Entering a new era
Annual Report 2018
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www.serica-energy.com
Serica Energy plc
48 George Street
LONDON W1U 7DY
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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2018 has been a year of
incredible achievement
Serica has established
itself as one of the leading
independent UKCS operating
companies and has
assembled a talented and
motivated team
Highlights
01
01
Contents
Highlights
Corporate highlights
Financial highlights
01
02
03 Operational highlights
04 Executive Chairman’s statement
06 Serica at a glance
08 How we operate
Strategic report
10
Chief Executive’s review
15 Corporate & social responsibility
16 Review of operations
25 Reserves
26
Financial review
Corporate governance
36 Board of Directors
38 Directors’ report
40 Corporate governance statement
60 Directors’ responsibilities statement
Financial report
Independent auditor’s report
61
68 Financial statements
72 Notes to the financial statements
110 Glossary
Licence holdings
111
112 Corporate information
Corporate highlights
BKR acquisitions
completed
68.8 million boe
2P reserves
Erskine export line
bypass completed
Columbus
FDP approved
The Strategic Report of the operations and financial results of Serica Energy plc (“Serica”) and its subsidiaries (the “Group”) should be read in
conjunction with Serica’s consolidated financial statements for the year ended 31 December 2018. References to the “Company” include Serica
and its subsidiaries where relevant. All figures are reported in US dollars (“US$”) unless otherwise stated.
02
Financial highlights
25.2
25.2
25.2
25.2
19.3
19.3
19.3
19.3
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6.6
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14.1
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17.1
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10.8
10.8
10.8
10.8
74.7
74.7
74.7
74.7
54.9
54.9
54.9
54.9
34.0
34.0
34.0
34.0
16.6
16.6
16.6
16.6
60
60
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2016
2016
2016
2016
2017
2017
2017
2017
2018
2018
2018
2018
2016
2016
2016
2016
2017
2017
2017
2017
2018
2018
2018
2018
2016
2016
2016
2016
2017
2017
2017
2017
2018
2018
2018
2018
2016
2016
2016
2016
2017
2017
2017
2017
2018
2018
2018
2018
Gross profit
US$m
Operating profit
US$m
Group profit for the year
US$m
Cash balances
US$m
Gross profit increased by
30.6% to US$25.2 million
(2017: US$19.3 million)
reflecting one month of post
completion BKR income
plus two and a half months
of income from Erskine
after an extended shut-in
to complete a bypass of the
condensate export line
Operating profit of US$9.1
million (2017: US$14.1 million)
was impacted by one-off
BKR transition costs of
US$11.7 million
Group profit for the year
of US$74.7 million (2017:
US$17.1 million) showed a
337% increase. This figure
includes a bargain purchase
gain of US$52.9 million on
the BKR acquisitions
calculated in accordance
with IFRS
Cash balances and term
deposits stood at US$91.8
million at 31 March 2019,
compared to US$54.9 million
at 31 December 2018, a
US$36.9 million increase
during the first three months
of 2019
Serica Energy plc Annual report & accounts 2018 Operational highlights
03
Bruce, Keith & Rhum Fields
(Serica 98%, 100%, 50%)
Erskine Field
(Serica 18%)
Full year production
(net to the BKR interests
acquired by Serica) for
2018 amounted to over
24,000 boe/d
Following production
interruptions during the
early part of 2018 due to
an FPS shut down and
poor weather conditions,
performance was stronger
in the 2nd half of the year,
continuing into 2019
The Erskine field has
performed strongly since
production was restarted
on 24 October 2018 after
replacing a section of
Lomond to CATS riser
condensate export line
Production has averaged
over 3,100 boe per day net to
Serica during the five-month
period to end March 2019
An updated independent
audit of Erskine field
reserves, following the
Lomond export facilities
upgrade, has increased
Serica’s share of estimated
remaining 2P reserves
to 5.7 million boe as at
31 December 2018, an
84% increase over the
3.1 million boe estimated at
31 December 2017
Columbus Development
(Serica 50%)
Serica submitted an FDP to
the OGA in June 2018 and
was granted development
and production consent in
October 2018. Development
work started as soon as FDP
approval was received. First
gas is targeted for 2021
Columbus resources have
been re-classified as reserves
by independent reserves
auditors who ascribe to
Serica net 2P reserves of
6.2 million boe within the
Columbus development
area as of 1 January 2019
Exploration
The Rowallan exploration
well (22/19c-7) was
drilled to target the high
pressure, high temperature
Rowallan Prospect. The
well encountered 182
metres of sandstones and
shales but did not contain
hydrocarbons. Serica was
fully carried on all costs
associated with this licence
and so did not incur any
costs in the planning and
drilling of the Rowallan
exploration well
The Company was awarded
four licences on the UK
Continental Shelf in the
UK's 30th Offshore Licensing
Round
Outlook
The Company continues to see strong
net cash flows since the turn of the year
Net production from the Bruce, Keith,
Rhum and Erskine fields has averaged
over 30,000 boe/d in Q1 2019
Highlights 04
Executive Chairman’s statement
The past year has been
pivotal for Serica, a year
of real achievement for all
stakeholders, employees and
shareholders alike and lays the
foundations for future growth
Completion of the purchase of
operated interests in the Bruce, Keith
and Rhum fields from BP (the “BKR
fields”) together with subsequent
transactions to buy additional
interests in the Bruce and Keith fields
from Total, BHP and Marubeni, has
brought very material financial and
strategic benefits to the Company
and its shareholders. The transactions
included a complex restructuring
of partnership interests which has
enabled production to continue
seamlessly to the benefit of the UK
as well as to Serica and field partners.
We are delighted with the outcome.
Serica is now one of the leading UK
Independent companies operating in
the UK sector of the North Sea. We
operate one of the major offshore
facilities, handling up to 50,000
boe/d of gas and liquids production.
Plans to improve and extend field
performance are in hand. Columbus is
now approved for development and,
with new investment opportunities
continually under review, we
are strongly placed to grow and
generate value for shareholders.
Although production from the Erskine
field was closed for over nine months
of last year and production from the
BKR fields is only included for the
month of December we are reporting
strong results for the year. Gross profit
for 2018 was up by 31% at US$25.2
million and profit after tax was US$74.7
million, the latter largely influenced
by the significant purchase gain that
we are required to record on the BKR
transactions under IFRS and also by the
accelerated utilisation of tax assets.
We continue to see strong levels
of production. Serica’s net share
of production from Erskine and
the BKR fields for the first three
months of 2019 has exceeded
30,000 boe/d, an approximately
fifteen-fold increase over the levels prior
to suspension of Erskine production
one year earlier. This indicates the
impact of the BKR transactions.
This major production increase is
generating substantial inward net
cash flows. With 37% of our 2019
gas production, adjusted for net
cash flow sharing, hedged at a floor
of 35p/therm and over 20% of our
production in oil, revenue generation
is well balanced and robust at the
current price deck. Serica’s net cash
balances at 31 March 2019 have risen
to US$92 million, up from US$55
million at the end of December,
and give an indication of the cash
generating capability of our assets.
We are very proud of the team at Serica
which has enabled this to happen and
the optimum risk/reward sharing basis
on which it was structured, obviating
the need for further fund raising and
protecting shareholders’ interests.
Our strong cash flow and operating
capabilities provide an enviable
platform from which Serica can
continue to build for the future. It is a
testament to what can be achieved by
a small but highly experienced team.
By building up a production base
to which we can add value through
our own expertise Serica is well on its
way to achieving the first steps of its
strategic objectives. This commenced
with the acquisition of our interest
in the producing Erskine field just
under four years ago. Although a
small beginning this generated
material benefit to the Company and
continues to do so. The acquisition of
the BKR field interests now opens up
a whole new dimension and range
of opportunity for Serica to broaden
its portfolio and participate in the
full cycle of upstream activities.
Serica Energy plc Annual report & accounts 2018 05
Whilst we are not averse to taking on
assets overseas we will be focusing
our immediate attention on the North
Sea which is going through a period
of evolution as major companies
restructure their asset portfolios. As an
experienced and now fully established
North Sea operating company Serica
is in a good position to play its part
and benefit from these changes. We
have opened a new operating base
in Aberdeen to handle operations.
The team which has joined us from
BP to operate the fields and the new
employees who have joined us to help
manage the operations provide us with
the capability to take on new projects
and we have both the balance sheet
strength with minimal borrowings and
the increasing cash resources to do so.
Which brings me to the people. None
of this would be possible without the
skills of the people involved and the
knowledge and experience of those
who were responsible for the efficient
and safe transfer of operations from
BP and who will take the Company
forward. I know that shareholders
will wish me to thank them.
At the Board we are also seeing
changes in parallel with the Company’s
expanding operations and we will
continue to review the optimum
Board composition for a Company of
Serica’s size and responsibilities. We
have recently appointed Trevor Garlick
and Malcolm Webb as non-executive
Directors, both of them joining the
Company at the end of November.
Trevor’s knowledge of the North Sea
industry from his time at BP, where
he was latterly Regional President
of BP’s North Sea Business, will be
invaluable to us whilst Malcolm brings
a deep knowledge of the UK industry
gained from his time in the industry
and latterly as CEO of Oil & Gas UK.
Both bring experience and knowledge
complementing that already existing
on the Board. We welcome them both.
In summary, Serica has had a
remarkable year and now has an
enviable portfolio of cash generating
assets which have considerable
unlocked value. I strongly believe
that the Company has the team, the
experience, the financial strength and
the capability to unlock this value
and also build new opportunities for
increased returns for the benefit of
shareholders. We intend to achieve
these objectives both organically and
through further asset acquisitions
and consolidations which have the
potential to utilise our strengths,
exploit synergies and build upon
our strong operating capabilities.
Our underlying target and focus is to
increase shareholder value. We will
continually be seeking ways of doing
so as our financial position strengthens.
This will include the possibility of
generating financial returns for
shareholders commensurate with our
value growth objectives when we feel
that the Company has the capacity
to do so. I am confident that the
Company has the capability and is well
on the path to achieving these goals.
Tony Craven Walker
Executive Chairman
16 April 2019
The acquisition of the BKR field
interests now opens up a whole
new dimension and range of
opportunity for Serica
Highlights 06
Serica at a glance
Serica is one of the UK’s
top independent oil & gas
operators Our full-cycle
portfolio generates cash flow
from four producing fields
What we do
From our operating headquarters in
Aberdeen our team is focused on
maximising the potential in all our
projects whilst building our reputation
as a reliable and safe operator.
Our corporate headquarters is in
London and we are listed on the UK’s
Alternative (AIM) market under the
ticker SQZ.
Serica promotes a culture of safety,
reliability and innovation within our
140+ strong team.
Our vision
Serica aims to deliver shareholder value
by building reputation and relationships
within the upstream industry, opening
up further opportunities to grow the
business.
Rhum
Bruce, Keith
Development
Production
Operated
Aberdeen
Erskine
Columbus
Produce
Operate
Develop
Explore
D E V E L O P
P R O D U C E
O P E R A T E
P R O D U C E
Serica now has production
from four fields into two
platforms exported via three
offtake routes. Q1 2019 net
production averaged over
30,000 boe/d
O P E R A T E
E X P L O R E
D E V E L O P
P R O D U C E
E X P L O R E
O P E R A T E
Serica operates the Bruce
facilities, handling up to
50,000 boe/d gross gas
and liquids on behalf of the
Company and its partners
D E V E L O P
E X P L O R E
O P E R A T E
D E V E L O P
Serica is developing the
P R O D U C E
Columbus field as operator
with a 50% interest. The
single well is targetted for
2020 with first production
in 2021
E X P L O R E
Serica made four successful
applications for new licences
in the UKCS 30th Round.
We will continue to target
opportunities where an
attractive balance can be
struck between financial
commitment and risked
commercial return
Serica Energy plc Annual report & accounts 2018 07
140+ employees
We now employ over 140 staff,
99 offshore operating our Bruce
installation and 45 in our Aberdeen
and London offices
68.8 million
boe 2P reserves
Serica's net 2P reserves were
estimated by independent reserves
auditors to be 68.8 million boe at
1 January 2019
Leadership
Having welcomed two of the UK
energy industry's most highly
respected figures to our expanded
Board, Serica now fields a hugely
experienced leadership team
across the key disciplines to deliver
shareholder value
US$91.8 million
Serica continues to generate
steady income from production.
The resulting cash balance had
grown to US$91.8 million at
31 March 2019
80/20%
our 30,000 boe/d production
average during Q1 of 2019 was
80% gas, 20% oil
Highlights 08
How we operate
Serica’s strategy is to
identify and acquire assets
where we can add value
We support this strategy with
a motivating and enabling
management culture shaped
around five key drivers
E N C E S
W IN L I C
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Our strategy for growth
We are well-positioned to develop our
business with a sizeable operating
capability and sales revenue from
diversified sources of production
Added to that, the Company is largely
debt-free
Serica's growth strategy builds on the
flexibility generated by these two key
positions and we are superbly placed
to react quickly when attractive growth
opportunities arise at any point in the oil
and gas life cycle
As our operating expertise is based
around the Central and Northern North
Sea we will focus on opportunities
where we can add value when the
current operator may be unable to do so
Serica Energy plc Annual report & accounts 2018 09
Our business drivers in action
Serica has a fresh, new team, focused
on maximising the productive life of
our assets, adding value throughout the
life cycle and innovating to enhance
efficiency. We will support and motivate
our talented team, combining the
best technology and a decisive, agile
management approach which will
streamline decision-making to optimise
efficiency and encourage innovation
Safety
The safety of our people and the
protection of our environment are vital
to a sustainable business. Serica has
already upgraded all Bruce lifeboats
and is now launching a cross-discipline
safety campaign involving training and
awareness-building
Focus
As a mature asset BKR is the subject
of constant review focused on safely
maximising operating up-time. During
2018 production reliability was good and
our team aims to better that during 2019
Simplification
On the Bruce platform
we have been able to
replace nine bespoke software
applications with a single product,
streamlining procedures to improve
efficiency and job satisfaction
Innovation
As development field operator for
Columbus our team will consult with
best-in-field experts to optimise the
results of our planned field development
Investment
The Company exercises strong financial
discipline across every aspect of its
business. Our Q1 2019 cash balance of
US$92 million, puts Serica in an enviable
position for investment in future growth
Highlights 10
Chief Executive’s review
The word transformational
is perhaps overused
in corporate reports but 2018
was a truly transformational
year for Serica
68.8
mmboe
3.1
mmboe
25k
boe/d
2k
boe/d
$55m
$34m
7
140+
Net 2P reserves
Average net production
Cash and deposits
Employees
We had finished 2017 with seven employees, net 2P reserves of 3.1 million boe,
average net production of less than 2,000 boe/d and cash and deposits of
US$34 million. By the end of 2018 the Group had over 140 employees, net 2P reserves
of 69 million boe, average net production of over 25,000 boe/day and despite
completing the major acquisition of the Bruce, Keith and Rhum assets we had
grown our cash and deposits to US$55 million. We still hold no debt other than a
prepayment facility arranged with BP as part of the BKR Acquisition and our liquidity
has remained strong throughout the period.
There were a number of significant events during the year and these illustrate the
diversity of Serica’s full-lifecycle portfolio of assets:
The completion of the
Bruce, Keith and Rhum
asset transactions
The installation of a bypass
pipeline to address the
historic waxing issues
affecting Erskine production
leading to a significant
reserves upgrade from
3.1 mmboe net 2P reserves
(at 1 January 2018) to
5.7 mmboe net 2P reserves
(at 1 January 2019)
The approval of the
Columbus Field
Development Plan (FDP)
leading to the upgrade of
2C contingent resources
to 6.2 mmboe of net 2P
reserves
The spud of the
fully-carried Rowallan
exploration well
Serica Energy plc Annual report & accounts 2018 11
Right: Mitch Flegg, CEO on Bruce platform
Bruce, Keith and Rhum (“BKR”)
In November 2017 Serica announced
the BKR Acquisition under which Serica
UK acquired a 36% interest in the Bruce
field, a 34.83% interest in the Keith field
and a 50% interest in the Rhum field
and associated infrastructure. The deal
had an effective date of 1 January 2018.
In August 2018, Serica announced
the Total E&P Transaction under
which Serica UK acquired a 42.25%
interest in the Bruce field and a
25% interest in the Keith field and
associated infrastructure. The Total E&P
Transaction also had an effective date
of 1 January 2018.
In November 2018, Serica announced
the BHP Transaction under which Serica
UK acquired a 16.0% interest in the
Bruce field and a 31.83% interest in the
Keith field and associated infrastructure.
The BHP Transaction also had an
effective date of 1 January 2018.
Later in November 2018, Serica
announced the Marubeni Transaction
under which Serica acquired a 3.75%
interest in the Bruce field and the
8.33% interest in the Keith field and
associated infrastructure. The Marubeni
Transaction also had an effective date
of 1 January 2018.
All four transactions were completed on
30 November 2018 meaning that Serica
now has a 50% interest in the Rhum
field, a 98% interest in the Bruce field
and a 100% interest in the Keith field.
The bulk of the consideration for
the transactions was deferred and
contingent. Consequently, Serica did
not have to raise equity. The combined
initial consideration of US$22 million
was exceeded by Serica’s US$50
million share of the net post-tax cash
flows between 1 January 2018 and
completion which benefitted from
higher than anticipated gas prices in
2018. In addition to these net proceeds
of US$28 million received by Serica at
completion, further proceeds in excess
of US$5 million are expected to fall
due to Serica once final completion
statements have been agreed.
A completion condition of the sale
and purchase agreement under
which Serica acquired interests in
the BKR fields from BP was replacing
the Licence issued to BP by the U.S.
government Office of Foreign Assets
Control (“OFAC”). This Licence enabled
certain U.S. companies and their owned
or controlled non-U.S. affiliates to
provide goods, services and support to
Rhum field operations notwithstanding
the 50% participation in the field by
Iran Oil Company (U.K.) Limited (“IOC”),
which was part of the National Iranian
Oil Company group.
On 8 May 2018 the United States
announced that it would withdraw
from the Iran nuclear deal and re-
impose the full range of U.S. primary
and secondary sanctions against Iran.
Thus, it became apparent that in order
to continue Rhum field operations,
it would be necessary to address the
application of both U.S. primary and
secondary sanctions to the field.
On 9 October 2018, Serica announced
that a new conditional Licence had
been issued by OFAC to BP (as the then
operator and 50% owner of Rhum) and
Serica (the proposed acquirer of BP’s
interest and operatorship in Rhum). The
Licence allows specified U.S. entities
and their owned or controlled non-U.S.
affiliates to provide goods, services and
support to Rhum operations. OFAC
also provided an assurance that any
other non-U.S. entities providing goods,
services and support involving Rhum
are not to be exposed to U.S. secondary
sanctions provided that the Licence
remains in force. The Licence was
contingent upon certain arrangements
being put in place in relation to
IOC’s participation in the Rhum field.
This condition was satisfied by the
implementation of these arrangements
on 2 November 2018.
As was announced by Serica on
9 October 2018, the arrangements
implemented in relation to IOC’s
participation in Rhum involve the
following provisions. All benefits
accruing from and relating to IOC’s
interest in the Rhum field are being
held in escrow for such period as U.S.
sanctions apply. This ensures that
neither IOC nor any direct or indirect
parent company of IOC will derive
economic benefit from the Rhum
field during that period. In addition,
IOC exercises no decision-making
powers in respect of Rhum during the
same period. Such powers are being
exercised by a management company
that operates independently of IOC
and Serica.
Strategic report 12
Chief Executive’s review continued
BKR colleagues on and offshore can discuss
projects and efficiently resolve issues using
our live video link
30,000 boe/d
average net production Q1 2019
$92m
$55m
2018
year end
2019
end Q1
Cash balance
Serica net cash balance up
US$36.9 million during the first
three months of 2019
Since the full re-imposition of U.S.
sanctions against Iran on 5 November
2018, BP until 30 November and
Serica thereafter, have been able
to procure the goods, services and
support necessary to maintain Rhum
field operations, thereby preserving
production from a strategic UK natural
resource. The existing Licence issued by
OFAC expires on 31 October 2019. Serica
will be applying for the renewal of the
Licence during this year.
Production levels from the assets
have been good. During the early
part of 2018 there were production
interruptions due to poor weather
conditions and also due to a temporary
shutdown of the Forties Pipeline
System which is used to export liquids
from BKR. The FPS interruption was a
rare event which the operator, Ineos
FPS, was quick to address given the
strategic importance of this line which
transports to shore over 40% of total
UK oil production. Performance was
stronger in the second half of the year
resulting in an average full-year net
production in excess of 24,000 boe/
day. During the year Ofgem approved
the raising of the National Transmission
System (“NTS”) entry specification for
CO2 content of gas delivered at the St
Fergus Gas Terminal to 5.5%molCO2
thereby eliminating the need for costly
blending gas previously required to
offset the relatively higher CO2 content
of Rhum gas.
An independent Competent Person’s
Report (“CPR”) performed by Ryder
Scott estimates net combined Bruce,
Keith and Rhum 2P Reserves at
1 January 2019 to be 56.9 million boe.
BP had entered into a contract for
a rig to carry out the re-entry and
re-completion of the previously drilled
(but not yet producing) Rhum R3 well.
This work was due to commence in
May 2018 but BP decided to defer the
work due to uncertainty caused by the
announcement on 8 May 2018 by the
US Government of its withdrawal from
the Joint Comprehensive Plan of Action
(“JCPOA”) and the reintroduction of
wider U.S. sanctions on Iran and certain
transactions with Iranian entities.
Following the receipt of the OFAC
Licence and completion of the BKR
Acquisition, Serica has continued the
planning for the R3 project and expects
to start inspection work on the well this
year. Final well planning is in progress
and it is likely that the re-entry and
re-completion will take place in early
2020. The well is already connected to
the necessary infrastructure which will
facilitate bringing the R3 well on stream
quickly after the operations have been
concluded.
Throughout 2018 Serica worked with
BP and the relevant authorities to
ensure a safe and seamless transition
of operatorship. As part of the
integration process 114 members of staff
transferred across from BP to Serica
on 30 November 2018 when the BKR
acquisitions completed and Serica
assumed operatorship of Bruce, Keith
and Rhum. During the year Serica also
recruited a further 23 staff members in
order to ensure that the team would be
fully resourced to handle all aspects of
operatorship from day one.
Aberdeen premises were identified,
secured and fitted out in order to
provide a new high-tech Operational
Headquarters for the Company. The
centerpiece of this facility is a real-time
video and communications link to the
control room on the Bruce platform.
The key objectives of the transition
process were that there should be
no HSE incidents associated with the
transition and that there should be no
detrimental impact on production. It
is to the immense credit of the entire
workforce that both of these objectives
were fully achieved.
Erskine
Production from the Erskine field was
suspended on 16 January 2018 due to
a wax build-up in the Lomond to CATS
Riser Platform condensate export line.
A section of this pipeline had been
affected by wax-build up and this had
led to reductions in Erskine production
over a number of years. Historically the
problem has been managed through
rate control, periodic soaking of the line
with solvents and pigging. However,
pigging programmes have historically
been limited due to the risk of full
blockage. New Lomond operator,
Serica Energy plc Annual report & accounts 2018 13
Serica intends to continue targeting
exploration opportunities where
an attractive balance can be struck
between financial commitment
and risked commercial return and
therefore participated in three
applications for new licences in
the UKCS 30th Offshore Licensing
Round. All three applications were
successful and Serica was awarded
four new exploration licence areas:
Rowallan South
Blocks 22/24g (split) and 22/25f (split),
Serica Energy (UK) Limited: 20% working
interest, operator ENI UK.
These blocks lie directly to the south of
the Rowallan well, in which Serica holds
a 15% interest. The blocks were offered
on condition of making a ‘drill or drop’
decision to enter the next phase.
Columbus West
Block 23/21b, Serica Energy (UK) Limited:
50% working interest, operator Summit
Exploration and Production.
The block lies immediately to the west
of Serica’s Columbus development. The
proposed work programme contains
further seismic reprocessing with a drill
or drop decision.
Skerryvore/Ruvaal
Blocks 30/12c (part), 30/13c (split), 30/17h,
30/18c and 30/19c (part), Serica Energy (UK)
Limited: 20% working interest, operator
Parkmead.
The blocks lie in the Central North Sea
and contain the Skerryvore and Ruvaal
prospects 60km south of the Erskine
field. The proposed work programme
for the Skerryvore licence area includes
acquiring and reprocessing 3D seismic
data and a contingent well decision.
There is a separate licence for the
Ruvaal area on block 30/19c with a drill
or drop decision.
Chrysaor Limited, after reviewing the
various wax management measures
employed in recent years, concluded
that the best long-term solution would
be to bypass the area of wax build-up
by replacing a 26 km section of line,
a proposal that Serica fully supported.
The line was successfully replaced
during the summer of 2018 and Erskine
production was restarted at the end
of October after the line had been
recommissioned.
A regular pigging programme on the
new line has been initiated from the
start aimed at preventing the wax
build-up that has previously proved so
difficult to remove.
An independent CPR performed by
Netherland Sewell and Associates
has taken account of the increase in
uptime associated with the bypass
pipeline and estimates Net Erskine
2P Reserves of 5.7 million boe in
place as at 31 December 2018. This
is a significant increase on the 3.1
million boe reported at the end of the
previous year.
Net production averaged in excess of
3,000 boe/day during the period from
the restart of production until the end
of 2018 giving a full year average net
production of 650 boe/day. Production
in the first three months of 2019 has
continued to average in excess of 3,000
boe/day.
Columbus
In Q1 2018 Serica and its partners in the
Columbus development concluded
the evaluation of two potential offtake
routes for Columbus production
and selected the Shearwater hub as
providing the optimum export route
for Columbus gas and liquids. This
scheme will utilize a new pipeline
to be constructed by the owners of
the nearby Arran field. This pipeline,
connecting the Arran field to the
Shearwater complex, operated by
Shell UK, is planned to pass close to
Columbus and provides a commercial
route for field development.
A Field Development Plan (“FDP”) was
submitted for approval in June 2018.
Peak production is expected to be
7,800 gross boe/day. The Development
Area will be drained by a single well,
which will be connected to the recently
approved Arran-Shearwater pipeline,
through which Columbus production
will be exported along with Arran field
production. When the production
reaches the Shearwater platform
facilities, it will be separated into gas
and liquids and exported via pipelines
to terminals onshore. Columbus
development timing is dependent on
the Arran-Shearwater pipeline being
tied into the Shearwater platform in
Q3 2020. Columbus start-up is targeted
for mid-2021.
OGA approval of the FDP was
granted in October 2018. This means
that the 2C Contingent Resources
previously assigned to Columbus
have been upgraded to 2P Reserves.
An independent CPR performed by
Netherland Sewell and Associates
estimates net Columbus 2P Reserves at
31 December 2018 to be 6.2 million boe.
Exploration
The ENI UK Limited (“ENI”) operated
Rowallan exploration well, 22/19c-7,
spudded on 30 December 2018.
Serica had a 15% fully carried interest
in this well which was drilled to
target the gas condensate Rowallan
prospect, a significant structural fault
and dip-closed trap in the east of
Block 22/19c in the Central North
Sea. The Ensco 121 heavy duty jack-
up rig was used to drill the well.
On 4 April 2019 it was announced
that well 22/19c-7, had reached a
total depth of 4,641 metres and
would be plugged and abandoned.
The well encountered a 182 metre
section of sandstone and shale, but
was not found to be hydrocarbon
bearing. The well was high pressure
and high temperature and drilled
using managed pressure drilling and
continuous circulating technology. The
well was drilled on time and on budget.
We will now assess the valuable data
acquired before deciding the forward
plan for the remaining prospects on
block 22/19c and adjacent blocks. This
result justifies our policy of reducing
financial exposure to exploration risk
by means of farm-out. In this case
we were fully carried and did not pay
anything towards the cost of the well.
Strategic report
14
Chief Executive’s review continued
Opportunities
Serica has established itself as one
of the leading independent UKCS
operating companies and has
assembled a talented and motivated
operating team. We intend to use these
skills to continue to optimise the value
of all of our assets. In particular we
aim to extend the field life of the BKR
assets by concentrating on enhancing
recovery and reducing costs by
eliminating unnecessary complexity.
Particular attention is being applied
to the Bruce platform where we feel
that our focused team can continue
to improve the uptime of the facility.
The fact that Serica has managed to
complete the transactions with the
all of the previous Bruce owners is a
very important step forward because
this will remove any potential partner
misalignment issues that could have
impacted our ability to extend field life,
increase the utilisation of the facilities
and maximise economic recovery from
the area as a whole. The extensive
infrastructure associated with the Bruce
field offers significant capacity for third
party tiebacks and Serica intends to
fully investigate all opportunities to
attract new business in this area.
The current corporate growth strategy
is to identify and acquire assets where
Serica can generate value in order
to enhance shareholder returns.
This started with the 2015 Erskine
acquisition and continued with the
2018 BKR transactions and in each case
Serica has demonstrated the ability to
unlock value by solving commercial
and/or political problems. Serica has
now developed a sizable operating
capability and will be able to use this
to solve operational and/or subsurface
problems. Serica is largely debt-free
and benefits from the strong cash
flow from ongoing operations (Erskine
and BKR) which can be deployed for
future projects.
Serica is not just a late-life production
operator. We aim to expand the
portfolio at all stages – exploration,
appraisal, development and
production. Our operating expertise
is based around the Central and
Northern North Sea and (coupled
with tax synergies) this means that
that the search for new opportunities
is currently focused on the UKCS.
Serica is committed to identifying
opportunities based on value rather
than volume and will continue to
look for assets (preferably operated
rather than non-operated) where
Serica can add value when the current
operator may be unable to do so.
Mitch Flegg
Chief Executive Officer
16 April 2019
Serica is largely debt free and ended
Q1 2019 with a cash balance of
US$91.8 million putting the Company in
a strong position to expand the portfolio
Serica Energy plc Annual report & accounts 2018 15
Corporate and social responsibility
Serica is committed to
providing a safe, reliable
and responsible operating
environment
Business ethics
The Board operates according to
clear procedures and allocation of
responsibility. This system of delegation
allows risk to be assessed and managed
effectively. The Company’s obligations
to its stakeholders, are widely
understood across all its activities.
Our Board has set out policies and
procedures governing the standards
and behaviours of our personnel
wherever they are at work. The
Company’s leadership is wholly
committed to work with transparency
and integrity, taking personal
responsibility for individual actions and
corporate behaviours.
Serica’s Operating Management System
guides the Company on how we set
health, safety and environmental
standards and helps us to monitor
achievements with a view to continuous
improvement. Our Board will ensure
that the necessary resources are in place
to support that vision.
People
2018 saw 114 staff transferring from
BP to the new Serica team and the
creation of 23 new jobs. This multi-
discipline team is already delivering
exceptional results and is at the heart of
our potential for growth.
such as Step Change in Safety’s Major
Accident Hazard programme and
work closely with our Elected Safety
Representative community.
We are proud to be an early adopter
of the new IOGP Life Saving Rules and
signatories to the Industry Search and
Rescue (ISAR) helicopter service.
Environment
Serica will do all in its power to protect
the environment and minimise the
impact of our assets, supporting such
industry initiatives as Aberdeen Marine
Logistics Alliance.
We believe that success will be
delivered through an environment
of mutual trust and respect, where
roles and responsibilities are clear and
personal accountability is a matter of
professional pride. We are committed
to investing in our people to build a
sense of confidence, shared values and
responsibility that will bring prosperity
to employees and shareholders alike.
The Company is supportive of other
environmental drivers such as fuel
efficiency. One of our first moves on
taking operatorship of the BKR asset
was to switch crew transport to direct
flights from Aberdeen to Bruce on
Sikorsky’s most advanced civil aircraft,
the S-92, delivering significant fuel
efficiency and improving the travel
experience of our valued personnel.
HSE
One of our priorities, when assuming
operatorship, was early engagement
with key industry bodies such as HSE,
OPRED, Step Change in Safety and
OGUK. We will continue to develop
these important relationships and
contribute to industry initiatives
wherever possible.
Serica are committed to continuous
improvement of our HSE performance
and we acknowledge the key role
our people play. We recognise the
importance of developing HSE
knowledge, through industry initiatives
Local community
As one of the UK oil & gas industry’s
major businesses Serica is highly
conscious of the part we play in the
local economy. Currently over 90% of
our contracts are with UK suppliers,
almost 70% of these in the North East
of Scotland.
Our newly formed staff committee will
build a programme for local charitable
support and we look forward to
reporting great progress on this in next
year’s report.
Strategic report
16
Review of operations
Serica assumed
operatorship of Bruce
on 30 November 2018
bringing a new perspective
to one of the UK’s most
important mature assets
Serica Energy plc Annual report & accounts 2018 17
Strategic report 18
Production
Bruce is one of the UK's major producing
facilities and nobody knows it as well
as our team. Our task is to maximise
economic recovery of its resources and
pursue third party tie-back opportunities
for further earning potential
Mike Killeen
VP Operations
Northern North Sea
Bruce Field
Blocks 9/8a, 9/9b and 9/9c,
Serica 98%
RHUM
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B
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Frigg
BRUCE
KEITH
Frig g to St. F erg u s
Boa
F
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s
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B
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Beryl
Kraken
Mariner
Serica completed the acquisition of
the Bruce field on 30 November 2018
and took over as operator from BP.
Serica now operates the field and
facilities consisting of three bridge-
linked platforms, wells, pipelines and
subsea infrastructure. The platforms
contain living quarters for up to 168
people, reception, compression, power
generation, processing and export
facilities and a drilling platform that
is currently mothballed. There is also
the subsea Western Area Development
(WAD) that produces from the edges
of the Bruce area. Serica is now
responsible for actively maintaining,
monitoring, repairing and optimising
all equipment, wells and pipelines.
The Bruce field is produced through
a combination of platform wells and
subsea wells tied back to the platform,
with over 20 producing wells in total
producing from multiple reservoirs
and compartments. Bruce production
is predominantly gas which is rich
in NGL’s. Gas is exported through
the Frigg pipeline to the St Fergus
terminal, where it is separated into
sales gas and NGL’s. Oil is exported
through the Forties Pipeline System
to Grangemouth.
The offshore team is supported onshore
by the Serica technical headquarters
in Aberdeen which has a live video
link to the platform, streaming data
and offering seamless communication
with the offshore crew. Serica has
established a highly skilled asset team
consisting of the experienced and
knowledgeable former BP staff and
newly employed experts covering
the full range of engineering and
maintenance support. Serica has
installed the necessary systems and
measures to ensure continued safe
and efficient operations.
Serica’s 98% field interest and focus
on the Bruce asset means that it can
identify and implement changes
that improve performance swiftly and
efficiently. One of the first actions Serica
as operator carried out was to change
the route the helicopters took from
Aberdeen to the platform. The flight
path used by the previous operator was
via Shetland, which included a change
of aircraft and made the journey more
prone to delays and cancellations.
After a thorough HSE review and risk
assessment, Serica changed this to
one direct flight from Aberdeen to
the platform, which has significantly
reduced flight times and increased
reliability, meaning people get home
in a timely manner at the end of their
rota.
Serica is striving to simplify processes
to improve efficiency and reduce risk.
A new asset integrity management
software has been introduced
which also delivers safety and risk
management. This one system has
replaced nine individual IT systems that
were previously used. The result is a
much more integrated tool that tracks
and reports modifications, incidents
and actions in one place, giving users
the information they require and a
live update of risk profiles. There is also
a new maintenance management
system which is linked to the materials,
purchasing and storage system, again
simplifying the process and reducing
duplication and errors.
Bruce field production in 2018 averaged
in excess of 12,000 boe/d of exported
oil and gas net to Serica. Production
reliability was 89% with a planned
maintenance shut down period that
coincided with a planned shut-down of
the Forties Pipeline System. The latest
independent estimate of reserves by
Ryder Scott estimated 2P reserves of
21.9 million boe net to Serica as of
1 January 2019.
Serica Energy plc Annual report & accounts 2018
19
Serica has introduced a new
asset integrity management
system as part of its campaign
to simplify processes to reduce
risk and increase efficiency
Strategic report 20
Production continued
56.9 million boe
BKR fields 2P reserves net to Serica at 1 January 2019
An annual maintenance shutdown was
carried out in 2018 and was completed
on time and on budget. During this
time the flare system was overhauled
to ensure safe and reliable operations
going forward. Engine change outs
were carried out on two of the
compression systems. The engines were
replaced with upgraded models of
improved design to increase reliability.
The oil line to the Forties Unity platform
was investigated with an intelligent pig
and found to be in excellent condition.
Three wells were brought back
on production after repairs to the
conductors (pipes connecting the
wells from the seabed to the platform)
adding to production rates. A further
two conductor clamps were added
to wells to prevent possible shut-ins.
Further conductor work is planned
for 2019.
Northern North Sea
Keith Field
Block 9/8a,
Serica 100%
Northern North Sea
Rhum Field
Block 3/29a,
Serica 50%
Keith is an oil field produced by one
subsea well tied back to the Bruce
facilities and requires very little
maintenance. Keith produces at a
relatively low rate but provides a low
cost contribution to the oil export from
Bruce. Average Keith production in
2018 was around 800 boe/d. The latest
independent estimate of reserves by
Ryder Scott estimated 2P reserves
of 656,000 boe net to Serica as of
1 January 2019.
The Rhum field is a gas condensate
field producing from two subsea wells
tied into the Bruce facilities through
a 44km pipeline. Rhum production is
separated into gas and oil and exported
to St Fergus and Grangemouth along
with Bruce and Keith production.
Both wells are capable of producing
at high rates, up to 100,000 mmscf/d
each of gas in 2018. Rhum gas has a
higher CO2 content than Bruce gas and
so is blended with Bruce gas before
leaving the offshore facilities. The field
has produced at a relatively constant
rate and has not shown significant
decline. Average Rhum production
in 2018 was around 12,000 boe/d net
to Serica. The reservoir pressure is
actively monitored via a third well (R3)
that is not producing and so there
is a good understanding of reservoir
performance.
The R3 well requires intervention work
before it can be brought on production.
This was not carried out in 2018 due to
concerns about secondary sanctions
and their impact on contractors.
The issue has now been resolved.
Serica plans to carry-out investigative
work on the well prior to finalising
a well workover programme. Rhum
production has not been materially
constrained to-date by the delay in
work on R3.
The latest independent estimate of
reserves by Ryder Scott estimated 2P
reserves of 34.5 million boe net to Serica
as of 1 January 2019.
(L) Mike Killeen, VP Operations in Aberdeen
Improving core equipment with changeout
of Bruce’s LPBC 9-tonne gas turbine
Serica Energy plc Annual report & accounts 2018
21
The extensive infrastructure associated
with the Bruce field offers significant
capacity for third party tiebacks and Serica
intends to fully investigate all opportunities
to attract new business to this area
Strategic report 22
Production continued
5.7 million boe
Erskine field's estimated 2P reserves net to Serica at 1 January 2019
The pipeline bypass was completed
at the end of September 2018 and
production resumed in October 2018.
All Erskine wells were brought back
on production and production rates
regularly exceeded 3,500 boe/day
net to Serica. Erskine production for
2018 was only around 650 boe/d net
to Serica due to the extended period
of shut-in. A high frequency cleaning
regime of the condensate export
pipeline has been implemented in
order to maintain the availability of the
export route and improve overall export
reliability.
An updated independent audit of the
Erskine field confirmed Serica’s share
of estimated 2P reserves at 5.7 million
boe as of 1 January 2019. This is a
significant increase in reserves. It arises
from a re-evaluation of well decline
rates and facility uptime based upon
the more stable rates achieved since
the resumption of production which
has led to an expected extension in
economic field life.
Central North Sea
Erskine Field
Blocks 23/26a (Area B) and
23/26b (Area B), Serica 18%
22/19c
Columbus
Lomond
Shearwater
Erskine
29
30
Serica holds a non-operated interest
in Erskine, a gas and condensate field
located in the UK Central North Sea.
Serica’s co-venturers are Chevron
50% (operator) and Chrysaor Limited
32%. Erskine fluids are processed and
exported via the Lomond platform,
which is 100% owned and operated
by Chrysaor.
The Erskine field is produced
through five production wells over
the Erskine normally unmanned
platform, transported to Lomond via a
multiphase pipeline and processed on
the Lomond platform. Then condensate
is exported down the Forties Pipeline
System via the CATS riser platform at
Everest and gas is exported via the
CATS pipeline to the CATS terminal at
Teeside.
o
N
During 2018 a major project was
carried out to significantly improve
production export reliability for Erskine
fluids. Over the last five years the export
route for Erskine production has been
severely impacted by wax build-up
in the condensate export pipeline
between Lomond and the CATS
riser platform at Everest. The Erskine
partnership supported the Lomond
operator’s proposal to lay a new section
U
K
of pipeline to bypass the affected
section of pipe. Soon afterwards,
production was suspended due to a
blocked condensate export line. In
April after remedial measures to clear
the blockage had not succeeded, the
Lomond operator Chrysaor made the
decision to cease clearance operations
and concentrate on accelerating the
bypass programme.
w
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Skerryvore
0 5Km
Ruvaal
Serica Energy plc Annual report & accounts 2018
23
Development
The value of Columbus has been
unlocked by working with industry
partners and infrastructure owners
to find commercial and technical
solutions through collaboration
and innovation
Central North Sea
Columbus Development
Blocks 23/16f and 23/21a,
Serica 50%
Arran North
Arran South
Columbus
Lomond
Shearwater
Erskine
The Columbus gas condensate
development is located in close
proximity to the Lomond field and has
been designated as part of the Lomond
Field Area. However, it has separate and
independent development approval.
Serica is Columbus field operator with
partners Tailwind Mistral Limited (25%)
and Endeavour Energy UK Limited
(25%). The field is located in the Eastern
Central Graben, UK Central North Sea
and the reservoir is located within the
Forties Sandstone.
The Columbus development has
been appraised with four wells and
is to be developed with a single
production well. Serica submitted a
Field Development Plan (“FDP) to the
OGA in June 2018 and was granted
development and production consent
in October 2018. Development work
started as soon as FDP approval was
received. First gas is targeted for 2021.
The Columbus development plan
involves tying a single horizontal
subsea well into the pipeline planned
to be laid between Arran field (which
received development approval at a
similar time to Columbus) and the
Shearwater platform, both operated
by Shell. Arran and Columbus fluids
will combine in the new pipeline
and be produced together through
the Shearwater processing facilities,
making use of an existing riser which
will be available from Q4 2020. Under
agreements which have been entered
into, the Columbus partners will pay
for the tie-in and compensate the
Arran owners for some re-routing of
the pipeline but will not bear the
capital cost of laying a new pipeline to
Shearwater. Costs will be recovered by
Arran by way of a tariff on production
through the pipeline.
Now that the development is
proceeding, Columbus resources have
been re-classified as reserves. The latest
reserves report written by independent
reserves auditors Netherland & Sewell
Associates Incorporated (“NSAI”)
ascribed to Serica net 2P reserves of
6.2 million boe within the Columbus
development area as of 1 January 2019.
29
30
6.2 million
Columbus resources have
been re-classified as reserves,
adding net 2P reserves of
6.2 million boe from
1 January 2019
N
U
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0 5Km
Serica VP Technical Clara Altobell discusses
plans for Columbus with Manager of
Projects Fergus Jenkins
Skerryvore
Ruvaal
Strategic report
24
Exploration
Central North Sea: Rowallan Prospect -
Block 22/19c, Serica 15%
Block 22/19c is located in the Central
North Sea, around 20km west of
Columbus. Well 22/19c-7 was spudded
on 30 December 2018 by the Ensco 121
drilling rig. The well was targeting high
pressure high temperature reservoirs
and so managed pressure drilling and
continuous circulating technology were
used to drill the well.
22/19c-7 was drilled to target the
Rowallan Prospect comprising potential
condensate targets in the Triassic
Skagerrak and the Middle Jurassic
Pentland formations. Partners comprise
ENI UK Limited (operator – 32%), JX
Nippon Exploration and Production
(U.K.) Limited (25%), Mitsui E&P UK
Limited (20%) and Equinor (8%).
On 3 April 2019 the partnership made
the decision to plug and abandon
the well after drilling to a total depth
of 4,641 metres. The well encountered
182 metres of high pressure high
temperature sandstones and shales but
did not contain hydrocarbons. The data
acquired during the drilling operation
will be used to review the remaining
prospects on block 22/19c.
Serica was fully carried on all cost
associated with this licence and so did
not incur any costs in the planning and
drilling of the Rowallan exploration well.
Licence Awards in the UK’s 30th
Offshore Licensing Round
The Company was awarded four
licences on the UK Continental Shelf
in the UK’s 30th Offshore Licensing
Round:
●● Rowallan South P.2385 – Blocks
22/24g and 22/25f (Serica UK: 20%
interest);
●● Columbus West P.2388 – Block 23/21b
(Serica UK: 50% interest);
●● Skerryvore P.2400 – Blocks 30/12c,
30/13c, 30/17h and 30/18c, and Ruuval
P.2402 – Block 30/19c (both Serica
UK: 20% interest).
P.2358 was acquired as protection
acreage in the event of a Rowallan
discovery, as the prospect may have
extended onto this block. The results of
the 22/19c-7 well will be used to revise
the interpretation of the prospectivity
of this licence before making a drill or
drop decision within two years.
Seismic reprocessing is being carried
out on Columbus West to identify
prospectivity. There is a drill or drop
clause on this licence after two years.
The Skerryvore and Ruuval licences
are operated by Parkmead. Seismic
acquisition is planned to review the
prospects in more detail and make a
drill or drop decision within three years.
Ireland
Rockall Basin: Frontier Exploration
Licences 1/09 and 4/13, Serica 100%
Serica is in talks with the Irish
authorities over an acceptable work
programme for extending the licences
which were due to expire in November
2018 and January 2019. The 4/13 licence
contains structural prospects Aghla
Beg and Aghla More and the overlying
stratigraphic prospect Derryveagh.
Studies into the likely lithologies of the
prospects showed signs of sedimentary
geometries within the Aghla More
prospect, but more fractured basement
like features in Aghla Beg.
Serica estimates P50 prospective
resources for these stacked prospects
to be in the order of 4tcf of gas and 250
million barrels of condensate.
Licence 1/09 contains the Muckish
prospect, which is a large, structural
prospect, analogous to the Dooish
discovery. Technical work carried out
in 2018 investigated similarities of
the geology to the prospects in 4/13
through seismic attribute analysis.
The results were inconclusive on the
geological characteristics of Muckish,
due to seismic noise and volcanic
interference, but it did highlight a
Cretaceous fan system in the area.
An exploration well that can penetrate
Derryveagh and Aghla More is the
highest ranked opportunity and Serica
is seeking a farm-in partner to join
in drilling.
Slyne Basin: Frontier Exploration
Licence 01/06, Serica 100%
Serica is in talks with the Irish
authorities over an acceptable work
programme for extending the licence
which was due to expire in December
2018. The licence contains three
prospects, Boyne, Achill and Liffey,
with oil and gas potential in both the
Jurassic and Triassic reservoirs. There
is the Bandon oil discovery on block,
which was encountered in the Jurassic
sands. In the event of a gas discovery,
the licence is ideally positioned for a
tie-back to the Corrib subsea manifold.
Serica is seeking to identify a farm-in
partner to drill an exploration well on
the licence.
Namibia
Luderitz Basin: Blocks 2512A, 2513A,
2513B and 2612A (part), Serica 85%
Serica has extended the first renewal
period of the licence to continue until
the end of 2019. This licence period
does not include a commitment to
drill a well. The excellent 3D seismic
data has identified giant carbonate
prospects as well as large, more
conventional Cretaceous fan prospects
supported by seismic anomalies.
Serica has engaged specialist help to
market the opportunity more widely.
A technical review following recent
drilling results offshore Namibia has
uncovered the potential for a regional
seal deposited during the Aptian
geological time period. This could
explain the absence of hydrocarbons in
the recent wells drilled in nearby blocks.
This would also benefit the Serica
prospects as they are located deeper
beneath the Aptian seal, which could
form a trap and in prime location for
source and migration. Serica hopes to
attract a partner to join in drilling an
exploration well.
Serica Energy plc Annual report & accounts 2018
Group proved plus probable reserves – unaudited
25
At 1 January 2017
Revisions
Production
United Kingdom
Oil
mmbbl
2.1
(0.1)
(0.4)
Gas
bcf
10.4
0.6
(2.2)
Total
Oil
mmbbl
2.1
(0.1)
(0.4)
Total
Gas
bcf
10.4
0.6
(2.2)
Total
Oil & gas
mmboe
3.8
–
(0.7)
At 31 December 2017
1.6
8.8
1.6
8.8
3.1
Acquisitions
Re-classification
Revisions
Production
8.7
2.6
1.6
(0.1)
293.5
21.4
8.2
(5.1)
8.7
2.6
1.6
(0.1)
293.5
57.5
21.4
8.2
(5.1)
6.2
3.0
(1.0)
At 31 December 2018
14.4
326.8
14.4
326.8
68.8
Proved developed
Probable developed
9.3
5.1
212.0
114.8
9.3
5.1
212.0
114.8
44.6
24.2
At 31 December 2018
14.4
326.8
14.4
326.8
68.8
Proved and Probable reserves are based on independent reports prepared by consultants Netherland, Sewell & Associates
(Erskine and Columbus) and Ryder Scott (Bruce, Keith and Rhum) in accordance with the reserve definitions of the Canadian
Oil and Gas Evaluation Handbook.
Gas reserves at 31 December 2017 and 2018 have been converted to barrels of oil equivalent using a factor of 6.0 bcf per mmboe
for reporting and comparison purposes; actual calorific value of produced gas may result in a different conversion factor for
individual fields.
The resources of the Columbus development in the UK North Sea were classified as Contingent Resources as at 31 December
2016 and 2017.
Strategic report
26
Financial review
Serica generated a profit
for the year of US$74.7
million for 2018 compared
to US$17.1 million for 2017
Comparison with the prior year is
significantly influenced by two key
factors; the shut-in of the Erskine field
for most of 2018 to carry out a bypass
of the condensate export pipeline; and
the impact of the BKR acquisitions
completed on 30 November 2018.
In addition to Erskine operations and
normal administrative and corporate
costs, Serica’s 2018 results include
net income from the BKR fields from
the completion date of 30 November
2018 plus a bargain purchase gain
of US$52.9 million in respect of the
acquisition partially offset by expensed
BKR transaction and transition costs
totalling US$14.4 million. Serica’s
share of net income from the BKR
fields from the effective date of the
BKR acquisitions, 1 January 2018, until
30 November is offset against the
consideration paid rather than included
within operating profit in the income
statement. Details of the accounting for
the BKR acquisitions are provided
in note 26.
Sales revenues
Although the Erskine field, Serica’s only
producing interest pre-BKR, was shut
in for more than nine months of 2018,
the impact of one month of production
from the BKR assets acquired was still
sufficient, in conjunction with strong
sales prices, to boost revenues by over
40% compared to 2017. Total product
sales volumes for the year comprised
approximately 47.1 million therms of
gas, 96,000 lifted barrels of oil and
11,400 MT of NGLs. These generated
2018 product sales revenue of US$45.7
million consisting of BKR revenues of
US$33.9 million and Erskine revenues
of US$11.8 million (2017: US$32.0 million
recorded net of a charge of US$1.2
million from movement in liquids
overlift/underlift).
BKR revenues for the one month of
production comprised gas sales of
US$30.9 million at average realised
prices of approximately 60.1 pence/
therm and NGL sales of US$3.0
million at average realised prices of
approximately US$303/MT. Oil sales
are booked as revenue when barrels
are lifted and title is transferred. As no
liftings were recorded in December for
Serica’s net BKR interests, Serica’s net
oil allocation of 95,000 barrels from
December BKR production increased
its oil underlift position as at 31
December 2018 with the corresponding
income statement credit classified
within cost of sales.
Erskine revenues from approximately
two and a half months of production
in 2018 comprised gas sales of US$5.2
million (2017: US$12.5 million) at an
average realised price of approximately
59.6p/therm (2017: 41.5p/therm), oil sales
of US$6.2 million (2017: US$17.2 million)
from 95,852 lifted barrels at an average
realised price of US$65.2/bbl (2017:
US$53.2/bbl) and NGL sales of US$0.4
million (2017: US$3.5 million) at average
realised prices of $284/MT.
Gross profit
Gross profit for 2018 was US$25.2
million compared to US$19.3 million
for 2017. Overall cost of sales of US$20.5
million compared to US$12.7 million for
2017. This comprised US$17.0 million
of operating costs (2017- US$11.0
million) and US$7.8 million of non-
cash depletion charges (2017 – US$1.7
million) offset by a US$4.3 million
credit for the movement during the
year from an opening liquids overlift
position to a closing underlift position,
(2017 – US$1.2 million debit included
within sales revenues). Operating costs
include costs of production, processing,
transportation and insurance. Depletion
charges are based upon the booked
acquisition value for the BKR and
Erskine transactions allocated on a unit
of production basis for the relevant
period. The prior year calculation
was based upon Erskine costs and
production alone. Operating costs of
US$7.6 million (2017 – US$11.0 million)
and depletion of US$0.4 million (2017
– US$1.7 million) related to the Erskine
field whilst operating costs of US$9.4
million and depletion charges of US$7.4
million related to the BKR fields.
Serica Energy plc Annual report & accounts 2018 27
Andy Bell, VP Finance
Operating profit before net finance
revenue, tax and transaction costs
Operating profit for 2018 was US$9.1
million compared to US$14.1 million for
2017. This included BKR transition costs
of US$11.7 million (2017 – nil) which
comprise the set-up of operations
systems and processes prior to taking
on operatorship of the BKR assets, the
transfer of operations contracts and
documentation and the obtaining
of necessary approvals from the Oil
and Gas Authority. Administrative
expenses of US$4.8 million, up from
US$2.2 million for 2017, reflected the
significant increase in personnel and
activity following the signing of the
BKR Acquisition agreement in late
2017. Other expense of US$2.1 million
for 2018 increased from US$1.4 million
for 2017 and principally comprised gas
price hedging costs expensed during
the respective years plus unrealised
losses on hedging instruments still in
place at year-end. These costs were
offset by a net credit of US$3.1 million
comprising a reversal of US$12.5 million
of impairment charges previously made
against the Columbus development
now that development is underway, net
of US$9.4 million of write-offs related
to the Group’s Irish licences for which
the Group has no significant ongoing
expenditure plans. This compares to
write-offs of US$1.6 million in 2017
related to the relinquishment of
UK licence P1482 and other minor
exploration expenditures.
Pre-licence costs, foreign exchange
gains and share-based payment
provisions generated 2018 net charges
of US$0.6 million compared to a
net gain of US$0.1 million in 2017. A
reduction in exchange gains reflected
general GB£/US$ currency movements
whilst an increase in share-based
payments largely arose from awards
made late in 2017 upon signature of
the BKR deal with BP.
Profit before taxation
and profit for the year
Profit before taxation was US$59.2
million (2017 – US$10.8 million) after
taking into account a bargain purchase
gain of US$52.9 million (2017 - nil), BKR
transaction costs of US$2.7 million
(2017 – US$3.4 million) and net finance
charges of US$0.1 million (2017 – US$0.1
million credit).
The bargain purchase gain represents
the difference between provisional
fair valuations of assets acquired and
consideration paid or potentially
payable calculated in accordance with
applicable accounting standards. Such
calculations are complex and involve a
range of projections and assumptions
related to future costs, production
volumes, sales prices, discount rates
and tax. The calculations for the BKR
acquisitions are further complicated
by the structuring of most of the
consideration as either contingent
upon future asset performance or
deferred. The accounting for the
acquisition of the transaction assets
has only been provisionally determined
at this stage, as the accounting
standards provide for potential further
adjustments to fair value assessments
up to twelve months after completion
of the acquisitions.
The BKR transaction costs comprise
work on documentation related to
the re-admission of Serica to AIM
upon completion of the acquisitions
and other fees associated with
the acquisitions. Prior year costs
comprised work on the structuring
and negotiation of the acquisitions
and preparation of the original AIM
admission document.
Finance revenue and costs represent
interest earned on cash deposits
less interest payable mainly on the
prepayment facility drawings.
The net deferred tax credit of US$15.5
million largely reflects the accelerated
recognition of the Group’s historic UK
ring fenced tax losses based upon
the significant increase in projected
income arising from completion of the
BKR acquisitions. The prior year credit
of US$6.3 million represented a partial
release based solely upon utilisation
of losses against near-term Erskine
production.
Overall, this generated a profit for the
year of US$74.7 million increased from
US$17.1 million for 2017.
Strategic report 28
Financial review continued
BKR net cash flow sharing
payments directly related to
future production and sales
Balance sheet
The balance sheet at 31 December 2018
incorporates a series of adjustments
related to the BKR acquisitions. These
include accounting for the acquisitions
themselves and also significant
increases to current and non-current
assets and liabilities reflecting higher
overall levels of business activity. In
addition, receipt of Columbus FDP
approval in October 2018 has led to a
reclassification of costs from exploration
and evaluation to property, plant and
equipment.
The reduction of exploration and
evaluation assets from US$53.4 million
in 2017 to US$4.1 million in 2018
principally reflects the reversal of a
Columbus asset impairment provision
followed by the reclassification of total
pre-development costs to-date to
property, plant and equipment. The
Columbus impairment provision of
US$12.6 million made in prior periods
was reversed in 2018 following the
receipt of development approval and
other operational developments in the
year. Development approval also means
that total Columbus costs of US$54.3
million were reclassified to property,
plant and equipment. In addition, costs
of US$1.9 million were incurred during
2018 on general exploration activities
whilst US$9.4 million relating to the
Group’s Irish licences was written off
as the Group has no plans to commit
further significant expenditures on
these licences.
Property, plant and equipment
increased from US$7.6 million to
US$475.9 million during 2018. In
addition to the reclassification of
US$54.3 million of Columbus costs from
exploration and evaluation assets, the
increase includes a fair value attributed
to the BKR assets calculated as
US$416.5 million. The BKR transactions
are classified as business combinations
and calculations of fair value are carried
out in accordance with applicable
accounting standards. As described
above, such valuations involve a series
of judgements and assumptions on
all key components of the calculations
and are provisional until twelve months
following acquisition. The structuring of
the BKR acquisitions, with most of the
consideration being either contingent
upon future asset performance or
deferred, creates an ongoing link
between the value generated from
the assets acquired and consideration
ultimately paid.
An inventories balance of US$7.1 million
at 31 December 2018 (2017 – US$0.5
million) includes materials and spare
parts transferred with the BKR assets.
Trade and other receivables increased
from US$2.3 million in 2017 to US$66.4
million in 2018 with the new balance
including trade receivables of US$39.4
million (2017 – US$1.2 million), other
BKR receivables of US$7.8 million
(2017 – US$nil), US$7.5 million of
recoverables from JV partners (2017
– US$0.1 million) and US$8.6 million of
liquids underlifted at year end (2017
– nil). The increase in trade receivables,
which mainly comprise sales revenues
Serica Energy plc Annual report & accounts 2018 29
due, reflected the general increase
in Group production and sales levels.
Other receivables comprise sunk costs
recoverable through joint venture
arrangements and BKR consideration
outstanding after final calculations
of net cash flow due to Serica arising
during the pre-completion period.
Liquids underlifted comprise volumes
of oil and NGLs awaiting lifting by
product buyers at year end.
The derivative financial asset of
US$2.7 million in 2017 represented
the fair value of gas price put options
covering the period from 1 January
2018 to 30 June 2020. After taking
account of the expiry of 2018 puts
and revaluation of remaining puts at
end 2018 pricing, the book value has
been reduced to US$0.2 million. The
year-end cash and cash equivalent
balances plus term deposits totalled
US$54.9 million (2017 – US$34.0 million).
The increase in current trade and
other payables to US$49.2 million at
31 December 2018 from US$7.8 million
in 2017 represents significant accruals
and creditors following completion of
the BKR acquisitions. It also includes
Erskine operating expenditures due
and remaining pipeline bypass costs at
the end of 2018. Current provisions of
US$2.4 million (2017 – US$2.2 million)
represent certain contingent liabilities
related to savings in field operating
costs that may fall due under the
Erskine acquisition agreement.
Financial liabilities of US$115.0 million
(2017 - nil) within current liabilities and
US$209.5 million (2017 – US$3.8 million)
within non-current liabilities comprise
amounts projected to be paid under
the BKR agreements. The current
element comprises US$20.2 million
(2017 - US$3.8 million in non-current
financial liabilities) of total drawings
under the prepayment facility with
BP plus amounts of US$94.8 million
estimated to fall due under the net
cash flow sharing arrangements over
the course of 2019. Amounts identified
as currently due under both the
prepayment facility and the net cash
flow sharing arrangements, are directly
related to production volumes and
sales prices actually achieved over
the year. The non-current element
comprises further contingent and
deferred amounts the bulk of which
are also directly related to future asset
volume and price performance.
Non-current financial liabilities of
US$3.8 million in 2017 represented
drawings under the gas prepayment
facility with BP to cover gas price puts
which increased to US$20.2 million in
2018 following further drawings under
the facility of GB£12.8 million at BKR
completion and are now recognised as
current liabilities.
Non-current provisions of US$28.8
million have been made in respect
of decommissioning liabilities for the
Bruce and Keith interests acquired
from Marubeni. These were not subject
to the same contingent and deferred
consideration arrangements as those
field interests acquired from BP, Total
E&P and BHP respectively under which
decommissioning liabilities were
retained by the vendors with Serica
liable to pay deferred consideration
equivalent to 30% of the actual costs of
decommissioning net of tax recovered
by them. No provision is included for
decommissioning liabilities related to
Erskine as these are retained by BP up
to a cap which is not projected to be
exceeded.
Overall net assets have increased from
US$102.3 million in 2017 to US$177.8
million in 2018.
The increase in share capital from
US$229.3 million to US$229.6 million
arose from shares issued following the
exercise of share options whilst the
increase in other reserve from US$20.8
million to US$21.3 million arose from
share-based payments.
Cash balances and
future commitments
Current cash position and price
hedging
At 31 December 2018 the Group held
cash and cash equivalents of US$53.6
million (2017 – US$28.3 million) plus
term deposits of US$1.3 million (2017
– US$5.7 million). The main element
of the net increase arose upon BKR
completion when Serica received
US$50.0 million of net revenues and
working capital adjustments less
US$21.6 million of upfront consideration
and also drew GB£12.8 million (US$16.3
million) under a gas prepayment
facility with BP. Serica also settled the
outstanding US$2.8 million tranche of
Erskine consideration on 29 June 2018.
Strategic report 30
Financial review continued
Other significant cash movements
during the year included BKR transition
and transaction costs of US$17.1 million
(2017 – US$1.9 million), US$1.8 million
of exploration asset expenditure (2017
– US$1.9 million) and US$5.2 million
of Erskine capital costs (2017 – US$0.1
million). Serica’s share of BKR post-tax
income for the eleven months prior to
completion is included within the cash
inflow from business combinations. Net
cash income from the BKR assets for
the remaining month post completion
was received after year-end and
consequently is not included in the
closing cash balances.
At 31 December 2018 Serica held gas
price puts covering volumes of 240,000
therms per day for 2019 and 160,000
therms per day for 1H 2020 all at a floor
price of 35 p/therm with no upside
price restrictions.
Field and other capital commitments
Following completion of the
condensate export line bypass there
are no further capital commitments
on the Erskine producing field and net
production revenues are expected to
cover all ongoing field expenditures.
There are no significant current capital
commitments on the BKR producing
fields though plans to carry out work
on the Rhum R3 well are in hand with
work expected to be carried out in
early 2020. Net revenues from Serica’s
share of income from the fields, after
net cashflow sharing payments, is
expected to cover Serica’s retained
share of ongoing field expenditures and
contingent or deferred consideration
due under the respective acquisition
agreements. These include GB£16
million due to BP upon a successful
outcome from the Rhum R3 workover
and amounts of up to GB£7.7 million
also due to BP in respect of each
of 2019, 2020 and 2021 dependent
upon achievement of certain Rhum
field production and gas price levels.,
In addition, amounts of US$5 million
are due to Total E&P on each of 31
July 2019, 31 March 2020 and 30
November 2020. Further deferred
contingent consideration amounts
will fall due to each of BP, Total E&P
and BHP representing 30% of their
respective shares of the actual costs
of decommissioning the BKR field
facilities in existence on 30 November
2018 at completion, net of tax relief.
Other
Asset values and impairment
At 31 December 2018, Serica’s market
capitalisation stood at US$423.1 million
based upon a share price of 125.5
pence which exceeded the net asset
value of US$177.8 million. By 15 April
the Company’s market capitalisation
was US$409.5 million. Management
has carried out a thorough review of
the carrying value of the Group’s assets
and determined that no significant
writedowns are required.
BKR asset acquisitions
On 30 November 2018 Serica
completed the four BKR acquisitions.
These comprised:
●● 36% in Bruce, 34.83333% in Keith
and 50% in Rhum plus operatorship
of each field from BP Exploration
Operating Company Limited
(“BP”). Initial consideration, paid at
completion, was GB£12.8 million
with contingent payments of
GB£16 million due in relation to
the outcome of future work on the
Rhum R3 well and up to a total
GB£23.1 million, split equally over the
years 2019, 2020 and 2021, due in
relation to Rhum field performance
and sales prices in respect of the
three years. In addition, Serica
will pay contingent consideration
related to net cash flows from the
assets acquired from BP as set
out below. As part of the gas sales
arrangements, BP Gas Marketing
Limited provided a gas prepayment
facility of up to GB£16 million that
was fully drawn to cover the cost
of gas price puts and the initial
consideration. Amounts due to BP
are secured over the interests in the
assets acquired from them.
●● 42.25% in Bruce and 25% in
Keith from Total E&P UK Limited
(“Total E&P”). Initial consideration
was US$5 million with three
further instalments of deferred
consideration of US$5 million
each, due on 31 July 2019, 31 March
2020 and 30 November 2020. In
addition, Serica will pay contingent
consideration related to net cash
flows from the assets acquired from
Total E&P as set out below.
●● 16% in Bruce and 31.83333% in
Keith from BHP Billiton Petroleum
Great Britain Limited (“BHP”). Initial
consideration was GB£1 million. In
addition, Serica will pay contingent
consideration related to net cash
flows from the assets acquired from
BHP as set out below.
●● 3.75% in Bruce and 8.33334% in
Keith from Marubeni Oil and Gas
(UK) Limited (“Marubeni”). Initial
consideration was US$1 million
payable to Serica with no contingent
or deferred consideration.
In addition, Serica will pay contingent
cash consideration to BP, Total E&P
and BHP calculated as a percentage
(60% in 2018, 50% in 2019 and 40%
in each of 2020 and 2021) of net cash
flows resulting from the respective field
interests acquired. Amounts arising
up to completion were adjusted for
notional tax at prevailing rates and
offset against initial consideration.
Amounts arising after completion will
be paid by Serica pre-tax with such
amounts to be offset by Serica against
its own tax liabilities.
Serica Energy plc Annual report & accounts 2018 31
production risks and mitigate where
possible. In parallel, the Company
minimised non-core expenditures
and utilised oil and gas hedging
instruments, setting price floors to
protect cash flow margins from severe
price falls.
In addition to the diversification of
revenue streams delivered by the
four BKR acquisitions and associated
cash receipts upon completion, the
continuing net cash flows from its
greatly increased production levels
are enabling Serica to build a strong
working capital reserve. This is available
to respond to a range of risks including
production interruptions, severe
commodity price falls and unexpected
costs. To supplement this the Company
carries business interruption insurance
to meet estimated field operating costs
over sustained periods of production
shut-in, where caused by events
covered under such policies. The
Company will also seek cost effective
opportunities to add to its existing 35
pence per therm gas price puts which
currently cover an estimated 37% of the
Company’s retained share of projected
2019 gas production.
Each of BP, Total E&P and BHP
will retain liability, in respect of the
field interests Serica acquired from
each of them, for all the costs of
decommissioning those facilities that
existed at the date of completion.
Serica will pay deferred contingent
consideration equal to 30% of actual
future decommissioning costs, reduced
by the tax relief that each of BP, Total
E&P and BHP receives on such costs.
In the case of the Marubeni Transaction,
Serica took on responsibility for
decommissioning liabilities for these
interests but without any contingent or
deferred cash consideration.
Net cash flow sharing with BP, Total
E&P and BHP is being settled on a
monthly basis starting in January 2019
and no other contingent or deferred
consideration payments have yet
fallen due.
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 Group 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, to carry
insurance, where both available and
cost effective, and to retain adequate
working capital.
Prior to the BKR acquisitions, Serica
carried significant exposure to a single
production stream and held limited
cash resources. The main response was
to look for additional revenue streams
whilst, in the meantime, working with
the operators of the Erskine field and
Lomond offtake facilities to identify
Strategic report 32
Financial review continued
The principal risks currently
recognised and the mitigating
actions taken by the management
are as follows:
Investment Returns
Management seeks to invest in a portfolio of exploration, development and producing acreage
delivering returns to shareholders through acquisitions of producing assets to which it can add
further value and through the discovery and exploitation of commercial reserves. Delivery of this
business model carries a number of key risks
Risk
Mitigation
Market support may be eroded lowering
investor support and obstructing
fundraising
●● Management regularly communicates its strategy to shareholders
●● Focus is placed on building a diverse and resilient asset portfolio capable of
offering prospectivity throughout the business cycle
Management’s decisions on capital
allocation may not deliver the expected
successful outcomes
●● Rigorous analysis is conducted of all investment proposals
●● Investments are spread over a range of areas and risk profiles
Each asset carries its own risk profile and
no outcome can be certain
●● Management aims to avoid over-exposure to individual assets, to identify the
associated risks objectively and mitigate where practical
Operations
Operations may not go according to plan leading to damage, pollution, cost overruns
or poor outcomes
Risk
Mitigation
Production may be interrupted
generating significant revenue loss whilst
costs continue to be incurred
Equipment may fail and wells may
experience a loss of control causing delays
and/or environmental damage
Third party offtake routes may experience
restrictions or interruptions and full
availability may depend upon sustained
production from other fields in the
system
Resource estimates may be misleading
and exceed actual reserves recovered
●● Business interruption cover is carried when cost effective
●● The Company seeks to diversify its sources of income
●● The Group retains fully trained and experienced personnel and contractors
●● The planning process involves risk identification and establishment of
mitigation measures
●● Equipment is subject to regular inspection and monitoring
●● Appropriate insurances are retained
●● The Group aims to diversify its exposure to offtake routes where possible
though all of its oil production currently uses the FPS system
●● The Group carries business interruption cover
●● The Group deploys qualified personnel
●● Regular third-party reports are commissioned
●● A prudent range of possible outcomes are considered within the planning
process
Serica Energy plc Annual report & accounts 2018 33
Personnel
The Group relies upon a pool of experienced and motivated personnel to conduct its operations and
execute successful investment strategies
Risk
Mitigation
Key personnel may be lost to other
companies
●● The Remuneration Committee regularly evaluates incentivisation schemes to
ensure they remain competitive
●● The Group seeks to build depth of experience in all key functions to ensure
continuity
Personal safety may be at risk in
demanding operating environments,
typically offshore
●● 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
Staff and representatives may find
themselves exposed to bribery and
corrupt practices
●● Group policies and procedures are communicated to personnel regularly
●● Management reviews all significant contracts and relationships with agents
and governments
Political and commercial environment
World share and commodity markets and political environments continue to be volatile
Risk
Mitigation
Sanctions imposed by the U.S.
government may threaten continuing
production from the Rhum field
The OFAC Licence must be renewed
annually
Volatile commodity prices mean that the
Group cannot be certain of the future
sales value of its products
Funding to support investment and field
development programmes may not be
available at reasonable cost
●● An OFAC Licence has been obtained which has enabled continuing
production from Rhum
●● Serica intends to initiate the renewal process well in advance of the
specified date
●● Planning and forecasting considers downside price scenarios
●● Oil and gas floor price hedging may be utilised where deemed cost effective
●● Price mitigation strategies may be employed at the point of major capital
commitment
●● Serica seeks to apply a flexible approach to funding and maintain a range of
financing options
In addition to the principal risks and
uncertainties described herein, the
Group 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, the
development of production facilities
and delivery of hydrocarbons. 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
The Strategic Report has been
approved by the Board of Directors.
On behalf of the Board
Mitch Flegg
Chief Executive Officer
16 April 2019
Strategic report
34
Corporate governance
The Company’s
transformation during 2018
required evolution at Board
and management levels
In both areas Serica has
added depth and breadth to
our leadership with continued
focus on safety and integrity
Serica Energy plc Annual report & accounts 2018 35
Corporate governance
36 Board of Directors
38 Directors’ report
40
Corporate governance
statement
Directors’ responsibilities
statement
60
Serica Energy plc Annual report & accounts 2018
Corporate governance 36
Board of Directors
Our board with over 250 years of
Oil & Gas industry experience guides
us with a strong governance culture
contributing to sustainable successful
growth and achieving our objectives
Neil Pike
Non–Executive Director
and Senior Independent Director
Appointed: 2004
Neil Pike, Senior Independent non-
Executive Director joined the Company
as a director in 2004. Mr Pike has
been involved in the global petroleum
business as a financier since joining
the energy department at Citibank
in 1975. Mr Pike remained an industry
specialist with Citibank throughout his
career until he joined the Company
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. Mr Pike
with his financial background provides
the experience required as chairman
of the Audit Committee to challenge
the business internally and also the
Group’s auditors.
Antony Craven Walker
Executive Chairman
Appointed: 2004
Mitch Flegg
Chief Executive Officer
Appointed: 2017
Mitch Flegg, Chief Executive officer
has over 35 years of experience in
the upstream oil and gas industry,
including positions at Shell and
Enterprise Oil. Mr Flegg first joined the
Company in 2006 and was 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 in September 2012. Mr Flegg
left the Company in May 2015 to
become CEO of Circle Oil Plc. Mr Flegg
re-joined the Board on 21 November
2017 as Chief Executive Officer on the
announcement of the BKR transaction.
Mr Flegg’s background and experience
ensures that the Company is effectively
led to achieve the Company’s long-term
strategic goals to become a leading
producer and operator.
Antony Craven Walker, Executive
Chairman, started his career with BP
in 1966 and has been a leading figure
in the British independent oil industry
since the early 1970s. Mr Craven Walker
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.
Mr Craven Walker was also a founder
member of BRINDEX (Association of
British Independent Oil Exploration
Companies). Mr Craven Walker was
appointed non-executive Chairman of
the Company in 2004 and following
the retirement of the then Chief
Executive in April 2011, initially acted
as interim Chief Executive. With effect
from 1 June 2015, he took the role of
Executive Chairman following the
departure of two Executive Directors.
Under his direction the Company
embarked upon its strategy to refocus
on the North Sea and build a strong
production base. Mr Craven Walker’s
experience in the oil and gas and
public market sectors gives him
the skills necessary to provide the
services of Executive Chairman as the
Company continues to develop its
business strategy.
Serica Energy plc Annual report & accounts 2018 37
Ian Vann
Non–Executive Director
Appointed: 2007
Trevor Garlick
Non–Executive Director
Appointed: 2018
Malcolm Webb
Non–Executive Director
Appointed: 2018
Ian Vann, Non-Executive Director
joined the Board in 2007. Mr Vann
was employed by BP from 1976 and
directed and led BP’s global exploration
efforts from 1996 until his retirement in
January 2007. Mr Vann 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. Mr Vann’s industry
background provides the Board with
the necessary expertise to review and
challenge decisions and opportunities
presented both within the formal
arena of the boardroom and as called
upon when needed by the executives.
Mr Vann chairs the Company’s
Remuneration Committee.
Trevor William Garlick, Non-Executive
Director joined the Board on 30
November 2018, on completion of the
BKR transactions. Mr Garlick started
his career in 1982 with Marathon Oil
International, before joining BP in 1986,
where he worked for 30 years, latterly
as Regional President for BP in UK and
Norway from 2010 until his retirement
in 2016. Mr Garlick was the Operator’s
Chair of the industry association, Oil
& Gas UK, from 2014 to 2016 and is
currently a director of Opportunity
North East Limited and Vice Chairman
of the Oil & Gas Technology Centre.
As a newly appointed non-executive
to the Board, Mr Garlick brings a
wealth of experience and a fresh pair
of eyes to the business. Mr Garlick
chairs the Company’s Health, Safety
and Environment Committee and the
Reserves Committee.
Malcolm Webb, Non-Executive Director
joined the Board on 30 November
2018, on completion of the BKR
transactions. Mr Webb started his career
with Burmah Oil Company in 1974,
before joining the British National Oil
Corporation in 1976 and Charterhouse
Petroleum in 1981, as a solicitor
working in various legal roles. Between
1986 and 1999, Mr Webb worked in
the Petrofina SA Group in various
senior management roles, leaving as
Managing Director of Fina plc. In 2001,
Mr Webb joined the UK Petroleum
Industry Association as Director General
and between 2004 and 2015 served
as Chief Executive to the industry
association, Oil & Gas UK. Mr Webb’s
industry background, together with
his corporate and legal experience
provides the Board with the expertise
to review and challenge decisions and
opportunities presented. Mr Webb
chairs the Company’s Nominations
Committee.
Corporate governance 38
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 2018.
Principal Activities
Results and Dividends
Directors and their Interests
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
and Namibia.
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 Chief Executive Officer’s
Report, 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).
The profit for the year was
US$74,717,000 (2017: US$17,103,000).
The Directors do not recommend the
payment of a dividend (2017: US$nil).
Financial Instruments
The Group’s financial risk
management objectives and policies
are discussed in note 24.
Events Since Balance Sheet
Date
There have been no events since
the balance sheet date that require
disclosure.
The following Directors have held
office in the Company since 1 January
2018 to the date of this report:
Antony Craven Walker
Neil Pike
Ian Vann
Mitch Flegg
Trevor Garlick (appointed
30 November 2018)
Malcolm Webb (appointed
30 November 2018)
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:
Class of share
Interest at end of year
Interest at start of year
(or date of appointment if later)
Antony Craven Walker1
Neil Pike2
Ian Vann
Mitch Flegg
Malcolm Webb
Trevor Garlick
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
7,357,694
505,000
267,935
184,445
44,681
–
7,357,694
505,000
267,935
184,445
–
–
1.
6,448,810 ordinary shares were held by Antony Craven Walker and 908,884 by Rathbones (pension funds).
2.
190,000 ordinary shares were held by Romayne Pike in her ISA and 185,000 ordinary shares by Luska Limited.
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.
Serica Energy plc Annual report & accounts 2018
39
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:
Details of share awards that have been
granted to certain Directors under the
Serica Energy plc Share Option Plan
2005 (“Serica 2005 Option Plan”) are
included in note 28 to the Financial
Statements. Details of share awards
made during 2018 and up to 15 April
2019 under the Serica Energy plc Long
Term Incentive Plan (the “LTIP”) are
also included in note 28.
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
Mitch Flegg
Director
16 April 2019
Corporate governance 40
Corporate governance
Chairman’s Corporate
Governance Statement:
As Chairman of the Company, I have
a keen interest in ensuring that an
effective and focused Board leads the
business and builds upon its successes
to date. Strong corporate governance
helps underpin the foundations of
a solid and successful business. The
Board is committed to ensuring good
corporate governance, from executive
level and throughout the operations of
the business.
Following the requirement by AIM
that all AIM listed companies would
comply with a recognised corporate
governance code by 28 September
2018, the decision was made by the
Company that it would adopt the
Quoted Companies Alliance Corporate
Governance Code 2018 (the ‘QCA
Code’). The directors believe the QCA
code to be the most appropriate
recognised corporate governance code
for the Company.
As Chairman, it is my duty to ensure
that good standards of governance are
delivered and fed down throughout
the organisation. The Board is
supportive of embracing the highest
level of corporate governance possible
and works to instil a culture across the
Company which delivers strong values
and behaviours.
The importance of engaging with our
shareholders underpins the essence
of the business, ensuring that there
are opportunities for investors to
engage with both the Board and
executive team.
In November 2018, the Company
announced the completion of the
acquisition of interests in the Bruce,
Keith & Rhum fields from BP (‘BKR’),
which is transformational for the
Company and firmly places the
Company as one of the leading ‘mid-
tier’ independent exploration and
production companies operating in
the UKCS.
As the Company embeds the
acquisition of BKR, as Chairman I will
work with the Board to build upon
the existing values that are in place
and ensure that good corporate
governance continues to be present
within the organisation and delivered
throughout the business, ensuring
that we grow with foundations of
integrity and strong principles for the
benefit of all stakeholders.
Antony Craven Walker
Executive Chairman
Serica Energy plc Annual report & accounts 2018 41
Principles of the Quoted Companies Alliance (QCA) Corporate Governance Code
The Company’s annual general
meeting is a regular opportunity
for shareholders to meet with the
Company and receive a corporate
presentation. There is also an
opportunity for shareholders to ask
questions after the presentation,
during the formal business of the
meeting and informally following
the meeting.
The Chairman and the CEO are
together responsible for shareholder
liaison and a listening board for
shareholders. In all communications
with shareholders and the general
market the Company maintains strict
compliance with the requirements
of the AIM Rules and Market Abuse
Regulations.
Further information can be found on
the Company’s website
https://www.serica-energy.com/RNS
https://www.serica-energy.com/
financial-reports
https://www.serica-energy.com/
presentations
Principle 1: Establish a
strategy and business model
which promote long-term
value for shareholders
Explain the Company’s business
model and strategy, including key
challenges in their execution (and
how those will be addressed)
The Company operates in the
upstream oil and gas exploration,
development and production
sector and is therefore exposed to
political, operational, commercial,
product pricing and hazard risk. The
Company’s strategy is to maintain a
portfolio of properties and risk diversity
which enables it to manage the risks,
the financial capacity and the growth
opportunities in the business. It does
this both by an active programme of
acquisition and divestment to balance
risk and potential whilst also seeking
to optimise operating costs and
procedures to improve performance
and by identifying where new
technologies can enhance value. The
Company strives to maintain a forward
looking, professional and safety
conscious culture in all that it does
as this also provides essential checks
and balances and underpins a value
creative environment to the benefit of
all stakeholders.
Principle 2: Seek to
understand and meet
shareholder needs and
expectations
Explain the ways in which the
Company seeks to engage with
shareholders. This should include
information on those responsible for
shareholder liaison or specification of
the point of contact for such matters
The Company engages with its
shareholders through regulatory news
flow, providing financial results on a
half yearly basis, operational updates
to maintain information on overall
performance, additional news flow
when there is a material deviation
from the operational updates,
releases relating to matters of material
importance to the Company’s business
and releases of a regulatory nature.
The Company maintains an
informative and regularly updated
website at www.serica-energy.com
through which shareholders can
obtain copies of the Company’s annual
report, interim report and other
regulatory documents and regulatory
news service releases. The web-site
includes copies of all presentations
made from time to time to analysts,
shareholders and the general market
and includes a facility under which
shareholders may submit questions
or make comments relating to the
Company’s business. Whenever
possible the Company endeavours to
respond to enquiries.
Corporate governance 42
Corporate governance continued
Principle 3: Take into account
wider stakeholder and social
responsibilities and their
implications for long term
success
Explain how the business model
identifies the key resources and
relationships on which the business
relies
The Company’s business model and
strategy are described in Principle 1.
The acquisitions of operated interests
in the Bruce, Keith and Rhum fields
and associated infrastructure in
the UK North Sea, completed on
30 November 2018, and the earlier
acquisition in mid-2015 of a non-
operated interest in the Erskine field
are good examples of the business
model in action and have brought
material benefit to the Company
and its shareholders. The resources
acquired in these transactions, which
are transformational for the Company,
relied upon executive experience and
industry relationships for identification
and had characteristics which lent
themselves to the generation of
new value under the Company’s
management.
Further information relating to the
acquisition of operated interests in
Bruce, Keith and Rhum can be found
on the Company’s website
https://www.serica-energy.com/about-
the-deal
The Company maintains assets in
both the UK and overseas. In the
current environment and given the
synergies relating to the Company’s
existing assets the directors believe
that the UKCS will continue to provide
opportunities in the near term to grow
the business and provide the basis to
add further shareholder value.
Explain how the Company obtains
feedback from stakeholders and the
actions that have been generated
as a result of this feedback (e.g.
changes to inputs or improvements
in products)
The Company engages with its key
stakeholders through various channels
depending upon who they are and
values the feedback it receives from
them. These stakeholders include
shareholders, suppliers, customers,
regulators and the Company’s
employees. The Company takes every
opportunity to ensure that where
possible the views of its stakeholders
are considered and acted upon when
these are believed likely to bring
material benefit to the success and
integrity of the Company’s business
activities.
Principle 4: Embed
effective risk management,
considering both
opportunities and threats,
throughout the organisation
Describe how the board has
embedded effective risk
management in order to execute and
deliver strategy. This should include
a description of what the board does
to identify, assess and manage risk
and how it gets assurance that the
risk management and related control
systems in place are effective
The Company’s approach to the
management and identification of
risk is set out in the Business Risks and
Uncertainties section of the Financial
Review contained in the 2018 annual
report on page 31. The Company
encourages a culture of risk awareness
and management at all levels
throughout the Company. Strategic
risks are regularly reviewed by the
Board and, at executive level, the
Company employs outside advisors
to assess and advise on risk when it is
felt additional third-party expertise is
required. Through the HSE and Audit
Committees the Board maintains a full
and active awareness of operational
and financial risks and the assurances
that effective control systems are
in place.
Serica Energy plc Annual report & accounts 2018 43
Principle 5: Maintain the
Board as a well-functioning,
balanced team led by the
Chair
Identify those directors who are
considered to be independent; where
there are grounds to question the
independence of a director, through
length of service or otherwise, this
must be explained
The Board currently has an Executive
Chairman, a Chief Executive Officer
(CEO) and four non-executive
Directors. All Directors have extensive
and complementary skills, knowledge
and experience covering all facets
of the business which requires both
entrepreneurial and custodian
oversight and all are considered
independent in terms of character
and judgement. The Board is aware of
the need to maintain and build upon
this balance of backgrounds and to
maintain a diversity of talent through
succession planning as the Company
further develops and the needs of its
business grows.
During the two-year period when the
Company was being repositioned and
prior to the appointment of Mitch
Flegg as Chief Executive Officer in
November 2017 all executive functions
of the Board were undertaken by
Antony Craven Walker acting as the
Chairman and sole executive Director.
Whilst this phase is now complete
the Company continues to build and
consolidate its position in the sector.
The Board believes that during this
period it is in the Company’s best
interests for Antony Craven Walker
to continue for the time being as
Executive Chairman in order to provide
continuity and ongoing strategic
support to the Chief Executive Officer.
Neil Pike, Senior Independent Director,
and Ian Vann have been non-executive
Directors of the Company for over
ten years and therefore could be
considered not to be independent
due to length of service. However,
both have made a major contribution
as non-executive Directors during a
period of material transformation for
the Company and continue to provide
valuable insight, independent advice
and views as the Company develops
its strategy and plans for succession
evolve in parallel. Due to their length
of service they stand for re-election
at every AGM whilst they continue to
serve on the Board.
Trevor Garlick and Malcolm Webb
joined the Board as non-executive
Directors in November 2018. Both
Trevor Garlick and Malcolm Webb are
considered to be independent.
For full background refer to “Board
Composition” on page 47 of the 2018
annual report.
Describe the time commitment
required from directors (including
non-executive directors as well as
part-time executive directors)
The executive Directors are expected
to devote substantially the whole of
their time to their duties with the
Company. The non-executive Directors
have a lesser time commitment. It
is anticipated that non-executive
Directors will each dedicate 12 days
a year in addition to their duties as
Board members.
Include the number of meetings
of the board (and any committees)
during the year, together with the
attendance record of each director
Full details of the number of Board
and Committee meetings held and
the attendance record of each of
the Directors is provided in the 2018
annual report on page 49.
Principle 6: Ensure that
between them the directors
have the necessary up-to-
date experience, skills and
capabilities
Identify each director
Information on each of the Directors is
provided in the 2018 annual report on
pages 36-37.
Describe the relevant experience,
skills and personal qualities and
capabilities that each director brings
to the board (a simple list of current
and past roles is insufficient); the
statement should demonstrate how
the board as a whole contains (or
will contain) the necessary mix of
experience, skills, personal qualities
(including gender balance) and
capabilities to deliver the strategy of
the company for the benefit of the
shareholders over the medium to
long-term
The Board of directors covers a
wide range of experience and
skills. To meet the requirements of
an independent upstream oil and
gas exploration, development and
production company these experience
and skills must cover financial, legal,
operational and technical knowledge
experience of risk management and
growth in the independent sector
and of public markets. Each of the
directors on the Board, both executive
and non-executive, have considerable
experience and all have demonstrated
skills which are complementary,
independent and sufficient to cover
all of the requirements of the Board.
As the Company continues to grow
Corporate governance 44
Corporate governance continued
its asset base and to refresh the
Board the Nominations Committee
maintains oversight of the Company’s
requirements to ensure that the make-
up of the Board is kept in line with the
Company’s needs and provides a mix
of experience, skills, personal qualities
and capabilities appropriate to the
task. These include full consideration
to maintain a healthy diversity where
this is possible, including gender
diversity. For background history of
each of the directors refer to pages
36-37 of the 2018 annual report.
Explain how each director keeps his/
her skillset up-to-date
The Board as a whole has significant
experience both within the industry
and in public and financial markets.
The Board receives support and advice
from its Nomad on AIM requirements
as and when required and each
director is encouraged to discuss any
matter of interest with the Company’s
professional advisors.
Where the board or any committee
has sought external advice on a
significant matter, this must be
described and explained
During 2018 the Company used a
number of external professional
advisers in relation to the transactions
implemented during the year (the
BKR transactions). Advice was
also received from the Company’s
professional advisors and Nomad in
relation to the documentation and
procedures necessary to meet the AIM
reverse take-over requirements for
implementation of the transactions.
The Reserves Committee, a sub-
committee of the Audit Committee,
engages independent reserves
auditors to provide an independent
competent persons report on the
Company’s end of year reserves.
Where external advisers to the board
or any of its committees have been
engaged, explain their role
Details of the Company’s advisors can
be found on the website https://www.
serica-energy.com/aim-rule-26
Describe any internal advisory
responsibilities, such as the roles
performed by the company secretary
and the senior independent director,
in advising and supporting the board
The directors have access to the
Company’s Nomad, company
secretary, lawyers and auditors and
are able to obtain advice from other
external bodies as and when required.
The Company Secretary helps keep
the Board up to date on areas of
new governance and liaises with
the Company’s lawyers and Nomad
on areas of AIM requirements.
The Company Secretary has
communication with both the
Chairman and CEO and is available
to other members of the Board if
required.
The Senior Independent Director
helps ensure that impartiality is
maintained.
Principle 7: Evaluate board
performance based on clear
and relevant objectives,
seeking continuous
improvement
Include a high-level explanation of
the board performance effectiveness
process
During 2018 the Company
has undergone a significant
transformation from a small
independent North Sea producer to a
material mid-tier North Sea operator
producing from several offshore
fields. This has required evolution at
the Board level as well as at executive
level. The make-up of the Company’s
Board of Directors has kept pace with
these changes with the introduction
of new experience and skill-sets
complementing those already on the
Board. By this means the Board is
continuing to refresh and enhance its
performance
Where a board performance
evaluation has taken place in the
year, provide a brief overview of it,
how it was conducted and its results
and recommendations. Progress
against previous recommendations
should also be addressed
Due to the significant and
transformational transactions
undertaken by the Company during
2018 and the changes to the Board
during the course of the year no
Board evaluation took place in
2018. It is intended that a Board
evaluation process be put in place to
be implemented during the course
of 2019 and future years. For further
information see ‘Board Evaluation’ on
annual report page 50.
Serica Energy plc Annual report & accounts 2018 45
Include a more detailed description
of the board performance evaluation
process/cycle adopted by the
Company. This should include a
summary of:
•
•
The criteria against which
board, committee and individual
effectiveness is considered;
How evaluation procedures have
evolved from previous years, the
results of the evaluation process
and action taken or planned as a
result; and
•
How often board evaluations take
place
As cited above, due to significant
transactions undertaken by the
company during 2018 and changes
to the Board, no Board evaluation
process took place during 2018.
Explain how the Company
approaches succession planning and
the processes by which it determines
board and other senior management
appointments, including any links to
the board evaluation process
Succession planning is undertaken by
the Nominations Committee working
together with the Chairman and the
Board. See page 50 of the 2018 annual
report.
Principle 8: Promote a
corporate culture that is
based on ethical values and
behaviour
Include in the Chair’s corporate
governance statement how the
culture is consistent with the
company’s objectives, strategy and
business model in the strategic
report and with the description of
principal risks and uncertainties. The
statement should explain what the
board does to monitor and promote
a healthy corporate culture and how
the board assesses the state of the
culture at present
The corporate culture of the Company
is established from the Board of
directors and communicated to
the Company through the Chief
Executive Officer through a regular
series of internal meetings with
senior management. By this means
the Company’s strategy, objectives
and approach to health, safety,
environmental and diversity issues are
communicated to all employees with
the Board maintaining full oversight.
Explain how the board ensures
that the Company has the means
to determine that ethical values
and behaviours are recognised
and respected
The Company operates a full feed-
back system directly to the Chairman,
Chief Executive Officer or Senior
Independent Director which provides
the mechanism to enable the
Company to become aware of any
deviation from the Company’s ethical
values.
Principle 9: Maintain
corporate structures and
process that are fit for
purpose and support
good decision-making by
the board
Describe the roles and
responsibilities of the chair, chief
executive and any other directors
who have specific individual
responsibilities or remits (e.g. for
engagement with shareholders or
other stakeholder groups)
Information can be found on the
Company’s website
https://www.serica-energy.com/aim-
rule-26
Describe the roles of any committees
(e.g. audit, remuneration and
nomination committees) setting
out any terms of reference and
matters reserved by the board for its
consideration
2018 annual report pages 47-48
Further information relating to the
Company’s Committees can be found
on the Company’s website
https://www.serica-energy.com/board-
committees
Describe which matters are reserved
for the board
The Company’s terms of reference are
retained by the Company Secretary
and are currently being refreshed
following the Company’s recent
transformation.
The following matters are a summary
of the matters which require the
approval of the Board.
Corporate governance 46
Corporate governance continued
Strategy and Plans: responsibility to
supervise the formulation of strategic
direction, plans and priorities for the
Company; approve capital expenditure
budgets and related operating plans;
approve material divestitures and
acquisitions;
Other: Empowered to retain,
oversee, compensate and terminate
independent advisors to assist the
Board in its activities.
Describe any plans for evolution of
the governance framework in line
with the Company’s plans for growth
Following the recent transactions
undertaken by the Company, as
business grows and Committee
member changes have been made,
the Company plans to focus on
succession planning and Board
evaluation during 2019. Each
Committee chairman also plans
to refresh each Committee terms
of reference which shall reflect the
Company’s plans for growth.
Financial and Corporate Issues:
responsibility to take steps to ensure
implementation and integrity of
the Company’s internal control and
management information systems;
approval of financial statements
and approve the release thereof by
management;
Identification and Management
of Risks: responsibility to ensure
that management has identified
the principal risks of the Company’s
business and implemented
appropriate strategies to manage the
risks;
Policies and Procedures:
responsibility to monitor compliance
with all significant policies and
procedures by which the Company is
operated;
Oversight of Communications and
Public Disclosure: ensuring that
the Company has in place effective,
accurate and timely disclosure and
communication processes with
shareholders and financial, regulatory
and other recipients;
Corporate Governance Matters:
review of the Company’s overall
corporate governance arrangements;
Principle 10: Communicate
how the Company is
governed and is performing
by maintaining a dialogue
with shareholders and other
relevant stakeholders
Describe the work of any board
committees undertaken during
the year
Refer to 2018 annual report detailing
each committee report at pages 50-57.
Include an audit committee
report (or equivalent report if such
committee is not in place)
Refer to 2018 annual report: page 50.
Include a remuneration committee
report (or equivalent report if such
committee is not in place)
Refer to 2018 annual report: page 54..
If the company has not published
one or more of the disclosures
set out under Principles 1-9, the
omitted disclosures must be
identified and the reason for their
omission explained
The Company has published all of the
disclosures set out under Principles 1-9
and has not omitted any disclosures.
Serica Energy plc Annual report & accounts 2018 47
Board Composition
The composition of the Board
changed during 2018 with the
appointment of two non-Executive
Directors, Malcolm Webb and Trevor
Garlick on 30 November 2018 at the
time of the announcement of the
acquisition of BP’s interests in the BKR
assets. This was an important step in
strengthening the Board and bringing
the governance structure of the
Board in line with the requirements
of the QCA Code and general good
governance.
As at 31 December 2018, the Board
of the Company consisted of the
Executive Chairman, the Chief
Executive Officer and four non-
executive Directors. Neil Pike, a
senior independent Non-Executive
director along with the other non-
Executive Directors helps assist with
the independence required given
the Company has an Executive
Chairman. All the non-Executive
directors 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 believes that there is 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. There is no
formal Board performance appraisal
system currently in place, but the
Nominations Committee considers
this as part of its remit.
Corporate Governance
Framework
The Board of Directors acknowledge
the importance of corporate
governance, believing that the QCA
Code provides the company with the
right framework to maintain a strong
level of governance.
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.
The Company is committed to a
corporate culture that is based on
sound ethical values and behaviours
and it seeks to instil these values
across the organisation as a whole. The
Company promotes its commitment
through its public statements on its
website, in its report and accounts and
internally through its communications
to its employees and other
stakeholders.
The Company has a zero-tolerance
approach to bribery and corruption
and has adopted an anti-bribery policy
to protect the Group, its employees
and those third parties with which
the Company engages. An online
training session is being organised by
the Company to be rolled out to all
employees to ensure compliance with
the anti-bribery policy.
The Company has adopted a
whistleblowing policy which enables
employees to raise any concerns that
they may have in confidence with
the Chairman, CEO or the Senior
Independent Director.
Board Committees and
Structure
The Board has established a
Nominations Committee, an Audit
Committee, a Reserves Committee,
a Remuneration and Compensation
Committee and a Health, Safety
and Environmental Committee.
All Committees are committed to
report back to the Board following a
Committee meeting.
Corporate governance 48
Corporate governance continued
Nominations Committee
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 Trevor
Garlick and its other members are Ian
Vann and Mitch Flegg. The Committee
met once in 2018 and typically meets
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, share
schemes, 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 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 Nominations Committee is
responsible for monitoring the
effectiveness of the Board and its
Committees, proposing to the Board
new nominees for election as directors
determining successor plans and for
assessing directors on an ongoing
basis.
The Committee met twice during 2018
and will meet as required during the
next financial year.
The Nominations Committee is
comprised of the Executive Chairman
and two independent Non-Executive
Directors. The Committee is chaired by
Malcolm Webb and its other members
are Antony Craven Walker and Neil
Pike.
Audit Committee
The Audit Committee meets regularly
and consists of three members, all of
whom are Non-Executive Directors.
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 with the
external auditor without management
present.
The Audit Committee met four times
in 2018 and proposes to meet at least
three times during the next financial
year. The Committee is chaired by Neil
Pike and the other members are Ian
Vann and Trevor Garlick.
The Committee met five times in
2018 and proposes to meet at least
twice 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 three
non-Executive Directors all of whom
are independent. The Committee
is chaired by Ian Vann and its other
members are Neil Pike and Malcolm
Webb
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 twice during 2018
and proposes to meet at least three
times during the next financial year.
The Committee is chaired by Trevor
Garlick and its other members are Ian
Vann and Mitch Flegg.
Serica Energy plc Annual report & accounts 2018 49
Directors’ attendance at meetings
The Board generally has one scheduled Board meeting every month over the course of the financial year with informal
discussions scheduled as required. 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 Directors’ attendance at scheduled Board meetings and Board committees during 2018 is detailed in the table below:
Director
A Craven Walker (Chairman)
N Pike
I Vann
M Flegg
M Webb2 5
T Garlick3 6
Total meetings
Notes:
Board
Audit
Remuneration and
Compensation
Nominations
HSE
Reserves
15*
15
15
15
1
1
15
1§
4*
4
–
–
–
4
2§
5
5*
4§
–
–
5
1
2*
2
2§
*
–
2
2
–
2*
2§
–
*
2
–
–
1*
–
–
*
1
1.
The Chairman, CEO 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.
2.
Malcolm Webb was appointed to the Board on 30 November 2018.
3. Trevor Garlick was appointed to the Board on 30 November 2018.
4. On 20 December 2018, changes were made to the composition of the Company’s Committees.
5.
Malcolm Webb was appointed to the Nominations Committee on 20 December 2018 replacing Neil Pike as chairman whilst Ian Vann
stood down as a member of the Nominations Committee. Malcolm Webb was also appointed as a member of the Remuneration
Committee on 20 December 2018.
6.
Trevor Garlick was appointed to the HSE Committee and Reserves Committee on 20 December 2018 replacing Ian Vann as chairman.
Trevor Garlick was also appointed to the Audit Committee on 20 December 2018.
* Chairman
§ Invitee
Corporate governance 50
Corporate governance continued
Board Objectives/Activities
The Board is responsible for
formulating, reviewing and approving
the Company’s strategy, budgets and
corporate actions. The effectiveness
of the Board, director and senior
management appointments and the
Company’s succession planning, will
be evaluated on a regular basis.
Board Evaluation
The Board considers that its
effectiveness and the individual
performance of its directors is vital to
the success of the Company.
The Board considers that it functions
effectively and the need for formal
Board evaluation has not been
considered necessary to date.
The Company currently conducts
an informal Board self-evaluation
process on an ad hoc basis. However,
it is recognised that with the
expansion of the Board in parallel
with the expansion of the Company’s
activities and the need to meet the
requirements of the QCA Code a more
formal process will be necessary. The
Company will introduce a structure
to set clear targets and objectives
for improving and monitoring
performance of an enlarged Board
and will introduce a formal evaluation
for all Board members to monitor
their individual contribution and
commitment.
The evaluation process will set
out criteria against which Board,
Committee and individual
effectiveness is measured.
The directors have a wide knowledge
of the Company’s business and
understand their duties as directors
of a company quoted on AIM. The
directors have access to the Company’s
Nominated Adviser, auditors and
solicitors as and when required. These
advisors are available to provide formal
support and advice to the Board from
time to time and do so in accordance
with good practice. The directors are
also able, at the Company’s expense, to
obtain advice from external advisers if
required.
The Board is mindful of the need
for succession planning. The Board
previously disclosed its intention to
appoint two further Non-Executive
Directors and was pleased to
announce the appointments of Mr
Trevor Garlick and Mr Malcolm Webb
effective from 30 November 2018. The
Nominations Committee will continue
to meet and monitor the requirements
for succession planning and Board
appointments to ensure that the
Board is fit for purpose. If external
training or assistance with recruitment
is required by the Committee, this will
be made available.
The Nominations Committee is
mindful of the Board’s performance
and composition together with the
performance of individual directors
and senior management.
Audit Committee Report
The Audit Committee (the
‘Committee’) is a standing committee
of the Board of the Company and is
comprised of three Non-Executive
directors.
An important part of the role of
the Committee is its responsibility
for reviewing and monitoring the
effectiveness of the Group’s financial
reporting, internal control policies,
and procedures for the identification,
assessment and reporting of risk.
The latter two areas are integral
to the Group’s core management
processes and the Committee devotes
significant time to their review. The
Audit Committee is also responsible
for overseeing the relationship with
the external auditor.
An essential part of the integrity of
the financial statements lies around
the key assumptions and estimates
or judgments to be made. The
Committee reviews key judgments
prior to publication of the financial
statements at both the end of the
financial year and at the end of the
six month interim period, as well
as considering significant issues
throughout the year. In particular,
this includes reviewing any subjective
material assumptions within the
Group’s activities to enable an
appropriate determination of asset
valuation, provisioning and the
accounting treatment thereof. The
Committee reviewed and was satisfied
that the judgments exercised by
management on material items
contained within the Report and
Financial Statements are reasonable.
The Board has engaged Ernst & Young
(EY) to act as external auditors
and they are also invited to attend
Committee meetings, unless they
have a conflict of interest. During
the year, the Committee met four
times and the members attendance
record at Committee meetings during
the financial year is set out in the
Corporate Governance at page 49..
Serica Energy plc Annual report & accounts 2018 51
Reserves Committee Report
The Reserves Committee (the
‘Committee’) is a sub-committee of
the Audit Committee, a standing
committee of the Board of the
Company and is comprised of two
Non-Executive directors and an
Executive director.
The Committee composition
changed in December 2018 with
the appointment of Trevor Garlick
as a director of the Company. The
Committee now comprises of Trevor
Garlick (Non-Executive director), Ian
Vann (Non-Executive director and
previous chairman of the Committee)
and Mitch Flegg (Executive director of
the Company).
The Committee’s purpose is to review
the reports of the independent
reserves auditors. This requires 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 meets at least once a year
prior to approval of the annual results.
The Audit Committee has considered
the Group’s internal control and
risk management policies and
systems, their effectiveness and the
requirements for an internal audit
function in the context of the Group’s
overall risk management system. The
Committee is satisfied that the Group
does not currently require an internal
audit function; however, it will continue
to periodically review the situation.
Responsibilities
The Committee reviews and makes
recommendations to the Board on:
●● any change in accounting policies
●● decisions requiring a major element
of judgement and risk
●● compliance with accounting
standards and legal and regulatory
requirements
The external auditors, EY, were
appointed during the financial year.
The Serica Group fee to EY for the
financial year to 31 December 2018 is
GB£222,000. The Audit Committee
shall undertake a comprehensive
review of the quality, effectiveness,
value and independence of the audit
provided by EY each year, seeking the
views of the wider Board, together
with relevant members of the
Committee.
Whilst EY have been the Company’s
auditors for fourteen years, the
Committee are comfortable that EY’s
audit remains independent. A new
audit partner has been allocated to the
Company which further demonstrates
the independence of the audit
provided by EY.
●● disclosures in the interim and
annual report and financial
statements
●● reviewing the effectiveness of
the Group’s financial and internal
controls
●● any significant concerns of the
external auditor about the conduct,
results or overall outcome of the
annual audit of the Group
●● any matters that may significantly
affect the independence of the
external auditor
Neil Pike
Chairman of the Audit Committee
16 April 2019
2018
●● Evaluated the effectiveness of the
Group’s technical processes and
standards.
●● Reviewed the results of
management and independent
audits of the Group’s reserves and
resources and advised the Audit
Committee of the Company and,
where appropriate, the Board of its
conclusions in respect of the same.
Corporate governance 52
Corporate governance continued
2019 looking forward
●● Refresh the Committee Terms of
Reference in assisting the Board in
the Company’s compliance with
legal and regulatory requirements.
●● Review the Company’s procedures
for providing information to the
qualified reserves evaluator or
auditor who reports on reserves
data.
●● Meet with management and the
qualified reserves evaluator or
auditor, to review the reserves data
and the auditor’s annual reserves
report.
●● Determine whether any restrictions
affect the ability of the qualified
reserves evaluator or auditor to
report on reserves data without
reservation.
●● Review and recommend to the
Board for approval the content
and filing of the Company’s annual
statement of reserves data and
other oil and gas information.
Trevor Garlick
Chairman of the Reserves Committee
16 April 2019
Nominations Committee
Report
The Nominations Committee is a
standing committee of the Board of
the Company comprised of two Non-
Executive Directors and one Executive
Director.
The Committee’s membership
changed at the beginning of 2019 and
now comprises Malcolm Webb (Non-
Executive director and Committee
Chairman), Neil Pike (Non-Executive
director) and Antony Craven Walker
(Executive Chairman of the Company).
Prior to 28 February 2019, the
Committee was named the
Corporate Governance & Nominations
Committee. However, the Board has
decided that corporate governance
should be the clear responsibility
of the Board under the leadership
of the Chairman of the Company.
Accordingly, the Committee has been
renamed the Nominations Committee
and given new Terms of Reference
focussed on matters relating to the
composition and effectiveness of the
Board.
The Role of the Committee
The Committee is responsible for:
●● Reviewing the structure,
effectiveness and performance of
all members of the Board and of all
Board Committees.
●● The recruitment and training of
directors, including independent
Non-Executive directors.
●● Maintaining an effective succession
plan for the Board, its Committees
and the senior executives of the
Company.
Independence of Non-Executive
Directors
The Committee and the Board are
satisfied that each Non-Executive
director serving at the end of the year
remains independent and continues
to have sufficient time to discharge
their responsibilities to the Company.
Neil Pike and Ian Vann have served
on the Board for over ten years. Their
ongoing contribution is integral to
the Company’s governance during
a period of major transition, which
includes plans for succession. Whilst
they continue to serve on the Board
they stand for re-election at the
Company’s Annual General Meetings
and are considered to be providing
independent advice and oversight in
both character and judgement.
2018
In 2018 the Committee led the process
of searching for additional directors
to be appointed on the completion of
the acquisition of the Bruce, Keith &
Rhum fields (‘BKR’). The Committee
progressed conversations with
several potential candidates before
recommending the appointments of
Malcolm Webb and Trevor Garlick to
the Board, subject to the necessary
nominated advisor checks and
completion of BKR on 30 November
2018.
2019 looking forward
The Committee, which has so far
met twice in 2019, will pay particular
attention to Board structure and
succession planning this year, whilst of
course continuing to discharge all its
other responsibilities.
“Board composition is a key focus
for the Nominations Committee,
with a view to ensuring the Board
has the right skills and experience to
direct the Company in the successful
execution of its strategy”.
Malcolm Webb
Chairman of the Nominations
Committee
16 April 2019
Serica Energy plc Annual report & accounts 2018 53
Health, Safety and
Environment Committee
Report
The Health, Safety and Environment
Committee (‘Committee’) is
responsible for matters affecting
occupational health, safety and
environment, including the
formulation of a health, safety and
environment policy.
The Committee composition changed
towards the end of 2018 with the
appointment of Trevor Garlick as
a director of the Company. The
Committee now comprises of Trevor
Garlick (Non-Executive director), Ian
Vann (Non-Executive director and
previous chairman of the Committee)
and Mitch Flegg (Chief Executive
Officer of the Company).
Due to the Company’s recent
acquisition of equity in and the
operatorship of the Bruce, Keith &
Rhum fields, the Committee shall play
a far more active role given the size
and transformation of the Company.
During the year under review, the
Committee met twice to discuss
matters pertaining to Health Safety
and Environmental (‘HSE’) issues. The
Committee is primarily focused on
ensuring that the HSE policies are
adopted and applied across the Group.
2018 Review
●● Committee meetings during
●● The Committee continued to
meet during the year to review the
on-going HSE procedures.
●● The Committee met on two
occasions during the year.
●● Reportable HSE incidents occurred
over the year were reviewed.
●● Approved the Corporate Major
Accident Prevention Policy to
recommend to the Board.
●● Reviewed and assisted with the
submission of the Safety Case
Regulation requirements relating to
the Bruce field.
2019 Looking Forward
●● Ensure HSE Policies set the right
direction
●● Ensure Leadership is proactively
engaged in HSE management.
2019 will focus on: Evaluating HSE
performance against industry
standards, monitoring maintenance
plan delivery, HSE Plan delivery,
acting on Regulator feedback,
major risk and major accident
management and understanding
lessons; Non-operated asset
HSE performance and employee
communications.
“The Committee will help ensure that
the Company continues to operate
its assets safely. The Committee’s
main role is to assure the Board that
that the Company has plans in place
to maintain and improve a strong
health, safety and environmental
culture. This is a key part of the
Company’s strategy”.
Trevor Garlick
Chairman of the Health and Safety and
Environment Committee
●● Further Development of HSE and
16 April 2019
Risk Management Plans.
●● New HSE organisation is to be put in
place with clear accountabilities
●● Quarterly HSE Committee meetings
to take place during 2019
●● HSE performance is to be measured,
benchmarked and linked to the
Company bonus scheme.
Corporate governance 54
Corporate governance continued
Remuneration Committee
Report
The Remuneration and Compensation
Committee (the “Committee”) is a
standing committee of the Board of
the Company and is comprised of
three Non-Executive directors.
The purpose of the Committee is to
assist the Board in discharging its
oversight responsibilities relating
to the attraction, compensation,
evaluation and retention of Executive
directors and key senior management
employees, in particular the Chief
Executive Officer and Executive
Chairman. The Committee aims to
ensure that the Company has the
right skills and expertise needed to
enable the Company to achieve its
goals and strategies and that fair and
competitive compensation is awarded
with appropriate performance
incentives.
The Committee comprises three Non-
Executive directors whose names and
profiles are set out in the Board and
Committees section of this Annual
Report. The Committee held five
meetings during 2018. Members’
attendance records are disclosed in
the Corporate Governance Report
contained in this Annual Report.
Consideration by the Directors
of matters relating to Directors’
remuneration
The Committee is responsible for
making recommendations to the
Board regarding the framework for
the remuneration of the Executive
Directors and other members
of Executive Management. The
Committee works within its terms of
reference, and its role includes:
●● Determining and agreeing with the
Board, the Remuneration Policy for
all Executive directors and under
guidance of the Executive directors,
other members of Executive
Management Team.
●● Ensuring Executive remuneration
packages are competitive.
●● Determining whether annual
bonus payments should be made
and approving levels for individual
executive directors
●● Determining each year whether
any awards/grants should be made
under the incentive schemes and
the value of such awards.
●● Considering any new long-term
incentive scheme awards and
performance criteria.
●● Agreeing directors’ service contracts
and notice periods.
The Company is committed to
maintaining an open and transparent
dialogue with Shareholders on all
aspects of Remuneration within the
Group.
Summary of work undertaken
during 2018
●● The Committee reviewed the 2018
employee salary increases along
with the 2018 bonus scheme.
●● The Committee undertook work
in connection with ensuring
compliance with the Transfer
of undertakings (Protection of
Employment) Regulations prior to
and after the Company’s acquisition
of Bruce, Keith and Rhum (‘BKR’);
which included:
– Reviewing the remuneration
packages for BP employees
to gauge how the Company
would provide transferring
BP employees with alterative
benefits of equivalent value to
those benefits that BP provided;
– Recommending to the Board
the appointment of Link
Asset Services to administer
the various Company’s share
schemes;
– Recommending to the Board
the adoption of the Serica
Energy 2018 Share Save Scheme
(‘SAYE Scheme’);
– Considering how options would
be satisfied under the SAYE
Scheme for recommendation to
the Board;
– Recommending to the Board
the appointment of a trustee in
order to provide a mechanism
for agreeing with trustees
how they would satisfy option
granted under the SAYE Scheme
and the Company’s existing
Long-Term Incentive Plan (‘LTIP’);
– Agreeing how transferring BP
employees would be provided
with the opportunity to
contribute to the Company’s
existing Share Incentive Plan
(‘SIP’) whilst ensuring that the
SIP was equivalent in value to
the scheme enjoyed by those
BP employees prior to the
completion to BKR;
Serica Energy plc Annual report & accounts 2018
55
– Agreeing how transferring BP
employees would be provided
with awards in place of the
awards received under the BP
Share Value Plan;
– Considering and agreeing
the type of LTIP awards to be
granted to transferring BP
employees along with the timing
and grant of the LTIP awards,
including the lapsed portion of
the 2018 SVP award;
– Recommending to the Board to
grant retention LTIP awards to
transferring BP employees;
– Considering and agreeing an
alternative benefit to those
transferring BP employees who
were members of a defined
benefit pension arrangement.
●● Considering and agreeing bonus
compensation to employees in
light of their contribution to the
completion of the BKR acquisitions.
Executive Directors’ service contracts
The commencement date and notice period of the Executive Director service contracts are set out below:
Director
Commencement Date
Notice period
Antony Craven Walker
1 July 2015
Mitch Flegg
21 November 2017
6 months from Executive
12 months from Company
6 months from Executive
12 months from Company
Executive Remuneration
The table below sets out the remuneration and breakdown for each Executive director paid for the 2018 financial year.
Salary
Annual Bonus
Benefits
Pension
TOTAL
Antony Craven Walker
Mitch Flegg
£315,000
£270,000
£157,500
£16,201
NIL
£488,701
£135,000
NIL
£27,000
£432,000
Mr Craven Walker has waived his entitlement to Illness and Medical Insurance, Pension contribution and participation in
the SIP.
Corporate governance
56
Corporate governance continued
Additional Details
Share Option Plans
The Company operates three
discretionary incentive share option
plans: the Serica Energy Plc Long
Term Incentive Plan (the “LTIP”),
which was adopted by the Board on
20 November 2017 which permits
the grant of share-based awards,
the 2017 Serica Energy plc Company
Share Option Plan (“2017 CSOP”),
which was adopted by the Board on
20 November 2017, and the Serica
2005 Option Plan, which was adopted
Long Term Incentive Plan
by the Board on 14 November 2005.
Awards can no longer be made under
the Serica 2005 Option Plan, however,
options remain outstanding under the
Serica 2005 Option Plan. The LTIP and
the 2017 CSOP together are known as
the “Discretionary Plans”.
The Discretionary Plans will govern
all future grants of options by the
Company to Directors, officers,
employees and certain consultants
of the Group. The directors intend
that the maximum number of
ordinary shares which may be utilised
pursuant to the Discretionary Plans
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. The objective of
the Discretionary Plans is to develop
the interest of directors, officers,
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.
The following awards have been granted to certain directors and employees under the LTIP, these were deemed to be
granted on 30 November 2017 under IFRS 2 in accordance with the 30 November 2017 Admission Document.
Director/Employees
Antony Craven Walker
Mitch Flegg
Employees below Board level (in aggregate)
Total number of shares granted subject
to Deferred Bonus Share Awards
225,000
225,000
575,000
1,025,000
Deferred Bonus Share Awards involve the deferral of bonuses into awards over shares in the Company. They are structured as
nil-cost options and may be exercised up until the fifth anniversary of the date of grant. These awards vested on 31 January
2019 and were not subject to performance conditions; however, they were conditional on completion of the BKR Acquisition,
subject to the Board determining otherwise.
Director/Employees
Antony Craven Walker
Mitch Flegg
Employees below Board level (in aggregate)
Total number of shares granted subject
to Performance Share Awards
1,500,000
1,500,000
2,250,000
5,250,000
Serica Energy plc Annual report & accounts 2018 57
Performance Share Awards have a three-year vesting period and are subject to performance conditions based on average
share price growth targets to be measured by reference to dealing days in the period of 90 days ending immediately prior to
expiry of a three-year performance starting on the date of grant of a Performance Share Award. Performance Share Awards
are structured as nil-cost options and may be exercised up until the tenth anniversary of the date of grant deemed to be on
30 November 2017 under IFRS 2 in accordance with the 30 November 2017 Admission Document. They were not subject to
completion of the BKR Acquisition.
Non-Executive Directors
2019 Non-Executive Director fees
Non-Executive Directors
Neil Pike
Ian Vann
Malcolm Webb*
Trevor Garlick*
*appointed to the Board on 30 November 2018
Ian Vann
Remuneration Committee Chairman
16 April 2019
Environmental and Social Governance
Chair/
Director
Fees (£)
Committee
Chairman
Fees (£)
40,000
40,000
40,000
40,000
10,000
10,000
10,000
10,000
Serica’s sustainability efforts are a natural and integrated part of its operations and a proof of the Company’s commitment to
provide a safe, reliable and responsible operating environment for all its stakeholders.
Our approach
As an oil and gas exploration and production company, we recognise the significance of sustainability for our business,
and strive for continuous improvements aimed at promoting sustainable development. In doing so, we guide ourselves by
industry-relevant CSR values and principles which are embedded in our strategy, management processes and business
operations.
Our operations are controlled via a management system comprising a set of policies and guidelines, which help us monitor,
evaluate and improve our daily activities, internal control systems and procedures. Serica’s Board of Directors assesses the
Company’s sustainability practices and performance, and ensures that the necessary resources are in place to support that
vision.
The key policies and guidance in place are:
●● Code of Business Conduct
●● Health, Safety and Environment (HSE) Policy
●● Personnel Handbook
●● Anti-Corruption and Bribery Policy
●● Whistle Blowing Policy
●● Share-dealing Policy
Corporate governance 58
Corporate governance continued
Our people
HSE
Environment
Serica will do all in its power to protect
the environment and minimise the
impact of our assets, supporting
such industry initiatives as Aberdeen
Marine Logistics Alliance, designed
to maximise efficiency and reduce
marine logistics costs through the
sharing of vessels wherever possible.
The Company is supportive of other
environmental drivers such as fuel
efficiency. One of our first moves on
taking operatorship of the BKR assets
was to switch crew transport to direct
flights from Aberdeen to Bruce on
Sikorsky’s most advanced civil aircraft,
the S-92, delivering significant fuel
efficiency and improving the travel
experience of our personnel.
For Serica employee management
is about providing a healthy and
productive atmosphere to each
member of its team. In 2018, the
Company’s staff structure was
transformed with 114 employees
transferring from BP to the new
Serica team, following the landmark
acquisition of BKR interests. To
facilitate this transition and encourage
integration, we put in place all
requirements needed for a safe
and efficient transfer of operations,
including the opening of new offices
in Aberdeen and the creation of 23
new jobs. The newly formed multi-
disciplinary team is already delivering
exceptional results and is at the heart
of our potential for growth.
We believe that success will be
delivered by creating a working
environment of mutual respect
and trust where shared goals, roles
and responsibilities are clear and
personal accountability is a matter
of professional pride. We invest time
to train, support and motivate our
personnel to build the atmosphere
of confidence, shared values and
responsibility that will bring prosperity
to employees and shareholders alike.
The safety of our employees and
operations always comes first in our
business and we continue to improve
our standards and procedures to
maintain healthy and harmless
working environment. One of our
priorities on assuming operatorship
of the newly acquired assets was to
initiate engagement sessions with key
industry bodies such as the Offshore
Petroleum Regulator for Environment
& Decommissioning (OPRED) and
the Health and Safety Executive (HSE)
in order to facilitate consultation on
health and safety related matters
and further improve our standards
to meet industry requirements. We
will continue to work hard to invest in
these important relationships.
We believe that engagement and
collaboration are essential to reducing
the impacts of our activities and
mitigating risks. Serica is committed to
providing guidance and training to its
offshore personnel in order to ensure
safe work practice, supported by
required skills, sustainability awareness
and efficient communications. In
doing so, we have engaged with
an expert in oil and gas workforce
engagement, Step Change in Safety
(SCiS), to improve our employees’
Major Accident Hazard awareness. We
are also proud to be an early adopter
of the new International Association
of Oil and Gas Producers (IOGP) Life
Saving Rules and signatories to the
Industry Search and Rescue (ISAR)
helicopter service. These engagements
have helped us establish appropriate
operating procedures to ensure
effective delivery on our policies,
and we strive to further improve our
practices in this area.
Serica Energy plc Annual report & accounts 2018 59
This approach covers our work with
our own employees, as well as third
parties, giving guidance to the way
we manage our supply chain. As
one of the UK oil & gas industry’s
major businesses, Serica is highly
conscious of the part we play in the
local economy. Currently, over 90%
of our contracts are serviced by UK
suppliers, and almost 70% of these
are in the North East of Scotland. We
strive to encourage transparency and
accountability in our engagement
processes with all of our suppliers.
On behalf of the Board
AMBA Secretaries Limited
16 April 2019
Business ethics
By establishing strong corporate
governance policies, we are ensuring
that Serica’s core values and standards
of business conduct align with
the interests of all stakeholders.
By adopting and implementing
clear procedures and allocating
responsibilities across the managing
team, we strive to ensure significant
progress towards achieving
international best practice in the area
of risk assessment and management.
The Board of Directors plays a
fundamental stewardship role in
ensuring that the Company directs
its activities in a manner that enables
all stakeholders to thrive. The set of
policies and procedures, set out by
the Board, governs the standards and
behaviours of our personnel wherever
they are at work. The Company’s
leadership is wholly committed to
work with transparency and integrity,
taking personal responsibility for
individual actions and corporate
behaviours.
Corporate governance 60
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 Group 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.
Serica Energy plc Annual report & accounts 2018 Independent auditor’s report to the members of Serica Energy plc
61
Opinion
In our opinion:
●● Serica Energy plc’s group financial
statements and parent company
financial statements (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 2018 and of the group’s
profit for the year then ended;
●● the group financial statements
have been properly prepared in
accordance with IFRSs as adopted
by the European Union;
●● the financial statements have been
prepared in accordance with the
requirements of the Companies Act
2006.
●● 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;
and
We have audited the Financial
Statements of Serica Energy plc which
comprise:
Group
Parent company
Group balance sheet as at 31 December 2018
Balance sheet as at 31 December 2018
Group income statement for the year then ended
Statement of changes in equity for the year then ended
Group statement of comprehensive income for the
year then ended
Statement of cash flows for the year then ended
Group statement of changes in equity for the year
then ended
Related notes 1 to 31 to the Financial Statements including
a summary of significant accounting policies
Group statement of cash flows for the year then ended
Related notes 1 to 31 to the Financial Statements,
including a summary of significant accounting policies
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 to the parent company
financial statements, as applied in
accordance with the provisions of the
Companies Act 2006.
Separate opinion in relation
to IFRSs as issued by the
IASB
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.
Basis for opinion
We conducted our audit in accordance
with International Standards on
Auditing (UK) (ISAs (UK)) and
applicable law. Our responsibilities
under those standards are
further described in the Auditor’s
responsibilities for the audit of the
financial statements section of our
report below. We are independent
of the group and parent company
in accordance with the ethical
requirements that are relevant to our
audit of the financial statements in
the UK, including the FRC’s Ethical
Auditor’s report 62
Independent auditor’s report continued
Standard as applied to listed entities,
and we have fulfilled our other ethical
responsibilities in accordance with
these requirements.
We believe that the audit evidence
we have obtained is sufficient and
appropriate to provide a basis for our
opinion.
Conclusions relating to going
concern
We have nothing to report in respect
of the following matters in relation
to which the ISAs (UK) require us to
report to you where:
●● the directors’ use of the going
concern basis of accounting in
the preparation of the financial
statements is not appropriate; or
●● the directors have not disclosed
in the financial statements any
identified material uncertainties that
may cast significant doubt about
the group’s or the parent company’s
ability to continue to adopt the
going concern basis of accounting
for a period of at least twelve months
from the date when the financial
statements are authorised for issue.
Overview of our audit
approach
Key audit matters
●● Accounting for business
combination
●● Assessment of commercial reserves
and its impact on the financial
statements
Audit scope
●● We performed an audit of the
complete financial information
of two components and audit
procedures on specific balances for
a further three components.
●● The components where we
performed full or specific audit
procedures accounted for 100% of
Profit before tax, 100% of Revenue
and 100% of Total assets.
Materiality
●● Overall group materiality of $1,430k
which represents 1% of the Group’s
equity.
Key audit matters
Key audit matters are those matters
that, in our professional judgment,
were of most significance in our audit
of the financial statements of the
current period and include the most
significant assessed risks of material
misstatement (whether or not due
to fraud) that we identified. These
matters included those which had the
greatest effect on: the overall audit
strategy, the allocation of resources in
the audit; and directing the efforts of
the engagement team. These matters
were addressed in the context of our
audit of the financial statements as a
whole, and in our opinion thereon, and
we do not provide a separate opinion
on these matters.
Risk: Accounting for business
combination
Refer to the Accounting policies
(page 72); and Note 26 of the
Consolidated Financial Statements
(page 103)
During 2018, the Group completed a
transaction whereby Serica acquired
a 98% interest in the Bruce and
Keith fields and a 50% interest in the
Rhum field for a combination of cash,
deferred and contingent consideration.
This transaction falls under the scope
of IFRS 3 Business Combinations.
This acquisition has been accounted
for using the acquisition method
where the Group has performed a
provisional purchase price allocation
(“PPA”) exercise as disclosed in Note
26 to the financial statements, and
subsequently allocated it to the assets
acquired and liabilities assumed at
the acquisition date at fair values. As
a result, the Group has recognised a
bargain purchase of $52,938k.
The Group employed a valuations
expert to provide support with respect
to the determination of the fair values
of the assets acquired and liabilities
assumed.
Significant judgement has been
exercised by management in
establishing the initial estimates of the
fair values of the identifiable assets
and liabilities acquired, together with
the resulting bargain purchase as
well as deferred tax arising on the
Serica Energy plc Annual report & accounts 2018 63
acquisition. There is also a high level
of estimation involved in determining
the contingent element of the
consideration which is based on a
share of future cashflows from the
fields.
Given this, we believe that the
accounting for the business
combination as a whole, carries
significant risk of material
misstatement.
Our response to the risk
Our procedures focused primarily
on the risks relating to the valuation
model, assumptions and judgements
associated with the estimation of
the fair value measurements. These
included:
●● reading the purchase agreements
to obtain an understanding of the
transactions and the key terms;
●● making enquiries of management
and those who participated in
the preparation of the model
to understand the terms of
the contracts and obtained an
understanding of the process and
identified key controls;
●● assessing the valuation model, the
cash flow forecasts, and the key
assumptions used in the calculation
of the asset’s fair value;
●● using our internal valuation
specialists to assist us in reviewing
management’s valuation
methodologies and assessing the
external key assumptions and inputs
used in measuring the fair value of
the net identifiable assets and the
contingent consideration payable.
This included price curves, inflation
rates, exchange rates and discount
rate;
●● using our modelling team to audit
the integrity of the models used in
the valuations;
●● assessing the valuation of the
contingent consideration by
evaluating the timing and
appropriateness of the inputs,
and ensured these were applied
consistently in accordance with the
contractual agreements;
●● involving our internal specialists
to review the related deferred
taxes arising from the business
combination, and to review the
underlying assumptions;
●● assessing the competence of both
management’s internal and external
specialists and the objectivity and
independence of external specialists,
to consider whether they were
appropriately qualified to carry out
the valuation;
●● confirming consistency of
assumptions with other areas of the
financial statements; and
●● assessing the adequacy of the
related disclosures in Note 26 to the
financial statements.
Key observations communicated to
the Audit Committee
At the April 2019 meeting of the
Audit Committee, we confirmed
that we had audited the accounting
for the business combination and
were satisfied that management
had followed a robust process in
completing the exercise and that it
reflected appropriately the facts and
circumstances that existed at the
acquisition date.
We concluded that the values of the
net assets acquired, deferred tax
and the contingent and deferred
consideration at the date of acquisition
and at the year end, reported in the
financial statements are appropriate;
as well as the disclosures made in
relation to such assumptions.
Risk: Assessment of
commercial reserves and
its impact on the Financial
Statements
Refer to note 2 accounting policies
section “Use of judgement and
estimates and key sources of
estimation uncertainty” (page 72);
The estimate of oil and gas reserves
and resources has a significant
impact on the Financial Statements,
particularly impairment testing;
depreciation, depletion and
amortization (‘DD&A’) charges; and
valuation of assets acquired as part of
the business combination.
The estimation of oil and natural
gas reserves and resources is a
significant area of judgement due to
the technical uncertainty in assessing
quantities.
Reserves and resources are also a
fundamental indicator of the future
potential of the group’s performance.
Our response to the risk
We carried out the following
procedures:
●● confirming our understanding
of the group’s controls over their
certification process for technical
and commercial experts who
are responsible for reserves and
resources estimation;
Auditor’s report 64
Independent auditor’s report continued
●● assessing the competence and
objectivity of these experts, to satisfy
ourselves they were appropriately
qualified to carry out the volumes
estimation;
●● obtaining confirmation directly from
Netherland, Sewell and Associates
Inc (NSAI) and Ryder Scott that they
are independent from Serica and
have performed their procedures
under the Canadian Oil & Gas
Evaluation Handbook (“COGEH”)
standards;
●● assessing the rationale for any
differences between the reserves
estimates provided by Ryder Scott
and management’s own estimates
used in the accounting for the PPA
and subsequent DD&A charges
relating to the assets acquired;
●● confirming that any material
changes in reserves and resources
were made in the appropriate
accounting period;
●● validating that the reserves and
resources estimates were included
appropriately as key inputs within
the group’s financial statements,
including; the reserves used in
the PPA model, calculation of
recoverable amount for Columbus
asset, preparation of the cash flow
forecasts for the assessment of the
going concern assumption, the
determination of the deferred tax
asset and as accounting for DD&A.
Key observations communicated to
the Audit Committee
We did not identify any exceptions as a
result of our audit procedures.
We consider the commercial reserves
updates have been correctly included
in the financial statement calculations,
and consider the disclosures in
the Financial Statements to be
appropriate.
In the prior year, our auditor’s
report included a key audit matter
in relation to ‘Recoverability of the
Exploration and Evaluation assets’.
We removed this in the current year as
the asset profile of the company has
changed significantly in 2018 and the
company now holds only one active
exploration and evaluation asset, with
the key asset being reclassified to
development assets.
An overview of the scope of
our audit
Tailoring the scope
Our assessment of audit risk, our
evaluation of materiality and our
allocation of performance materiality
determine our audit scope for each
entity within the Group. Taken
together, this enables us to form an
opinion on the consolidated financial
statements. We take into account
size, risk profile, the organisation of
the group and effectiveness of group
wide controls, changes in the business
environment and other factors such
as recent Internal audit results when
assessing the level of work to be
performed at each entity.
In assessing the risk of material
misstatement to the Group financial
statements, and to ensure we had
adequate quantitative coverage of
significant accounts in the financial
statements we selected 5 components,
which represent the principal business
units within the Group.
Of the five components selected,
we performed an audit of the
complete financial information of two
components (“full scope components”)
which were selected based on their
size or risk characteristics. For the
remaining three components (“specific
scope components”), we performed
audit procedures on specific accounts
within that component that we
considered had the potential for the
greatest impact on the significant
accounts in the financial statements
either because of the size of these
accounts or their risk profile.
The components where we performed
audit procedures accounted for 100%
(2017: 100%) of the Group’s Profit before
tax, 100% (2017: 100%) of the Group’s
Revenue and 100% (2017: 98%) of the
Group’s Total assets.
For the current year, the full scope
components contributed 100% (2017:
100%) of the Group’s Profit before
tax, 100% (2017: 100%) of the Group’s
Revenue and 99% (2017: 86%) of the
Group’s Total assets.
The specific scope component
contributed 0% (2017: 0%) of the
Group’s Profit before tax, 0% (2017: 0%)
of the Group’s Revenue and 1% (2017:
12%) of the Group’s Total assets. The
audit scope of these components
may not have included testing of all
significant accounts of the component
but will have contributed to the
coverage of significant accounts tested
for the Group.
For the remaining components,
we performed other procedures,
including analytical review, testing of
consolidation journals, intercompany
eliminations and foreign currency
translation recalculations to respond
to any potential risks of material
misstatement to the Group financial
statements.
Serica Energy plc Annual report & accounts 2018 65
Changes from the prior year
There were no significant changes in
our scoping as compared to the prior
year. We have performed full scope
and specific procedures in 2018 on
the same five components that were
classified as full and specific scope in
2017. Related audit procedures at these
components have not significantly
changed.
Involvement with component teams
All audit work performed for the
purposes of the audit was undertaken
by the Group audit team.
Our application of materiality
We apply the concept of materiality
in planning and performing the audit,
in evaluating the effect of identified
misstatements on the audit and in
forming our audit opinion.
Materiality
The magnitude of an omission or
misstatement that, individually or in
the aggregate, could reasonably be
expected to influence the economic
decisions of the users of the financial
statements. Materiality provides a
basis for determining the nature and
extent of our audit procedures.
We determined materiality for the
Group to be $1,430 thousand (2017:
$550 thousand), which is 1% (2017: 5%)
of equity (2017: profit before tax). We
believe that, in the current year, equity
is the most appropriate measurement
basis compared to profit before tax
as, although profits are a principle
consideration of the users of the
financial statements, the current
year profits are influenced to a large
extent by the bargain purchase gain
arising from the business combination
and costs incurred by the Group in
completing the deal over a 12-month
period to 30 November 2018 The
increase in materiality compared to
the prior year is a result of the increase
in the net assets of the Group by 39%.
We determined materiality for
the Parent Company to be $6,600
thousand (2017: $5,110 thousand),
which is 5% (2017: 5%) of equity. We use
equity as the basis for materiality as
the purpose of the Parent Company is
to hold investments in its subsidiaries.
During the course of our audit, we
reassessed initial materiality and
updated its calculation for the actual
financial results of the year.
Performance materiality
The application of materiality at
the individual account or balance
level. It is set at an amount to
reduce to an appropriately low level
the probability that the aggregate
of uncorrected and undetected
misstatements exceeds materiality.
On the basis of our risk assessments,
together with our assessment of the
Group’s overall control environment,
our judgement was that performance
materiality was 75% (2017: 75%) of our
planning materiality, namely $1,070
thousand (2017: $400 thousand). We
have set performance materiality
at this percentage after taking
into account the Group’s history of
misstatements, our ability to assess
the likelihood of misstatements and
the effectiveness of the internal control
environment.
Audit work at component locations
for the purpose of obtaining
audit coverage over significant
financial statement accounts is
undertaken based on a percentage
of total performance materiality. The
performance materiality set for each
component is based on the relative
scale and risk of the component to the
Group as a whole and our assessment
of the risk of misstatement at that
component. In the current year, the
range of performance materiality
allocated to components was $750
thousand to $1,070 thousand (2017:
$200 thousand to $450 thousand).
Reporting threshold
An amount below which identified
misstatements are considered as
being clearly trivial.
We agreed with the Audit Committee
that we would report to them all
uncorrected audit differences in excess
of $70 thousand (2017: $28 thousand),
which is set at 5% of planning
materiality, as well as differences
below that threshold that, in our view,
warranted reporting on qualitative
grounds.
We evaluate any uncorrected
misstatements against both the
quantitative measures of materiality
discussed above and in light of other
relevant qualitative considerations in
forming our opinion.
Auditor’s report 66
Independent auditor’s report continued
Other information
The other information comprises the
information included in the annual
report set out on pages 4-5 and 10-33,
other than the financial statements
and our auditor’s report thereon. The
directors are responsible for the other
information.
Our opinion on the financial
statements does not cover the other
information and, except to the extent
otherwise explicitly stated in this
report, we do not express any form of
assurance conclusion thereon.
In connection with our audit of the
financial statements, our responsibility
is to read the other information and, in
doing so, consider whether the other
information is materially inconsistent
with the financial statements or our
knowledge obtained in the audit or
otherwise appears to be materially
misstated. If we identify such material
inconsistencies or apparent material
misstatements, we are required
to determine whether there is a
material misstatement in the financial
statements or a material misstatement
of the other information. If, based
on the work we have performed, we
conclude that there is a material
misstatement of the other information,
we are required to report that fact.
We have nothing to report in this
regard.
Opinions on other matters
prescribed by the Companies
Act 2006
In our opinion, based on the work
undertaken in the course of the audit:
●● the information given in the
strategic report and the directors’
report for the financial year for
which the financial statements
are prepared is consistent with the
financial statements; and
●● the strategic report and directors’
report have been prepared in
accordance with applicable legal
requirements.
Matters on which we
are required to report by
exception
In the light of the knowledge and
understanding of the group and the
parent company and its environment
obtained in the course of the audit,
we have not identified material
misstatements in the strategic report
or the directors’ report.
We have nothing to report in respect
of the following matters in relation
to which 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
Responsibilities of directors
As explained more fully in the directors’
responsibilities statement set out on
page 57, the directors are responsible
for the preparation of the financial
statements and for being satisfied
that they give a true and fair view,
and for such internal control as the
directors determine is necessary to
enable the preparation of financial
statements that are free from material
misstatement, whether due to fraud
or error.
In preparing the financial statements,
the directors are responsible for
assessing the group and parent
company’s ability to continue as
a going concern, disclosing, as
applicable, matters related to going
concern and using the going concern
basis of accounting unless the
directors either intend to liquidate the
group or the parent company or to
cease operations, or have no realistic
alternative but to do so.
Serica Energy plc Annual report & accounts 2018 67
Auditor’s responsibilities for
the audit of the Financial
Statements
Our objectives are to obtain reasonable
assurance about whether the financial
statements as a whole are free from
material misstatement, whether
due to fraud or error, and to issue
an auditor’s report that includes our
opinion. Reasonable assurance is a
high level of assurance, but is not a
guarantee that an audit conducted in
accordance with ISAs (UK) will always
detect a material misstatement when
it exists. Misstatements can arise from
fraud or error and are considered
material if, individually or in the
aggregate, they could reasonably be
expected to influence the economic
decisions of users taken on the basis
of these financial statements.
A further description of our
responsibilities for the audit of the
financial statements is located on
the Financial Reporting Council’s
website at https://www.frc.org.
uk/auditorsresponsibilities. This
description forms part of our
auditor’s report.
Use of our report
This report is made solely to the
company’s members, as a body, in
accordance with Chapter 3 of Part
16 of the Companies Act 2006. Our
audit work has been undertaken
so that we might state to the
company’s members those matters
we are required to state to them
in an auditor’s report and for no
other purpose. To the fullest extent
permitted by law, we do not accept or
assume responsibility to anyone other
than the company and the company’s
members as a body, for our audit work,
for this report, or for the opinions we
have formed.
Mark Woodward (Senior statutory
auditor)
for and on behalf of Ernst & Young LLP,
Statutory Auditor
London
16 April 2019
Auditor’s report 68
Group income statement for the year ended 31 December
Continuing operations
Note
2018
US$000
2017
US$000
Sales revenue
Cost of sales
Gross profit
Other expense
Pre-licence costs
Impairment and write-offs of E&E assets
Administrative expenses
Foreign exchange gain
Share-based payments
BKR transition costs
Operating profit before net finance revenue, tax
and transaction costs
Bargain purchase gain on BKR acquisitions
BKR transaction costs
Finance revenue
Finance costs
Profit before taxation
4
5
14
27
26
26
26
10
11
45,747
31,966
(20,543)
(12,668)
25,204
19,298
(2,120)
(1,426)
(283)
3,121
(4,802)
150
(483)
(11,690)
(303)
(1,612)
(2,244)
511
(98)
–
9,097
14,126
52,938
–
(2,720)
(3,386)
271
(373)
246
(138)
59,213
10,848
Taxation credit for the year
12a
15,504
6,255
Profit for the year
74,717
17,103
Earnings per ordinary share - EPS
Basic EPS on profit for the year (US$)
Diluted EPS on profit for the year (US$)
13
13
0.28
0.27
0.06
0.06
Group Statement of Comprehensive Income
There are no other comprehensive income items other than those passing through the income statement.
Serica Energy plc Annual report & accounts 2018 Balance sheet as at 31 December
69
Registered number: 5450950
Non–current assets
Exploration & evaluation assets
Property, plant and equipment
Investments in subsidiaries
Deferred tax asset
Current assets
Inventories
Trade and other receivables
Derivative financial asset
Term deposits
Cash and cash equivalents
Total Assets
Current liabilities
Trade and other payables
Financial liabilities
Provisions
Non–current liabilities
Financial liabilities
Provisions
Deferred tax liability
Total Liabilities
Net Assets
Share capital
Merger reserve
Other reserve
Accumulated deficit
Total Equity
Group
Company
Note
2018
US$000
2017
US$000
2018
US$000
2017
US$000
14
15
16
12d)
4,054
53,413
475,896
7,640
–
–
–
–
–
–
–
134,034
1,350
16,209
–
479,950
77,262
134,034
1,350
17
18
19
20
20
21
22
23
22
23
7,071
66,376
176
1,273
453
2,274
2,670
5,698
–
–
109,811
83,269
–
–
1,273
1,350
53,614
28,279
25,099
18,712
128,510
39,374
136,183
103,331
608,460
116,636
270,217
104,681
(49,174)
(7,825)
(4,099)
(2,385)
(114,997)
–
(2,353)
(2,234)
(209,459)
(3,825)
(28,839)
12d)
(25,864)
(456)
–
–
–
–
–
–
–
–
–
–
–
(430,686)
(14,340)
(4,099)
(2,385)
177,774
102,296
266,118
102,296
25
16
229,586
229,308
194,314
194,036
–
–
112,174
–
21,296
20,813
21,296
20,813
(73,108)
(147,825)
(61,666)
(112,553)
177,774
102,296
266,118
102,296
The profit for the Company was US$163,061,000 for the year ended 31 December 2018 (2017: profit of US$17,103,000). In
accordance with the exemption granted under section 408 of the Companies Act 2006 a separate income statement for the
Company has not been presented.
Approved by the Board on 16 April 2019.
Antony Craven Walker
Executive Chairman
Mitch Flegg
Chief Executive Officer
Financial report 70
Statement of changes in equity for the year ended 31 December
Group
At 1 January 2017
Profit for the year
Total comprehensive income
Share-based payments
At 31 December 2017
Profit for the year
Total comprehensive income
Share-based payments
Issue of share capital
Share
capital
US$000
Other
reserve
US$000
Accum’d
deficit
US$000
Total
US$000
Note
229,308
20,715
(164,928)
85,095
–
–
–
–
–
98
17,103
17,103
–
17,103
17,103
98
229,308
20,813
(147,825)
102,296
–
–
–
278
–
–
483
–
74,717
74,717
–
–
74,717
74,717
483
278
28
28
25
At 31 December 2018
229,586
21,296
(73,108)
177,774
Company
At 1 January 2017
Profit for the year
Total comprehensive income
Share-based payments (note 28)
Share
capital
US$000
194,036
–
–
–
At 31 December 2017
194,036
Profit for the year
Total comprehensive income
Share-based payments (note 28)
Issue of share capital (note 25)
Transfers
Merger
reserve
US$000
Other
reserve
US$000
Accum’d
deficit
US$000
Total
US$000
–
–
–
–
–
–
–
–
–
20,715
(129,656)
85,095
–
–
98
17,103
17,103
–
17,103
17,103
98
20,813
(112,553)
102,296
–
–
483
–
–
163,061
163,061
163,061
163,061
–
–
(112,174)
483
278
–
–
–
–
278
–
112,174
At 31 December 2018
194,314
112,174
21,296
(61,666)
266,118
Serica Energy plc Annual report & accounts 2018 71
Cash flow statement For the year ended 31 December
Operating activities:
Profit for the year
Adjustments to reconcile profit for the year to net cash
flow from operating activities:
Taxation credit
BKR transition and transaction costs
Bargain purchase gain on BKR acquisitions
Net finance costs/(income)
Depreciation and depletion
Oil and NGL over/underlift
Impairment and write–offs of E&E assets
Unrealised and realised hedging losses
Write–back of loans and investments
Share–based payments
Other non–cash movements
Cash outflow on BKR transition/transaction
Increase in financial assets
(Increase)/decrease in trade and other receivables
Decrease/(increase) in inventories
Increase/(decrease) in trade and other payables
Net cash (out)/inflow from operations
Investing activities:
Interest received
Purchase of E&E assets
Purchase of property, plant and equipment
Cash inflow from business combination
Cash outflow arising on asset acquisitions
Changes in term deposits
Receipts from Group subsidiaries
Net cash flow from investing activities
Financing activities:
Proceeds from borrowings
Proceeds from issue of shares
Finance costs paid
Net cash flow from financing activities
Net increase/(decrease) in cash and cash equivalents
Effect of exchange rates on cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
Group
Company
Note
2018
US$000
2017
US$000
*restated
2018
US$000
2017
US$000
*restated
74,717
17,103
163,061
17,103
(15,504)
14,410
(52,938)
102
7,803
(4,306)
(3,121)
2,494
–
483
(150)
(17,083)
–
(46,477)
35
25,784
(13,751)
271
(1,803)
(5,570)
28,384
(2,775)
4,425
–
(6,255)
3,386
–
(108)
1,710
1,163
1,612
1,133
–
98
(406)
(1,867)
(3,803)
4,110
(52)
(291)
17,533
246
(1,855)
(72)
–
(2,775)
(5,698)
–
22,932
(10,154)
16,338
3,803
278
(258)
16,358
–
(135)
3,668
–
–
–
–
–
–
(271)
(246)
–
–
–
–
–
–
–
–
(164,961)
(17,909)
483
105
–
–
(862)
–
1,683
(762)
98
(302)
–
–
(671)
–
1,905
(22)
271
246
–
–
–
–
77
6,584
6,932
–
278
–
278
–
–
–
–
(1,350)
5,358
4,254
–
–
–
–
25,539
11,047
6,448
(204)
28,279
53,614
639
16,593
28,279
(61)
18,712
25,099
4,232
414
14,066
18,712
26
21
22
25
26
26
26
26
* changes in term deposits have been reclassified from financing to investing activities
Financial report 72
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 2018 were authorised for issue by the
Board of Directors on 16 April 2019 and the balance sheets were signed on the Board’s behalf by Antony Craven Walker and
Mitch Flegg. Serica Energy plc is a public limited company incorporated and domiciled in England & Wales with its registered
office at 48 George Street, London, W1U 7DY. 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, and Namibia. The
Company’s ordinary shares are traded on AIM.
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 2018.
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 2018 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 profit dealt with in the financial statements of the parent Company
was US$163,061,000 (2017: profit US$17,103,000).
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 2018.
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 Directors are required to consider the availability of resources to meet the Group’s liabilities for the foreseeable future. The
financial position of the Group, its cash flows and capital commitments are described in the Financial Review above.
At 31 December 2018 the Company held cash and term deposits of US$54.9 million which had increased to approximately
US$92 million by the end of March 2019. The bulk of contingent and deferred consideration due under the BKR acquisition
agreements is related to future successful field performance and consequently will be either reduced or deferred in the event
of production interruptions or lower net cash generation.
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 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 judgements 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: determining the fair value of property, plant and equipment on a business
combination, determining the fair value of contingent consideration, decommissioning provisions, 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 the recoverability of deferred tax assets.
Determining the fair value of property, plant and equipment on business combination
The Group determines the fair value of oil and gas assets acquired in a business combination based on the discounted
cash flows at the time of acquisition based on management’s assessment of proven and probable reserves reflecting risks
applicable to the assets acquired. The estimated future cash flows attributable to the asset are discounted to their present
value using a discount rate that reflects the market assessments of the time value of money and the risks specific to the asset
at the time of acquisition. In calculating the asset fair value, the Group will apply oil and gas price assumptions representing
management’s view of the medium and long-term pricing (see note 26).
Serica Energy plc Annual report & accounts 2018 73
2. Accounting Policies continued
Determining the fair value of contingent consideration on BKR acquisitions
The Group determines the fair value of contingent consideration payable based on discounted cash flows at the time of the
acquisition calculated for each separate component of the contingent consideration. The same models and assumptions are
used in the calculation of the fair value of property, plant and equipment arising on the business combination. Any cash flows
specific to the contingent consideration also reflect applicable commercial terms and risks (see note 22).
Decommissioning provision
Amounts used in recording a provision for decommissioning are estimates based on current legal and constructive
requirements and current technology and price levels for the removal of facilities and plugging and abandoning of wells.
Due to changes in relation to these items, the future actual cash outflows in relation to decommissioning are likely to differ
in practice. To reflect the effects due to changes in legislation, requirements and technology and price levels, the carrying
amounts of decommissioning provisions are reviewed on a regular basis. The effects of changes in estimates do not give rise
to prior year adjustments and are dealt with prospectively. While the Group uses its best estimates and judgement, actual
results could differ from these estimates (see note 23).
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 data sets using its own internal expertise. In estimating the fair values associated
with the BKR business combination, including the contingent consideration payable, and the depletion charge for 2018,
management has applied its own assessment of proven and probable reserves reflecting risks applicable to the assets
required.
Assessment of the recoverable amount of intangible and tangible assets
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 licence performance obligations can be met
within the required regulatory timeframe, 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 and production 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 16).
Deferred tax assets
Deferred tax assets, including those arising from unutilised tax losses, require management to assess the likelihood that the
Group will generate sufficient taxable profits in future periods, in order to utilise recognised deferred tax assets. Assumptions
about the generation of future taxable profits depend on management’s estimates of future cash flows. These estimates
are based on forecast cash flows from operations (which are impacted by production and sales volumes, oil and natural gas
prices, reserves, operating costs, decommissioning costs, capital expenditure, dividends and other capital management
transactions) and judgement about the application of existing tax laws. The most significant variable behind the increased
deferred tax asset recognised in 2018 from 2017 is the acquisition of the further producing oil and gas assets in November
2018 which have generated a significant increase in management’s estimate of future cash flows and taxable income
expected to be sheltered by available tax losses. To the extent that actual events differ significantly from estimates, the ability
of the Group to realise deferred tax assets could be impacted.
Financial report 74
Notes to the financial statements continued
2. Accounting Policies continued
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 Energy Slyne B.V., Serica Energy Rockall B.V., Serica Energy Namibia B.V., Serica Energy
Corporation, Asia Petroleum Development Limited, Petroleum Development Associates (Asia) Limited and Petroleum
Development Associates (Lematang) Limited. Together these comprise the “Group”.
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.
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and
designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition
date. Any contingent consideration to be transferred to the acquirer will be recognized at fair value at the acquisition date.
Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IFRS 9
Financial Instruments, is measured at fair value with the changes in fair value recognized in the statement of profit or loss
in accordance with IFRS 9. Other contingent consideration that is not within the scope of IFRS 9 is measured at fair value at
each reporting date with changes in fair value recognized in profit or loss.
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. If the fair value of the
net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly
identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the
amounts to be recognized at the acquisition date. If the reassessment still results in an excess of fair value of net assets
acquired over the aggregate consideration transferred, then the gain is recognized in profit or loss.
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
joint operations are included in the Review of Operations.
Serica Energy plc Annual report & accounts 2018 75
2. Accounting Policies continued
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.
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. Where conditions giving rise to impairment subsequently reverse, the effect of the
impairment charge is reversed as a credit to 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 management’s assessment of proved
and probable reserves, reflecting risks applicable to the specific assets. Changes in reserve quantities and cost estimates are
recognised prospectively from the last reporting date.
Financial report 76
Notes to the financial statements continued
2. Accounting Policies continued
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 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.
Acquisitions, Asset Purchases and Disposals
Acquisitions of oil and gas properties are accounted for under the acquisition method when the assets acquired and liabilities
assumed constitute a business.
Transactions involving the purchase of an individual field interest, or a group of field interests, that do not constitute a
business, are treated as asset purchases. Accordingly, no goodwill and no deferred tax gross up arises, and the consideration is
allocated to the assets and liabilities purchased on an appropriate basis. 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.
Underlift/Overlift
Lifting arrangements for oil and gas produced in certain fields are such that each participant may not receive its share of
the overall production in each period. The difference between cumulative entitlement and cumulative production less stock
is ‘underlift’ or ‘overlift’. Underlift and overlift are valued at market value and included within debtors (‘underlift’) or creditors
(‘overlift’). Following the adoption of IFRS 15 ‘Revenue from Contracts with Customers’, movement in liquids over/underlift
is classified in cost of sales with effect from 1 January 2018. Movements during an accounting period had previously been
adjusted through revenue, such that gross profit was recognised on an entitlement basis.
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 and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the
financial instrument.
Serica Energy plc Annual report & accounts 2018 77
2. Accounting Policies continued
Financial assets
Financial assets are classified, at initial recognition, as subsequently measured at amortised cost, fair value through profit or
loss, and fair value through other comprehensive income (OCI).
The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics
and the Group’s business model for managing them.
With the exception of trade receivables that do not contain a significant financing component or for which the Group has
applied the practical expedient, the Group initially measures a financial asset at its fair value plus transaction costs (in the
case of a financial asset not at fair value through profit or loss). Trade receivables that do not contain a significant financing
component or for which the Group has applied the practical expedient are measured at the transaction price determined
under IFRS 15.
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.
Financial liabilities
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and
borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group’s
financial liabilities currently include interest bearing loans and borrowings, and trade and other payables. All financial liabilities
are recognised initially at fair value. 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.
Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is
probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the
amount of the obligation.
The Group’s fair value estimate in respect of contingent consideration that may be payable following the acquisition of its
interest in the Erskine Field is capitalised as an asset acquisition cost. In determining fair value it is necessary to make a series
of assumptions to estimate future operating costs and other variables. Accordingly, the fair value is categorised as Level 3 in
the fair value hierarchy.
Leases
Operating lease payments are recognised as an operating expense in the income statement on a straight-line basis over the
lease term.
Financial report 78
Notes to the financial statements continued
2. Accounting Policies continued
Revenue from contracts with customers
Revenue from contracts with customers is recognised when control of the goods or services are transferred to the customer
at an amount that reflects the consideration to which the Group expects to be entitled to in exchange for those goods
or services. Revenue is measured at the fair value of the consideration received or receivable and represents amounts
receivable for goods provided in the normal course of business, net of discounts, customs duties and sales taxes. The Group
has concluded that is is the principal in its revenue arrangements because it typically controls the goods or services before
transferring them to the customer.
The sale of crude oil, gas or condensate represents a single performance obligation, being the sale of barrels equivalent
on collection of a cargo or on delivery of commodity into an infrastructure. Revenue is accordingly recognised for this
performance obligation when control over the corresponding commodity is transferred to the customer. The normal credit
term is 15 to 45 days upon collection or delivery.
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.
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.
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. For equity awards cancelled by forfeiture when vesting
conditions are not met, any expense previously recognised is reversed and recognised as a credit in the income statement.
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.
Serica Energy plc Annual report & accounts 2018 79
2. Accounting Policies continued
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 Group has adopted and applied the following standards that are relevant to its operations for the first time for the annual
reporting period commencing 1 January 2018:
●● IFRS 9 - Financial Instruments; and
●● IFRS 15 – Revenue from Contracts with Customers
IFRS 9 Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which replaces IAS 39 Financial Instruments:
Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for
classification and measurement, impairment under the ‘expected credit loss’ (‘ECL’) model and hedge accounting. IFRS 9 is
effective for annual periods beginning on or after 1 January 2018, with early application permitted. The Group has adopted
the new standard on the required effective date and applied the modified approach which has resulted in no required
adjustment to retained earnings.
For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group
does not track changes in credit risk but instead recognises a loss allowance, if applicable, based on lifetime ECLs at each
reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for
forward looking factors specific to the debtors and the economic environment.
The Group has performed an impact assessment for the application of IFRS 9 based on currently available information. The
Group’s receivables have a good credit rating and there has been no noted change in the credit risk of receivables in the year,
therefore the Group does not believe that the new ECL impairment methodology has a material impact on the valuation of
financial assets. The Group’s impact assessment has indicated no changes to amounts previously recognised and therefore
there are no adjustments to opening retained earnings.
Financial report 80
Notes to the financial statements continued
2. Accounting Policies continued
IFRS 15 Revenue from Contracts with Customers
IFRS 15 was issued in May 2014 and amended in April 2016. It establishes a single comprehensive model that will apply to
revenue arising from contracts with customers. IFRS 15 superseded the previous revenue recognition guidance including IAS
18 Revenue and related interpretations when it became effective, for annual periods beginning on or after 1 January 2018.
Although IFRS 15 does not generally represent a change from Serica’s current practice, the accounting for certain contracts,
such as those for underlifts and overlifts, was identified as an area of change. Movements in liquids overlift/underlift previously
disclosed in sales revenue (see note 4) has been classified in cost of sales with effect from 1 January 2018.
There are no other new or amended standards or interpretations effective for the first time for periods beginning on or after
1 January 2018 that had a significant impact on the financial statements.
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 is currently assessing the
impact of these standards and intends to adopt them when they become effective.
Standard
IFRS 16 – Leases
IFRS 16 Leases
Effective year commencing on or after
1 January 2019
IFRS 16 Leases, issued in January 2016, sets out the principles for the recognition, measurement, presentation and disclosure
of leases for both lessors and lessees. It replaces the previous leases standard IAS 17 Leases and is effective from 1 January 2019.
Under the new standard all lease contracts, with limited exceptions, are recognised in financial statements by way of right of
use assets and corresponding lease liabilities. Compared with the existing accounting for operating leases, it will also impact
the classification and timing of expenses and consequently the classification between cash flow from operating activities and
cash flow from financing activities.
IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset,
representing its right to use the underlying asset, and a lease liability, representing its obligation to make lease payments.
Lessees will be required to recognise separately the interest expense on the lease liability and the depreciation expense on the
right-of-use asset. There are recognition exemptions for short-term leases and leases of low-value items. Lessor accounting
remains similar to the current accounting under IAS 17 i.e. lessors continue to classify leases as finance or operating leases.
During 2018, the Group has performed an impact assessment for the application of IFRS 16. This assessment is based on
currently available information and will be subject to changes arising from further reasonable and supportable information
being made available to the Group in 2019. Serica does not currently have material lease contracts and therefore the impact
of the adoption of the new standard at 1 January 2019 is not expected to be material. The Group continues to assess its
accounting processes, controls and policies on an ongoing basis.
The Group will adopt the new standard on the required effective date using the modified retrospective method. The Group
will apply the practical expedient to grandfather the definition of a lease on transition. It will therefore apply IFRS 16 to all
contracts entered into before 1 January 2019 and identified as leases in accordance with IAS 17. Contracts which have not been
considered or identified as a lease will continue to be accounted for in line with their historical treatment. The Group will also
elect to use the exemptions proposed by the standard on lease contracts for which the lease terms ends within 12 months as
of the date of initial application and lease contracts for which the underlying asset is of low value.
Serica Energy plc Annual report & accounts 2018 81
3. Segment Information
The Group’s business is that of oil and 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 2018 and 2017. Costs associated with the UK corporate centre are
included in the UK reportable segment.
Year ended 31 December 2018
Revenue
Continuing operations
Depletion
Other expenses
Pre-licence costs
E&E asset impairment/write-offs
BKR transition costs
Operating and segment profit/loss
Bargain purchase gain on BKR acquisition
BKR transaction costs
Finance costs
Finance revenue
Profit/(loss) before taxation
Taxation credit for the year
Profit/(loss) after taxation
Other segment information:
Property, plant & equipment
Exploration and evaluation assets
Other assets
Unallocated assets
Total assets
Segment liabilities
Total liabilities
Capital expenditure 2018:
Property, plant & equipment
Exploration and evaluation assets
UK
US$000
Ireland
US$000
Africa
US$000
Total
US$000
45,747
(7,803)
(19,995)
(283)
12,564
(11,690)
18,540
52,938
(2,720)
(373)
271
68,656
15,504
84,160
UK
US$000
475,896
95
109,745
585,736
(430,382)
(430,382)
5,233
995
–
–
–
–
(9,443)
–
(9,443)
–
–
–
–
(9,443)
–
(9,443)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Ireland
US$000
Africa
US$000
45,747
(7,803)
(19,995)
(283)
3,121
(11,690)
9,097
52,938
(2,720)
(373)
271
59,213
15,504
74,717
Total
US$000
–
–
7
7
(163)
(163)
–
542
–
475,896
3,959
4,054
–
109,752
18,758
3,959
608,460
(141)
(141)
(430,686)
(430,686)
–
266
5,233
1,803
Financial report 82
Notes to the financial statements continued
3. Segment Information continued
Year ended 31 December 2017
Revenue
Continuing operations
Depletion
Other expenses
Pre-licence costs
E&E asset impairment/write-offs
Operating and segment profit/loss
BKR acquisition costs (1)
Finance costs
Finance revenue
Profit/(loss) before taxation
Taxation credit for the year
Profit/(loss) after taxation
Other segment information:
Property, plant & equipment
Exploration and evaluation assets
Other assets
Unallocated assets
Total assets
Segment liabilities
Total liabilities
Capital expenditure 2017:
Property, plant & equipment
Exploration and evaluation assets
Unallocated assets comprise cash on deposit.
Information on major customers is provided in note 4.
UK
US$000
Ireland
US$000
Africa
US$000
Total
US$000
31,966
(1,710)
(14,215)
(301)
(1,593)
14,147
(3,386)
(138)
246
10,869
6,255
17,124
UK
US$000
7,640
40,818
29,919
–
–
–
(2)
–
(2)
–
–
–
(2)
–
(2)
–
–
–
–
(19)
(19)
–
–
–
(19)
–
(19)
Ireland
US$000
Africa
US$000
–
8,902
87
–
3,693
–
31,966
(1,710)
(14,215)
(303)
(1,612)
14,126
(3,386)
(138)
246
10,848
6,255
17,103
Total
US$000
7,640
53,413
30,006
25,577
78,377
8,989
3,693
116,636
(14,027)
(14,027)
272
763
(280)
(280)
–
697
(33)
(33)
(14,340)
(14,340)
–
395
272
1,855
Serica Energy plc Annual report & accounts 2018 4. Sales Revenue
Gas sales
Oil sales
NGL sales
Movement in liquids overlift/underlift*
83
2018
US$000
2017
US$000
36,046
12,463
6,247
17,177
3,454
3,489
–
(1,163)
45,747
31,966
Gas sales revenue in 2017 and 2018 arose from one key customer, all oil sales revenue in 2017 and 2018 was from one key
customer, and NGL sales in 2018 were made to four (2017: three) customers.
* following the adoption of IFRS 15 ‘Revenue from Contracts with Customers’, movement in liquids over/underlift is classified in
cost of sales with effect from 1 January 2018.
5. Cost of Sales
Operating costs
Depletion (see note 15)
Movement in liquids overlift/underlift *
2018
US$000
17,046
7,803
(4,306)
2017
US$000
10,958
1,710
–
20,543
12,668
* following the adoption of IFRS 15 ‘Revenue from Contracts with Customers’, movement in liquids over/underlift is classified in
cost of sales with effect from 1 January 2018.
6. Analysis of Expenses by Function
Administrative
Net impairment reversal and E&E write-offs (see note 14)
Other
7. Group Operating Profit
This is stated after charging:
Operating lease rentals (minimum lease payments):
– Land and buildings
– Other
Total lease payments recognised as an expense
Depreciation, depletion and amortisation expense
Depreciation of other property, plant and equipment totalled US$nil in 2018 (2017: US$nil).
Depletion of oil and gas properties is classified within cost of sales.
2018
US$000
4,802
(3,121)
2,776
4,457
2017
US$000
2,244
1,612
1,316
5,172
2018
US$000
2017
US$000
265
–
265
73
–
73
Financial report 84
Notes to the financial statements continued
8. 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:
Corporate transaction services
Other assurance fees
2018
US$000
2017
US$000
227
40
15
282
357
43
400
100
31
11
142
540
23
563
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.
9. Staff Costs and Directors’ Emoluments
a) Staff Costs
Staff costs
Wages and salaries
Social security costs
Other pension costs
Share-based long-term incentives
2018
US$000
2017
US$000
6,361
701
187
483
1,496
190
66
98
7,732
1,850
The average number of persons employed by the Group during the year was 22 (2017: 6), with 7 in management functions
(2017: 4), 13 in technical functions (2017: 1) and 2 (2017:1) in finance and administrative functions.
●
The average number of persons employed by the Company during the year was 7 (2017: 6), with 6 in management
functions (2017: 4), nil in technical functions (2017: 1) and 1 (2017:1) in finance and administrative functions.
Staff costs for key management personnel:
Short-term employee benefits
Post-employment benefits
Share-based payments
1,462
36
230
1,728
791
4
46
841
Serica Energy plc Annual report & accounts 2018
85
9. Staff Costs and Directors’ Emoluments continued
b) Directors’ Emoluments
The emoluments of the individual Directors were as follows. Other than fees paid to Jeffrey Harris in US$, all sums are paid in
£ sterling but are converted at an exchange rate of £1=US$1.335 (2017: £1=US$1.288) to US$ being the reporting currency for the
purposes of the Company’s accounts.
A Craven Walker
M Flegg1
N Pike
I Vann
T Garlick2
M Webb3
J Harris4
2018
Salary and
fees
US$000
2018
Bonus
US$000
2018
Pension5
US$000
2018
Benefits
in kind
US$000
2018
Total
US$000
2017
Total
US$000
421
361
67
67
5
5
–
210
180
–
–
–
–
–
–
36
–
–
–
–
–
22
–
–
–
–
–
–
653
577
67
67
5
5
–
926
390
36
22
1,374
512
44
52
52
–
–
47
707
1. Cash in lieu of pension.
2. Trevor Garlick was appointed on 30 November 2018.
3. Malcolm Webb was appointed on 30 November 2018.
4. Jeffrey Harris resigned on 20 November 2017.
5.
In lieu of pension.
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
2018
2017
1
–
1
–
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 and those described in Note 31.
10. Finance Revenue
Bank interest receivable
Other finance revenue
Total finance revenue
2018
US$000
2017
US$000
271
–
271
246
–
246
Financial report 86
Notes to the financial statements continued
11. Finance Costs
Interest payable on BKR Facility
Interest payable on Erskine acquisition consideration
Other interest payable
Unwinding of discount on decommissioning provisions (note 23)
Total finance costs
12. Taxation
a) Tax (credited)/charged 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
Total deferred tax credit
2018
US$000
272
55
6
40
373
2017
US$000
22
113
3
–
138
2018
US$000
2017
US$000
–
–
–
–
–
–
–
–
(15,504)
(15,504)
(6,255)
(6,255)
Tax credit in the income statement
(15,504)
(6,255)
b) Reconciliation of the total tax (credit)/charge
The tax in the income statement for the year differs from the amount that would be expected by applying the standard UK
corporation tax rate for the following reasons:
Accounting profit before taxation
Statutory rate of corporation tax rate in the UK of 40% (2017: 19.25%)
Impact of higher tax rates on ring fence profits
Expenses not deductible for tax purposes
Unrecognised tax losses
Exploration write-offs
Bargain gain on BKR acquisitions
Utilisation of tax losses not previously recognised
Different foreign tax rates
Adjustment to reflect tax rate changes
Recognition of losses not previously recognised
Tax credit reported in the income statement
2018
US$000
2017
US$000
59,213
10,848
23,685
–
1,314
490
2,361
(21,175)
2,088
2,634
1,417
82
–
–
(8,105)
(6,218)
1,430
–
(15,504)
(15,504)
(3)
–
(6,255)
(6,255)
Serica Energy plc Annual report & accounts 2018 87
12. Taxation continued
c) Recognised and unrecognised tax losses
The Group’s deferred tax assets at 31 December 2018 are recognised to the extent that taxable profits are expected to arise
in the future against which tax losses and allowances in the UK can be utilised. In accordance with IAS 12 Income Taxes,
the Group assessed the recoverability of its deferred tax assets at 31 December 2018 with respect to ring fence losses and
allowances.
The Group has UK ring fence tax losses of US$139.3 million available as at 31 December 2018 (2017: US$146.5 million) which
form part of total UK tax losses of approximately US$170.2 million (2017: US$176.1 million) that are available indefinitely for
offset against future trading profits of the companies in which the losses arose. Of this amount US$66.0 million (2017: US$47.8
million) has been set off against taxable temporary differences. The benefit of approximately US$30.9 million (2017: US$87.8
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 either been recognised in the net deferred tax asset or set against a deferred tax liability arising.
d) Deferred tax
The deferred tax included in the balance sheet is as follows:
Deferred tax liability:
Temporary differences on capital expenditure
Deferred tax liability
Deferred tax asset:
Tax losses carried forward
Deductibles under the Net Cash Flow Sharing Deed
Decommissioning liability
Deferred tax asset
2018
US$000
2017
US$000
(190,796)
(19,138)
(190,796)
(19,138)
55,876
97,520
11,536
35,347
–
–
164,932
35,347
Net deferred tax (liability)/asset
(25,864)
16,209
Reconciliation of net deferred tax assets/(liabilities)
At 1 January
Tax income during the period recognised in profit or loss
Deferred taxes acquired (see note 26)
At 31 December
2018
US$000
16,209
15,504
(57,577)
2017
US$000
9,954
6,255
–
(25,864)
16,209
Financial report
88
Notes to the financial statements continued
12. Taxation continued
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
Deferred income tax credit
e) Changes to UK corporation tax legislation
2018
US$000
2017
US$000
5,041
(966)
–
(20,545)
(15,504)
–
(5,289)
(6,255)
The main rate of UK corporation tax changed from 20% to 19% on 1 April 2017 and will change to 18% on 1 April 2020. The
UK Finance Bill 2016 includes a reduction of the UK corporation tax rate to 17% on 1 April 2020. This will replace the 18% UK
corporation tax rate that is currently legislated to take effect.
In March 2016 it was announced that the rate of SC would be reduced from 20% to 10% with effect from 1 January 2016. This
was substantively enacted on 6 September 2016 and reduced the headline rate of tax to 40% for ring-fenced trading profits.
f) Unrecognised deferred tax liability
In 2018 and 2017 there are no material temporary differences associated with investments with subsidiaries for which deferred
tax liabilities have not been recognised.
g) Company
The Company has US$30.4 million (2017: US$ 29.2 million) of UK corporation tax losses which are not recognised as deferred
tax assets.
13. 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.
The following reflects the income and share data used in the basic and diluted earnings per share computations:
Net profit from continuing operations
2018
US$000
2017
US$000
74,717
17,103
Net profit attributable to equity holders of the parent
74,717
17,103
2018
‘000
2017
‘000
Basic weighted average number of shares
264,164
263,679
Diluted weighted average number of shares
275,251
266,724
Basic EPS on profit for the year (US$)
Diluted EPS on profit for the year (US$)
2018
US$
0.28
0.27
2017
US$
0.06
0.06
Serica Energy plc Annual report & accounts 2018
14. Exploration and Evaluation Assets
Group
Cost:
1 January 2017
Additions
Write-offs
31 December 2017
Additions
Write-offs
Transfers to property, plant and equipment (note 15)
31 December 2018
Provision for impairment:
1 January 2017
Impairment reversal for the year
31 December 2017
Impairment reversal for the year
31 December 2018
Net book amount:
31 December 2018
31 December 2017
1 January 2017
89
Total
US$000
65,734
1,855
(1,612)
65,977
1,803
(9,443)
(54,283)
4,054
(12,564)
–
(12,564)
12,564
–
4,054
53,413
53,170
The impairment reversal net of write-off charges against E&E assets in 2018 was a credit of US$3.1 million (2017: charge of
US$1.6 million).
This comprised an impairment reversal of US$12.6 million in respect of the Group’s Columbus asset in the UK North Sea
partially offset by asset write-off charges against the Group’s Irish assets consisting of the Slyne 1/06 Licence (US$3.4 million)
and Rockall 1/09 and 4/13 Licences (US$6.0 million).
The full impairment reversal recorded against the Columbus asset book amount in 2018 arose from revised economic
evaluations and operational developments in the project. The recoverable post-tax amount of US$68 million for the Columbus
asset was determined on a fair value less costs to sell basis (’FVLCS’) using a discounted cash flow model which exceeded the
Columbus book cost of US$54.3 million. The projected cash flows were extrapolated until 2029 using a 2% growth rate and
were adjusted to risks specific to the asset and discounted using a discount rate of 10% (10.5% for previous impairment reversal
in 2015). This discount rate is derived from the Group’s estimate of discount rates that might be applied by active market
participants and is adjusted where applicable to take into account any specific risks relating to the region where the asset is
located.
In determining FVLCS it is necessary to make a series of assumptions to estimate future cash flows including volumes, price
assumption and cost estimates. The calculation is most sensitive to the following assumptions; discount rates, oil and gas
prices, reserve estimates and project risk. There are no reasonably possible changes in any of the above key assumptions that
would cause the carrying value of the Columbus asset to materially exceed its recoverable amount.
Financial report 90
Notes to the financial statements continued
14. Exploration and Evaluation Assets continued
Serica submitted a Field Development Plan to the OGA in June 2018 and was granted development and production consent
in October 2018. Now that the development is proceeding, Columbus resources have been re-classified as reserves and
the book costs previously recorded as Exploration and Evaluation assets have been reclassified as Oil and Gas assets within
Property, Plant and Equipment.
The 2017 asset write-off figure comprised a US$1.5 million charge following the relinquishment of UK Licence P1482
(containing the Doyle prospect) in 1H 2017, other minor UK asset write-offs and a final minor charge against costs incurred on
the Sidi Moussa block in Morocco.
Company
The Company has no E&E assets.
15. Property, Plant and Equipment
Group
Cost:
1 January 2017
Additions
31 December 2017
Additions
Acquisitions (note 26)
Transfers (note 14)
31 December 2018
Depreciation and depletion:
1 January 2017
Charge for the year (note 5)
31 December 2017
Charge for the year (note 5)
31 December 2018
Net book amount:
31 December 2018
31 December 2017
1 January 2017
BKR asset acquisitions
Oil and gas
properties
US$000
Equipment,
fixtures and
fittings
US$000
Total
US$000
11,693
272
11,965
5,233
416,543
54,283
–
–
–
270
–
–
270
488,024
–
–
–
–
–
2,615
1,710
4,325
7,803
12,128
11,693
272
11,965
4,963
416,543
54,283
487,754
2,615
1,710
4,325
7,803
12,128
475,626
270
475,896
7,640
9,078
–
–
7,640
9,078
On 30 November 2018 the Group acquired interests in the Bruce, Keith and Rhum fields resulting in an acquisition of assets
(see note 26) at a value of US$416.5 million allocated to property, plant and equipment. Depletion charges in 2018 on the
assessed book amount for the BKR assets have been calculated on a unit of production basis based on management’s
assessment of proven and probable reserves reflecting risks applicable to the assets acquired.
Columbus
Following the approval of the FDP for Columbus and decision for the project to proceed the associated net book cost has
been transferred from E&E assets to property, plant and equipment.
Other
Depletion charges on oil and gas properties are classified within ‘cost of sales’.
Company
The Company has no property, plant and equipment.
Serica Energy plc Annual report & accounts 2018 16. Investments
Company – Investment in subsidiaries
Cost:
As at 1 January 2017 and 2018
Increase in investment
As at 31 December 2018
Provision for impairment:
As at 1 January 2017 and 2018
Impairment reversal for the year
As at 31 December 2018
Net book amount:
31 December 2018
31 December 2017
1 January 2017
91
Total
US$000
134,034
–
134,034
(132,684)
132,684
–
134,034
1,350
1,350
In the Company financial statements, the cost of the investment acquired on an historic reorganisation in 2005 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) was
credited to a merger reserve. The merger reserve is adjusted for any write-down in the value of the investment in subsidiary.
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 were eliminated. The write-back of investment in subsidiary in 2018 has
generated a transfer of US$112,174,000 to the merger reserve of those amounts initially eliminated in prior periods.
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 impairment reversal in 2018 of US$132,684,000 (2017: US$nil) against
the carrying value of investments in subsidiaries, and the reduction of US$32,277,000 (2017: US$17,909,000) in provision for
impairment against amounts owed by Group undertakings (see note 18) has been made following an increase in value
attributed to certain of the oil and gas assets held by the Company’s subsidiary undertakings. This has largely been generated
following the acquisition of the BKR assets in November 2018, an upgrade to Erskine proved and probable reserves, and
operational developments on the Columbus asset during the year.
Financial report 92
Notes to the financial statements continued
16. Investments continued
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 BV (i & iii)
Serica Energy (UK) Ltd (i)
Serica Energy Slyne BV (i & iii)
Serica Energy Rockall BV (i & iii)
Serica Energy Namibia BV (i & iii)
Serica Sidi Moussa BV (i & iii)
Serica Foum Draa BV (i,iii & iv)
Serica Glagah Kambuna BV (i & iii)
Serica Energy Corporation (i & ii)
APD Ltd (i & ii)
PDA Asia Ltd (i & ii)
PDA (Lematang) Ltd (i)
Serica UK Exploration Ltd (i)
Serica Walvis Namibia BV (i,iii & iv)
(i) Held by a subsidiary undertaking
(ii)
Incorporated in the British Virgin Islands
(iii) Incorporated in the Netherlands
(iv) Liquidated in 2018
Nature of
% voting rights
and shares held
% voting rights
and shares held
Holding
business
2018
2017
Ordinary
Ordinary
Ordinary
Holding
Holding
E&P
Ordinary
Exploration
Ordinary
Exploration
Ordinary
Exploration
Ordinary
Exploration
Ordinary
Dormant
Ordinary
Dormant
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
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
The registered office of the Company’s subsidiaries incorporated in the UK is 48 George Street, London, W1U 7DY.
The registered office of the Company’s subsidiaries incorporated in the Netherlands is Hoogoorddreef 15, 1101 BA Amsterdam,
The Netherlands.
The registered office of APD Ltd and PDA Asia Ltd is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British
Virgin Islands. The registered office of Serica Energy Corporation is P.O. Box 71, Road Town, Tortola, British Virgin Islands.
17. Inventories
Materials and spare parts
Group
Company
2018
US$000
2017
US$000
2018
US$000
2017
US$000
7,071
7,071
453
453
–
–
–
–
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.
Serica Energy plc Annual report & accounts 2018
93
18. Trade and Other Receivables
Group
Company
2018
US$000
2017
US$000
2018
US$000
2017
US$000
Due within one year:
Amounts owed by Group undertakings
–
–
108,073
82,380
Trade receivables
39,414
1,208
Amounts recoverable from JV partners
Other BKR receivables
Other receivables
Prepayments and accrued income
VAT recoverable
Liquids underlift
7,505
7,835
44
408
2,578
8,592
100
–
152
182
632
–
–
–
–
19
336
1,383
–
–
–
–
44
213
632
–
66,376
2,274
109,811
83,269
Trade receivables at 31 December 2018 arose from five (2017: four) customers. They are non-interest bearing and are generally
on 15 to 30 day terms.
Other BKR receivables include final consideration amounts due from the BKR acquisitions and deferred BKR transition costs.
None of the Group’s receivables are considered impaired and there are no financial assets past due but not impaired at the
year end. The Directors consider the carrying amount of trade and other receivables approximates to their fair value.
Management considers that there are no unreasonable concentrations of credit risk within the Group or Company.
At the reporting date the amounts owed by Group undertakings to the Company are disclosed net of an impairment of
US$16,847,000 (2017: US$49,124,000) – see note 16.
19. Financial Assets
Financial assets - current
Derivative financial instruments
Derivative financial instruments
Group
Company
2018
US$000
2017
US$000
2018
US$000
2017
US$000
176
176
2,670
2,670
–
–
–
–
The Group enters into derivative financial instruments with various counterparties. The gas put option commodity contract
with BP (fair value hierarchy level 2) is measured based on a consensus of mid-market values from third party providers
based on the Black Scholes model with inputs of observable spot commodities price, interest rates and the volatility of the
commodity.
Financial report 94
Notes to the financial statements continued
20. Cash and Term Deposits
Cash at bank and in hand
Short-term deposits
Cash and cash equivalents
Term deposits
Group
Company
2018
US$000
2017
US$000
2018
US$000
2017
US$000
36,129
8,400
8,114
17,485
19,879
16,985
53,614
28,279
25,099
1,273
5,698
1,273
4,682
14,030
18,712
1,350
54,887
33,977
26,372
20,062
As at 31 December 2018, the cash balance of US$54.9 million contains an amount of US$3.8 million (2017: US$3.1 million) that is
secured against a bank guarantee given in respect of operational and capital expenditure to be carried out during 2019 on the
Erskine field in the UK. The funds are freely transferrable but alternative collateral would need to be put in place to replace the
cash security.
Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits and term deposits are
made for varying periods of between one and ninety-five days 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:
Group
Company
S&P credit
rating
2018
US$000
2017
US$000
2018
US$000
2017
US$000
Barclays Bank plc
Lloyds Bank plc
A-2
A-1
24,917
29,936
18,198
15,748
6,578
5,663
19,794
14,399
For the purposes of the consolidated and Company cash flow statement, cash and cash equivalents exclude term deposits
of US$1,273,000 and US$1,273,000 respectively from the above amounts at 31 December 2018 (2017: US$5,698,000 and
US$1,350,000).
Serica Energy plc Annual report & accounts 2018 21. Trade and Other Payables
Current:
Trade payables
Other payables
Accrued expenses
Liquids overlift
BP consideration liability
95
Group
Company
2018
US$000
2017
US$000
2018
US$000
2017
US$000
5,658
15,543
27,973
–
–
49,174
2,202
1,838
–
813
2,972
7,825
3,305
794
1,898
487
–
–
–
–
–
–
4,099
2,385
Trade payables are non-interest bearing and are generally on 15 to 30 day terms.
Accrued expenses include accruals for operating and capital expenditure in relation the oil and gas assets. The Directors
consider the carrying amount of trade and other payables approximates to their fair value.
22. Financial liabilities
BKR contingent consideration (note 26)
BKR deferred consideration (note 26)
BKR prepayment facility
Current
Non-current
BKR consideration
Group
Company
2018
US$000
289,553
14,661
20,242
324,456
114,997
209,459
324,456
2017
US$000
2018
US$000
2017
US$000
–
–
3,825
3,825
–
3,825
3,825
–
–
–
–
–
–
–
–
–
–
–
–
–
–
On 30 November 2018 Serica completed the four BKR acquisitions. These comprised:
●● 36% in Bruce, 34.83333% in Keith and 50% in Rhum plus operatorship of each field from BP Exploration Operating
Company Limited (“BP”). Initial consideration, paid at completion, was GB£12.8 million with contingent payments of GB£16
million due in relation to the outcome of future work on the Rhum R3 well and up to a total GB£23.1 million due in relation
to Rhum field performance and sales prices in respect of 2019, 2020 and 2021.
●● 42.25% in Bruce and 25% in Keith from Total E&P UK Limited (“Total E&P”). Initial consideration was US$5 million with three
further instalments of deferred consideration of US$5 million each due on 31 July 2019, 31 March 2020 and 30 November
2020.
●● 16% in Bruce and 31.83333% in Keith from BHP Billiton Petroleum Great Britain Limited (“BHP”). Initial consideration was
GB£1 million.
●● 3.75% in Bruce and 8.33334% in Keith from Marubeni Oil and Gas (UK) Limited (“Marubeni”). Initial consideration was US$1
million payable to Serica with no contingent or deferred consideration.
Financial report 96
Notes to the financial statements continued
22. Financial liabilities continued
In addition to combined initial, deferred and contingent considerations, Serica will pay contingent cash consideration to BP,
Total E&P and BHP calculated as a percentage (60% in 2018, 50% in 2019 and 40% in each of 2020 and 2021) of net cash flows
resulting from the respective field interests acquired. Serica will also pay deferred contingent consideration equal to 30% of
their respective shares of future decommissioning costs, reduced by the tax relief that each of BP, Total E&P and BHP Billiton
receives on such costs.
The aggregate BKR consideration of US$304.2 million is classified as US$94.8 million as current and US$209.4 million as non-
current but the bulk of contingent consideration due under the BKR acquisition agreements is related to future successful
field performance and consequently will be either reduced or deferred in the event of production interruptions or lower net
cash generation.
Fair value measurement of BKR continent consideration
The fair value of the contingent consideration was estimated from a valuation technique using future expected discounted
cash flows. This methodology uses several significant unobservable inputs which are categorised within Level 3 of the fair
value hierarchy.
The calculations are complex as they are structured with most of the contingent consideration contingent upon future
commodity price and economic environment as well as future asset performance. They involve a range of projections and
assumptions related to future operating and development costs, production volumes, oil and gas sales prices, discount rates,
estimates of future decommissioning expenditure and taxation. Estimated contingent consideration payments have been
calculated at a discount rate of 12% and assumed repayment across the remaining 2019-2021 period of the Net Cash Flow
Sharing Deed and other operational timelines that trigger payment of consideration.
Given the multiple input variables and judgements used in the calculations, and the inter relationships between changes
in these variables, an estimate of a reasonable range of possible outcomes of undiscounted value of the contingent
consideration is not considered possible. In isolation, the calculations are most sensitive to assumed oil and gas reserves and
production profiles and future natural gas prices. Changes in most of the key assumptions noted above would also impact
the fair value of assets/liabilities in addition to the contingent consideration.
A sensitivity analysis to the discount rate used shows a decrease in the discount rate used from 12% to 10% would result in an
increase in the fair value of the contingent consideration by US$17.4 million, and an increase from 12% to 14% would result in a
decrease in the fair value of the contingent consideration by US$12.4 million.
BKR prepayment facility
Current liabilities of US$20.2 million as at 31 December 2018 (2017: US$3.8 million) represent amounts drawn under the
prepayment facility made between Serica and BP Gas Marketing Limited and dated 21 November 2017. Under this facility,
BP Gas has agreed to provide for drawings to cover the initial consideration and cost of premiums payable for gas price puts
(hedging instruments which set a floor price for certain volumes of gas production) which have been purchased by Serica
in conjunction with signing the acquisition agreement. The prepayment facility carries interest at one-month LIBOR plus
4.5% per annum compounded monthly and added to the outstanding amount and has a maximum duration of three years
from initial drawings on 21 November 2017. Repayments will commence six months after completion and be based on 35%
of Serica’s retained share of gas sales revenues from the BKR Assets including any price related hedging gains and after
deduction of those proportions due to BP under the Net Cash Flow Sharing Deed.
The total amount is now recorded within current liabilities as repayment is projected to be completed within over the course
of 2019 on the basis of current gas production and sales price estimates.
Serica Energy plc Annual report & accounts 2018 23. Provisions
At 1 January 2017
Additions during the year
At 31 December 2017
Acquisitions (note 26)
Revisions during the year
Unwinding of discount
At 31 December 2018
Classified as:
Current
Non-current
97
Total
US$000
2,190
500
2,690
Erskine
consideration
US$000
Decommissioning
provision
US$000
2,190
500
2,690
–
(337)
–
–
–
–
28,799
28,799
–
40
(337)
40
2,353
28,839
31,192
2,353
–
2,353
–
2,353
28,839
28,839
28,839
31,192
Erskine consideration payments
Under the terms of the Erskine acquisition, certain contingent payments may be made by Serica related to savings in field
operating costs. The current fair value estimated provision for these amounts is US$2.4 million which has been capitalised as
an asset acquisition cost (see note 15). Uncertainties currently exist as to the quantification of any final payment.
Decommissioning provision
Bruce, Keith and Rhum fields
The Group makes full provision for the future costs of decommissioning its production facilities and pipelines on a discounted
basis. With respect to the Bruce, Keith and Rhum fields, the decommissioning provision is based on the Group’s contractual
obligations of 3.75%, 8.33334% and 0% respectively of the decommissioning liabilities rather than the Group’s equity interests
acquired. The Group’s provision represents the present value of decommissioning costs which are expected to be incurred
up to 2032 and assumes no further development of the Group’s assets. The liability is discounted at a rate of 2% and the
unwinding of the discount is classified as a finance cost (see note 11).
Erskine field
No provision for decommissioning liabilities for the Erskine field is recorded as at 31 December 2017 or 2018 as the Group’s
current estimate for such costs is under the agreed capped level to be funded by BP. This has been fixed at a gross GB£174.0
million (GB£31.32 million net to Serica) with this figure adjusted for inflation.
Company
The Company has no provisions.
Financial report 98
Notes to the financial statements continued
24. 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 the BKR facility; given the level of expenditure
plans over 2019/20 this is managed in the short-term through selecting treasury deposit periods of one to three 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.
●● Serica sells oil, gas and related products only to recognised international oil and gas companies and has no previous history
of default or non-payment of trade receivables. 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.
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 2018
Fixed rate
Short-term deposits
Term deposits
Floating rate
Cash
BKR facility
Within 1 year
US$000
1–2 years
US$000
2–5 years
US$000
Total
US$000
17,485
1,273
–
–
–
–
17,485
1,273
18,758
Within 1 year
US$000
1–2 years
US$000
2–5 years
US$000
Total
US$000
36,129
(20,242)
–
–
–
–
36,129
(20,242)
15,887
Serica Energy plc Annual report & accounts 2018 99
24. Financial Instruments continued
Year ended 31 December 2017
Fixed rate
Short-term deposits
Term deposits
Floating rate
Cash
BP consideration liability
BKR facility
Within 1 year
US$000
1–2 years
US$000
2–5 years
US$000
Total
US$000
19,879
5,698
–
–
–
–
Within 1 year
US$000
1–2 years
US$000
2–5 years
US$000
8,400
(2,972)
–
–
–
(3,825)
–
–
–
19,879
5,698
25,577
Total
US$000
8,400
(2,972)
(3,825)
1,603
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 profit 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
profit
before tax
2018
US$000
Effect on
profit
before tax
2017
US$000
169
(169)
186
(186)
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.
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 2018
Fixed rate
Short-term deposits
Term deposits
Floating rate
Cash
Within 1 year
US$000
1–2 years
US$000
2–5 years
US$000
Total
US$000
16,985
1,273
–
–
–
–
16,985
1,273
18,258
Within 1 year
US$000
1–2 years
US$000
2–5 years
US$000
Total
US$000
8,114
–
–
8,114
Financial report
100
Notes to the financial statements continued
24. Financial Instruments continued
Year ended 31 December 2017
Fixed rate
Short-term deposits
Term deposits
Floating rate
Cash
Credit risk
Within 1 year
US$000
1–2 years
US$000
2–5 years
US$000
Total
US$000
14,030
1,350
–
–
–
–
14,030
1,350
15,380
Within 1 year
US$000
1–2 years
US$000
2–5 years
US$000
Total
US$000
4,682
–
–
4,682
The Group’s and Company’s exposure to credit risk relating to financial assets arises from the default of a counterparty with
a maximum exposure equal to the carrying value as at the balance sheet date. Cash and treasury credit risks are mitigated
through spreading the placement of funds over a range of institutions each carrying acceptable published credit ratings to
minimise counterparty risk.
In addition, there are credit risks of commercial counterparties including exposures in respect of outstanding receivables. The
Group’s oil and gas sales are all contracted with well established oil and gas or energy companies. Also, where Serica operates
joint ventures on behalf of partners it seeks to recover the appropriate share of costs from the third party counterparties. The
majority of partners in these ventures are well established oil and gas companies. In the event of non-payment, operating
agreements typically provide recourse through increased venture shares. Receivable balances are monitored on an ongoing
basis with appropriate follow-up action taken where necessary.
Foreign currency risk
The Group enters into transactions denominated in currencies other than its US dollar reporting currency. Non-US$
denominated balances, subject to exchange rate fluctuations, at year-end were as follows:
Cash and cash equivalents:
Pounds sterling
Norwegian kroner
Euros
Accounts receivable:
Pounds sterling
Trade and other payables:
Pounds sterling
Euros
Group
Company
2018
US$000
2017
US$000
2018
US$000
2017
US$000
44,169
11,416
17,150
7,076
8
34
9
31
–
–
–
–
49,353
3,619
1,390
676
44,534
442
7,208
443
4,013
2,307
42
64
Serica Energy plc Annual report & accounts 2018 101
24. Financial Instruments continued
The following table demonstrates the Group’s sensitivity to a 10% increase or decrease in the US Dollar against the Pound
sterling. The sensitivity analysis includes only foreign currency denominated monetary items and adjusts their translation at
the year-end for a 10% change in the foreign currency rate.
Increase/decrease in foreign exchange rate
10% strengthening of US$ against £GBP
10% weakening of US$ against £GBP
Liquidity risk
Effect on
profit
before tax
2018
US$000
4,899
(4,899)
Effect on
profit
before tax
2017
US$000
783
(783)
The table below summarises the maturity profile of the Group and Company’s financial liabilities at 31 December 2018 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 2018
Trade and other payables
BKR facility
Year ended 31 December 2017
Trade and other payables
Financial liabilities
Company
Year ended 31 December 2018
Trade and other payables
Year ended 31 December 2017
Trade and other payables
Commodity price risk
Within 1 year
US$000
1–2 years
US$000
2–5 years
US$000
49,174
20,242
–
–
–
–
Within 1 year
US$000
1–2 years
US$000
2–5 years
US$000
7,825
–
–
4,117
–
–
Within 1 year
US$000
1–2 years
US$000
2–5 years
US$000
Total
US$000
49,174
20,242
Total
US$000
7,825
4,117
Total
US$000
4,099
–
–
4,099
Within 1 year
US$000
1–2 years
US$000
2–5 years
US$000
2,385
–
–
Total
US$000
2,385
The Group is exposed to commodity price risk. Where and when appropriate the Group will put in place suitable hedging
arrangements to mitigate the risk of a fall in commodity prices. All gas production is sold at prices linked to the spot market.
The significant majority of oil and NGL production was sold at prices linked to the spot market.
At 31 December 2018, the Group held put options covering 2019 and 1H 2020 daily volumes of 240,000 and 160,000 therms per
day respectively, of gas at floor prices of 35 pence per therm.
Financial report 102
Notes to the financial statements continued
24. Financial Instruments continued
Fair values of financial assets and liabilities
Management assessed that the fair values of cash and short-term deposits, trade receivables, trade payables, other current
liabilities and the non-current financial liability under the BKR prepayment facility approximate their carrying amounts largely
due to the short-term maturities of these instruments. As such the fair value hierarchy is not provided.
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, production and development expenditure, and to safeguard the
entity’s ability to continue as a going concern and create shareholder value. At 31 December 2018, capital employed of the
Group amounted to US$198.0 million (comprised of US$177.8 million of equity shareholders’ funds and US$20.2 of borrowings),
compared to US$106.1 million at 31 December 2017 (comprised of US$102.3 million of equity shareholders’ funds and US$3.8 of
borrowings).
At 31 December 2018, capital employed of the Company amounted to US$266.1 million (comprised of US$266.1 million of
equity shareholders’ funds and US$nil of borrowings), compared to US$102.3 million at 31 December 2017 (comprised of
US$102.3 million of equity shareholders’ funds and US$nil of borrowings).
25. 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.
As at 31 December 2018, the share capital of the Company comprised one “A” share of GB£50,000 and 264,757,819 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
Number
Share
capital
US$000
Share
premium
US$000
Total
Share capital
US$000
As at 1 January 2017 and 2018
263,679,040
26,458
202,850
229,308
Shares issued
1,078,780
108
170
278
As at 31 December 2018
264,757,820
26,566
203,020
229,586
Allotted, issued and fully paid:
Company
Number
Share
capital
US$000
Share
premium
US$000
Total
Share capital
US$000
As at 1 January 2017 and 2018
263,679,040
26,458
167,578
194,036
Shares issued
1,078,780
108
170
278
As at 31 December 2018
264,757,820
26,566
167,748
194,314
70,556 ordinary shares were issued in Q1 2019 and as at 1 April 2019 the issued voting share capital of the Company was
264,828,375 ordinary shares and one “A” share.
Serica Energy plc Annual report & accounts 2018 103
26. Business Combination
Acquisition of Bruce, Keith and Rhum interests
On 30 November 2018 Serica completed a transaction to acquire various interests in the Bruce, Keith and Rhum fields in the
UK North Sea from BP and three further transactions with Total E&P, BHP and Marubeni to acquire their respective interests
in the Bruce and Keith fields.
Completion of these four transactions means Serica now has a 50% interest in the Rhum field, a 98% interest in the Bruce
field and a 100% interest in the Keith field.
The combination of transactions is an acquisition of interests in a joint operation under IFRS 11 and, as the activity constitutes
a business as defined in IFRS 3 Business Combinations, the acquisitions have been accounted for as a business combination.
The consolidated financial statements include the fair values of the identifiable assets and liabilities as at the date of
acquisition, and the results of the combined transaction assets for the one month period from the acquisition date.
Assets
Property, plant and equipment (note 15)
VAT recoverable and other assets
Underlift
Inventory
Liabilities
Trade and other payables
Deferred tax liability (note 12d)
Provisions (note 23)
Total identifiable net assets at fair value
Bargain purchase gain arising on acquisitions
Initial consideration received/receivable
Deferred consideration payable (note 22)
Contingent consideration payable (note 22)
Purchase consideration
Fair value
recognised on
acquisition
US$000
416,543
507
5,099
6,653
428,802
(19,511)
(57,577)
(28,799)
(105,887)
322,915
52,938
34,237
(14,661)
(289,553)
269,977
The excess of fair value of the net assets acquired over the purchase consideration has immediately been recognised as a
bargain purchase gain in the income statement.
Fair value of consideration
The combined base consideration of the four transactions was US$22 million, which was adjusted for interim period and
working capital adjustments since the economic date of 1 January 2018, resulting in combined initial consideration received at
completion and receivable of US$34 million. The present value of the contingent consideration was calculated from the future
expected cash flows, at a discount rate of 12% and assumed repayment across the 2019-2021 period of the Net Cash Flow
Sharing Deed and other operational timelines that trigger payment of consideration.
Financial report 104
Notes to the financial statements continued
26. Business Combination continued
The bargain purchase gain representing the excess of fair value of the net assets acquired over the purchase consideration
has arisen primarily due to the strategic decisions of the sellers to exit these assets due to a variety of factors including
operational risks and relatively low materiality for the sellers. These later life assets have significant remaining resources and
Serica has the ability to both maximise the value from these assets and share the value with BP, Total E&P and BHP Billiton.
Furthermore, the majority of the consideration payable is contingent upon future events and is also subject to the impact
of discounting. The gain has been immediately recognised in the income statement. The BKR asset acquisitions consist of
four separate transactions with the four different counterparties who report historical financial information under differing
financial reporting requirements. Management consider that it is impractical to assess the income statement disclosure
impacts in respect of the combined single entity for the 2018 reporting period as though the acquisitions had completed on 1
January 2018.
The initial accounting for the acquisition of the transaction assets has only been provisionally determined at the end of
the reporting period. At the date of finalisation of these financial statements, the necessary market valuations and other
calculations had not been finalised and they have therefore only been provisionally determined based on the Directors’ best
estimates. Thus, the fair value of the net asset may be subsequently adjusted, with a corresponding adjustment to the bargain
gain on purchase prior to 30 November 2019 (one year after the transaction).
BKR acquisitions and other transition related costs
Significant transition costs of US$11,690,000 and transaction costs of US$2,720,000 were expensed in 2018 on various elements
of the four BKR acquisitions which completed on 30 November 2018. These were largely incurred on the significant transition
work streams associated with the preparations for the transfer of operatorship of the BKR Assets (US$5.0 million), related IT
costs (US$4.0 million), the transfer of documentation and contracts, and general preparation covering all associated processes.
Other costs included corporate items incurred on the negotiation and documentation of the transactions and on the AIM
Re-admission Document published in November 2018.
BKR transaction costs of US$3,386,000 were expensed in 2017 on the acquisition, announced on 21 November 2017, of the
BKR Assets from BP. These were largely incurred on the negotiation and documentation of the transaction and on the AIM
Admission Document published on 30 November 2017. It also included other consultancy and advisor fees arising throughout
the process.
Change in functional and presentational currency
An entity’s functional currency is the currency of the primary economic environment in which the entity operates. In light of
the recent developments within the Group’s operations following completion of the BKR acquisitions on 30 November 2018,
the directors have reassessed the functional currency of both the Company and the Group’s main operating subsidiary, Serica
Energy (UK) Limited and concluded that the functional currency of these entities is now GBP Sterling.
The BKR acquisitions have brought a significant increase in scale to the business with a significant majority of revenues
now earned from gas sales which realise revenue in GBP Sterling, and most of the operator expenditure running the BKR
assets is also denominated in GBP Sterling. The date of change in functional currency from US Dollars to GBP Sterling is 30
November 2018, however this will be effective on 1 January 2019 given that the impact between a change on 30 November
2018 compared to 1 January 2019 is considered to be immaterial. It is expected that the 2019 Group and Company financial
statements will be presented in GBP Sterling. When the change in presentational currency from US dollars to GBP
Sterling takes effect in 2019, it will represent a voluntary change in accounting policy and applied retrospectively with 2018
comparatives restated.
Serica Energy plc Annual report & accounts 2018 27. Additional Cash Flow Information
Analysis of Group net cash:
Year ended 31 December 2018
Cash
Short-term deposits
Year ended 31 December 2017
Cash
Short-term deposits
Analysis of Company net cash:
Year ended 31 December 2018
Cash
Short-term deposits
Year ended 31 December 2017
Cash
Short-term deposits
105
1 January
2018
US$000
Cash flow
US$000
Non-cash
movements
US$000
31 December
2018
US$000
8,400
27,881
19,879
(2,342)
(152)
(52)
36,129
17,485
28,279
25,539
(204)
53,614
1 January
2017
US$000
Cash flow
US$000
Non-cash
movements
US$000
31 December
2017
US$000
2,859
13,734
16,593
5,351
5,696
11,047
190
449
639
8,400
19,879
28,279
1 January
2018
US$000
Cash flow
US$000
Non-cash
movements
US$000
31 December
2018
US$000
4,684
3,471
(41)
8,114
14,028
18,712
1 January
2017
US$000
2,977
(20)
16,985
6,448
(61)
25,099
Cash flow
US$000
Non-cash
movements
US$000
31 December
2017
US$000
332
4,248
13,734
14,066
(16)
4,232
104
310
414
4,684
14,028
18,712
Financial report
106
Notes to the financial statements continued
28. Share–Based Payments
Share Option Plans
The Company operates three discretionary incentive share option plans: the Serica Energy Plc Long Term Incentive Plan
(the “LTIP”), which was adopted by the Board on 20 November 2017 which permits the grant of share-based awards, the 2017
Serica Energy plc Company Share Option Plan (“2017 CSOP”), which was adopted by the Board on 20 November 2017, and
the Serica 2005 Option Plan, which was adopted by the Board on 14 November 2005. Awards can no longer be made under
the Serica 2005 Option Plan, however, options remain outstanding under the Serica 2005 Option Plan. The LTIP and the 2017
CSOP together are known as the “Discretionary Plans”.
A separate plan, the 2016 Serica Energy plc Company Share Option Plan (“2016 CSOP”), was approved for adoption at the
Company’s AGM in June 2016, but this was terminated with effect from 29 November 2017 following the adoption of two
further discretionary plans on 20 November 2017, and there are no outstanding options under the 2016 CSOP.
The Discretionary Plans will govern all future grants of options by the Company to Directors, officers, key employees and
certain consultants of the Group. The Directors intend that the maximum number of ordinary shares which may be utilised
pursuant to the Discretionary Plans 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.
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 2005 Option Plan
As at 31 December 2018, 6,465,550 options granted by the Company under the Serica 2005 Option Plan were outstanding. All
options awarded under the Serica 2005 Option Plan since November 2009 have a three-year vesting period. When awarding
options to directors, the Remuneration Committee are required to set Performance Conditions in addition to the vesting
provisions before vesting can take place. Of the above options, 2,500,000 of these options were granted to Mr Craven Walker
in July 2015 at exercise prices higher than the market price at the time of the grant to establish firm performance targets.
These options are set out in the table below:
A Craven Walker
A Craven Walker
A Craven Walker
Outstanding
as at 1/1/18
Outstanding
as at 31/12/18
Exercise
Price £
Date of grant
Expiry date
1,000,000
1,000,000
1,000,000
1,000,000
500,000
500,000
0.12
0.18
0.24
17/7/15
16/7/25
17/7/15
16/7/25
17/7/15
16/7/25
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$483,000 has been charged to the income statement in continuing operations for the year
ended 31 December 2018 (2017: US$98,000) and a similar amount credited to the share-based payments reserve, classified
as ‘Other reserve’ in the Balance Sheet. A charge of US$230,000 (2017: US$46,000) of the total continuing operations charge
was in respect of key management personnel (defined in note 9). The charge of US$98,000 expensed in 2017 includes an
amount of US$50,000 (US$25,000 attributable to key management personnel) in relation to awards that were granted under
the LTIP in 2018 and detailed below. This charge was attributable for the December 2017 period as the relevant Directors and
employees were considered to be rendering services in consideration for awards that were deemed as granted at that time
under IFRS2.
No options were granted in 2017 or 2018 under the Serica 2005 Option Plan.
Serica Energy plc Annual report & accounts 2018 107
28. Share–Based Payments continued
The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options
during the year:
Serica 2005 option plan
Outstanding as at 1 January
Exercised during the year
Expired during the year
2018
Number
2018
WAEP £
2017
Number
2017
WAEP £
8,196,330
0.25
8,466,330
(1,078,780)
(652,000)
0.24
0.40
0.28
–
–
(270,000)
1.036
Outstanding as at 31 December
Exercisable as at 31 December
6,465,550
0.25
8,196,330
6,465,550
0.25
4,196,330
0.25
0.38
The weighted average remaining contractual life of options outstanding as at 31 December 2018 is 4.9 years (2017: 5.6 years).
For the Serica 2005 option plan, the exercise price for outstanding options at the 2018 year-end ranges from GB£0.07 to
GB£0.68 (2017: GB£0.07 to GB£1.04).
As at 31 December 2018, the following director and employee share options were outstanding:
Expiry Date
Amount
January 2020
1,030,000
April 2021
January 2022
October 2022
January 2023
January 2024
June 2025
July 2025
July 2025
July 2025
50,000
885,550
400,000
200,000
300,000
1,100,000
1,000,000
1,000,000
500,000
Total
6,465,550
Exercise
cost
£
785,400
15,685
240,112
116,000
81,750
58,500
99,000
120,000
180,000
120,000
Long Term Incentive Plan
The following awards have been granted to certain Directors and employees under the LTIP, these were deemed to be
granted in November 2017 under IFRS 2.
Director/Employees
Antony Craven Walker
Mitch Flegg
Employees below Board level (in aggregate)
Total number of
shares granted subject to
Deferred Bonus Share Awards
225,000
225,000
575,000
1,025,000
Financial report 108
Notes to the financial statements continued
28. Share–Based Payments continued
Deferred Bonus Share Awards involve the deferral of bonuses into awards over shares in the Company. They are structured
as nil-cost options and may be exercised up until the fifth anniversary of the date of grant. Vesting of the Deferred Bonus
Share Awards was the later of the date of completion of the BKR Acquisition and 31 January 2019. They are not subject
to performance conditions; however, they were conditional on completion of the BKR Acquisition, subject to the Board
determining otherwise.
Director/Employees
Antony Craven Walker
Mitch Flegg
Employees below Board level (in aggregate)
Total number of
shares granted subject to
Performance Share Awards
1,500,000
1,500,000
2,250,000
5,250,000
Performance Share Awards have a three-year vesting period and are subject to performance conditions based on average
share price growth targets to be measured by reference to dealing days in the period of 90 days ending immediately prior to
expiry of a three-year performance starting on the date of grant of a Performance Share Award. Performance Share Awards
are structured as nil-cost options and may be exercised up until the tenth anniversary of the date of grant. They were not
subject to completion of the BKR Acquisition.
LTIP awards in 2019
In March 2019, the Company granted nil-cost options over a total of 3,784,765 ordinary shares under the LTIP. The award was
made to members of the Group’s executive team, senior management and employees. The awards included a total of 822,154
ordinary shares for the executive directors and persons discharging managerial responsibilities as follows:
Director/PDMR
Antony Craven Walker
Mitch Flegg
Total number of
shares granted subject to
Performance Share Awards
411,067
411,067
822,134
These awards are subject to vesting criteria based on absolute share price performance over a three-year period.
29. Commitments under Operating Leases
Operating lease agreements where the Group is lessee
At 31 December 2018 the Group has entered into commercial leases in respect of the 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
Company
2018
US$000
2017
US$000
2018
US$000
2017
US$000
525
–
525
74
–
74
72
–
72
74
–
74
In September 2018, the Group extended its 21 Gloucester Place, London office operating lease with a minimum commitment
period until June 2019.
In March 2019 the Group entered into a five-year operating lease at its new registered office, 48 George Street following the
expiry of its London office lease at 52 George Street.
Serica Energy plc Annual report & accounts 2018 109
30. Capital Commitments and Contingencies
At 31 December 2018, other amounts contracted for but not provided in the financial statements for the acquisition of
exploration and evaluation assets amounted to US$nil for the Group and US$nil for the Company (2017: US$nil and US$nil
respectively).
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.
BKR commitments
There are no significant current capital commitments on the BKR producing fields though plans to carry out work on the
Rhum R3 well are in hand with work expected to be carried out in 2020. Net revenues from Serica’s share of income from
the fields, after net cash flow sharing payments, are expected to cover Serica’s retained share of ongoing field expenditures
and deferred or contingent consideration due under the respective acquisition agreements. These include GB£16 million
due to BP upon a successful outcome from the Rhum R3 workover, US$5 million due to Total E&P on each of 31 July 2019,
31 March 2020 and 30 November 2020 and amounts of up to GB£7.7 million due to BP in respect of each or 2019, 2020 and
2021 dependent upon achievement of certain Rhum field production and gas price levels. Further deferred contingent
consideration amounts will fall due to each of BP, Total E&P and BHP representing 30% of their retained share of the actual
costs of decommissioning the BKR field facilities in existence at completion net of tax relief. In April 2019, Serica has posted
cash collateral of approximately GB£12.1 million (US$15.7 million under BKR decommissioning security arrangements in
support to the issue of letters of credit required.
Erskine commitments
As at 31 December 2018, the cash balance of US$54.9 million contains an amount of US$3.8 million that is secured against a
bank guarantee given in respect of operational and capital expenditure to be carried out during 2019 on the Erskine field in
the UK. The funds are freely transferrable but alternative collateral would need to be put in place to replace the cash security.
Other commitments
The Group has no significant exploration commitments.
Other less material minimum obligations include G&G, seismic work and ongoing licence fees in the UK and Namibia.
Other
The Group occasionally has to provide security for a proportion of its future obligations to defined work programmes or other
commitments.
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.
31. 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 9 above. The disclosures in note 9 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.
Financial report 110
Glossary
bbl
bcf
boe
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 the appropriate rate)
BKR Assets
Bruce, Keith and Rhum fields
CPR
FDP
HPHT
mscf
mmbbl
mmboe
mmscf
mmscfd
NGLs
NTS
OGA
Overlift
Underlift
P10
P50
P90
Competent Persons Report
Field Development Plan
High pressure high temperature
thousand standard cubic feet
million barrels
million barrels of oil equivalent
million standard cubic feet
million standard cubic feet per day
Natural gas liquids extracted from gas streams
National Transmission System
Oil and Gas Authority
Volumes of oil or NGLs sold in excess of volumes produced
Volumes of oil or NGLs produced but not yet sold
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
Pigging
A process of pipeline cleaning and maintenance which involves the use of devices called pigs
Proved Reserves
Probable Reserves
Possible Reserves
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
Reserves
Estimates of discovered recoverable commercial hydrocarbon reserves calculated in accordance
with the Canadian National Instrument 51-101
Contingent Resources
Estimates of discovered recoverable hydrocarbon resources for which commercial production is
not yet assured, calculated in accordance with the Canadian National Instrument 51-101
Prospective Resources
Estimates of the potential recoverable hydrocarbon resources attributable to undrilled prospects,
calculated in accordance with the Canadian National Instrument 51-101
TAC
Tcf
UKCS
Technical Assistance Contract
trillion standard cubic feet
United Kingdom Continental Shelf
Serica Energy plc Annual report & accounts 2018 111
Licence holdings
The following table summarises
the Group’s licences as at
31 December 2018
Licence Block(s)
Description
Role
%
Location
United Kingdom
P090
P198
P209
P209
P209
P276
P276
P276
P566
P975
P975
P101
9/9a Rest of Block
excluding Bruce (REST)
3/29a (ALL)
9/8a BRUCE
9/8a KEITH
9/8a Rest of Block,
excluding Bruce and Keith
(REST)
9/9b BRUCE
9/9c (ALL)
9/9b Rest of Block
excluding Bruce (REST)
3/29b (ALL)
3/24b (ALL)
3/29d (ALL)
23/21a
P1314
23/16f
P057
P264
23/26a
23/26b
P1620
22/19c
P2385
22/24g, 22/25f
P2388
23/21b
Development
Operator
98%
Northern North Sea
Rhum Field Production
Operator
50%
Northern North Sea
Bruce Field Production
Operator
98%
Northern North Sea
Keith Field Production
Operator
100% Northern North Sea
Development
Operator
98%
Northern North Sea
Bruce Field Production
Operator
98%
Northern North Sea
Bruce Field Production
Operator
98%
Northern North Sea
Development
Operator
98%
Northern North Sea
Rhum non-unitised
Rhum non-unitised
Rhum non-unitised
Operator
100% Northern North Sea
Operator
100% Northern North Sea
Operator
100% Northern North Sea
Columbus Development Area
Operator
50%
Central North Sea
Columbus Development Area
Operator
50%
Central North Sea
Erskine Field Production
Non-operator
18%
Central North Sea
Erskine Field Production
Non-operator
18%
Central North Sea
Exploration
Exploration
Exploration
Non-operator
15%
Central North Sea
Non-operator
20%
Central North Sea
Non-operator
50%
Central North Sea
P2400
30/12c, 30/13c, 30/17h, 30/18c Exploration
Non-operator
20%
Central North Sea
P2402
30/19c
Exploration
Non-operator
20%
Central North Sea
Ireland
1/06
1/09
4/13
Namibia
27/4 (part), 27/5 (part), 27/9
(part)
Exploration
Operator
100% Slyne Basin
5/17 (part), 5/18, 5/22 (part),
5/23 (part), 5/27 (part), 5/28
(part)
Exploration
Operator
100% Rockall Basin
11/10, 11/15, 12/1 (part), 12/6,
12/11 (part)
Exploration
Operator
100% Rockall Basin
0047
2512A, 2513A, 2513B, 2612A
(part)
Exploration
Operator
85%
Luderitz Basin
Licence holdings 112
Corporate information
Registered and Main Office
Company Secretary
48 George Street
London W1U 7DY
Nominated Advisor & UK Broker
Peel Hunt LLP
Moor House
120 London Wall
London EC2Y 5ET
UK Broker
Jefferies International Limited
68 Upper Thames Street
London EC4V 3BJ
Auditor
Ernst & Young LLP
1 More London Place
London SE1 2AF
Bankers
Barclays, Lloyds
AMBA Secretaries Limited
UK Registrar
Link Asset Services
34 Beckenham Road
Kent BR3 4TU
Listing
AIM, London
Symbol: SQZ
Website
www.serica-energy.com
Company Number
5450950
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.
Serica Energy plc Annual report & accounts 2018 Serica Energy plc
48 George Street
LONDON W1U 7DY
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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2018 has been a year of
incredible achievement
Serica has established
itself as one of the leading
independent UKCS operating
companies and has
assembled a talented and
motivated team
Entering a new era
Annual Report 2018
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www.serica-energy.com