approved by the Board and signed on its behalf.
Jann Brown
Managing Director and Chief Financial Officer
5 March 2019
Directors’ Report
continued
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 Strategic Report on pages 2 to 60
including the Financial Review on pages 32 to 35, they continue
to adopt the going concern basis in preparing the accounts.
Directors’ responsibilities for the financial statements
The Directors are responsible for preparing the annual report and
the Financial Statements in accordance with applicable United
Kingdom law and IFRS 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.
100
SOCO International plc Annual Report and Accounts 2018 Financial Statements
Independent Auditor’s Report
Consolidated Income Statement
102
109
Consolidated Statement of Comprehensive Income 109
Balance Sheets
Statements of Changes in Equity
Cash Flow Statements
110
111
112
Notes to the Consolidated Financial Statements 113
101 Financial
Statements
101
Financial Statements Independent Auditor’s Report
Report on
the audit of
the Financial
Statements
Independent Auditor’s Report to the members of SOCO International plc
Opinion
In our opinion:
+ the financial statements of SOCO
We have audited the financial statements
which comprise:
+ the consolidated income statement;
+ the consolidated statement of
comprehensive income;
+ the group and parent company
balance sheets;
+ the group and parent company
statements of changes in equity;
+ the group and parent company cash
flow statements; and
+ the related notes 1 to 35.
The financial reporting framework that
has been applied in their preparation
is applicable law and 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.
Basis for opinion
We conducted our audit in accordance
with International Standards on Auditing
(UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are
further described in the auditor’s
responsibilities for the audit of the financial
statements section of our report.
We are independent of the group and
the parent company in accordance with
the ethical requirements that are relevant
to our audit of the financial statements in
the UK, including the Financial Reporting
Council’s (the ‘FRC’s’) Ethical Standard
as applied to listed public interest entities,
and we have fulfilled our other ethical
responsibilities in accordance with these
requirements. We confirm that the
non-audit services prohibited by the FRC’s
Ethical Standard were not provided to the
group or the parent company.
We believe that the audit evidence we
have obtained is sufficient and appropriate
to provide a basis for our opinion.
International plc (the ‘parent company’)
and its subsidiaries (the ‘group’) give a
true and fair view of the state of the
group’s and of the parent company’s
affairs as at 31 December 2018 and of the
group’s profit for the year then ended;
+ the group financial statements have
been properly prepared in accordance
with International Financial Reporting
Standards (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.
102
SOCO International plc Annual Report and Accounts 2018 Summary of our audit approach
Key audit matters
Materiality
Scoping
Significant changes in our approach
The key audit matter that we identified in the current year was:
+ Impairment and impairment reversal of producing oil & gas assets
The materiality that we used for the group financial statements was $7 million which was determined on the
basis of 1.5% of net assets.
We focused primarily on the group’s key business unit, being Vietnam, which is accounted for in Vietnam and
in London together with the parent company which is also based in London. These locations account for 98%
of the group’s net assets, 100% of revenue and 96% of the profit before tax. Specified audit procedures were
then performed on the remaining 2% of the group’s net assets.
the current year, following no further changes in accounting policy.
The following changes were made to the key audit matters reported in the prior year:
+ Change in exploration & evaluation accounting policy is no longer a key audit matter as it is not relevant in
+ Impairment of intangible exploration & evaluation assets is no longer a key audit matter following the
+ Oil & gas reserves and contingent resource estimates is no longer considered a key audit matter following
our reassessment of the associated risk. We have instead considered oil & gas reserves and contingent
resource estimates as part of the key audit matter relating to the impairment and impairment reversal of
producing oil & gas assets.
disposal of the material African exploration & evaluation assets in the current year.
Conclusions relating to going concern,
principal risks and viability statement
Going concern
We have reviewed the directors’ statement
in Note 2 to the financial statements about
whether they considered it appropriate
to adopt the going concern basis of
accounting in preparing them and their
identification of any material uncertainties
to the group’s and company’s ability to
continue to do so over a period of at least
twelve months from the date of approval
of the financial statements.
We considered as part of our risk
assessment the nature of the group, its
business model and related risks including
where relevant the impact of Brexit, the
requirements of the applicable financial
reporting framework and the system of
internal control. We evaluated the directors’
assessment of the group’s ability to continue
as a going concern, including challenging the
underlying data and key assumptions used
to make the assessment, and evaluated the
directors’ plans for future actions in relation
to their going concern assessment.
We are required to state whether we have
anything material to add or draw attention
to in relation to that statement required by
Listing Rule 9.8.6R(3) and report if the
statement is materially inconsistent with
our knowledge obtained in the audit.
We confirm that we have nothing
material to report, add or draw attention
to in respect of these matters.
Principal risks and viability statement
Based solely on reading the directors’
statements and considering whether they
were consistent with the knowledge we
obtained in the course of the audit, including
the knowledge obtained in the evaluation of
the directors’ assessment of the group’s
and the company’s ability to continue as a
going concern, we are required to state
whether we have anything material to add
or draw attention to in relation to:
+ the disclosures on pages 36 to 43 that
describe the principal risks and
explain how they are being managed
or mitigated;
+ the directors’ confirmation on pages
42 to 43 that they have carried out a
robust assessment of the principal
risks facing the group, including those
that would threaten its business
model, future performance, solvency
or liquidity; or
+ the directors’ explanation on pages
42 to 43 as to how they have assessed
the prospects of the group, over what
period they have done so and why
they consider that period to be
appropriate, and their statement as
to whether they have a reasonable
expectation that the group will be able
to continue in operation and meet its
liabilities as they fall due over the
period of their assessment, including
any related disclosures drawing
attention to any necessary
qualifications or assumptions.
We are also required to report whether
the directors’ statement relating to the
prospects of the group required by Listing
Rule 9.8.6R(3) is materially inconsistent
with our knowledge obtained in the audit.
We confirm that we have nothing
material to report, add or draw attention
to in respect of these matters.
103
Financial Statements Independent Auditor’s Report
continued
Key audit matters
Key audit matters are those matters that,
in our professional judgement, were of
most significance in our audit of the
financial statements of the current period
and include the most significant assessed
risks of material misstatement (whether
or not due to fraud) that we identified.
These matters included those which had
the greatest effect on: the overall audit
strategy, the allocation of resources in the
audit; and directing the efforts of the
engagement team.
The matter was addressed in the context
of our audit of the financial statements
as a whole, and in forming our opinion
thereon, and we do not provide a separate
opinion on this matter.
Impairment and impairment reversal of Producing Oil & Gas Assets
Key audit matter description
How the scope of our audit responded
to the key audit matter
The value of property, plant and equipment relating to the group’s producing oil and gas assets as at
31 December 2018 was $506.9 million (2017: $505.4 million). This is considered a key audit matter due to the
significant judgements and estimates involved in assessing whether any impairment, or impairment reversal,
has arisen at year-end, and in quantifying any such impairments or reversals. Given the importance of
producing assets to the group and the judgemental nature of the inputs used in determining the recoverable
amounts, we also considered there to be a potential for fraud in this area.
Management reviewed both of its producing fields in Vietnam for indicators of impairment and impairment
reversal. As a result of the movements in reserves estimates, management identified an indicator of
impairment for Te Giac Trang (‘TGT’) and an indicator of impairment reversal for Ca Ngu Vang (‘CNV’).
Management has estimated the fair values less costs of disposal of each field and compared these to the
balance sheet carrying amount of each field on the balance sheet.
For TGT the recoverable value was above the carrying amount and as such, management considered that no
impairment was required. For CNV the recoverable amount was greater than the carrying amount and taking
into account the key driving factor being the uplift in reserves, management concluded it was appropriate for
an impairment reversal of $37.8 million to be recognised. This impairment reversal represents the reversal in
full of the prior impairment recorded on the CNV field.
Management’s fair value estimates were based on key assumptions which for both fields included:
+ oil and gas prices;
+ reserves estimates and production profiles; and
+ the discount rate adopted, which remains consistent with the prior year at 10% for both fields.
In relation to reserves estimates management has engaged a third party reservoir engineering expert to
provide an independent report on the group’s reserves estimates using standard industry reserve estimation
methods and definitions for both the CNV and TGT fields. In addition, management has explained the scope
of work of the third party expert and their findings in the review of operations, as well as highlighting oil and
gas reserves as a key source of estimation uncertainty in note 4 to the financial statements.
As referenced in note 4 of the financial statements the carrying value of property, plant and equipment is
considered by management as a critical accounting judgement and key source of estimation uncertainty.
Further details of the key assumptions used by management in their impairment evaluation are provided
in note 15 of the financial statements and in the Report of the Audit & Risk Committee on page 76 to 81.
curves;
and impairment reversal triggers for TGT and CNV;
For both the TGT and CNV assessments, we performed the following procedures;
+ we understood the basis for management’s conclusion as to the existence or otherwise of impairment
+ we compared oil and gas price assumptions with third party forecasts and publicly available forward
+ we understood the process used by management to derive their reserves estimates and how they provide
+ we reviewed the third party expert’s report on SOCO’s reserves estimates as summarised in the review
of operations and checked that these estimates were used consistently throughout the accounting
calculations reflected in the financial statements;
information to, and interact with, the third party expert;
used for both TGT and CNV;
of work, expertise and objectivity;
+ we communicated directly with the third party reserves experts to discuss and assess their scope
+ we used our internal valuation specialists to perform an independent recalculation of the discount rates
+ we assessed management’s other assumptions by reference to third party information, our knowledge
of the group and industry and also budgeted and forecast performance;
+ we tested management’s impairment calculations for mechanical accuracy;
+ we completed a scenario analysis for TGT and CNV, through which we conducted sensitivities for a range
of input assumptions, including oil price and discount rates, and computed what we believed to be
a reasonable range of recoverable amounts and then compared the carrying value against this range; and
+ we considered whether management’s disclosures relating to impairment and associated estimation
uncertainty were adequate.
104
SOCO International plc Annual Report and Accounts 2018 Key observations
We are satisfied that following the identification of impairment indicators on TGT an impairment test was
appropriately performed and no impairment was required. We note that the level of available headroom on
TGT is low ($1 million) and have concluded that this is appropriately disclosed in the sensitivity disclosures
provided within note 15.
In relation to CNV, following the identification of impairment reversal indicators we were satisfied that an
impairment reversal test was appropriately performed resulting in an impairment reversal of $37.8 million.
Our work noted that assumptions regarding discount rates were below our assessment of benchmarks but
that the oil prices used were also below the middle of the range of pricing that we view as appropriate.
Accordingly, as these matters offset, management’s combined assumptions in determining their recoverable
value were within the reasonable range of assumptions.
Our application of materiality
We define materiality as the magnitude of
misstatement in the financial statements
that makes it probable that the economic
decisions of a reasonably knowledgeable
person would be changed or influenced.
We use materiality both in planning the
scope of our audit work and in evaluating
the results of our work.
Based on our professional judgement,
we determined materiality for the financial
statements as a whole as follows:
Materiality
Group: $7 million (2017: $7.4 million)
Parent company: $6.75 million (2017: $5.7 million)
Basis for determining materiality
Group and parent company: 1.5% of net assets (2017: 1.5% of net assets)
Rationale for the benchmark applied
In respect of the group, given the continued volatility in oil prices, the uncertain outlook for future oil prices,
and a profit of $3.7 million (after adjusted for exceptional impairment reversals), we do not consider that
focusing solely on the group’s profit before tax would represent a stable basis for materiality or be
representative of the underlying scale of the group. Accordingly, consistent with the prior year, we have
concluded that net assets represent the most appropriate benchmark which reflects the long term value of the
group through its portfolio of production and exploration assets and their associated reserves and contingent
resources.
For the parent company, as the primary nature of this holding company is to hold investments in subsidiaries,
we have concluded that net assets represents the most appropriate benchmark.
Net Assets $500.8m
Net Assets
Group materiality
Group materiality $7.0m
Vietnam component
materiality $5.6m
Audit Committee
reporting threshold
$0.35m
105
Financial Statements Independent Auditor’s Report
continued
We agreed with the Audit & Risk
Committee that we would report to the
Committee all audit differences in excess
of $350,000 (2017: $370,000), as well as
differences below that threshold that, in our
view, warranted reporting on qualitative
grounds. We also report to the Audit & Risk
Committee on disclosure matters that we
identified when assessing the overall
presentation of the financial statements.
An overview of the scope of our audit
Our group audit was scoped by obtaining
an understanding of the group and its
environment, including group-wide
controls, and assessing the risks of
material misstatement at the group level.
Based on that assessment, we scoped in
the group’s remaining key business unit,
Vietnam, which is accounted for in
Vietnam and in London together with the
parent company which is also accounted
for in London. The Vietnamese
component and the parent company,
which were subject to full scope audits,
accounted for 98 % of the group’s net
assets, 100% of revenue and 96% of loss
before tax. Specified audit procedures
have been performed on the remaining
2% of the group’s net assets. The
Vietnamese component materiality was
$5.6 million. We also audited the
consolidation of the group’s business
units. In both the current and prior year,
all of the key audit matters that had the
greatest effect on our audit strategy,
as described above, were audited directly
by the group audit team in London.
The group audit team assesses each year
how best to be appropriately involved
in the audit work undertaken in Vietnam.
In the current year, this was achieved by
regular interaction and review through
correspondence, telephone and other
electronic media as well as performing
a review of the underlying work of the
component auditors in selected key areas
in person by a senior member of the
audit team.
106
Other information
The directors are responsible for the
other information. The other information
comprises the information included in
the annual report, other than the financial
statements and our auditor’s report thereon.
Our opinion on the financial statements
does not cover the other information and,
except to the extent otherwise explicitly
stated in our report, we do not express any
form of assurance conclusion thereon.
In connection with our audit of the
financial statements, our responsibility is
to read the other information and, in doing
so, consider whether the other information
is materially inconsistent with the financial
statements or our knowledge obtained
in the audit or otherwise appears to be
materially misstated.
If we identify such material inconsistencies
or apparent material misstatements,
we are required to determine whether
there is a material misstatement in the
financial statements or a material
misstatement of the other information.
If, based on the work we have performed,
we conclude that there is a material
misstatement of this other information,
we are required to report that fact.
In this context, matters that we are
specifically required to report to you
as uncorrected material misstatements
of the other information include where
we conclude that:
+ Fair, balanced and understandable –
the statement given by the directors
that they consider the annual report
and financial statements taken
as a whole is fair, balanced and
understandable and provides the
information necessary for
shareholders to assess the group’s
position and performance, business
model and strategy, is materially
inconsistent with our knowledge
obtained in the audit; or
+ Audit & Risk Committee reporting –
the section describing the work of the
Audit & Risk Committee does not
appropriately address matters
communicated by us to the Audit &
Risk Committee; or
+ Directors’ statement of compliance
with the UK Corporate Governance
Code – the parts of the directors’
statement required under the Listing
Rules relating to the company’s
compliance with the UK Corporate
Governance Code containing
provisions specified for review by the
auditor in accordance with Listing
Rule 9.8.10R(2) do not properly
disclose a departure from a relevant
provision of the UK Corporate
Governance Code.
We have nothing material to report,
in respect of these matters.
Responsibilities of directors
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,
and for such internal control as the
directors determine is necessary to enable
the preparation of financial statements
that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, the
directors are responsible for assessing the
group’s and the parent company’s ability
to continue as a going concern, disclosing
as applicable, matters related to going
concern and using the going concern
basis of accounting unless the directors
either intend to liquidate the group or the
parent company or to cease operations,
or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit
of the financial statements
Our objectives are to obtain reasonable
assurance about whether the financial
statements as a whole are free from
material misstatement, whether due
to fraud or error, and to issue an auditor’s
report that includes our opinion.
Reasonable assurance is a high level
of assurance, but is not a guarantee that
an audit conducted in accordance with
ISAs (UK) will always detect a material
misstatement when it exists.
Misstatements can arise from fraud
or error and are considered material if,
individually or in the aggregate, they could
reasonably be expected to influence the
economic decisions of users taken on the
basis of these financial statements.
SOCO International plc Annual Report and Accounts 2018 Details of the extent to which the audit
was considered capable of detecting
irregularities, including fraud are set
out below.
A further description of our responsibilities
for the audit of the financial statements
is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities.
This description forms part of our
auditor’s report.
Extent to which the audit was
considered capable of detecting
irregularities, including fraud
We identify and assess the risks of
material misstatement of the financial
statements, whether due to fraud or error,
and then design and perform audit
procedures responsive to those risks,
including obtaining audit evidence that
is sufficient and appropriate to provide
a basis for our opinion.
Identifying and assessing potential risks
related to irregularities
In identifying and assessing risks of material
misstatement in respect of irregularities,
including fraud and non-compliance with
laws and regulations, our procedures
included the following:
+ enquiring of management and the
Audit & Risk Committee, including
obtaining and reviewing supporting
documentation, concerning the
group’s policies and procedures
relating to:
– identifying, evaluating and complying
with laws and regulations and
whether they were aware of any
instances of non-compliance;
– detecting and responding to the
risks of fraud and whether they have
knowledge of any actual, suspected
or alleged fraud;
– the internal controls established
to mitigate risks related to fraud
or non-compliance with laws and
regulations;
+ discussing among the engagement
team including the significant
component audit team regarding how
and where fraud might occur in the
financial statements and any potential
indicators of fraud. As part of this
discussion, we identified potential
for fraud in the following areas:
impairment and impairment reversal
of producing assets and management
override of controls due to fraud;
+ obtaining an understanding of the
legal and regulatory frameworks that
the group operates in, focusing on
those laws and regulations that had
a direct effect on the financial
statements or that had a fundamental
effect on the operations of the group.
The key laws and regulations we
considered in this context included
the UK Companies Act 2006 the UK
Corporate Governance Code, the
Listing Rules of the UK Listing
Authority and the relevant tax
compliance regulations in the
jurisdictions in which the Group
operates; and
+ considering any relevant articles
published in the media that were
brought to our attention and whether
they led to any matters that required
further investigation through our
audit work.
Audit response to risks identified
As a result of performing the above,
we identified impairment and impairment
reversal of producing assets as a key
audit matter. The key audit matters section
of our report explains the matter in more
detail and also describes the specific
procedures we performed in response
to that key audit matter.
In addition to the above, our procedures
to respond to risks identified included
the following:
+ reviewing the financial statement
disclosures and testing to supporting
documentation to assess compliance
with relevant laws and regulations
discussed above;
+ enquiring of management, the Audit
& Risk Committee and in-house legal
counsel concerning actual and
potential litigation and claims or other
matters identified;
+ performing analytical procedures to
identify any unusual or unexpected
relationships that may indicate risks
of material misstatement due to fraud;
+ reading minutes of meetings of those
charged with governance and making
enquiries regarding any relevant legal
correspondence; and
+ in addressing the risk of fraud through
management override of controls,
testing the appropriateness of journal
entries and other adjustments;
assessing whether the judgements
made in making accounting estimates
are indicative of a potential bias; and
evaluating the business rationale of
any significant transactions that are
unusual or outside the normal course
of business. Our review of journals
and other expenses disclosed in the
financial statements actively
considered any matters identified
through the steps above.
We also communicated relevant identified
laws and regulations and potential fraud
risks to all engagement team members
and the significant component audit team,
and remained alert to any indications of
fraud or non-compliance with laws and
regulations throughout the audit.
Report on other legal and regulatory
requirements
Opinions 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.
In our opinion, based on the work
undertaken in the course of the audit:
+ the information given in the strategic
report and the directors’ report for the
financial year for which the financial
statements are prepared is consistent
with the financial statements; and
+ the strategic report and the directors’
report have been prepared in
accordance with applicable legal
requirements.
In the light of the knowledge and
understanding of the group and the parent
company and their environment obtained
in the course of the audit, we have not
identified any material misstatements in
the strategic report or the directors’ report.
107
Financial Statements Independent Auditor’s Report
continued
Matters on which we are required
to report by exception
Adequacy of explanations received and
accounting records
Under the Companies Act 2006 we are
required to report to you if, in our opinion:
+ we have not received all the information
and explanations we require for our
audit; or
+ 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 are not in agreement with
the accounting records and returns.
We have nothing to report in respect
of these matters.
Directors’ remuneration
Under the Companies Act 2006 we are also
required to report if in our opinion certain
disclosures of directors’ remuneration have
not been made or the part of the directors’
remuneration report to be audited is not in
agreement with the accounting records
and returns.
We have nothing to report in respect
of these matters.
Other matters
Auditor tenure
Following the recommendation of the
Audit & Risk Committee, we were
appointed by the directors on 1 August
2002 to audit the financial statements for
the year ending 31 December 2002 and
subsequent financial periods. The period
of total uninterrupted engagement
including previous renewals and
reappointments of the firm is 17 years,
covering the years ending 31 December
2002 to 31 December 2018.
Consistency of the audit report with
the additional report to the Audit & Risk
Committee
Our audit opinion is consistent with the
additional report to the Audit & Risk
Committee we are required to provide
in accordance with ISAs (UK).
Use of our report
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.
Anthony Matthews FCA
Senior statutory auditor
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
5 March 2019
108
SOCO International plc Annual Report and Accounts 2018 Consolidated Financial Statements
Consolidated Income Statement
for the year to 31 December 2018
Continuing operations
Revenue
Cost of sales
Gross profit
Administrative expenses
Reversal of impairment charge
Operating profit
Investment revenue
Finance costs
Profit before tax
Tax
Profit/(loss) for the year from continuing operations
Discontinued operations
Profit/(loss) post-tax for the year from discontinued operations
Profit/(loss) for the year
Earnings/(loss) per share from continuing operations (cents)
Basic
Diluted
Earnings/(loss) per share from continuing and discontinued operations (cents)
Basic
Diluted
Notes
5, 6
7
15
8
6
6, 11
34
6
13
2018
$ million
2017
$ million
175.1
(104.6)
70.5
(28.4)
37.8
79.9
2.7
(2.5)
80.1
(56.0)
24.1
3.6
27.7
7.3
7.0
8.4
8.1
156.2
(115.0)
41.2
(18.3)
–
22.9
1.4
(1.6)
22.7
(27.7)
(5.0)
(152.3)
(157.3)
(1.5)
(1.5)
(47.7)
(47.7)
Consolidated Statement of Comprehensive
Income for the year to 31 December 2018
Profit/(loss) for the year
Items that may be subsequently reclassified to profit or loss:
Unrealised currency translation differences
Total comprehensive profit/(loss) for the year
Notes
28
28
2018
$ million
27.7
0.2
27.9
2017
$ million
(157.3)
(0.4)
(157.7)
The above consolidated income statements and consolidated statements of comprehensive income should be read in conjunction with the accompanying notes.
109
Financial Statements
Consolidated Financial Statements
continued
Balance Sheets as
at 31 December 2018
Non-current assets
Intangible assets
Property, plant and equipment
Investments
Other assets
Current assets
Inventories
Trade and other receivables
Tax receivables
Liquid investments
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Tax payable
Net current assets (liabilities)
Non-current liabilities
Deferred tax liabilities
Borrowings
Long term provisions
Total liabilities
Net assets
Equity
Share capital
Other reserves
Retained earnings
Total equity
Notes
2018
$ million
Group
2017
$ million
2018
$ million
Company
2017
$ million
14
15
16
17
18
19
20
20
21
22
23
24
25
26
28
5.8
507.2
–
40.6
553.6
4.1
19.6
0.6
–
240.1
264.4
818.0
(22.9)
(5.2)
(28.1)
236.3
(141.8)
(95.6)
(51.7)
(289.1)
(317.2)
500.8
27.6
246.6
226.6
500.8
3.8
505.9
–
36.9
546.6
4.2
20.7
0.6
25.3
112.4
163.2
709.8
(23.1)
(6.8)
(29.9)
133.3
(132.6)
–
(52.7)
(185.3)
(215.2)
494.6
27.6
245.9
221.1
494.6
–
0.3
396.7
–
397.0
–
0.9
0.6
–
105.9
107.4
504.4
(9.5)
(0.7)
(10.2)
97.2
–
–
–
–
(10.2)
494.2
27.6
196.7
269.9
494.2
–
0.5
388.2
–
388.7
–
0.7
0.1
–
1.0
1.8
390.5
(9.6)
(0.2)
(9.8)
(8.0)
–
–
–
–
(9.8)
380.7
27.6
195.8
157.3
380.7
The above consolidated balance sheet statements should be read in conjunction with the accompanying notes.
The profit for the financial year in the accounts of the Company (Co number 3300821) was $159.9m inclusive of dividends from
subsidiary undertakings (2017: loss of $176.6m). 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.
The financial statements were approved by the Board of Directors on 5 March 2019 and signed on its behalf by:
Rui de Sousa
Chairman
110
Jann Brown
Director
SOCO International plc Annual Report and Accounts 2018
Statements of Changes in Equity
for the year to 31 December 2018
As at 1 January 2017
Loss for the year
Unrealised currency translation differences
Distributions
Share-based payments
As at 1 January 2018
Profit for the year
Unrealised currency translation differences
Distributions
Share-based payments
Transfer relating to share-based payments
As at 31 December 2018
As at 1 January 2017
Loss for the year
Unrealised currency translation differences
Distributions
Share-based payments
Transfer relating to share-based payments
As at 1 January 2018
Profit for the year
Unrealised currency translation differences
Distributions
Share-based payments
Transfer relating to share-based payments
As at 31 December 2018
Called up
share capital
(see Note 25)
$ million
Other reserves
(see Note 26)
$ million
Retained
earnings
(see Note 28)
$ million
Notes
27.6
243.8
–
–
–
–
–
0.4
–
1.7
27.6
245.9
–
–
–
–
–
–
(1.4)
–
3.0
(0.9)
27.6
246.6
399.8
(157.3)
(0.4)
(21.0)
–
221.1
27.7
0.2
(23.3)
–
0.9
226.6
28
26, 28
27, 28
26
26
Called up
share capital
(see Note 25)
$ million
Other reserves
(see Note 26)
$ million
Retained
earnings
(see Note 28)
$ million
Notes
27.6
194.5
–
–
–
–
–
27.6
–
–
–
–
–
–
0.4
–
1.7
(0.8)
195.8
–
(1.4)
–
3.0
(0.7)
27.6
196.7
303.9
(176.6)
51.0
(21.0)
–
–
157.3
159.9
(24.8)
(23.3)
–
0.8
269.9
12, 28
26, 28
27, 28
26
26
The above consolidated statements of changes in equity should be read in conjunction with the accompanying notes.
Group
Total
$ million
671.2
(157.3)
–
(21.0)
1.7
494.6
27.7
(1.2)
(23.3)
3.0
–
500.8
Company
Total
$ million
526.0
(176.6)
51.4
(21.0)
1.7
(0.8)
380.7
159.9
(26.2)
(23.3)
3.0
0.1
494.2
111
Financial Statements Consolidated Financial Statements
continued
Cash Flow Statements
for the year to 31 December 2018
Net cash from (used in) continuing operating activities
Net cash used in discontinued operating activities
Net cash from (used in) operating activities
Investing activities
Purchase of intangible assets
Purchase of property, plant and equipment
Decrease (increase) in liquid investments1
Payment to abandonment fund
Deferred proceeds on disposal of Mongolia assets
Investment in subsidiary undertakings
Dividends received from subsidiary undertakings
Net cash from continuing investing activities
Net cash from (used in) discontinued investing activities
Net cash from investing activities
Financing activities
Net proceeds from borrowings
Proceeds from exercise of share options
Purchase of own shares into treasury
Dividend paid to company shareholders
Net cash from (used in) continuing financing activities
Net cash from (used in) financing activities
Net 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 1
Notes
30
30
30
2018
$ million
55.9
(1.7)
54.2
Group
2017
$ million
45.0
–
45.0
2018
$ million
(23.2)
–
(23.2)
Company
2017
$ million
(12.9)
–
(12.9)
(2.4)
(16.6)
25.3
(3.4)
–
–
–
2.9
0.5
3.4
95.6
–
(1.3)
(23.3)
71.0
71.0
128.6
112.4
(0.9)
240.1
(1.3)
(20.8)
(10.0)
(3.1)
42.7
–
–
7.5
(4.1)
3.4
–
(0.3)
–
(21.0)
(21.3)
(21.3)
27.1
85.0
0.3
112.4
17
34
23
29
27
20
–
(0.1)
–
–
–
(33.4)
187.0
153.5
–
153.5
–
(1.2)
–
(23.3)
(24.5)
(24.5)
105.8
1.0
(0.9)
105.9
–
(0.1)
–
–
–
(3.1)
37.6
34.4
–
34.4
–
(0.3)
–
(21.0)
(21.3)
(21.3)
0.2
0.5
0.3
1.0
1 Liquid investments comprise short term liquid investments of between three to six months maturity while cash and cash equivalents comprise cash at bank and
other short term highly liquid investments of less than three months maturity. The combined cash and cash equivalents and liquid investments balance at
31 December 2017 was $137.7m. No liquid investments were held as of 31 December 2018.
The above consolidated cash flow statements should be read in conjunction with the accompanying notes.
112
SOCO International plc Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements
1 General information
SOCO International plc is a company limited by shares and incorporated in England and Wales under the Companies Act. The address
of the registered office is given on the inside back cover. The nature of the Group’s operations and its principal activities are set out
in Note 6, in the Operations Review and Financial Review on pages 24 to 31 and 32 to 35, respectively. SOCO International plc is the
ultimate parent company of the Group and except where otherwise indicated the following accounting policies apply to both the
Group and the Company.
2 Significant accounting policies
(a) Basis of preparation
The Financial Statements have been prepared in accordance with, and comply with, IFRS adopted for use in the European Union (‘EU’)
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 also been prepared on a going concern basis of accounting for the reasons set
out in the Annual Report of the Directors on page 100 and in the Financial Review on page 35.
The Financial Statements have been prepared under the historical cost basis, except for the valuation of hydrocarbon inventories
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 remained GBP although its Financial Statements are presented in US dollars to be consistent with the
Group. The principal accounting policies adopted are set out below.
Where applicable, comparatives have been adjusted to present them on the same basis as current period figure.
(b) New and amended standards adopted by the group
SOCO Adopted IFRS 9 ‘Financial Instruments’ and IFRS 15 ‘Revenue from Contracts with Customers’ on 1 January 2018.
These pronouncements have been endorsed by the EU.
IFRS 9 Financial Instruments
On 1 January 2018, SOCO adopted IFRS 9 ‘Financial Instruments’ which replaced IAS 39 ‘Financial Instruments: Recognition and
Measurement’ and includes requirements for classification and measurement of financial assets and financial liabilities, impairment
of financial assets and hedge accounting.
The adoption of IFRS 9 has had immaterial quantitative effect on the consolidated financial statements of the Group and the separate
financial statements of SOCO International Plc.
IFRS 15 Revenue from Contracts with Customers
On 1 January 2018, SOCO adopted IFRS 15 ‘Revenue from Contracts with Customers’, which replaced IAS 18 ‘Revenue’.
The adoption of IFRS 15 has had no material quantitative effect on the consolidated financial statements of the Group and the separate
financial statements of SOCO International Plc.
Disclosure of disaggregated revenue information consistent with the requirement included in IFRS 15 has not had an impact on the
information presented in Note 5.
(c) New standards and interpretations not yet adopted
At the date of authorisation of these financial statements, the following IFRS’s and IAS’s, 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 EU):
IFRS 16 Leases
In January 2016, the IASB issued IFRS 16 ‘Leases’ which the Group will adopt for periods beginning on or after 1 January 2019. The
adoption of IFRS 16 will impact both the measurement and disclosures of leases over a value threshold and with terms longer than one
year. The lease expense recognition pattern for lessees will generally be accelerated. Additional lease liabilities and right of use assets
are expected to be recorded. The cash flow statement will be affected as payments for the principal portion of the lease liability will be
presented within financing, not operating, activities.
113
Financial Statements Notes to the Consolidated Financial Statements
continued
2 Significant accounting policies continued
The Group has set up a project team which has reviewed all of the Group’s leasing arrangements over the last year in light of the
new lease accounting rules in IFRS 16. The standard will affect primarily the accounting for the Group’s operating leases.
The Group will apply the standard from its mandatory adoption date of 1 January 2019. The Group intends to apply the simplified
approach and will not restate comparative amounts for the year prior to first adoption. Right-of-use assets will be measured at the
amount of the lease liability on adoption (adjusted for any prepaid or accrued lease expenses).
The Group does not currently intend to bring short term leases (12 months or fewer to run as at 1 January 2019, including reasonably
certain options to extend) or low value leases on balance sheet. Costs for these items will continue to be expensed directly to the
income statement.
The critical judgemental matter for the Group with regard to the application of IFRS 16 is the treatment of its share in the bare boat
charter of the FPSO leased by HLJOC. The FPSO facilities are also shared with a third party. We note that there are ongoing IFRIC
discussions on IFRS 11 ‘Joint Arrangements’ that may have a bearing on the Group’s future recognition of lease costs under IFRS 16.
With those discussions ongoing, we are currently taking the conservative view that the Group should disclose its share of the FPSO
as a lease and will revisit the issue at the time of our 2019 interim reporting.
Accordingly, as at 1 January 2019, the Group reports that it has non-cancellable operating lease commitments of $55.9m, see Note 31.
$54.0m of which relates to the FPSO facilities, and the remainder to office properties.
For the lease commitments the Group expects to recognise right-of use assets of approximately $47.3m on 1 January 2019 and
a matching lease liability. Overall net current assets will be $7.3m lower due to the presentation of a portion of the liability as a
current liability.
The Group expects that the net profit after tax will decrease by approximately $0.8m for 2019 as a result of adopting the new rules.
There are no other standards that are not yet effective and that would be expected to have a material impact on the Group in the
current or future reporting periods nor on foreseeable future transactions.
SOCO has not early adopted any amendments, standards or interpretations that have been issued but are not yet effective.
(d) 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 investor is exposed, or has rights to
variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
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.
(e) Investments
Non-current investments in subsidiaries of the Company are shown at cost less provision for impairment. Liquid investments comprise
short term liquid investments of between three to six months maturity.
Interests in Joint Arrangements
(f)
A joint arrangement is an arrangement where two or more parties have joint control. Joint control is the contractually agreed sharing
of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the
parties sharing control. Joint arrangements where the Group has the rights to assets and obligations for liabilities of the arrangement
are classified as joint operations and are accounted for by recognising the Group’s share of assets, liabilities, income and expenses.
Joint arrangements where the Group has the rights to the net assets of the arrangement are classified as joint ventures and are
accounted for using the equity method of accounting.
114
SOCO International plc Annual Report and Accounts 2018 2 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 a liftings basis and is recognised
when the Group satisfies a performance obligation by transferring oil and gas to a customer. In accordance with the Group’s sales
agreements for oil and gas, the title to oil and gas typically transfers to a customer at the same time as the customer takes physical
possession of the oil or gas. Typically, at this point in time, the performance obligations of the Group are fully satisfied.
Investment revenue is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.
(h) Intangible and Tangible non-current assets
Oil and gas exploration, evaluation and development expenditure
The Group adopts the successful efforts method of accounting for exploration and evaluation costs. Pre-licence costs are expensed
in the period in which they are incurred. All licence acquisition, exploration and evaluation costs and direct administration costs are
initially capitalised as intangible non-current assets in cost centres by well (most typically), field or exploration area, as appropriate.
Interest payable is capitalised insofar as it relates to specific development activities.
These costs are then written off as exploration costs in the income statement unless commercial reserves have been established
or the determination process has not been completed and there are no indicators of impairment.
All field development costs are capitalised as property, plant and equipment. Property, plant and equipment related to production
activities is amortised in accordance with the Group’s depletion and amortisation accounting policy.
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 specified in paragraphs
18 to 20 of IFRS 6. The impairment indicators in IFRS 6 for each exploration asset are:
+ The period for which the entity has the right to explore in the specific area has expired during the period or will expire in the
near future, and is not expected to be renewed;
+ Substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted
nor planned;
+ Exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable
quantities of mineral resources and the entity has decided to discontinue such activities in the specific area; and
+ Sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the carrying amount
of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale.
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.
115
Financial Statements Notes to the Consolidated Financial Statements
continued
2 Significant accounting policies continued
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, from the date of adoption
of the revised estimates, over the estimated remaining proven and probable reserves.
Inventories
(j)
Inventories, except for inventories of hydrocarbons, are valued at the lower of cost and net realisable value.
Physical inventories of hydrocarbons are valued at net realisable value in line with well established industry practice. Underlifts
and overlifts are valued at market value and are included in accrued income and prepayments, and accruals and deferred income,
respectively. Changes in hydrocarbon inventories, underlifts and overlifts are adjusted through cost of sales.
(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.
For cash-settled share-based payments, a liability is recognised measured initially at fair value. At each balance sheet date until the
liability is settled, and at the date of settlement, the fair value of the liability is measured, with any changes in fair value recognised
in profit or loss for the year.
(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.
116
SOCO International plc Annual Report and Accounts 2018 2 Significant accounting policies continued
(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. Up to the date of this balance sheet, the Group had not utilised derivative
financial instruments.
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 19, 20, 21, 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 recognised initially at fair value and subsequently measured at amortised cost, less loss allowance,
when required.
Trade payables
Trade payables are generally stated at amortised costs using the effective interest rate.
Bank borrowing
Interest-bearing bank loans are recorded at the proceeds received, net of direct issue costs. Finance charges, including any direct
issue costs, are accounted for on an accrual basis in the income statement using the effective interest method and are added to the
carrying amount of the instrument to the extent that they are not settled in the year in which they arise.
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 daily rate of exchange 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 other comprehensive income 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.
117
Financial Statements Notes to the Consolidated Financial Statements
continued
3 Financial risk management
The Board reviews and agrees policies for managing financial risks that may affect the Group. In certain cases the Board delegates
responsibility for such reviews and policy setting to the Audit and Risk Committee. The principal financial risks affecting the Group
are discussed in the Risk Management Report on pages 36 to 43.
4 Critical judgements and accounting estimates
(a) Critical judgements in applying the Group’s accounting policies
In the process of applying the Group’s accounting policies described in Note 2, management has made judgements that may have
a significant effect on the amounts recognised in the financial statements. These are discussed below:
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.
Management considers these assets for impairment at least annually with reference to indicators in IFRS 6. Note 14 discloses
the carrying value of intangible exploration and evaluation assets. Further, Note 2(h) describes the Group’s policy regarding
reclassification of intangible assets to tangible assets. Management considers the appropriateness of asset classification
at least annually.
(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 within the next financial year are discussed below:
Oil and gas reserves and DD&A
Note 2(h) sets out the Group’s accounting policy on DD&A. Proven and probable reserves are estimated using standard recognised
evaluation techniques and are disclosed on page 137. The estimate is reviewed at least twice a year and is audited at year end. 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. As discussed in the Operations Review on page 28, the TGT and CNV proved and
probable reserves estimates have been revised based on ongoing work of ERCE and audited by our Reserves Auditors, RISC Advisory
Pty Ltd. Reserves estimates are inherently uncertain, especially in the early stages of a field’s life, and are routinely revised over the
producing lives of oil and gas fields as new information becomes available and as economic conditions evolve. Such revisions may
impact the Group’s future financial position and results, in particular, in relation to DD&A and impairment testing of oil and gas
property plant and equipment.
Impairment of producing oil and gas assets
If impairment indicators are identified in relation to a producing oil and gas field, management is required to compare the net carrying
value of the assets and liabilities which represent the field cash generating unit (CGU) with the estimated recoverable amount of the
field. Management generally determines the recoverable amount of the field by estimating its fair value less costs of disposal, using
a discounted cash flow method. Calculating the net present value of the discounted cash flows involves key assumptions which
include commodity prices, 2P reserves estimates and discount rates. Other assumptions include production profiles, future operating
and capital expenditures. Further information relating to the specific assumptions and uncertainties relevant to impairment tests
performed in the year are discussed in Note 15.
118
SOCO International plc Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements
5 Total revenue
An analysis of the Group’s revenue is as follows:
Oil and gas sales (see Note 6)
Investment revenue
2018
$ million
175.1
2.7
177.8
2017
$ million
156.2
1.4
157.6
6 Segment information
The Group has one principal business activity being oil and gas exploration and production. The Group’s continuing operations are
located in South East Asia. Africa has been classified as a discontinued operation for all years shown, as the Group disposed of all of
its interests in that geographical area. There are no inter-segment sales. South East Asia and Africa form the basis on which the Group
reports its segment information.
Oil and gas sales (see Note 5)
Depreciation, depletion and amortisation (see Note 7)
Reversal of impairment charge (see Note 15)
Profit (loss) before tax from continuing operations 1
Profit post-tax from discontinued operations
Tax charge (see Note 11)
Oil and gas sales (see Note 5)
Depreciation, depletion and amortisation (see Note 7)
Reversal of impairment charge
Profit (loss) before tax from continuing operations 1
Loss post-tax from discontinued operations
Tax charge (see Note 11)
SE Asia
$ million
Africa2
$ million
Unallocated
$ million
175.1
51.8
37.8
107.7
–
56.0
–
–
–
–
3.6
–
–
0.3
–
(27.6)
–
–
SE Asia
$ million
Africa3
$ million
Unallocated
$ million
156.2
56.5
–
39.9
–
27.7
–
–
–
–
(152.3)
–
–
0.3
–
(17.2)
–
–
2018
Group
$ million
175.1
52.1
37.8
80.1
3.6
56.0
2017
Group
$ million
156.2
56.8
–
22.7
(152.3)
27.7
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 As of December 2018, Africa operations had been disposed.
3 In December 2017, an impairment indicator of IFRS 6 was triggered following the Group’s announcement that no substantive expenditure for the Africa assets was
either budgeted or planned in the near future. The remaining costs capitalised associated with exploration areas in Africa of $152.3m was therefore fully impaired
in the income statement.
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 are revenues of $129.1m and $35.0m which arose from the Group’s two largest
customers who contributed more than 10% to the Group’s oil and gas revenue (2017: $102.9m and $21.1m from the Group’s two
largest customers).
119
Financial Statements Notes to the Consolidated Financial Statements
continued
6 Segment information continued
Geographical information
The Group’s oil and gas revenue and non-current assets (excluding other receivables) by geographical location are separately detailed
below where they exceed 10% of total revenue or non-current assets, respectively:
Revenue
All of the Group’s oil and gas revenue is derived from foreign countries. The Group’s oil and gas revenue by geographical location is
determined by reference to the final destination of oil or gas sold.
Vietnam
Thailand
Other
Non-current assets
United Kingdom
Vietnam
Excludes other assets
7 Cost of sales
Depreciation, depletion and amortisation
Production based taxes
Production operating costs
Inventories
8 Finance costs
Unwinding of discount on provisions (see Note 24)
Interest payable and similar fees
Net foreign exchange losses
2018
$ million
2017
$ million
131.8
26.1
17.2
175.1
2018
$ million
0.2
512.8
513.0
105.7
36.3
14.2
156.2
2017
$ million
0.4
509.3
509.7
2018
$ million
2017
$ million
51.8
15.1
37.6
0.1
104.6
56.5
13.6
43.4
1.5
115.0
2018
$ million
2017
$ million
1.4
0.6
0.5
2.5
1.6
–
–
1.6
In 2018 $1.4m relates to the unwinding of discount on the provisions for decommissioning (2017: $1.6m). The provisions are 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 TGT and CNV
(currently estimated to be 12 – 13 years) in the removal and decommissioning of the facilities currently in place (see Note 24).
120
SOCO International plc Annual Report and Accounts 2018 9 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 – half year review
Taxation compliance services
Corporate finance services and other assurance services
Other services
Total non-audit fees
2018
$000s
188
2017
$000s
190
8
196
68
–
583
–
651
25
215
54
–
540
17
611
The non-audit fees during 2018 included the half year review, due diligence related corporate finance services and other assurance
services associated primarily with reporting accountant services on two transactions that took place during 2018. All non-audit fees
were fully approved by the Audit & Risk Committee, having concluded such services were compatible with auditor independence
and were consistent with relevant ethical guidance in place. In 2017, other assurance service included the half year review, regulatory
advice, other advice to management and corporate finance services on a transaction proposed in 2017.
Details of the Company’s policy on the use of auditors for non-audit services are set out in the Audit & Risk Committee Report
on pages 76 to 81.
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 26 (2017: 19), of which 23 (2017: 16)
were administrative personnel and 3 (2017: 3) were operations personnel. Their aggregate remuneration comprised:
Wages and salaries
Social security costs
Share-based payment expense (see Note 29)
Other pension costs under money purchase schemes
Other benefits
2018
$ million
9.1
1.7
2.0
0.9
0.8
14.5
Group
2017
$ million
8.5
0.5
2.5
0.7
1.1
13.3
In accordance with the Group’s accounting policy $1.6m of the Group’s staff costs above have been capitalised (2017: $1.5m)
all of which related to our Vietnam assets.
11 Tax
Current tax
Deferred tax (see Note 22)
2018
$ million
46.8
9.2
56.0
2017
$ million
42.1
(14.4)
27.7
The Group’s corporation tax is calculated at 50% (2017: 50%) of the estimated assessable profit for the year in Vietnam.
During 2018 and 2017 both current and deferred taxation have arisen in overseas jurisdictions only.
121
Financial Statements Notes to the Consolidated Financial Statements
continued
11 Tax continued
The charge for the year can be reconciled to the profit / (loss) per the income statement as follows:
Profit / (Loss) before tax
Profit / (Loss) before tax at 50% (2017: 50%)
Effects of:
Non-deductible expenses
Tax losses not recognised
Non-deductible exploration costs written off
Tax charge for the year
2018
$ million
83.7
41.9
4.5
8.5
1.1
56.0
2017
$ million
(129.6)
(64.8)
10.1
6.2
76.2
27.7
The prevailing tax rate in Vietnam, where the Group produces oil and gas, is 50%. The tax charge in future periods may also be
affected by the factors in the reconciliation above.
Non-deductible expenses, net of the effect of the CNV reversal of impairment of $5.0m, primarily relate to Vietnam DD&A charges
for costs previously capitalised, which are non-deductible for Vietnamese tax purposes of $6.7m (2017: $6.9m). A further $2.8m
(2017: $3.2m) relates to non-deductible corporate costs including share scheme incentives.
The effect from tax losses not recognised relates to costs, primarily of the Company, deductible for tax in the UK but not expected
to be utilised in the foreseeable future.
The effect of non-deductible exploration costs written off of $76.2m in 2017 relates to the impairment of exploration assets in Africa.
12 Profit attributable to SOCO International plc
The profit for the financial year in the accounts of the Company was $159.9m inclusive of dividends from subsidiary undertakings
(2017: loss of $176.6m). 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.
13 Earnings per share
The calculation of the basic and diluted earnings per share is based on the following data:
Profit/(loss) for the purposes of basic profit/(loss) per share
Effect of dilutive potential ordinary shares – Cash settled share awards and options
Profit/(loss) for the purposes of diluted profit/(loss) per share
Profit/(loss) from continuing operations for the purposes of basic profit/(loss) per share
Effect of dilutive potential ordinary shares – Cash settled share awards and options
Profit/(loss) from continuing operations for the purposes of diluted profit/(loss) per share
Weighted average number of ordinary shares
Effect of dilutive potential ordinary shares – Share awards and options
Weighted average number of ordinary shares for the purpose of diluted loss per share
2018
$ million
27.7
(0.7)
27.0
2018
$ million
24.1
(0.7)
23.4
Group
2017
$ million
(157.3)
(0.7)
(158.0)
Group
2017
$ million
(5.0)
(0.7)
(5.7)
Number of shares (million)
2018
$ million
329.8
4.6
334.4
2017
$ million
329.8
3.6
333.4
In accordance with IAS 33 “Earnings per Share”, the effects of antidilutive potential shares have not been included when calculating
dilutive loss per share for the year ended 31 December 2018 or the prior year.
122
SOCO International plc Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements
14 Intangible assets
Exploration and evaluation expenditure
As at 1 January
Additions
Exploration expense
As at 31 December
2018
$ million
3.8
2.0
–
5.8
Group
2017
$ million
150.6
5.5
(152.3)
3.8
Intangible assets at 2018 year-end comprise the Group’s exploration and evaluation project which is pending determination and relate
to Blocks 125&126 in Vietnam. The outcome of ongoing exploration, and therefore whether the carrying value of E&E assets will
ultimately be recovered, is inherently uncertain. 2017 additions were related to Africa, $4.0m, and $1.5m to Vietnam.
In 2017, the amount of $152.3m was written off to the income statement as one of the impairment indicators specified in paragraphs 18 to
20 of IFRS 6 (see Note 2(h)) was triggered for Africa licences Marine XI, Congo (Brazzaville) and Cabinda North, Angola as no substantive
expenditure on further exploration was budgeted or planned for those assets, as they were no longer a core priority for the Group, and
have subsequently been disposed in 2018.
15 Property, plant and equipment
Cost
As at 1 January 2017
Additions
Disposals
Currency exchange
As at 1 January 2018
Additions
Currency exchange
As at 31 December 2018
Depreciation
As at 1 January 2017
Charge for the year
Currency exchange
As at 1 January 2018
Charge for the year
Reversal of impairment charge
Currency exchange
As at 31 December 2018
Carrying amount
As at 31 December 2018
As at 31 December 2017
Oil and gas
properties
$ million
Other
$ million
Total
$ million
Other
$ million
Group
Company
908.8
20.1
(11.8)
–
917.1
15.5
–
932.6
355.2
56.5
–
411.7
51.8
(37.8)
–
425.7
506.9
505.4
1.8
0.1
–
0.2
2.1
0.1
(0.1)
2.1
1.2
0.3
0.1
1.6
0.3
–
(0.1)
1.8
0.3
0.5
910.6
20.2
(11.8)
0.2
919.2
15.6
(0.1)
934.7
356.4
56.8
0.1
413.3
52.1
(37.8)
(0.1)
427.5
507.2
505.9
1.7
0.1
–
0.2
2.0
0.1
(0.1)
2.0
1.1
0.3
0.1
1.5
0.3
–
(0.1)
1.7
0.3
0.5
As discussed in the Operations Review on pages 24 to 31, the SOCO working interest in proved and probable oil and gas reserves,
audited by RISC Advisory Pty Ltd, show a decrease of 4.8 MMBOE to 2P reserves numbers for TGT and an increase of 2.4 MMBOE
to 2P reserves numbers for CNV.
This downward revision triggered an impairment test on the Group’s TGT asset in Vietnam. The recoverable amount of the TGT producing
asset has been determined using the fair value less costs of disposal method which constitutes a level 3 valuation within the fair value
hierarchy. The net book value is supported by the fair value derived from a discounted cash flow valuation of the 2P production profile.
The key assumptions to which the fair value measurement is most sensitive are oil price, discount rate and 2P reserves (2017: oil price,
discount rate and 2P reserves). In 2018, the post-tax nominal discount rate has been maintained at 10% as there has been no change in
the technical confidence in the reservoir. As at 31 December 2018, the fair value of the asset is estimated based on a post-tax nominal
discount rate of 10% (2017: 10%) and an oil price of $63.8/bbl in 2019, $66.3/bbl in 2020, plus inflation of 2.0% thereafter (2017: an oil price
reflecting a gradual increase over five years from $61/bbl in 2018 to $72 in 2022 plus inflation of 2% thereafter).
123
Financial Statements Notes to the Consolidated Financial Statements
continued
Any negative movement to the key assumptions (oil price, discount rate and 2P reserves) used when determining fair value less costs
of disposal method for TGT could result in a future impairment of the asset. Details of the uncertainties relating to the 2P reserves are
provided in Note 4 (b).
In 2014 an impairment of the Group’s CNV asset of $60.5m and associated $22.3m deferred tax was charged to the Income Statement.
The 2018 upward revision in the 2P reserves of this asset has resulted in a reversal of the impairment of $37.8m in the period and
$13.9m reversal of the tax asset. The recoverable amount of the CNV producing asset has been determined using the fair value less
costs of disposal method which constitutes a level 3 valuation within the fair value hierarchy.
Testing of sensitivity cases indicated that the $5/bbl reduction in the long term oil price used when determining the fair value less
costs of disposal method would result in a post-tax impairment of the TGT asset of $27.0m and a reduction in the post-tax reversal
of impairment of $5.0m of the CNV asset and a 1% increase in the discount rate would result in a post-tax impairment of $7.0m for the
TGT asset and a reduction in the post-tax reversal of impairment of $0.6m of the CNV asset.
Other fixed assets comprise office fixtures and fittings and computer equipment.
16 Fixed asset investments and joint arrangements
Group Investments
The Company and the Group had investments in the following subsidiary undertakings as at 31 December 2018 which affected the
profits or net assets of the Group, all of which (unless indicated) are indirectly held.
OPECO Vietnam Limited
SOCO Vietnam Ltd
SOCO Exploration Limited
SOCO Finance (Jersey) Limited
SOCO SEA Limited
Country of incorporation Country of operation Principal activity
Cook Islands
Cayman Islands
Vietnam
Vietnam
Oil and gas development and production
Oil and gas development and production
Jersey
Jersey
Jersey
–
–
–
Investment holding
Group financing
Investment holding
SOCO Exploration (Vietnam) Limited
Cayman Islands
Vietnam
Oil and gas exploration
SOCO DRC Limited
Cayman Islands
SOCO Exploration & Production DRC SARL DRC
OPECO, Inc
Pharos Energy Limited
SOCO Management Services, Inc.
USA
UK
USA
–
–
–
–
–
–
Investment holding
-
USA
Management services
Percentage
holding Footnotes
Registered
address
100
100
100
100
100
100
85
85
100
100
100
2,6
2,5
1,4
1
1
2,7
2,3,4
2,3,4
2,6
1
2
e
d
a
a
a
d
d
f
c
b
c
Footnotes:
Group investments
1 Investments held directly by SOCO International plc.
2 Investments held indirectly by SOCO International plc.
3 Dormant pending voluntary dissolution.
4 SOCO Exploration Limited is the 85% shareholder of SOCO DRC Limited, which wholly owns SOCO Exploration & Production DRC SARL. The 15% non-controlling
interest is held by Quantic group of companies, of which Rui de Sousa is a 50% beneficial interest holder (see Note 33).
Joint arrangements
5 SOCO Vietnam Ltd holds a 28.5% working interest in Block 16-1, TGT Field. The Field operational base is development/production and is operated by Hoang Long
Joint Operating Company which is registered in Vietnam. SOCO Vietnam Ltd holds a 25% working interest in Block 9-2, CNV Field. The Field operational base is
development/production and is operated by Hoan Vu Joint Operating Company which is registered in Vietnam.
6 OPECO Vietnam Limited holds a 2% working interest in Block 16-1, TGT Field. The Field operational base is development/production and is operated by Hoang Long
Joint Operating Company which is registered in Vietnam.
7 SOCO Exploration (Vietnam) Limited holds a 70% working interest in Blocks 125 & 126 and is the Operator. The operating office is registered in Vietnam. The main
activity is exploration.
Registered addresses:
(a) 47 Esplanade, St Helier, Jersey, JE1 0BD, Channel Islands
(b) 48 Dover Street, London, W1S 4FF, United Kingdom
(c) Corporation Trust Center, 1209 Orange Street, Wilmington, DE 19801, USA
(d) 196 Raleigh Quay, Governors Harbour, P.O. Box 1968, Grand Cayman, Cayman Islands, KY1 1104
(e) 3/F BCI House, P.O. Box 208, Avarua, Rarotonga, Cook Islands
(f) Sutter & Pearc (DRC), Av Democratie no. 7476/1, Commune de la Combe, Kinshasa, DRC
124
SOCO International plc Annual Report and Accounts 2018 Divestments:
The following subsidiary undertaking were sold during the year:
– SOCO Congo Limited *
– SOCO Exploration & Production Congo SA *
– SOCO Cabinda Limited
* SOCO Exploration Limited was an 85% shareholder of SOCO Congo Limited, which owned 100% of SOCO Exploration & Production
Congo SA. The 15% non-controlling interest was held by the Quantic group of companies, of which Rui de Sousa is a 50% beneficial
interest holder (see note 33).
The following subsidiaries, being dormant, entered into voluntary dissolution prior to 31 December 2018:
– SOCO International Operations LLC
– SOCO Vietnam Acquisition Limited
– SOCO Vietnam (Holdings) Limited
– SOCO Cuu Long Limited
– SOCO Exploration (Asia) Limited
– Torobex Limited
– SOCO Congo BEX Limited
– SOCO MED Limited
– SOCO North Africa Limited
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.
In 2018 the increase in investment value of $8.5m was due mainly to investment in subsidiaries of $33.4m offset by foreign exchange
loss of $24.9m.
125
Financial Statements Notes to the Consolidated Financial Statements
continued
17 Other non-current assets
Other non-current assets comprise the Group`s share of contributions made into two abandonment security funds which were
established to ensure that sufficient funds exist to meet future abandonment obligations on TGT and CNV fields. The funds are
operated by PetroVietnam and the JOC partners retain the legal rights to the funds pending commencement of abandonment
operations. The Group doesn’t expect to received cash or another financial asset from PetroVietnam. During 2018, the Group has
contributed $3.4m (2017: $3.1m). As at 31 December 2018 the Group’s total contribution to the funds was $40.3m (2017: $36.9m).
The remainder in other assets, $0.3m, was the non-current part of the fair value of the consideration for the sale of Congo (see Note 34).
18 Inventories
Inventories comprise crude oil and condensate and are valued at net realisable value in line with well established industry practice
with changes in hydrocarbon inventories adjusted through cost of sales (see Note 7).
19 Trade and other receivables
Amounts falling due within one year
Trade receivables
Other receivables
Prepayments and accrued income
2018
$ million
16.8
1.5
1.3
19.6
Group
2017
$ million
17.5
0.8
2.4
20.7
2018
$ million
Company
2017
$ million
–
–
0.9
0.9
–
–
0.7
0.7
There are no amounts overdue or allowances for doubtful debts in respect of trade or other receivables (2017: nil). There is no material
difference between the carrying amount of trade and other receivables and their fair value.
Included in trade and other receivables arising from South East Asia at 31 December 2018 are trade receivables of $8m and $7.8m
which arose from the Group’s two largest customers (2017: $12.9m and $4.0m from the Group’s two largest customers).
Trade and other receivables are financial assets and measured at amortised cost. The Group applies the IFRS 9 simplified approach to
measuring expected credit losses (‘ECL’) which uses a lifetime expected loss allowance for all trade receivables. As mentioned above,
94% of our trade receivables are concentrated with two largest customers, one of them being a subsidiary of a government regulated
entity and the other being a major global oil & gas company. As of 31 December 2018, we have concluded that there is immaterial
quantitative effect for the ECL.
20 Cash and cash equivalents and liquid investments
As at 31 December 2018, cash and cash equivalents of $240.1m (2017: $112.4m), 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. Of this balance, $157.3m (2017: $90.4m) were in Money Market
Funds that are valued at quoted prices of the funds in the active markets for the financial instruments. The Money Market Funds were
recorded at fair value at the year end.
As at 31 December 2017, liquid investments of $25.3m comprised short term liquid investments of between three to six months
maturity while cash and cash equivalents comprised cash at bank and other short term highly liquid investments of less than three
months maturity. The combined cash and cash equivalents and liquid investments balance at 31 December 2017 was $137.7m.
During 2018, the $25.3m were transferred from liquid investments to cash accounts which are available on demand and hence are
now classified as cash and cash equivalents.
126
SOCO International plc Annual Report and Accounts 2018 21 Trade and other payables
Trade payables
Other payables
Accruals and deferred income
Liability for onerous commitments
2018
$ million
1.0
8.1
13.2
0.6
22.9
Group
2017
$ million
1.5
7.4
13.3
0.9
23.1
2018
$ million
–
1.6
7.9
–
9.5
Company
2017
$ million
–
3.9
5.7
–
9.6
There is no material difference between the carrying value of trade payables and their fair value. The above trade and other payables
are held at amortised cost and are not discounted as the impact would not be material.
Trade and other payables are financial liabilities and are therefore measured at amortised cost. The average credit period for
settlement of trade payables is standard 30 days or later if this falls within the agreed terms. The Group has financial risk management
policies in place to ensure that all payables are paid within the pre-agreed credit terms. Further information relating to financial risks
and how the Group mitigate these risks are discussed in the Risk Management Report on pages 36 to 43.
22 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 2017
Credit to income
As at 1 January 2018
Charge to income (see Note 11)
As at 31 December 2018
Accelerated tax
depreciation
$ million
Other
temporary
differences
$ million
144.1
(13.6)
130.5
9.2
139.7
2.9
(0.8)
2.1
–
2.1
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 $151.1m (2017: $134.5m). The gross losses have no expiry date.
23 Borrowings
Long-term debt:
Fair Value of Bank loans
Less unamortised issue costs and debt arrangements fees
Carrying value of total debt
2018
$ million
100.0
(4.4)
95.6
Group
$ million
147.0
(14.4)
132.6
9.2
141.8
Group
2017
$ million
–
–
–
On September 2018, the Group signed a new $125m Reserve Based Lending Facility (‘RBL’) secured against the Group’s producing
assets in Vietnam. In addition to the committed $125m, a further $125m is available on an uncommitted accordion basis. The RBL has
a five year term and matures in September 2023. On 17 December 2018 $100m was drawn down against this facility and the proceeds
of which are recorded as cash and cash equivalents as at 31 December 2018 in readiness of funding the Merlon acquisition.
127
Financial Statements Notes to the Consolidated Financial Statements
continued
24 Long term provisions
Decommissioning
As at 1 January
New provisions and changes in estimates
Unwinding of discount (see Note 8)
2018
$ million
52.7
(2.4)
1.4
51.7
Group
2017
$ million
62.9
(11.8)
1.6
52.7
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 12-13 years) in the removal and decommissioning of the facilities
currently in place. The provision is calculated using an inflation rate of 2.0% (2017: 2.5%) and a discount rate of 3% (2017: 3%).
25 Share capital
Ordinary Shares of £0.05 each
Issued and fully paid
2018
Shares
2017
Shares
341,076,911
341,076,911
2018
$ million
27.6
2017
$ million
27.6
As at 31 December 2018 authorised share capital comprised 600 million (2017: 600 million) ordinary shares of £0.05 each with a total
nominal value of £30m (2017: £30m). The Company did not issue any new ordinary shares during 2018 (2017: nil).
26 Other reserves
As at 1 January 2017
Currency exchange translation differences
Share-based payments
Transfer relating to share-based payments
As at 1 January 2018
Currency exchange translation differences
Share-based payments
Transfer relating to share-based payments
As at 31 December 2018
As at 1 January 2017
Currency exchange translation differences
Share-based payments
Transfer relating to share-based payments
As at 1 January 2018
Currency exchange translation differences
Share-based payments
Transfer relating to share-based payments
As at 31 December 2018
Capital
redemption
reserve
$ million
Merger reserve
$ million
Own shares
$ million
Share based
payments
$ million
100.3
188.7
(47.9)
–
–
–
–
–
–
100.3
188.7
–
–
–
–
–
–
–
–
0.8
(47.1)
–
–
–
100.3
188.7
(47.1)
2.7
0.4
1.7
(0.8)
4.0
(1.4)
3.0
(0.9)
4.7
Capital
redemption
reserve
$ million
Merger reserve
$ million
Own shares
$ million
Share based
payments
$ million
100.3
131.8
(40.3)
–
–
–
–
–
–
–
–
–
100.3
131.8
(40.3)
–
–
–
–
–
–
–
–
–
100.3
131.8
(40.3)
2.7
0.4
1.7
(0.8)
4.0
(1.4)
3.0
(0.7)
4.9
Group
Total
$ million
243.8
0.4
1.7
–
245.9
(1.4)
3.0
(0.9)
246.6
Company
Total
$ million
194.5
0.4
1.7
(0.8)
195.8
(1.4)
3.0
(0.7)
196.7
The Group’s other reserves comprise reserves arising in respect of merger relief, upon the purchase of the Company’s own Shares
held in treasury and held by the Trust.
The number of treasury Shares held by the Group and the number of Shares held by the Trust at 31 December 2018 was 9,122,268 (2017:
9,122,268) and 2,897,094 (2017: 2,114,596), respectively. The market price of the Shares at 31 December 2018 was £0.6890 (2017: £1.1150).
128
SOCO International plc Annual Report and Accounts 2018 The Trust, a discretionary trust, holds Shares for the purpose of satisfying employee share schemes, details of which are set out in
Note 29 and in the Directors’ Remuneration Report on pages 82 to 96. During the year, the Trust bought 1,139,861 shares and 357,363
were exercised.
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.
27 Distribution to shareholders
In June 2018, the Company paid dividends to shareholders of $23.3m (2017: $21.0m) or 5.25 pence per Ordinary Share (2017: 5 pence
per Ordinary Share).
The SOCO EBT, which is consolidated within the Group, waived its rights to receive a dividend in 2018 and 2017.
The Board is recommending a final dividend of 5.5 pence per Ordinary Share, which amounts to approximately $28.9m, assuming that
the SOCO EBT waives its entitlement to dividends in respect of its holding of Ordinary Shares. The proposed final dividend is subject
to approval by shareholders at the Annual General Meeting and has not been included as a liability in these Financial Statements.
The proposed dividend, if approved by shareholders, will be paid on 31 May 2019 to shareholders on the register of members at the
close of business on 10 May 2019 (the “Dividend Record Date”. If the acquisition of Merlon El Fayum Petroleum Company (the “MPEFC
Acquisition”) has completed by the Dividend Record Date, the proposed dividend will be paid on the 65,561,041 consideration shares
in the normal manner. If the MPEFC Acquisition has not completed by the Dividend Record Date, the payment of the proposed
dividend will be treated as an adjustment event under the sale and purchase agreement relating to the MPEFC Acquisition, resulting in
an increase in the cash consideration payable by the Company by such amount as is required to put the seller in the same economic
position as it would have been had the dividend not been paid.
28 Retained earnings
As at 1 January 2017
Loss for the year
Unrealised currency translation differences
Distributions
As at 1 January 2018
Profit for the year
Unrealised currency translation differences
Transfer relating to share based payments
Distributions (see Note 27)
As at 31 December 2018
As at 1 January 2017
Loss for the year
Unrealised currency translation differences
Distributions
As at 1 January 2018
Profit for the year
Unrealised currency translation differences
Share-based payments
Distributions (see Note 27)
As at 31 December 2018
Unrealised
currency
translation
differences
$ million
Retained profit
$ million
394.5
(157.3)
–
(21.0)
216.2
27.7
–
0.9
(23.3)
221.5
Retained profit
$ million
553.7
(176.6)
–
(21.0)
356.1
159.9
–
0.8
(23.3)
493.5
5.3
–
(0.4)
–
4.9
–
0.2
–
–
5.1
Unrealised
currency
translation
differences
$ million
(249.8)
–
51.0
–
(198.8)
–
(24.8)
–
–
(223.6)
Group
Total
$ million
399.8
(157.3)
(0.4)
(21.0)
221.1
27.7
0.2
0.9
(23.3)
226.6
Company
Total
$ million
303.9
(176.6)
51.0
(21.0)
157.3
159.9
(24.8)
0.8
(23.3)
269.9
129
Financial Statements Notes to the Consolidated Financial Statements
continued
29 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 82 to 96. The Group recognised total expenses of $2.0m (2017: $2.5m) 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
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 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 part cash and part equity-settled through a transfer at nil consideration of the Company’s ordinary shares
(Shares). No awards were exercised during 2018. Awards exercised during 2017 of 329,394 Shares were part-equity settled by
transferring at nil consideration 185,171 ordinary shares (Shares) held by the Trust. The remaining 144,223 awards exercised in 2017,
being the number of Shares that might otherwise be sold in the market, were satisfied by cash settlement of the participants’ tax
liabilities of $0.2m. The Board decided in that instance it was in the best interest of the Company to agree this settlement method
with the participants. The Company has no legal or constructive obligation to repurchase or settle awards in cash. Details of awards
outstanding during the year are as follows:
As at 1 January
Adjustments1
Granted
Exercised
Forfeited during the year
As at 31 December
Exercisable as at 31 December
2018
No. of share
awards
8,742,295
553,501
4,983,108
–
(1,551,230)
12,727,674
2017
No. of share
awards
4,121,158
321,933
5,008,500
(329,394)
(379,902)
8,742,295
–
–
1 In accordance with Share Scheme rules, adjustments were made for the payment of dividends in 2018 and 2017.
Awards outstanding at the end of the year have a weighted average remaining contractual life of 1.4 (2017: 1.5) years. The weighted
average market price and estimated fair value of the 2018 grants (at grant date) were £0.96 and £0.53, respectively.
The fair value of the LTIPs granted during 2018 has been provided by FIT Remuneration Consultants, which represents the Company’s
performance against the targets using a Monte Carlo Model. The future vesting proportion in 2018 was 55%.
Previously, the fair value of awards at date of grant had been estimated using a binomial option pricing model, based on the market
price at date of grant and a nil exercise price. The future vesting proportion for 2017 of 40% 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.
Other Share Schemes
The Company operates a discretionary share option scheme for employees of the Group. Awards vest over a three year period, and
are normally forfeited if the employee leaves the Group before the option vests. Vested options are exercisable at a price equal to the
average quoted market price of the Company’s Shares on the date of grant and are expected to be equity-settled. The Company has
no legal or constructive obligation to repurchase or settle options in cash. Unexercised options expire at the end of a 10 year period.
Other than to Directors, the Company can also grant options with a zero exercise price or with an exercise price which is set below
the market price of the Company’s shares on the date of grant. Such options, which are included in the table below, are granted
by reference to the rules of the discretionary share option scheme and are expected to be equity-settled.
The Company can additionally grant awards under the Deferred Share Bonus Plan with a zero exercise price or with an exercise price
which is set below the market price of the Company’s shares on the date of grant. Awards vest over a two year period, and are
normally forfeited if the employee leaves the Group before the option vests. Such awards, which are also included in the table below,
are expected to be cash-settled.
130
SOCO International plc Annual Report and Accounts 2018 29 Incentive plans continued
As at 1 January
Adjustments1
Granted
Forfeited during the year
Expired
Exercised
As at 31 December
Exercisable as at 31 December
2018
Weighted
average
exercise price
£
2017
Weighted
average
exercise price
£
No. of share
awards
0.46
3,140,390
–
–
1.05
–
–
0.54
1.29
77,370
100,000
(174,893)
–
(306,817)
2,836,050
866,241
0.59
–
–
3.07
–
–
0.46
1.30
No. of share
awards
2,836,050
37,484
791,432
(7,914)
–
(1,249,177)
2,407,875
867,836
1 In accordance with Share Scheme rules, adjustments were made for the payment of dividends in 2018 and 2017.
The weighted average market price at the date of exercise during 2018 was £0.96 (2017: £1.40). Awards outstanding at the end of the year
have a weighted average remaining contractual life of 6.3 (2017: 6.4) years. The weighted average market price and estimated fair value
of the discretionary share option scheme 2018 grants (at grant date) were £0.995 and £0.30, respectively. The weighted average market
price and estimated fair value of the deferred share bonus scheme 2018 grants (at grant date) was £0.995 (2017: £1.53).
The fair value of awards granted during 2018 has been provided by FIT Remuneration Consultants, which represents the Company’s
performance against the targets using a Monte Carlo Model. Previously, the fair value of discretionary share option scheme awards
at date of grant has been estimated using a binomial option pricing model, based on the market price at date of grant and the fair value
of deferred share bonus scheme awards at date of grant was estimated based on the market price at date of grant.
30 Reconciliation of operating profit to operating cash flows
Operating profit/(loss)
Share-based payments
Depletion and depreciation
Reversal of impairment charge
Operating cash flows before movements in working capital
Decrease in inventories
Decrease (increase) in receivables
Increase in payables
Cash generated by (used in) operations
Interest received
Interest paid
Income taxes paid
Net cash from (used in) continuing operating activities
Net cash used in discontinued operating activities
Net cash from (used in) operating activities
2018
$ million
Group
2017
$ million
79.9
2.5
52.1
(37.8)
96.7
0.1
1.2
3.4
101.4
2.6
(0.1)
(48.0)
55.9
(1.7)
54.2
22.9
2.0
56.8
–
81.7
1.5
4.4
0.2
87.8
1.4
–
(44.2)
45.0
–
45.0
2018
$ million
(26.7)
Company
2017
$ million
(18.0)
2.5
0.3
–
(23.9)
–
(0.7)
1.4
(23.2)
–
–
–
(23.2)
–
(23.2)
2.0
0.3
–
(15.7)
–
0.4
2.4
(12.9)
–
–
–
(12.9)
–
(12.9)
131
Financial Statements Notes to the Consolidated Financial Statements
continued
31 Operating lease arrangements
Minimum lease payments under operating leases recognised in income for the year
2018
$ million
23.1
2017
$ million
29.2
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
2018
$ million
2017
$ million
9.9
39.0
7.0
55.9
19.0
2.2
–
21.2
Operating lease payments represent rentals payable by the Group for chartering an FPSO and for office properties. The previous
FPSO lease expired in 2018 but new terms have been agreed from August 2018 and will continue until November 2024.
32 Capital commitments
At 31 December 2018 the Group had exploration licence commitments not accrued of approximately $25.8m (2017: $26.3m).
33 Related party transactions
During the year, the Company recorded a net cost of $0.6m (2017: net cost of $1.0m) in respect of services rendered between
Group companies.
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 82 to 96.
Short term employee benefits
Post-employment benefits
Share-based payments
2018
$ million
2017
$ million
5.9
0.3
1.5
7.7
6.1
0.3
1.7
8.1
Directors’ transactions
Pursuant to a lease dated 20 April 1997, Comfort Storyville (a company wholly owned by Mr Ed Story) has leased to the Group,
office and storage space in Comfort, Texas, USA. The lease, which was negotiated on an arm’s length basis, has a fixed monthly
rent of $1,000.
Under the terms of an acquisition approved by shareholders in 1999, the Company and its Investor Group, including Quantic group
of companies, of which Mr Rui de Sousa is a 50% beneficial interest holder, jointly participated in certain regions in which the Investor
Group utilised 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 non-controlling interest in special purpose entities created to hold such projects.
The shareholding terms were modelled after the SOCO Vietnam arrangement which was negotiated with third parties. The
non-controlling holdings by Quantic group of companies in the subsidiary undertakings, which principally affected the profits or net
assets of the Group, are shown in Note 16. The Group has entered into a consulting agreement, which is terminable by either party
on 30 days’ written notice, wherein Quantic Limited, which is part of the Quantic group companies, 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. As of February 2019, the consulting agreement with SOCO and Quantic
has been terminated and no further consulting fees will be paid.
132
SOCO International plc Annual Report and Accounts 2018 34 Disposal of Africa interest
Disposal of Congo interest
On 24th June 2018, SOCO signed and completed a Sale and Purchase Agreement (“the SPA”) with Coastal Energy Congo Limited
(“Coastal Energy”), to sell its entire shareholding in SOCO Congo Limited (“SOCO Congo”), which holds the Group’s appraisal interests
in Congo (Brazzaville). Under the terms of the Agreement the Group is entitled to receive a cash consideration of up to $10m plus
subsequent payments based on future oil and condensate production sold from those interests in Congo (royalty). The cash
consideration of up to $10m payable under the SPA is structured as follows:
+ Tranche 1: $1m within 10 business days on the later to occur of: i. agreement or expert determination of a statement of net assets
or liabilities of SOCO Congo and its subsidiary as at 30 June 2018 (the 30 June Statement); and ii. execution of the first agreement
relating to the bonus payable in respect of any of the four exploitation permits (the “PEX bonus agreement”);
+ Tranche 2: $5m within 10 business days of formal approval of the first development plan on any of the exploitation permits; and
+ Tranche 3: $4m within 20 business days on the earlier to occur of: i. first commercial production of oil or condensate from any
of the exploitation permits; and ii. 31 December 2019.
Each element of the cash consideration is subject to potential adjustment by reference to the 30 June 2018 Statement.
In addition, SOCO will retain the right to an overriding royalty interest on all barrels of oil or condensate produced and sold from
any of the four exploitation permits. The royalty payable on each barrel of oil or condensate produced and sold will be determined
by reference to the prevailing price of North Sea Dated Brent (“the Benchmark Price”), as summarised below:
+ $0.50 on each barrel where the Benchmark Price is at or under $52.25 per barrel; or
+ $1.00 on each barrel where the Benchmark Price is over $52.25 per barrel.
The fair value of the above consideration (including the overriding royalty) at 31 December 2018 was estimated at $0.49m. The fair
value of the consideration will be reassessed at each balance sheet date, with movements recorded in the income statement. The fair
value of this financial asset is included in current and non-current assets at $0.18m and $0.31m respectively. It 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 13 ‘Fair
Value Measurement’). To arrive at the estimated fair value, we have applied a discount rate and a probability of success for each of the
four elements set out above. The discount rate is 12% and represents a rate which reflects the time value of money, country risk and
the credit risk of Coastal Energy group. The probability of success, being the probability that the conditions relating to each element of
consideration are both met and enforceable, ranges from 20% for Tranche 1 to 2% for Tranches 2 and 3, with the figures reflecting the
high estimation uncertainty due to the short time which has elapsed since completion, as well as the requirement for the PEX bonus
criteria to be met (Tranche 1) before it is possible to comply with the criteria in respect of the remaining elements of the consideration.
In determining the fair value of the royalty, the key inputs include the probability of future oil prices being above $52.25 per barrel as
well as estimated future production, as well as a 2% probability of commercial production being achieved. A summary of the fair values
attributed to each element of the consideration at 31 December 2018 is outlined below.
List of four elements of consideration
Tranche 1 – PEX bonus agreement signed
Tranche 2 – first development plan approval
Tranche 3 – first commercial production
Overriding royalty interest
Total
undiscounted/
unrisked value
discounted
risked value
$1m
$5m
$4m
$0.18m
$0.08m
$0.06m
$0.17m
$0.49m
133
Financial Statements Notes to the Consolidated Financial Statements
continued
The fair value of the consideration is most sensitive to changes in the probability of success applied to each element, with the key
triggering events considered to represent the PEX bonus signature and, following on from this, the approval of the first development
plan. A change in the discount rate by 1% would increase/decrease the fair value by $0.01 million. The fair value will be retested
at each reporting date.
As the Group’s Congo asset is now classified as part of the Group’s discontinued Africa operations, the profit and loss attributable
to the Congo interest up to the date of completion have been removed from continuing operations.
In 2018, the Congo Brazzaville interest, generated an operating and post-tax loss of $1.5m (2017: $104m). No revenue arose for any
of the years. Immediately prior to the sale the Group’s share of net assets held by the Congo interest was $0.34m comprising current
assets of $0.69m, cash of $4.5m and current liabilities of $4.85m. Immediately after completion of the sale the Group recognised
a gain on disposal of $0.15m based on the fair value of the financial asset of $0.49m.
Disposal of Angola interest
On 29th June 2018, SOCO Exploration Limited entered into a Sale and Purchase Agreement (“the SPA”) with Quill Trading Corporation
and WMLC Resources Limited to sell its entire shareholding in SOCO Cabinda Limited (“SOCO Cabinda”), for a total cash
consideration of up to $5m. SOCO Cabinda holds the Group’s exploration interest in Angola.
The completion of the SPA was conditional, inter alia, upon receipt of customary approvals which were obtained on the second half
of 2018. As 30 June 2018, SOCO Cabinda was recognised as disposal assets classified as held for sale and part of the Group’s
discontinued Africa operations.
For the first half of 2018, SOCO Cabinda generated an operating and post-tax loss of $0.7m (full year 2017: $48.3m,). No revenue arose
for any of the years.
In October 2018 the sale was completed as SOCO has received the total cash consideration of $5m together with a minor further
payment to cover funding requirements after 30 June 2018.
Immediately prior to the sale the Group’s share of net liabilities held by the Angola interest was liabilities associated with assets
classified as held for sale of $1.6m with intangible assets fully impaired as of 31 December 2017. Immediately after completion of the
sale the Group recognised a gain on disposal of $5.7m.
35 Acquisition of Merlon
As announced on 20 September 2018, the Company signed a sale and purchase agreement (the “Merlon SPA”) with Merlon
International LLC for the proposed acquisition of Merlon Petroleum El Fayum Company in consideration for the payment of
approximately $136m in cash and the issue of 65,561,041 new ordinary shares in the Company. On 21 December 2018 the Company’s
shareholders approved the acquisition in general meeting, satisfying one of the conditions precedent to the acquisition. Since the
balance sheet date, the Company has continued to work towards satisfaction of the remaining conditions precedent under the
Merlon SPA, including liaison with the relevant regulatory and governmental authorities in Egypt and with the Financial Conduct
Authority and the London Stock Exchange on the admission to listing and trading of the consideration shares. Completion of the
acquisition is expected to occur in 1H 2019.
134
SOCO International plc Annual Report and Accounts 2018 Additional Information
Non- IFRS measures
Five Year Summary
Reserves Statistics
Report on Payments to Governments
Glossary of Terms
Company Information
136
137
137
138
140
IBC
135 Additional
Information
135
Additional Information Non-IFRS measures
Non-IFRS measures
The Group uses certain measures of performance that are not specifically defined under IFRS or other generally accepted accounting
principles. These non-IFRS measures include cash operating costs per barrel and DD&A per barrel.
Cash operating costs per barrel
Cash operating costs for the period calculated over barrels of oil equivalent produced. This is a useful indicator of cash operating
costs incurred to produce oil and gas from the Group’s producing assets.
Cost of sales
Less:
Depreciation, depletion and amortisation
Production based taxes
Inventories
Other cost of sales
Cash operating costs
Production (BOEPD)
Cash operating cost per BOE ($)
2018
$ million
104.6
2017
$ million
115.0
(51.8)
(15.1)
(0.1)
(1.4)
36.2
7,274
13.63
(56.5)
(13.6)
(1.5)
(1.9)
41.5
8,276
13.73
DD&A per barrel
DD&A per barrel is calculated as net book value of oil and gas assets in production, together with estimated future development
costs over the remaining 2P reserves. This is a useful indicator of ongoing rates of depreciation and amortisation of the Group’s
producing assets.
Depreciation, depletion and amortisation
Production (BOEPD)
DD&A per BOE ($)
2018
$ million
51.8
7,274
19.51
2017
$ million
56.5
8,276
18.72
136
SOCO International plc Annual Report and Accounts 2018 Five Year Summary (unaudited)
Consolidated income statement
Oil and gas revenues
Gross profit
Operating profit
Profit (loss) for the year
Consolidated balance sheet
Non-current assets
Net current assets
Non-current liabilities
Net assets
Share capital
Other reserves
Retained earnings
Total equity
Year to
31 Dec 2018
$ million
Year to
31 Dec 2017
$ million
(Restated)*
Year to
31 Dec 2016
$ million
(Not Restated)
Year to
31 Dec 2015
$ million
(Not Restated)
Year to
31 Dec 2014
$ million
175.1
70.5
79.9
27.7
156.2
41.2
22.9
(157.3)
154.6
34.7
23.4
(4.2)
214.8
48.4
2.0
(33.8)
448.2
304.4
152.6
14.0
2018
$ million
2017
$ million
(Restated)
2016
$ million
(Not Restated)
2015
$ million
(Not Restated)
2014
$ million
553.6
236.3
(289.1)
500.8
27.6
246.6
226.6
500.8
546.6
133.3
(185.3)
494.6
27.6
245.9
221.1
494.6
738.6
142.5
(209.9)
671.2
27.6
243.8
399.8
671.2
1,001.5
134.6
(243.6)
892.5
27.6
242.3
622.6
892.5
1,068.7
157.7
(251.3)
975.1
27.6
239.5
708.0
975.1
Year to
31 Dec 2018
$ million
Year to
31 Dec 2017
$ million
(Restated)
Year to
31 Dec 2016
$ million
(Not Restated)
Year to
31 Dec 2015
$ million
(Not Restated)
Year to
31 Dec 2014
$ million
Consolidated cash flow statement
Net cash from operating activities
Capital expenditure
Distributions
* Restated in 2017 when adopted the successful efforts method
54.2
22.4
23.3
Reserves Statistics (unaudited)
Net working interest, MMBOE
Oil and Gas 2P Commercial Reserves1,2
As at 1 January 2018
Production
Revision
2P Commercial Reserves as at 31 December 2018
Oil and Gas 2C Contingent Resources1,2
As at 1 January 2018
Revision4
2C Contingent Resources as at 31 December 2018
Total of 2P Reserves and 2C Contingent Resources as at 31 December 2018
45.0
26.2
21.0
TGT
23.1
(2.1)
(4.8)
16.2
14.9
(2.7)
12.2
28.4
46.0
35.8
17.5
80.3
87.5
51.1
251.2
162.5
119.2
CNV
Vietnam3
Group
5.0
(0.6)
2.4
6.8
5.9
(1.7)
4.2
11.0
28.1
(2.7)
(2.4)
23.0
20.8
(4.4)
16.4
39.4
1 Reserves and Contingent Resources are categorised in line with 2018 SPE/WPC/AAPG/SPEE /SWLA Petroleum Resource Management System.
2 Assumes oil equivalent conversion factor of 6,000 scf/boe.
3 Reserves and Contingent Resources have been independently audited by Risc Advisory Pty Ltd
4 Revisions to the Vietnam assets come from the approach taken by the reserves auditor.
Risks associated with reserves evaluation and estimation uncertainty are discussed in Note 4(b) to the Financial Statements.
28.1
(2.7)
(2.4)
23.0
20.8
(4.4)
16.4
39.4
137
Additional Information Report on Payments to Governments (unaudited)
Bonuses
This represents any bonus paid to
governments during the year on
achievement of commercial milestones
such as signing of a petroleum agreement
or contract, achieving commercial
discovery, or after first production.
Licence Fees
This represents licence fees, rental fees,
entry fees and other consideration for
licences and/or concessions paid for access
to an area during the year (with the exception
of signature bonuses which are captured
within bonus payments).
Infrastructure improvement payments
This represents payments made in respect
of infrastructure improvements for projects
that are not directly related to oil and
gas activities during the year. This can
be a contractually obligated payment
in a Production Sharing Contract or
a discretionary payment for building/
improving local infrastructure such as roads,
bridges, ports, schools and hospitals.
Payroll Taxes
This represents payroll and employer
taxes including PAYE and national
insurance paid by SOCO as a direct
employer.
Export Duty
This represents payments made to
governments during the year in relation
to the exportation of petroleum products.
Witholding Tax
This represents the amount of tax
deducted at source from third party
service providers during the year and
paid to respective governments.
Other Taxes
This represents business rates paid during
the year on non-domestic properties.
Payment
The information is reported under the
following payment types:
Production entitlements in barrels
These are the host government’s total
share of production in the reporting period
derived from projects operated by SOCO.
This includes the government’s non-cash
royalties as a sovereign entity or through
its participation as an equity or interest
holder in projects within its home country.
In Vietnam where SOCO participates in
two Joint Operating Companies (“JOCs”),
production entitlements through the
government’s interest in the respective
JOC. The figures produced are on a paid
lifting basis valued at realised sale prices.
Income Taxes
This represents cash tax calculated on the
basis of profits including income or capital
gains. Income taxes are usually reflected
in corporate income tax returns. The cash
payment of income taxes occurs in the
year in which the tax has arisen or up to
one year later. Income taxes also include
any cash tax rebates received from the
government or revenue authority during
the year. Income taxes do not include
fines and penalties. Consumption taxes
including value adding taxes, personal
income taxes, sales taxes and property
taxes are excluded.
Royalties
These represent royalties during the year
to governments for the right to extract oil
or gas. The terms of these royalties are set
within the individual Production Sharing
Contracts & Agreements and can vary
from project to project within a country.
The cash payment of royalties occurs in
the year in which the tax has arisen.
Dividends
These are dividend payments, other than
dividends paid to a government as an
ordinary shareholder of an entity, in lieu
of production entitlements or royalties.
For the year ending 31 December 2018,
there were no reportable dividend
payments to governments.
Disclosure
In accordance with the Financial Conduct
Authority’s Disclosure and Transparency
Rule 4.3A in respect of payments made
by the Company to governments for the
year ended 31 December 2018 and in
compliance with The Reports on
Payments to Governments Regulations
2014 (SI 2014/3209), SOCO presents
its disclosure for the year ending
31 December 2018.
Basis for preparation
Legislation
This report is prepared in accordance with
the Reports on Payments to Governments
Regulations 2014 as enacted in the UK
in December 2014 and as amended
in December 2015.
The Reports on Payments to Government
Regulations (UK Regulations) were
enacted on 1 December 2014 and require
UK companies in extractive industries
to publicly disclose payments they have
made to Governments where they
undertake extractive operations. The
aim of the regulations is to enhance the
transparency of the payments made
by companies in the extractive sector
to host governments in the form of taxes,
bonuses, royalties, fees and support for
infrastructure improvements. The UK
Regulations came into effect on
1 January 2015.
The payments disclosed for 2018 are in line
with the EU Directive and UK Regulations
and we have provided additional voluntary
disclosures on payroll taxes, export duty,
withholding tax and other taxes.
In line with the UK Regulations, a payment
of a series of related payments which do
not exceed $109,091 (£86,000) have not
been disclosed. Where the aggregate
payments made in the period for a project
or country are less than $109,091,
payments are not disclosed for the
project or country.
All of the payments disclosed in accordance
with the EU Directive have been made
to National Governments, either directly
or through a Ministry or Department,
or to a national oil company, who have
a working interest in a particular licence.
138
SOCO International plc Annual Report and Accounts 2018 Transparency disclosure 2018 (unaudited)
Production
entitlements
Production
entitlements
Income
Taxes Royalties Dividends
Bonus
Payments
Licence
fees
Infrastructure
improvement
payments
Total EU
Transparency
Directive
Payroll
Taxes
UK Regulations
Voluntary Disclosure
With-
holding
Tax
Export
Duty
Other
Taxes
Total
Licence/
Corporate/
Area
Vietnam*
Block 16–1
Block 9.2
Total
Vietnam
Republic of
Congo
(ROC)**
Marine XI &
Lidongo PEX
Total ROC
United
Kingdom (UK)
Corporate
Total UK
United States
of America
(US)
Corporate
Total US
SOCO Total
bbls (000)
$ 000’s
$ 000’s
$ 000’s
$ 000’s
$ 000’s $ 000’s
$ 000’s
$ 000’s $ 000’s $ 000’s $ 000’s $ 000’s
$ 000’s
1,471
104,210
42,067
11,908
558
2,029
28,846
5,994
133,056 48,061
1,635
13,543
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,029
–
–
–
–
133,056 48,061
–
–
13,543
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
78
75
153
–
–
–
–
–
–
153
–
–
–
–
–
–
–
–
–
–
158,263
36,550
194,813
–
–
–
–
–
–
–
–
–
3,861
3,861
1,729
–
1,729
–
–
–
–
–
–
194,813
1,541
1,541
5,402
–
–
1,729
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,729
–
1,729
–
–
432
432
4,293
4,293
–
–
432
1,541
1,541
7,563
Transparency disclosure 2018 (unaudited)
UK Regulations
Production
entitlements
Production
entitlements
Income
Taxes Royalties Dividends
Bonus
Payments
Licence
fees
Infrastructure
improvement
payments
Payroll
Taxes
Total
Voluntary Disclosure
With-
holding
Tax
Export
Duty
Other
Taxes
Total
bbls (000)
$ 000’s
$ 000’s
$ 000’s
$ 000’s
$ 000’s $ 000’s
$ 000’s
$ 000’s $ 000’s $ 000’s $ 000’s $ 000’s
$ 000’s
Country/
Government
Vietnam*
Ho Chi Minh City
Tax Dept
Customs Office
PetroVietnam
E&P Corp (PVEP)
Total Vietnam
Republic of
Congo (ROC)**
Ministry Of
Hydrocarbons
Tresor Public
Total ROC
United Kingdom
(UK)
Inland Revenue
City of
Westminster
Total UK
United States of
America (US)
Internal Revenue
Service
Total US
SOCO Total
–
–
48,061
13,543
–
2,029
–
133,056
–
–
–
–
2,029
133,056 48,061
13,543
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,029
–
–
133,056 48,061
–
13,543
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
153
153
–
–
–
–
–
–
–
–
–
–
61,604
–
133,209
– 194,813
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,861
–
3,861
1,541
–
1,729
–
1,729
–
–
–
–
–
–
–
–
153
–
–
– 194,813
1,541
5,402
–
1,729
* Joint Operating Company Project’s tax payments reported on SOCO Net Working Interest Basis.
** Projects Operated by SOCO 100% of tax payments reported.
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,729
–
1,729
–
–
–
–
432
3,861
432
432
4,293
–
1,541
–
432
1,541
7,563
139
Additional Information Glossary of Terms
Glossary of
Terms
A
AGM
Annual General Meeting
B
bbl
Barrel
blpd
Barrels of liquids per day
Bn
Billion
boe
Barrels of oil equivalent
BHCPP
Bach Ho Central Processing Platform
boepd
Barrels of oil equivalent per day
bopd
Barrels of oil per day
bwpd
Barrels of water per day
C
CASH or cash
Cash, cash equivalent and liquid
investments
CAPEX or capex
Capital expenditure
CEO
Chief Executive Officer
CFO
Chief Finance Officer
CNV
Ca Ngu Vang field located in Block 9-2
Congo (Brazzaville)
The Republic of the Congo
Contingent Resources
Those quantities of petroleum to be
potentially recoverable from known
accumulations by application of
development projects but which are
not currently considered to be
commercially recoverable due
to one or more contingencies
D
DD&A
Depreciation, depletion and
amortisation
E
E&P
Exploration & Production
EBITDAX
Earnings before Interest, Tax,
Depreciation, Amortization and
Exploration Expenses
140
EBT
Employee benefit trust
E&E
Exploration and Evaluation
EGP
Egyptian Pound
EGPC
Egyptian General Petroleum
Corporation
EU
European Union
F
FFDP
Full Field Development Plan
FPSO
Floating, Production, Storage
and Offloading Vessel
FY
Full year
G
G&A
General and administration
GHG
Green House Gas
H
HLHVJOC
Hoang Long and Hoan Vu Joint
Operating Companies
HLJOC
Hoang Long Joint Operating Company
HVJOC
Hoan Vu Joint Operating Company
I
IAS
International Accounting Standards
IFRS
International Financial Reporting
Standards
IMF
International Monetary Fund
IOGP
The International Association of
Oil & Gas Producers
IPIECA
The global oil and gas industry
association for environmental and
social issues
J
JOC
Joint Operating Company
JV
Joint venture
K
k
thousands
kbopd
Thousand barrels of oil per day
Km
Kilometre
km2
Square kilometre
L
LTI
Lost Time Injury
LTIF
Lost Time Injury Frequency
LTIP
Long Term Incentive Plan
M
m
million
M&A
Mergers and Acquisitions
RBL
Reserve Based Lending Facility
RISC
RISC Advisory Pty Ltd
S
Shares
Ordinary Shares
SOCO Cabinda
SOCO Cabinda Limited
SOCO Congo
SOCO Congo Limited
SOCO EPC
SOCO Exploration & Production
Congo SA
SOCO Vietnam
SOCO Vietnam Ltd
STOIIP
Stock Tank Oil Initially In Place
T
TGT
Te Giac Trang field located in Block 16-1
MENA
Middle East and North Africa region
TSR
Total shareholder return
Merlon
Merlon El Fayum Company
mmbbl
Million barrels
mmboe
Million barrels of oil equivalent
O
OOIP
Original Oil in Place
OPECO Vietnam
OPECO Vietnam Limited
Opex
Operational expenditure
P
Petrosilah
An Egyptian joint stock company to be
held 50/50 between the SOCO Group
and the Egyptian General Petroleum
Corporation
PSC
Production sharing contract or
production sharing agreement
Petrovietnam
Vietnam Oil and Gas Group
PTTEP
PTT Exploration and Production Public
Company Limited
R
Reserves
Reserves are those quantities of
petroleum anticipated to be
commercially recoverable by
application of development projects to
known accumulations from a given
date forward under defined conditions.
Reserves must further satisfy four
criteria: they must be discovered,
recoverable, commercial and
remaining based on the development
projects applied
TIA
Tie-in Agreement
U
UK
United Kingdom
US
United States of America
W
WHP
Wellhead Platform
Y
YTD
Year-to-Date
$
United States Dollar
£
UK Pound Sterling
1C
Low estimate scenario of Contingent
Resources
1H
First half
1P
Equivalent to Prove Reserves; denotes
low estimate scenario of Reserves
2C
Best estimate scenario of Contingent
Resources
2C Contingent Resources
Best estimate scenario of Contingent
Resources
2P Reserves
Equivalent to the sum of Proved plus
Probable Reserves; denotes best
estimate scenario of Reserves. Also
referred to as 2P Commercial Reserves
SOCO International plc Annual Report and Accounts 2018
Registered office:
SOCO International plc
48 Dover Street
London, W1S 4FF
United Kingdom
Registered in England
T +44 (0)20 7747 2000
F +44 (0)20 7747 2001
Company No. 3300821
socointernational.com
Company Secretary
Tony Hunter
Financial Calendar
Group results for the year to
31 December are announced
in March. The Annual General
Meeting is held during the
second quarter. Interim Results
to 30 June are announced
in September.
Advisors:
Auditor
Deloitte LLP
London, United Kingdom
Bankers
J.P. Morgan
125 London Wall
London, EC2Y 5AY
United Kingdom
HSBC UK Bank plc
60 Queen Victoria Street
London
EC4N 4TR
United Kingdom
BNP Paribas – Singapore Branch
10 Collyer Quay
#33-01 Ocean Financial Center
049315
Singapore
Financial Advisor
and Corporate Broker
Jefferies Hoare Govett
Vintners Place
68 Upper Thames Street
London, EC4V 3BJ
United Kingdom
J.P. Morgan Cazenove
25 Bank Street
London, E14 5JP
United Kingdom
Financial Advisor
Evercore
15 Stanhope Gate
London, W1K 1LN
United Kingdom
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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
48 Dover Street
London, W1S 4FF
United Kingdom
Registered in England
T +44 (0)20 7747 2000
F +44 (0)20 7747 2001
Company No. 3300821
socointernational.com