INVESTING
IN THE FUTURE
ANNUAL REPORT 2020
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www.serica-energy.com
CONTENTS
Highlights
2020 Performance
Executive Chairman’s Statement
Serica at a Glance
Strategic Report
Chief Executive’s Review
HSEQ
Environmental, Social & Governance
Review of Operations
Reserves
Licence Holdings
Financial Review
Corporate Governance
Board of Directors
Directors’ Report
Corporate Governance
Directors’ Responsibilities Statement
Financial Statements
Independent Auditor’s Report
Primary Financial Statements
Notes to the Financial Statements
Other Information
Glossary
Corporate Information
2
4
6
8
10
12
14
20
21
22
28
30
32
46
47
56
60
96
97
CORPORATE INFORMATION
Registered and Main Office
Bankers
48 George Street
London W1U 7DY
Operational Headquarters
H1 Building
Hill of Rubislaw
Anderson Drive
Aberdeen AB15 6BY
Nominated Advisor & UK Broker
Jefferies International Limited
Peel Hunt LLP
100 Liverpool Street
London EC2M 2AT
UK Broker
100 Bishopsgate
London EC2N 4JL
Auditor
Ernst & Young LLP
1 More London Place
London SE1 2AF
Barclays, Lloyds
Company Secretary
AMBA Secretaries Limited
UK Registrar
Link Asset Services
10th Floor, Central Square
29 Wellington Street
Leeds LS1 4DL
Listing
AIM, London
Symbol: SQZ
Website
www.serica-energy.com
Company Number
5450950
INVESTING IN A DIGITAL TWIN
TO ADVANCE EFFICIENCY
In 2020 work commenced on a digital survey of our BKR asset.
After 40 days, billions of laser scan measurements from over
5,500 scan locations had been uploaded to create a single Point
Cloud model and along with hundreds of thousands of HD digital
images our Digital Twin was born!
A millimetre accurate model of every aspect of our Bruce platform
is now accessible to staff across all disciplines from any location
via a web-based app. The many benefits of the digital twin include:
•
•
reduction of platform visits,
remote design for fabrication of equipment,
• detailed assessment of condition of equipment and pipework.
The digital twin is now an integral part of our working toolbox
and Serica personnel have already identified multiple future
applications, all of which will help us to work more efficiently.
Produced by Communiqué Associates Limited, Edinburgh +44 7802 349934
“The pedigree of Serica’s personnel is
outstanding. During one of the most
challenging years, our investment in
emerging technology such as the creation
of the digital twin of our Bruce asset, shown
on this year’s front cover, has provided our
team with the tools to help deliver efficient
and safe operations in an environmentally
friendly manner whilst creating a blueprint
for modern working practices.
Serica’s Board would like to acknowledge
their respect for the loyalty and focus our
team has shown during COVID lockdown.”
Mitch Flegg
Chief Executive Officer
“Despite the many obstacles presented during 2020, Serica
has continued to strengthen its financial and operational
foundations whilst delivering returns to our shareholders.”
Mitch Flegg
Chief Executive Officer
£12.5 million Full year profit before tax
DIVIDEND
An increased dividend of 3.5p to
be recommended at 2021 AGM
ESG FOCUS
Significant reduction in
carbon emissions and flaring
INVESTMENT In three major capital
growth projects
RESERVES
New CPR shows significant
reserves upgrade
FIELD LIFE
Cost reduction and efficiency have
extended BKR asset life expectancy
until at least 2030 (“COP”)
2 l Serica Energy plc Annual Report & Accounts 2020
STRONG PROGRESS
Cash balances £m
Dividend p/share
2020
3.5
2019
3
2018
2017
2020
2019
2018
61
2020
2030
2020
89.3
2020
3.5
62.3
2019
2028
2019
101.8
2019
3
68.8
2018
2026
2018
43.1
2017
3.1
2017
2026
2017
25.2
2018
2017
2020
2019
2018
2017
2020
3.5
2020
3.5
2020
2020
61
2020
61
2020
2030
2020
2030
2020
Reserves mmboe
BKR CoP
2019
3
2019
3
2019
2019
62.3
2019
62.3
2019
2028
2019
2028
2019
2018
2017
2018
2017
2018
2018
68.8
2018
68.8
2018
2026
2018
2026
43.1
2018
2017
3.1
2017
3.1
2017
2017
2026
2017
2026
25.2
2017
LOOKING TO THE FUTURE
We enter 2021 with confidence and an undiminished ambition to deliver
value for our shareholders. This year we expect to benefit from:
•
A strong balance sheet, no debt, limited decommissioning liability
• Investment in three capital growth projects
– R3 Intervention (ongoing)
– Columbus development (ongoing)
– North Eigg exploration well (2022)
• Being well positioned for ongoing M&A activity
•
Serica’s share of BKR net cash flow increasing to 100% on
1 January 2022
61
62.3
2020
2019
2030
2020
89.3
2028
2019
101.8
68.8
2018
2026
2018
43.1
2017
2026
2017
25.2
89.3
101.8
3.1
43.1
89.3
101.8
2
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25.2
2 l Serica Energy plc Annual Report & Accounts 2020
Serica Energy plc Annual Report & Accounts 2020 l 3
Performance Overview
EXECUTIVE CHAIRMANʼS STATEMENT
“Serica continues to focus
on our main tenets: adding
shareholder value, protecting
shareholder value and returning
shareholder value.”
Dear Shareholder,
The past twelve months have seen a perfect storm of events
caused by the worldwide pandemic which erupted at the
start of 2020. The resultant lockdown, requiring companies
to restrict travel, abandon office working, implement
social distancing and introduce new digital technologies to
facilitate communication, has put considerable strain on
established business models and work practices.
In the oil and gas world, we also had to
contend with one of the biggest commodity
price collapses in recent years, with US oil
prices moving into negative territory for
a short time early in 2020 and European
gas prices dropping to levels which have
not been seen for decades. In short, 2020
has been an extraordinarily difficult year to
navigate for all industries but particularly for
the oil and gas industry.
I am pleased to report that Serica has not
only been able to weather these storms,
but we have also been able to move
forward with all of the projects we set for
the year, in particular the Columbus gas
field development and the R3 intervention
projects. A successful conclusion of these
projects should see a significant increase in
production levels in the second half of this
year to add to the benefits we are already
seeing from strengthening commodity
prices. We are also entering the last year
of the net cash flow sharing arrangements
with BP, Total and BHP which formed the
basis of our acquisition of the BKR assets
in 2018. As a result, we will be retaining
100% of cash flows from these assets
from the beginning of next year, up from
60% this year and further strengthening
our cash generation.
We have been able to achieve our 2020
operational targets to build for the future
with minimal impact on our financial
resources. Cash balances remained strong
at year end, standing at just under £90
million compared with £101 million at the
start of the year despite the low oil and
gas prices and after making significant
capital investments in the Columbus
and R3 projects. In addition, we are
reporting a profit for the year of just under
£8 million after providing for deferred
tax. Albeit significantly less than the
£64 million reported for the prior year this
demonstrates remarkable resilience during
a severe industry downturn.
Prices for both oil and gas have
strengthened since the start of this year,
particularly gas prices which affect some
80% of our production and which have
risen some four-fold from their 2020 low,
supporting ongoing spend on our Columbus
and Rhum R3 projects. This strong financial
position, with no debt and considerable
unutilised debt capacity, allows us to
prepare for drilling the North Eigg gas
prospect next year as well as completing
our existing projects this year, continuing
investment in the BKR assets and pursuing
further growth opportunities.
Last year we paid our maiden dividend,
amounting to 3p per share, and did so at
a time of considerable upheaval in the oil
and gas sector. This year, in view of the
Company’s continuing strong cash position,
we are recommending an increased
dividend of 3.5p per share reflecting the
Board’s confidence in the future prospects
for the Company. Subject to approval
at the Annual General Meeting in June,
this will be paid as a single final dividend
to all shareholders on the register at
25 June 2021.
4 l Serica Energy plc Annual Report & Accounts 2020
The Company puts considerable emphasis
on setting the highest standards that it
can to meet environmental, social and
good governance expectations of our
shareholders, other stakeholders and of
society at large. These include diversity
where this can be achieved and equal
opportunity. As a young company we are
able to implement good modern practices
and involve all of our employees in seeking
to achieve and improve on our targets
and we endeavour to bring new thinking
and business innovation to these efforts
as a focal part of our leadership team.
Mitch Flegg, in his CEO’s report, will be
highlighting some of the steps we are taking
and significant improvements we have
been able to make to the carbon intensity
of our offshore operations since taking
over operations two years ago. Further
information is provided in our Annual Report
and we will also be publishing a full ESG
performance report on our website as part
of our annual reporting cycle.
Many commentators have questioned
the role of oil and gas as the world enters
a new phase and new technologies are
developed to replace the traditional sources
of energy. Targets have been set to achieve
Net Zero carbon by 2050 with various stage
targets in the intervening period. There is
no question that the oil and gas industry is
fully committed to meeting those targets
and has the technological expertise and
knowledge to achieve it but it is a process
which will take time to implement. Oil
and gas, particularly gas as a relatively
clean fuel, will still be required to underpin
“Last year we paid our maiden dividend at
a time of considerable upheaval in the oil
and gas sector. This year, in view of the
Company’s continuing strong cash position,
we are recommending an increased dividend
of 3.5p per share reflecting the Board’s
confidence in the future prospects for
the Company.”
this transition and to provide economies
with the fuel and materials they need as
part of the energy mix to maintain supply
and living standards whilst the shift to
new sources of energy is implemented
and new technologies and the necessary
infrastructure are developed.
Serica has a role to play in this transition.
As an established North Sea production
operator we have the skills and finances to
work in partnership with major companies
as they seek to optimise their reserves,
reduce operating costs, improve profitability
and move to lower carbon technologies.
With our performance as Bruce operator
we have strong ESG credentials and
we will be looking to build on this as a
fundamental part of any new investment
as well as continuing to focus on our main
tenets: adding shareholder value, protecting
shareholder value and returning shareholder
value. Serica has been able to do all three in
2020 and is well-placed to grow on the back
of its existing assets as well as building on
new opportunities. We are looking forward
to 2021.
In summary, I am very pleased to report
that we have been able to manage the
challenges of 2020 and are entering 2021
financially and operationally stronger than
ever. This is due in no small part to the huge
commitment of Serica’s teams in London,
Aberdeen and on the Bruce offshore
complex. I would like to thank all of them on
behalf of the Board and our shareholders
for their outstanding performance in such
challenging times.
Tony Craven Walker
Chairman
14 April 2021
4 l Serica Energy plc Annual Report & Accounts 2020
Serica Energy plc Annual Report & Accounts 2020 l 5
Performance Overview SERICA AT A GLANCE
A nimble, dynamic and experienced company,
Serica is now one of the UK’s leading mid-
tier independent oil and gas companies
responsible, through the Bruce platform, for
around 5% of the UK’s gas production.
Our talented team of 160+ manages a full-
cycle portfolio of high quality assets centred
on the UK North Sea, delivering production
from four fields, implementing our strategy of
using technology and experience to maximise
the productive life of our fields and drive
down costs.
NORTH EIGG
RHUM
BRUCE, KEITH
ABERDEEN
COLUMBUS
ERSKINE
PRODUCTION
DEVELOPMENT
EXPLORATION
BKR
ERSKINE
OPERATOR. SERICA 98% BRUCE, 100% KEITH, 50% RHUM
SERICA 18% OPERATED BY ITHACA ENERGY
With over 25 wells, these assets are estimated
collectively to contain net 2P reserves of 50.9 mmboe
as of 1 January 2021, of which more than 80% is gas.
Erskine is a High Pressure High Temperature (HPHT)
gas condensate field. From five producing wells Erskine
delivered around 2,300 boepd net to Serica in 2020.
COLUMBUS
SERICA 50%, OPERATOR
NORTH EIGG
SERICA 100%, OPERATOR
In the Central North Sea, the Columbus gas
condensate prospect spudded on 17 March 2021 via
the Maersk Resilient jack-up rig. Development is now
ongoing, with first gas anticipated Q4 2021.
The North Eigg exploration prospect is estimated to
contain 367 bcf (P50) and potentially over 1Tcf (P10)
of recoverable gas (unrisked). Serica has commenced
planning to allow drilling of an exploration well in 2022.
PRODUCTION
80%
gas
Current government
forecasts suggest that gas
will remain a vital part of
the UK’s energy mix as we
move towards Net Zero. Our
commitment is to continue
to provide clean natural gas
whilst reducing the carbon
intensity of our operations.
Frigg
INVESTING FOR GROWTH
Serica’s strong balance sheet with significant cash, no debt and limited
decommissioning liabilities enables it to pursue its investment strategies
unaffected by short-term commodity price fluctuations
2020/21
Rhum R3
intervention work
2021
Columbus Development
and first production
3/24c
North
Eigg
3/29c
Rhum
South
Eigg
2022
North Eigg
exploration well
(planned)
6 l Serica Energy plc Annual Report & Accounts 2020
Kraken
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B
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m
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R
Bruce
Keith
Mariner
Frig g to St. F erg u s
Boa
F
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t
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s
U
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B
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Beryl
FIRMLY COMMITTED TO OUR STRATEGY TO DELIVER GROWTH
RESERVES UPGRADE
Serica’s consistent focus on cost reduction and
operational efficiency have extended the life
expectancy of our assets by a further two years,
until at least 2030.
Net 2P developed and undeveloped reserves (mmboe)
61.0
end 2020
62.3
end 2019
Production during 2020
8.1mmboe
PLAYING OUR PART
IN TRANSITION
Serica has the skills to thrive as part of the Net
Zero Transition, making a contribution to security
of energy supply, emissions accountability and the
UK economy. As some operators exit the UKCS,
Serica’s outstanding operating team has proven its
ability to innovate and improve asset performance,
for example reducing flaring by 62% in our first two
years as operator of BKR.
IMMINENT CASHFLOW BOOST
As we enter the fourth and final year of our Net Cash
Flow Sharing agreement with vendors BP, Total and
BHP, Serica’s retained share of cashflow will grow
from 2022 onwards.
TECHNOLOGY UPTAKE
COVID-19 has accelerated
our uptake of new technology
to facilitate intelligent and
efficient work practices
that will improve speed
and accuracy whilst
lowering costs in a
broad range of ways
across our operations.
A good example of this
is our commission of
the Bruce Digital Twin.
Serica
Vendors
40%
50%
60%
100%
2018
2019
2020/21
01.01.22
HEDGING PROGRAMME
Our gas price hedging programme protects against
severe downside gas prices whilst retaining most of
the upside benefit. For this reason, Serica continues to
increase and extend its hedging position.
£12.3 million
Serica’s hedging cash income for 2020
up to 25%
of 2021/2 retained gas sales hedged via swaps *
D
N
E
D
V
D
I
I
3.5p /share
recommended for 2021
* after adjustment for 2021 net cash flow sharing
Serica Energy plc Annual Report & Accounts 2020 l 7
Performance Overview
CEO’S REVIEW
“2020 was a year of solid
performance and improvement
which demonstrated the
resilience and profitability
of the Company in the face
of unprecedented business
challenges. 2021 will be a year
of continued investment in the
growth opportunities which exist
in our portfolio.”
It is impossible to review any aspect of
2020 without first considering the impact
of the COVID-19 pandemic. Serica was
quick to implement measures to reduce
the likelihood of the virus impacting
our operations. We adopted new travel
procedures which included reducing the
number of personnel on helicopters to and
from our offshore installations. We also
significantly limited manning levels on the
Bruce platform in order to reduce the risk
of an outbreak, allow social distancing
offshore and provide isolation areas for
suspected cases. These reduced manning
levels meant that the working conditions
were more difficult for those staff remaining
on the platform and also meant that we
have had to prioritise essential (especially
safety and environmentally critical) activities
throughout the year. I am delighted to
report that due to the incredible skill, hard
work and professionalism of our team we
have managed to avoid any cases of the
virus on our installations and so we have
incurred no COVID-19 related interruptions
to production. Our safety performance was
outstanding with zero recordable injuries
sustained during the year. Serica has not
furloughed any staff or taken advantage
of any of the government assistance
programmes.
Serica has demonstrated that it has
all of the skills to thrive as a modern,
dynamic energy company operating as
part of the Net Zero transition. Over 80%
of our production is natural gas which is
a key component in this transition. Our
second annual Environmental, Social
and Governance (“ESG”) Report will be
published along with the Annual Report.
In the past year we have reduced Bruce
carbon emissions by over 11% and we have
achieved a 62% reduction in flaring in only
two years as operator of the Bruce platform.
Despite the severe social impact of
COVID-19 and the economic impact on
commodity pricing which has affected
all companies in 2020, I am pleased to
report that Serica Energy’s robust hedging
position, combined with the structure of
the transactions under which we acquired
our interests in the Bruce, Keith and Rhum
(“BKR”) fields, has resulted in the Company
reporting a full-year profit of £7.8 million
(2019: £64.0 million) after provision for
deferred tax.
Production levels in 2020 were impacted
by a 45-day suspension of BKR production
to resolve an issue with an unused caisson
on the Bruce platform. As a result, Serica’s
net production for the year averaged
23,800 boe/d (compared to 30,000 boe/d
in 2019). It should be noted that the 45-day
shut-down occurred in the early part of the
year when gas prices were significantly
lower than late in the year. The production
from the 45-day period is not lost but
deferred and the shut-down is not expected
to have any impact on ultimate recovery
from BKR.
Gas prices for the year averaged less than
25 pence per therm before hedging gains
but Serica’s gas price hedging programme
effectively fixed prices for approximately
one-third of our retained 2020 gas sales
at approximately 39 pence per therm.
This hedging programme delivered cash
income of £12.3 million during 2020. We
continue to extend our hedging position
and for 2021 and 2022 Serica has swaps
in place covering up to 25% of retained gas
sales after adjustment for 2021 net cash
flow sharing. These swaps provide some
protection against severe downside gas
prices whilst retaining the potential upside
benefit from the majority of production.
We continue to focus on minimising our
cost base and in 2020 we have realised
further reductions in our absolute operating
costs. However, when expressed as
costs per barrel there is an increase to
US$14.12/boe (2019: US$12.60/boe).
The increase in operating costs per barrel
reflected lower production volumes caused
by the 45-day BKR production suspension
in the first half and does not indicate an
increase in the underlying trend.
Serica has commissioned a new Competent
Person’s Report (“CPR”) effective 1 January
2021 and this has identified an upgrade
to net 2P Reserves estimates particularly
due to the successful efforts to extend
the prognosed Cessation of Production
(“COP”) on Bruce through which all Bruce,
Keith and Rhum production is processed.
I am delighted to report that the latest CPR
estimates that the Bruce COP (2P case) has
been extended by a further two years and
is now predicted to occur in 2030. In the
last two years we have extended COP by a
8 l Serica Energy plc Annual Report & Accounts 2020
“We see significant benefits and potential in our existing
portfolio and continue to look at new opportunities to expand
our operations to diversify risk, provide new growth prospects
and achieve economies of scale.”
investment in the growth opportunities
which exist in our portfolio. The end of 2021
will represent another huge milestone for
the Company with the expiry of the cash
flow sharing arrangement under which
Serica has been sharing the net cash flow
from BKR variously with BPEOC, Total
E&P and BHP who originally sold us their
interests. In 2021 Serica retains 60% of the
net cash flow but this will increase to 100%
on 1 January 2022 and stay at that level
thereafter providing a significant cash boost
for the Company.
Serica’s strategy is to build on the strong
financial and operating capabilities which
the Company has established in the UK
Sector of the North Sea and focus on
our strong ESG credentials. Whilst we
see significant benefits and potential in
our existing portfolio and continue to
look at new opportunities to expand our
operations to diversify risk, provide new
growth prospects and achieve economies
of scale. We are confident that we have
the resources to deliver this strategy and
the platform to create additional value
for shareholders.
Mitch Flegg
Chief Executive Officer
14 April 2021
total of four years; this is a clear indication
that our BKR life extension strategy is being
successful. Our net 2P reserves stood at
62.3 million boe at 1 January 2020 and
our 2020 net production was more than
8 million boe but due to these upgrades,
after 2020 production, our net 2P reserves
at 1 January 2021 stand at 61.0 million boe.
During 2020, Serica decided to withdraw
from Namibia where we had originally been
awarded a licence in 2011. Following a full
review, we elected not to seek a further
renewal period or to continue with a new
licence application. The pace of exploration
activity in Namibia had been slower than
we hoped, and the development of any
discovery would likely have been high cost,
time consuming and inconsistent with our
sustainability objectives. Therefore, we have
decided to concentrate on the numerous
lower risk, nearer term opportunities in our
North Sea portfolio. In particular we have
a programme of three investment projects
that each have the ability to generate
significant value for the Company:
1. The Rhum field currently produces from
two wells (R1 and R2) which are subsea
tie- backs to the Bruce platform. A third
well (R3) was drilled when the field
was originally developed but was not
put into production due to mechanical
issues with equipment in the well. In
late 2020, operations commenced to
remedy these problems. The completion
equipment installed in the well by the
previous operator in 2005 has been fully
recovered. We are now in the process of
regaining access to the reservoir prior to
running a new completion, reperforating
and flowing the well. R3 is expected
to accelerate field production, with the
potential to bring additional reserves into
the commercial lifespan of the field, and
to provide operational back-up to the
existing two wells.
2. The Columbus development well in the
UK Central North Sea was spudded in
March 2021. The well is being drilled
with the Maersk Resilient jack up rig
to a total depth of 17,600ft and will
include a 5,600ft horizontal section. The
Columbus development area is 35km
north east of the Shearwater production
facilities and will be drained by a single
producing well tied into the existing
Arran-Shearwater pipeline. The recent
Competent Person’s Report estimates
the Columbus gross undeveloped 2P
reserves to be in excess of 14 million
barrels of oil equivalent (“boe”). Serica
is operator and has a 50% interest in
the project. Production is expected
to commence in early Q4 2021, with
average production forecast to be
around 3,500 boe/d net to Serica, of
which over 70% is gas.
3. Planning is ongoing for the drilling
of the HPHT North Eigg exploration
well which we expect to spud in 2022.
This prospect is located in the area
adjacent to the Serica operated Rhum
field and in the event of a discovery,
Serica will investigate options for
subsea tie-backs to the Bruce facilities
and topsides modifications to ensure
a low cost, low emission design to
enable early development, maximise
recovery and optimise production.
Serica has carried out an in-house
evaluation of the prospect and estimates
the unrisked prospective recoverable
resources, based on seismic mapping
and Rhum analogue data, to be around
70 million boe.
2020 was a year of solid performance and
improvement which demonstrated the
resilience and profitability of the Company
in the face of unprecedented business
challenges. 2021 will be a year of continued
Serica Energy plc Annual Report & Accounts 2020 l 9
Strategic Report HSEQ
HSEQ is integral to our business. Our HSEQ Manager reports directly to our Chief Executive and our HSE
Board Committee meets quarterly. We continuously focus on improving our HSEQ performance and during
2020 delivered the following initiatives:
SUPERB PERFORMANCE WITH ZERO RECORDABLE INJURIES
Total Recordable Injury Frequency (TRIF) measures the number of recordable injuries
(based on OSHA criteria) per 200,000 work hours. We recognise that good personal safety
performance is not indicative of overall safety performance, however, poor performance
certainly suggests all is not well. In December, Serica achieved a TRIF rate of zero across all
our operations. The team are rightly proud of this accomplishment and remain focused on
maintaining an injury free workplace.
CATEGORY
2019
2020
Day Away From Work Cases (DAFWC)
Restricted Work Injury/Illness
Medical Treatment Injury/Illness
3
3
1
0
0
0
FIRST AID CASES
>50%
reduction
OVERHAULING OUR OPERATING MANAGEMENT SYSTEM
Our HSEQ Policy is implemented through our Operating Management System (OMS) which includes many Policies, Practices, and Standards.
In 2020, we commenced an ambitious project to review and revise our OMS to minimise complexity and align with our values and goals.
HYDROCARBON RELEASE PREVENTION
5 KEYS TO PREVENTION
Leadership engagement and communication
Incident learnings and culture
Strengthening operational integrity
Strengthening asset integrity
Self verification and assurance
These key focus points were identified by our Hydrocarbon Release
Prevention group, formed in in 2020 and led by our Engineering
Manager. The group meets regularly.
We recognise the need for continual vigilance to prevent the
unplanned release of hydrocarbons from our assets and the team
have our full support.
AUDIT AND ASSURANCE
Restrictions on personnel, both on and offshore, necessitated a
novel approach to the delivery of our audit and assurance activities.
Using collaborative technology, and with the co-operation of our
contractors, we were able to execute both internal and third party
audits successfully.
10 l Serica Energy plc Annual Report & Accounts 2020
INVESTING IN OUR TEAM
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hazard identification skills. A structured
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HAZARD IDENTIFICATION
Focus on Health and Wellbeing
We recognise the importance
of cognitive and emotional
wellbeing in our workforce
and 2020 presented some
additional challenges for our team. The COVID-19 pandemic led to
home working, with many people also managing the home schooling
of their children. To keep the team connected and promote social
interaction, which was difficult for many, we have supported flexible
working patterns, created a wellbeing hub populated with useful
resources, and organised regular online social events. We also
trained additional Mental Health First Aiders both on and offshore.
SAFETY OBSERVATION PROGRAMME
90%
Participation in our safety observation
programme is actively encouraged
and reached record levels in 2020. On
average, 90% of the personnel on our
Bruce installation participate in the
programme each week. This is a strong
indication that our workforce is prepared to intervene when
they see a risk, and to commend and enforce positive
behaviours.
EMERGENCY RESPONSE
10emergency
exercises
in 2020
Another challenge presented by COVID
restrictions was the ability to respond and
support an emergency scenario from remote
locations. We reacted quickly to the challenge
and conducted 10 emergency exercises
in 2020 involving Duty Managers, Incident
Management and Incident Support Teams.
MAINTAINING STANDARDS
As an operator, Serica’s responsibility to manage
Major Accident Hazards was unchanged when
COVID-19 significantly reduced numbers of
personnel offshore. Our teams seized the
challenge, generating innovative ideas which
have added long term value to our business.
ENVIRONMENTAL
In spite of the many challenges of the
year Serica increased its commitment to
improving our environmental performance.
You can read more about our ESG work
during 2020 overleaf.
“We recognise that positive
HSEQ performance is the
foundation of our business
and success requires the
engagement and support
of all our staff, contractors
and partners.”
Craig Robertson
HSEQ Manager
Serica Energy plc Annual Report & Accounts 2020 l 11
Serica Energy plc Annual Report & Accounts 2020 l 11
Strategic Report ENVIRONMENTAL, SOCIAL & GOVERNANCE
Serica has set out to build on its ESG performance, instilling an ESG culture into its staff,
management and Board. Serica commits to transparent reporting and setting clear targets,
which are linked to staff remuneration.
2020 COMMITMENT
WHAT WE ACHIEVED IN 2020
Further reduce emissions
CO2 emissions on Bruce in 2020 were 10% lower than in 2019. Flaring was 45% lower
Providing transparency in its ESG reporting
Serica now reports to GRI, SASB, TCFD and UN Global Compact. We are aligned
to the UNSDGs. We have set KPIs and made achieving ESG targets part of our
remuneration structure
Including the impact of carbon emissions
in all business development decisions
The language of ESG has grown throughout the organisation. Offshore on the Bruce
platform, there are daily flare discussions, on drilling rigs we monitor emissions more
closely, engineering solutions are sought with emissions in mind and there are regular ESG
updates to the board, in the HSE committee meetings and in main board meetings. Cost of
carbon is incorporated into our economic evaluation of assets and aligning with TCFD will
make this process more formal.
Increasing workforce engagement in
charitable activities and knowledge sharing
Four ESG committees were set up to engage staff in charity, D&I, education and emissions
reduction. An ESG Champion programme was also created for offshore workers on Bruce.
The ESG report shows the achievements of these groups.
Education
Charities &
Fundraising
Emissions
Reduction
Diversity
& Inclusion
In 2020, our VP ESG and Business Innovation formalised the Company’s ESG ambitions
by setting up four new staff run committees to engage and motivate staff to get involved
in supporting the UN Sustainable Development Goals. In addition, an ESG Champions
committee was set up offshore to identify and execute practical ways to reduce emissions
and waste and support Company targets. The supply chain team instigated a number of
initiatives such as ‘Zero Waste to Landfill’ from the Bruce platform, using a ferry service to
reduce emissions from supply vessels and using packaging pods to transport equipment to
lower packaging waste.
FOCUSING STAFF ON KEY ESG ISSUES WITH BONUS KPIs
1
2
Carbon intensity
Flare volumes
3 Workforce engagement in ESG
4 Waste volumes generated
5
Diversity of personnel
These targets, equally weighted for all employees, were selected to advance our
commitments to the UNSDGs. Climate action is the most material to our industry but we also
focus on waste reduction and acting on new initiatives.
A Diversity & Inclusion committee is working on improvements to our recruitment processes
to ensure we provide equal opportunities and encourage diversity in the workplace.
For local community engagement, the
charity committee has supported local
charities Abernecessities, Cfine and
Clan. These charities support vulnerable
people in the Aberdeen area supplying
foodbanks, clothes and support for cancer
sufferers. Serica also donated funds to a
local Aberdeen school to provide laptops
during lockdown to help disadvantaged
pupils continue to study. At the start of the
COVID-19 pandemic staff raised money
and we gave a company donation to NHS
charities to provide PPE at a time when
there were shortages.
Our Governance section outlines in detail
the Company Governance framework and
how we manage risk and ensure ethical
practices. Our Board has the appropriate
skillsets to apply appropriate governance
with backgrounds in business, legal,
banking, finance, technical oil and gas
and HSE. Serica is a member of the UN
Global Compact and follows its ten guiding
principles. Our business management
system ensures we have the appropriate
policies to ensure ethical practices
are followed.
12 l Serica Energy plc Annual Report & Accounts 2020
“ I am proud to report that
Serica delivered on its ESG
commitments for 2020 and
has grown its culture to deliver
even more this year. There
is a greater understanding
throughout the company
and more ownership of ESG
targets, drawing on innovation,
creativity and passion.”
Clara Altobell
VP ESG and Business Innovation
Serica Energy plc Annual Report & Accounts 2020 l 13
Serica Energy plc Annual Report & Accounts 2020 l 13
Strategic Report REVIEW OF OPERATIONS – PRODUCTION
Northern North Sea: Bruce Field
Blocks 9/8a, 9/9b and 9/9c, Serica 98%
Serica operates the Bruce 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 derrick that is
currently mothballed.
The Bruce field is produced through a
combination of platform wells and subsea
wells tied back to the platform, with over
20 wells producing from multiple reservoirs
and compartments. Bruce production is
predominantly gas which is rich in NGLs.
Gas is exported through the Frigg pipeline
to the St Fergus terminal, where it is
separated into sales gas and NGLs. 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. The onshore support team was
already using video links to provide support
to the platform, so whilst working from
home during the COVID- 19 pandemic,
that technology has allowed Serica to
provide uninterrupted support to the
offshore operation.
In January 2020, during a Bruce platform
inspection, the condition of an unused
seawater return caisson on the platform
was observed to have deteriorated. This
caisson had been taken out of service in
2009. Production through the Bruce facility
was halted while the problem was fully
investigated.
A subsequent underwater inspection
determined that the caisson had parted
below the water line. Both the upper and
lower sections of the caisson were intact
and engineering work to ensure that the
caisson was properly secured commenced.
Work was successfully undertaken during
the following weeks and the caisson
sections secured, allowing production to
restart on 5 March. During August, further
work was undertaken to remove damaged
parts of the caisson back to shore.
To maintain operations during COVID-19
restrictions, increased social distancing
offshore, pre-mobilisation testing, social
distancing on transportation (including
helicopters) and other practical control
measures were introduced. This reduced
the number of personnel working offshore
by 30%. This had an initial impact on
the quantity of work that was able to be
executed offshore, but during the year
Serica found ways to remove inefficiencies
whilst maintaining reduced numbers
offshore. No pandemic production
interruptions occurred in 2020.
Bruce field production in 2020 averaged
in excess of 9,600 boe/d of exported oil
and gas net to Serica (2019: 13,100 boe/d)
with the reduction primarily as a result of
the 45-day caisson shut-down. Full year
production reliability was 84.7% (96%
excluding the caisson interruption).
The latest independent report of reserves,
compiled by RISC Advisory, estimated 2P
reserves of 15.7 million boe net to Serica as
of 1 January 2021 (2020: 22.2 million boe).
The restricted programme of well work
during 2020 has led to declassification of
some 2P reserves pending reinstatement of
this work in future periods.
INVESTING IN TECHNOLOGY
TO DRIVE DOWN COSTS
As part of the drive to be more efficient,
during 2020 Serica created a digital
twin of the Bruce facility to enable
more onshore support (maintenance
campaigns, visual inspection,
modification design and pipework
fabrication) to be undertaken without
personnel having to visit the platform.
As an example, one specific inspection
scope that had previously been forecast
to cost £150,000, was carried out with
reductions of 75% in offshore days and
40% in the total cost. This reduces cost,
shortens response time and minimises
travel risk. Further enhancements to
this technology will be incorporated in
future years.
EXAMPLE OF COST SAVINGS
2020 inspection delivered with:
fewer offshore days
75%
40%
cost reduction
14 l Serica Energy plc Annual Report & Accounts 2020
“ Whilst working from home
during COVID-19, technology
has allowed Serica’s onshore
team to provide seamless,
uninterrupted support to our
offshore operation.”
Mike Killeen
VP Operations
Serica Energy plc Annual Report & Accounts 2020 l 15
Strategic Report REVIEW OF OPERATIONS – PRODUCTION continued
“ The Bruce Hub forms the heart of Serica’s
business, collectively producing almost
5% of the UK’s gas. Our updated CPR
shows a significant reserves upgrade and
a two year extension to field life.”
Carol Stewart
North Sea Business Manager
OUR STRATEGY TO MAXIMISE THE ECONOMIC LIFE OF BRUCE
Serica’s strategic objective for the Bruce
Hub is to maximise its economic life.
In pursuit of this objective, Serica will:
•
•
Operate safely and fulfil our ESG and
HSE responsibilities
•
Seek to sustain base production
through management of the existing
well stock including well work,
investing in maintenance of the
facilities and efficiently controlling
operating costs
Aim to enhance utilisation of the
Bruce facilities through investment
in equity production and attracting
third-party business.
We will harness technology and
innovate to maximise the economic
life of the Bruce Hub
Northern North Sea: Keith Field
Block 9/8a, Serica 100%
Keith is an oil field produced by one subsea
well tied back to the Bruce facilities.
Keith produces at a relatively low rate but
provides a low-cost contribution to oil
export from Bruce. Keith production was
interrupted in January 2020 initially due
to the Bruce caisson issue and thereafter
when required topsides reinstatement work
was unable to progress due to the reduced
number of people offshore in response to
COVID-19. An intervention to restore flow
from Keith was successfully carried out in
late March 2021 and further enhancement
work is planned in Q2. Keith production
during 2020 was minimal but average
production in 2019 was around 450 boe/d.
No 2P reserves were included in the most
recent reserves report pending successful
reinstatement of production.
Northern North Sea: Rhum Field
Blocks 3/29a, Serica 50%
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. Rhum gas has a higher CO2
content than Bruce gas and so is blended
with Bruce gas before leaving the offshore
facilities. The field continues to outperform
our expectations at the time of acquisition.
An intervention campaign is under way
to workover the R3 well and allow it to be
brought onto production. The well was
drilled at the same time as the other two
Rhum production wells, however problems
were encountered in 2005 by the previous
operator during well completion. The well
was left with an ice-like hydrate plug which
prevented it from flowing; attempts at that
time to rectify this additionally resulted in
wireline debris being left in the well.
Serica has successfully remedied both
issues, recovering the wireline ‘fish’ and
dissociating the hydrate plug with heated
fluid. The well is now being prepared
for production. The operation has taken
longer than anticipated due largely to
the unexpectedly poor condition of the
equipment being recovered from the well
and also to periodically severe weather
conditions. Production from the well
is now expected to commence in Q3.
Total R3 capital costs are now projected
at £21.0 million, net to Serica after
adjustment for net cash flow sharing, of
which £11.5 million will be spent in 2021.
This represents a total cost overrun of
£9.7 million net to Serica.
Average Rhum production in 2020 was over
11,900 boe/d net to Serica (2019: 13,775
boe/d) the reduction being primarily as
a result of the Bruce caisson shut down.
The latest independent report of reserves,
compiled by RISC Advisory, estimated 2P
reserves of 35.1 million boe net to Serica as
at 1 January 2021 (2020: 28.7 million boe).
16 l Serica Energy plc Annual Report & Accounts 2020
The significant increase after adjustment
for 2020 production demonstrates Serica’s
progress in extending projected field life and
adding to recoverable reserves.
Central North Sea: Erskine Field
Blocks 23/26a (Area B) and 23/26b
(Area B), Serica 18%
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 Ithaca Energy 50%
(operator) and Harbour Energy 32%. Erskine
fluids are processed and exported via the
Lomond platform, which is 100% owned
and operated by Harbour Energy.
The Erskine field is produced through five
production wells over the Erskine normally
unattended installation, 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 Teesside.
and no indications of wax build-up have
been seen. Serica is supporting Ithaca
and Harbour Energy with their reliability
improvement plans for the Erskine system
and provides a secondee to Lomond as part
of the offshore management team.
The flash and export coolers that are part
of the Erskine production module located
on the Lomond platform were replaced
in April 2020. The 2020 Forties Pipeline
System maintenance shut-in, planned for
June 2020, was deferred due to COVID-
19 until May 2021. However, the Lomond
offtake facilities and the Erskine field were
shut in for 35 days during Q3 to carry out an
extensive maintenance programme.
The high frequency pigging programme on
the condensate export line has continued
Erskine production levels in 2020
averaged over 2,300 boe/d net to Serica
(2019: 2,700 boe/d) after the planned
35 day maintenance shut-down in Q3.
Full year production reliability in 2020
was slightly above 82%, after exclusion
of the maintenance shut-down, which
was comparable to 2019. The latest
independent report of reserves, compiled
by RISC Advisory, estimated 2P reserves
of 3.1 million boe net to Serica as of
1 January 2021 (2020: 4.1 million boe).
Serica Energy plc Annual Report & Accounts 2020 l 17
Strategic Report REVIEW OF OPERATIONS – DEVELOPMENT
“ Serica has invested in three major
capital projects, all of which have
progressed signficantly during 2020.
Our aim is to expand our portfolio
and our focus is on value.”
Fergus Jenkins
VP Technical
Central North Sea: Columbus Development
Blocks 23/16f and 23/21a (part)
Serica 50% and Operator
Serica is development operator with
partners Tailwind Energy Limited (25%)
and Waldorf Production Limited (25%).
Columbus is located in the Eastern Central
Graben, UK Central North Sea and the
reservoir is located within the Forties
Sandstone. Columbus has been designated
as a development within the Lomond Field
Area; it is however independent of Lomond,
having separate development consent,
export route and licence terms.
The development comprises a single
horizontal well with a subsea completion
connected to the Arran-Shearwater pipeline,
through which Columbus production will be
exported along with Arran field production.
The Arran export pipeline was approved at a
similar time to Columbus and has now been
constructed and laid on the seabed, though
it has not yet been tied into the Shearwater
platform. When production from Arran
and Columbus reaches the Shearwater
facilities, it will be separated into gas which
is exported via the SEGAL line to St Fergus
and liquids which are exported via the
Forties Pipeline System to Cruden Bay.
Columbus development timing is dependent
on the export pipeline being tied into the
Shearwater platform and Arran exports
beginning. Columbus start-up is therefore
expected during the fourth quarter of 2021,
once stabilised production conditions have
been achieved following the Arran field
coming on-line.
The Maersk Resilient heavy-duty jackup
rig was contracted to drill the 23/16f-C1
development well; it arrived on site on
6 March and the well was spudded on
17 March 2021. The well is planned to be
drilled to a total depth of 17,600ft and will
include a 5,600ft horizontal section through
the reservoir. Well operations are expected
to take around 70 days.
After drilling the well, an open-hole sand-
screen completion will be installed and a
short clean-up flow and well test will be
performed to provide production data and
prepare for flowing into the export system.
The well will then be suspended, before
being connected to the Arran-Shearwater
pipeline later in the year. When production
commences, average gross production is
forecast to be around 7,000 boe/d, of which
over 70% will be gas.
The latest independent report of reserves,
compiled by RISC Advisory, estimated 2P
reserves of 7.1 mmboe net to Serica as at
1 January 2021 (2020: 6.7 million boe).
MAERSK RESILIENT
Shearwater A
COLUMBUS EXPORT INFRASTRUCTURE
Shearwater C
Columbus Drill Centre
Arran North
Arran South
Production Pipeline
Electro-Hydraulic Control Umbilical
18 l Serica Energy plc Annual Report & Accounts 2020
REVIEW OF OPERATIONS – EXPLORATION
UK
North Eigg and South Eigg –
Blocks 3/24c and 3/29c
Serica 100% and Operator
In December 2019, Serica was awarded the
P2501 Licence as part of an out of Round
application; this comprises Blocks 3/24c
and 3/29c and contains the North Eigg and
South Eigg prospects. The official start date
for the licence was 1 January 2020. The
work programme involves reprocessing
seismic data and drilling an exploration
well within three years of the start of the
licence. The North Eigg prospect has been
high-graded for drilling, being clearly visible
on 3D seismic data and sharing many
similarities with the nearby Rhum field,
operated by Serica.
Work has started on planning to drill the
exploration well, which is expected to be
high temperature and high pressure, during
the summer of 2022. In the event of a
commercial discovery, Serica would seek a
fast-track route to develop the field, whilst
implementing options that would reduce
emissions. This could potentially be via
a subsea tie-back to the Serica operated
and 98% owned Bruce facilities, which are
to the south of the prospect. This would
bring the benefits of reducing the overall
carbon intensity of the Bruce facilities and
extending the life of the infrastructure.
Columbus West – Block 23/21b
Serica 50%, Operator Summit Exploration
and Production
An extensive work programme was
undertaken to mature the prospectivity on
the licence. Despite this work, stratigraphic
trapping and sealing mechanisms for the
prospects remained elusive and could not
be satisfactorily confirmed.
The seismic data response was also
suggestive of oil rather than gas
accumulations and the economics were
determined not to be favourable for an
oil development, as there was no nearby
tieback host.
Taking current market outlook into
consideration, and the approaching
commitment required to move to the
next phase of the licence which would
have meant relinquishing 50% of the
initial licensed area and committing to
drill a well, the risk-reward ratio related
to proceeding with West Columbus was
not deemed sufficient to proceed with
exploration drilling.
Serica therefore supported the operator’s
recommendation to relinquish the licence.
Skerryvore and Ruvaal– Blocks 30/12c
(part), 30/13c (split), 30/17h, 30/18c and
30/19c (part)
Serica 20%, Operator Parkmead
The Skerryvore and Ruvaal prospects
lie in the Central North Sea, 60km south
of the Erskine field. Over 500 km² of 3D
seismic data has been purchased over the
licence areas. The seismic data is being
reprocessed and will then be interpreted
to enable a drill or drop decision to be
made on the prospects. For a variety of
reasons, delivery of the reprocessed data
was delayed by almost a year during 2020,
so interpretation work is yet to begin; the
operator therefore applied to OGA for an
extension to the initial three-year licence
term and it has now been extended by 12
months to September 2022. Interpretation
will start as soon as data is made available.
Licence Awards in the UK
32nd licensing round
In December 2020 Serica was formally
awarded four new blocks in the UK 32nd
licensing round. Blocks 3/25b, 3/30,
4/26 and 9/5a are in the vicinity of the
Bruce hub and include several leads
which, if successful, could be tied back
to Serica’s existing infrastructure. The
work programme does not include any
commitment wells but is designed to
mature these leads to drill-ready status.
Namibia
Luderitz Basin: Blocks 2512A, 2513A,
2513B and 2612A (part)
Serica 85% and Operator
Serica Energy Namibia B.V. (the Company’s
subsidiary holding interests in Namibia) had
an 85% interest in a Petroleum Agreement
in the Luderitz Basin, offshore Namibia.
Following completion of the initial licence
period which had already been extended
until the end of 2019 whilst partners were
sought to drill an exploration well, Serica
worked with the Ministry of Mines and
Energy to discuss the options of a further
extension or new licence application.
However, due to COVID-19 restrictions,
exceptionally low oil and gas prices, and
market uncertainties, these discussions
were delayed. After further review Serica
then elected not to progress this and made
the decision to withdraw from Namibia
to focus on activities in the UK North Sea
which are nearer to existing infrastructure,
such as drilling North Eigg in 2022 and
working on the 32nd Round licences.
NORTH EIGG EXPLORATION WELL, HIGH GRADED TO DRILL IN 2022
Rhum
Wells
South Eigg Prospect
East Shetland Bounding Fault
Rhum Field
North Eigg Prospect
Serica Energy plc Annual Report & Accounts 2020 l 19
Strategic Report GROUP PROVED PLUS PROBABLE RESERVES (“2P”)
Group Proved plus Probable Reserves (“2P”)
2P Reserves at 31 December 2019
2020 production
Revisions
Oil
mmbbl
14.8
(0.9)
(1.1)
Gas
bcf
Total oil and gas
mmboe
284.7
62.3
(40.8)
45.3
(8.1)
6.8
2P Reserves at 31 December 2020
12.8
289.2
61.0
* Total Group gas reserves at 31 December 2019 and 2020 have been converted to barrels of oil equivalent using a factor of 6.0 bcf per mmboe for reporting
and comparison purposes. As the actual calorific values of gas produced from individual fields varies, reported production rates for each field and the total
production and revisions numbers reported above do not convert precisely.
Group Proved and Probable reserves as at 31 December 2019 were based on the independent report prepared by Lloyd’s Register (“LR”) in
accordance with the reserve definitions guidelines defined in SPE Petroleum Resources Management System 2018 (“PRMS 2018”). LR closed
their consultancy division in 2020 and Serica selected RISC Advisory (“RISC”) to prepare an independent report as at 31 December 2020 using
the same guidelines.
Figures quoted relate to export fluids, so Fuel in Operation (reported in previous reports) is not relevant as it has already been subtracted.
Impacts of COVID-19 meant that some of the planned production enhancement work on Bruce was not carried out in 2020; as this relies on
equipment upgrades which were also delayed, the work cannot be carried out in the short-term and this was reflected in the re-classification
of some volumes from reserves to contingent resources (hence they do not contribute to the figures in the table above). Once this work has
been reinstated in the firm work programme, these volumes will again form part of the 2P reserve.
Additional data from Rhum caused a revision to in-place gas which resulted in a material increase to the recoverable reserve estimate for the
field. This offset much of the Bruce reserves reduction and Serica’s 2020 production.
Aggregate reserves revisions result from several factors, including field production performance in the time between audits and prevailing
commodity prices, which are used for the economic evaluation.
20 l Serica Energy plc Annual Report & Accounts 2020
LICENCE HOLDINGS
The following table summarises the Groupʼs licences as at 31 December 2020.
Licence
Block(s)
Description
Role
%
Location
United Kingdom
P.090
9/9a Bruce
Bruce Field Production
Operator
99%
Northern North Sea
P.090
9/9a Rest of Block excluding
Bruce (REST)
Development
P.198
3/29a (ALL)
Rhum Field Production
P.209
9/8a Bruce
Bruce Field Production
P.209
9/8a Keith
Keith Field Production
P.209
9/8a Rest of Block excluding
Bruce and Keith (REST)
Development
Operator
98%
Northern North Sea
Operator
Operator
Operator
50%
Northern North Sea
98%
Northern North Sea
100% Northern North Sea
Operator
98%
Northern North Sea
P.276
9/9b Bruce
Bruce Field Production
Operator
98%
Northern North Sea
P.276
9/9c (ALL)
Bruce Field Production
Operator
98%
Northern North Sea
P.276
9/9b Rest of Block excluding
Bruce Unit (REST)
Development
Operator
98%
Northern North Sea
P.566
3/29b (ALL)
Rhum Field non-unitised production
Operator
100% Northern North Sea
P.975
3/24b (ALL)
Rhum non-unitised production
P.975
P.101
P.1314
P.57
P.264
P.2400
P.2402
P.2501
P2506*
3/29d (ALL)
Rhum non-unitised production
23/21a Columbus
Columbus Development Area
23/16f
23/26a
23/26b
Columbus Development Area
Erskine Field Production
Erskine Field Production
30/12c, 30/13c, 30/17h,
30/18c
30/19c
3/24c,3/29c
3/25b, 3/30, 4/26, 9/5a
Exploration
Exploration
Exploration
Exploration
* Licence dated 19 January 2021
Operator
Operator
Operator
Operator
Non-operator
Non-operator
100% Northern North Sea
100% Northern North Sea
50%
50%
18%
18%
Central North Sea
Central North Sea
Central North Sea
Central North Sea
Non-operator
20%
Central North Sea
Non-operator
20%
Central North Sea
Operator
Operator
100% Northern North Sea
100% Northern North Sea
Serica Energy plc Annual Report & Accounts 2020 l 21
Strategic Report FINANCIAL REVIEW
“BKR net cash flow sharing, plus gas price
hedging, substantially mitigated the cash
impacts of oil and gas price falls and the
45-day Bruce platform shut-down.”
Andy Bell
VP Finance
Field revenues and costs are booked for
Serica’s full equity interests and included
within gross profits. Under the BKR deals,
amounts are due to the asset vendors for
net cash flow sharing (50% in 2019, 40% in
2020 and 2021) and certain other deferred
payments. Estimates of these amounts
were included within the fair value upon
acquisition and subsequent changes are
included as ‘Change in fair value of BKR
financial liability’ within profit before tax for
each reported period. Such variations are
driven principally by changes in commodity
sales prices and production volumes.
2020 Results
Serica generated a profit before taxation
for 2020 of £12.5 million compared to
£108.8 million for 2019. After non-cash
deferred tax provisions of £4.8 million
(2019: £44.8 million), profit for the year
was £7.8 million compared to £64.0 million
for 2019.
Results for full year 2020 were impacted
by the COVID-19 crisis, which caused
unprecedented falls in both oil and gas
prices, and also by a 45-day shut-down of
the BKR fields early in the year to secure a
damaged caisson on the Bruce platform.
However, the combined effects of the BKR
net cash flow sharing structure and Serica’s
gas price hedging programme mitigated
the cash impact of each substantially. Net
cash flow sharing payments under the BKR
deals were significantly reduced in line with
lower net cash income generated during
the year. In addition, Serica’s gas price
hedging programme effectively fixed prices
for approximately one third of retained
gas sales for 2020 at approximately 39
pence per therm before system fees – well
above market levels. This was of particular
importance during H1 when market prices
averaged below 20 pence per therm.
A particular and somewhat counterintuitive
feature of the strong recovery in gas prices
late in 2020 was that future liabilities,
valued at 31 December on the basis of
forward commodity prices, increased
compared to the 30 June 2020 valuation
with consequent impact upon the income
statement during 2H 2020. These
comprised estimates of the final year of
BKR net cash flow sharing and also the
valuation of our gas price hedging over
2021 and 2022. As Serica retains 60% of
BKR net cash flows in 2021 and 100%
thereafter, it stands to benefit substantially
from increased cash flows arising from
strong commodity prices and this will be
reflected in 2021 cash flow and net income.
Equally, as no more than 25% of Serica’s
projected retained gas production for any
period is hedged, and currently none of its
oil or other liquids, the Company will also
benefit during 2021 and thereafter should
actual commodity pricing prove to be as
strong as the basis used for valuing those
hedge instrument liabilities. Nonetheless,
in view of recent and ongoing volatility in
commodity markets the Company’s strategy
remains to protect commodity pricing for a
proportion of its future production.
The overall impact of this volatile year
was to deliver two distinct periods. In H1,
production interruption and plummeting oil
and gas prices led to net operating cash
flow falling to breakeven levels though
this was then boosted by realised hedging
income and by reduced liability valuations
at 30 June 2020. In H2, stronger production
and strengthening commodity prices,
particularly in Q4, led to greatly improved
net operating cash though this was then
offset by the increased year end liability
provisions described above. Earnings before
interest, tax, depreciation and exploration
(“EBITDAX”) in H1 were £9.6 million and in
H2 were £30.4 million after adjustment for
unrealised hedging losses.
Sales revenues
Total product sales volumes for the year
comprised approximately 386.3 million
therms of gas (2019: 491.3 million therms),
1,002,000 lifted barrels of oil (2019:
1,567,100 barrels) and 71,800 metric tonnes
of NGLs (2019: 85,500 metric tonnes).
Overall, this represented total 2020 product
sales of 22,400 boe/d (2019: 29,300 boe/d)
delivering total revenue of £125.6 million
(2019: £250.5 million). This consisted of
BKR revenues of £108.8 million (2019:
£216.6 million) and Erskine revenues of
£16.8 million (2019: £33.9 million). Average
sales prices net of system fees were 21
pence per therm (2019: 31 pence per
therm), US$42.4 per barrel (2019: US$61.4
per barrel) and £176 per metric tonne
(2019: £266 per metric tonne) respectively
giving a combined realised sales price for
lifted volumes of approximately US$20 per
barrel of oil equivalent (2019: US$30 per
boe). This is before gas price hedging gains
detailed below.
Gross loss
The gross loss for 2020 was £2.9 million
compared to a gross profit of £85.8 million
for 2019. Overall cost of sales of £128.6
million compared to £164.7 million for
2019. This comprised £89.7 million of
operating costs (2019: £105.1 million) and
£38.5 million of non-cash depletion charges
(2019: £52.6 million) plus a £0.3 million
charge representing a reduction during
the year of the opening liquids underlift
position (2019: £7.0 million). Reductions
in both operating costs and depletion
charges reflected lower production
volumes plus other operating cost savings,
whilst depletion charges were further
reduced by an increase in remaining field
reserves. Operating costs comprise costs
of production, processing, transportation
and insurance and averaged approximately
US$14.12 per boe (2019: US$12.6). An
22 l Serica Energy plc Annual Report & Accounts 2020
overall reduction in operating costs was
achieved despite exceptional expenditures
on Bruce caisson repairs and represented a
reduction in underlying costs of some 10%.
The increase in operating costs per barrel
for the year reflected lower production
volumes arising from the caisson shut-
down whilst the fixed element of operating
costs continued to be incurred and does not
reflect an increase in the underlying trend.
Overall, despite the unprecedented fall in
oil and gas sales prices and the loss of 45
days of BKR production, sales revenues for
the year plus cash hedging gains covered
cash operating costs for the year one and a
half times over.
Operating loss before BKR fair value
adjustment, net finance revenue, and tax
The operating loss for 2020 was
£18.7 million compared to a profit of
£87.7 million for 2019. This included
£4.3 million of other expense from net
commodity price hedging losses (2019: gain
of £10.6 million). Realised hedging gains of
£12.3 million (2019: £3.9 million) were more
than offset by unrealised hedging losses of
£16.6 million (2019: gains of £6.7 million).
The unrealised losses reflected the surge in
future gas prices at the close of 2020 and
will only become fully realised should actual
prices for 2021 and 2022 reach those
levels. Overall, cash hedging gains realised
during 2020 represented approximately
US$3 per boe based upon retained volumes
after adjustment for BKR cash flow sharing.
E&E asset write-offs of £3.7 million (2019:
£0.1 million) principally represented the
write-off of exploration costs following
expiry of Serica’s Namibian licence.
Administrative expenses of £5.6 million
compared to £6.0 million for 2019 whilst
share-based payments were £1.9 million
(2019: £1.1 million) and currency losses
were £0.3 million (2019: £1.0 million) largely
arising on US$ holdings.
Profit before taxation and profit for
the year
Profit before taxation was £12.5 million
(2019: £108.8 million) after a gain in the
fair value of the BKR financial liability
of £31.3 million (2019: £21.8 million)
and negligible net finance costs (2019:
£0.7 million). Net finance costs represent
the discount unwind on decommissioning
provisions less interest earned on
cash deposits.
The fair value gain of £31.3 million arose
following a downwards revision of the fair
value of the balance sheet financial liability
relating to consideration projected to be
paid under the BKR agreements. The fair
value of this liability is re-assessed at each
financial period end. The most significant
factors behind the downward revision in fair
value in the year are the impact of lower
production volumes and realised gas pricing
on net cash flow payments in respect
of 2020.
The 2020 taxation charge of £4.8 million
(2019: £44.8 million) solely comprised
a non-cash deferred tax element. As
the Company continues to benefit from
accumulated losses carried forward from
previous years it is not currently paying
cash taxes. It is nonetheless required
to make provision for deferred taxes
in recognition of future periods when
all losses have been utilised and cash
payments will commence.
Overall, this generated a profit after
taxation for 2020 of £7.8 million compared
to a profit after taxation of £64.0 million
for 2019.
Group Balance Sheet
The balance sheet at 31 December 2020
demonstrates Serica’s resilience during
this turbulent year. This has allowed the
Company to fund its significant capital
expenditures on Columbus development
and Rhum R3 well work from its cash
resources without recourse to borrowing
and also to pay its maiden cash dividend of
£8.0 million.
A reduction in exploration and evaluation
assets from £3.7 million in 2019 to
£1.0 million at 31 December 2020 reflected
a £3.7 million write-off of past expenditures
(including £3.5 million from Namibia)
following licence relinquishment partially
offset by £1.0 million of new expenditure on
UK licences during 2020.
Total property, plant and equipment
decreased from £325.4 million at year end
2019 to £311.1 million at 31 December
2020 after depletion charges for 2020 of
£38.5 million (2019: £52.6 million), asset
revisions of £1.1 million (2019: £0.6 million)
and other charges of £0.2 million (2019:
£0.2 million) partly offset by capital
expenditure on Columbus and Rhum during
2020 of £25.5 million (2019: Columbus
£4.5 million, other £0.2 million). Depletion
charges represent the allocation of field
capital costs over the estimated producing
life of each field and principally comprise
costs of asset acquisitions.
An inventories balance of £4.6 million at
31 December 2020 showed little change
from £4.7 million at the end of 2019. An
increase in trade and other receivables
from £35.9 million at the end of 2019 to
£41.3 million at 31 December 2020 largely
reflected higher prices for December gas
sales plus increased capital expenditure
amounts recoverable from field partners.
The derivative financial asset of £6.9 million
at year end 2019 had become a derivative
financial liability of £9.7 million at
31 December 2020. This represents the
valuation of gas price hedges in place
at the respective year ends and the
consequent amounts projected to be either
due or payable based upon futures pricing
prevailing at those points. Year end 2020
reflected particularly strong futures pricing
which, should it be realised, would deliver
greatly increased gas sales revenues during
2021 and 2022.
The reduction in cash balances from
£101.8 million at 31 December 2019
to £89.3 million at 31 December 2020
reflected cash flow from operations offset
by both the significant capital expenditures
of £25.5 million and also the payment of a
£8.0 million dividend during the year.
The increase in current trade and other
payables to £31.1 million at 31 December
2020 from £24.6 million at the end of 2019
arose largely due to a high level of accruals
related to the Rhum R3 well work.
A final cash dividend for 2019 of 3 pence
per share (2018: nil) was proposed in April
2020 and approved at the annual general
meeting on 25 June 2020. The dividend was
paid in July 2020.
Current financial liabilities of £53.6 million
(31 December 2019: £45.4 million) and non-
current financial liabilities of £48.8 million
(31 December 2019: £110.1 million)
comprise total remaining amounts
projected to be paid under the BKR
acquisition agreements.
The current liability comprises amounts
estimated to fall due over the final twelve
months of the net cash flow sharing
arrangements, a fixed payment of
£16 million contingent upon the outcome
of the Rhum R3 well work and contingent
consideration in respect of Rhum field
performance during 2021. Amounts
Serica Energy plc Annual Report & Accounts 2020 l 23
Strategic Report FINANCIAL REVIEW continued
due under the net cash flow sharing
arrangements are based on forward
projections of production volumes and
sales prices. Subsequent payments will
be calculated on volumes and prices
actually achieved in 2021. The non-current
liability comprises deferred consideration
in respect of BKR decommissioning and
oil linefill. Under arrangements for those
BKR field interests acquired from BP,
Total E&P and BHP, 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.
The overall reduction in financial liabilities of
£53.1 million during 2020 comprised cash
amounts of £21.8 million paid in the period
and £31.3 million released through the
income statement. This release arose due
to lower than previously forecast net cash
flow sharing payments in respect of 2020
partially offset by a re-assessment of the
estimated fair value of projected remaining
payments as at 31 December 2020.
Non-current provisions of £22.8 million have
been made in respect of decommissioning
liabilities for the Bruce and Keith interests
acquired from Marubeni (31 December
2019: £22.6 million). These were not
subject to the same deferred consideration
arrangements as applied for those field
interests acquired from BP, Total E&P and
BHP described above. No provision is
included for decommissioning liabilities
related to the Erskine facilities as these
liabilities are retained by BP up to a cap
which is not projected to be exceeded.
The deferred tax liability of £80.6 million
at 31 December 2020 has increased
from £75.8 million at year end 2019 and
reflects accounting provisions expected
to be released against future tax charges
once the Group’s tax losses have been
fully utilised.
Overall, net assets have increased from
£198.0 million at year end 2019 to
£199.8 million at 31 December 2020 after
payment of £8.0 in dividends.
The increase in share capital from
£181.4 million to £181.6 million arose from
shares issued following the exercise of
share options and shares issued under an
employee share scheme, whilst the increase
in other reserves from £17.8 million to
£19.7 million arose from share-based
payments related to share option awards.
Cash Balances and Future
Commitments
Current cash position and price hedging
At 31 December 2020 the Group held cash
and cash equivalents of £89.3 million
(2019: £101.8 million). This is after capital
investments during the year of £26.6 million
and dividend payments of £8.0 million plus
monthly net cash flow sharing payments
and other BKR consideration totalling
£11.4 million and £10.4 million respectively.
Amounts due under the net cash flow
sharing arrangements have fallen from 50%
of BKR net operating cash flows for 2019
to 40% for 2020. This leaves one more
year of payments at 40% and then zero
thereafter. The £12.1 million of total cash
and cash equivalents held in a restricted
account against letters of credit issued
in respect of certain decommissioning
liabilities as at 31 December 2020 (2019:
£12.1 million) was reduced to £6.4 million
effective 1 January 2021 due to an upgrade
in reserves and further extension of BKR
field life.
At 31 December 2020 Serica held gas
price swaps covering 167,000 therms
per day for H1 2021 and 192,000 therms
per day for H2 2021 at average prices
of 37 pence per therm and 36 pence per
therm respectively. It further held gas price
swaps covering 200,000 therms per day
for H1 2022 and 50,000 therms per day for
H2 2022 at average prices of 40 pence per
therm and 37 pence per therm respectively.
At 31 December 2020 a cash margin call
of £1.8 million had been paid to a hedge
counterparty as security against settlement
of future hedge instruments (2019: nil).
In 2021 to date, Serica has obtained
additional gas price swaps covering 50,000
therms per day for H1 2022, 100,000
therms per day for H2 2022 and 50,000
therms per day for Q1 2023 at average
prices of 46, 41 and 50 pence per therm
respectively.
Following onset of the COVID-19 crisis in
March last year, cash projections were run
to examine the potential impact of extended
low oil and gas prices as well as possible
production interruptions and the situation
was kept under review thereafter. Some
80% of Serica’s production is gas with
exposure to price falls partially mitigated
by price hedging now extending up to
Q1 2023. The BKR net cash flow sharing
arrangements and structuring of elements
of Rhum deferred consideration further
mitigate the impact of low sales prices
and any production interruptions upon net
income to end 2021. This allied to the fact
that Serica currently has substantial cash
resources, no borrowings and relatively low
operating costs per boe means that the
Company is well placed to withstand such
risks and its capital commitments can be
funded from existing cash resources.
Field and other capital commitments
There are no existing capital commitments
on the Erskine producing field and net
production revenues are expected to cover
all ongoing field expenditures. Serica’s share
of decommissioning costs relating to its
18% Erskine field interest will be met by BP
up to a level of £31.3 million, adjusted for
inflation, and Serica’s current estimate of
such costs is below this level.
There are no significant existing capital
commitments on the BKR producing fields
other than an estimated £11 million net to
Serica outstanding at 31 December 2020
on the Rhum R3 well work, expected to
be completed during Q2 2021. Potential
further programmes to enhance current
production profiles and extend field life are
under consideration. Net revenues from
Serica’s share of income from the BKR
fields, after net cash flow sharing payments,
is expected to cover Serica’s retained share
of ongoing field expenditures as well as
other contingent or deferred consideration
due under the respective BKR acquisition
agreements set out below.
The Columbus development is underway
with first gas expected in Q4 2021. Total
development expenditure net to Serica’s
share outstanding at 31 December 2020 is
estimated at approximately £15 million.
The Group has no significant exploration
commitments apart from a well on
the North Eigg prospect to be drilled
within three years of the 1 January 2020
licence award.
BKR asset acquisitions
On 30 November 2018 Serica completed
the four BKR acquisitions. The following
elements of consideration were outstanding
at 31 December 2020:
•
A contingent payment of £16.0 million
is due to BP Exploration Operating
Company (“BPEOC”) upon bringing the
Rhum R3 well onto production and
achieving a minimum cumulative 90
days of gas production at a defined level.
24 l Serica Energy plc Annual Report & Accounts 2020
•
•
•
A contingent payment of up to £7.7 million is due to BPEOC
based upon Rhum 2021 average field production and commodity
sales prices in the year. The payment made in respect of 2019
was £2.6 million whilst the payment calculated in respect of
2020 and made in Q1 2021 was £1.0 million. There will be a final
calculation of the combined average performance covering years
2019 to 2021 and applied to the total potential consideration for
the three years of up to £23.1 million. Any difference between
this calculation and cumulative payments to-date will then
be settled.
In addition, Serica will pay contingent cash consideration to
BPEOC, Total E&P and BHP calculated as 40% of 2021 net cash
flows resulting from the respective field interests acquired from
those companies. Such amounts will be paid by Serica pre-tax
on a monthly basis and then offset by Serica against its own
tax liabilities.
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 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. Staged prepayments against such projected amounts
will commence in 2022 and be spread over the remaining years
before cessation of field production.
•
Serica will pay to each of BP, Total E&P and BHP, deferred
consideration equal to 90% of their respective shares of the
realised value of oil in the Bruce pipeline at the end of field life.
Other
Asset values and impairment
At 31 December 2020, Serica’s market capitalisation stood at £308.0
million based upon a share price of 115 pence which exceeded the
net asset value of £199.8 million. By 13 April the Company’s market
capitalisation has risen to £320.5 million.
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.
Following completion of the four BKR acquisitions in 2018, Serica
has built 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 mitigate
the impact of deferred or lost revenues over sustained periods of
production shut-in beyond an initial 60 days, where caused by events
covered under such policies. The Company also uses price hedging
instruments to help manage field revenues and will continue to seek
cost effective opportunities to add to its existing hedge position.
These currently cover up to 25% of the Company’s retained share of
projected 2021 and 2022 gas production.
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 capable of 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
Stock market support may be eroded lowering investor appetite
and obstructing fundraising
Each investment carries its own risk profile and no outcome can
be certain
•
•
•
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 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
• The Company seeks to diversify its revenue streams
•
Management determines and retains an appropriate level of
working capital
• Business interruption cover is carried when cost effective
Third party offtake routes may experience restrictions or
interruptions and full availability may depend upon sustained
production from other fields in the system
•
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
Serica Energy plc Annual Report & Accounts 2020 l 25
Strategic Report FINANCIAL REVIEW continued
The Company is reliant upon its IT systems to maintain
operations and communications
• The Group employs specialist support
•
Protection against external intrusion is incorporated within the system
and tested regularly
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
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 and licences are
required to be renewed periodically
The UKCS licensing regime under which Serica’s operational
rights and obligations are defined may be subject to
future change
Volatile commodity prices mean that the Group cannot be certain
of the future sales value of its products
•
•
•
•
An OFAC License has been obtained which has enabled continuing
production from Rhum
Serica initiates the renewal process well in advance of the specified
date
Management maintains regular communication with regulatory
authorities
The Company aligns its standards and objectives with government
policies as closely as possible
• 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
COVID-19: The impact of the virus has significantly affected the majority of global activities and markets. The full extent and duration of the
crisis remains uncertain
Risk
Mitigation
The Company’s personnel may be at risk from catching the virus
The spread of infection and associated counter measures may
interrupt offshore operations
The continued operation of Serica’s fields may be adversely
affected by interruptions to operations of fields and
infrastructure downstream
•
•
•
•
•
•
The Company has instituted recommended safe practices and will
maintain these as necessary
Serica has instituted a programme of working from home where
feasible and temporarily closed its London and Aberdeen offices
The Company has reduced the number of staff working offshore to a
safe minimum
Management encourages safe practices travelling to and from the
platform and mandates additional precautions whilst offshore
Serica carries a working capital reserve to cover such eventualities
Serica works with the regulatory bodies and infrastructure owners to
identify and mitigate any such risks
26 l Serica Energy plc Annual Report & Accounts 2020
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.
ESG performance is tracked through the
following KPI’s whose progress is covered
within the ESG Report to be issued along
with the 2020 Annual Report:
• Carbon intensity
• Flare volumes
• Workforce engagement in ESG
• Waste volumes generated
• Diversity of personnel
Elements falling within each of the above
categories are included within annual
incentive schemes for all Group employees.
The Company tracks its new business
development objectives through the building
of a risk-balanced portfolio of full cycle
assets. Specific KPI’s are not applied due to
the range of different potential acquisition
targets. However, successful delivery will
add to future production volumes and net
realised income.
Further information upon the Company’s
HSE and ESG policies and delivery can
be found in an updated ESG Report
which will be issued along with the 2020
Annual Report.
Section 172 statement
The Directors’ statement under Section 172
of the Companies Act 2006 is included on
pages 44 and 45.
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
14 April 2021
ESG strategy and risk management
Details of ESG strategies directed
towards reducing carbon emissions and
contributing to government Net Zero targets
are described on page 12 and also in a
separate ESG Report which will be issued
in conjunction with publication of the 2020
Annual Report.
Serica has reviewed guidance issued by
the Task Force on Climate-related Financial
Disclosures (“TCFD”) with regard to the
identification, management and reporting
of climate-related financial risks. The
Company is in the process of developing its
capabilities to report under TCFD guidance.
Management considers climate-related
strategic and financial risks in both its
existing asset portfolio and future business
growth including potential acquisitions.
This includes consideration of the potential
impact of both transition and physical risks.
Key Performance Indicators (“KPIs”)
The Company’s main business is the
acquisition, development and production of
commercially attractive oil and gas reserves
in a safe and environmentally sensitive
manner. This is achieved both through
pursuing the full cycle of exploration,
discovery, development and production and
also through acquiring existing reserves
where management believe that further
value can be added.
Operational and financial performance is
tracked through the following KPI’s whose
progress is covered within the Review of
Operations and Finance Review within this
strategic report:
• Daily production volumes
•
•
Production costs per barrel of oil
equivalent
Realised sales income per barrel of oil
equivalent
HSE performance is tracked through the
following KPI’s whose progress is covered
within the ESG Report to be issued along
with the 2020 Annual Report:
• Recordable incidents and injuries
• Workforce engagement in HSE
• Quality of discharges to air and water
Serica Energy plc Annual Report & Accounts 2020 l 27
Strategic Report BOARD OF DIRECTORS
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 and becomes a leading
producer and operator.
COMMITTEES Reserves Committee,
Health Safety & Environmental Committee
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.
COMMITTEES Nomination & Corporate
Governance Committee
Neil Pike
Non-Executive Director and Senior
Independent Director
Appointed: 2004
Neil Pike, the 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.
COMMITTEES Audit Committee (Chair),
Remuneration Committee, Nomination &
Corporate Governance Committee
Good governance depends on strong
and effective leadership and a healthy
corporate culture.
28 l Serica Energy plc Annual Report & Accounts 2020
Kate Coppinger
Non-Executive Director
Appointed: April 2020
Trevor Garlick
Non-Executive Director
Appointed: 2018
Kate Coppinger, Non-Executive Director joined the Board on 22
April 2020. Ms. Coppinger has over 20 years’ investment banking,
Ms Coppinger’s career includes roles at Canadian Imperial Bank of
Commerce, Harrison Lovegrove and most recently as Managing
Director at Standard Chartered in the Oil and Gas team responsible
for origination and execution of transactions for European clients.
Her global transaction experience spans Asia through to South
America with particular emphasis on the North Sea.
COMMITTEES Audit Committee
Trevor William Garlick, Non-Executive Director, joined the Board
on 30 November 2018, on completion of the BKR transaction. Mr
Garlick spent most of his career in BP where he worked for 30
years, latterly as Regional President of UK / Norway from 2010 until
retirement in 2016. Mr Garlick is a director of Opportunity North
East Limited (O.N.E Energy Chair) and Vice-Chair of the Oil & Gas
Technology Centre – OGTC. He chairs the Company’s Health, Safety
and Environmental Committee and the Reserves Committee.
COMMITTEES Health Safety & Environmental Committee (Chair),
Reserves Committee (Chair) and Audit Committee
Ian Vann
Non-Executive Director
Appointed: 2007
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.
Malcolm Webb, Non-Executive Director, joined the Board on 30
November 2018, on completion of the BKR transaction. Mr Webb
started his career with Burmah Oil Company in 1974 as a company
legal adviser. Between 1986 and 1999, Mr Webb worked in the
Petrofina SA Group in various senior management roles. In 2001,
Mr Webb was appointed Director General of the UK Petroleum
Industry Association and in 2004 he joined Oil & Gas UK as Chief
Executive, from which post he retired in 2015. 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 Nomination and Corporate Governance Committee.
COMMITTEES Remuneration Committee (Chair), Health
Safety & Environmental Committee, Audit Committee and
Reserves Committee
COMMITTEES Nomination & Corporate Governance Committee
(Chair) and Remuneration Committee
Serica Energy plc Annual Report & Accounts 2020 l 29
Corporate Governance 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 2020.
Principal Activities
Employee Engagement
Events Since Balance Sheet Date
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.
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).
Information regarding Serica’s engagement
with employees is included in the Directors’
statement under Section 172 of the
Companies Act 2006 on pages 44 and 45.
Results and Dividends
The profit for the year was £7,779,000
(2019: £64,020,000).
The Directors are recommending the
payment of a final dividend by the Company
of 3.5 pence per share for the year to
31 December 2020, see note 13 (2019: 3
pence per share).
Financial Instruments
The Group’s financial risk management
objectives and policies are discussed in
note 24.
Antony Craven Walker¹
Neil Pike²
Ian Vann
Mitch Flegg
Malcolm Webb
Trevor Garlick
Kate Coppinger
Class
of share
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Events since the balance sheet date are
included in Note 31.
Directors and their Interests
The following Directors have held office in
the Company since 1 January 2020 to the
date of this report:
Antony Craven Walker
Neil Pike
Ian Vann
Mitch Flegg
Trevor Garlick
Malcolm Webb
Kate Coppinger (appointed 22 April 2020)
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:
Interest at
end of year
7,357,694
320,000
267,935
184,445
64,506
–
–
Interest at
start of year (or date of
appointment if later)
7,357,694
505,000
267,935
184,445
44,681
–
–
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.
None of the Directors who held office at the end of the financial year had any disclosable interest in the shares of other Group companies.
No rights to subscribe for shares in or debentures of Group companies were granted to any of the Directors or their immediate families, or
exercised by them, during the financial year except as indicated below:
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 27 to the Financial Statements. Details of share awards made during 2020 and up to 13 April 2021 under the Serica
Energy plc Long Term Incentive Plan (the “LTIP”) are also included in note 27.
30 l Serica Energy plc Annual Report & Accounts 2020
Greenhouse Gas Emissions (“GHG”)
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 they are obliged to take
as a director in order to make themselves
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
14 April 2021
As part of our GRI reporting, we provide
a detailed data book of our Scope 1
emissions for 2020 compared to 2019
in our 2020 ESG report, which will be
released with our published annual report.
The Company does not own any vehicles
and so our Scope 1 emissions are those
generated by the Serica operated Bruce
facilities to provide power and compression
to produce and export oil and gas from the
Bruce, Keith and Rhum fields. This includes
fuel gas usage, diesel, flared and vented
gas. The Bruce facilities qualified for the
EU Emissions Trading Scheme and so our
emissions are reported, audited and verified
based on this scheme. In 2020 our EUETS
emissions were 214,425 tonnes of CO2,
compared to 241,503 tonnes in 2019. Part
of this reduction was down to our efforts
to reduce our gas flaring which resulted
in a 45% drop due to operational changes
and equipment maintenance. Energy
consumption on Bruce in 2020 was around
950 GWh compared to 1,120 GWh in 2019.
Carbon intensity, which is CO2 emissions
divided by production, increased slightly
due to lower production volumes in 2020
when the platform was shut in for 45 days.
Carbon intensity was 18.3 kg CO2/boe in
2020 compared to 16.7 kg CO2/boe in 2019.
The carbon intensity target for 2021 is
17.0 kg CO2/boe.
As well as flare reduction, other initiatives
to reduce our emissions on Bruce
included energy efficiency assessment
surveys offshore, the formation of a multi-
disciplinary emissions reduction group,
greater monitoring of flare and fuel usage,
technology assessments and changes to
our supply chain processes.
Our electricity usage in our Aberdeen
operations headquarters reduced by 35% in
2020 due to remote working necessitated
by COVID-19 restrictions, 13,476 kg of
CO2e for 2020 compared to 20,667 kg in
2019. Our London office emissions were
2,578kg of CO2e compared to 4,210 kg in
2019, a 40% reduction. CO2e was calculated
using the UK Government GHG Conversion
Factors for Company Reporting for 2020
issued by BEIS and DEFRA.The 2020 ESG
report will provide more detail on our
emission reduction activities and statistics
as well as our plans for 2021.
Serica Energy plc Annual Report & Accounts 2020 l 31
Corporate Governance CORPORATE GOVERNANCE STATEMENT
Chairman’s Corporate Governance Statement:
The corporate governance section of
our report explains how the Company’s
governance framework supports the
principles of integrity, strong ethical
values and professionalism integral to our
business. As Executive Chairman of the
Company, it is my responsibility to work
with my fellow Board members to ensure
that the Company embraces corporate
governance and delivers the highest
standards we can. It is within my role to
manage the Board in the best interests of
our many stakeholders. As we said last
year, as a Board we believe that practicing
good corporate governance is essential
for building a successful and sustainable
business. Good governance depends
on strong and effective leadership and
a healthy corporate culture, supported
by robust systems and processes
and a good understanding of risk. The
Board has a comprehensive corporate
governance framework, with clearly defined
responsibilities and accountabilities to
safeguard long-term shareholder value.
This report, together with the reports
of the Audit, Nomination & Corporate
Governance, Remuneration and Health,
Safety & Environmental Committees, seeks
to demonstrate our commitment to high
standards of governance.
The Company adopts the Quoted
Companies Alliance Corporate Governance
Code 2018 (the ‘QCA Code’) which it
believes to be the most appropriate
recognised corporate governance code for
the Company. The QCA has ten principles
which the Company is required to adhere
to and to make certain disclosures both
within this report and on its website. The
Company’s website disclosures can be
found at www.serica-energy.com.
2020 has been a particularly challenging
year, with the COVID-19 pandemic having
an impact on economies and businesses
across the globe. The importance of
a united Board working to ensure that
the Company continues to deliver for
its shareholders whilst maintaining high
standards of employee welfare, safety,
corporate governance and commitment to
environmental issues is imperative to the
continuing success of the business.
The importance of maintaining strong
relationships and engaging with our
shareholders continues and underpins
the success of the business. The Board
strives to ensure that there are numerous
opportunities for investors to engage with
both the Board and Executive Directors. Due
to COVID-19 the Company’s 2020 Annual
General Meeting was held as a closed
meeting and shareholders were encouraged
to ask questions via the online Q&A session
following the meeting. The Executive
Directors were available to meet with
shareholders and analysts on-line following
the Company’s interim and final results.
32 l Serica Energy plc Annual Report & Accounts 2020
The QCA Code has ten principles of corporate governance that the Company has committed to apply within the foundations of the business.
These principles are:
Principles
Serica Response
Establish a strategy and business model which promote long-term
value for shareholders
Seek to understand and meet shareholder needs and expectations.
Take into account wider stakeholder and social responsibilities and
their implications for long-term success
Embed effective risk management, considering both opportunities
and threats, throughout the organisation
The Company operates in a sector that is exposed to political,
operational, commercial, product pricing and hazard risks.
Its strategy is to manage risks, financial capacity and growth
opportunities through an active programme of acquisition and
divestment to balance risk and potential whilst optimising operating
costs and procedures to improve performance and identifying
new technologies that can enhance value. The Company seeks
a forward looking, professional and safety conscious culture
in all that it does to provide an environment for the benefit of
all stakeholders.
The Company engages with shareholders at the Annual General
Meeting and after the announcements of interim and final results.
It also regularly presents at investor events. During 2020, the
Company engaged as best as possible with stakeholders through
online forums.
The Company seeks to be a responsible corporate citizen in all its
areas of operation and is committed to maintaining a high standard
of corporate governance.
The Company publishes an Environmental, Social and Governance
Report. There are also further details on pages 12 and 13 of
this report.
The Company has an effective risk management framework, which
is subject to oversight by the Audit Committee. See further details
on page 38.
Maintain the Board as a well-functioning balanced team led by
the Chair
Refer to further discussion of the Board structure and composition
on page 34.
Ensure that between them the Directors have the necessary up-to-
date experience, skills and capabilities
The complementary skills and experience of our Board and
Executive Management team are included on pages 28 and 29.
Evaluate Board performance based on clear and relevant objectives,
seeking continuous improvement
Refer to discussion of Board evaluation on page 35.
Promote a corporate culture that is based on ethical values
and behaviours
The Company has a zero-tolerance approach to bribery and
corruption and has an Anti-Bribery Policy in place to protect the
Company, its employees and those third parties with which the
business engages. Employees have each partaken in Anti-Bribery
training and assessment.
Maintain governance structures and processes that are fit for
purpose and support good decision-making by the Board
Refer to further discussion of the Company’s governance
structures, including matters reserved for the Board, on page 35.
Communicate how the Company is governed and is performing
by maintaining a dialogue with shareholders and other relevant
stakeholders
The Company’s financial and operational performance is
summarised in the Annual Report and the Interim Report, with
regular updates provided to stakeholders in other forums through
the year, including press releases and regular updates to the
Company’s website.
Serica Energy plc Annual Report & Accounts 2020 l 33
Corporate Governance Board Committees and Structure
The Board has five Committees as
follows: Nomination & Corporate
Governance Committee, Audit Committee,
Reserves Committee, Health, Safety
and Environmental Committee and
Remuneration Committee. All Committees
operate under clearly defined terms of
reference to ensure proper functioning
and effective application of best practice.
Committees are required to report back to
the Board following a Committee meeting.
More detailed information of each
Committee can be found on pages 37 to 41.
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 is
evaluated on a regular basis.
CORPORATE GOVERNANCE FRAMEWORK
Governance Structure
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 ultimate accountability
for good governance and maintains 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.
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 Board has
five independent Non-Executive Directors
to bring an independent view to the Board
one of whom (Neil Pike) acts as Senior
Independent Director. The Chairman has
the responsibility of ensuring that the
Board discharges its responsibilities and
is also responsible for facilitating full and
constructive contributions from each
member of the Board in determination of
the Group’s strategy and overall commercial
objectives. 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 embraces equal opportunity,
diversity, social responsibility, safety and
commitment to the environment and
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 adopted a code of
dealings in securities which the Board
regards as appropriate for an AIM listed
company and is compliant with the UK
Market Abuse Regulations. The Company
takes all reasonable steps to ensure
compliance by the Directors, employees and
agents with the provisions of the AIM rules
relating to dealings in securities.
The Directors acknowledge the importance
of ensuring that the Company, its
employees and those third parties with
which the business engages are operating
within the requirements of the Bribery
Act. 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 adopted by
the Company to ensure that all employees
and the Board are compliant with the anti-
bribery policy.
Board Composition
As at 31 December 2020, the Board of
the Company consisted of the Executive
Chairman, the Chief Executive Officer and
five independent Non-Executive Directors.
Neil Pike, as the senior independent Non-
Executive director, along with the other
Non-Executive Directors ensure the Board
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.
34 l Serica Energy plc Annual Report & Accounts 2020
BOARD EVALUATION/REVIEW OF THE BOARD’S EFFECTIVENESS
The Board considers that its effectiveness
and the individual performance of its
directors is vital to the success of the
Company.
It was 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, a formal
Board evaluation process was required.
During 2020, the Company conducted
a full formal Board evaluation. As part
of the process, Directors were asked to
evaluate the Board structure, dynamics
and functioning, Corporate Governance
and Internal Controls & Risk Management.
The Board discussed the results in detail
and have made some changes where
deemed necessary, such as providing an
increased focus on more strategic and
risk-led matters in addition to important
technical and operational matters during
Board meetings and it was agreed that
holding non-executive director meetings on
a regular basis was an important part of the
governance process.
There is a strong flow of communication
between the Directors, and in particular
between the Chief Executive Officer
and Chairman, with consideration being
given to the strategic and operational
needs of the business. Comprehensive
board papers are circulated in advance
of meetings, giving Directors due time to
review the documentation and enabling an
effective meeting. Minutes are drawn up to
reflect the true record of the discussions
and decisions made. Resulting actions
are tracked for appropriate delivery and
follow up.
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 (Nomad),
auditors and solicitors as and when
required. The Company’s Nomad provides
annual board room training. 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 Company Secretary helps keep the
Board up to date with developments in
corporate governance and liaises with the
Nomad on areas of AIM requirements.
The Company Secretary has frequent
communication with the Chairman,
Chief Executive Officer and chairs of the
Committees and is available to other
members of the Board as required. 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 and diversity planning
when making Board changes and is
actively putting this in place with a new
appointment already made in 2020 and
further appointments expected to take
place in parallel with Board retirements.
The Nomination & Corporate Governance
Committee regularly monitors the
requirements for succession planning
and Board appointments to ensure that
the Board is fit for purpose and keeps
pace with the evolution of the Company. If
assistance with recruitment is required by
the Committee, this will be made available.
The Nomination & Corporate Governance
Committee is mindful of the Board’s
performance and composition together with
the performance of individual Directors and
senior management.
Matters Reserved for the Board
The Board retains full and effective control
over the Company and is responsible for
the Company’s strategy and key financial
and compliance issues. There are certain
matters that are reserved for the Board and
they include but are not limited to:
Strategy and Management
Approval of: long-term objectives;
commercial strategic aims; annual
operating and capital expenditure budgets;
extending the Company’s activities into
new business; any decision to cease to
operate all or any material part of the
Company’s business.
Structure and Capital
Capital structure; major changes to the
Company’s corporate structure; changes
to the management and control structure;
change to the Company’s listing; alteration
of the Company’s articles of association;
change in the Company’s accounting
reference date, registered name or
business name.
Financial Reporting and Controls
Approval of: finance reports; interim
management statements and any other
preliminary announcement of the final
results; annual reports and accounts;
dividend policy and declaration of any
dividend and significant changes in
accounting policies/practice.
Internal Controls
Ensuring maintenance of a sound system
of internal control and risk management
including regular risk review.
Finance
Raising new capital and confirmation of
major financing facilities; recommendation
of dividends; operating and capital
expenditure budgets; granting of security
over any material Company asset; financial
stress testing.
Contracts
All contracts above £3m; major capital
contracts over £3m; contracts which are
material or strategic; contracts outside of
the approved budget and not in the ordinary
course of business; major investments or
any acquisitions/disposals and transactions
with Directors or other related parties which
are not in the ordinary course of business.
Communications
Approval of resolutions and documentation
put forward to shareholders; approval
of circulars, prospectuses and listing
particulars and approval of press releases
concerning matters decided by the Board.
Board membership and other
appointments
Director and senior management
appointments and the Company’s
succession planning is evaluated on a
regular basis commensurate with good
corporate governance practice on diversity,
experience and skills and the evolving
needs of the Company.
Remuneration
Determining the remuneration policy for
the Executive Directors, senior executives
and all staff and the remuneration of the
Non-Executive Directors. Introduction of
new share incentive plans or major changes
to existing plans, to be put to shareholders
for approval.
Delegation of Authority
Division of responsibilities between
the Chairman, the Chief Executive and
Executive Directors; delegated levels of
authority, including the Chief Executive’s
authority limits; establishment of Board
Committees and approval of terms of
reference of Board Committees.
Corporate Governance Matters
Review of the Company’s overall corporate
governance arrangements.
Serica Energy plc Annual Report & Accounts 2020 l 35
Corporate Governance BOARD EVALUATION/REVIEW OF THE BOARD’S EFFECTIVENESS continued
Other
Policies including the share dealing code;
appointment or change of the Company’s
principal professional advisers and auditors;
overall levels of insurance for the Company;
material litigation; any decision likely to have
a material impact on the Group or Company
from any perspective including, but not
limited to, financial, operational, strategic
or reputational; matters reserved for Board
decisions and which the Board considers
suitable for delegation are contained in the
terms of reference of its Committees; and
the grant of options, warrants or any other
form of security convertible into shares.
Directors’ attendance at meetings
The Board generally has one scheduled
Board meeting every month over the course
of the financial year other than the month
of December with informal discussions and
additional Board meetings scheduled as
required. From March – December 2020, all
Board meetings were held virtually via video
conference. 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. As COVID-19 restrictions
on meetings made it impossible for the
Non-Executive Directors to meet in person
during 2020 the Senior Independent
Director instead held a series of telephone
conference calls with Non-Executive
Directors.
The Directors’ attendance at Board
meetings and Board committees during
2020 is detailed in the table below:
Director
A Craven Walker
(Chairman of the Board)
N Pike
I Vann
M Flegg
M Webb
T Garlick
K Coppinger**
Total meetings
Notes:
Board
12*
12
12
12
12
12
7
12
Audit
Remuneration
Nomination
& Corporate
Governance
HSE
Reserves
3†
6*
6
2†
–
6
3
6
1†
4
4*
4†
4
–
–
4
3
3
–
1†
3*
–
–
3
–
–
4
4
–
4*
–
4
–
–
1
–
–
1*
–
1
The Chairman, Chief Executive Officer and Non-Executive Directors attended a number of meetings of Committees of which they were not members during the
course of the year at the invitation of the Committee chairman.
* Chairman
† Invitee
** K Coppinger was appointed to the Board on 22 April 2020
36 l Serica Energy plc Annual Report & Accounts 2020
NOMINATION AND CORPORATE GOVERNANCE COMMITTEE REPORT
The Nomination and Corporate Governance
Committee assists the Board in the
oversight of Corporate Governance at Board
level. In that regard the Company follows
the Corporate Governance Code of the
Quoted Companies Alliance, of which it is a
member. The Committee is also responsible
for monitoring the overall effectiveness
of the Board and the appointment of new
directors, together with succession planning
for the Board.
2020 activities
The Committee continued to review
succession planning and assisted in the
appointment of Kate Coppinger to the
Board as part of this ongoing process.
It also organised a formal evaluation of
the effectiveness of the Board and its
Committees. The evaluation was conducted
by confidential written questionnaires and
relevant group meetings. The results and
consequent changes are noted on page 35.
2021 looking forward
The Committee will continue to monitor
and advise on Corporate Governance and
pay particular attention to Board structure,
diversity and succession planning and
expects to see further Board changes
consistent with these objectives as the
Company’s needs evolve.
Malcolm Webb
Chairman of the Nomination and Corporate
Governance Committee
14 April 2021
The Committee’s membership comprises
Malcolm Webb (Non-Executive director
and Committee Chairman), Neil Pike
(Non-Executive director) and Antony
Craven Walker (Executive Chairman of
the Company).
The Committee met three times during
2020 and will meet at least three times
during 2021.
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 each
served on the Board for over ten years,
standing for re-election annually. A process
is in hand for succession planning as
noted below.
Serica Energy plc Annual Report & Accounts 2020 l 37
Corporate Governance AUDIT COMMITTEE REPORT
The Audit Committee is a standing
committee of the Board and assists
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 Committee may hold
private sessions with management and with
the external auditor without management
present. The Committee is also responsible
for overseeing the relationship with the
external auditor.
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.
An essential element 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 Audit Committee meets regularly and
comprises Neil Pike (Non-Executive director
and Committee Chairman, Ian Vann (Non-
Executive director), Trevor Garlick (Non-
Executive director) and Kate Coppinger
(Non-Executive director).
2020 activities
Responsibilities
The Committee reviews and makes
recommendations to the Board on all
material financial decisions affecting the
Company, including:
• any change in accounting policies
•
•
•
•
•
decisions requiring a major element of
judgement and risk
compliance with accounting standards
and legal and regulatory requirements
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
14 April 2021
The Committee continues to engage Ernst
& Young (EY) to act as external auditors and
they are also invited to attend the relevant
Committee meetings, unless they have a
conflict of interest.
•
•
•
During the year, the Committee reviewed
the Company’s Treasury Policy, Dividend
Policy, Hedging Strategy and Bank
Credit ratings and the Company’s risk
management framework.
The Committee engaged a specialist
to provide an external review of the
Company’s existing systems of financial
control which involved reviewing
the Group’s internal control and risk
management policies and systems and
their effectiveness. At this stage, the
Committee is satisfied that the Group
does not currently require an internal
audit function, although this will be kept
under review.
The external auditors, EY, were
re-appointed at the Company’s annual
general meeting. The Serica Group fee to
EY for the financial year to 31 December
2020 is £340,000. The Audit Committee
undertakes a comprehensive review
of the quality, effectiveness, value and
independence of the audit provided by
EY each year.
•
The Company declared and paid its
maiden dividend to shareholders.
Whilst EY have been the Company’s
auditors for many years, the Committee
are comfortable that EY’s audit remains
independent. The current audit partner has
served the Company for 3 years.
2021 and beyond
The Committee, which so far has met twice
in 2021 shall continue to work according to
its Terms of Reference, and in particular
•
•
•
Keep under review the Company’s
existing control framework.
Ensure that risk management
procedures and controls are appropriate.
Continue to consider the
recommendations of the Quoted
Companies Alliance Corporate
Governance Code, Audit Guide.
•
Consider whether a dividend should be
payable to shareholders.
38 l Serica Energy plc Annual Report & Accounts 2020
RESERVES COMMITTEE REPORT
The Reserves Committee is a sub-
committee of the Audit Committee. The
Committee’s purpose is to review the
reports of the independent reserves auditor
which require that the Board discuss the
reserves reports with the independent
reserves auditor or delegate authority to a
reserves committee comprised of at least
two Non-Executive Directors.
The Committee comprises of Trevor Garlick
(Non-Executive director and Committee
Chairman), Ian Vann (Non-Executive director
and previous chairman of the Committee)
and Mitch Flegg (Chief Executive Officer of
the Company). The Committee met once in
2020 and typically meets once a year prior
to publication of the annual results.
2020 activities
•
•
Reviewed the Company’s procedures
for providing information to the qualified
reserves auditor who reported on
reserves data.
Met with management and the
qualified reserves auditor to review the
reserves data and the auditor's annual
reserves report.
•
•
Engaged another UK-based reserves
auditor RISC Advisory (as the previous
auditor Lloyds Register stopped offering
this service to the industry).
Reviewed and recommended to the
Board approval of the content and filing
of the Company’s annual statement
of reserves data and other oil and
gas information.
2021 Looking Forward
•
•
Meet with the new reserves auditor and
review end 2020 reserve revisions and
booking.
Make a recommendation to the Board
(via the Audit Committee) regarding the
Company’s annual statement of reserves
data and other oil and gas information.
Trevor Garlick
Chairman of the Reserves Committee
14 April 2021
Serica Energy plc Annual Report & Accounts 2020 l 39
Corporate Governance HEALTH, SAFETY AND ENVIRONMENTAL COMMITTEE REPORT
The Health, Safety and Environmental
Committee provides assurance to the
Board on occupational health, safety and
environmental leadership. It is primarily
focused on ensuring that HSE policies
are adopted and applied across the
Group. Since Q4 2020, the Committee has
been asked to add Environmental, Social
and Governance (ESG) assurance into
their remit.
The Committee comprises of Trevor Garlick
(Non-Executive director and Committee
Chairman), Ian Vann (Non-Executive director
and previous chairman of the Committee)
and Mitch Flegg (Chief Executive Officer
of the Company). The VP Operations is
invited to attend the meeting and present
his report. Since Q4, the VP of ESG and
Business Innovation has also attended the
meetings to present her report.
During 2020, the Committee has met
quarterly to discuss matters pertaining
to Health, Safety and Environmental
issues which were complicated and at
times dominated by the increasing threat
of COVID-19 amongst the workforce. In
addition, the Committee focused all the
Company’s operations, ensuring that
adequate HSE policies are adopted and
applied across the Group and the Safety
Leadership of both Management and the
workforce is visible and impactful.
2020 activities
•
•
Evaluated HSE performance against
industry standards and acted on
Regulator feedback.
Monitored interactions with the
HSE inspector and ensured that the
relationship with the Regulator is
constructive and responsive.
•
•
•
•
•
•
Established and monitored delivery of
HSE performance against the HSE and
Risk Management Plan at each meeting.
Monitored HSE performance via both
leading and lagging indicators.
Reviewed major and reportable HSE
incidents that occurred, investigations
and lessons learned at each meeting.
Ensured that the Operations Team has
tested its emergency response and crisis
management.
Strengthened work force engagement
and ownership of the design and delivery
of the HSE plan.
Since Q4 of the year, added ESG as
an agenda item focusing in particular
on the Company’s environmental
footprint and plans to contribute to the
decarbonisation and energy transition of
the North Sea industry.
•
Agreed HSE performance metrics linked
to the Company bonus scheme.
2021 looking forward
During 2021, the Committee plans to
continue to review the on-going HSE
procedures and culture, evaluate HSE
performance against industry standards,
evaluate performance against the internal
2021 plan, agree a HSE bonus scorecard
for 2021 to be linked to the Company bonus
scheme for 2021 and ensure that the HSE
policy and procedures remain effective. The
Committee also plans to place a greater
focus on ESG and how the Company
can plan to reduce carbon intensity
and emissions.
“The management and workforce of the
Group have operated in a very difficult
onshore and offshore environment. They
have rapidly put in place new policies to
minimise the risk of COVID-19 infection at
all sites. This has been successful to date in
preventing transmission at work. Within this
context, which includes the onshore staff
working from home and reduced crew sizes
offshore, they have also achieved lower
carbon emissions, maintained the focus
on plant integrity, planned some complex
operations and recorded a year of injury-
free operations. There is always much to do
and we cannot become complacent.
The ownership that is being demonstrated
across the staff to make a personal
impact on H,S and particularly E matters
is making a difference. We will support
the whole team in continuing to build this
commitment as the Company expands its
operations, recognising the risk that the
pandemic still presents”.
Trevor Garlick
Chairman of the Health, Safety and
Environmental Committee
14 April 2021
40 l Serica Energy plc Annual Report & Accounts 2020
DIRECTORS’ REMUNERATION REPORT
The Remuneration Committee
The Remuneration Committee is a standing
Committee of the Board and 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 Committee
assists 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 across the Company.
The Committee comprises Ian Vann
(Non-Executive Director and Committee
Chairman), Neil Pike (Non-Executive
Director) and Malcolm Webb (Non-
Executive Director). The Committee met
four times in 2020 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.
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:
•
•
•
•
•
•
•
Reviewing and approving the Company's
overall compensation philosophy and
programs.
Determining and agreeing with the
Board, the Remuneration Policy for all
Executive Directors and, under guidance
of the Executive Directors, other
members of the 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.
2020 activities
The Committee:
•
•
•
•
•
•
Approved the level of both the 2019 cash
bonus and discretionary bonus.
Agreed the targets for the 2020 cash
bonus scheme.
Agreed the 2020 employee salary
increases.
Approved the grant of Long Term
Incentive Plan (LTIP) awards for 2020.
Concluded that dividend accrual
payments should be applied to all Long
Term Incentive Plan awards.
Approved the vesting of performance
awards granted in May 2018.
2021 looking forward
•
•
•
•
•
•
•
Reviewing and agreeing the cash bonus
to be awarded to employees in respect
of the financial year 2020.
Considering and agreeing any
discretionary bonuses to be awarded to
senior management.
Considering and agreeing a programme
for the grant of any LTIP awards for
2021.
Proposing and agreeing the
remuneration packages for Executive
Directors and advising the Board on the
remuneration of Non-executive Directors
for 2021.
Reviewing and agreeing salary proposals
for all employees.
Considering a Share Save scheme for
2021.
Agreeing a framework for the cash
bonus plan 2021.
Serica Energy plc Annual Report & Accounts 2020 l 41
Corporate Governance DIRECTORS’ REMUNERATION REPORT continued
Executive Directors’ service contracts
The Company’s policies on Directors’ service contracts are indicated below:
Director
Antony Craven Walker
Effective term
1 July 2015
Mitch Flegg
21 November 2017
Notice period
6 months from Executive
12 months from Company
6 months from Executive
12 months from Company
Executive Remuneration
The table below sets out the single total figure of remuneration and breakdown for each Executive Director paid for the 2020 financial year.
Salary
Annual Bonus
Benefits
Pension
Total
Anthony Craven Walker
£400,000
£80,000
£4,913
Nil
£484,913
Mitch Flegg
£400,000
£80,000
£522
£40,000
£520,522
Mr Craven Walker has waived his entitlement to Illness and Medical Insurance, pension contribution and participation in the SIP.
Mr Flegg receives cash in lieu of his entitlement to pension contribution.
Additional Details
Share Option Plans
The Company operates three discretionary incentive share option plans: (i) 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, (ii) the 2017 Serica Energy plc
Company Share Option Plan (“2017 CSOP”), which was adopted by the Board on 20 November 2017, and (iii) 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". The
Discretionary Plans will govern all future grants of options by the Company to Directors, officers and employees of the Group. The Directors
intend that the maximum number of ordinary shares which may be utilised across all of the Company’s share option 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 and employees 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
Director options outstanding at 31 December 2020 under the Serica 2005 Option Plan are detailed below:
Director/Employees
Antony Craven Walker
Mitch Flegg
Total number of shares granted
2,500,000
–
2,500,000
Following the approval of the Company’s 3p per share dividend to shareholders in 2020, dividend accrual amounts of 63,451 LTIP scheme
interests (nil cost) were granted in relation to the 2,500,000 Serica 2005 Option Plan awards that had fully vested. These 63,451 LTIP scheme
interests were outstanding at 31 December 2020.
Long Term Incentive Plan
The following awards have been granted to Directors under the LTIP, these were deemed to be granted in November 2017 under IFRS 2 in
accordance with the 30 November 2017 Admission Document:
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.
42 l Serica Energy plc Annual Report & Accounts 2020
Director
Antony Craven Walker
Mitch Flegg
Total number of shares granted subject
to Deferred Bonus Share Awards
225,000
225,000
450,000
Following the Company’s 3p per share dividend to shareholders in 2020, dividend accrual amounts of 5,710 LTIP scheme interests (nil cost)
were granted to both Mr Craven Walker and Mr Flegg in relation to their respective 225,000 DSA Plan awards that had fully vested. The
combined figure of 461,420 LTIP scheme interests were outstanding at 31 December 2020.
Performance Share Awards were granted in 2018, 2019 and 2020, these awards are subject to different vesting criteria based on absolute
share price performance over a three-year period. The targets in respect of the 2018 Performance Share Awards were met and vested in full
on 1 December 2020. All Performance Share Awards are structured as nil-cost options and may be exercised up until the tenth anniversary of
the date of grant.
Director
Antony Craven Walker
Mitch Flegg
Total number of shares granted
subject to Performance Share Awards
2019
411,067
411,067
822,134
2018
(vested in full)
1,500,000
1,500,000
3,000,000
2020
386,100
386,100
772,200
Following the Company’s 3p per share dividend to shareholders in 2020, dividend accrual amounts of 38,071 LTIP scheme interests (nil cost)
were granted to both Mr Craven Walker and Mr Flegg in relation to their respective 1,500,000 PSA Plan awards that had fully vested on 30
November 2020. The combined figure of 3,076,142 fully vested LTIP scheme interests were outstanding at 31 December 2020.
Non-Executive Directors
2020 Non-Executive Director fees
Non-Executive Directors
Neil Pike
Ian Vann
Malcolm Webb
Trevor Garlick
Kate Coppinger
Chair/Director
Fees (£)*
Committee Chairman
Fees (£)
40,000
40,000
40,000
40,000
27,744
10,000
10,000
10,000
10,000
–
Kate Coppinger was appointed on 22 April 2020 and the Director Fee for 2020 is a pro-rata figure of the base annual fee of £40,000.
* These fees have remained unchanged for several years. With effect from 1 January 2021 they have been increased to £50,000 per annum
in line with the Group’s expansion and with market comparatives and in order to ensure that the Company can provide an appropriate fee
compensation to new directors appointed to the Board under the Company’s succession plans.
Ian Vann
Remuneration Committee Chairman
14 April 2021
On behalf of the Board
AMBA Secretaries Limited
14 April 2021
Serica Energy plc Annual Report & Accounts 2020 l 43
Corporate Governance DIRECTORS’ STATEMENT UNDER SECTION 172 (1) OF THE COMPANIES ACT 2006
The Section 172 (1) of the Companies
Act obliges the Directors to promote the
success of the Company for the benefit of
the Company’s members as a whole.
The section specifies that the Directors
must act in good faith when promoting the
success of the Company and in doing so
have regard (amongst other things) to:
a) the likely consequences of any decision
in the long term,
b) the interests of the Company’s
employees,
c) the need to foster the Company’s
business relationship with suppliers,
customers and others,
d) the impact of the Company’s operations
on the community and environment,
e) the desirability of the Company
maintaining a reputation for high
standards of business conduct, and
f)
the need to act fairly as between
members of the Company.
The Board of Directors is collectively
responsible for the decisions made towards
the long-term success of the Company and
the way in which the strategic, operational
and risk management decisions have been
implemented throughout the business is
detailed in this Strategic Report.
Employees
Our employees are one of the primary
assets of our business and the Board
recognises that our employees are the
key resource which enables the delivery of
Company’s vision and goals.
We ensure that:
•
•
•
•
•
Health, Safety and the Environment are
considered paramount throughout the
organisation
Annual pay and benefit reviews are
carried out to determine whether all
levels of employees are benefitting fairly
and to retain and encourage skills vital
for the business
There is competitive pay and employee
benefits
There is ongoing necessary training
and development and career prospects
available
There are freely available company
policies and procedures
•
•
•
Staff engagement surveys are
conducted
Personal development reviews and work
appraisals are conducted
Employees are informed of the results
and important business decisions and
are encouraged to feel engaged and to
improve their potential
• Working conditions are favourable.
Engagement during 2020 has been
paramount due to the COVID-19 pandemic.
The Company has worked to ensure
that employees are safe and well, both
physically and mentally, COVID-19 testing
had been conducted both on-shore and off-
shore for those employees who are not able
to work from home. Well-Being workshops
were arranged and the majority of staff
have worked remotely during the year.
The Remuneration Committee oversees
and makes recommendations of
executive remuneration and any long-term
share awards. The Board encourages
management to improve employee
engagement and to provide necessary
training in order to use their skills in the
relevant areas in the business. The Health,
Safety and Environmental Committee
reviews the health and safety measures
implemented across the business on
a quarterly basis and improvements
are continuously recommended for
better practice.
Suppliers, Customers and Regulatory
Authorities
The Board acknowledges that a strong
business relationship with suppliers
and customers is a vital part of growth.
Whilst day to day business operations are
delegated to the executive management,
the Board sets directions with regard to
new business ventures. The Board upholds
ethical business behaviour across all of
the Company’s activities and encourages
management to seek comparable business
practices from all suppliers and customers
doing business with the Company. We
value the feedback we receive from our
stakeholders and we take every opportunity
to ensure that where possible their wishes
are duly considered.
Community and Environment
The Board periodically reviews the Health
and Safety measures implemented by
the Health, Safety and Environmental
Committee in the business premises and
improvements are recommended for better
practices. The Company recognises and is
aware of the potential impact that it may
have on the environment.
Maintaining High Standards of
Business Conduct
The Company is incorporated in the UK
and governed by the Companies Act 2006.
The Company has adopted the Quoted
Companies Alliance Corporate Governance
Code 2018 (the ‘QCA Code’) and the Board
recognises the importance of maintaining
a good level of corporate governance,
which together with the requirements to
comply with the AIM Rules ensures that the
interests of the Company’s stakeholders are
safeguarded. The Board has prompted that
ethical behaviour and business practices
should be implemented across the
business. Anti-corruption and anti-bribery
training are compulsory for all staff and
contractors and the anti-bribery statement
and policy is provided on the Company’s
website. The Company’s expectation of
honest, fair and professional behaviour is
reflected by this and there is zero tolerance
for bribery and unethical behaviour by
anyone representing the Company.
The importance of making all employees
feel safe in their environment is maintained
and a Whistleblowing Policy is in place
to enable staff to confidentially raise any
concerns freely and to discuss any issues
that arise. Strong financial controls are in
place and are well documented. The Board
regularly considers the key business risks
and a risk matrix is discussed by the Board
on a monthly basis.
Shareholders
The Board places equal importance
on all shareholders and recognises the
significance of transparent and effective
communications with shareholders. As
an AIM listed company there is a need
to provide fair and balanced information
in a way that is understandable to
all stakeholders and particularly
our shareholders.
44 l Serica Energy plc Annual Report & Accounts 2020
The primary communication tool with our
shareholders is through the Regulatory
News Service, (“RNS”) on regulatory
matters and matters of material substance.
The Company’s website provides details
of the business, investor presentations
and details of the Board and Board
Committees, changes to major shareholder
information and QCA Code disclosure
updates under AIM Rule 26. Changes
are promptly published on the website to
enable the shareholders to be kept abreast
of Company’s affairs. The Company’s
Annual Report and Notice of Annual
General Meetings (AGM) are available to all
shareholders. The Interim Report and other
investor presentations are also available on
our website.
The Board acknowledges that encouraging
effective two-way communication
with shareholders encourages mutual
understanding and better connection
with them. Investor events are also
arranged with shareholders throughout
the year which present an opportunity for
shareholders to speak with the Executive
Directors in a formal environment and in
more informal one to one meetings. By
providing a variety of ways to communicate
with investors the Company feels that it
reaches out to engage with a wide range
of its stakeholders. The Board is mindful
that during the global COVID-19 pandemic
face to face meeting with shareholders
has not been possible during 2020. The
Company has endeavoured to maintain
communication with investors remotely
and believes that engagement has
been carried out efficiently during these
challenging times.
On behalf of Board
Antony Craven Walker
Executive Chairman
14 April 2021
Serica Energy plc Annual Report & Accounts 2020 l 45
Corporate Governance 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
Accounting Standards in conformity
with the requirements of the Companies
Act 2006.
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
Accounting Standards in conformity with
the requirements of the Companies Act
2006. Under United Kingdom company law
the Directors have elected to prepare the
parent company financial statements in
accordance with International Accounting
Standards in conformity with the
requirements of the Companies Act 2006.
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 International Accounting
Standards in conformity with the
requirements of the Companies Act
2006, 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 International
Accounting Standards in conformity
with the requirements of the Companies
Act 2006 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 International
Accounting Standards in conformity
with the requirements of the Companies
Act 2006, 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.
46 l Serica Energy plc Annual Report & Accounts 2020
INDEPENDENT AUDITOR’S REPORT to the members of Serica Energy plc
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 2020 and of the group’s profit for the year
then ended;
the group financial statements have been properly prepared in accordance with international accounting standards in conformity with the
requirements of the Companies Act 2006;
the parent company financial statements have been properly prepared in accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006 and as applied in accordance with section 408 of the Companies Act; and
•
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements of Serica Energy plc (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended
31 December 2020 which comprise:
Group
Parent company
Group balance sheet as at 31 December 2020
Balance sheet as at 31 December 2020
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 accounting standards in
conformity with the requirements of the Companies Act 2006 and, as regards to the parent company financial statements, as applied in
accordance with section 408 of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under
those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are
independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK,
including the FRC’s Ethical 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
In auditing the financial statements, we have concluded that the directors use of the going concern basis of accounting in the preparation of
the financial statements is appropriate. Our evaluation of the directors’ assessment of the group and parent company’s ability to continue to
adopt the going concern basis of accounting included the following:
•
•
•
•
we obtained the Group’s going concern assessment which includes the cash flow forecast and its liquidity position covering the period to
30 June 2022 (the going concern period) and we assessed the information used in the going concern assessment for consistency with the
business plans and information obtained through auditing other areas of the business;
we assessed the key risks to going concern, such as future oil and gas prices and operational issues impacting production volumes, based
on management’s identification of those risks and our own understanding of the business;
we reviewed and challenged the significant assumptions applied in the forecast, focussing on the plausible downside scenarios modelled
by management, which included the impact on the business model of low oil and gas prices and production shut-ins as a result of
COVID-19 outbreaks or other potential operational issues. We assessed the reasonableness of these assumptions and consistency with
information used in other aspects of the preparation of the financial statements;
we challenged management’s reverse stress test that was prepared to determine the operating conditions under which Serica could
potentially experience a liquidity shortfall during the going concern period. We assessed the likelihood of the breakeven commodity prices
materialising based on historic prices and independent third-party price forecasts for the going concern period. Under this reverse stress
testing, we concluded that the likelihood of the conditions arising that would lead to a liquidity shortfall were remote;
•
we confirmed that the method used in management’s model is appropriate and checked the clerical accuracy of the model;
Serica Energy plc Annual Report & Accounts 2020 l 47
Auditor’s Report INDEPENDENT AUDITOR’S REPORT to the members of Serica Energy plc continued
•
•
•
•
•
we obtained bank confirmations of the Group’s cash and cash equivalent balances as at 31 December 2020 and received bank statements
to confirm the balances as at 1 April 2021;
we have assessed management’s ability to forecast accurately based on their historical performance and, where management have
experienced differences between forecasts and actuals (whether due to oil and gas prices or other factors), this has informed our view of
the adequacy of the stress testing performed by management in their assessment;
we also performed inquiries of those charged with Governance, inquiries with members of management outside of the finance function,
reviews of minutes and other financial information to consider events or conditions beyond 30 June 2022;
considered the likelihood of management’s ability to execute mitigating actions, as required, to continue its business activities in the severe
downside scenarios simulated in the sensitivity analysis and reverse stress test; and
we reviewed the appropriateness of management’s going concern disclosures in describing the risks associated with its ability to continue
as a going concern for the period to 30 June 2022.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or
collectively, may cast significant doubt on the group and parent company’s ability to continue as a going concern for a period from when the
financial statements are authorised for issue to 30 June 2022.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group’s ability to continue as
a going concern.
Overview of our audit approach
Audit scope
•
•
We performed an audit of the complete financial information of two components and audit procedures on
specific balances for a further one component.
The components where we performed full or specific audit procedures accounted for 99% of the adjusted
profit before tax measure used to calculate materiality, 100% of Revenue and 99% of Total assets.
Key audit matters
• Measurement of BKR contingent consideration
Materiality
•
•
•
Assessment of commercial reserves and its impact on the Financial Statements
Impairment of property, plant and equipment
Overall group materiality of £3.2m which represents 4% of normalised profit before tax excluding the impact
of fair value movements on the BKR contingent consideration and commodity price swaps (“adjusted profit
before tax”).
An overview of the scope of the parent company and group audits
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each
company 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 company.
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, of the ten reporting components of the Group, we selected three components covering
entities within the UK and Namibia, which represent the principal business units within the Group.
Of the three 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 one component (“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 reporting components where we performed audit procedures accounted for 100% (2019: 100%) of the Group’s adjusted PBT measure
used to calculate materiality, 100% (2019: 100%) of the Group’s Revenue and 99% (2019: 99%) of the Group’s Total assets. For the current year,
the full scope components contributed 81% (2019: 100%) of the Group’s adjusted PBT measure used to calculate materiality, 100% (2019:
100%) of the Group’s Revenue and 99% (2019: 100%) of the Group’s Total assets. The specific scope component contributed 19% (2019: 0%)
of the Group’s adjusted PBT measure used to calculate materiality, 0% (2019: 0%) of the Group’s Revenue and 0% (2019: 1%) 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 tested for the Group.
Of the remaining seven components that together represent 0% of the Group’s adjusted profit before tax. For these components, we
performed other procedures, including analytical review procedures, testing of consolidation journals, and intercompany eliminations to
respond to any potential risks of material misstatement to the Group financial statements.
48 l Serica Energy plc Annual Report & Accounts 2020
Changes from the prior year
There have been no significant changes in scope compared to the prior year audit, which reflects the relative stability of Serica’s business and
operations in 2020.
Involvement with component teams
All audit work performed for the purposes of the audit was undertaken by the Group audit team.
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.
Key observations
communicated to the
Audit Committee
At the April 2021 meeting
of the Audit Committee,
we confirmed that we were
satisfied that management
had followed a robust
process in estimating the
fair value as at the balance
sheet date.
We concluded that the
value of the contingent
consideration recorded as a
liability at year end and the
movement in the liability
from 2019, recorded in the
income statement, as well
as payments made in the
year were accounted for
appropriately. In addition,
we concluded that the
disclosures made in
relation to the estimates
and estimation uncertainty
involved with the valuation
were appropriate.
Risk
Our response to the risk
Measurement of BKR contingent consideration
(£102.4m, 2019 £155.5m)
Refer to the Accounting policies (page 61);
and Note 22 of the Consolidated Financial
Statements (page 83).
During 2018, the Group completed a transaction
whereby Serica acquired a 98% interest in the
Bruce and Keith (BKR) fields and a 50% interest
in the Rhum field for a combination of cash,
deferred and contingent consideration. The
contingent consideration is remeasured at fair
value at each reporting date with changes in the
fair value during the year being reflected in the
income statement.
At 31 December 2020, the fair value of the BKR
contingent consideration is £102.4 million and
the change in fair value since the prior year that
is recorded in the income statement represents
a gain of £31.3 million. There is a significant
judgement and estimation involved in determining
the contingent element of the consideration, and
its fair value, which is based on a share of future
cashflows from the fields.
The fair value calculations are complex as most
of the contingent consideration is dependent
upon future commodity prices 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.
• Our procedures focused primarily on the risks relating
to the contingent consideration model, assumptions
and judgements associated with the estimation of the
consideration. These included:
• making enquiries of management and those who
participated in the preparation of the valuation to
understand the terms of the contracts, whether there
had been any changes to the agreements after the
2018 acquisition and obtained an understanding of
the process and identified key controls;
• ensuring the mechanics of the model are consistent
with the terms of the relevant agreements;
• checking the integrity of the model and testing its
mathematical accuracy;
• using our internal valuation specialists to assist us in
assessing the key external assumptions and inputs
used in measuring the fair value of the contingent
consideration payable. This included commodity price
curves, discount rates and inflation;
• assessing the reasonableness of forecast production
and cost profiles, decommissioning and taxation;
• assessing management’s estimation of commercial
oil and gas reserves used in the contingent
consideration calculation (see KAM on assessment of
commercial reserves);
• performing sensitivity analysis in relation to significant
assumptions applied by management in the valuation;
• confirming the cash consideration paid during the
year to relevant transaction agreements and bank
documentation;
Given this, we believe that the measurement of
contingent consideration carries significant risk of
material misstatement.
• confirming consistency of assumptions with other
areas of the financial statements (including the search
for contradictory evidence); and
• assessing the adequacy of the related disclosures in
Note 22 to the financial statements.
• The above audit procedures were performed in one
component under full scope audit, covering 100% of
this risk amount.
Serica Energy plc Annual Report & Accounts 2020 l 49
Auditor’s Report 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.
INDEPENDENT AUDITOR’S REPORT to the members of Serica Energy plc continued
Risk
Assessment of commercial reserves and its
impact on the Financial Statements
Refer to the Accounting policies section “Use
of judgement and estimates and key sources of
estimation uncertainty” (page 61)
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 the contingent
consideration associated with the 2018
BKR acquisition.
As described in note 15 to the consolidated
financial statements, oil and gas properties
amounted to £310.8 million and have an
associated DD&A charge of £38.5 million. At
31 December 2020, the fair value of contingent
consideration is £102.4 million and the impact on
the income statement of the change in fair value
is £31.3 million.
The estimation of oil and natural gas reserves and
resources is a significant area 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;
• 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 RISC that they
are independent from Serica and have performed their
procedures in line with the guidelines set out by the
Society of Petroleum Engineers;
• 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 contingent consideration
model, preparation of the cash flow forecasts for
the assessment of the going concern assumption,
the determination of the deferred tax asset and
accounting for DD&A.
The above audit procedures were performed in one
component under full scope audit, covering 100% of this
risk amount.
50 l Serica Energy plc Annual Report & Accounts 2020
Key observations
communicated to the
Audit Committee
On the basis of our
audit procedures,
we are satisfied with
the appropriateness
of management’s
conclusion that there
are no indicators of
impairment of the group’s
oil and gas properties as
at 31 December 2020.
Although oil and gas
prices fell during 2020,
Serica’s future price
assumptions have not
changed significantly and
the recoverable amount
of the group’s oil and gas
properties is not sensitive
to any such changes as at
31 December 2020.
Risk
Our response to the risk
Impairment of property, plant and equipment
Refer to the Accounting policies section “Use
of judgement and estimates and key sources of
estimation uncertainty” (page 61)
As described in note 15 to the consolidated
financial statements, oil and gas properties
recorded within property, plant and equipment
(PP&E) amounted to £310.8 million as at 31
December 2020. PP&E is assessed for impairment
when facts and circumstances suggest that
the carrying amount of an asset exceeds its
recoverable amount (which is the higher of the
estimation of Value in Use and Fair Value less
Cost of Disposal).
The low and volatile oil and gas price environment
during 2020 has led a number of companies
in the oil and gas industry to revisit their short,
medium or long-term price assumptions. Where
the recoverable amount of oil and gas properties
are sensitive to any such changes in price
assumptions, this could represent a potential
indicator of impairment. Other potential indicators
of impairment include a producing asset’s
operational performance and significant changes
(reductions) in oil and gas reserve estimates.
There is a risk that impairment indicators are not
identified, and any resulting impairment tests are
not performed on a timely basis.
Where impairment tests are performed, the
most complex judgements in determining the
recoverable amount of oil and gas properties
are the estimation of future oil and gas price,
both in the short term and the long term, and
the estimation of oil and gas reserves. The
estimation of future oil and gas prices is subject
to increased uncertainty, given climate change,
the energy transition and the impact of the COVID-
19 pandemic on the demand for both crude oil
and natural gas products. If impairment tests are
performed, there is a risk that management’s oil
and gas price assumptions are not appropriate,
potentially leading to a material misstatement.
A further management judgement relates to the
estimation of oil and gas reserves as there is
significant estimation uncertainty in the process
of assessing the quantities of Serica’s commercial
reserves and resources. We have described
the risk within the Assessment of commercial
reserves and its impact on the financial
statements key audit matter above.
We carried out the following procedures to respond to
the risk:
• obtained management’s assessment of whether
any indicators of impairment were present at 31
December 2020;
• challenged the validity and completeness of the
indicators identified by management based on
our understanding of the business, experience of
auditing other oil and gas companies and knowledge
gained from other areas of the audit. Our procedures
included:
•
to test price assumptions, we compared future
short and long-term commodity prices to consensus
analysts’ forecasts and those adopted by other oil and
gas companies; we evaluated whether prices were
used consistently across Serica;
• we assessed the economic performance of each oil
and gas property during the year against approved
budgets, taking into account updated reserves and
resources estimates;
• we considered the results of any impairment tests
previously performed and whether there were any
significant changes in key assumptions that could
have a material impact on the outcome of those tests;
• where assets had initially been recorded at fair value,
including the BKR acquisition in 2018, we considered
whether there was any evidence of changes in key
assumptions applied in the fair value exercise that
might represent contradictory evidence counter to the
conclusions reached in management’s assessment of
impairment indicators;
• we assessed whether the cash flow forecasts
tested as part of our audit of going concern and
the fair value of the BKR contingent consideration,
including the impact of price downside scenarios and
sensitivity analyses, supported the conclusion that
the recoverable amounts of the group’s oil and gas
properties were not sensitive to changes in current
price assumptions;
• we obtained and tested relevant support for
management’s position on market interest rates and
other macro-economic factors; and
•
the procedures we performed in relation to oil and gas
estimates are described above within the Assessment
of commercial reserves key audit matter.
The above audit procedures were performed in one
component under full scope audit, covering 100% of this
risk amount.
Serica Energy plc Annual Report & Accounts 2020 l 51
Auditor’s Report INDEPENDENT AUDITOR’S REPORT to the members of Serica Energy plc continued
In the prior year, our auditor’s report included a key audit matter in relation to the impact of Covid-19 and low oil and gas prices on the
assessment of going concern. Although the pandemic has not ended, oil and gas prices have increased and have stabilised, based in part
on the emergence of effective vaccines. Based on our independent assessment of oil and gas prices to analysts’ consensus forecasts we no
longer consider the impact of COVID-19 and low oil and gas prices on the assessment of going concern to be a key audit matter. We report
separately on our audit of the going concern assessment on page 47.
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 £3.2 million (2019: £3.2 million), which is 4% of adjusted profit before tax (2019: 4% of adjusted
profit before tax or 3% of profit before tax). We believe that adjusted profit before tax, on a normalised basis in 2020, provides us with an
appropriate basis for planning materiality in the current year audit.
Our key criterion in determining materiality remains our perception of the needs of Serica’s stakeholders. We consider which earnings, activity
or capital-based measure aligns best with the expectations of the users of Serica’s financial statements. In doing so, we apply a ‘reasonable
investor perspective’, which reflects our understanding of the common financial information needs of the members of Serica as a group.
Consistent with our approach in the prior period, the financial measure on which we have determined materiality is profit before tax. We
believe that profit before tax is the most appropriate measure upon which to calculate materiality as it represents a key performance indicator
used by Serica’s investors and is the expectation for a listed company that is generating profits.
Given the low prices experienced in 2020, we determined that the basis of planning materiality should be normalised profit before tax.
We normalised the 2020 profit before tax by extrapolating the forecast Q4 2020 profit before tax, Under auditing standards, the use of a
normalised basis is appropriate where an entity’s results are directly impacted by a significant change in the market price for a commodity
whilst the underlying operating activity remains similar to previous years, provided this is viewed as a temporary change. In the 4th Quarter of
2020 and post year-end, Brent and NBP prices have more than recovered to the levels they were before the pandemic and price collapses in
March 2020. Serica’s business and operations have also remained fundamentally the same with the majority of production and profits arising
from the BKR assets and the Columbus field under development. By applying a normalised approach, large year-on-year swings in materiality
are minimised. We used Q4 2020 forecast earnings as a basis to normalise profit before tax as we believe Q4 oil and gas prices were more
stable and reflective of both the price levels experienced in 2019 and the levels forecast in 2021 and 2022. However, given the inherent
uncertainty in estimating future commodity prices, we concluded it was appropriate to limit materiality to the same overall level as in the 2019
audit (£3.2 million) and therefore the percentage of adjusted profit before tax that we have applied is lower than the 5% threshold permissible
under auditing standards.
In our calculation of initial planning materiality, we also excluded from profit before tax the impact of fair value movements on the BKR
contingent consideration and commodity price hedges. This was based on the fact that both of these financial statement items are impacted
by significant changes in oil and gas prices, which could distort the underlying results of the performance of the business. These amounts
represented net income statement gains of £24.6 million (2020) and £32.3 million (2019) that have therefore been excluded from adjusted
profit before tax.
We determined materiality for the parent company to be £5.4 million (2019: £4.2 million), which is 2% of equity (2019: 2% of equity). We
use equity as the basis for materiality as the purpose of the parent company is to hold investments in its subsidiaries. Although the parent
company has made a profit before tax in 2020, this is because the group has commenced the distribution of intra-group dividends from the
operating subsidiaries to the parent company, which has resulted in a significant profit before tax in the parent company. This intragroup
distribution was to ensure that the parent company had sufficient distributable reserves in order to make Serica’s maiden dividend payment
during the year; however, this has not changed the key focus of the users of the parent company financial statements. Furthermore, we do
not expect significant annual profits to be generated by the company in future periods, as this will be dependent on the level and timing of any
subsequent intra-group dividends paid by the group’s operating companies. Any balances in the parent company financial statements that
were relevant to our audit of the consolidated group were audited using an allocation of group performance materiality.
During the course of our audit, we reassessed initial materiality and, based on the actual results for the fourth quarter of 2020 compared to
management’s initial forecast used in our initial assessment, and the relative stability of oil and gas price forecasts for 2021, we concluded
that no changes were required.
52 l Serica Energy plc Annual Report & Accounts 2020
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% (2019: 50%) of our planning materiality, namely £2.4m (2019: £1.6m). We have set performance materiality
at this percentage due to the stability in the group post the material acquisition of BKR in 2018 and the lower number of audit differences
identified in the 2019 audit compared to 2018.
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 £2.1 million (2019: £1.7 million).
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 £0.16m (2019:
£0.16m), 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.
Other information
The other information comprises the information included in the annual report (set out on pages 4-5 and 8-46), other than the financial
statements and our auditor’s report thereon. The directors are responsible for the other information within the annual report.
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.
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 course of 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 themselves. 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.
Serica Energy plc Annual Report & Accounts 2020 l 53
Auditor’s Report Responsibilities of directors
As explained more fully in the directors’ responsibilities statement set out on page 46, 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.
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.
Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect irregularities, including fraud. The risk of not detecting a material misstatement due to fraud is higher
than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional
misrepresentations, or through collusion. The extent to which our procedures are capable of detecting irregularities, including fraud is
detailed below.
However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the company
and management.
•
•
•
•
•
•
We obtained an understanding of the legal and regulatory frameworks that are applicable to the group and determined that the most
significant are international accounting standards in conformity with the requirements of the Companies Act 2006, the Companies Act
2006, AIM listing rules and UK tax legislation.
We understood how Serica Energy plc is complying with those frameworks by making enquiries of management, those responsible for
legal and compliance procedures. We corroborated our enquiries through our review of Board minutes, papers provided to the Audit
Committee and correspondence received from regulatory bodies, and noted there was no contradictory evidence.
We assessed the susceptibility of the group’s financial statements to material misstatement, including how fraud might occur by
meeting with management from various parts of the business to understand what areas were susceptible to fraud. We also considered
performance targets and their propensity to influence management to manage earnings.
We considered the programmes and controls that the Group has established to address risks identified, or that otherwise prevent, deter
and detect fraud; and how senior management monitors those programmes and controls. Where risk was considered as higher, we
performed audit procedures to address each identified fraud risk.
Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations. Our procedures
involved: incorporated data analytics across our audit approach, journal entry testing with a focus on manual consolidation journals and
journals meeting our defined risk criteria based on our understanding of the business; enquiries of management, review of Board and Audit
Committee reporting; and focused testing as referred to in the key audit matters section above.
We ensured our audit team has appropriate industry experience through working for many years on relevant audits, including experience of
oil and gas companies. Our audit planning included considering external market factors, for example geopolitical risk, the potential impact
of climate change, commodity price risk and major trends in the industry.
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
14 April 2021
54 l Serica Energy plc Annual Report & Accounts 2020
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
GROUP INCOME STATEMENT for the year ended 31 December
Continuing operations
Sales revenue
Cost of sales
Gross (loss)/profit
Other (expense)/income
Pre-licence costs
E&E asset write-offs
Administrative expenses
Foreign exchange loss
Share-based payments
Operating (loss)/profit before net finance revenue and tax
Change in fair value of BKR financial liabilities
Finance revenue
Finance costs
Profit before taxation
Note
2020
£000
2019
£000
4
5
6
14
27
22
9
10
125,641
250,533
(128,560)
(164,748)
(2,919)
85,785
(4,276)
10,618
–
(3,725)
(5,579)
(344)
(1,862)
(566)
(80)
(5,963)
(1,020)
(1,094)
(18,705)
87,680
31,296
465
(508)
21,771
571
(1,252)
12,548
108,770
Taxation charge for the year
11a)
(4,769)
(44,750)
Profit for the year
7,779
64,020
Earnings per ordinary share – EPS
Basic EPS on profit for the year (£)
Diluted EPS on profit for the year (£)
12
12
0.03
0.03
0.24
0.23
Group Statement of Comprehensive Income
There are no other comprehensive income items other than those passing through the income statement.
56 l Serica Energy plc Annual Report & Accounts 2020
BALANCE SHEET as at 31 December
Registered number: 5450950
Non-current assets
Exploration & evaluation assets
Property, plant and equipment
Investments in subsidiaries
Current assets
Inventories
Trade and other receivables
Derivative financial asset
Cash and cash equivalents
Total Assets
Current liabilities
Trade and other payables
Derivative financial liability
Financial liabilities
Provisions
Non-current liabilities
Financial liabilities
Provisions
Deferred tax liability
Total Liabilities
Net Assets
Share capital
Merger reserve
Other reserve
Accumulated (deficit)/funds
Group
Company
Note
2020
£000
2019
£000
2020
£000
2019
£000
14
15
16
17
18
19
20
21
19
22
23
22
23
11d)
25
16
1,043
311,125
–
3,652
325,404
–
312,168
329,056
–
215
105,256
105,471
–
387
105,256
105,643
4,633
41,329
–
89,333
135,295
4,671
35,906
6,880
101,825
149,282
–
–
162,291
93,330
–
7,078
169,369
–
11,348
104,678
447,463
478,338
274,840
210,321
(24,600)
(995)
(1,738)
(31,121)
(9,691)
–
(53,634)
(45,351)
(1,002)
(1,848)
(48,770)
(22,799)
(80,600)
(110,108)
(22,590)
(75,831)
–
–
–
–
–
–
–
–
–
–
–
–
(247,617)
(280,328)
(995)
(1,738)
199,846
198,010
273,845
208,583
181,606
181,385
153,907
153,686
–
19,680
(1,440)
–
17,818
(1,193)
88,088
19,680
12,170
88,088
17,818
(51,009)
Total Equity
199,846
198,010
273,845
208,583
The profit for the Company was £71.2 million for the year ended 31 December 2020 (2019: loss of £2.6 million). 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 14 April 2021
Antony Craven Walker
Executive Chairman
Mitch Flegg
Chief Executive Officer
Serica Energy plc Annual Report & Accounts 2020 l 57
Financial Statements STATEMENT OF CHANGES IN EQUITY for the year ended 31 December
Group
At 1 January 2019
Profit for the year
Total comprehensive income
Share–based payments
Issue of share capital
At 31 December 2019
Profit for the year
Total comprehensive income
Share–based payments
Issue of share capital
Dividend paid
Share
capital
£000
Other
reserve
£000
Accum’d
deficit
£000
Note
Total
£000
180,294
16,724
(65,213)
131,805
–
–
–
1,091
–
–
1,094
–
64,020
64,020
–
–
64,020
64,020
1,094
1,091
181,385
17,818
(1,193)
198,010
–
–
–
221
–
–
–
1,862
–
–
7,779
7,779
–
–
7,779
7,779
1,862
221
(8,026)
(8,026)
27
25
27
25
13
At 31 December 2020
181,606
19,680
(1,440)
199,846
Company
Share
capital
£000
Merger
reserve
£000
Other
reserve
£000
Accum’d
funds/
(deficit)
£000
Total
£000
At 1 January 2019
152,595
88,088
16,724
(48,426)
208,981
Loss for the year
Total comprehensive income
Share-based payments (note 27)
Issue of share capital (note 25)
–
–
–
1,091
–
–
–
–
–
–
1,094
–
(2,583)
(2,583)
–
–
(2,583)
(2,583)
1,094
1,091
At 31 December 2019
153,686
88,088
17,818
(51,009)
208,583
Profit for the year
Total comprehensive income
Share-based payments (note 27)
Issue of share capital (note 25)
Dividend paid (note 13)
–
–
–
221
–
–
–
–
–
–
–
–
1,862
–
–
71,205
71,205
–
–
71,205
71,205
1,862
221
(8,026)
(8,026)
At 31 December 2020
153,907
88,088
19,680
12,170
273,845
58 l Serica Energy plc Annual Report & Accounts 2020
CASH FLOW STATEMENT for the year ended 31 December
Operating activities:
Profit/(loss) for the year
Adjustments to reconcile profit for the year
to net cash flow from operating activities:
Taxation charge
Change in BKR fair value liability
Net finance costs/(income)
Depreciation and depletion
Oil and NGL over/underlift
E&E asset write-offs
Unrealised hedging losses/(gains)
Write-back of loans and investments
Share-based payments
Other non-cash movements
(Increase)/decrease in trade and other receivables
Decrease/(increase) in inventories
Increase/(decrease) in trade and other payables
Group
Company
Note
2020
£000
2019
£000
2020
£000
2019
£000
7,779
64,020
71,205
(2,583)
4,769
(31,296)
43
38,495
342
3,725
16,571
–
1,862
629
(5,423)
38
6,537
44,750
(21,771)
681
52,631
6,969
80
(6,742)
–
1,094
638
6,147
(386)
(11,056)
–
–
(20)
–
–
–
–
–
1,862
182
(74,906)
–
(438)
–
–
(176)
–
–
–
–
–
1,094
(149)
1,100
–
(1,690)
Net cash in/(out)flow from operations
44,071
137,055
(2,115)
(2,404)
Investing activities:
Interest received
Purchase of E&E assets
Purchase of property, plant and equipment
Cash outflow from business combination
Cash outflow arising on asset acquisitions
Changes in term deposits
Receipts/(payments) from Group subsidiaries
Net cash flow from investing activities
Financing activities:
Repayments of borrowings
Payments of lease liabilities
Proceeds from issue of shares
Dividends paid
Finance costs paid
Net cash flow from financing activities
Net (decrease)/increase 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
465
(1,116)
(25,530)
(21,759)
–
–
–
571
(549)
(4,736)
(57,259)
–
1,000
–
(47,940)
(60,973)
–
(133)
221
(8,026)
(56)
(15,673)
(178)
1,091
–
(962)
(7,994)
(15,722)
(11,863)
60,360
(629)
(638)
101,825
89,333
42,103
101,825
57
–
–
–
–
–
5,945
6,002
–
(133)
221
(8,026)
(37)
(7,975)
(4,088)
(182)
11,348
7,078
22
22
28
25
13
26
26
26
26
225
–
–
–
–
1,000
(8,196)
(6,971)
–
(178)
1,091
–
(49)
864
(8,511)
149
19,710
11,348
Serica Energy plc Annual Report & Accounts 2020 l 59
Financial Statements NOTES TO THE FINANCIAL STATEMENTS
1.
Authorisation of the Financial Statements and Statement of Compliance with International Accounting Standards in
conformity with the requirements of the Companies Act 2006
The Group’s and Company’s financial statements for the year ended 31 December 2020 were authorised for issue by the Board of Directors
on 14 April 2021 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. The Company’s ordinary shares are traded on AIM.
The Group’s financial statements have been prepared in accordance with International Accounting Standards in conformity with the
requirements of the Companies Act 2006 as they apply to the financial statements of the Group for the year ended 31 December 2020.
The Company’s financial statements have been prepared in accordance with International Accounting Standards in conformity with the
requirements of the Companies Act 2006 as they apply to the financial statements of the Company for the year ended 31 December 2020 and
as applied in accordance with the provisions of the Companies Act 2006. 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 £71,205,000 (2019:
loss £2,583,000).
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 2020.
The Group and Company financial statements have been prepared on a historical cost basis and following the change in functional and
presentational currency from US$ to £ sterling with effect from 1 January 2019 are presented in £ sterling. All values are rounded to the
nearest thousand pounds (£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 2020 the Group held cash and term deposits of £89.3 million which had increased to approximately £93.6 million by
31 March 2021 after payment of £4.6 million of margin calls related to outstanding gas price hedging. The balance at 31 March 2021 included
£6.4 million of restricted funds. 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 lower net cash generation from either
production interruptions or lower oil and gas prices.
The Group regularly monitors its cash, funding and liquidity position. Near term cash projections are revised and underlying assumptions
reviewed, generally monthly, and longer-term projections are also updated regularly. Downside price and other risking scenarios are
considered. In addition to commodity sales prices the Group is exposed to potential production interruptions and these are also considered
under such scenarios. Serica’s acquisitions to-date have been structured to reduce post-completion risk and, following completion of the BKR
transactions, management has given priority to building a strong cash reserve which can respond to different types of risk. For the purposes
of the Group’s going concern assessment we have reviewed cash projections for the period ending 30 June 2022, the ‘going concern period’.
Following onset of the COVID-19 crisis, we stress tested future cash flow forecasts for the Group to evaluate the impact of plausible downside
scenarios. The environment has since improved but Serica continues to model the downside impact of production interruption and lower than
forecast commodity prices. These include scenarios that reflect extended low oil and gas prices over 2021 and 2022, which are lower than
current forecasts and forward prices, and a three-month production shut-in to reflect potential operational or COVID-19 related issues that
could impact the Group. Under such scenarios we retain sufficient liquidity in our business. We have also performed a reverse stress test to
assist our judgement which is designed to model the extreme price conditions that would have to exist such that the Group required additional
cash resources or had to rely upon additional cash resources within the going concern period.
The impact of low gas prices is partially mitigated by price hedging up to 31 March 2023 for a proportion of projected gas sales volumes,
which deliver monthly cash inflows to Serica where market prices are lower than 31 up to 50 pence per therm with the price variations
reflecting the periods covered. The BKR net cash flow sharing arrangements, which run to end 2021, vary in line with actual net cash
generated and therefore the impact of lower sales prices and production volumes will be shared by Serica and the previous BKR owners.
Serica currently has no borrowings, relatively low operating costs per boe and its limited capital commitments can be funded from existing
cash resources. Additionally, we have implemented operating cost reductions which provide further resilience against softer commodity
prices. In particular, Serica has reduced the level of offshore personnel through the COVID-19 period by deferring non-essential work and has
facilitated remote working wherever possible.
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 going concern period. Accordingly, they continue to adopt the going concern
basis in preparing the financial statements.
60 l Serica Energy plc Annual Report & Accounts 2020
2. Accounting Policies continued
Use of judgement and estimates and key sources of estimation uncertainty
The preparation of financial statements in conformity with International Accounting Standards in conformity with the requirements of the
Companies Act 2006 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 contingent consideration, determining the fair value of property, plant and equipment on
a business combination, decommissioning provisions, the assessment of commercial reserves, the impairment of the Group and Company’s
assets (including oil and gas development assets and Exploration and Evaluation “E&E” assets), and the recoverability of deferred tax assets.
Determining the fair value of contingent consideration on BKR acquisitions
The Group determined the fair value of initial contingent consideration payable based on discounted cash flows at the time of the acquisition
in 2018, calculated for each separate component of the contingent consideration. The same models and assumptions were 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. In calculating the fair value of contingent consideration on the BKR
acquisitions payable as at 31 December 2020, assumptions underlying the calculation were updated from 2019. These included updated
commodity prices, production profiles, future opex, capex and decommissioning cost estimates, discount rates, proved and probable reserves
estimates and risk assessments. For further details including sensitivities of the calculation to changes in input variables, 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 oil and gas 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.
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 proven and probable 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).
A review was performed for any indication that the value of the Group’s oil and gas assets may be impaired at the balance sheet date of 31
December 2020 in accordance with the stated policy and no impairment triggers were noted.
Serica Energy plc Annual Report & Accounts 2020 l 61
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
2. Accounting Policies continued
Deferred taxation
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. To
the extent that actual events differ significantly from estimates, the ability of the Group to realise deferred tax assets could be impacted.
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 its subsidiaries is £ sterling following the change in functional and
presentational currency from US$ to £ sterling with effect from 1 January 2019.
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 recognised 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 recognised 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 recognised 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 recognised 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 recognised 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.
62 l Serica Energy plc Annual Report & Accounts 2020
2. Accounting Policies continued
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.
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, any applicable 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. Proved and
probable reserves estimates obtained from an independent reserves specialist have been used as the basis for 2019 and 2020 calculations.
Serica Energy plc Annual Report & Accounts 2020 l 63
Financial Statements 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’).
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, and right-of-use assets over the period of lease.
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.
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.
64 l Serica Energy plc Annual Report & Accounts 2020
2. Accounting Policies continued
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.
In order for a financial asset to be classified and measured at amortised cost it needs to give rise to cash flows that are ‘solely payments of
principal and interest (SPPI)’ on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an
instrument level. Financial assets with cash flows that are not SPPI are classified and measured at fair value through profit or loss, irrespective
of the business model.
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
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.
Derivative financial instruments
The Group uses derivative financial instruments, such as forward commodity contracts, to hedge its commodity price risks. The Group has
elected not to apply hedge accounting to these derivatives. Such derivative financial instruments are initially recognised at fair value on the
date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets
when the fair value is positive and as financial liabilities when the fair value is negative. Any gains or losses arising from changes in the fair
value of derivatives are taken directly to the statement of profit or loss and other comprehensive income and presented within operating profit.
Further details of the fair values of derivative financial instruments and how they are measured are provided in Note 19.
Equity
Equity instruments issued by the Company are recorded in equity at the proceeds received, net of direct issue costs.
Trade and other receivables and contract assets
Trade receivables and contract assets
A receivable represents the Group’s right to an amount of consideration that is unconditional (i.e., only the passage of time is required
before payment of the consideration is due). A contract asset is the right to consideration in exchange for goods or services transferred to
the customer.
Provision for expected credit losses of trade receivables and contract assets
For trade receivables and contract assets, the Group applies a simplified approach in calculating expected credit losses ‘ECLs’. Therefore, the
Group does not track changes in credit risk, but instead, recognises a loss allowance 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. A financial asset is written off when there is no reasonable expectation of recovering the contractual
cash flows. 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.
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 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. The value of the provision is determined by the amounts and nature of operating costs incurred over
a contractual period.
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 it is the principal in its revenue arrangements
because it typically controls the goods or services before transferring them to the customer.
Serica Energy plc Annual Report & Accounts 2020 l 65
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
2. Accounting Policies continued
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 Executive 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.
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.
66 l Serica Energy plc Annual Report & Accounts 2020
2. Accounting Policies continued
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.
Leases
In applying IFRS 16 for the first time the Group applied the short-term lease practical expedient by not recognising lease liabilities in
respect to lease arrangements with a remaining lease term of less than 12 months as at 1 January 2019. The Group adopted the modified
retrospective approach to adoption on 1 January 2019, measuring right-of use assets at an amount based on their respective lease liability on
adoption, with the cumulative effect of adopting the standard recognised at the date of initial application without restatement of comparative
information.
As a lessee, the Group recognises a right-of-use asset and a lease liability at the lease commencement date. The lease liability is initially
measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the
lease, or, if that rate cannot be readily determined, the Group uses its incremental borrowing rate.
The lease liability is subsequently recorded at amortised cost, using the effective interest rate method. The liability is remeasured when
there is a change in future lease payments arising from a change in an index or rate or if the Group changes its assessment of whether it
will exercise a purchase, extension or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is
made to the carrying amount of the right-of-use asset or is recorded in profit or loss if the carrying amount of the right-of-use asset has been
reduced to zero.
The right-of-use asset is measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made
at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying
asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. Right-of-use assets are
depreciated over the shorter period of lease term and useful life of the underlying asset.
The Group does not currently act as a lessor.
New and amended standards and interpretations
The Group has adopted and applied for the first time, certain standards and amendments, which are effective for annual periods beginning
on or after 1 January 2020. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not
yet effective. The nature and effect of the changes that result from the adoption of these new standards are described below. Other than the
changes described below, the accounting policies adopted are consistent with those of the previous financial year.
Several other amendments and interpretations apply for the first time in 2020, but do not have an impact on the consolidated financial
statements of the Group. The Group has not early adopted any standards, interpretations or amendments that have been issued but are not
yet effective.
Amendments to IFRS 3: Definition of a Business
The amendment to IFRS 3 Business Combinations clarifies that to be considered a business, an integrated set of activities and assets must
include, at a minimum, an input and a substantive process that, together, significantly contribute to the ability to create output. Furthermore,
it clarifies that a business can exist without including all of the inputs and processes needed to create outputs. These amendments had
no impact on the consolidated financial statements of the Group, but may impact future periods should the Group enter into any additional
business combinations.
Amendments to IFRS 7, IFRS 9 and IAS 39 Interest Rate Benchmark Reform
The amendments to IFRS 9 and IAS 39 Financial Instruments: Recognition and Measurement provide a number of reliefs, which apply to
all hedging relationships that are directly affected by interest rate benchmark reform. A hedging relationship is affected if the reform gives
rise to uncertainty about the timing and/or amount of benchmark-based cash flows of the hedged item or the hedging instrument. These
amendments have no impact on the consolidated financial statements of the Group.
Serica Energy plc Annual Report & Accounts 2020 l 67
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
2. Accounting Policies continued
Amendments to IAS 1 and IAS 8 Definition of Material
The amendments provide a new definition of material that states, “information is material if omitting, misstating or obscuring it could
reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those
financial statements, which provide financial information about a specific reporting entity.” The amendments clarify that materiality will
depend on the nature or magnitude of information, either individually or in combination with other information, in the context of the financial
statements. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users.
These amendments had no impact on the consolidated financial statements of, nor is there expected to be any future impact to the Group.
Conceptual Framework for Financial Reporting issued on 29 March 2018
The Conceptual Framework is not a standard, and none of the concepts contained therein override the concepts or requirements in any
standard. The purpose of the Conceptual Framework is to assist the IASB in developing standards, to help preparers develop consistent
accounting policies where there is no applicable standard in place and to assist all parties to understand and interpret the standards. This
will affect those entities which developed their accounting policies based on the Conceptual Framework. The revised Conceptual Framework
includes some new concepts, updated definitions and recognition criteria for assets and liabilities and clarifies some important concepts.
These amendments had no impact on the consolidated financial statements of the Group.
Standards issued but not yet effective
Certain standards or interpretations issued but not yet effective up to the date of issuance of the Group’s financial statements are listed below.
This listing of standards and interpretations issued are those that the Group reasonably expects to have an impact on disclosures, financial
position or performance when applied at a future date. The Group is currently assessing the impact of these standards and intends to adopt
them when they become effective. In reviewing the below standards, the Group does not believe that there will be a material impact on the
financial statements.
Amendments to IAS 1: Classification of Liabilities as Current or Non-current
The amendments are effective for annual reporting periods beginning on or after 1 January 2023 and must be applied retrospectively. The
Group is currently assessing the impact the amendments will have on current practice.
Reference to the Conceptual Framework – Amendments to IFRS 3
The amendments are effective for annual reporting periods beginning on or after 1 January 2022 and apply prospectively.
Property, Plant and Equipment: Proceeds before Intended Use – Amendments to IAS 16
The amendment is effective for annual reporting periods beginning on or after 1 January 2022 and must be applied retrospectively to items
of property, plant and equipment made available for use on or after the beginning of the earliest period presented when the entity first applies
the amendment.
68 l Serica Energy plc Annual Report & Accounts 2020
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 2020 and 2019. Costs associated with the UK corporate centre are included in the UK reportable segment.
Year ended 31 December 2020
Revenue
Continuing operations
Depletion
Other expenses
E&E asset write-offs
Operating and segment loss
Change in BKR financial liability
Finance revenue
Finance costs
Profit/(loss) before taxation
Taxation charge 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 2020:
Property, plant & equipment
Exploration and evaluation assets
UK
£000
Africa
£000
Total
£000
125,641
(38,495)
(102,126)
(267)
(15,247)
31,296
465
(508)
16,006
(4,769)
11,237
311,125
1,043
135,295
447,463
(247,617)
(247,617)
–
–
–
(3,458)
(3,458)
–
–
–
125,641
(38,495)
(102,126)
(3,725)
(18,705)
31,296
465
(508)
(3,458)
12,548
–
(3,458)
(4,769)
7,779
–
–
–
–
–
–
311,125
1,043
135,295
–
447,463
(247,617)
(247,617)
25,530
1,006
–
110
25,530
1,116
Serica Energy plc Annual Report & Accounts 2020 l 69
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
3. Segment Information continued
Year ended 31 December 2019
Revenue
Continuing operations
Depletion
Other expenses
Pre-licence costs
E&E asset write-offs
Operating and segment profit/(loss)
Change in BKR financial liability
Finance revenue
Finance costs
Profit/(loss) before taxation
Taxation charge 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 2019:
Property, plant & equipment
Exploration and evaluation assets
UK
£000
Ireland
£000
Africa
£000
Total
£000
250,533
(52,631)
(109,576)
(566)
(62)
87,698
21,771
571
(1,252)
108,788
(44,750)
64,038
325,404
304
149,282
474,990
(280,272)
(280,272)
5,074
291
–
–
–
–
(18)
(18)
–
–
–
(18)
–
(18)
–
–
–
–
(52)
(52)
–
18
–
–
–
–
–
–
–
–
–
–
–
–
250,533
(52,631)
(109,576)
(566)
(80)
87,680
21,771
571
(1,252)
108,770
(44,750)
64,020
–
325,404
3,348
–
3,652
149,282
–
3,348
478,338
(4)
(4)
(280,328)
(280,328)
–
240
5,074
549
Unallocated assets comprise cash on deposit. In 2019 and 2020 all cash on deposit is allocated to the UK operating segment.
Information on major customers is provided in note 4.
4. Sales Revenue
Gas sales
Oil sales
NGL sales
2020
£000
80,066
32,917
12,658
2019
£000
152,586
75,237
22,710
125,641
250,533
Gas sales revenue in 2019 and 2020 arose from one key customer, all oil sales revenue in 2019 and 2020 was from one key customer, and
NGL sales in 2020 were made to four (2019: four) customers.
70 l Serica Energy plc Annual Report & Accounts 2020
5. Cost of Sales
Operating costs
Depletion (see note 15)
Movement in liquids overlift/underlift
6. Group Operating (Loss)/Profit
This is stated after crediting/(charging):
Realised hedging gains
Unrealised hedging (losses)/gains
Other (expense)/income
Depreciation, depletion and amortisation expense
2020
£000
89,723
38,495
342
2019
£000
105,148
52,631
6,969
128,560
164,748
2020
£000
2019
£000
12,295
(16,571)
3,876
6,742
(4,276)
10,618
Depreciation of other property, plant and equipment totalled £225,000 in 2020 (2019: £190,000) and was allocated within general and
administrative expenses.
Depletion of oil and gas properties is classified within cost of sales.
7. Auditor’s Remuneration
Audit of the Group accounts
Audit of the Company’s accounts
Audit of accounts of Company’s subsidiaries
Total audit fees
No fees were paid to Ernst & Young LLP and its associates for non-audit services in 2019 or 2020.
2020
£000
300
30
10
340
2019
£000
325
30
12
367
Serica Energy plc Annual Report & Accounts 2020 l 71
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS continued
8. Staff Costs and Directors’ Emoluments
a) Staff Costs
Staff costs – Group
Wages and salaries
Social security costs
Other pension costs
Share-based long-term incentives
Staff Costs – Company
Staff costs
Wages and salaries
Social security costs
Other pension costs
2020
£000
17,935
2,276
1,966
1,839
2019
£000
15,260
2,075
1,960
1,094
24,016
20,389
2,432
362
145
2,506
455
94
2,939
3,055
The average number of persons employed by the Group during the year was 153 (2019: 145), with 9 in management functions (2019: 9),
134 (2019: 126) in technical functions and 10 (2019: 10) in finance and administrative functions.
The average number of persons employed by the Company during the year was 11 (2019:10) with 7 (2019: 7) in management functions,
1 (2019: nil) in technical functions and 3 (2019: 3) in finance and administrative functions.
Staff costs for key management personnel:
Short-term employee benefits
Post-employment benefits
Share-based payments
1,340
40
544
1,255
40
242
1,924
1,537
72 l Serica Energy plc Annual Report & Accounts 2020
8. Staff Costs and Directors’ Emoluments continued
b) Directors’ Emoluments
The emoluments of the individual Directors were as follows. All amounts are paid in £ sterling.
A Craven Walker
M Flegg¹
N Pike
I Vann
T Garlick
M Webb
K Coppinger²
2020
Salary and
fees
£000
2020
Bonus
£000
2020
Pension
£000
2020
Benefits
in kind
£000
400
400
50
50
50
50
28
80
80
–
–
–
–
–
1,028
160
–
40
–
–
–
–
–
40
5
1
–
–
–
–
–
6
Note (1) Cash in lieu of pension.
Note (2) Kate Coppinger was appointed on 22 April 2020
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
2020
Total
£000
485
521
50
50
50
50
28
2019
Total
£000
419
564
50
50
50
50
–
1,234
1,183
2020
2019
1
–
£000
–
1
–
£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 30.
9. Finance Revenue
Bank interest receivable
Total finance revenue
10. Finance Costs
Interest payable on BKR Facility
Other interest payable
Unwinding of discount on decommissioning provisions (note 23)
Total finance costs
2020
£000
465
465
2020
£000
–
56
452
508
2019
£000
571
571
2019
£000
643
96
513
1,252
Serica Energy plc Annual Report & Accounts 2020 l 73
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
11. Taxation
a) Tax charged in the income statement
Charge for the year
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 charge
Tax charge in the income statement
b) Reconciliation of the total tax charge/(credit)
2020
£000
2019
£000
–
–
–
–
4,769
–
44,750
–
4,769
44,750
4,769
44,750
The tax in the income statement for the year differs from the amount that would be corporation tax in the UK of expected by applying the
standard UK corporation tax rate for the following reasons:
Accounting profit before taxation
Statutory rate of corporation tax in the UK of 40% (2019: 40%)
Expenses not deductible for tax purposes
Unrecognised tax losses
Exploration write-offs
Investment Allowance
Income not subject to tax
Revisions to assets
Different foreign tax rates
Other
2020
£000
2019
£000
12,548
108,770
5,019
185
1,519
971
(1,600)
(988)
(338)
521
(520)
43,508
218
1,033
29
–
–
–
11
(49)
Tax charge/(credit) reported in the income statement
4,769
44,750
74 l Serica Energy plc Annual Report & Accounts 2020
11. Taxation continued
c) Recognised and unrecognised tax losses
The Group’s deferred tax assets at 31 December 2020 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 2020 with respect to ring fence losses and allowances.
The Group has UK ring fence tax losses of £46.1 million available as at 31 December 2020 (2019: £40.2 million) which form part of total
UK tax losses of approximately £72.4 million (2019: £65.4 million) that are available indefinitely for offset against future trading profits of
the companies in which the losses arose. Of this amount £46.1 million (2019: £40.2 million) has been set off against taxable temporary
differences. The benefit of approximately £26.3 million (2019: £25.2 million) of tax losses has not been recognised in these consolidated
statements which reflects the extent of the total available UK tax losses that have not 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
Net deferred tax liability
Reconciliation of net deferred tax (liabilities)/assets
At 1 January
Tax charge during the year recognised in profit
At 31 December
2020
£000
2019
£000
(124,781)
(130,162)
(124,781)
(130,162)
20,427
14,635
9,119
16,395
28,900
9,036
44,181
54,331
(80,600)
(75,831)
2020
£000
2019
£000
(75,831)
(31,081)
(4,769)
(44,750)
(80,600)
(75,831)
Serica Energy plc Annual Report & Accounts 2020 l 75
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
11. 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
Net Cash Flow Sharing Deed
Other temporary differences
Deferred income tax charge/(credit)
e) Changes to UK corporation tax legislation
2020
£000
2019
£000
(5,381)
(19,666)
–
(4,032)
14,265
(83)
–
27,483
36,910
23
4,769
44,750
In the Budget statement on 3 March 2021 it was announced that the corporation tax rate will increase from 19% to 25% with effect from
2023. The Group does not currently recognise any deferred tax assets in respect of UK non-ring fence tax losses and therefore this rate
change did not impact the disclosed results. The headline rate of tax for UK ring-fenced trading profits remains at 40%.
f) Unrecognised deferred tax liability
In 2020 and 2019 there are no material temporary differences associated with investments withbsidiaries for which subsidiaries for which
deferred tax liabilities have not been recognised.
g) Company
The Company has £26.3 million (2019: £25.2 million) of UK corporation tax losses which are not recognised as deferred tax assets.
12. Earnings Per Share
Basic earnings or loss per ordinary share amounts are calculated by dividing net profit or loss for the year attributable to ordinary equity
holders of the parent by the weighted average number of ordinary shares outstanding during the year.
Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of the Company by the
weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be
issued on the conversion of dilutive potential ordinary shares granted under share-based payment plans (see note 27) 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
Net profit attributable to equity holders of the parent
Basic weighted average number of shares
Dilutive potential of ordinary shares granted under
share-based payment plans
Diluted weighted average number of shares
Basic EPS on profit for the year (£)
Diluted EPS on profit for the year (£)
76 l Serica Energy plc Annual Report & Accounts 2020
2020
£000
2019
£000
7,779
64,020
7,779
2020
‘000
64,020
2019
‘000
267,523
10,511
265,768
10,362
278,034
276,130
2020
£
0.03
0.03
2019
£
0.24
0.23
13. Dividends Proposed
Proposed dividends on ordinary shares
A final cash dividend for 2020 of 3.5 pence per share is proposed which would generate a payment of £9.4 million. Proposed dividends on
ordinary shares are subject to approval at the annual general meeting and are not recognised as a liability as at 31 December.
Dividend on ordinary shares paid in 2020
A final cash dividend for 2019 of 3 pence per share was proposed in April 2020 and approved at the annual general meeting on 25 June 2020.
Following the approval in the 1H 2020 period, the dividend payable of £8.0 million was paid in July 2020.
14. Exploration and Evaluation Assets
Group
Cost:
1 January 2019
Additions
Write-offs
31 December 2019
Additions
Write-offs
31 December 2020
Provision for impairment:
1 January 2019
Impairment reversal for the year
31 December 2019
Impairment reversal for the year
31 December 2020
Net book amount:
31 December 2020
31 December 2019
1 January 2019
Total
£000
3,183
549
(80)
3,652
1,116
(3,725)
1,043
–
–
–
–
–
1,043
3,652
3,183
The 2020 asset write-off figure comprised a £3.458 million charge against the Group’s Namibian licence following the region exit in the year,
and £0.267 million from the relinquishment of UK Licence P2388 Block 23/21b.
The 2019 asset write-off figure comprised a £0.1 million charge following the relinquishment of UK Licence P1620 (containing the Rowallan
prospect) and final minor charges against costs incurred on the Group’s Irish licences.
Company
The Company has no E&E assets.
Serica Energy plc Annual Report & Accounts 2020 l 77
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS continued
15. Property, Plant and Equipment
Group
Cost:
1 January 2019
Additions
Revisions (note 23)
31 December 2019
Additions
Revisions (note 23)
31 December 2020
Depreciation and depletion:
1 January 2019
Charge for the year (note 5)
31 December 2019
Charge for the year (note 5,6)
31 December 2020
Net book amount:
31 December 2020
31 December 2019
1 January 2019
BKR asset acquisitions
Oil and gas
properties
£000
Equipment,
fixtures and
fittings
£000
Right-of-use
assets
£000
Total
£000
383,033
212
–
383,245
4,558
(570)
–
–
516
–
5,074
(570)
387,021
212
516
387,749
25,530
(1,089)
–
–
–
–
25,530
(1,089)
411,462
212
516
412,190
9,524
52,631
62,155
38,495
–
61
61
53
–
9,524
129
129
172
52,821
62,345
38,720
100,650
114
301
101,065
310,812
324,866
373,509
98
151
212
215
311,125
387
325,404
–
373,721
On 30 November 2018 the Group acquired interests in the Bruce, Keith and Rhum fields resulting in an acquisition of assets at a value of
£326.3 million allocated to property, plant and equipment.
Other
Depletion charges on oil and gas properties are classified within ‘cost of sales’. Depreciation on other elements of property, plant and
equipment is provided on a straight-line basis, and taken through general and administration expenses.
Company
The Company has right-of-use assets with a net book amount of £0.2 million as at 31 December 2020 (2019: £0.4 million).
78 l Serica Energy plc Annual Report & Accounts 2020
16. Investments
Company – Investment in subsidiaries
Cost:
As at 1 January 2019
Movement in investment
As at 1 January 2020
Movement in investment
As at 31 December 2020
Provision for impairment:
As at 1 January 2019
Impairment reversal for the year
As at 1 January 2020
Impairment reversal for the year
As at 31 December 2020
Net book amount:
31 December 2020
31 December 2019
1 January 2019
Total
£000
105,256
–
105,256
–
105,256
–
–
–
–
–
105,256
105,256
105,256
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 £88,088,000
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.
Serica Energy plc Annual Report & Accounts 2020 l 79
Financial Statements
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:
% voting
rights and
shares held
2020
% voting
rights and
shares held
2019
Nature of business
Holding
Holding
E&P
Exploration
Exploration
Exploration
Exploration
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
Holding
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
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 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)
(i) Held by a subsidiary undertaking
(ii) Incorporated in the British Virgin Islands
(iii) Incorporated in the Netherlands
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
2020
£000
2019
£000
2020
£000
2019
£000
4,633
4,671
4,633
4,671
–
–
–
–
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. Inventories are recorded net of an obsolescence provision of £1.6 million (2019: £1.3 million).
80 l Serica Energy plc Annual Report & Accounts 2020
18. Trade and Other Receivables
Due within one year:
Amounts owed by Group undertakings
Trade receivables
Amounts recoverable from JV partners
Other receivables
Prepayments and accrued income
VAT recoverable
Group
Company
2020
£000
2019
£000
2020
£000
2019
£000
–
20,172
15,836
1,689
1,176
2,456
–
162,119
93,064
20,859
10,870
1,191
983
2,003
–
–
–
82
90
–
–
–
–
266
41,329
35,906
162,291
93,330
Trade receivables at 31 December 2020 arose from five (2019: five) customers. They are non-interest bearing and are generally on
15 to 30-day terms.
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 £13,231,000
(2019: £13,231,000).
19. Financial (Liabilities)/Assets
Financial (liabilities)/assets
Derivative financial instruments
Derivative financial instruments
Group
Company
2020
£000
2019
£000
2020
£000
2019
£000
(9,691)
6,880
(9,691)
6,880
–
–
–
–
The Group enters into derivative financial instruments with various counterparties. The gas put option commodity contract with BP held at
31 December 2019 (fair value hierarchy level 2) was 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. No gas put
options were held at 31 December 2020. Other derivative financial instruments held at 31 December 2019 and 2020 comprised gas swaps
which were valued by counterparties, with the valuations reviewed internally and corroborated with readily available market data (level 2).
Details of the Group’s derivative financial instruments held as at 31 December 2020 and entered into during 2021 to date are provided in
note 24.
Serica Energy plc Annual Report & Accounts 2020 l 81
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
20. Cash and Term Deposits
Cash at bank and in hand
Short-term deposits
Group
Company
2020
£000
36,010
53,323
2019
£000
42,584
59,241
2020
£000
1,217
5,861
2019
£000
5,281
6,067
Cash and cash equivalents
89,333
101,825
7,078
11,348
Term deposits
–
–
–
–
89,333
101,825
7,078
11,348
As at 31 December 2020, the cash balance of £89.3 million (2019: £101.8 million) contains an amount of £12.1 million (2019: £12.1 million)
held in a restricted account as security against letters of credit issued in respect of certain decommissioning liabilities. This secured
amount was reduced to £6.4 million on 1 January 2021. At 31 December 2020 a cash margin call of £1.8 million had been paid to a hedge
counterparty as security against settlement of future hedge instruments (2019: nil) and is included in Other debtors.
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:
Barclays Bank plc
Lloyds Bank plc
Investec Bank plc
21. Trade and Other Payables
Current:
Trade payables
Other payables
Accrued expenses
Liquids overlift
S&P/
Moody’s
credit rating
A-1
A-1
P-1
Group
Company
2020
£000
38,076
38,885
12,333
2019
£000
36,358
53,120
12,314
2020
£000
4,121
2,957
–
Group
Company
2020
£000
2019
£000
2020
£000
11,237
384
18,936
564
5,807
1,914
16,657
222
31,121
24,600
246
327
422
–
995
2019
£000
5,229
6,119
–
2019
£000
94
629
1,015
–
1,738
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.
Lease liabilities in respect of right of use assets are included within other payables.
82 l Serica Energy plc Annual Report & Accounts 2020
22. Financial liabilities
BKR contingent consideration
BKR deferred consideration
Split:
Current
Non–current
Group
Company
2020
£000
2019
£000
2020
£000
2019
£000
102,404
148,054
–
7,405
102,404
155,459
53,634
48,770
45,351
110,108
102,404
155,459
–
–
–
–
–
–
–
–
–
–
–
–
BKR consideration
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 £12.8 million with contingent payments of £16 million due in relation to the outcome of future
work on the Rhum R3 well and up to a total £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 £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.
In addition to combined initial, deferred and contingent considerations, Serica pays 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 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 contingent consideration
The fair value of the contingent consideration is estimated as at applicable reporting dates 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 dependent 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 10% (2019: 11%) and assumed repayment
across the remaining 2021 period (2019: 2020-2021 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 feasible. 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.
In calculating the fair value of contingent consideration on the BKR acquisitions payable as at 31 December 2020, assumptions underlying the
calculation were updated from 2019. These included updated commodity prices, production profiles, future opex, capex and decommissioning
cost estimates, discount rates, proved and probable reserves estimates and risk assessments.
Serica Energy plc Annual Report & Accounts 2020 l 83
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
22. Financial liabilities continued
A sensitivity analysis to the gas prices used shows a decrease of 10% in the price used would result in a decrease in the fair value of the
contingent consideration by £6.6 million, and an increase of 10% would result in an increase in the fair value of the contingent consideration by
£6.6 million.
A sensitivity analysis to the discount rate used shows a decrease in the discount rate used from 10% to 9% would result in an increase in the
fair value of the contingent consideration by £4.4 million, and an increase from 10% to 11% would result in a decrease in the fair value of the
contingent consideration by £3.9 million.
2020 payments and income statement gain of £31.3 million arising on revaluation of BKR consideration
Short and long-term financial liabilities representing estimated BKR consideration as at 31 December 2019 totalled £155.5 million. During
2020, £21.8 million of BKR contingent and deferred consideration was paid comprising £7.8 million of deferred consideration (paid to Total
E&P) £2.6 million of Rhum contingent consideration (paid to BP) and £11.4 million of Net Cash Flow Sharing Deed payments (paid to BP, Total
E&P and BHP).
As noted above, the fair value of this financial liability was re-assessed for the 2020 financial period end, with the final estimate of short and
long-term liabilities as at 31 December 2020 amounting to £102.4 million (2019: £155.5 million). The overall liability reduction of £53.1 million
in 2020 comprised cash payments of £21.8 million and a non-cash revision of £31.3 million recorded as a gain in the Income Statement.
The most significant factor behind the downward revision released to the Income Statement is lower realised gas pricing on amounts paid in
respect of 2020 Net Cash Flow payments and other elements of contingent consideration.
Reconciliation of movement in BKR consideration
Total
£000
155,459
(21,759)
(44,659)
13,363
(31,296)
102,404
53,634
48,770
102,404
At 31 December 2019
Payments made in year
Revisions during the year
Unwinding of discount
Change in fair value liability
At 31 December 2020
Classified as:
Current
Non-current
84 l Serica Energy plc Annual Report & Accounts 2020
23. Provisions
Erskine
consideration
£000
Decommissioning
provision
£000
Total
£000
At 1 January 2019
1,848
22,647
24,495
Revisions during the year
Unwinding of discount (note 10)
-
-
(570)
513
(570)
513
At 31 December 2019
1,848
22,590
24,438
Revisions during the year
Unwinding of discount (note 10)
(846)
-
(243)
452
(1,089)
452
At 31 December 2020
1,002
22,799
23,801
Classified as:
Current
Non-current
Decommissioning provision
Bruce, Keith and Rhum fields
1,002
-
-
22,799
1,002
22,799
1,002
22,799
23,801
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% (2019: 2%) and the unwinding of the discount is classified as a finance cost (see
note 10).
Erskine field
No provision for decommissioning liabilities for the Erskine field is recorded as at 31 December 2019 or 2020 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 £174.0 million (£31.32 million net to Serica)
with this figure adjusted for inflation.
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 estimated payment for these amounts has been capitalised as an oil and gas asset cost (see note 15). Uncertainties currently exist as
to the quantification of any final payment but this is expected to be settled in 2021.
Company
The Company has no provisions.
Serica Energy plc Annual Report & Accounts 2020 l 85
Financial Statements 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, derivative financial instruments, deferred consideration and contingent consideration 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, during 2019, the BKR facility; given the level of expenditure plans
over 2021/22 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-£ cash holdings and other financial instruments relating to its operations. The £ 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 2020
Within 1 year
£000
1-2 years
£000
2-5 years
£000
Total
£000
53,323
–
–
Within 1 year
£000
1-2 years
£000
2-5 years
£000
36,010
–
–
Within 1 year
£000
1-2 years
£000
2-5 years
£000
59,241
–
–
Within 1 year
£000
1-2 years
£000
2-5 years
£000
42,584
–
–
53,323
53,323
Total
£000
36,010
36,010
Total
£000
59,241
59,241
Total
£000
42,584
42,584
Fixed rate
Short-term deposits
Floating rate
Cash
Year ended 31 December 2019
Fixed rate
Short-term deposits
Floating rate
Cash
86 l Serica Energy plc Annual Report & Accounts 2020
24. Financial Instruments continued
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
2020
£000
Effect on
profit
before tax
2019
£000
733
(733)
524
(524)
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 2020
Fixed rate
Short-term deposits
Floating rate
Cash
Year ended 31 December 2019
Fixed rate
Short-term deposits
Floating rate
Cash
Credit risk
Within 1 year
£000
1-2 years
£000
2-5 years
£000
5,861
–
–
Within 1 year
£000
1-2 years
£000
2-5 years
£000
Total
£000
5,861
5,861
Total
£000
1,216
–
–
1,216
Within 1 year
£000
1-2 years
£000
2-5 years
£000
6,067
–
–
Within 1 year
£000
1-2 years
£000
2-5 years
£000
Total
£000
6,067
6,067
Total
£000
5,281
–
–
5,281
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.
Serica Energy plc Annual Report & Accounts 2020 l 87
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
24. Financial Instruments continued
Foreign currency risk
The Group enters into transactions denominated in currencies other than its GBP£ reporting currency. Non-GBP denominated balances,
subject to exchange rate fluctuations, at year-end were as follows:
Cash and cash equivalents:
US Dollar
Norwegian kroner
Euros
Accounts receivable:
US Dollar
Trade and other payables:
US Dollar
Group
Company
2020
£000
2019
£000
2020
£000
2019
£000
25,064
30,395
4,302
7,783
6
51
6
172
5,468
7,397
2,069
2,584
–
–
17
46
–
–
10
–
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 £ against US$
10% weakening of £ against US$
Liquidity risk
Effect on
profit
before tax
2020
£000
Effect on
profit
before tax
2019
£000
(2,846)
2,846
(3,521)
3,521
The table below summarises the maturity profile of the Group and Company’s financial liabilities at 31 December 2020 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 2020
Within 1 year
£000
1 to 2 years
£000
2 to 5 years
£000
>5 years
£000
Trade and other payables
BKR deferred consideration
Derivative financial liabilities
Year ended 31 December 2019
Trade and other payables
BKR deferred consideration
32,123
–
6,984
–
–
2,707
–
–
–
–
–
–
Within 1 year
£000
1 to 2 years
£000
2 to 5 years
£000
>5 years
£000
24,600
7,405
–
–
–
–
–
–
Total
£000
32,123
–
9,691
Total
£000
24,600
7,405
Amounts payable as BKR contingent consideration are explained in detail in note 22. The bulk of contingent consideration due under the BKR
acquisition agreements is related to future successful field performance and either paid out as a proportion of cash inflows or dependent on
successful performance, with liquidity risk impacted downwards accordingly.
88 l Serica Energy plc Annual Report & Accounts 2020
24. Financial Instruments continued
Company
Year ended 31 December 2020
Within
1 year
£000
1 to 2 years
£000
2 to 5 years
£000
Total
£000
Trade and other payables
995
–
–
995
Year ended 31 December 2019
Within
1 year
£000
1 to 2 years
£000
2 to 5 years
£000
Total
£000
Trade and other payables
1,738
–
–
1,738
Commodity price risk
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 2020 Serica held gas price swaps covering 167,000 therms per day for H1 2021 and 192,000 therms per day for H2 2021 at
average prices of 37 pence per therm and 36 pence per therm respectively. It further held gas price swaps covering 200,000 therms per day
for H1 2022 and 50,000 therms per day for H2 2022 at average prices of 40 pence per therm and 37 pence per therm respectively.
In 2021 to date, Serica has obtained additional gas price swaps covering 50,000 therms per day for H1 2022, 100,000 therms per day for H2
2022 and 50,000 therms per day for Q1 2023 at average prices of 46, 41 and 50 pence per therm respectively.
Fair values of financial assets and liabilities
Management assessed that the fair values of cash and short-term deposits, trade receivables, trade payables and other current liabilities
approximate their carrying amounts largely due to the short-term maturities of these instruments. As such the fair value hierarchy is
not provided.
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 2020, capital employed of the Group amounted to £199.8 million (comprised of £199.8 million of
equity shareholders’ funds and £nil of borrowings), compared to £198.0 million at 31 December 2019 (comprised of £198.0 million of equity
shareholders’ funds and £nil of borrowings).
At 31 December 2020, capital employed of the Company amounted to £273.8 (comprised of £273.8 million of equity shareholders’ funds and
£nil of borrowings), compared to £208.6 million at 31 December 2019 (comprised of £208.6 million of equity shareholders’ funds and £nil
of borrowings).
Serica Energy plc Annual Report & Accounts 2020 l 89
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
25. Equity Share Capital
As at 31 December 2020, the share capital of the Company comprised one “A” share of GB£50,000 and 267,809,702 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
£000
Share
premium
£000
Total
Share
capital
£000
As at 1 January 2019
264,757,820
20,862
159,432
180,294
Shares issued
2,472,397
200
891
1,091
As at 1 January 2020
267,230,217
21,062
160,323
181,385
Shares issued
579,486
45
176
221
As at 31 December 2020
267,809,703
21,107
160,499
181,606
Allotted, issued and fully paid:
Company
As at 1 January 2019
Shares issued
As at 1 January 2020
Shares issued
Number
Share
capital
£000
Share
premium
£000
Total
Share
capital
£000
264,757,820
20,862
131,733
152,595
2,472,397
200
891
1,091
267,230,217
21,062
132,624
153,686
579,486
45
176
221
As at 31 December 2020
267,809,703
21,107
132,800
153,907
579,486 ordinary shares issued in 2020 under the Company’s Share Incentive Plan.187,710 ordinary shares have been issued in 2021 to date
and as at 13 April 2021 the issued voting share capital of the Company was 267,997,412 ordinary shares and one “A” share.
90 l Serica Energy plc Annual Report & Accounts 2020
26. Additional Cash Flow Information
Analysis of Group net cash
Year ended 31 December 2020
Cash
Short-term deposits
Year ended 31 December 2019
Cash
Short-term deposits
Analysis of Company net cash
Year ended 31 December 2020
Cash
Short-term deposits
Year ended 31 December 2019
Cash
Short-term deposits
1 January
2020
£000
Cash flow
£000
Non-cash
movements
£000
31 December
2020
£000
42,584
59,241
(6,282)
(5,581)
(292)
(337)
36,010
53,323
101,825
(11,863)
(629)
89,333
1 January
2019
£000
Cash flow
£000
Non-cash
movements
£000
31 December
2019
£000
28,371
13,732
14,424
45,936
(211)
(427)
42,584
59,241
42,103
60,360
(638)
101,825
1 January
2020
£000
Cash flow
£000
Non-cash
movements
£000
31 December
2020
£000
5,281
6,067
(3,963)
(125)
(101)
(81)
1,217
5,861
11,348
(4,088)
(182)
7,078
1 January
2019
£000
Cash flow
£000
Non-cash
movements
£000
31 December
2019
£000
6,372
13,338
(1,142)
(7,369)
51
98
5,281
6,067
19,710
(8,511)
149
11,348
Changes in Group liabilities arising from financing activities
Year ended 31 December 2019
1 January
2019
£000
Cash flow
£000
Non-cash
movements
£000
31 December
2019
£000
BKR facility
15,896
(16,539)
643
–
Cash outflows in 2019 comprised £15,673,000 of borrowing repayments and £866,000 of finance costs paid. The BKR facility was fully repaid
as at 31 December 2019. No liabilities from financing activities existed during 2020.
Serica Energy plc Annual Report & Accounts 2020 l 91
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
27. 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”.
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 2020, 4,578,050 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.
No options were granted in 2019 or 2020 under the Serica 2005 Option Plan.
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
2020
Number
2020
WAEP
£
2019
Number
2019
WAEP
£
4,578,050
0.15
6,465,550
–
–
–
–
(1,887,500)
–
0.25
0.48
–
0.15
0.15
Outstanding as at 31 December
4,578,050
0.15
4,578,050
Exercisable as at 31 December
4,578,050
0.15
4,578,050
The weighted average remaining contractual life of options outstanding as at 31 December 2020 is 4.0 years (2019: 5.0 years).
For the Serica 2005 option plan, the exercise price for outstanding options at the 2020 year-end ranges from £0.07 to £0.31 (2019: £0.07
to £0.31).
As at 31 December 2020, the following director and employee share options were outstanding:
Expiry Date
April 2021
January 2022
January 2023
January 2024
Amount
50,000
428,050
200,000
300,000
June 2025
1,100,000
July 2025
1,000,000
July 2025
1,000,000
July 2025
500,000
Total
4,578,050
Exercise cost
GB£
15,685
91,496
54,500
39,000
72,600
120,000
180,000
120,000
92 l Serica Energy plc Annual Report & Accounts 2020
27. Share-Based Payments continued
50,000 options under the plan with an average exercise cost of £0.31 were exercised in January 2021.
Following the approval of the Company’s 3p per share dividend to shareholders in 2020, a dividend accrual amount of 116,192 LTIP scheme
interests (nil cost) were granted in relation to the 4,578,050 2005 Option Plan awards that had fully vested. These 116,192 LTIP scheme
interests were outstanding at 31 December 2020.
Long Term Incentive Plan
The following awards granted to certain Directors and employees under the LTIP (deemed to be granted in November 2017 under IFRS 2) are
outstanding as at 31 December 2020.
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
414,000
864,000
Following the Company’s 3p per share dividend to shareholders in 2020, dividend accrual amounts of 21,926 LTIP scheme interests (nil cost)
were granted in relation to the 864,000 DSA Plan awards that had fully vested. The combined figure of 885,926 LTIP scheme interests were
outstanding at 31 December 2020.
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 and all awards have therefore now vested. They 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
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 and are exercisable
as at 31 December 2020.
Following the Company’s 3p per share dividend to shareholders in 2020, dividend accrual amounts of 133,247 LTIP scheme interests (nil cost)
were granted in relation to the 5,250,000 PSA Plan awards that had fully vested on 30 November 2020. The combined figure of 5,383,247 LTIP
scheme interests were outstanding at 31 December 2020.
Serica Energy plc Annual Report & Accounts 2020 l 93
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
27. Share-Based Payments continued
LTIP awards in 2019
In Q1 2019, the Company granted nil-cost Performance Share Awards over 3,735,640 ordinary shares and nil-cost Retention Share Awards
over 309,415 ordinary shares, a combined total of 4,045,055 ordinary shares under the LTIP. 203,488 of the 2019 LTIP awards have been
cancelled since the initial grant and 3,841,567 of the total awards were outstanding at 31 December 2020. The award was made to members
of the Group’s executive team, senior management and employees. The awards included a total of 822,134 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 and are not exercisable as at
31 December 2020.
LTIP awards in 2020
In May 2020, the Company granted nil-cost Performance Share Awards over 2,669,280 ordinary shares under the LTIP. All of the total
awards were outstanding at 31 December 2020. The award was made to members of the Group’s executive team, senior management
and employees. The awards included a total of 772,200 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
386,100
386,100
772,200
These awards are subject to vesting criteria based on absolute share price performance over a three-year period and are not exercisable as at
31 December 2020.
Share-based compensation
The Company calculates the value of share-based compensation using a Black-Scholes option pricing model (or other appropriate model
for those 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 options granted in 2019 and 2020 were consistently valued in line with the Company’s valuation policy.
Assumptions made included a weighted average risk-free interest rate of 2%, no dividend yield, a weighted average expected life of 5 years,
and a volatility factor of expected market price of in a range from 60-70%. The expected volatility reflects the assumption that the historical
volatility is indicative of future trends, which may not necessarily be the actual outcome. The weighted fair value of options granted during the
year was £0.67 (2019: £0.81). The estimated fair value of options is amortised to expense over the options’ vesting period.
£1,862,000 has been charged to the income statement for the year ended 31 December 2020 (2019: £1,094,000) and a similar amount
credited to the share-based payments reserve, classified as ‘Other reserve’ in the Balance Sheet. A charge of £544,000 (2019: £242,000) of the
total charge was in respect of key management personnel (defined in note 8).
28. Leases
In March 2019 the Group entered into a three-year lease at its new registered office, 48 George Street, following the expiry of its previous
London office lease at 52 George Street, which had been recognised as an operating lease.
Following the adoption of IFRS 16 – Leases on 1 January 2019, the Group recognised a right-of use asset and a lease liability at the lease
commencement date.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by
using the rate implicit in the lease, or, if that rate cannot be readily determined, the Group uses its incremental borrowing rate.
94 l Serica Energy plc Annual Report & Accounts 2020
28. Leases continued
The right-of-use asset is measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at
or before the commencement date. Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying
asset. The depreciation starts at the commencement date of the lease.
The Group had no right-of use assets as at 31 December 2018. Initial right-of-use assets and lease liabilities of £516,000 were recognised
by the Group during 2019 within property, plant and equipment and other liabilities respectively. A depreciation charge of £172,000 (2019:
£129,000) was expensed within administrative expenses. £133,000 (2019: £178,000) of cash payments made against the lease liability during
2020 are reflected in the 2020 Group cash flow statement as a cash outflow in financing activities.
29. Capital Commitments and Contingencies
At 31 December 2020, other amounts contracted for but not provided in the financial statements for the acquisition of exploration and
evaluation assets and oil and gas properties, other than the commitments set out below, amounted to £nil for the Group and £nil for the
Company (2019: £nil and £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 existing capital commitments on the BKR producing fields other than an estimated £11 million net to Serica
outstanding at 31 December 2020 on the Rhum R3 well work, expected to be completed during Q2 2021. 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 £16 million due to BP upon a successful
outcome from the Rhum R3 workover, and amounts of up to £7.7 million due to BP in respect of 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 posted cash collateral of approximately £12.1 million under BKR decommissioning security arrangements, related
to the interests acquired from Marubeni, in support to the issue of letters of credit required. This secured amount is within the Group’s cash
balances of £89.3 million as at 31 December 2020, but the secured amount was reduced to £6.4 million on 1 January 2021. The funds are
freely transferable but alternative collateral would need to be put in place to replace the cash security.
Other commitments
The Columbus development is underway with first gas expected in Q4 2021. Total development expenditure net to Serica’s share outstanding
at 31 December 2020 is estimated at approximately £15 million.
The Group has no significant exploration commitments apart from the well on North Eigg prospect to be drilled by the end of the three-year
licence term in December 2022. Other less material minimum obligations include G&G, seismic work and ongoing licence fees in the UK.
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.
30. Related Party Transactions and Transactions with Directors
There are no related party transactions, or transactions with Directors that require disclosure except for the remuneration items disclosed in
the Directors Report and note 8 above. The disclosures in note 8 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.
31. Post Balance Sheet Events
On 21 January 2021, Serica announced that it had received a renewed License and secondary sanctions assurance from the US Office of
Foreign Assets Control (“OFAC”) relating to the North Sea Rhum field, in which the Company has a 50% interest. OFAC issued the renewed
License for the period up to 31 January 2023. The License may be renewed on application by Serica assuming the conditions continue to
be met.
On 17 March 2021 Serica announced the spud of the Columbus 23/16f-CDev1 development well in the UK Central North Sea which is being
drilled to a total depth of 17,600ft and will include a 5,600ft horizontal section. The well is being drilled with the Maersk Resilient Heavy Duty
Jack Up rig and is expected to take around 70 days.
Serica Energy plc Annual Report & Accounts 2020 l 95
Financial Statements GLOSSARY
bbl
bcf
boe
BKR
BPEOC
CGU
CPR
ESG
FDP
FPS
GRI
HPHT
mscf
mmbbl
mmboe
mmscf
mmscfd
NGLs
NTS
OGA
Overlift
Underlift
P10
P50
P90
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)
Bruce, Keith and Rhum fields
BP Exploration Operating Company
Cash generating unit
Competent Persons Report
Environmental, Social and Governance
Field Development Plan
Forties Pipeline System
Global Reporting Index (framework for sustainability reporting)
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
Reserves
SASB
Tcf
TCFD
UKCS
UNSDG
Proved reserves are those Reserves that can be estimated with a high degree of certainty to be recoverable.
It is likely that the actual remaining quantities recovered will exceed the estimated proved reserves
Probable reserves are those additional Reserves that are less certain to be recovered than proved reserves.
It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of the
estimated proved + probable reserves
Possible reserves are those additional Reserves that are less certain to be recovered than probable reserves.
It is unlikely that the actual remaining quantities recovered will exceed the sum of the estimated proved +
probable + possible reserves
Estimates of discovered recoverable commercial hydrocarbon reserves calculated in accordance with the
revised June 2018 Petroleum Resources Management System (PRMS) version 1.01
Sustainability accounting standards board
trillion standard cubic feet
Taskforce on Climate-related Financial Disclosures
United Kingdom Continental Shelf
United Nations Sustainable Development Goals
96 l Serica Energy plc Annual Report & Accounts 2020
CONTENTS
Highlights
2020 Performance
Executive Chairman’s Statement
Serica at a Glance
Strategic Report
Chief Executive’s Review
HSEQ
Environmental, Social & Governance
Review of Operations
Reserves
Licence Holdings
Financial Review
Corporate Governance
Board of Directors
Directors’ Report
Corporate Governance
Directors’ Responsibilities Statement
Financial Statements
Independent Auditor’s Report
Primary Financial Statements
Notes to the Financial Statements
Other Information
Glossary
Corporate Information
2
4
6
8
10
12
14
20
21
22
28
30
32
46
47
56
60
96
97
CORPORATE INFORMATION
Registered and Main Office
Bankers
48 George Street
London W1U 7DY
Operational Headquarters
H1 Building
Hill of Rubislaw
Anderson Drive
Aberdeen AB15 6BY
Nominated Advisor & UK Broker
Peel Hunt LLP
100 Liverpool Street
London EC2M 2AT
UK Broker
Jefferies International Limited
100 Bishopsgate
London EC2N 4JL
Auditor
Ernst & Young LLP
1 More London Place
London SE1 2AF
Barclays, Lloyds
Company Secretary
AMBA Secretaries Limited
UK Registrar
Link Asset Services
10th Floor, Central Square
29 Wellington Street
Leeds LS1 4DL
Listing
AIM, London
Symbol: SQZ
Website
www.serica-energy.com
Company Number
5450950
INVESTING IN A DIGITAL TWIN
TO ADVANCE EFFICIENCY
In 2020 work commenced on a digital survey of our BKR asset.
After 40 days, billions of laser scan measurements from over
5,500 scan locations had been uploaded to create a single Point
Cloud model and along with hundreds of thousands of HD digital
images our Digital Twin was born!
A millimetre accurate model of every aspect of our Bruce platform
is now accessible to staff across all disciplines from any location
via a web-based app. The many benefits of the digital twin include:
•
•
reduction of platform visits,
remote design for fabrication of equipment,
• detailed assessment of condition of equipment and pipework.
The digital twin is now an integral part of our working toolbox
and Serica personnel have already identified multiple future
applications, all of which will help us to work more efficiently.
Produced by Communiqué Associates Limited, Edinburgh +44 7802 349934
INVESTING
IN THE FUTURE
ANNUAL REPORT 2020
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www.serica-energy.com