Serica Energy PLC
Annual Report 2013

Plain-text annual report

Serica2013 SERICA ENERGY PLC ANNUAL REPORT AND ACCOUNTS 2013 Serica Energy plc is an oil and gas exploration and development company with activities based in the UK, Ireland, Namibia and Morocco, and an economic interest in an oilfield offshore Norway. The Company’s shares are listed on AIM in London and on the Canadian TSX Exchange under the symbol SQZ. 02 Highlights 03 Summary 04 Licence interests 05 Chairman’s statement 07 Strategic report 07 Chief Operating Officer’s review 09 Review of licence holdings 12 Finance Director’s review 17 Consolidated financial statements 20 Corporate governance statement 23 Directors’ biographies 24 Directors’ responsibilities statement 25 Auditor’s report 27 Financial statements 63 Group proved plus probable reserves 64 Glossary 65 Corporate information SERICA ENERGY PLC ANNUAL REPORT AND ACCOUNTS 2013 HIGHLIGHTS Operations Highlights • Progress continues on all four of Serica’s UK gas-centric projects – Centrica to carry Serica for 20% on Doyle well in Block 113/27c - Serica also received award of adjacent block 113/22a into which prospect likely extends – ENI joins as operator in block 22/19c where large HPHT prospects evident - Serica (15%) carried by JX Nippon through first well – 3D Seismic acquired and processed in Greater York area - interpretation underway – Serica 37.5% interest – Export route for Columbus field under negotiation - commercial discussions continue with BG and others - infrastructure support from Wood Report and DECC • Atlantic Margin and Africa exploration moving forward on programme – Namibia - partnering process underway - huge benefit from BP’s involvement in Luderitz Basin – c. US$50 million of high quality data at nil cost to Serica – Morocco - first Foum Draa well drilled, results non-commercial – first well in Sidi Moussa spuds early 2H2014 – Serica largely carried on both wells – Ireland - Ministry awards full Frontier Licence in Rockall Basin and extends Serica’s existing licence – partnering process underway in Slyne Basin blocks • Competent Person’s Report flags major potential in all of Serica’s licences – highlights in Operations Review • Operator of Bream has indicated end year development decision - would provide a large uplift in value to Serica Financial Highlights • Funded to meet planned expenditure through end 2015 • End year cash balance of US$26.1 million, nil debt • Successful fundraise of US$19.5 million - well supported by new and existing shareholders • Reduced loss for the year from continuing operations of US$5.1 million (2012: US$16.4 million) • Efficiencies improved - costs strictly controlled - all major commitments farmed-out 2 Serica Energy plc Annual Report and Accounts 2013 SUMMARY FOR 2013 Company net oil and gas reserves (working interest basis) At 31 December Gas – million cubic feet Condensate and LPG – barrels Total – barrels of oil equivalent Financial position Market capitalisation – US$ Net current assets – US$ Cash – US$ Number of shares in issue Number of shares fully diluted Proven and probable 2013 21,900 1,500,000 5,200,000 55 million 26 million 26 million 250,179,040 261,187,500 Proven and probable 2012 23,400 1,600,000 5,500,000 74 million 19 million 22 million 182,770,311 193,728,771 Serica Energy plc Annual Report and Accounts 2013 3 LICENCE INTERESTS The following table summarises the Company’s licences as at 31 December 2013. Block(s) Description Role Non-operator Non-operator Non-operator Exploration Exploration Exploration Columbus Field – Development planned Operator Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Non-operator Non-operator Non-operator Non-operator Operator Operator (1) Operator (1) Operator (1) UK 15/21g 15/21a (part) 22/19c 23/16f 47/2b (split) 47/3g (split) 47/7 (split) 47/8d (part) 110/8b 113/26b 113/27c 113/22a Ireland 27/4 27/5 (part) 27/9 5/17 5/18 5/22 5/23 5/27 5/28 11/10 11/15 12/1 (part) 12/6 12/11 (part) Namibia 2512A 2513A 2513B 2612A (part) Morocco Foum Draa Sidi Moussa Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration % at 31/12/13 21% 21% 15% 50% 37.5% 37.5% 37.5% 37.5% 100% 65% (1) 65% (1) 35% (1) 50% 50% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 85% 85% 85% 85% Location Central North Sea Central North Sea Central North Sea Central North Sea Southern North Sea Southern North Sea Southern North Sea Southern North Sea East Irish Sea East Irish Sea East Irish Sea East Irish Sea Slyne Basin Slyne Basin Slyne Basin Rockall Basin Rockall Basin Rockall Basin Rockall Basin Rockall Basin Rockall Basin Rockall Basin Rockall Basin Rockall Basin Rockall Basin Rockall Basin Luderitz Basin Luderitz Basin Luderitz Basin Luderitz Basin Operator Operator Operator Operator Operator Operator Operator Operator Operator Operator Operator Operator Operator Operator Operator Operator Operator Operator Non-operator Non-operator 8.3333% 5% Tarfaya-Ifni Basin Tarfaya-Ifni Basin Indonesia Glagah Kambuna TAC Kambuna Field Production Non-operator 25% (2) Offshore North Sumatra Notes: (1) Interest subject to a farm-out agreement. Post completion, Serica’s interest will be 20% and Hydrocarbon Resources Limited (a wholly owned subsidiary of Centrica) will be appointed operator. (2) Glagah Kambuna TAC terminated on 31 December 2013. 4 Serica Energy plc Annual Report and Accounts 2013 CHAIRMAN’S STATEMENT Dear Shareholder I am pleased to report that the Company made good progress during 2013 to advance its exploration programme, both in the UK and overseas. We now have an enviable portfolio of rapidly maturing and ready to drill prospects, some of which are already farmed-out, providing shareholders with exposure to material upside, both near and longer term, at very little cost. An independent report undertaken by Netherland Sewell and Associates has confirmed the range and potential of the Company’s prospect inventory and more details are provided in the Chief Operating Officer’s Review. The report also includes the year-end audit of reserves and confirms the Columbus reserves at 15.5 mmboe, 5.2 mmboe net to Serica’s interest. Work has continued in our efforts to find alternative arrangements for Columbus production. Towards the year end, we were able to complete a capital financing in difficult market conditions to place us in a healthy financial position to take us forward. I am pleased with the result and am delighted with the support that we received from shareholders to make this financing so successful. The Company’s main challenge going forward is to secure an export route for Columbus and no effort is being spared by the Board to this end. We have striven hard to achieve this objective and have been in continual discussions with the Lomond field operator throughout the past few months but we have yet to reach a satisfactory conclusion. As I have said previously there are no technical impediments to connecting Columbus to the adjacent Lomond platform. We have, nevertheless, extended discussions to other operators who can also take the gas and liquids. I give further commentary below but we will report back to shareholders as soon as we have demonstrable progress. UK Exploration and Norway Our UK exploration programme has seen material progress. During the year we reached agreement with Centrica which will see a well drilled on our Doyle prospect in the East Irish Sea at limited cost to Serica. Centrica are meeting the costs of our retained 20% interest up to a gross well expenditure of £11 million and they have confirmed that the well will be drilled as part of their forward programme with spud now likely early next year. With the prospect lying close to the Morecambe Bay production facilities, also operated by Centrica, it is expected that any discovery would see early development. Progress towards drilling on Block 22/19c, located just to the west of Columbus, is encouraging. Our partner, JX Nippon, has confirmed that it has reached agreement under which ENI will be joining the group. The block contains two large high-pressure, high-temperature (“HPHT”) prospects. The prospective resources independently attributed to these two prospects are considerable. Under an earlier farm-out agreement with JX Nippon, Serica will be fully carried for its 15% share of the cost of drilling a well, providing shareholders with exposure to significant potential at no cost. In addition, the Government has announced that it will introduce specific tax changes to encourage development of HPHT fields. Serica is well placed to benefit from these changes. In the Southern gas basin, our work programme to shoot a 3D seismic survey in the blocks adjacent to the producing York field has been completed and the data has now been fully processed and is being interpreted. Serica has a 37.5% interest in these blocks and we are expecting results to show additional gas accumulations and support a drilling programme. In short, in addition to Columbus, Serica is involved in three active gas-focussed exploration projects in the UK, each of which has clearly defined potential and in two of which it is carried by third parties. With the current tight gas supply and security uncertainties we believe that gas prices will continue to be strong for the foreseeable future and encourage development of new reserves. In Norway, we await the announcement of an investment decision for Bream. This has been stated recently by the operator to be around the end of 2014/early 2015. At the time of such an announcement the Company would expect to see a material increase in the value of its indirect holding in the field and we look forward to this project finally moving ahead. Atlantic Margin Exploration We also continue to make progress in our Atlantic Margin blocks. In Namibia, we have benefitted from BP’s participation in the acquisition and interpretation of the large 3D seismic survey which we undertook in 2012 and completed during 2013. Although, following the conclusion of a portfolio review, BP decided not to build on its foothold in Namibia and is pulling back to other areas in which it has a larger presence, its valuable contribution has enabled Serica to prove the presence of very large structures with clear characteristics of potentially prolific carbonate deposits as well as highlighting shallower clastic accumulations likely to have been exposed to regionally present mature oil source rocks. This has all been achieved at no cost to Serica, and has not only accelerated exploration, but has put us in a stronger position than at the time of the licence award just over two years ago. We are now in the partnering process to take the licence to the next stage and are very positive about the blocks’ potential. In Morocco, we drilled our first well towards the end of the year, operated by Cairn Energy who also paid the bulk of the drilling costs related to our retained 8.33% working interest. The well, drilled in the Foum Draa licence, did not encounter commercial hydrocarbons, but the cost to Serica was minimised as the result of our farm-out and does not write off the block’s potential. Our Moroccan activities continue with the drilling of our second well in which our costs are largely met, in this case by Genel in the Sidi Moussa block where we have a retained 5% working interest. The well is expected to be drilled in the third quarter 2014 and would have a material impact on Serica, at minimal exposure, if successful. Serica Energy plc Annual Report and Accounts 2013 5 Forward prospects Although regulatory processes, increasing costs, overly complex taxation and maturing infrastructure have conspired to make it difficult to operate efficiently in the North Sea it is believed that the Government has recognised the need to alleviate the problem. The Wood report is a major step in this direction and comes at a time when the UK needs to encourage development of its remaining gas reserves and extend the life of its offshore infrastructure. We therefore expect matters to improve. At the same time we are seeing the larger oil companies refocussing their business strategies which provides new opportunities for the smaller E&P companies to expand and diversify through increased M&A activity. It is our firm belief that Serica has the skills and resources to pursue such opportunities. We believe that 2014 will see progress across the Company’s areas of operations as well as the pursuit of new opportunities both in the UK and overseas. The November financing has put Serica in a good position to achieve these objectives and, with our portfolio of prospects rich with potential and a lean but strong and experienced management team, we are continually looking to opportunities and synergies both to expand and to unlock the value of our business. Although we have made good progress on the exploration front, 2013 has been challenging and I would like to thank all of our employees for their continued hard work during the year and shareholders for their patience. We shall be providing shareholders with an update of the Company’s activities at the forthcoming Annual General Meeting to be held on 26 June 2014 when I would hope to be able to report on further progress. Tony Craven Walker Chairman 9 April 2014 Our activities in Ireland continue to be focussed on partnering efforts. Our blocks offer well-defined prospects close to existing oil and gas discoveries, one of which, the Bandon oil discovery, was drilled by Serica. We are seeing signs of increasing industry interest, but there has been only limited farm-out activity in the area to date. We believe that this will change as the strategic benefits of discoveries which can improve energy security in Western Europe become more apparent. Columbus Returning to Columbus, Serica is not alone in facing problems gaining access to infrastructure. The fact that it has taken us and our partners eight years of investment and endeavour to gain access to infrastructure, and we still have not been able to reach agreement with the major companies who operate the platform and pipeline systems, has sent a strong message to the UK Government that regulatory and oversight processes have got to be strengthened if the North Sea’s potential is going to be fully exploited. The Wood Report, which was commissioned by the Government to investigate the problem and published in February 2014, supports the case for change. It is hard-hitting in its findings and requires existing infrastructure operators to collaborate fully to make infrastructure available to smaller companies. We welcome and fully support the findings of the Wood Report. The mature, developed areas offshore UK still hold significant undeveloped reserves and reserves remaining in existing fields and it will be the smaller companies who will play a pivotal role in finding and developing these reserves. Preventing these companies from accessing existing infrastructure damages investor confidence, prevents new, emerging companies from flourishing, holds back entrepreneurial and technical expertise and, ultimately, results in a loss to the nation of the long term value of its reserves and their strategic value. We are, therefore, starting to press the findings of the Wood Report as well as continuing discussions with other operators. We are committed to seeing the development of Columbus take place. With renewed Government emphasis to tackle the industry needs we believe these problems of infrastructure access and appropriate taxation policies will be resolved. Finances In November 2013 the Board took steps to strengthen the Company’s financial position. The Company completed a capital financing in difficult market conditions, raising a gross US$19.5 million. The Board recognises and is grateful for the support received from both existing and new shareholders who participated in the financing. The funds raised will underpin the growth of the business in 2014 and beyond and help to secure the full potential of the Group’s assets and to ultimately maximise value for shareholders. Our finances are also strengthened by our zero debt position. The Group is debt free and the year-end net cash balance of US$26.1 million, coupled with the benefits of the Group’s farm-out efforts in recent years, and control of overhead costs, is sufficient to meet the Group’s contractual commitments and current projected cash requirements to the end of 2015. 6 Serica Energy plc Annual Report and Accounts 2013 STRATEGIC REPORT The following Strategic Report of the operations and financial results of Serica Energy plc and its subsidiaries (the “Group”) should be read in conjunction with Serica’s consolidated financial statements for the year ended 31 December 2013. Disclosure and Other Exemptions Relating to Foreign Issuers. The Company is subject to the foreign regulatory requirements of the Alternative Investment Market of the London Stock Exchange in the United Kingdom. References to the “Company” include Serica and its subsidiaries where relevant. All figures are reported in US dollars (“US$”) unless otherwise stated. The Company is a “designated foreign issuer” as that term is defined under National Instrument 71-102 - Continuous Serica is an oil and gas company with exploration and development activities based in the UK, Ireland, Namibia and Morocco, and an economic interest in an oilfield offshore Norway. The Company’s interest in the Kambuna field in Indonesia was formally terminated on 31 December 2013. CHIEF OPERATING OFFICER’S REVIEW UK Operations Columbus Development BG’s unexpected decision to cancel the Lomond Bridge Linked Platform (“BLP”) project in early 2013 was a major setback for the Columbus project. The focus of the technical work for the rest of the year was switched to identifying and securing a new offtake route for Columbus. The preferred technical solution is for a direct subsea tie-back to the existing Lomond facilities which are less than 8km away from Columbus. Technical work has shown that this solution is feasible and that the capital expenditure required is appropriate for a development of this size. The obstacle has been to agree commercial terms for the transportation and processing of Columbus production on the Lomond platform. Progress has been slow although dialogue is continuing with BG International Limited (the operator of the Lomond infrastructure), the Department of Energy and Climate Change (“DECC”) and other stakeholders in the area. If access to the Lomond offtake route cannot be secured on acceptable terms then there are other realistic alternative offtake routes that are currently under consideration. Technical work has commenced on these alternatives and approaches have been made to the relevant operators. Against this background, continuing cost rises in the North Sea are also eroding development economics and both we and the other operators in the area are conscious of the need for close co-operation, highlighted by the DECC sponsored Wood Report, to reduce cost and maintain efficiencies. The Government has recognised the need to assist in these objectives as well as to ensure that there are no taxation impediments holding back development. In December 2013, DECC granted a two year extension to the licence which includes the 23/16f portion of the Columbus field. This extension shows the understanding and commitment of DECC to support our efforts and allows time for the Columbus partners to secure a commercially viable offtake route for the field. Exploration In the East Irish Sea, a site survey in Block 113/27c was completed during the year in preparation for drilling the Doyle Triassic gas prospect. Under an agreement with Centrica’s subsidiary Hydrocarbon Resources Limited (“HRL”) for the farm-out of Blocks 113/26b and 27c, HRL are paying Serica’s share of costs associated with the drilling of an exploration well to test Doyle up to a gross cap of £11 million in return for a 45% interest in the licence. The site survey was therefore performed at no cost to Serica. HRL, as designated operator, has confirmed that the well will be spudded early in their next drilling campaign and that they are about to go to tender for a suitable rig. In November 2013, we were delighted to be awarded a 35% operated interest in Block 113/22a which is adjacent to Block 113/27c and is believed to contain an extension to the Doyle prospect. The award was made as part of the delayed UK 27th Offshore Licensing Round. Work commitments include obtaining 150 kilometres of 2D seismic data and a drill or drop decision on a well within 3 years. The farm-out agreement with HRL covers all of Blocks 113/26b, 113/27c and 113/22a. Upon completion of the farm-out HRL will take over formally as operator with Serica retaining a 20% interest. In the Central North Sea, Serica has a 15% interest in Block 22/19c, located two blocks to the west of Columbus. As the result of a farm-out to JX Nippon, who took over as operator, Serica has a full carry on this licence up to and including the drilling of an exploration well. The decision to drill this well lies with JX Nippon. Serica Energy plc Annual Report and Accounts 2013 7 CHIEF OPERATING OFFICER’S REVIEW CONTINUED However, JX Nippon have recently advised us that they have reached agreement with ENI to join the block and we expect this will lead to an accelerated programme. The group has identified significant deep High Pressure High Temperature (“HPHT”) potential in the Jurassic and Triassic. A Competent Person’s Report (“CPR”) conducted by Netherland, Sewell & Associates, Inc (“NSAI”) and commissioned by Serica, has assessed the highest ranked prospect to contain between a P90 of 40mmboe and a P10 of 243mmboe of unrisked prospective gross resources. A site survey is expected to be acquired in 2014 in preparation for drilling an exploration well. In the Southern North Sea a new 3D seismic survey was acquired over part of the Greater York area blocks operated by Centrica in which Serica has a 37.5% interest. This survey was acquired on schedule and under budget and has now been fully processed. Interpretation of the newly acquired data is ongoing with the aim of selecting the location for an exploration well. Namibia In Namibia the main focus during 2013 was the processing and interpretation of the 3D seismic survey that was acquired by Serica over our Luderitz blocks in 2012. The interpretation of the seismic, which covered approximately 25% of the licence area and focussed on Prospect B, is now complete and has confirmed that our primary prospect (Prospect B) exhibits the characteristics of a very large carbonate platform. An independent assessment of the unrisked prospective resources contained in our Namibian licence has been performed by NSAI and covers prospects which have been mapped from early 2D seismic as well as the highly detailed 3D. This CPR recognises the multi-prospect nature of the licence and states that Prospect B at the primary Barremian level alone contains P50 unrisked prospective recoverable oil resources of 623 million barrels (with a P90 to P10 range of 138 million to 2.81 billion barrels). The report gives a geological risk factor of 16%. In addition to the large Lower Cretaceous carbonate prospects evident on the licence the seismic also confirms the presence of large turbidite channel sand formations. These sands are likely to have been sourced by regionally present mature oil source rocks and therefore present valid and attractive targets. The costs associated with the acquisition and processing of the 3D seismic survey were fully paid by BP as part of their 2012 farm in agreement. At the end of 2013 BP decided to refocus its international portfolio and elected to withdraw from the licence. Serica now holds 85% of the equity in the licence but retains the 3D seismic data which cost almost US$50million to acquire and process. We have now commenced a process to attract one or more new partners to enter into a Joint Venture arrangement with us with the aim of drilling the first exploration well in 2015. The initial level of industry interest in this opportunity has been strong and discussions continue. Morocco In April, a site survey was carried out by Cairn Energy in preparation for drilling the FD-1 well on our Foum Draa licence in Morocco. The well was spudded in October using the fifth generation semi-submersible drilling rig Cajun Express. This was a deepwater well drilled in over 1,500m of water and to a total depth of 5,255m. Drilling operations finished in early January 2014. The well failed to find commercial hydrocarbons but did encounter gas shows indicating an active thermogenic petroleum system. In line with our ongoing strategy of limiting our cost exposure, the first US$60million of the gross drilling costs for this well were paid by Cairn, our farm-in partner, minimising the net cost to Serica’s retained 8.33% working interest. The group is now evaluating the valuable data recovered from the well and will soon agree on a forward plan for the licence. The next Moroccan well in which we have an involvement will be in the Sidi Moussa licence which is now operated by Genel Energy. Once again our cost exposure is limited under a farm-out agreement and Genel will carry Serica’s retained 5% working interest for the first US$50million of gross well costs, therefore considerably limiting our cost exposure. The site survey has been completed and the rig Noble Paul Romano has been contracted to drill the well which is expected to spud in Q3 2014. This prospect is a carbonate draped tilted fault block structure that the operator Genel estimates to hold prospective resources of 200 million barrels with a 20% chance of success. Ireland Serica holds 100% interests in two large swathes of blocks in the Atlantic Margin Rockall Basin and has undertaken considerable work reprocessing 2D and 3D seismic data to delineate fully the prospectivity of these blocks. This work has identified large prospects of pre-Cretaceous age close to an existing discovery drilled off block. In July 2013 we were pleased to be informed that the Minister of State at the Department of Communications, Energy and Natural Resources (“DCENR”) had consented to extend the original four year duration of Serica’s Rockall Basin Frontier Exploration Licence 01/09 by two years to enable further work to be done on the licence, including a possible site survey. This was followed in December 2013, when we were advised that we had been successful in our application to convert adjacent Licence Option 11/1 to a full Frontier Exploration Licence and that the Minister of State at the DCENR has granted Frontier Exploration Licence number 04/13 with effect from 1 December 2013. This places us in a stronger position to attract industry partners as the attractiveness of the technical potential and the licence terms become better understood. Given the size of the prospects and their position in a proven gas-condensate bearing basin, holding two licences with significant acreage (over 1,900 square kilometres) greatly expands the options open to Serica to deliver an active drilling campaign in the area. The NSAI CPR attributes P50 unrisked prospective resources of 677bcf (with a range from 8 Serica Energy plc Annual Report and Accounts 2013 a P90 of 155bcf to a P10 of 3.4tcf) to the Muckish prospect with a geological risk factor of 26%. In addition to the clearly mapped prospects, recent in-house analysis of the extensive seismic database has also indicated the presence of an alternative play type, not previously considered and it is evident that the blocks contain the potential for deepwater fans. Evaluation of this play has commenced and will be completed in Q2 2014. Further south in the Slyne Basin, we have two significant drill-ready prospects in Licence 01/06, the Boyne and the Liffey prospects. The blocks are located 40 kilometres south of the Corrib gas field in water depths of 180 to 280 metres. Boyne and Liffey are two Lower Jurassic prospects mapped as a result of the discovery of oil in shallower Jurassic sediments in the Bandon well drilled by Serica in 2009. NSAI in their CPR attribute P50 gross unrisked prospective resources (for the combined Jurassic and Triassic objectives in Boyne and Liffey) of 215mmboe (with a range from a P90 of 56mmboe to a P10 of 824mmboe). Together with our partner (RWE), we are looking for a further partner to invest in an exploration well to drill the Boyne Prospect in return for significant equity in the licence. This is a high value farm-in opportunity with moderate risk and significant upside. Indonesia Finally, during 2013 the Kambuna Field in Indonesia reached the end of its economic life. The field has been abandoned in accordance with local regulations and the Technical Assistance Contract (TAC) with Pertamina was terminated in December 2013. The abandonment and handover operations were completed smoothly and within budget. Mitch Flegg Chief Operating Officer 9 April 2014 REVIEW OF LICENCE HOLDINGS The following summary gives further detailed information on Serica’s licence interests in which activities took place during, and subsequent to the end of 2013. United Kingdom Central North Sea: Block 23/16f - Columbus Field Development Block 23/16f covers an area of approximately 22 square kilometres in the UK Central North Sea and contains the majority of the Columbus gas field. The Columbus field, containing gas rich in condensate, extends from Block 23/16f into Block 23/21 to the south, operated by BG International Limited (“BG”). Block 23/21 includes the Lomond platform and the producing Lomond field. Serica has a 50% interest as operator in Block 23/16f and will be the operator for Columbus field facilities with an interest of 33.2%. In early March 2013 Serica, as operator of the Columbus field and on behalf of the Columbus field participants, issued tender documents to pre-qualifying contractors for the fabrication, installation and hook-up of sub-sea facilities and the provision of associated sub-sea equipment and systems. This followed the issuing by BG in December 2012 of tender documents for the construction and installation of a Bridge Linked Platform (“BLP”), through which Columbus field gas and condensate production would be exported. In late March 2013, BG informed Serica that it had decided not to proceed with the construction of the BLP. This cancellation was a setback to the Columbus project but since then, progress has been made towards a revised development plan under which the Columbus field would be tied back directly to the Lomond platform without need for a BLP. Preliminary engineering studies showed that this solution is technically feasible and could be delivered within the time frame envisaged under the previous BLP-based plan. The outstanding issue to be addressed before detailed technical work can proceed is for (non-binding) commercial terms to be agreed between the Columbus owners and the Lomond owner. Negotiations are continuing with BG, DECC and other interested parties with all parties working to secure a positive outcome following which clearances will be required from DECC enabling the project to proceed. Serica is aiming to reach an understanding acceptable to all parties during the first half of 2014. The original field development plan, as submitted to DECC, was designed to evaluate the potential for additional reserves which may exist as an extension to Columbus and this would remain the intention in any revised plan designed to take account of a modified export route. The partners in Block 23/16f recently obtained a two year extension from DECC for the second phase of the licence (P1314), which now expires in December 2015. This cooperation Serica Energy plc Annual Report and Accounts 2013 9 REVIEW OF LICENCE HOLDINGS CONTINUED from DECC is indicative of their support to help reach a positive conclusion and extends the timeframe to achieve agreement for an export route. As part of this process, the part of the block east of the Columbus accumulation has been relinquished such that the portion retained, which contains the Columbus field, has an area of 22 square kilometres. Lomond is the nearest and easiest platform for Columbus to link into and remains the prime choice for cost and simplicity reasons. However, in addition to negotiations with BG discussions have also been opened up with other infrastructure operators who can provide alternatives in the event that negotiations with BG fail to reach a commercial conclusion. Independent consultant NSAI carried out a reserves report on the Columbus field for the end of 2013. This report estimated that the gross Proved plus Probable Reserves of the field are 66.0 bcf of gas and 4.5 mmbbl of liquids, a total of 15.5 mmboe. Serica holds a 50% interest in those Columbus reserves lying in Block 23/16f. After providing for reserves lying in the adjacent Block, NSAI estimates the Company’s share of proved and probable reserves in the field to be 21.9 bcf of sales gas and 1.5 mmbbl of liquids, a net 5.2 mmboe to Serica. Central North Sea: Blocks 15/21g and 15/21a (part) – Spaniards Appraisal Block 15/21g, in which Serica was initially awarded a 30% interest, lies immediately west of the Scott oil field and adjacent to Block 15/21a containing the Jurassic oil discovery well 15/21-38z (“Spaniards”), which flowed 2,660 bpd of 25° API oil from a good quality Jurassic-aged Upper Claymore sand. In January 2012 Block 15/21g was amalgamated with part of Block 15/21a to form a single area which includes the Spaniards discovery. Serica has a 21% interest in the amalgamated area. In Q4 2012 the Spaniards East well was drilled to appraise the Spaniards discovery but was plugged and abandoned. The analysis of the Spaniards East well data confirms that there is little chance of any remaining oil prospectivity in the east of the field. The focus of the forward work programme is to mature the Spaniards West prospect so that a decision can be made whether to drill another well or withdraw from the licence. Central North Sea: Block 22/19c Block 22/19c is located approximately 20 kilometres to the west of Serica’s Columbus field. Following the farm-out of an 85% interest to JX Nippon in 2012, Serica has a 15% interest in the block and has a full carry on this licence up to and including the drilling of an exploration well. The partners have identified significant deep HPHT potential in the Jurassic and Triassic on the block and a site survey is expected to be acquired in 2014 in preparation for drilling an exploration well. JX Nippon has recently executed an agreement with ENI for the latter to join the block as operator with a 50% interest. The transaction between JX Nippon and ENI is subject to normal regulatory and partner approvals. Serica expects that the transaction will lead to an accelerated programme. Southern North Sea: Blocks 47/2b (Split), 47/3g (Split), 47/7 (Split) & 47/8d (Part) Serica has a 37.5% interest in the blocks which are operated by Centrica. These blocks are contiguous part blocks immediately adjacent to the producing York field, also operated by Centrica. A number of gas prospects, including a possible extension to the York field, have been identified on the blocks at Leman (Permian) level with additional leads at Namurian (Carboniferous) level. The work obligation, comprising a 3D seismic acquisition survey and reprocessing of existing seismic data, has been completed. East Irish Sea: Block 110/8b Serica has a 100% interest and operatorship of Block 110/8b. Recent drilling by Centrica in the adjoining block to the north is likely to have investigated prospectivity for gas in the area of the Darwen North prospect lying in the north of Block 110/8b but results of the drilling have not been released. East Irish Sea: Blocks 113/26b and 113/27c - Doyle Prospect In June 2013 the Company announced that it had reached agreement with Centrica, through Centrica’s subsidiary HRL, for the farm-out of UK East Irish Sea Blocks 113/26b and 27c, in which Serica presently holds a 65% interest. Under the agreement, HRL will acquire an operated 45% interest in the licence, with Serica retaining 20%, in consideration for HRL bearing Serica’s share of costs associated with the drilling of an exploration well up to a gross cap of £11 million. The agreement is subject to UK government approval. Completion also requires agreement with the operator of a wind farm planned nearby. However this is now at an advanced stage with final agreement expected shortly. A Triassic gas prospect, the Doyle prospect, lies in the north of Block 113/27c. A fault and dip closed structure, this prospect has been fully matured and is ready to drill. The site survey has been completed and the well is expected to be drilled in early 2015. East Irish Sea: Block 113/22a In November 2013 Serica was awarded a Traditional Licence in the latest stage of the 27th Offshore Licensing Round, announced by DECC. Block 113/22a in the East Irish Sea has been awarded to a group in which Serica has a 35% interest and is operator. The other participants in the new licence award are HRL (a subsidiary of Centrica) 30%, MPX Limited 25% and Agora Limited (a subsidiary of Cairn Energy) 10%. This block is adjacent to Serica Block 113/27c and the farm-out agreement for Blocks 113/26b and 113/27c with Centrica noted above, extends to the new licence offered. As a result, Serica will have a 20% interest both in the new licence offered and in Blocks 113/26b & 27c on completion of the farm-out. The Doyle 10 Serica Energy plc Annual Report and Accounts 2013 prospect in Block 113/27c is believed to extend into Block 113/22a. Northern North Sea: Blocks 210/19a and 210/20a – South Otter Prospects Drilling of the South Otter blocks, in which Serica held a 100% interest, remained subject to a farm-out programme. As sufficiently attractive proposals to enable a well to be drilled in the blocks were not received, Serica made the decision to relinquish the blocks in January 2013 to comply with the terms of the licence. Ireland Frontier Exploration Licence 1/09: Blocks 5/17, 5/18, 5/22, 5/23, 5/27, and 5/28 - Muckish Prospects Serica holds a 100% working interest in six blocks in this licence covering a total area of 993 square kilometres in the north- eastern part of the Rockall Basin off the west coast of Ireland. A large exploration gas condensate prospect, Muckish, has been fully delineated from 3D seismic data in Blocks 5/22 and 5/23. Muckish is analogous to the nearby Dooish gas condensate discovery and provides material upside in a proven hydrocarbon basin. The evaluation of 3D seismic data coverage and the nearby Dooish gas-condensate discovery, give confidence in the potential of the prospect which covers an area of approximately 30 square kilometres with over 600 metres of vertical closure in a water depth of 1,450 metres. Serica has secured a two-year extension to the first phase of the licence covering the blocks and is moving forward with plans to perform a site survey in preparation for securing partners to participate in drilling the Muckish prospect. Frontier Exploration Licence 4/13 - Blocks 11/10, 11/15, 12/1(part), 12/6 and 12/11(part) - Midleton Prospects In December 2013, following the initial two year period of the licence award, Serica took the option to convert Licence Option 11/01, also located in the Rockall Basin, into a full Frontier Exploration Licence (“FEL”). Following a mandatory 25% relinquishment at the time of the option conversion into FEL 4/13, the three blocks and two part blocks now cover an area of approximately 925 square kilometres. The area covered by the licence contains two pre-Cretaceous fault block prospects, Midleton and West Midleton which are analogous to the proven gas-condensate bearing Dooish discovery lying immediately to the east. These complement and provide additional diversity to the Muckish prospect lying in Serica’s acreage just to the north east and the award will enable a comprehensive exploration programme covering the Muckish and Midleton prospects. Serica is undertaking 2D and 3D seismic reprocessing work and other geological studies to firm up these two additional prospects. Recent in-house analysis of the extensive seismic database has also indicated the presence of deepwater fans, a play type not previously considered. This will be fully evaluated during this licence phase. Frontier Exploration Licence 01/06: Blocks 27/4, 27/5 (west) and 27/9 - Liffey & Boyne Prospects Licence FEL 1/06 covers an area of approximately 305 square kilometres in the Slyne Basin off the west coast of Ireland. The blocks lie some 40 kilometres south of the Corrib discovery, which has reserves of approximately 800 bcf of gas. The Company holds a 50% interest in the blocks and operates the licence. The Company, in partnership with RWE, has launched a farm-out campaign to follow up on the 2009 Bandon oil discovery made by Serica. Subject to identifying a suitable partner or partners a well is targeted to be drilled on the Boyne prospect in 2015. Namibia Luderitz Basin: Blocks 2512A, 2513A, 2513B and 2612A (part) During 2013, Serica, in partnership with BP, undertook the processing and interpretation of an extensive 4,180 square kilometre 3D seismic survey undertaken by Serica in 2012. The survey, covering approximately 25% of the licensed area and costing approximately US$50 million, was fully funded by BP under the terms of a farm-out agreement with Serica and was designed to delineate the size and nature of Prospect B, one of three large structures identified on the licence at Lower Cretaceous (Barremian) level, and to examine prospectivity at shallower levels. The results of this survey are positive. Processing of the data confirms Prospect B as having the clear characteristics of a large carbonate platform extending over 700 square kilometres with a vertical closure of up to 300 metres. The expectation of a predominantly carbonate structure has been reinforced by third party drilling elsewhere in Namibia which has proven the presence of large structures with associated carbonate build-up at Lower Cretaceous level. The survey also confirmed the presence of large submarine canyon-channel turbidite sand systems at both Lower and Upper Cretaceous levels. These, together with further leads and other large prospects on the licence, provide considerable additional potential. This is recognised in the NSAI report which gives a combined best estimate of gross unrisked prospective oil resources associated with 7 prospects and 2 leads identified on licence of 2,297 million barrels and 437 million barrels respectively. In December 2013, BP decided not to exercise an option to increase its interest in the licence and assigned its 30% interest to Serica under the terms of Serica’s farm-out agreement with BP. Serica now holds an interest of 85% in the licence in partnership with The National Petroleum Corporation of Namibia (Pty) Limited (“NAMCOR”) and Indigenous Energy (Pty) Limited. The withdrawal of BP leaves Serica with a valuable and Serica Energy plc Annual Report and Accounts 2013 11 REVIEW OF LICENCE HOLDINGS CONTINUED extensive, fully interpreted data set and provides the Company with an opportunity to attract new partners and to retain a larger percentage interest. contract has been signed for the Noble Paul Romano drilling rig and the well is due to spud in Q3 2014. Morocco Sidi Moussa and Foum Draa Petroleum Agreements Serica holds licence interests in the Foum Draa and adjacent Sidi Moussa Petroleum Agreements offshore Morocco. The blocks cover a total area of approximately 8,375 square kilometres in the sparsely explored Tarfaya-Ifni Basin and extend from the Moroccan coastline into water depths reaching a maximum of 2,000 metres. The Tarfaya-Ifni Basin is geologically analogous to the oil producing salt basins of West Africa. Foum Draa Following a farm-out to Cairn Energy, Serica has an 8.33% interest in the Foum Draa licence. In October 2013, drilling operations on the licence commenced with the FD-1 well. In December, Cairn reported that the well had reached a Total Depth of 5,255m MDBRT (measured depth below rotary table). Although commercial hydrocarbons and clastic reservoir rocks were not found, gas shows were encountered indicating an active thermogenic petroleum system. The well was plugged and abandoned. Under the terms of the 2012 farm out agreement Serica was carried by Cairn for its share of drilling costs up to a gross well cost of US$60 million. Sidi Moussa Serica has a 5% working interest in the Sidi Moussa licence and is carried by Genel for its share of the cost of drilling the first well on the licence up to a gross well cost of US$50 million. The location for the first exploration well has been agreed and the well will target a prospect with unrisked prospective resources estimated by Genel, the operator, at 200 mmboe. Site survey operations were completed in August/September 2013, a rig Norway Serica has a significant economic interest in the development of the Bream field and is due a substantial payment on first production. In their Annual Results Statement (March 2014), the Operator, Premier, stated: “A formal concept selection design will now take place during the first quarter of 2014 and an investment decision is planned for late 2014, or early 2015. The Bream development concept is planned to be an FPSO with subsea production and water injection wells”. Indonesia Glagah Kambuna TAC - Kambuna Field, Offshore North Sumatra, Indonesia Serica held a 25% interest in the Glagah Kambuna Technical Assistance Contract (“TAC”) offshore North Sumatra, Indonesia for the large part of 2013. The TAC covered an area of approximately 380 square kilometres and contained the producing Kambuna gas field. Throughout the first half of 2013 the Company benefited from cash flows from field production but the field reached the end of its economic life in July 2013 and was shut-in as planned. Gross Kambuna field production in 2013 was 1,176 mmscf of gas and 100,000 barrels of condensate. Average prices realised during the year for gas and condensate sales respectively were US$6.5 per mcf and US$105.3 per barrel. The partnership agreed handover arrangements with the Indonesian authorities and the decommissioning process, which involved securing the three wells and wellhead structure, was completed in November 2013. The TAC was formally terminated and facilities handed over to Pertamina in December 2013. FINANCE DIRECTOR’S REVIEW Financial summary The Group entered 2013 aware that Kambuna field revenues would cease in mid year and that it would be more than two years before expected first revenues from the Columbus field. It was therefore recognised that additional funding would need to be secured ready for the Group’s exploration programme from 1H 2014 and to support further business growth. In June 2013 a farm-out on its East Irish Sea licence containing the Doyle prospect was agreed with Centrica. This transaction gives a carry on an exploration well up to a gross cap of £11m, and is another demonstration of the Group’s successful approach to risk management limiting its financial exposure whilst maintaining upside potential from exploration drilling. 12 Serica Energy plc Annual Report and Accounts 2013 The most significant exploration expenditure during 2013 was incurred in the UK Southern North Sea on 3D seismic acquisition on the Greater York asset, followed by the drilling of the Foum Draa well in Morocco in Q4 2013. Although the drilling results of the FD-1 well were disappointing, the Group’s share of costs was limited due to the capped carry negotiated in the prior year farm- out to the operator Cairn. Income statement - discontinued operations Serica generated a profit from discontinued operations of US$0.1 million for the year ended 31 December 2013 (2012: loss of US$8.3 million) from its 25% interest in the Kambuna field. Field production ceased in July 2013, the facilities were decommissioned in 2H 2013 and the Glagah Kambuna TAC was formally terminated in December 2013. The main financial event of the year was the successful capital raise from a placing and open offer which completed in November 2013 raising US$19.5 million before expenses. This transaction is covered in more detail below but enabled the Group to end 2013 with a stronger cash position of US$26.1 million and no debt. Results from operations Following the cessation of production and the decommissioning of the Kambuna field facilities in the second half of 2013, the annual financial results of the Kambuna field business segment are disclosed within ‘discontinued operations’ in the financial statements and separate from the results of the retained core business segments. 2012 comparative figures have been restated accordingly. A high level summary of the income statement results for continuing and discontinued operations is given below. Income statement – continuing operations The Company generated a loss before tax from continuing operations of US$5.1 million for 2013 compared to a loss before tax of US$16.4 million for 2012. The pre-licence expenditure of US$0.3 million for 2013 was in line with the 2012 charge of US$0.3 million due to a similar level of activity in the year. Pre-licence costs included direct costs and allocated general administrative costs incurred on oil and gas activities prior to the award of licences, concessions or exploration rights. Asset write offs of US$0.3 million in 2013 included minor exploration and evaluation (“E&E”) asset and obsolete inventory amounts and were significantly lower than the 2012 charge of US$10.5 million. The prior year charge included US$8.8 million attributed to the Spaniards block in the UK North Sea, US$1.1 million of charge from relinquished UK licences and US$0.6 million of obsolete inventory. Administrative expenses of US$4.5 million for 2013 decreased from US$5.3 million for 2012. The Company has worked to reduce overhead during 2013 and expects these savings to give further benefit in 2014. The accounting gain of US$1.0 million on disposal in 2012 was recorded following the Company’s farm-out to BP in Namibia and related to the recognition of recovery for those past costs incurred that had been expensed as pre-licence costs in previous periods. Finance costs reduced from US$0.6 million in 2012 to US$0.04 million in 2013 following the expiry of the loan facility in March 2013. No finance costs are currently being incurred. The field commenced its anticipated natural decline during 2011 in line with reservoir pressure depletion. In 2013, gross Kambuna field gas production totalled 1,176 mmscf (2012: 5,538 mmscf) together with condensate production of 100,000 barrels (2012: 334,000 barrels). The 2013 gas production was sold at prices averaging US$6.47 per mscf (2012 US$6.53 per mscf) and generated US$1.7 million (2012 US$8.0 million) of revenue net to Serica. Condensate liftings in the year earned US$2.4 million (2012 US$7.4 million) of revenue net to Serica at an average price of US$105.3 per barrel (2012 US$116.1 per barrel). Cost of sales for 2013 were driven by field production and totalled US$3.9 million (2012 US$19.3 million). The charge comprised direct operating costs of US$2.6 million (2012 US$6.2 million), non cash depletion of US$1.0 million (2012 US$13.1 million) and a decrease in condensate inventory of US$0.3 million (2012 US$0.02 million increase). In 2012, a US$4.4 million pre-tax impairment relating to the Kambuna field was recorded against oil and gas property, plant and equipment. Taxation charges typically arose from Kambuna field operations, although there is no current taxation or deferred taxation charge in 2012 or 2013 given the cost recovery position of the field at the time. Balance Sheet During 2013, total investments in E&E assets increased from US$66.9 million to US$74.6 million, an increase consisting of US$7.8 million of additions less US$0.1 million of exploration asset write-offs. The more significant exploration costs in the year were incurred on the following assets: In Africa, US$2.3 million was capitalised on the Foum Draa licence in Morocco (largely consisting on the costs of the FD-1 well drilled in Q4 2013) and US$1.1 million was incurred in respect of the Luderitz basin licence interests in Namibia. FD-1 well operations continued into January 2014 and an estimated cost of US$1.2 million of expenditure incurred in the current 2014 period is not recognised in the 2013 financial statements. In the UK & Ireland, US$2.1 million was incurred on a 3D seismic survey on the Group’s Greater York interests in the Southern North Sea, US$0.7 million was incurred on the Columbus development and US$0.7 million on exploration work on the Rockall licences in Ireland. Property, plant and equipment balances chiefly comprised the net book amount of the expenditure on the Kambuna asset and were fully depleted to US$ nil in the year. Serica Energy plc Annual Report and Accounts 2013 13 FINANCE DIRECTOR’S REVIEW CONTINUED Long-term other receivables of US$1.3 million are represented by value added tax (“VAT”) on Indonesian capital spend which continues to be recovered from the Indonesian authorities. Trade and other receivables at 31 December 2013 totalled US$3.9 million and included US$1.4 million of trade debtors from condensate sales from the Kambuna field. The aggregate total in 2013 showed a decrease of US$5.0 million from the 2012 balance of US$8.9 million. The fall is attributable to the recovery during the period of Indonesian VAT, back costs from 2012 farm-outs and a significant drop in JV partner recoverables in Namibia and Kambuna, reflecting the reduced current activity on those assets. Cash and cash equivalents increased from US$22.3 million to US$26.1 million in the year The Company received net proceeds of US$18.2 million from the issue of shares in the placing and open offer which completed in November 2013, and also benefitted from cash inflows from Kambuna field revenues. Cash outflows were incurred on the Q4 2012 East Spaniards well (US$6.9 million) and Greater York 3D seismic acquisition (US$2.1 million) in the UK, Kambuna field operating costs in Indonesia and on the Foum Draa exploration well drilling in Morocco. Other costs included seismic work across the portfolio, Columbus Field Development Plan expense together with new venture costs, ongoing administrative costs and corporate activity. Trade and other payables totalled US$4.4 million at 31 December 2013 and were significantly reduced from the prior year balance of US$11.7 million which included US$6.9 million of liabilities from the East Spaniards well in the UK drilled in Q4 2012 but cash settled in Q1 2013. The current year balance chiefly includes creditors and accruals of US$1.7 million from the Foum Draa well drilling in Morocco and final creditors of US$1.1 million from the Kambuna field decommissioning and operations. Provisions of US$1.6 million at 31 December 2012 were in respect of obligations to decommission the Kambuna in Indonesia. This process was completed in Q4 2013 and any unpaid liabilities are classified in trade and other payables. Capital raising, cash and future commitments Capital raising The main financial event in the year was a capital raising which completed in November 2013 and raised aggregate gross proceeds of approximately US$19.5 million. The capital raising comprised three elements: the placing of 56,870,934 new ordinary shares with institutional and other investors; the acceptance of 6,093,351 new ordinary shares in an open offer to qualifying shareholders; and the placing of 4,444,444 new ordinary shares not taken up by qualifying shareholders under the open offer. in November 2013. As at 9 April 2014 the Company has 250,179,040 ordinary shares issued and outstanding. Whilst the Company was able to meet its 2013 commitments from cash in place as at 31 December 2012, the capital raising was needed for the exploration programme from 1H 2014 and to support further business growth. It has also put the Company onto a stronger footing and improved its ability to fund upcoming expenditure in order to bring projects to maturity whilst enabling the Group to optimise, and ultimately realise, value across its portfolio. Current cash position, capital expenditure commitments and other obligations At 31 December 2013, the Group held cash and cash equivalents of US$26.1 million and US$0.4 million of short-term restricted cash. Liabilities of US$2.8 million arising from the Q4 2013 Foum Draa well in Morocco have been settled since the year end, and as at 7 April 2014, cash and restricted cash balances held totaled US$21.5 million. Management believe these are sufficient resources to meet the current committed programme for 2014 and 2015. The Group’s main near term exploration commitments in 2014 are on the Sidi Moussa licence where an exploration well is expected to be drilled in Q3 2014. The Company is carried for its share of expenditure up to a gross cap of US$50 million and has currently budgeted to pay some US$2.3 million, being its paying share of costs over and above the agreed cap to the farm-in carry. In the UK East Irish Sea, the exploration well on the Doyle prospect slated for 2015 is also subject to a cap although no overrun is currently forecast. The Group has no significant commitments on its other exploration licences. The Company will continue to give priority to the careful management of existing financial resources. Although a key objective for the Group is to get the Columbus development back on track when the final decision to proceed with the Columbus development is made, the Group would use alternative means of finance to fund its share of development costs. Other Asset values and Impairment At 31 December 2013 Serica’s market capitalisation stood at US$54.7 million (£33.1 million), based upon a share price of £0.1325, which was exceeded by the net asset value at that date of US$102.1 million. By 7 April 2014 the Company’s market capitalisation had decreased to US$44.6 million. Management conducted a thorough review of the carrying value of the Group’s assets and determined that no significant write-downs were required. All new ordinary shares were issued at a price of 18 pence per share and following the relevant required approvals, the aggregate of 67,408,729 new ordinary shares were listed on AIM and the TSX Christopher Hearne Finance Director 9 April 2014 14 Serica Energy plc Annual Report and Accounts 2013 Business Risk and Uncertainties Serica, like all companies in the oil and gas industry, operates in an environment subject to inherent risks and uncertainties. The Board regularly considers the principal risks to which the company is exposed and monitors any agreed mitigating actions. The overall strategy for the protection of shareholder value against these risks is to retain a broad portfolio of assets with varied risk/reward profiles, to apply prudent industry practice in all operations, to carry insurance where available and cost effective, and to retain adequate working capital. The principal risks currently recognised and the mitigating actions taken by the management are as follows: Investment Returns: Management seeks to raise funds and then to generate shareholder returns though investment in a portfolio of exploration acreage leading to the drilling of wells and discovery of commercial reserves. Delivery of this business model carries a number of key risks. Risk Market support may be eroded obstructing fundraising and lowering the share price Mitigation • Management regularly communicates its strategy to shareholders • Focus is placed on building an asset portfolio capable of delivering General market conditions may fluctuate hindering delivery of the company’s business plan Management’s decisions on capital allocation may not deliver the expected successful outcomes Each asset carries its own risk profile and no outcome can be certain regular news flow and offering continuing prospectivity • Management aims to retain adequate working capital to ride out downturns should they arise • Rigorous analysis is conducted of all investment proposals • Operations are spread over a range of areas and risk profiles • Management aims to avoid over-exposure to individual assets and to identify the associated risks objectively Operations: Operations may not go according to plan leading to damage, pollution, cost overruns or poor outcomes. Risk Individual wells may not deliver recoverable oil and gas reserves Mitigation • Thorough pre-drill evaluations are conducted to identify the risk/reward balance Wells may blow out or equipment may fail causing environmental damage and delays Operations may take far longer or cost more than expected Resource estimates may be misleading and exceed actual reserves recovered • Exposure is selectively mitigated through farm-out • The Group retains fully trained and experienced personnel • The planning process involves risk identification and establishment of mitigation measures • Emphasis is placed on engaging experienced contractors • Appropriate insurances are retained • Management applies rigorous budget control • Adequate working capital is retained to cover reasonable eventualities • The Group deploys qualified personnel • Regular third-party reports are commissioned • A prudent range of possible outcomes are considered within the planning process Personnel: The company relies upon a pool of experienced and motivated personnel to identify and execute successful investment strategies Risk Key personnel may be lost to other companies Mitigation • The Remuneration Committee regularly evaluates incentivisation Personal safety may be at risk in demanding operating environments, typically offshore Staff and representatives may find themselves exposed to bribery and corrupt practices schemes to ensure they remain competitive • A culture of safety is encouraged throughout the organisation • Responsible personnel are designated at all appropriate levels • The Group maintains up-to-date emergency response resources and procedures • Insurance cover is carried in accordance with industry best practice • Company policies and procedures are communicated to personnel regularly • Management reviews all significant contracts and relationships with agents and governments Serica Energy plc Annual Report and Accounts 2013 15 FINANCE DIRECTOR’S REVIEW CONTINUED Commercial environment: World and regional markets continue to be volatile with fluctuations and infrastructure access issues that might hinder the company’s business success Risk Volatile commodity prices mean that the company cannot be certain of the future sales value of its products Mitigation • Price mitigation strategies may be employed at the point of major capital commitment The company may not be able to get access, at reasonable cost, to infrastructure and product markets when required Credit to support field development programmes may not be available at reasonable cost Fiscal regimes may vary, increasing effective tax rates and reducing the expected value of reserves • Gas may be sold under long-term contracts reducing exposure to short term fluctuations • Oil and gas price hedging contracts may be utilised where viable • Budget planning considers a range of commodity pricing • A range of different off-take options are pursued wherever possible • Serica seeks to build and maintain strong banking relationships and initiates funding discussions at as early a stage as practicable • Operations are currently spread over a range of different fiscal regimes in Western Europe and Africa • Before committing to a significant investment the likelihood of fiscal term changes is considered when evaluating the risk/reward balance In addition to the principal risks and uncertainties described herein, the Company is subject to a number of other risk factors generally, a description of which is set out in our latest annual information form available on www.sedar.com. Key Performance Indicators (“KPIs”) The Company’s main business is the acquisition of interests in prospective exploration acreage, the discovery of hydrocarbons in commercial quantities and the crystallisation of value whether through production or disposal of reserves. The Company tracks its non-financial performance through the accumulation of licence interests in proven and prospective hydrocarbon producing regions, the level of success in encountering hydrocarbons and the development of production facilities. In parallel, the Company tracks its financial performance through management of expenditures within resources available, the cost-effective exploitation of reserves and the crystallisation of value at the optimum point. A review of the Company’s progress against these KPIs is covered in the operations and financial review within this Strategic Report. Additional Information Additional information relating to Serica, can be found on the Company’s website at www.serica-energy.com and on SEDAR at www.sedar.com Approved on behalf of the Board Christopher Hearne Finance Director 9 April 2014 Forward Looking Statements This disclosure contains certain forward looking statements that involve substantial known and unknown risks and uncertainties, some of which are beyond Serica Energy plc’s control, including: the impact of general economic conditions where Serica Energy plc operates, industry conditions, changes in laws and regulations including the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced, increased competition, the lack of availability of qualified personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of companies with respect to announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities. Serica Energy plc’s actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward looking statements will transpire or occur, or if any of them do so, what benefits, including the amount of proceeds, that Serica Energy plc will derive therefrom. 16 Serica Energy plc Annual Report and Accounts 2013 CONSOLIDATED FINANCIAL STATEMENTS OF SERICA ENERGY PLC YEAR ENDED 31 DECEMBER 2013 DIRECTORS’ REPORT The Directors of the Company present their report and the Group financial statements of Serica Energy plc (“Serica” or the “Company”) for the year ended 31 December 2013. Principal Activities The principal activity of the Company and its subsidiary undertakings (the “Group”) is to identify, acquire, explore and subsequently exploit oil and gas reserves. Its current activities are located in the United Kingdom, Ireland, Namibia and Morocco. Business Review and Future Developments A review of the business and the future developments of the Group is presented in the Strategic Report (including a Review of Operations and Financial Review) and Chairman’s Statement (all of which, together with the Corporate Governance Statement, are incorporated by reference into this Directors’ Report). Results and Dividends The loss for the year was US$5,008,000 (2012: loss US$24,708,000). The Directors do not recommend the payment of a dividend (2012: US$nil). Financial Instruments The Group’s financial risk management objectives and policies are discussed in note 22. Events Since Balance Sheet Date Events since the balance sheet date are included in note 29. Directors and their Interests The following Directors have held office in the Company since 1 January 2013: Antony Craven Walker Christopher Hearne Peter Sadler (resigned 27 June 2013) Neil Pike Mitchell Flegg Ian Vann Steven Theede Jeffrey Harris The Directors who held office at the end of the financial year had the following interests in the ordinary shares of the Company according to the register of Directors’ interests: Antony Craven Walker (1) Christopher Hearne Mitchell Flegg Neil Pike (2) Ian Vann Steven Theede Jeffrey Harris (3) Class of share Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Interest at end of year Interest at start of year 7,829,916 1,051,613 301,463 505,000 267,935 749,485 46,090,576 5,970,236 794,632 102,816 405,000 133,935 749,485 25,501,736 1. 4,207,078 ordinary shares are held by Antony Craven Walker, 2,241,732 ordinary shares are held by Christine Elizabeth Walker and 1,381,106 by Rathbones (pension funds). 2. 190,000 ordinary shares are held by Romayne Pike and 185,000 ordinary shares by Luska Limited. 3. 46,090,576 ordinary shares are held by GRG UK Oil LLC who are represented on the Board by Jeffrey Harris. Serica Energy plc Annual Report and Accounts 2013 17 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED None of the Directors who held office at the end of the financial year had any disclosable interest in the shares of other Group companies. No rights to subscribe for shares in or debentures of Group companies were granted to any of the Directors or their immediate families, or exercised by them, during the financial year except as indicated below: The Directors are interested in share options held by them pursuant to the terms of the Serica Energy Corporation option plan (a summary of which is set out in note 25) as follows: 1/1/13 Granted Expired 31/12/13 Exercise Price Cdn$ C Hearne 600,000 100,000 – – – – 600,000 100,000 1.00 1.80 Date of grant 17/01/05 15/06/05 Expiry date 16/01/15 14/06/15 The options above have fully vested. The following Directors are also interested in share options held by them pursuant to the terms of the Serica Energy plc Share Option Plan 2005 (“Serica 2005 Option Plan”) (a summary of which is set out in note 25) as follows: C Hearne M Flegg 1/1/13 Granted Expired 31/12/13 103,000 7,000 350,000 675,000 200,000 402,190 400,000 270,000 150,000 210,000 66,000 225,000 200,000 326,750 400,000 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 103,000 7,000 350,000 675,000 200,000 402,190 400,000 270,000 150,000 210,000 66,000 225,000 200,000 326,750 400,000 Exercise Price £ 0.97 0.97 0.82 0.68 0.314 0.214 0.29 0.96 1.02 0.75 0.32 0.68 0.314 0.214 0.29 Date of grant 23/11/05 23/11/05 31/03/08 11/01/10 05/04/11 11/01/12 08/10/12 12/06/06 11/01/07 14/03/08 05/01/09 11/01/10 05/04/11 11/01/12 08/10/12 Expiry date 22/11/15 22/11/15 30/03/18 10/01/20 04/04/21 10/01/22 07/10/22 11/06/16 10/01/17 13/03/18 04/01/14 10/01/20 04/04/21 10/01/22 07/10/22 Options granted prior to December 2009 vest as to one third on each of the first, second and third anniversaries of grant in line with the practice for companies listed in Toronto which applied at the date of grant. Options awarded since December 2009 have a three year vesting period. Under the Serica 2005 Option Plan, when awarding options to directors, the Remuneration Committee is required to set Performance Conditions, in addition to the vesting provisions, before vesting can take place. In summary the Performance Conditions are as follows: In respect of the options granted in November 2005, the director may only exercise those options on condition that the Serica share price on a 30 day moving average basis prior to 23 November 2015 has reached at least 200p. In respect of the options granted in March 2008, the director may only exercise those options on condition that the Serica share price on a 30 day moving average basis prior to 30 March 2018 has reached at least 200p. 18 Serica Energy plc Annual Report and Accounts 2013 In respect of the options granted in January 2010, the vesting of the options is subject to Serica share price Performance Conditions measured against a selected peer group initially consisting of Antrim Energy Inc., Aurelian Oil & Gas plc (Aurelian), Bowleven plc, Falkland Oil & Gas Limited, Faroe Petroleum plc, Gulfsands Petroleum plc, Ithaca Energy Inc, Northern Petroleum plc, Petroceltic International plc, Providence Resources plc, Regal Petroleum plc and Valiant Petroleum plc (Valiant). The Performance Conditions are as follows: – 40% of options to vest in the event that the Company outperforms the 25th percentile of peer group performance over any 1 year period – 80% of options to vest in the event that the Company outperforms the 50th percentile of peer group performance over any 1 year period – 100% of options to vest in the event that the Company outperforms the 75th percentile of peer group performance over any 1 year period The peer group of comparator companies is subject to change by the Remuneration Committee should the Remuneration Committee feel that the group no longer comprises a meaningful peer group comparator as the result, for example, of a significant change in the Company or one or more of the peer group companies ceasing to be quoted on a recognised exchange. Regal Petroleum plc (Regal) was replaced by Dominion Petroleum plc (Dominion) following Regal’s acquisition by Energees Management Limited and Dominion was replaced by Chariot Oil and Gas Limited (Chariot) following Dominion’s acquisition by Ophir Energy plc. Aurelian ceased to be quoted on a recognised exchange in January 2013 and Valiant merged with Ithaca Energy Inc in April 2013. Following these events Aurelian and Valiant are no longer included in the peer group of comparator companies and have not been replaced. In respect of the options granted in April 2011, the director may only exercise those options on condition that either of the following Performance Conditions is satisfied: – Achievement of full year post-tax, audited profit for the Serica Energy group of companies; and/or – Successful achievement of a merger or acquisition or other similar corporate event approved by the Board of Directors of the Company which, in the view of the Remuneration Committee, would create greater diversity and scope for the Company. In respect of the options granted in January 2012 and October 2012, the vesting of the options is subject to Serica share price Performance Conditions measured against a selected peer group initially consisting of Antrim Energy Inc., Aurelian Oil & Gas plc, Bowleven plc, Chariot Oil and Gas Limited, Falkland Oil & Gas Limited, Faroe Petroleum plc, Gulfsands Petroleum plc, Ithaca Energy Inc, Northern Petroleum plc, Petroceltic International plc, Providence Resources plc and Valiant Petroleum plc. The Performance Conditions are as follows: – 40% of options to vest in the event that the Company outperforms the 25th percentile of peer group performance over any 1 year period – 80% of options to vest in the event that the Company outperforms the 50th percentile of peer group performance over any 1 year period – 100% of options to vest in the event that the Company outperforms the 75th percentile of peer group performance over any 1 year period The peer group of comparator companies is subject to change by the Remuneration Committee should the Remuneration Committee feel that the group no longer comprises a meaningful peer group comparator as the result, for example, of a significant change in the Company or one or more of the peer group companies ceasing to be quoted on a recognised exchange. Aurelian ceased to be quoted on a recognised exchange in January 2013 and Valiant merged with Ithaca Energy Inc in April 2013. Following these events Aurelian and Valiant are no longer included in the peer group of comparator companies and have not been replaced. Auditor A resolution to reappoint Ernst & Young LLP, as auditor will be put to the members at the annual general meeting. Disclosure of information to auditors The directors who were members of the Board at the time of approving the Directors’ Report are listed above. So far as each person who was a director at the date of approving this report is aware, there is no relevant audit information, being information needed by the auditor in connection with preparing its report, of which the auditor is unaware. Having made enquiries of fellow directors and the Group’s auditor, each director has taken all the steps that he is obliged to take as a director in order to made himself aware of any relevant audit information and to establish that the auditor is aware of that information. On behalf of the Board Christopher Hearne Director 9 April 2014 Serica Energy plc Annual Report and Accounts 2013 19 CORPORATE GOVERNANCE STATEMENT The Board of Directors fully endorses the importance of sound corporate governance. Serica is incorporated in the United Kingdom. Its shares are traded on both the AIM market of the London Stock Exchange (“AIM”) and on the Toronto Stock Exchange in Canada (“TSX”). The code of practice followed for companies incorporated in the United Kingdom and listed on the premium sector of the Main Market of the London Stock Exchange is set out in the UK Corporate Governance Code (the “UK Code”). It is not compulsory for companies whose shares are traded on the AIM market but the Board applies those principles of the UK Code to the extent that it considers it reasonable and practical to do so given the size and nature of the Company. As the Company is quoted on the TSX market as well as on the AIM market it endeavours to meet the principles of the non-binding Corporate Governance Guidelines as well as the UK Code where it is deemed practical and appropriate to do so. The corporate governance guidelines applying to reporting issuers in Canada are set out under Ontario Securities Commission National Policy 58-201 (the “Corporate Governance Guidelines”). The Company is a ‘designated foreign issuer’ as defined under National Instrument 71-1-2-Continuous Disclosure and Other Exemptions Relating to Foreign Issuers. The Company is subject to the foreign regulatory requirements of the AIM Market of the London Stock Exchange. The disclosures below explain the composition of, role and responsibilities of the Board and the Board Committees. The Board and its Committees The Board of the Company currently consists of two Executive Directors, four non-Executive Directors and the Chairman of the Board who has been acting as Interim CEO since the retirement of Paul Ellis in April 2011. At the time of Mr Ellis’s retirement, the Board agreed that it was necessary for there to be some continuity in the management of the Company and it was agreed that the Chairman should be appointed as Interim CEO until such time as a suitably qualified successor to fill the CEO position could be identified. The position has been kept under review by the Corporate Governance and Nomination Committee which reports to the Board. This Committee considers that it remains in the best interests of the Company for the Chairman to continue to fill this role during this period of strategic refocus. This view is supported by the Board. Neil Pike continues to hold the position of Senior Independent Director which ensures that the appropriate level of balance is maintained on the Board. Peter Sadler resigned as an Executive Director in June 2013 but continues to provide consultancy services to the Group. It is considered that the Board is of sufficient size and that the balance of skills and experience is appropriate for a company of Serica’s size, stage of development and business although it is recognised that a CEO will need to be appointed in due course. All the non-Executive Directors and the Chairman are independent in character and judgement and have the range of experience and calibre to bring independent judgement on issues of strategy, performance, resources and standards of conduct which is vital to the success of the Group. The Board retains full and effective control over the Company. The Company holds regular Board meetings at which financial, operational and other reports are considered and, where appropriate, voted on. The Board is responsible for the Group’s strategy, performance, key financial and compliance issues, approval of any major capital expenditure and the framework of internal controls. The matters reserved for the Board include, amongst others, approval of the Group’s long term objectives, policies and budgets, changes relating to the Group’s management structure, approval of the Group’s annual report and accounts and ensuring maintenance of sound systems of internal control. There is a clearly defined organisational structure with lines of responsibility and delegation of authority to executive management. The Board is responsible for monitoring the activities of the executive management. The Chairman has the responsibility of ensuring that the Board discharges its responsibilities. In the event of an equality of votes at a meeting of the Board, the Chairman has a second or casting vote. Other than Jeffrey Harris who represents Global Reserve Group, the Company’s largest shareholder, all of the non-Executive Directors meet the requirements of independence prescribed in the UK Code. The Board believes that there has been an adequate balance between the non-Executive and Executive Directors, both in number and in experience and expertise, to ensure that the Board operates independently of executive management. The need to appoint a Chief Executive Officer is recognised and this is discussed further in the Chairman’s Report. There is no formal Board performance appraisal system in place but the Corporate Governance and Nomination Committee considers this as part of its remit. Individual Directors may engage outside advisors at the expense of the Company upon approval by the Board in appropriate circumstances. The Board has established a Corporate Governance and Nomination Committee, an Audit Committee, a Reserves Committee, a Remuneration and Compensation Committee and a Health, Safety and Environmental Committee. The terms of reference of the Corporate Governance and Nomination, Audit and Remuneration and Compensation Committees can be found on the Company’s website www.serica-energy.com 20 Serica Energy plc Annual Report and Accounts 2013 Corporate Governance and Nomination Committee The Corporate Governance and Nomination Committee is responsible for the Company’s observance of the UK Code and the Corporate Governance Guidelines where they apply to the Company, for compliance with the rules of AIM and the TSX and for other corporate governance matters, including compliance with the Company’s Share Dealing Code and with AIM and TSX in respect of dealings by directors or employees in the Company’s shares. The committee is responsible for monitoring the effectiveness of the Board and its Committees, proposing to the Board new nominees for election as directors to the Board, determining successor plans and for assessing directors on an ongoing basis. The committee met three times during 2013 and proposes to meet at least three times during the next financial year. The Corporate Governance and Nomination Committee is comprised of the Chairman and two non-Executive Directors all of whom are independent (other than as described in “The Board and its Committees” above). The committee is chaired by Neil Pike and its other member is Antony Craven Walker. Audit Committee The Audit Committee meets regularly and consists of three members, all of whom are non-Executive Directors and two of whom are independent including the chairman of the committee. The committee’s purpose is to assist the Board’s oversight of the integrity of the financial statements and other financial reporting, the independence and performance of the auditors, the regulation and risk profile of the Group and the review and approval of any related party transactions. The Audit Committee may hold private sessions with management and the external auditor. The Audit Committee met four times in 2013 and proposes to meet at least three times during the next financial year. The committee is chaired by Neil Pike and its other members are Steven Theede and Jeffrey Harris. The responsibilities and operation of the Audit Committee are more particularly set out in the Company’s Audit Committee Charter, a copy of which is included as Schedule A to the last annual information form filed for the Company, a copy of which is available on SEDAR at www.sedar.com. Reserves Committee The Reserves Committee is a sub-committee of the Audit Committee. The committee’s purpose is to review the reports of the independent reserves auditors pursuant to Canadian regulations which require that the Board discuss the reserves reports with the independent reserves auditors or delegate authority to a reserves committee comprised of at least two non-Executive Directors. The committee is chaired by Steven Theede and its other member is Ian Vann. The committee meets at least once a year prior to publication of the annual results. Remuneration and Compensation Committee The Remuneration and Compensation Committee meets regularly to consider all material elements of remuneration policy, the remuneration and incentivisation of Executive Directors and senior management and to make recommendations to the Board on the framework for executive remuneration and its cost. The role of the Remuneration and Compensation Committee is to keep under review the remuneration policies to ensure that Serica attracts, retains and motivates the most qualified talent who will contribute to the long-term success of the Company. The committee met three times in 2013 and proposes to meet at least three times during the next financial year. In addition, written resolutions of the committee are passed from time to time particularly in relation to routine matters such as the allotment of shares pursuant to share option exercises as well as to record formally decisions of the committee reached outside the scheduled meetings. The committee is composed of the Chairman and two non-Executive Directors all of whom are independent (other than as described in “The Board and its Committees” above). The Remuneration and Compensation Committee is chaired by Steve Theede and its other members are Neil Pike and Antony Craven Walker. Health, Safety and Environmental Committee The Health, Safety and Environmental Committee is responsible for matters affecting occupational health, safety and the environment, including the formulation of a health, safety and environmental policy. The committee met three times in 2013 and proposes to meet at least three times during the next financial year. The committee is chaired by Ian Vann and its other members are Mitch Flegg and Antony Craven Walker. Serica Energy plc Annual Report and Accounts 2013 21 CORPORATE GOVERNANCE STATEMENT CONTINUED Directors’ attendance at meetings The Board generally has one scheduled Board meeting per month over the course of the financial year. Additional meetings are held depending upon opportunities or issues to be dealt with by the Company from time to time. The non-Executive Directors hold informal meetings during the course of the year at which members of management are not in attendance. The following changes were made to the Board Committees during the course of the year: • Mr Harris appointed as a member of the Audit Committee on 28th February 2013. • Mr Craven Walker appointed as a member of the HSE Committee on 28th February 2013. • Mr Vann appointed as a member of the Corporate Governance and Nomination Committee on 25th April 2013. The directors’ attendance at scheduled Board meetings and Board committees during 2013 is detailed in the table below: Director Board A Craven Walker (Chairman) 12* CJ Hearne (CFO) 12 P Sadler (Business Development Director – resigned 27th June 2013) M Flegg (COO) N Pike S Theede I Vann J Harris Total meetings 5 12 12 11 12 12 12 – – – – 4* 3 – 3 4 Audit Remuneration Compensation Corporate and Governance and Nomination 3 – 3 – – – 3 3* – – 3 – – 3* – 1 – 3 HSE Reserves 2 – 1 3 – – 3* – 3 – – 1 – – 1* 1 – 1 Notes: 1. The Chairman and non-executive directors attended a number of meetings of committees of which they were not members during the course of the year at the invitation of the committee chairman. * Chairman Janette Davies Company Secretary 9 April 2014 22 Serica Energy plc Annual Report and Accounts 2013 DIRECTORS’ BIOGRAPHIES Antony Craven Walker Chairman and interim Chief Executive Tony Craven Walker started his career with BP and has been a leading figure in the British independent oil industry since the early 1970s. He founded two British independent oil companies, Charterhouse Petroleum, where he held the post of Chief Executive, and Monument Oil and Gas, where he held the post of Chief Executive and later became Chairman. He was also a founder member of BRINDEX (Association of British Independent Oil Exploration Companies). He was appointed Chairman of Serica in 2004 and following the retirement of Paul Ellis in April 2011, is currently acting as interim Chief Executive. Christopher Hearne Finance Director Chris Hearne joined Serica from Intrepid Energy, a leading independent exploration and production company in the North Sea, where he was responsible for corporate finance for eight years. In this capacity, he contributed to the growth of Intrepid Energy from a start-up company to its sale for over US$1 billion. Prior to joining Serica he worked as an investment banker with Lehman Brothers and Robert Fleming. He was appointed to the Board as Finance Director of Serica in 2005. Mitchell Flegg Chief Operating Officer Mitch Flegg has over 32 years of industry experience starting with Schlumberger and then with Enterprise Oil, (initially as a Petrophysicist) where he became responsible for drilling related operations for wells drilled in UK, Australia, Cambodia, Vietnam, Ireland, Romania and Bulgaria. After the takeover by Shell he worked on the implementation of new technology in well engineering before moving into asset management. Mitch joined Serica in 2006 and has been responsible for all drilling and development operations. He was promoted to the position of Chief Operating Officer in March 2011 and appointed to the Board of Serica in September 2012. Neil Pike Non-Executive Director Neil Pike has been involved in the global petroleum business as a financier since joining the energy department at Citibank in 1975 until joining the board of Serica. Neil remained an industry specialist with Citibank throughout his career and was closely involved in the development of specialised oil field finance. Latterly he was responsible for Citibank’s relationships with the oil and gas industry worldwide. He was appointed to the Board of Serica in 2004. Ian Vann Non-Executive Director Ian Vann was employed by BP from 1976, and directed and led BP’s global exploration efforts from 1996 until his retirement in January 2007. He was appointed to the executive leadership team of the Exploration & Production Division of BP in 2001, initially as Group Vice President, Technology and later as Group Vice President, Exploration and Business Development. He was appointed to the Board of Serica in 2007. Steven Theede Non-Executive Director Steven Theede held senior management positions with Conoco, later ConocoPhillips, and in 2000 was appointed President, Exploration and Production for Europe, Russia and the Caspian region. In 2003 he joined Yukos Oil Company and became its Chief Executive Officer in July 2004, a position he held until August 2006. He was appointed to the Board of Serica in 2007. Jeffrey Harris Non-Executive Director Jeffrey Harris founded Global Reserve Group LLC in 2012 following a twenty-nine year career with Warburg Pincus, during which period he invested in and advised companies in the industrial, consumer, technology and energy sectors. Jeffrey has served on the board of directors of over thirty companies, including twelve publicly-traded entities. He is past chairman of the National Venture Capital Association and an adjunct professor at the Columbia University Graduate School of Business where he teaches courses on venture capital, and entrepreneurship and innovation. He was appointed to the Board of Serica in December 2012. Serica Energy plc Annual Report and Accounts 2013 23 DIRECTORS’ RESPONSIBILITIES STATEMENT IN RELATION TO THE GROUP AND COMPANY FINANCIAL STATEMENTS The Directors are responsible for preparing the Strategic Report, the Director’s Report and financial statements in accordance with applicable United Kingdom law and regulations and those International Financial Reporting Standards as adopted by the European Union. Company law requires the directors to prepare financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union. Under United Kingdom company law the directors have elected to prepare the Parent Company financial statements in accordance with International Financial Reporting Standards as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and the profit or loss of the company for that period. In preparing those Group and Company financial statements the Directors are required to: • present fairly the financial position, financial performance and cash flows of the Group; • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state that the Group and Company has complied with IFRSs, subject to any material departures disclosed and explained in the financial statements; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s and Company’s financial position and financial performance; and • state whether the Group financial statements have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the Group and Company financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors confirm that they have complied with these requirements and, having a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future, will continue to adopt the going concern basis in preparing the accounts. 24 Serica Energy plc Annual Report and Accounts 2013 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SERICA ENERGY PLC We have audited the financial statements of Serica Energy plc for the year ended 31 December 2013 which comprise the Group Income Statement, the Group Statement of Comprehensive Income, the Group and Parent Company Balance Sheets, the Group and Parent Company Statements of Changes in Equity, the Group and Parent Company Cash Flow Statements and the related notes 1 to 29. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report and financial statements to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2013 and of the group’s loss for the year then ended; • the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; and • 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. Separate opinion in relation to IFRSs as issued by the IASB As explained in Note 1 to the financial statements, the group in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (IASB). In our opinion the financial statements comply with IFRSs as issued by the IASB. Opinion on other matter prescribed by the Companies Act 2006 In our opinion 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. Serica Energy plc Annual Report and Accounts 2013 25 Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Justine Belton, (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London 9 April 2014 26 Serica Energy plc Annual Report and Accounts 2013 Notes 25 6 13 9 10 GROUP INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER Continuing operations SALES REVENUE Cost of sales GROSS PROFIT Pre-licence costs E&E and other asset write-offs Administrative expenses Foreign exchange gain Share-based payments Depreciation 2013 US$000 * restated 2012 US$000 – – – (330) (299) (4,458) 341 (252) (109) – – – (331) (10,462) (5,274) 180 (570) (341) OPERATING LOSS BEFORE NET FINANCE REVENUE AND TAx (5,107) (16,798) Gain on disposal Finance revenue Finance costs LOSS BEFORE TAxATION 11 a) Taxation charge for the year Loss for the year from continuing operations Discontinued operations Profit/(loss) for the year from discontinued operations 4 LOSS FOR THE yEAR Loss per ordinary share – EPS Basic and diluted EPS on continuing operations (US$) Basic and diluted EPS on loss for the year (US$) 12 12 * restated for discontinued operations – see note 4 Group Statement of Comprehensive Income There are no other comprehensive income items other than those passing through the income statement. – 16 (38) 1,023 12 (615) (5,129) (16,378) – – (5,129) (16,378) 121 (8,330) (5,008) (24,708) (0.03) (0.03) (0.09) (0.14) Serica Energy plc Annual Report and Accounts 2013 27 Group 2013 US$000 74,609 – – 1,293 75,902 258 3,851 420 26,062 30,591 2012 US$000 66,880 1,145 – 1,706 69,731 481 8,941 412 22,345 32,179 Company 2013 US$000 – – – – – – 98,148 420 25,459 124,027 2012 US$000 – – 13,830 – 13,830 – 111,768 412 21,424 133,604 106,493 101,910 124,027 147,434 (4,417) – (11,677) (1,601) (4,417) (13,278) (959) – (959) (1,080) – (1,080) 102,076 88,632 123,068 146,354 227,958 – 20,297 (146,179) 209,758 – 20,045 (141,171) 192,686 – 20,297 (89,915) 174,486 4,322 20,045 (52,499) 102,076 88,632 123,068 146,354 BALANCE SHEET AS AT 31 DECEMBER Notes 13 14 15 16 17 18 18 19 20 21 23 15 Non-current assets Exploration & evaluation assets Property, plant and equipment Investments in subsidiaries Other receivables Current assets Inventories Trade and other receivables Financial assets Cash and cash equivalents TOTAL ASSETS Current liabilities Trade and other payables Provisions TOTAL LIABILITIES NET ASSETS Share capital Merger reserve Other reserve Accumulated deficit TOTAL EQUITy Approved by the Board on 9 April 2014 Antony Craven Walker Chief Executive Officer Christopher Hearne Finance Director 28 Serica Energy plc Annual Report and Accounts 2013 STATEMENT OF CHANGES IN EqUITY FOR THE YEAR ENDED 31 DECEMBER Group Share capital US$000 Other reserve US$000 Accum’d deficit US$000 Total US$000 At 1 January 2012 207,702 19,475 (116,463) 110,714 Loss for the year Total comprehensive income Share-based payments Proceeds on exercise of options Issue of ordinary shares AT 31 DECEMBER 2012 Loss for the year Total comprehensive income Share-based payments Issue of ordinary shares Fees from issue of shares AT 31 DECEMBER 2013 Company – – – 56 2,000 – – 570 – – (24,708) (24,708) – – – (24,708) (24,708) 570 56 2,000 209,758 20,045 (141,171) 88,632 – – – 19,525 (1,325) – – 252 – – (5,008) (5,008) – – – (5,008) (5,008) 252 19,525 (1,325) 227,958 20,297 (146,179) 102,076 Share capital US$000 Merger reserve US$000 Other reserve US$000 Accum’d deficit US$000 Total US$000 At 1 January 2012 172,430 4,322 19,475 (49,535) 146,692 Loss for the year Total comprehensive income Proceeds on exercise of options Share-based payments Issue of ordinary shares – – 56 – 2,000 – – – – – – – – 570 – (2,964) (2,964) – – – (2,964) (2,964) 56 570 2,000 AT 31 DECEMBER 2012 174,486 4,322 20,045 (52,499) 146,354 Loss for the year Total comprehensive income Share-based payments Issue of ordinary shares Fees from issue of shares Transfers – – – 19,525 (1,325) – – – – – – (4,322) – – 252 – – – (41,738) (41,738) – – – 4,322 (41,738) (41,738) 252 19,525 (1,325) – AT 31 DECEMBER 2013 192,686 – 20,297 (89,915) 123,068 Serica Energy plc Annual Report and Accounts 2013 29 CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER Operating activities: Loss for the year Adjustments to reconcile loss for the year to net cash flow from operating activities: Net finance costs Profit on disposal Depreciation Depletion and amortisation Asset write-offs Impairment Share-based payments Other non-cash movements Decrease in trade and other receivables Decrease in inventories (Decrease)/increase in trade and other payables Use of provisions Cash generated from operations Taxation paid NET CASH (OUT)/INFLOW FROM OPERATIONS Investing activities: Interest received Purchase of property, plant and equipment Purchase of E&E assets Cash inflow from disposals Funding provided to Group subsidiaries Funds from Group subsidiaries NET CASH FLOW FROM INVESTING ACTIVITIES Financing activities: Gross proceeds from issue of shares Fees from issue of shares Finance costs paid Proceeds on exercise of options NET CASH FLOW FROM FINANCING ACTIVITIES NET INCREASE IN CASH AND CASH EQUIVALENTS Effect of exchange rates on cash and cash equivalents Cash and cash equivalents at 1 January Group 2013 US$000 2012 US$000 Company 2013 US$000 2012 US$000 (5,008) (24,708) (41,738) (2,964) 28 – 109 1,036 299 – 252 (310) 4,570 24 (2,108) (1,607) (2,715) – (2,715) 16 – (13,094) 933 – – (12,145) 19,525 (1,325) (38) – 18,162 3,302 415 22,345 621 (1,023) 341 13,116 10,462 4,361 570 98 4,051 17 (3,600) – 4,306 (302) 4,004 12 (690) (5,816) 5,250 – – (1,244) – – (615) 56 (559) 2,201 198 19,946 22 – – – – 40,000 252 (345) 204 – (212) – 605 – – – – – 570 (141) 263 – 278 – (1,817) (1,389) – – (1,817) (1,389) 16 – – – (12,762) – (12,746) 19,525 (1,325) (38) – 18,162 3,599 436 21,424 8 – – – – 4,036 4,044 – – (613) 56 (557) 2,098 184 19,142 21,424 CASH AND CASH EQUIVALENTS AT 31 DECEMBER 26,062 22,345 25,459 30 Serica Energy plc Annual Report and Accounts 2013 NOTES TO THE FINANCIAL STATEMENTS 1. Authorisation of the Financial Statements and Statement of Compliance with IFRS The Group’s and Company’s financial statements for the year ended 31 December 2013 were authorised for issue by the Board of Directors on 9 April 2014 and the balance sheets were signed on the Board’s behalf by Antony Craven Walker and Chris Hearne. Serica Energy plc is a public limited company incorporated and domiciled in England & Wales. The principal activity of the Company and the Group is to identify, acquire and subsequently exploit oil and gas reserves. Its current activities are located in the United Kingdom, Ireland, Namibia and Morocco. The Company’s ordinary shares are traded on AIM and the TSX. The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the EU as they apply to the financial statements of the Group for the year ended 31 December 2013. The Company’s financial statements have been prepared in accordance with IFRS as adopted by the EU as they apply to the financial statements of the Company for the year ended 31 December 2013 and as applied in accordance with the provisions of the Companies Act 2006. The Group’s financial statements are also prepared in accordance with IFRS as issued by the IASB. The principal accounting policies adopted by the Group and by the Company are set out in note 2. The Company has taken advantage of the exemption provided under section 408 of the Companies Act 2006 not to publish its individual income statement and related notes. The deficit dealt with in the financial statements of the parent Company was US$41,738,000 (2012: US$2,964,000). On 1 September 2005, the Company completed a reorganisation (the “Reorganisation”). whereby the common shares of Serica Energy Corporation were automatically exchanged on a one-for-one basis for ordinary shares of Serica Energy plc, a newly formed company incorporated under the laws of the United Kingdom. In addition, each shareholder of the Corporation received beneficial ownership of part of the ‘A’ share of Serica Energy plc issued to meet the requirements of public companies under the United Kingdom jurisdiction. Under IFRS this reorganisation was considered to be a reverse takeover by Serica Energy Corporation and as such the financial statements of the Group represent a continuation of Serica Energy Corporation. 2. Accounting Policies Basis of Preparation The accounting policies which follow set out those policies which apply in preparing the financial statements for the year ended 31 December 2013. The Group and Company financial statements have been prepared on a historical cost basis and are presented in US dollars. All values are rounded to the nearest thousand dollars (US$000) except when otherwise indicated. Going Concern The financial position of the Group, its cash flows and capital commitments are described in the Financial Review above. Although the Group no longer benefits from sales revenue generated from its interest in the Kambuna field, following the capital raising of US$18.2 million (net of expenses) which completed in November 2013, the Group held cash and cash equivalents of US$26.1 million as at 31 December 2013. The Directors are required to consider the availability of resources to meet the Group and Company’s liabilities for the foreseeable future. Since the year end the Group has paid outstanding commitments of US$2.8 million from the recent Foum Draa exploration well in Morocco. It will also use these funds to pay its share of drilling costs over the contractual US$50 million cap on the Sidi Moussa well in Morocco, which is expected to spud in Q3 2014. The Group’s planned exploration well on the Doyle prospect in 2015 is also subject to a capped carry, which is not currently forecast to be exceeded. Any share of costs over the carry would not be significant and could be satisfied from current cash balances. The cash in place will cover other geological and geophysical, exploration, technical and administrative costs associated with its ongoing business in the short to medium term. In particular, it also provides balance sheet support to help achieve infrastructure access and project sanction for the Columbus field, and covers pre-drilling work in Namibia. When the final decision to proceed with the Columbus development is made, the Group would use alternative means of finance to fund its share of development costs. The Group has a record of prudent financial management with particular success in the raising of capital through farm down and will seek to continue this strategy. Serica Energy plc Annual Report and Accounts 2013 31 After making enquiries and having taken into consideration the above factors, the Directors have reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly they continue to adopt the going concern basis in preparing the annual financial statements. Use of judgement and estimates and key sources of estimation uncertainty The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Estimates and judgments are continuously evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual outcomes could differ from these estimates. The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the amounts recognised in the financial statements are: the assessment of commercial reserves, the impairment of the Group and Company’s assets (including oil & gas development assets and Exploration and Evaluation “E&E” assets) and share-based payment costs. Assessment of commercial reserves Management is required to assess the level of the Group’s commercial reserves together with the future expenditures to access those reserves, which are utilised in determining the amortisation and depletion charge for the period and assessing whether any impairment charge is required. The Group employs independent reserves specialists who periodically assess the Group’s level of commercial reserves by reference to data sets including geological, geophysical and engineering data together with reports, presentation and financial information pertaining to the contractual and fiscal terms applicable to the Group’s assets. In addition the Group undertakes its own assessment of commercial reserves and related future capital expenditure by reference to the same datasets using its own internal expertise. Impairment The Group monitors internal and external indicators of impairment relating to its intangible and tangible assets, which may indicate that the carrying value of the assets may not be recoverable. The assessment of the existence of indicators of impairment in E&E assets involves judgement, which includes whether management expects to fund significant further expenditure in respect of a licence and whether the recoverable amount may not cover the carrying value of the assets. For development and production assets judgement is involved when determining whether there have been any significant changes in the Group’s oil and gas reserves. The Group determines whether E&E assets are impaired at an asset level and in regional cash generating units (‘CGUs’) when facts and circumstances suggest that the carrying amount of a regional CGU may exceed its recoverable amount. As recoverable amounts are determined based upon risked potential, or where relevant, discovered oil and gas reserves, this involves estimations and the selection of a suitable pre-tax discount rate relevant to the asset in question. The calculation of the recoverable amount of oil and gas development properties involves estimating the net present value of cash flows expected to be generated from the asset in question. Future cash flows are based on assumptions on matters such as estimated oil and gas reserve quantities and commodity prices. The discount rate applied is a pre-tax rate which reflects the specific risks of the country in which the asset is located. Management is required to assess the carrying value of investments in subsidiaries in the parent company balance sheet for impairment by reference to the recoverable amount. This requires an estimate of amounts recoverable from oil and gas assets within the underlying subsidiaries (see note 15). Share-based payment costs The estimation of share-based payment costs requires the selection of an appropriate valuation model, consideration as to the inputs necessary for the valuation model chosen and the estimation of the number of awards that will ultimately vest, inputs for which arise from judgments relating to the continuing participation of employees (see note 25). Basis of Consolidation The consolidated financial statements include the accounts of Serica Energy plc (the “Company”) and its wholly owned subsidiaries Serica Holdings UK Limited, Serica Energy Holdings B.V., Serica Energy (UK) Limited, Serica Glagah Kambuna B.V., Serica Sidi Moussa B.V., Serica Foum Draa B.V., Serica Energy Slyne B.V., Serica Energy Rockall B.V., Serica Namibia B.V., Serica Energy Corporation, Asia Petroleum Development Limited, Petroleum Development Associates (Asia) Limited, Petroleum Development Associates Lematang Limited, Serica Energia Iberica S.L., Asia Petroleum Development (Asahan) Limited and Asia Petroleum Development (Biliton) Limited. Together these comprise the “Group”. 32 Serica Energy plc Annual Report and Accounts 2013 All inter-company balances and transactions have been eliminated upon consolidation. Foreign Currency Translation The functional and presentational currency of Serica Energy plc and all its subsidiaries is US dollars. Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the foreign currency rate of exchange ruling at the balance sheet date and differences are taken to the income statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rate at the date when the fair value was determined. Exchange gains and losses arising from translation are charged to the income statement as an operating item. Business Combinations and Goodwill Business combinations from 1 January 2010 Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. Acquisition costs incurred are expensed and included in administrative expenses. Goodwill on acquisition is initially measured at cost being the excess of purchase price over the fair market value of identifiable assets, liabilities and contingent liabilities acquired. Following initial acquisition it is measured at cost less any accumulated impairment losses. Goodwill is not amortised but is subject to an impairment test at least annually and more frequently if events or changes in circumstances indicate that the carrying value may be impaired. At the acquisition date, any goodwill acquired is allocated to each of the cash-generating units, or groups of cash generating units expected to benefit from the combination’s synergies. Impairment is determined by assessing the recoverable amount of the cash- generating unit, or groups of cash generating units to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Joint Arrangements A joint operation is a type of joint arrangement whereby the parties that have joint control of the arrangement have the rights to the assets and obligations for the liabilities, relating to the arrangement. The Group conducts petroleum and natural gas exploration and production activities jointly with other venturers who each have direct ownership in and jointly control the operations of the ventures. These are classified as jointly controlled operations and the financial statements reflect the Group’s share of assets and liabilities in such activities. Income from the sale or use of the Group’s share of the output of jointly controlled operations, and its share of joint venture expenses, are recognised when it is probable that the economic benefits associated with the transaction will flow to/from the Group and their amount can be measured reliably. Full details of Serica’s working interests in those petroleum and natural gas exploration and production activities classified as jointly controlled operations are included in the Review of Operations. Exploration and Evaluation Assets As allowed under IFRS 6 and in accordance with clarification issued by the International Financial Reporting Interpretations Committee, the Group has continued to apply its existing accounting policy to exploration and evaluation activity, subject to the specific requirements of IFRS 6. The Group will continue to monitor the application of these policies in light of expected future guidance on accounting for oil and gas activities. Pre-licence Award Costs Costs incurred prior to the award of oil and gas licences, concessions and other exploration rights are expensed in the income statement. Serica Energy plc Annual Report and Accounts 2013 33 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Exploration and Evaluation (E&E) The costs of exploring for and evaluating oil and gas properties, including the costs of acquiring rights to explore, geological and geophysical studies, exploratory drilling and directly related overheads, are capitalised and classified as intangible E&E assets. These costs are directly attributed to regional CGUs for the purposes of impairment testing; UK & Ireland and Africa. E&E assets are not amortised prior to the conclusion of appraisal activities but are assessed for impairment at an asset level and in regional CGUs when facts and circumstances suggest that the carrying amount of a regional cost centre may exceed its recoverable amount. Recoverable amounts are determined based upon risked potential, and where relevant, discovered oil and gas reserves. When an impairment test indicates an excess of carrying value compared to the recoverable amount, the carrying value of the regional CGU is written down to the recoverable amount in accordance with IAS 36. Such excess is expensed in the income statement. Costs of licences and associated E&E expenditure are expensed in the income statement if licences are relinquished, or if management do not expect to fund significant future expenditure in relation to the licence. The E&E phase is completed when either the technical feasibility and commercial viability of extracting a mineral resource are demonstrable or no further prospectivity is recognised. At that point, if commercial reserves have been discovered, the carrying value of the relevant assets, net of any impairment write-down, is classified as an oil and gas property within property, plant and equipment, and tested for impairment. If commercial reserves have not been discovered then the costs of such assets will be written off. Asset Purchases and Disposals When a commercial transaction involves the exchange of E&E assets of similar size and characteristics, no fair value calculation is performed. The capitalised costs of the asset being sold are transferred to the asset being acquired. Proceeds from a part disposal of an E&E asset, including back-cost contributions are credited against the capitalised cost of the asset, with any excess being taken to the income statement as a gain on disposal. Farm-ins In accordance with industry practice, the Group does not record its share of costs that are ‘carried’ by third parties in relation to its farm-in agreements in the E&E phase. Similarly, while the Group has agreed to carry the costs of another party to a Joint Operating Agreement (“JOA”) in order to earn additional equity, it records its paying interest that incorporates the additional contribution over its equity share. Property, Plant and Equipment – Oil and gas properties Capitalisation Oil and gas properties are stated at cost, less any accumulated depreciation and accumulated impairment losses. Oil and gas properties are accumulated into single field cost centres and represent the cost of developing the commercial reserves and bringing them into production together with the E&E expenditures incurred in finding commercial reserves previously transferred from E&E assets as outlined in the policy above. The cost will include, for qualifying assets, borrowing costs. Depletion Oil and gas properties are not depleted until production commences. Costs relating to each single field cost centre are depleted on a unit of production method based on the commercial proved and probable reserves for that cost centre. The depletion calculation takes account of the estimated future costs of development of recognised proved and probable reserves. Changes in reserve quantities and cost estimates are recognised prospectively from the last reporting date. The Kambuna field was depleted using proved and probable entitlement reserves until 30 June 2011. However, given the relatively short remaining field life, the Company then concluded that it was appropriate to use proved reserves as a basis for the specific depletion calculation for the Kambuna field asset with effect from 1 July 2011. Following the advancement of field shut-in plans and handover arrangements with Pertamina in 2H 2013, the Company concluded that, with effect from 1 October 2012, it was appropriate to use its best estimates of remaining production quantities as a basis to calculate the reserves for specific depletion and impairment calculations for the Kambuna field. The Kambuna property was fully depleted in July 2013. Impairment A review is performed for any indication that the value of the Group’s development and production assets may be impaired. For oil and gas properties when there are such indications, an impairment test is carried out on the cash generating unit. Each cash generating unit is identified in accordance with IAS 36. Serica’s cash generating units are those assets which generate largely independent cash flows and are normally, but not always, single development or production areas. If necessary, impairment is charged 34 Serica Energy plc Annual Report and Accounts 2013 through the income statement if the capitalised costs of the cash generating unit exceed the recoverable amount of the related commercial oil and gas reserves. Asset Disposals Proceeds from the entire disposal of a development and production asset, or any part thereof, are taken to the income statement together with the requisite proportional net book value of the asset, or part thereof, being sold. Decommissioning Liabilities for decommissioning costs are recognised when the Group has an obligation to dismantle and remove a production, transportation or processing facility and to restore the site on which it is located. Liabilities may arise upon construction of such facilities, upon acquisition or through a subsequent change in legislation or regulations. The amount recognised is the estimated present value of future expenditure determined in accordance with local conditions and requirements. A corresponding tangible item of property, plant and equipment equivalent to the provision is also created. Any changes in the present value of the estimated expenditure is added to or deducted from the cost of the assets to which it relates. The adjusted depreciable amount of the asset is then depreciated prospectively over its remaining useful life. The unwinding of the discount on the decommissioning provision is included as a finance cost. Property, Plant and Equipment – Other Computer equipment and fixtures, fittings and equipment are recorded at cost as tangible assets. The straight-line method of depreciation is used to depreciate the cost of these assets over their estimated useful lives. Computer equipment is depreciated over three years and fixtures, fittings and equipment over four years. Inventories Inventories are valued at the lower of cost and net realisable value. Cost is determined by the first-in first-out method and comprises direct purchase costs and transportation expenses. Investments In its separate financial statements the Company recognises its investments in subsidiaries at cost less any provision for impairment. Financial Instruments Financial instruments comprise financial assets, cash and cash equivalents, financial liabilities and equity instruments. Financial assets Financial assets within the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, or loans and receivables, as appropriate. When financial assets are recognised initially, they are measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of the financial asset are capitalised unless they relate to a financial asset classified at fair value through profit and loss in which case transaction costs are expensed in the income statement. The Group determines the classification of its financial assets at initial recognition and, where allowed and appropriate, re-evaluates this designation at each financial year end. Financial assets at fair value through profit or loss include financial assets held for trading and derivatives. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement loans and receivables are subsequently carried at amortised cost, using the effective interest rate method, less any allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition over the period to maturity. Gains and losses are recognised in the income statement when the loans and receivables are de-recognised or impaired, as well as through the amortisation process. Cash and cash equivalents Cash and cash equivalents include balances with banks and short-term investments with original maturities of three months or less at the date acquired. Serica Energy plc Annual Report and Accounts 2013 35 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Financial liabilities Financial liabilities include interest bearing loans and borrowings, and trade and other payables. Obligations for loans and borrowings are recognised when the Group becomes party to the related contracts and are measured initially at the fair value of consideration received less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process. Equity Equity instruments issued by the Company are recorded in equity at the proceeds received, net of direct issue costs. Leases Operating lease payments are recognised as an operating expense in the income statement on a straight line basis over the lease term. Revenue Recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue from oil and natural gas production is recognised on an entitlement basis for the Group’s net working interest. Finance Revenue Finance revenue chiefly comprises interest income from cash deposits on the basis of the effective interest rate method and is disclosed separately on the face of the income statement. Finance Costs Finance costs of debt are allocated to periods over the term of the related debt using the effective interest method. Arrangement fees and issue costs are amortised and charged to the income statement as finance costs over the term of the debt. Borrowing costs Borrowing costs directly relating to the acquisition, construction or production of a qualifying capital project under construction are capitalised and added to the project cost during construction until such time the assets are substantially ready for their intended use i.e when they are capable of commercial production. Where funds are borrowed specifically to finance a project, the amounts capitalised represent the actual borrowing costs incurred. All other borrowing costs are recognised in the income statement in the period in which they are incurred. Share-Based Payment Transactions Employees (including directors) of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (‘equity-settled transactions’). Equity-settled transactions The cost of equity-settled transactions with employees is measured by reference to the fair value at the date on which they are granted. In valuing equity-settled transactions, no account is taken of any service or performance conditions, other than conditions linked to the price of the shares of Serica Energy plc (‘market conditions’), if applicable. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the relevant employees become fully entitled to the award (the ‘vesting period’). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The income statement charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. 36 Serica Energy plc Annual Report and Accounts 2013 No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market or non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance conditions are satisfied. Equity awards cancelled are treated as vesting immediately on the date of cancellation, and any expense not recognised for the award at that date is recognised in the income statement. Estimated associated national insurance charges are expensed in the income statement on an accruals basis. Where the terms of an equity-settled award are modified or a new award is designated as replacing a cancelled or settled award, the cost based on the original award terms continues to be recognised over the original vesting period. In addition, an expense is recognised over the remainder of the new vesting period for the incremental fair value of any modification, based on the difference between the fair value of the original award and the fair value of the modified award, both as measured on the date of the modification. No reduction is recognised if this difference is negative. Income Taxes Current tax, including UK corporation tax and overseas corporation tax, is provided at amounts expected to be paid using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is provided using the liability method and tax rates and laws that have been enacted or substantively enacted at the balance sheet date. Provision is made for temporary differences at the balance sheet date between the tax bases of the assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax is provided on all temporary differences except for: • temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled by the Group and it is probable that the temporary differences will not reverse in the foreseeable future; and • temporary differences arising from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the income statement nor taxable profit or loss. Deferred tax assets are recognised for all deductible temporary differences, to the extent that it is probable that taxable profits will be available against which the deductible temporary differences can be utilised. Deferred tax assets and liabilities are presented net only if there is a legally enforceable right to set off current tax assets against current tax liabilities and if the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority. Earnings Per Share Earnings per share is calculated using the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is calculated based on the weighted average number of ordinary shares outstanding during the period plus the weighted average number of shares that would be issued on the conversion of all relevant potentially dilutive shares to ordinary shares. It is assumed that any proceeds obtained on the exercise of any options and warrants would be used to purchase ordinary shares at the average price during the period. Where the impact of converted shares would be anti-dilutive, these are excluded from the calculation of diluted earnings. New and amended standards and interpretations The accounting policies adopted are consistent with those of the previous financial year, except for the following new and amended IFRS and IFRIC interpretations effective as of 1 January 2013 unless otherwise stated. The adoption of the standards or interpretations is described below: i) IAS 1 Financial Statement presentation – Presentation of items of Other Comprehensive Income The amendments to IAS 1 change the grouping of items presented in Other Comprehensive Income. Items that could be classified to profit or loss at a future point in time would be presented separately from items that will never be reclassified. The amendment affects presentation only and has no impact on the Group’s financial position or performance. The amendment became effective for annual periods beginning on or after 1 July 2012. ii) IFRS 10 Consolidated Financial Statements IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. The application of IFRS 10 and IAS 27 did not impact the Group’s accounting for its interests in subsidiaries. Serica Energy plc Annual Report and Accounts 2013 37 NOTES TO THE FINANCIAL STATEMENTS CONTINUED iii) IFRS 11 Joint Arrangements IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities – Non-monetary Contributions by Venturers. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead JCEs that meet the definition of a joint venture must be accounted for using the equity method. The application of IFRS 11 did not impact on the financial position or performance of the Group. iv) IFRS 12 Disclosure of Involvement with Other Entities IFRS 12 includes all of the disclosures that were previously in IAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28. These disclosures relate to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required but the application of IFRS 12 did not impact on the financial position or performance of the Group. v) IFRS 13 Fair Value Measurement IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted, and also requires additional disclosures. Application of IFRS 13 has not materially impacted the fair value measurements of the Group. Standards issued but not yet effective Certain standards or interpretations issued but not yet effective up to the date of issuance of the Group’s financial statements are listed below. This listing of standards and interpretations issued are those that the Group reasonably expects to have an impact on disclosures, financial position or performance when applied at a future date. The Group intends to adopt these standards when they become effective. IFRS 9 Financial Instruments: Classification and Measurement IFRS 9 as issued reflects the first phase of the IASBs work on the replacement of IAS 39 and applies to the classification and measurement of financial assets and financial liabilities as defined in IAS 39. The standard is expected to be effective for annual periods beginning on or after 1 January 2018. Amendments to IAS 36: Recoverable Amount Disclosures for Non-Financial Assets The amendment addressed certain unintended consequences arising from consequential amendments made to IAS 36 when IFRS 13 was issued. The amendment is effective for annual periods beginning on or after 1 January 2014. The Directors anticipate the adoption of the standards and interpretations listed above, or any others in issue but not yet adopted, will not have a material impact on the Financial Statements of the Group. 38 Serica Energy plc Annual Report and Accounts 2013 3. Segment Information The Group’s business is that of oil & gas exploration, development and production. The Group’s reportable segments are based on the location of the Group’s assets. The following tables present revenue, profit and certain asset and liability information regarding the Group’s geographical reportable segments for the years ended 31 December 2013 and 2012. Costs associated with the UK corporate centre are included in the UK & Ireland reportable segment. Reportable information in respect of the Group’s interest in the producing Kambuna field in Indonesia is disclosed as a separate segment, with income statement information for the Kambuna field in Indonesia additionally classified as ‘discontinued’. year ended 31 December 2013 REVENUE Other expenses Pre-licence costs Asset write-offs Depletion Depreciation Operating and segment (loss)/profit Finance revenue Finance costs Loss before taxation Taxation charge for the year LOSS AFTER TAxATION Other segment information: Exploration and evaluation assets Other assets Unallocated assets TOTAL ASSETS Segment liabilities TOTAL LIABILITIES Capital expenditure 2013: Exploration and evaluation assets UK & Ireland US$000 – (4,369) (57) (299) – (109) (4,834) UK & Ireland US$000 70,372 12,403 82,775 (1,529) (1,529) Africa US$000 – – (273) – – – (273) Continuing Discontinued Total US$000 US$000 – 4,032 (4,369) (330) (299) – (109) (5,107) 16 (38) (5,129) – (5,129) (2,869) – – (1,036) – 127 – (6) 121 – 121 Africa US$000 Kambuna US$000 Total US$000 4,237 89 4,326 (1,864) (1,864) – 3,508 3,508 (1,024) (1,024) 74,609 16,000 15,884 106,493 (4,417) (4,417) 4,429 3,431 – 7,860 Serica Energy plc Annual Report and Accounts 2013 39 Continuing Total US$000 *restated Discontinued US$000 – 15,404 (5,664) (331) (10,462) – – (341) (16,798) 1,023 12 (615) (16,378) – (16,378) (6,239) – – (4,361) (13,116) – (8,312) – – (18) (8,330) – (8,330) – – – – – – – – – Africa US$000 Kambuna US$000 Total US$000 805 – 1,831 2,636 (979) (979) 1,326 – – 1,036 7,344 8,380 (3,660) (3,660) 66,880 1,145 26,135 7,750 101,910 (13,278) (13,278) – 690 12,764 690 Africa US$000 – – (213) – – – – (213) NOTES TO THE FINANCIAL STATEMENTS CONTINUED Year ended 31 December 2012 REVENUE Continuing operations Other expenses Pre-licence costs Asset write-offs Impairment Depletion Depreciation Operating loss and segment loss Profit on disposal Finance revenue Finance costs Loss before taxation Taxation charge for the year LOSS AFTER TAxATION Other segment information: Exploration and evaluation assets Plant, property and equipment Other assets Unallocated assets TOTAL ASSETS Segment liabilities TOTAL LIABILITIES Capital expenditure 2012: Exploration and evaluation assets Property, plant and equipment UK & Ireland US$000 – (5,664) (118) (10,462) – – (341) (16,585) UK & Ireland US$000 66,075 109 16,960 83,144 (8,639) (8,639) 11,438 – * restated for discontinued operations – see note 4 Unallocated assets and liabilities comprise financing items (including cash on deposit). Information on major customers is provided in note 4. 40 Serica Energy plc Annual Report and Accounts 2013 4. Discontinued Operation During 2012 and 2013, Serica’s sole remaining interest in Indonesia was its 25% interest in the Glagah Kambuna Technical Assistance Contract (“TAC”). The TAC covers an area of approximately 380 square kilometres offshore North Sumatra and contains the Kambuna gas field. Throughout the first half of 2013 the Company continued to benefit from cash flows from field production but, in July 2013, the field reached the end of its economic life and was shut-in. The partnership agreed handover arrangements with the Indonesian authorities which involved securing the three wells and wellhead structure. Following the completion of the agreed decommissioning procedures in Q4 2013, the TAC was formally terminated on 31 December 2013 and the facilities handed over to Pertamina. Following the developments of the Kambuna business segment in the second half of 2013, the financial results of the Kambuna field are now disclosed as ‘discontinued’ operations and separate from the results of the continuing business segments. The 2012 results from the Kambuna business segment have therefore been restated accordingly. Results of discontinued operations The results of the discontinued operations are presented below: SALES REVENUE Cost of sales GROSS PROFIT/(LOSS) Impairment of fixed assets Administrative expenses OPERATING PROFIT/(LOSS) Finance costs PROFIT/(LOSS) BEFORE TAxATION Taxation charge for the year PROFIT/(LOSS) FOR THE yEAR Earnings per ordinary share (EPS) Basic and diluted EPS on result in year Notes 14 year ended 31 December 2013 US$000 Year ended 31 December 2012 US$000 4,032 15,404 (3,905) 127 (19,330) (3,926) – – 127 (6) 121 – 121 US$ (0.00) (4,361) (25) (8,312) (18) (8,330) – (8,330) US$ (0.05) The earnings per ordinary share for the discontinued operations is derived from the net profit attributable to equity holders of the parent from discontinued operations of US$121,000 (2012: loss of US$8,330,000), divided by the weighted average number of ordinary shares for both basic and diluted amounts as disclosed in note 12. Sales Revenue Gas sales Condensate sales 2013 US$000 1,653 2,379 4,032 2012 US$000 7,966 7,438 15,404 Gas sales revenue in 2012 and 2013 arose from three customers, the most significant being PLN (2013: US$1,071,000, 2012: US$4,592,000) and Pertiwi (2013: US$582,000, 2012: US$2,538,000). All condensate sales revenue in 2012 and 2013 was from one customer, PLN. Serica Energy plc Annual Report and Accounts 2013 41 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Cost of Sales Operating costs Depletion (see note 14) Movement in inventories of oil Finance Costs 2013 US$000 2,587 1,036 282 3,905 2012 US$000 6,232 13,116 (18) 19,330 Finance costs consist entirely of the unwinding of a discount on the Kambuna decommissioning provision (see note 21). Other There are no taxation components within discontinued operations. The net cash flows attributable to the disposal group in discontinued operations are as follows: Year ended 31 December: Operating cash inflows Investing cash outflows Financing cash outflows (1) NET CASH INFLOW 2013 US$000 2,351 – – 2,351 2012 US$000 10,808 (690) – 10,118 (1) Repayments of loans and borrowings are classified as corporate cash outflows and excluded from discontinued operations. 42 Serica Energy plc Annual Report and Accounts 2013 5. Analysis of Expenses by Function Administrative Asset write-offs Other * restated for discontinued operations – see note 4 6. Group Operating Loss This is stated after charging: Depreciation of other property, plant and equipment Total depreciation, depletion and amortisation expense Depletion of oil and gas properties is classified with cost of sales under discontinued operations. Operating lease rentals (minimum lease payments): - Land and buildings - Other Total lease payments recognised as an expense * restated for discontinued operations – see note 4 7. Auditor’s Remuneration Audit of the Group accounts Audit of the Company’s accounts Audit of accounts of Company’s subsidiaries TOTAL AUDIT FEES Other fees to auditor: Taxation advisory services 2013 US$000 4,458 299 350 5,107 2013 US$000 109 109 524 21 545 *restated 2012 US$000 5,274 10,462 1,062 16,798 *restated 2012 US$000 341 341 531 21 552 2013 US$000 2012 US$000 102 34 20 156 101 34 19 154 US$000 US$000 – – 7 7 Fees paid to Ernst & Young LLP and its associates for non-audit services are not disclosed in the individual accounts of the Company as Group financial statements are prepared which are required to disclose such fees on a consolidated basis. Serica Energy plc Annual Report and Accounts 2013 43 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 8. Staff Costs and Directors’ Emoluments a) Staff Costs The average monthly number of persons employed by the Group during the year was: Management Technical Finance and administration Staff costs for the above persons: Wages and salaries Social security costs Other pension costs Share-based long-term incentives (including related NI cost) Staff costs for key management personnel: Short-term employee benefits Post-employment benefits Share-based payments b) Directors’ Emoluments 2013 No. 3 3 4 10 2012 No. 4 3 4 11 US$000 US$000 2,630 347 170 234 3,381 2,092 88 128 2,308 2,939 384 209 588 4,120 2,134 91 264 2,489 The emoluments of the individual Directors were as follows. Other than fees paid to Jeffrey Harris in US$, all sums are paid in £ sterling but are converted at an exchange rate of £1=US$1.564 (2012: £1=US$1.585) to US$ being the reporting currency for the purposes ofthe Company’s accounts. A Craven Walker (1) C Hearne P Sadler (2) M Flegg (3) N Pike I Vann S Theede J Harris (4) J Cartwright (5) Salary and fees 2013 US$000 Bonus 2013 US$000 Pension Benefits in kind 2013 US$000 2013 US$000 Total 2013 US$000 Total 2012 US$000 519 404 111 404 86 70 70 64 – 1,728 – 70 – 70 – – – – – 140 – 40 8 40 – – – – – 88 – 8 – 10 – – – – – 18 519 522 119 524 86 70 70 64 – 1,974 602 453 509 176 81 65 65 – 30 1,981 (1) Mr Craven Walker has acted as Interim CEO since 10 April 2011. At the request of Mr Craven Walker, the fees proposed for 2011, amounting to £150,000 (US$238,000), were agreed to be payable contingent upon certain strategic milestones being achieved by the Company. These milestones, which related to the securing of certain asset sales, acreage awards, farm-outs and progress with field developments, were achieved by early 2012. The fees for the period from 10 April 2011 to that date were therefore paid in 2012 and are included in the 2012 comparative totals in the table above. Since 1 May 2012, Mr Craven Walker has received a combined fee in respect of services as Chairman and Interim CEO pending the appointment of a successor to the CEO position. Since 1 January 2013 this fee has included a provision for travel allowance. He is not entitled to any other award such as share options, share scheme, bonus, pension or medical insurance. (2) Peter Sadler resigned on 27 June 2013 (3) Mitch Flegg was appointed on 5 September 2012 (4) Jeffrey Harris was appointed on 20 December 2012 (5) Jonathan Cartwright resigned on 28 June 2012 44 Serica Energy plc Annual Report and Accounts 2013 Number of Directors securing benefits under defined contribution schemes during the year Number of Directors who exercised share options Aggregate gains made by Directors on the exercise of options 2013 3 – 2012 3 – US$000 – US$000 – The Group defines key management personnel as the Directors of the Company. There are no transactions with Directors other than their remuneration as disclosed above. 9. Finance Revenue Bank interest receivable Other interest receivable TOTAL FINANCE REVENUE 10. Finance Costs Bank loans Other interest payable TOTAL FINANCE COSTS 2013 US$000 16 – 16 2013 US$000 37 1 38 2012 US$000 8 4 12 *restated 2012 US$000 615 – 615 * restated for discontinued operations – see note 4 Bank loan finance costs include interest payable, unutilised facility fees and an amortisation charge of associated issue costs. The unwinding of a discount on decommissioning provisions is classified within finance costs under ‘discontinued’ operations. 11. Taxation a) Tax charged/(credited) in the income statement Charge for the year Adjustment in respect of prior years Total current income tax charge Deferred tax Origination and reversal of temporary differences in the current year Adjustment in respect of prior years Adjustment to reflect tax rate changes in recognition of deferred tax Total deferred tax (credit) TAx CHARGE IN THE INCOME STATEMENT 2013 US$000 2012 US$000 – – – – – – – – – – – – – – – – Serica Energy plc Annual Report and Accounts 2013 45 NOTES TO THE FINANCIAL STATEMENTS CONTINUED b) Reconciliation of the total tax charge/(credit) The tax in the income statement for the year differs from the amount that would be corporation tax in the UK of expected by applying the standard UK corporation tax rate for the following reasons: Accounting loss before taxation – continuing operations Accounting profit/(loss) before taxation – discontinued operations Accounting loss before taxation Expected tax credit at standard UK corporation tax rate of 23.25% (2012 – 24.5%) Expenses not deductible for tax purposes Unrecognised deferred tax assets Gain on disposal not chargeable to tax Different foreign tax rates TAx CHARGE REPORTED IN THE INCOME STATEMENT * restated for discontinued operations – see note 4 c) Unrecognised tax losses 2013 US$000 *restated 2012 US$000 (5,129) (16,378) 121 (5,008) (1,164) 426 733 – 5 – (8,330) (24,708) (6,053) 432 6,920 (261) (1,038) – The benefit of approximately US$114.7 million (2012: US$110.2 million) of tax losses has not been recognised in these consolidated statements which reflects the extent of the total available UK tax losses that have not been set against a deferred tax liability arising. The Group has UK tax losses of approximately US$175.0 million (2012: US$167.2 million) that are available indefinitely for offset against future trading profits of the companies in which the losses arose. Of this amount US$60.3 million (2012: US$57.0 million) has been set off against taxable temporary differences. d) Deferred tax The deferred tax included in the balance sheet is as follows: Deferred tax liability: Temporary differences on capital expenditure Temporary difference on decommissioning asset Deferred tax liability Deferred tax asset: Temporary difference on future recoverable costs Tax losses carried forward Temporary difference on decommissioning provision Deferred tax asset NET DEFERRED TAx LIABILITy The deferred tax in the Group income statement is as follows: Deferred tax in the income statement: Temporary differences on capital expenditure Temporary difference on future recoverable costs Tax losses carried forward Temporary difference on decommissioning asset Temporary difference on decommissioning provision DEFERRED INCOME TAx (CREDIT) 46 Serica Energy plc Annual Report and Accounts 2013 2013 US$000 (37,372) – (37,372) – 37,372 – 37,372 – 2012 US$000 (35,336) – (35,336) – 35,336 – 35,336 – 2013 US$000 2012 US$000 2,036 – (2,036) – – – (21) – 21 (396) 396 – e) Changes to UK corporation tax legislation Legislation to reduce the main rate of UK corporation tax to 21% for the year commencing 1 April 2014 and 20% for the year from 1 April 2015 and beyond was enacted in July 2013. The UK corporation tax rate for ring-fenced trading profits remains 62%. The UK Government proposals to increase the extent to which the Small Field Allowance (“SFA”) is available in respect of small developments were enacted in July 2013. The allowance is now extended to fields with reserves of 6.25 million tonnes from the previous threshold of 3.5 million tonnes and the allowance available in respect of a qualifying field is increased from £75m (US$120m) to £150m (US$240m). f) Unrecognised deferred tax liability In 2012 and 2013 there are no material temporary differences associated with subsidiaries for which deferred tax liabilities have not been recognised. g) Company The Company has US$23.5 million (2012: US$ 22.3 million) of UK corporation tax losses which are not recognised as deferred tax assets. 12. Earnings Per Share Basic earnings or loss per ordinary share amounts are calculated by dividing net profit or loss for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of dilutive potential ordinary shares into ordinary shares. As a result of the net loss for the years ended 31 December 2012 and 2013, there is no dilutive effect of the share options in these years. The following reflects the income and share data used in the basic and diluted earnings per share computations: Net loss from continuing operations Net loss attributable to equity holders of the parent Basic weighted average number of shares Diluted weighted average number of shares Basic and diluted EPS on loss on continuing operations (US$) Basic and diluted EPS on loss for the year (US$) * restated for discontinued operations – see note 4 2013 US$000 *restated 2012 US$000 (5,129) (16,378) (5,008) (24,708) 2013 ’000 2012 ’000 191,266 177,743 191,266 177,743 2013 US$ (0.03) (0.03) 2012 US$ (0.09) (0.14) Serica Energy plc Annual Report and Accounts 2013 47 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 13. Exploration and Evaluation Assets Group Cost: 1 January 2012 Additions Relinquished licences Write offs Disposals 31 December 2012 Additions Write offs 31 December 2013 Provision for impairment: 1 January 2012 and 1 January 2013 Impairment charge for the year 31 December 2013 Net book value: 31 DECEMBER 2013 31 DECEMBER 2012 1 JANUARy 2012 Total US$000 69,083 12,764 (143) (9,664) (5,160) 66,880 7,860 (131) 74,609 – – – 74,609 66,880 69,083 Total asset write-offs expensed in the income statement from continuing operations in 2013 were US$0.3 million (2012: US$10.5 million). This charge comprised minor E&E asset write-offs of US$0.1 million (2012: US$9.7 million, of which US$8.8 million related to the costs incurred on the Spaniards East well in the UK North Sea) and a US$0.2 million charge against obsolete inventory (2012: US$0.6 million). Other 2012 minor write-offs were in respect of relinquished licences. Disposals of E&E assets in 2012 arose in the first quarter from the farm-out of an interest in the Company’s Namibian licence to BP, and in the third quarter from farm-outs of interests in Morocco and the UK. The re-imbursement due for the past costs capitalised as E&E assets is treated as a reduction from the book cost of the asset. The accounting gain of US$1.0 million on disposal recorded in the 2012 income statement relates to the recognition of recovery for those past Namibia costs incurred that had been expensed as pre-licence costs in previous periods. Company The Company has no E&E assets. 48 Serica Energy plc Annual Report and Accounts 2013 14. Property, Plant and Equipment Group Cost 1 January 2012 Additions Decommissioning asset 31 December 2012 Additions Disposals * 31 December 2013 Depreciation and depletion 1 January 2012 Charge for the year Impairment 31 December 2012 Charge for the year Disposals * 31 December 2013 Net book value 31 DECEMBER 2013 31 DECEMBER 2012 1 JANUARy 2012 Oil and gas Computer/IT Equipment properties US$000 US$000 Fixtures Fittings & Equipment US$000 62,598 690 (446) 62,842 – (62,842) – 44,329 13,116 4,361 61,806 1,036 (62,842) – – 1,036 18,269 189 – – 189 – – 189 149 32 – 181 8 – 189 – 8 40 901 – – 901 – – 901 491 309 – 800 101 – 901 – 101 410 Total US$000 63,688 690 (446) 63,932 – (62,842) 1,090 44,969 13,457 4,361 62,787 1,145 (62,842) 1,090 – 1,145 18,719 *The Kambuna field oil and gas properties were handed over to the Indonesian authorities on 31 December 2013. Impairment of oil and gas properties The net book amount of the Group’s only producing asset was fully depleted in July 2013 following the cessation of production from the Kambuna field. No annual impairment test on the Group’s property, plant and equipment was therefore required as at 31 December 2013. The Group did perform an annual impairment test as at 31 December 2012. In assessing whether a write-down is required in the carrying value of a potentially impaired item of property, plant and equipment or goodwill, the asset’s carrying value is compared with its recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and value in use. Oil and gas properties included an impairment calculated in accordance with IAS 36 - Impairment of assets, of US$4,361,000 attributed to oil and gas properties determined by estimating the value in use of the assets. This impairment charge is against the Group’s only gas condensate producing asset, Glagah Kambuna in Indonesia. The impairment primarily arose following the trigger of a downwards revision to field reserves estimates. The recoverable amount of Kambuna was determined on a value in use calculation using a discounted cash flow model. The projected cash flows were adjusted for risks specific to the asset and discounted using a pre-tax discount rate. This discount rate is derived from the Group’s post-tax weighted average cost of capital and is adjusted where applicable to take into account any specific risks relating to the region where the cash generating unit is located. In 2012, given the short-term nature of cash flows, no discount or extrapolation rates were used. The calculation of value in use is most sensitive to the following assumptions; reserves estimates, discount rates and oil prices. Serica Energy plc Annual Report and Accounts 2013 49 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Other Depletion charges on oil and gas properties are classified within ‘cost of sales’. Borrowing interest payable costs relating to drilling of development wells, that have been capitalised within oil and gas properties during 2009, prior to the commencement of production, amounted to US$1,200,000, at a weighted average interest of 4.6%. Company The Company has no property, plant and equipment. 15. Investments Company – Investment in subsidiaries Cost: 1 January 2012 Increase in investment 31 December 2012 Increase in investment 31 December 2013 Provision for impairment: 1 January 2012 and 1 January 2013 Impairment charge for the year 31 December 2013 Net book amount: 31 December 2013 31 December 2012 1 January 2012 Total US$000 130,684 2,000 132,684 – 132,684 (118,854) (13,830) (132,684) – 13,830 11,830 In the Company financial statements, the cost of the investment acquired on the Reorganisation (see note 1) was calculated with reference to the market value of Serica Energy Corporation as at the date of the Reorganisation. As a UK company, under Section 612 of the Companies Act 2006, the Company is entitled to merger relief on its share reorganisation with Serica Energy Corporation, and the excess of US$112,174,000 over the nominal value of shares issued (US$7,475,000) has been credited to a merger reserve. Following the impairment charges recorded in 2010 and 2013 against the Company’s investment in subsidiary undertakings, all amounts initially credited to the merger reserve have been eliminated. The increase in investment of US$2,000,000 during 2012 represents the value of shares issued by Serica Energy plc as part of the consideration paid to NAMCOR (see note 23) for the Company’s interests in Namibia which are held by Serica Energy Namibia B.V. Management has assessed the carrying value of investments in subsidiaries in the parent company balance sheet for impairment by reference to the recoverable amount. The incremental provisions for impairment arising in 2013 of US$13,830,000 against the investment in subsidiaries, and US$26,170,000 against amounts owed by Group undertakings (see note 18) have been made following a fall in value in certain of the oil and gas assets held by the Company’s subsidiary undertakings. 50 Serica Energy plc Annual Report and Accounts 2013 Details of the investments in which the Group and the Company (unless indicated) hold 20% or more of the nominal value of any class of share capital are as follows: Name of company: Serica Holdings UK Ltd Serica Energy Holdings B.V. (i & iii) Serica Energy (UK) Ltd (i) Serica Sidi Moussa BV (i & iii) Serica Foum Draa BV (i & iii) Serica Energy Slyne BV (i & iii) Serica Energy Rockall BV (i & iii) Serica Energy Namibia BV (i & iii) Serica Glagah Kambuna BV (i & iii) Serica Energia Iberica SL (i & iv) Serica Energy Corporation (i & ii) APD Ltd (i & ii) APD (Asahan) Ltd (i & ii) APD (Biliton) Ltd (i & ii) PDA Asia Ltd (i & ii) PDA (Lematang) Ltd (i) (i) Held by a subsidiary undertaking (ii) Incorporated in the British Virgin Islands (iii) Incorporated in the Netherlands (iv) Incorporated in Spain 16. Other Non-current Assets Holding Nature of business % voting rights and shares held 2013 % voting rights and shares held 2012 Holding Ordinary Holding Ordinary Exploration Ordinary Exploration Ordinary Exploration Ordinary Exploration Ordinary Exploration Ordinary Ordinary Exploration Ordinary Development Dormant Ordinary Dormant Ordinary Dormant Ordinary Dormant Ordinary Dormant Ordinary Dormant Ordinary Dormant Ordinary 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Group 2013 US$000 2012 US$000 Company 2013 US$000 2012 US$000 OTHER RECEIVABLES 1,293 1,706 – – Other receivables are represented by value added tax (“VAT”) on Indonesian capital spend, which would be recovered from the Indonesian authorities. Amounts at 31 December 2013 are disclosed net of an impairment of US$427,000 (2012: US$427,000). 17. Inventories Condensate stocks Materials and spare parts Group 2013 US$000 – 258 258 2012 US$000 282 199 481 Company 2013 US$000 – – – 2012 US$000 – – – Inventories are valued at the lower of cost and net realisable value. Cost is determined by the first-in first-out method and comprises direct purchase costs and transportation expenses. US$168,000 was expensed in the income statement as an asset write-off against materials and spare parts in 2013 (2012: US$609,000). Serica Energy plc Annual Report and Accounts 2013 51 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 18. Other Current Receivables Due within one year: Amounts owed by Group undertakings Trade receivables Amounts recoverable from JV partners Back costs recoverable Other receivables Prepayments and accrued income TRADE AND OTHER RECEIVABLES FINANCIAL ASSETS Group 2013 US$000 2012 US$000 Company 2013 US$000 – 1,428 1,334 – 597 492 3,851 420 – 2,099 3,451 933 2,009 449 8,941 412 2012 US$000 110,824 – – – 611 333 97,416 – – – 395 337 98,148 111,768 420 412 Trade receivables at 31 December 2013 arise from one customer, PLN. None of the Group’s receivables are considered impaired but US$749,000 of trade receivables and US$124,000 of other receivables are past due at the date of signing this report. The Directors consider the carrying amount of trade and other receivables approximates to their fair value. Financial assets entirely relate to restricted cash on deposit with financial institutions securing various guarantees and performance bonds associated with the Group’s trading activities. Management considers that there are no unreasonable concentrations of credit risk within the Group or Company. The financial assets disclosed above are not considered past due nor impaired. At the reporting date the amounts owed by Group undertakings to the Company are disclosed net of an impairment of US$33,509,000 (2012: US$7,339,000) – see note 15. 19. Cash and Short-Term Deposits Cash at bank and in hand Short-term deposits Group 2013 US$000 10,178 15,884 26,062 2012 US$000 14,595 7,750 22,345 Company 2013 US$000 9,575 15,884 25,459 2012 US$000 13,674 7,750 21,424 Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and six months depending on the immediate cash requirements of the Group, and earn interest at the respective short to medium term deposit rates. The Group’s exposure to credit risk arises from potential default of a counterparty, with a maximum exposure equal to the carrying amount. The Group seeks to minimise counterparty credit risks by only depositing cash surpluses with major banks of high quality credit standing, and spreading the placement of funds over a range of institutions. Financial institutions, and their credit ratings, which held greater than 10% of the Group’s cash and short-term deposits at the balance sheet date were as follows: HSBC Bank plc J.P. Morgan Chase Barclays Bank plc S&P credit rating A-1+ A-1 A-1 Group 2013 US$000 8,358 8,827 8,760 2012 US$000 7,929 7,824 6,567 Company 2013 US$000 8,358 8,827 8,273 2012 US$000 7,898 7,824 5,700 For the purposes of the consolidated and Company cash flow statement, cash and cash equivalents comprise the above amounts at 31 December. 52 Serica Energy plc Annual Report and Accounts 2013 20. Trade and Other Payables Current: Trade payables Other payables 21. Provisions Group 2013 US$000 958 3,459 4,417 2012 US$000 7,264 4,413 11,677 Company 2013 US$000 575 384 959 2012 US$000 505 575 1,080 Provisions for decommissioning and restoration of oil and gas assets are: At 1 January Decommissioning estimate revisions (see note 14) Unwinding of discount (see note 4) Payments and utilisation of provision At 31 December 2013 US$000 2012 US$000 1,601 – 6 (1,607) – 2,029 (446) 18 – 1,601 The Kambuna field ceased production in July 2013 and the field decommissioning work programme was completed in November 2013. Although no decommissioning provision is recorded as at 31 December 2013 as the work had been completed, certain liabilities arising from the work programme had not been paid at that date and are recorded within trade and other payables. Any payments made in prior periods into a restricted fund were recognised at the relevant Balance Sheet date as a separate asset within other receivables and not deducted from the gross liability. 22. Financial Instruments The Group’s financial instruments comprise cash and cash equivalents, bank loans and borrowings, accounts payable and accounts receivable. It is management’s opinion that the Group is not exposed to significant interest, credit or currency risks arising from its financial instruments other than as discussed below: Serica has exposure to interest rate fluctuations on its cash deposits and bank loans; given the level of expenditure plans over 2014/15 this is managed in the short-term through selecting treasury deposit periods of one to six months. Cash and treasury credit risks are mitigated through spreading the placement of funds over a range of institutions each carrying acceptable published credit ratings to minimise concentration and counterparty risk. Where Serica operates joint ventures on behalf of partners it seeks to recover the appropriate share of costs from these third parties. The majority of partners in these ventures are well established oil and gas companies. In the event of non payment, operating agreements typically provide recourse through increased venture shares. Serica retains certain non US$ cash holdings and other financial instruments relating to its operations. The US$ reporting currency value of these may fluctuate from time to time causing reported foreign exchange gains and losses. Serica maintains a broad strategy of matching the currency of funds held on deposit with the expected expenditures in those currencies. Management believes that this mitigates most of any actual potential currency risk from financial instruments. It is management’s opinion that the fair value of its financial instruments approximate to their carrying values, unless otherwise noted. Bank loans In recent years, the Company had access to a three-year US$50 million debt facility, which was arranged in November 2009 with J.P.Morgan plc, Bank of Scotland plc and Natixis as Mandated Lead Arrangers. This facility was principally to refinance the Company’s Serica Energy plc Annual Report and Accounts 2013 53 NOTES TO THE FINANCIAL STATEMENTS CONTINUED outstanding borrowings on the Kambuna field. It was also originally put in place partly to finance the appraisal and development of the Columbus field and for general corporate purposes. Although all outstanding amounts under the Company’s debt facility were fully repaid in February 2011, the facility was rolled forward until February 2013 whilst the directors reviewed the funding requirements and options available for the Columbus field development. In March 2013, in light of the expected timing requirements for the Company’s share of Columbus project development costs, the Company decided to allow the facility to expire. This decision was made in light of other financing options under review and to save ongoing unutilised fee costs. The facility was secured by first charges over the Group’s interests in the Kambuna field in Indonesia and the Columbus field in the UK North Sea and the shares of certain subsidiary companies. This security was released following the expiry of the facility in March 2013. Interest Rate Risk Profile of Financial Assets and Liabilities The interest rate profile of the financial assets and liabilities of the Group as at 31 December is as follows: Group year ended 31 December 2013 Fixed rate Short-term deposits Short-term financial assets Floating rate Cash Year ended 31 December 2012 Fixed rate Short-term deposits Short-term financial assets Floating rate Cash Within 1 year US$000 15,884 420 1-2 years US$000 – – 2-5 years US$000 – – Within 1 year US$000 10,178 1-2 years US$000 – 2-5 years US$000 – Total US$000 15,884 420 16,304 Total US$000 10,178 10,178 Within 1 year 1-2 years 2-5 years Total US$000 7,750 412 US$000 – – US$000 – – Within 1 year US$000 14,595 1-2 years US$000 – 2-5 years US$000 – US$000 7,750 412 8,162 Total US$000 14,595 14,595 The following table demonstrates the sensitivity of finance revenue and finance costs to a reasonably possible change in interest rates, with all other variables held constant, of the Group’s loss before tax (through the impact on fixed rate short-term deposits and applicable bank loans). Increase/decrease in interest rate +0.75% -0.75% Effect on (loss) Effect on (loss) before tax 2012 US$000 before tax 2013 US$000 143 (143) 169 (169) The other financial instruments of the Group that are not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk. 54 Serica Energy plc Annual Report and Accounts 2013 The interest rate profile of the financial assets and liabilities of the Company as at 31 December is as follows: Company year ended 31 December 2013 Fixed rate Short-term deposits Short-term financial assets Floating rate Cash Year ended 31 December 2012 Fixed rate Short-term deposits Short-term financial assets Floating rate Cash Credit risk Within 1 year US$000 1-2 years US$000 2-5 years US$000 15,884 420 – – – – Within 1 year US$000 1-2 years US$000 2-5 years US$000 9,575 – – Total US$000 15,884 420 16,304 Total US$000 9,575 9,575 Within 1 year US$000 1-2 years US$000 2-5 years US$000 Total US$000 7,750 412 – – – – Within 1 year US$000 1-2 years US$000 2-5 years US$000 13,674 – – 7,750 412 8,162 Total US$000 13,674 13,674 The Group’s and Company’s exposure to credit risk relating to financial assets arises from the default of a counterparty with a maximum exposure equal to the carrying value as at the balance sheet date. Where Serica operates joint ventures on behalf of partners it seeks to recover the appropriate share of costs from these third parties. The majority of partners in these ventures are well established oil and gas companies. In the event of non payment, operating agreements typically provide recourse through increased venture shares. Cash and treasury credit risks are mitigated through spreading the placement of funds over a range of institutions each carrying acceptable published credit ratings to minimise counterparty risk. Foreign currency risk The Group enters into transactions denominated in currencies other than its US dollar reporting currency. Non US$ denominated balances, subject to exchange rate fluctuations, at year-end were as follows: Cash and cash equivalents: Pounds sterling Canadian dollars Norwegian kroner Indonesian rupiah Euros Accounts receivable: Pounds sterling Group 2013 US$000 8,386 1 12 – 296 2012 US$000 5,524 5 13 25 404 Company 2013 US$000 8,100 1 – – – 2012 US$000 5,059 5 – – – 931 1,264 354 712 Serica Energy plc Annual Report and Accounts 2013 55 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Trade payables: Pounds sterling Canadian dollars Euros 1,260 41 103 8,203 – 108 1,185 41 20 529 – 43 The following table demonstrates the Group’s sensitivity to a 10% increase or decrease in the US Dollar against the Pounds sterling. The sensitivity analysis includes only foreign currency denominated monetary items and adjusts their translation at the year end for a 10% change in the foreign currency rate. Increase/decrease in foreign exchange rate 10% strengthening of US$ against £GBP 10% weakening of US$ against £GBP Liquidity risk Effect on (loss) Effect on (loss) before tax 2012 US$000 before tax 2013 US$000 806 (806) (141) 141 The table below summarises the maturity profile of the Group and Company’s financial liabilities at 31 December 2013 based on contractual undiscounted payments. The Group monitors its risk to a potential shortage of funds by monitoring the maturity dates of existing debt. Group year ended 31 December 2013 Trade and other payables Year ended 31 December 2012 Within 1 year US$000 1 to 2 years US$000 2 to 5 years US$000 Total US$000 4,417 – – 4,417 Within 1 Year US$000 1 to 2 years US$000 2 to 5 years US$000 Total US$000 Trade and other payables 11,677 – – 11,677 Company year ended 31 December 2013 Trade and other payables Year ended 31 December 2012 Trade and other payables Commodity price risk Within 1 year US$000 1 to 2 years US$000 2 to 5 years US$000 Total US$000 959 – – 959 Within 1 Year US$000 1 to 2 years US$000 2 to 5 years US$000 Total US$000 1,080 – – 1,080 During 2012 and 2013, all of the Group’s gas production was sold at fixed contracted prices. All condensate production was sold at prices linked to the spot market. During much of the Kambuna field production period, fluctuations in condensate price were largely offset by variations in cost recovery. Fair values of financial assets and liabilities Management assessed that the fair values of cash and short-term deposits, trade receivables, trade payables and other current liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments. As such the fair value hierarchy is not provided. 56 Serica Energy plc Annual Report and Accounts 2013 Capital management The primary objective of the Group’s capital management is to maintain appropriate levels of funding to meet the commitments of its forward programme of exploration and development expenditure, and to safeguard the entity’s ability to continue as a going concern and create shareholder value. At 31 December 2013, capital employed of the Group amounted to US$102.1 million (comprised of US$102.1 million of equity shareholders’ funds and US$nil million of borrowings), compared to US$88.6 million at 31 December 2012 (comprised of US$88.6 million of equity shareholders’ funds and US$nil of borrowings). At 31 December 2013, capital employed of the Company amounted to US$123.1 million (comprised of US$123.1 million of equity shareholders’ funds and US$nil million of borrowings), compared to US$146.4 million at 31 December 2012 (comprised of US$146.4 million of equity shareholders’ funds and US$nil million of borrowings). 23. Equity Share Capital The concept of authorised share capital was abolished under the Companies Act 2006 and shareholders approved the adoption of new Articles of Association at the 2010 Annual General Meeting which do not contain any reference to authorised share capital. The share capital of the Company comprises one “A” share of £50,000 and 250,179,039 ordinary shares of US$0.10 each. The “A” share has no special rights. The balance classified as total share capital includes the total net proceeds (both nominal value and share premium) on issue of the Group and Company’s equity share capital, comprising US$0.10 ordinary shares and one ‘A’ share. Allotted, issued and fully paid: Group As at 1 January 2012 Options exercised (i) Shares issued (ii) 31 December 2012 Shares issued (iii) Share capital US$000 Number Share Total premium Share capital US$000 US$000 176,660,311 17,756 189,946 207,702 110,000 6,000,000 182,770,311 67,408,729 11 600 18,367 6,741 45 1,400 191,391 11,459 56 2,000 209,758 18,200 AS AT 31 DECEMBER 2013 250,179,040 25,108 202,850 227,958 Allotted, issued and fully paid: Company As at 1 January 2012 Options exercised (i) Shares issued (ii) As at 31 December 2012 Shares issued (iii) Share capital US$000 Number Share Total premium Share capital US$000 US$000 176,660,311 17,756 154,674 172,430 110,000 6,000,000 11 600 45 1,400 56 2,000 182,770,311 18,367 156,119 174,486 67,408,729 6,741 11,459 18,200 AS AT 31 DECEMBER 2013 250,179,040 25,108 167,578 192,686 In April 2012, 110,000 share options were converted to ordinary shares at a price of £0.32. i) ii) In November 2012, 6,000,000 ordinary shares were issued to NAMCOR as part of the consideration for the interest in the Luderitz basin acquired in December 2011. NAMCOR had the option to take the shares or US$2 million in cash. The valuation of the shares issued is based on the cash alternative as value of the equity alternative when the deal was agreed was less than the cash alternative. At 31 December 2011 the US$2 million was accrued within Trade and other payables. iii) In November 2013, the Company raised US$18.2 million (net of expenses) through the issue of 67,408,729 ordinary shares at 18 pence each. The issue price represented a discount of 1.4% to the mid-market price of 18.25 pence per ordinary share on 21 October 2013, the announcement date of the share placing and open offer being 22 October 2013. Serica Energy plc Annual Report and Accounts 2013 57 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 24. Additional Cash Flow Information Analysis of Group net cash year ended 31 December 2013 Cash Short-term deposits Year ended 31 December 2012 Cash Short-term deposits Analysis of Company net cash year ended 31 December 2013 Short-term deposits Year ended 31 December 2012 Cash Short-term deposits 1 January 2013 US$000 14,595 7,750 22,345 1 January 2012 US$000 8,546 11,400 19,946 1 January 2013 US$000 13,674 7,750 21,424 1 January 2012 US$000 7,742 11,400 19,142 Cash flow US$000 Non-cash movements US$000 31 December 2013 US$000 (4,570) 7,872 3,302 Cash flow US$000 5,851 (3,650) 2,201 153 262 415 10,178 15,884 26,062 Non-cash movements US$000 31 December 2012 US$000 198 – 198 14,595 7,750 22,345 Cash flow US$000 Non-cash movements US$000 31 December 2013 US$000 (4,247) 7,846 3,599 Cash flow US$000 5,748 (3,650) 2,098 148 288 436 9,575 15,884 25,459 Non-cash movements US$000 31 December 2012 US$000 184 – 184 13,674 7,750 21,424 58 Serica Energy plc Annual Report and Accounts 2013 25. Share-Based Payments Share Option Plans Following a Reorganisation in 2005 (see note 1), the Company established an option plan (the “Serica 2005 Option Plan”) to replace the Serica Energy Corporation Share Option Plan (the “Serica BVI Option Plan”). The objective of these plans is to develop the interest of Directors, officers, key employees and certain consultants of the Group in the growth and development of the Group by providing them with the opportunity to acquire an interest in the Company and to assist the Company in retaining and attracting executives with experience and ability. Serica Energy Corporation (“Serica BVI”) was previously the holding company of the Group but, following the Reorganisation, is now a wholly owned subsidiary of the Company. Prior to the Reorganisation, Serica BVI issued options under the Serica BVI Option Plan and following the Reorganisation the Company has agreed to issue ordinary shares to holders of Serica BVI Options already awarded upon exercise of such options in place of the shares in Serica BVI to which they would be entitled. There are currently options outstanding under the Serica BVI Option Plan entitling holders to acquire up to an aggregate of 1,900,000 ordinary shares of the Company. No further options will be granted under the Serica BVI option plan. As at 31 December 2013, the Company has granted 18,532,460 options under the Serica 2005 Option Plan, 9,108,460 of which are currently outstanding. The Serica 2005 Option Plan will govern all future grants of options by the Company to Directors, officers, key employees and certain consultants of the Group. The Serica 2005 Option Plan is comprised of two parts, the basic share option plan and a part which constitutes an Enterprise Management Incentive Plan (“EMI Plan”) under rules set out by the H.M. Revenue & Customs in the United Kingdom. Options granted under the Serica 2005 Option Plan can be granted, at the discretion of the Board, under one or other of the two parts but, apart from certain tax benefits which can accrue to the Company and its UK employees if options are granted under the part relating to the EMI Plan meeting the conditions of that part of the Serica 2005 Option Plan, all other terms under which options can be awarded under either part are substantially identical. The Directors intend that the maximum number of ordinary shares which may be utilised pursuant to the Serica 2005 Option Plan will not exceed 10% of the issued ordinary shares of the Company from time to time in line with the recommendations of the Association of British Insurers. 4,744,690 of the 9,108,460 options outstanding under the Serica 2005 Option Plan are exercisable only if certain performance targets being met. These include the following options subject to market conditions; 110,000 options awarded to an executive director in December 2005, 350,000 options awarded to an executive director in March 2008 and 1,425,000 options awarded to executive directors in January 2010. In April 2011, 200,000 options were awarded to an executive director and 200,000 options were awarded to an employee exercisable only if certain operational performance targets are met. In October 2012 a further 800,000 share options under the Serica 2005 Option Plan were granted to two current executive directors, all of these options are subject to performance conditions. Details of the performance conditions attached are provided in the Directors’ Report. In November 2012, 400,000 options were granted to a consultant subject to performance conditions. The Company calculates the value of share-based compensation using a Black-Scholes option pricing model (or other appropriate model for those Directors’ options subject to certain market conditions) to estimate the fair value of share options at the date of grant. There are no cash settlement alternatives. The estimated fair value of options is amortised to expense over the options’ vesting period. US$252,000 has been charged to the income statement in continuing operations for the year ended 31 December 2013 (2012 – US$570,000) and a similar amount credited to the share-based payments reserve, classified as ‘Other reserve’ in the Balance Sheet. US$nil has been charged to the income statement in discontinued operations for the year ended 31 December 2013 (2012 – US$nil). US$128,000 (2012 – US$264,000) of the total continuing operations charge was in respect of key management personnel (defined in note 8). The options granted in 2013 and 2012 were consistently valued in line with the Company’s valuation policy. Assumptions made included a weighted average risk-free interest rate of 3%, no dividend yield, a weighted average expected life of three years, and a volatility factor of expected market price of in a range from 50-70%. The weighted fair value of options granted during the year was £0.15 (2012:£0.11). Serica Energy plc Annual Report and Accounts 2013 59 NOTES TO THE FINANCIAL STATEMENTS CONTINUED The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options during the year: Serica BVI option plan Outstanding as at 1 January Expired during the year Outstanding as at 31 December Exercisable as at 31 December Serica 2005 option plan Outstanding as at 1 January Granted during the year Exercised during the year Cancelled during the year Expired during the year Outstanding as at 31 December Exercisable as at 31 December 2013 Number 1,900,000 – 1,900,000 1,900,000 9,058,460 800,000 – – (750,000) 9,108,460 4,513,500 2013 WAEP Cdn$ 1.46 – 1.46 1.46 £ 0.52 0.23 – – 0.40 0.50 0.76 2012 Number 1,900,000 – 1,900,000 1,900,000 10,183,000 3,344,960 (110,000) (3,159,500) (1,200,000) 9,058,460 3,060,000 2012 WAEP Cdn$ 1.46 – 1.46 1.46 £ 0.75 0.24 0.32 0.81 0.99 0.52 0.73 The weighted average share price at the date of exercise for the options exercised in 2012 was £0.35. The weighted average remaining contractual life of options outstanding as at 31 December 2013 is 5.5 years (2012: 5.8 years). For the Serica BVI option plan, the exercise price for outstanding options at the 2013 year end ranges from Cdn$1.00 to Cdn$1.80 (2012: Cdn$1.00 to Cdn$1.80). For the Serica 2005 option plan, the exercise price for outstanding options at the 2013 year end ranges from £0.18 to £1.04 (2012: £0.21375 to £1.04). As at 31 December 2013, the following director and employee share options were outstanding: Expiry Date March 2014 December 2014 January 2015 June 2015 January 2014 November 2015 January 2016 June 2016 January 2017 May 2017 March 2018 March 2018 January 2020 April 2021 January 2022 October 2022 January 2023 November 2023 On 4 January 2014, 228,000 share options under the Serica 2005 Option Plan expired. 60 Serica Energy plc Annual Report and Accounts 2013 Amount 1,000,000 200,000 600,000 100,000 Exercise cost Cdn$ 1,800,000 200,000 600,000 180,000 Exercise cost £ 72,960 271,600 139,725 259,200 247,860 218,400 445,500 287,000 1,498,380 141,188 458,485 348,000 109,000 72,000 228,000 280,000 135,000 270,000 243,000 210,000 594,000 350,000 2,203,500 450,000 2,144,960 1,200,000 400,000 400,000 On 30 January 2014, 1,200,000 share options were granted to directors, and 600,000 share options granted to employees other than directors, all with an exercise cost of £0.13 and an expiry date of 29 January 2024. On 31 March 2014, 1,000,000 share options under the Serica BVI Option Plan expired. 26. Commitments under Operating Leases Operating lease agreements where the Group is lessee At 31 December 2013 the Group has entered into commercial leases in respect of rental of office premises and office equipment. Future minimum rentals payable under non-cancellable operating leases are as follows: Not later than one year Later than one year and not later than five years Group 2013 US$000 137 – 137 2012 US$000 146 – 146 Company 2013 US$000 – – – 2012 US$000 – – – In February 2013, the Group entered into a new five year office operating lease with a minimum commitment period of one year, expiring in March 2014. Operating sublease agreements where the Group is lessor In January 2013 the Group entered into an operating sublease for part of its UK office, expiring in March 2014. At 31 December 2013, future minimum rentals receivable under this sublease for a period not later than one year were US$32,000. 27. Capital Commitments and Contingencies At 31 December 2013, other amounts contracted for but not provided in the financial statements for the acquisition of exploration and evaluation assets amounted to US$1.2 million for the Group and US$nil for the Company (2012: US$nil and US$nil respectively). These amounts relate to costs incurred on Foum Draa drilling in Morocco in January 2014. The Company also has obligations to carry out defined work programmes on its oil and gas properties, under the terms of the award of rights to these properties. The Company is not obliged to meet other joint venture partner shares of these programmes. In Morocco, the partners on the Sidi Moussa licence expect to drill an exploration commitment well in Q3 2014. The Company is carried for its share of expenditure up to a gross cap of US$50 million. Serica has currently budgeted to pay some US$2.3 million, being its paying share of costs over and above the agreed cap to the farm-in carry. Under the terms of the Company’s Namibian licence, the value of work performed to date by the JV partners on the 3D Seismic acquisition programme has exceeded the minimum obligation expenditure on exploration work of US$15.0 million covering the entire initial four year period of the licence, ending in December 2015. Other less material minimum obligations include G&G, seismic work and ongoing licence fees in the UK and Ireland. The Group has to provide security for a proportion of its future obligations to defined work programmes or other commitments and fulfils this obligation through the Company providing US$0.4 million of cash collateral included as a financial asset (restricted cash) as at 31 December 2013 (2012: US$0.4 million). Where the Company enters into financial guarantee contracts and guarantees the indebtedness of other companies within the Group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time that it becomes probable that the Company will be required to make a payment under the guarantee. Serica Energy plc Annual Report and Accounts 2013 61 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 28. Related Party Transactions and Transactions with Directors There are no related party transactions, or transactions with Directors that require disclosure except for the remuneration items disclosed in the Directors Report and note 8 above. These disclosures include the compensation of key management personnel. The Company’s related parties consist of its subsidiaries and the transactions and amounts due to/due from them are disclosed in the accompanying notes to the Company financial statements. 29. Post Balance Sheet Events No events have occurred since the balance sheet date which would require disclosure or adjustment in the Group and Company accounts now presented. 62 Serica Energy plc Annual Report and Accounts 2013 Group Proved plus Probable Reserves – Unaudited Western Europe Indonesia At 1 January 2013 Revisions Production Oil mmbbl 1.6 (0.1) – At 31 December 2013 1.5 Proved developed Proved undeveloped Probable developed Probable undeveloped At 31 December 2013 – 0.8 – 0.7 1.5 Gas bcf 23.1 (1.2) – 21.9 – 12.1 – 9.8 21.9 Oil mmbbl 0.0 – – – – – – – – Gas bcf 0.3 – (0.3) – – – – – – Total Oil mmbbl 1.6 (0.1) – 1.5 – 0.8 – 0.7 1.5 Total Gas bcf 23.4 (1.2) (0.3) 21.9 – 12.1 – 9.8 21.9 Total Oil & gas mmboe 5.5 (0.2) (0.1) 5.2 – 2.9 – 2.3 5.2 Proved and probable reserves are based on independent reports prepared by consultants Netherland, Sewell & Associates (for the Columbus Field in the UK North Sea) in accordance with the reserve definitions of the Canadian Oil and Gas Evaluation Handbook. Gas reserves at 31 December 2013 have been converted to barrels of oil equivalent using a factor of 6.0 bcf per mmboe for Western Europe (Columbus field reserves) on the basis of a nominal gas calorific value of 1,000 BTU per cubic foot. In view of the field shut-in in July 2013 and subsequent handover to Pertamina, remaining economic hydrocarbon reserves as at 31 December 2012 were of an immaterial level, equating to the estimated levels of declining production in the remaining months of 2013 prior to handover. Accordingly no independent reserves audit was performed in 2012. Serica Energy plc Annual Report and Accounts 2013 63 GLOSSARY bbl bcf boe FPSO mscf mmbbl mmboe mmscf mmscfd P10 P50 P90 Proved Reserves Probable Reserves Possible Reserves Reserves Contingent Resources Prospective Resources TAC tcf barrel of 42 US gallons billion standard cubic feet barrels of oil equivalent (barrels of oil, condensate and LPG plus the heating equivalent of gas converted into barrels at a rate of 4,800 standard cubic feet per barrel for Kambuna, which has a relatively high calorific value, and 6,000 standard cubic feet per barrel for Columbus) Floating, production, storage and offloading unit thousand standard cubic feet million barrels million barrels of oil equivalent million standard cubic feet million standard cubic feet per day A high estimate that there should be at least a 10% probability that the quantities recovered will actually equal or exceed the estimate A best estimate that there should be at least a 50% probability that the quantities recovered will actually equal or exceed the estimate A low estimate that there should be at least a 90% probability that the quantities recovered will actually equal or exceed the estimate Proved reserves are those Reserves that can be estimated with a high degree of certainty to be recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated proved reserves. Probable reserves are those additional Reserves that are less certain to be recovered than proved reserves. It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved + probable reserves. Possible reserves are those additional Reserves that are less certain to be recovered than probable reserves. It is unlikely that the actual remaining quantities recovered will exceed the sum of the estimated proved + probable + possible reserves Estimates of discovered recoverable commercial hydrocarbon reserves calculated in accordance with the Canadian National Instrument 51 101 Estimates of discovered recoverable hydrocarbon resources for which commercial production is not yet assured, calculated in accordance with the Canadian National Instrument 51 101 Estimates of the potential recoverable hydrocarbon resources attributable to undrilled prospects, calculated in accordance with the Canadian National Instrument 51 101 Technical Assistance Contract trillion standard cubic feet 64 Serica Energy plc Annual Report and Accounts 2013 CORPORATE INFORMATION Registered and Main Office 52 George Street London W1U 7EA Nominated Advisor & UK Broker Peel Hunt LLP Moor House 120 London Wall London EC2Y 5ET Canadian & Joint UK Broker RBC Europe Limited Riverbank House 2 Swan Lane London EC4R 3BF Auditor Ernst & Young LLP 1 More London Place London SE1 2AF Bankers Barclays, HSBC, JPMorgan Chase UK Legal Advisor Herbert Smith Freehills Exchange House Primrose Street London EC2A 2HS Canadian Legal Advisor Stikeman Elliott LLP Dauntsey House 4b Fredericks’s Place London EC2R 8AB Company Secretary Janette Davies UK Registrar Capita Asset Services 34 Beckenham Road Kent BR3 4TU Canadian Registrar TMX Equity Transfer Services 200 University Avenue Suite 300 Toronto Ontario M5H 4H1 Public Relations Instinctif Partners 65 Gresham Street London EC2V 7NQ Listings AIM, London TSX, Toronto Symbol: SQZ Website www.serica-energy.com Annual General Meeting 26 June 2014 Instinctif Partners 65 Gresham Street London EC2V 7NQ Company Number 5450950 Serica Energy plc Annual Report and Accounts 2013 65 SERICA ENERGY PLC HEAD OFFICE 52 GEORGE STREET LONDON W1U 7EA UNITED KINGDOM T +44 (0)20 7487 7300 F +44 (0)20 7487 7330 info@serica-energy.com www.serica-energy.com 

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