GROWING
OUR BUSINESS
ANNUAL REPORT 2022
CONTENTS
Highlights
2022 Performance
Chairman’s Statement
Acquisition of Tailwind Energy
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
3
4
6
8
10
12
14
16
20
21
22
32
34
36
51
53
60
64
102
103
2022 PERFORMANCE
£476.2 million operating profit
and profit after tax of £177.8 million
Increased dividend
Full year dividend raised to
22p per share
Portfolio diversified
Announced acquisition of Tailwind Energy
completed March 2023
18% increase in production
Average net production increased
to 26,200 boe/d
Increased reserves
From 62.2 million boe in 2021 to
74.9 million boe end 2022. Serica
production replaced more than twofold
Profit After Taxation £m
Production boe/d
178
2022
2021
2020
8
79
2019
64
2022
2021
2020
2019
26,200
22,200
23,600
30,000
Full Year Dividend (p/share)
Serica Net 2P Reserves mmboe
22
9
2022
2021
2020
3.5
2019
3
2022
2021
2020
2019
74.9
62.2
61.0
62.3
LOOKING TO THE FUTURE
Serica is entering an exciting new growth phase with a clearly defined strategy
to continue investment in our high-quality portfolio of UK North Sea assets,
whilst targeting future acquisition opportunities. Our short-cycle growth
projects in 2023 and 2024 include:
· Bruce Light Well Intervention Campaigns
· Sidetrack of the Bittern B1z well
· A 5th Gannet E well sanctioned for drilling
· Phase 2 of drilling at the Evelyn field in 2024 for tie-in early 2025
Completion of the Tailwind acquisition puts the Company in a strong position
to maintain and grow its dividend for shareholders and provides a robust
platform from which to accelerate the growth of our business.
Serica Energy plc Annual Report & Accounts 2022 l 3
Performance Overview CHAIRMAN’S STATEMENT
“ We are committed to a dividend policy which
reflects the underlying performance of the
Company and which provides a good return
to shareholders in an uncertain environment
whilst also leaving room for investment in
continuing asset growth”
Dear Shareholder,
Last year I wrote to you against the backdrop of international
turmoil following Russia’s invasion of Ukraine and the
consequential major disruptions to energy supply. This
resulted in significant volatility in energy prices throughout
the year which saw UK day-forward gas prices peak for
a short period in August 2022 at over £6/therm. Since
then they have fallen and are now back to the level of two
years ago, approximately 80% lower than the level reached
last August.
In the meantime, however, the Government
has raised taxes on the offshore industry
to a level which does not reflect current
prices or provide for a price floor level.
This has impacted the smaller companies
disproportionately far more than the
international companies and is likely to
become unsustainable given that prices
are now very materially below the levels
envisaged when the tax rises were
introduced. Combined, this has had a
material effect on the share prices of
companies such as Serica and puts a
question mark over the financing of many
North Sea projects.
The important role of the smaller UK
upstream companies operating in the
North Sea, many of them British, is to
optimise the production of remaining North
Sea reserves for the ultimate benefit of the
UK at a time when the provision of energy
security has never been more important.
But to do this needs a stable fiscal
environment in which we can plan and
operate with taxes at a level commensurate
with the risks that we take. Setting taxes
on profits at the current 75% level without
any provision for falling prices drives away
the financing which is required.
It is to be hoped that the Government will
review its current policy and derive a new
basis upon which companies like Serica
can thrive and show the innovation which is
needed to bring the full benefit of offshore
resources to the UK in parallel with the
energy transition efforts being made by the
major companies.
Notwithstanding the background against
which we have to operate, Serica has been
able to add value in the four years since
acquiring the Bruce, Keith and Rhum (BKR)
assets in late 2018 and taking over as
operator. Our efforts to-date had already
extended the decommissioning date to
the end of this decade, illustrating the
innovation and technical skill of the smaller
companies. Our teams in Aberdeen and
offshore are now working on projects
to extend the life of these assets still
further and optimise producible reserves
in the right fiscal environment and this is
reflected in our latest reserves report.
As a result of the careful management
of our financial resources Serica remains
strongly financed. 2022 reflects the first
year following the end of the BKR earn-in
period which now enables us to derive
the full benefit of our interest in BKR. The
benefits of the resultant cash flow uplift
can be seen in our results. Although we
found gas in the North Eigg well which
will require further evaluation we have
taken full provision for the well to reflect
the uncertain outlook. The resulting group
profit before taxation for the year after this
provision amounts to £488 million against
the prior year £135 million. After providing
for the impact of materially increased
taxes, £278 million of which are current
cash payments, after tax profit was £178
million against prior year £79 million.
We are committed to a dividend policy
which reflects the underlying performance
of the Company and which provides a
good return to shareholders in an uncertain
environment whilst also leaving room for
4 l Serica Energy plc Annual Report & Accounts 2022
In line with good corporate governance
practice, due to my length of service I
shall be standing down from the Chair and
the Board at the end of our forthcoming
Annual General Meeting and am delighted
that David Latin has agreed to take over as
Chair from that date. David has been on
the Board since the end of 2021 and brings
enormous experience to the Company both
as an Independent Director and shortly
as Non-Executive Chairman. David has
over 30 years’ working in the upstream
sector including senior roles at BP plc and
the OMV Group where he led growth of a
significant business in the North Sea, Africa
and Australasia. More recently he has
developed his knowledge of private equity
investing as a founder of First Alpha Energy
Capital and of the energy transition via
venture capital backed Talaria Technology.
With David in the Chair and a strong Board
and Executive Team I am sure that the
Company is in good hands.
Tony Craven Walker
Chairman
12 April 2023
investment in continuing asset growth. In
November we paid an interim dividend of
8 pence per share. Subject to approval
of shareholders at the Annual General
Meeting in June 2023, we are proposing
a final dividend of 14 pence per share, an
increase on last year and bringing the total
dividend for the year to 22 pence per share.
We continue to look for ways to increase
our opportunity for value accretion. At
the turn of the year we announced our
intention to acquire Tailwind Energy
Investments Ltd. We have made it clear
for some time that over-reliance on a single
asset, BKR, whilst showing considerable
ongoing potential, is not a sensible policy
and the Tailwind transaction provides us
with the opportunity to achieve better
balance, both from a portfolio perspective
and from a commodity perspective. This
should provide us with the strength to
manage uncertain times whilst also adding
value for shareholders and is structured in
a way to maintain the full strength of our
balance sheet.
Shareholders approved the Tailwind
acquisition at an Extraordinary General
Meeting held in January and, following
receipt of all conditions precedent, we
announced completion of the transaction
in March. Serica is now a broader spread
company with interests in two North Sea
hubs, one of which it operates, and better
exposure to an oil/gas mix. The acquisition
also brings a portfolio of near term
investment opportunities as well as strong
reserves and production growth. We believe
that the transaction is fully compatible with
our ESG objectives and Serica is optimistic
that the full benefit of the combination will
start to come through this year.
As part of building the company to the
scale and size that we now are, we have
also been looking to strengthen and
broaden the Board. I am delighted that
Jérôme Schmitt, who joined the Board
in mid-2022, and Michiel Soeting, who
joined in February 2023, are providing
us with the benefit of their knowledge
and experience. Both bring significant
financial and strategic insight to the Board.
Following the Tailwind acquisition we
also welcome Rob Lawson and Guillaume
Vermersch who will further strengthen and
broaden the Board and bring additional and
complementary experience.
Finally, my own role. I have been on the
Board since the Company started as a
small exploration company operating in the
North Sea and South East Asia. I have seen
it through the transition to the company
that it is today, a very significant British-
based upstream operator with material
operations in the North Sea and generating
good returns to shareholders. I am proud
of that achievement and am proud of
the team that has made it possible. I am
sure that all shareholders would like me
to thank them. The Company has a very
strong team, a strong balance sheet, a very
material production base and very strong
credentials, all of which put it in a good
position for future success.
Serica Energy plc Annual Report & Accounts 2022 l 5
Performance Overview ACQUISITION OF TAILWIND ENERGY
Acquiring a complementary
set of producing assets to
expand and balance our portfolio
Improved cashflow
and shareholder
return predictability
Portfolio
diversification
After the end of the year, on 23 March 2023 Serica Energy completed the acquisition of
Tailwind Energy Investments Ltd, a privately owned independent oil and gas company with
assets in the UK North Sea. As part of the transaction, Mercuria - an investor in Tailwind -
became a strategic investor in Serica.
Tailwind was formed in 2016. Through a combination of acquisitions, production
enhancements and development of new fields, executed by a small and expert team of oil
and gas professionals, it built a portfolio of upstream assets situated in the UK North Sea.
At the end of 2022 this portfolio had 2P reserves of 55.5 million boe, with a rising production
profile that reached an average 23,300 boe/d in December 2022.
portfolio, provides a basis for continued dividends to shareholders,
investment in the existing portfolio and further acquisitions. Very
few UKCS-focused independent oil and gas companies share this
same combination of attributes.
As described elsewhere in the Annual Report and Serica’s updated
ESG Report, making a positive contribution to the North Sea
Transition Deal is a key objective. Serica will use its operating
experience and support the infrastructure operators of the Tailwind
assets to reduce emissions. The longer-term outlook depends in
part on investments to reduce emissions from the Bruce and Triton
hubs. As operator of the Bruce hub and co-owner of the Triton
FPSO, Serica is engaged in the development and implementation of
GHG Emissions Reduction Action Plans for both facilities.
Greater
resilience
The assets acquired by Serica with the Tailwind transaction
comprise primarily a mix of operated and non-operated producing
fields tied-back to the Triton FPSO in the UK Central North Sea.
Tailwind’s interests in producing fields also include 100% in the
Orlando field located in the UK Northern North Sea and a non-
operated 25% in the Columbus field in the UK Central North Sea
(operated by Serica).
The acquisition of Tailwind was aimed at achieving Serica’s
longstanding objective to have a more diverse and broadly based
UKCS portfolio of producing fields, with material reserves and
value upside potential, coupled with a more balanced exposure
to commodity price risk. The transaction represents substantial
progress towards this objective with the number of producing fields
increased from five to eleven, mainly centred around two hubs
(Bruce and Triton), a substantial increase in 2P reserves (combined
130.4 million boe as at 31 December 2022) and a balance of gas
and oil production.
The acquisition has also added considerably to the organic
investment opportunities in Serica’s portfolio. Rig slots have
been reserved in order to drill infill wells on the Bittern, Gannet E,
Guillemot North West and Evelyn fields in 2024; all of which are
existing tie-backs to the Triton FPSO. The potential developments
of the Belinda field as a tie-back to the Triton FPSO and the Mansell
field, situated in the UK Northern North Sea, are being evaluated. All
these activities will continue under the ownership of Serica, whose
team has been supplemented by the addition of Tailwind staff.
These substantial enhancements to Serica’s portfolio of upstream
assets have been achieved while maintaining the Company’s
financial strength. Moreover, Serica retains a relatively low level
of decommissioning liabilities largely as a result of foundational
transactions by both Serica and Tailwind in the past involving
the sellers retaining such obligations. Serica’s strong balance
sheet, allied with expected net cash inflows from the enlarged
6 l Serica Energy plc Annual Report & Accounts 2022
“The acquisition of Tailwind was aimed at
achieving Serica’s longstanding objective
to have a more diverse and broadly based
UKCS portfolio of producing fields, with
material reserves and value upside potential”
Mitch Flegg
Chief Executive Officer
Diversifies portfolio
•
Portfolio strengthened by adding new production hub in the Triton Area
resulting in a balanced mix of gas and oil
•
Introduces multiple short-cycle organic growth opportunities
Production & reserves increased
•
Serica becomes top 10 UK producer with net 2023 production increased
by 50–80%
•
Increases Serica net 2P reserves
Accretive from year one for shareholders
•
•
•
Forecast to be immediately accretive to earnings per share
~50% increase in 2023 – 2025 projected cash flow per share
~50% increase in combined reserves per share compared to 1 January 2022
Financial strength enhanced
•
Significant net cash position of enlarged entity and strong ongoing cashflow
creates significant fire power for M&A, organic investments and cash returns
to shareholders
•
Both asset portfolios characterised by low decommissioning obligations
Committed strategic investor
•
Introduces Mercuria as a strategic shareholder with a 25.2% interest bringing
additional capabilities and commitment to further growth
•
Experienced and valued risk management partner with international reach
Serica Energy plc Annual Report & Accounts 2022 l 7
Performance Overview SERICA AT A GLANCE
Serica Energy was founded in 2004 and is now a top ten
UKCS producer. Our two-pronged strategy is to invest in our
existing assets to unlock value and prolong their productive life,
whilst continuing to target future acquisition opportunities.
ORLANDO
& MANSELL
NNS
EXPLORATION
RHUM
BRUCE
& KEITH
A BALANCED PORTFOLIO OF ASSETS
WITH GROWTH POTENTIAL
40-47,000 boe/d
11
producing fields
2
producing hubs
2023 net production guidance
47% oil, 53% gas
200+
personnel on and offshore,
in Aberdeen and London
80%
of production operated
by Serica
ABERDEEN
TRITON
AREA
COLUMBUS
ERSKINE
SKERRYVORE
OUR COMMITMENT
The oil and gas we produce every day contributes to the stability of our country’s energy security and
we are committed to doing this with respect for the environment, our people and the communities that
surround us.
8 l Serica Energy plc Annual Report & Accounts 2022
ORLANDO
& MANSELL
NNS
EXPLORATION
RHUM
BRUCE
& KEITH
ABERDEEN
TRITON
AREA
COLUMBUS
ERSKINE
SKERRYVORE
SIGNIFICANT RESERVES UPGRADES
Net 2P developed and undeveloped reserves (mmboe)
Competent Person Reports (CPRs) on Serica and
Tailwind portfolios, both effective 1 January 2023,
reported upward revisions of 2P reserves figures
which, when combined, are three times the amount
of production during 2022.
Jan 2022
Jan 2023
SERICA
TAILWIND
62.2
41.8
74.9
55.5
Carbon Intensity
(kg CO2/boe)
Total Flaring
(tonnes)
10,000
8,000
6,000
4,000
2,000
0
Waste to Landfill
(tonnes)
110
100
90
80
70
60
50
40
30
20
10
0
2019 2020 2021 2022
2019 2020 2021 2022
2019 2020 2021 2022
ESG FOCUS
ON BRUCE
Serica has continued
its focus on emissions
and waste performance
to better industry
benchmarks.
18
16
14
12
10
8
6
4
2
0
DIVIDEND
22p /share
total for 2022
22p
9p
3p
3.5p
0p
2019 2020 2021 2022 2023
IMPROVING SHAREHOLDER RETURNS
In November we paid an interim dividend of 8 pence
per share. Subject to approval of shareholders at the
Annual General Meeting in June 2023, we propose a
final dividend of 14 pence per share, bringing the total
dividend for the year to 22 pence per share.
Total payments of £75 million are approaching ten times
our initial dividend paid in 2020.
Serica Energy plc Annual Report & Accounts 2022 l 9
Performance Overview CEO’S REVIEW
2022 has been another year of outstanding achievement
for Serica. Net production for the year was 26,200 boe/d,
an increase of some 18% on the previous year. This
increase is a further illustration of the successful strategy
of investing in our assets in order to both add value and
prolong their lives.
The Company still has a strong balance
sheet with significant cash and limited
decommissioning liabilities. This has
allowed us to make these investments
despite the backdrop of volatile commodity
prices and an unstable fiscal regime.
Two major capital growth projects were
executed during the year. Our first Light
Well Intervention Vessel (“LWIV”) campaign
was carried out in the second quarter
of the year with a scope of production
re-instatement, well surveillance,
production enhancement and well integrity
activities on a number of subsea wells tied
back to the Bruce platform. Some of these
wells had not been re-entered for over
20 years. The initial well (Bruce M1) was
re-entered for the first time since 1998.
After a successful scale removal and water
shutoff, a significant reperforation and new
perforation campaign was executed and
the well returned to production. Production
rates from the well increased from around
400 boe/d before intervention to over
1,800 boe/d in July 2022.
A similar programme was followed on the
second well (Bruce M4) and production
rates for the well were increased from
around 450 boe/d to over 2,400 boe/d.
The second project was the North Eigg
exploration well which was drilled in the
second half of the year. Although the
well was drilled safely and successfully
encountered hydrocarbons, the reservoir
sands were thinner than prognosed
and so the hydrocarbons found are
not of commercial quantities. The data
acquired from the well is being analysed
to determine if a future sidetrack location
can be designed to evaluate the volumes
of hydrocarbon in this new discovery. The
well has been suspended prior to future
potential re-entry and sidetrack.
In 2022 Serica had gas price hedging
in place covering approximately one
quarter of gas sales (or around one fifth
of combined oil and gas production).
These hedges were in the form of swaps
and equivalent fixed price instruments.
The majority (approx. 80%) of Serica’s
oil and gas production was unhedged
allowing the Company to benefit from the
historically high gas prices and strong oil
prices. During the year, the highly erratic
gas futures market had a huge impact on
hedge security requirements which at one
point stood at over £300 million. These
security requirements fell throughout
the second half of the year as Serica’s
remaining gas price hedges continue to
expire and stood at £24 million at year end.
On 26 May 2022 the UK government
announced the introduction of an Energy
Profits Levy (EPL), a new 25% levy on
profits arising on or after that day. On
17 November, the rate was increased to
35%, bringing the combined tax rate to
75%. However, incentives to reinvest in
additional oil and gas reserves offer Serica
the opportunity to mitigate its impact.
Therefore, we will maintain our ongoing
investment in near term opportunities from
our existing portfolio and look for further
opportunities where they can be justified
under the current tax regime.
Against this background the Company
is steadily increasing its returns to
shareholders, a key element of the strategy.
In November we paid an interim dividend
of 8 pence per share. Subject to approval
of shareholders at the Annual General
Meeting in June 2023, we are proposing
a final dividend of 14 pence per share, an
increase on last year and bringing the total
dividend for the year to 22 pence per share.
10 l Serica Energy plc Annual Report & Accounts 2022
“ I am immensely proud to see our team deliver strong growth in
production volumes, a significant upgrade to reserves and increased
profitability at all levels.
Our acquisition of Tailwind has boosted production and reserves and
provides a number of short-cycle growth opportunities for the Company”
Mitch Flegg
CEO
In December we announced that Serica
had entered into an agreement to acquire
the entire issued share capital of Tailwind
Energy Investments Ltd (“Tailwind”)
from Tailwind Energy Holdings LLP. The
transaction achieves our strategic objective
of materially increasing the scale and
diversity of our UKCS portfolio of assets.
The Tailwind portfolio also brings multiple
organic investment opportunities for further
material near-term growth in reserves and
production. Following this transaction,
Serica will retain its competitive strengths
of a strong balance sheet, positive
cash flow and low decommissioning
cost obligations. Moreover, through the
introduction of Mercuria as a new strategic
investor, we will be differentially positioned
to take advantage of the opportunities
we expect to arise through industry
consolidation, the North Sea Transition
Deal and potentially overseas.
As announced on 5 April 2023, Serica has
commissioned a new Competent Person’s
Report (“CPR”) effective 1 January 2023
which included a significant upgrade to net
2P reserves estimates. Our net 2P reserves
stood at 62.2 million boe at 1 January
2022 and our 2022 net production was
8.3 million boe after adjustment for fuel gas
but our net 2P reserves at 1 January 2023
stand at 74.9 million boe with revisions
having replaced more than twice the level
of 2022 production. This achievement is
further evidence that Serica’s long-term
strategy is delivering value.
Similarly, a CPR was commissioned for
the Tailwind Reserves effective 1 January
2023. For the Tailwind portfolio net 2P
reserves stood at 41.8 million boe at 1
January 2022 and 2022 net production
was 4.2 million boe but net 2P reserves at
1 January 2023 stand at 55.5 million boe.
Taking the two portfolios together, upward
net revisions of 2P reserves were more
than three times the amount of production
in 2022.
Our industry is essential for the economic
and environmental prosperity of our
country. Our brilliant, skilled people work
tirelessly to produce the energy from
offshore locations around Britain that
powers not just our homes, transport and
industry, but the everyday products we
need to live well.
We are proud to make a huge contribution
to the UK economy. Serica alone has paid
£284 million in tax to the UK Exchequer
since the start of 2022 and in 2022/23
alone our upstream industry as a whole
will add at least £28bn to the UK economy.
In addition to its pivotal role in securing
the energy security of the country, the
upstream sector has a sizeable impact on
the UK balance of payments and provides
215,000 skilled jobs across the length and
breadth of the country.
The industry is committed to delivering Net
Zero by 2050, but alongside expanding into
energy sources like wind and hydrogen,
the UK will continue to need oil and gas.
The Climate Change Committee concludes
that oil and gas will meet 50% of the UK’s
energy needs in the mid-2030s and will still
provide 22% in 2050. Around 40% of the
UK’s electricity comes today from gas fired
power stations and in 2022, domestic gas
production met 44% of the UK’s total needs
reducing the requirement for imports.
Finally, I would like to recognise the
outstanding performance of our 180 strong
workforce who have again exceeded
expectations and I welcome the new staff
who have joined us from Tailwind. I would
also like to acknowledge the incredible
contribution of Tony Craven Walker who
has today announced that he will be
standing down as Chair. Tony has been
instrumental in the development of the
Company from its early stages through to
its establishment at one of the UK’s top ten
producers, and I would like to personally
thank him for the experience and guidance
that he has provided to me and the entire
management team. I look forward to
working with the incoming Chair, Dave Latin
who I have known for many years.
I believe we have an outstanding workforce,
management team and Board and a
combination of skills that will drive the
company even further to create more value
for shareholders.
Mitch Flegg
Chief Executive Officer
12 April 2023
Serica Energy plc Annual Report & Accounts 2022 l 11
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 2021 delivered a series of initiatives.
HSE TRAINING AT SERICA
WELL INTEGRITY
Incident investigations are a fundamental process, supporting
continuous improvement in our HSEQ performance. In 2022, we
refreshed our incident investigation training to ensure that our
personnel are skilled in identifying the root causes of accidents and
near misses and making effective recommendations to prevent
their recurrence.
A common understanding of process safety and major accident
hazards is important, so we made that a focus in parts of our well-
attended onshore team safety meetings We also worked with Salus
Technical on an online Process Safety Awareness course which has
been mapped against IChemE’s process safety competence matrix
and is an industry first. The course will be rolled out in 2023 and we
believe this will provide an excellent foundation on which to build
further process safety training.
Our teams use IBM Maximo® to raise work orders for planned
wellhead/xmas tree maintenance and testing. During annual
maintenance and inspection programmes, Parsable Connected
Worker® allows real time recording of results via an EX rated tablet
This avoids manual transfer of data and potential human error. Both
systems integrate with SafeWells® well integrity system allowing
automatic update of data. Working with these systems helps Serica
manage our wells safely and responsibly throughout their lifecycle.
“Serica follows best practice for
managing the integrity of our wells
through proactive monitoring and
preventative maintenance”
Alex Pirie – Wells Manager
ELECTED SAFETY REPRESENTATIVES
Our Elected Safety Representatives (ESRs) continue to provide us with welcome feedback and an
invaluable link to the workforce. In 2022 we worked with the ESR community to enforce their value to
the Company, ensure that they had the resources required to excel, and enhance both their visibility
and stature. In January 2023, we held our first ESR offsite meeting, attended by seven ESRs, our VP
Operations, two Bruce Offshore Installation Managers (OIMs), and a representative from the Health
and Safety Executive.
HEALTH AND SAFETY PERFORMANCE
DIVING
Health and Safety performance was varied in 2022, but we are
proud that Serica’s open and honest reporting culture helps
personnel to welcome the learning opportunities that result.
On Bruce, there were three restricted work cases which were
considered to have reached their full potential. There were also
three reportable releases of hydrocarbon fluids, however, two of
these were lubricating oil, and none of those had the potential to
escalate to a more serious event. Balanced against the releases is
a concerted effort to address all identified leaks or seeps of volatile
hydrocarbons before they deteriorate and the result of this focus
meant that, during 2022, our team remediated thirty-four.
Health and safety performance on our projects improved in 2022,
with some excellent performance on our vessel-based activities
in particular.
CATEGORY*
2022
2021
2020
Day Away From Work Cases (DAFWC)
Restricted Work Injury/Illness
Medical Treatment Injury/Illness
* BKR statistics
0
3
0
0
0
1
0
0
0
12 l Serica Energy plc Annual Report & Accounts 2022
We recognise diving as a Major Accident
Hazard. To raise awareness we took
around 30 of our staff and contractors
to an event hosted by SPE-Aberdeen
“Last Breath – Reasoning with Life and
Death at the Bottom of the North Sea by
Chris Lemons”.
This was a unique opportunity to hear
Chris’ incredible story of survival; an
insight into the world of saturation diving
and the lead up to the fateful day in 2012
when Chris was stranded on the seabed,
300 feet down, in the icy darkness, with
only five minutes of gas to breathe.
“Our success is dependent on knowing our risks and how to
manage them. The ongoing development of our Operations
Management System and the continuous commitment of
our teams has been fundamental to this objective”
Craig Robertson
HSEQ Manager
OPERATIONS MANAGEMENT SYSTEM
(OMS) PROJECT
Our OMS is designed to deliver safe, environmentally, and socially
responsible, and reliable operations. The structure and content
recognises the principles of HSG65 (Managing for Health and Safety),
ISO 45001 (Occupational Health and Safety Management Systems)
and ISO 14001 (Environmental Management Systems) and ensures
that risks to the health and safety of personnel and to the environment
are reduced to As Low as Reasonably Practicable (ALARP).
ASSET LIFE EXTENSION
In 2023, the phase 1 Bruce facilities begin operating beyond their
original design life, and as we seek to extend the operation of the
facilities to 2035, and possibly beyond, we must ensure they remain
fit for purpose.
A significant amount of work has been undertaken in support of
this objective:
• Life extension studies for the platform structure and pipelines
In 2022 we simplified the structure of our Operations Management
System (OMS), reducing it from eight elements to four and removing
many documents through a process of streamlining and integration.
•
•
The initial focus of the Project Team was to improve our
documentation relating to Risk Management and Major Accident
Hazards with clear roles and responsibilities. Work is now in
progress on all four elements, and we are making some structural
changes to the document templates to make them easier to use,
and have moved the system to a new, faster site to enhance the
user experience. Elements are supported by a bespoke Computer
Based Training (CBT) module to ensure a common understanding.
CRISIS MANAGEMENT AND EMERGENCY
RESPONSE
Throughout 2022, Serica continued its programme of emergency
response exercises in support of its offshore operations. The scope
of these exercises embraced a broad range of topics covering
platform-based major accident hazard scenarios and campaign-
specific exercises covering our diving, drilling and light well
intervention activities.
Our capacity to work collaboratively with external organisations was
further tested in October 2022 when Serica fulfilled its regulatory
obligation to conduct an OPRED assessed Tier 3 exercise. These
formally assessed three-yearly exercises are designed to stress-
test the application of our oil pollution emergency plans (OPEP) in
response to a potential oil pollution incident and demonstrate our
ability to work collaboratively with participating government bodies.
Development of a strategy for operating and upgrading the
BKR facilities
A review of potential projects required for life extension, including
a review of requirements to meet North Sea Transition Deal
emissions targets
In 2022 we conducted a Safety Case Asset Life Extension Review
to consolidate the work to-date and support an update of the Safety
Case to demonstrate how we will continue to manage safe, reliable,
and responsible operations through the life extension phase.
MENTAL HEALTH AND WELLBEING
Our focus on positive mental health and wellbeing continues as
we provide and promote services including training, face-to-face
and remote counselling, webinars, and additional information and
resources. In 2023, we plan to release Mental Health e-learning
modules for our teams to further increase our awareness and
understanding of mental health issues and the support available.
“Learning outcomes are a critical
output of any emergency response
exercise, giving us valuable insight
to identify, assess and implement
continual improvement opportunities”
Jason Reynolds, HSEQ Advisor
Encouraged by the success of RigRun offshore, in 2022 we joined
the Virgin Pulse “VP GO” challenge for the first time, with a focus on
our onshore personnel. VP GO is a wellbeing programme designed
to help participants take small steps toward improving their health
through friendly competition and learning experiences. The main
event, ‘Destination GO challenged individuals or teams to compete
to find out who could get the most steps in during a virtual trek
across the globe.
Serica Energy plc Annual Report & Accounts 2022 l 13
Strategic Report ENVIRONMENTAL, SOCIAL & GOVERNANCE (ESG)
In 2022, Serica strengthened its position in ESG by making it a key part of the business
process. This began at the start of the year by establishing an Energy Transition Engineering
Advisor role who made real progress by embedding emissions reduction into the Company’s
planning processes.
The Bruce Emissions Reduction Action Plan now
clearly lays out how we intend to bring down our
operational emissions in line with targets in the
Government’s North Sea Transition Deal and this
has been submitted to the Regulator. The Serica
ESG policy was published and incorporated into our
Operating Management System, setting down the
Company’s ambitions and commitment to ESG.
Serica continues to set ESG-related targets on our
operated facilities as part of our remuneration scheme
for all staff. 2023’s ESG bonus-related targets for the
Bruce facilities are:
• Total flare below 5,000 tonnes
• Scope 1 CO2 emissions below 200,000 tonnes
Although absolute emissions in 2022 were 4% over
target, during 2022 our carbon intensity fell from 17.8
to 16.4kg CO2/boe.
2022 COMMITMENT
2022 OUTCOME COMMENTS
Daily flaring below 9.5
tonnes/day
9.0 tonnes/day
On target
Total flare below 5,000
tonnes
5,850 tonnes
16% above due to operational
upsets
Scope 1 CO2 emissions
below 210,000 tonnes
218,567 tonnes
3.5% over target due to higher
production rates and a shorter
maintenance period
General waste from
Bruce platform 90 tonnes
60% waste recycled
90 tonnes
On target
47% waste
recycled
Below target due to increased
waste to energy
Develop a methane
action plan
Done
Plan written – aerial survey and
enhanced monitoring
STAFF-LED COMMITTEES
During 2022 our five ESG Committees came into
their own with more ideas, activity and involvement
than ever.
The Emissions Reduction Group, formed of onshore and offshore engineering and specialist staff, continued their focus. In
2022, the group collaborated to plan a temporary power project to reduce emissions during maintenance, and progressed
studies into flare gas recovery, utilising waste heat to save energy and electrification of equipment by removing gas turbines.
The offshore based Bruce ESG Champions Committee works to generate and implement initiatives to help us lower
emissions, improve efficiency, reduce waste volumes, and promote wellbeing offshore. Throughout the year they worked
together to implement a reusable water bottle scheme, a digital newspaper service and trials of reusable alternatives.
The Charity Committee partnered with the Mental Health Foundation and organised fundraising activities throughout the
year, such as such as challenges for cyclists and walkers and a mental health awareness day donation. We stepped up
our support for Forces veterans, acknowledging the contribution they have made to our industry by establishing an Armed
Forces Support Group and giving to charities that benefit the wider veteran community. Other causes close to the hearts
of our workforce saw the donation of sports equipment to youth football and rugby teams, plus regular donations to
foodbanks and poverty alleviation charities.
Our Diversity and Inclusion Committee collaborated with external groups such as AFBE UK, Autism & Neurodiversity
Scotland and 4Pillars LGBT Community Support, aiming to minimise biases in our recruitment process by reviewing our
recruitment policy, interview questions, job descriptions and recruitment adverts to ensure gender neutral language. We also
continued to drive awareness of D&I with lunchtime sessions for staff delivered by the above parties. In 2022 the proportion
of female staff rose by 7%.
The Education Committee supported schools through a variety of outreach work, such as supporting mock interview
and CV writing workshops and providing outdoor learning packs to a local primary school. We repeated our Summer
Placement Programme with eight-week paid student placements for two students. Serica continue to support the OPITO
apprenticeship scheme, providing over £250,000 of funding per year.
14 l Serica Energy plc Annual Report & Accounts 2022
“The ESG momentum has continued at Serica as our people
turn ambition into action. We have progressed an arsenal
of projects to meet the challenge of emissions reduction
targets, embracing new technology and motivating our
workforce, not only to be part of the energy transition, but
also to make a positive impact on our communities”
Clara Altobell
VP ESG and Business Innovation
Our Governance section explains the
Company Governance framework and
how Serica manages risk to ensure ethical
practices. Our Board has the skillsets
to apply appropriate governance, with
experience in banking, legal, finance, HSE
and technical oil and gas. We are members
of the UN Global Compact and follow its
ten guiding principles and align with TCFD
reporting recommendations. Our Operations
Management System ensures that we have
the appropriate policies in place to ensure
ethical practices are followed.
GREENHOUSE GAS
EMISSIONS DISCLOSURE
In 2022 we reduced the carbon intensity
on Bruce by 8% compared to 2021 through
a combination of plant performance,
close monitoring and efficiency. We also
made significant progress in clarifying
our plans to meet the targets of the North
Sea Transition Deal with the development
of our Emissions Reduction Action Plan
for Bruce. This sets out the project work
required on our main sources of emissions,
power generation and compression, and
provides details on how the projects will
be planned and executed. This document
was submitted to Government and
demonstrates Serica’s commitment to
incorporating emissions reduction into our
business plans.
A detailed data book of our Scope 1 emissions for 2022 compared to previous years is
provided in the Serica 2022 ESG report, available on our website. 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 Company does not own any vehicles.
Our Bruce facilities’ emissions are reported, audited and verified based on the UK Emissions
Trading Scheme (ETS). In 2022 Serica’s UK ETS emissions were 218,567 tonnes of CO2,
within 5% of our 2021 emissions (208,868 tonnes). Our continued efforts to keep emissions
low have achieved a reduction since 2019 of around 10%. Energy consumption on Bruce
in 2022 was 1,017 GWh (2021: 975 GWh). Carbon intensity (CO2 emissions divided by
production) was 16.4 kg CO2/boe in 2022 (2021: 17.8 kg CO2/boe).
The Company continued its initiatives to reduce emissions on Bruce, including the adoption
of AI-based emissions monitoring software, adding more monitoring points on gas turbines
and performing an energy savings audit on the platform.
Electricity usage in our Aberdeen
operations headquarters generated
16,950 kg of CO2e for 2022 (2021:
14,126 kg). London office emissions were
3,736 kg of CO2e for 2022 (2021: 3,444 kg).
Serica has continued its blended working
approach, giving staff more flexible
working conditions, with the added benefit
of keeping office emissions low. CO2e
was calculated using the UK Government
GHG Conversion Factors for Company
Reporting for 2022 issued by formally BEIS
and DEFRA.
Our 2022 ESG report provides more
detail on our emission reduction
activities, statistics and plans for 2023.
Serica Energy plc Annual Report & Accounts 2022 l 15
Bruce Platform•Power•Compression•Flare*Vessels such as Supply, Diving Support, Workovers, Emergency Response & RescueOffice electricity(purchased)Scope 1DIRECTScope 3INDIRECTHelicopters Drilling rigs Non-operated processing VesselsScope 2INDIRECTStrategic Report REVIEW OF OPERATIONS – PRODUCTION
Northern North Sea: Bruce Field
Blocks 9/8a, 9/9b and 9/9c, Serica 98%
and operator
Serica operates the Bruce field and facilities
consisting of three bridge-linked platforms,
wells, pipelines and subsea infrastructure.
The platforms contain living quarters,
reception, compression, power generation,
processing and export facilities and a
drilling derrick that is currently mothballed.
There is also the subsea Western Area
Development (WAD) that produces from
the edges of the Bruce area.
Bruce production is predominantly gas
which is rich in liquids. Gas is exported
through the Frigg pipeline to the St Fergus
terminal, where it is separated into sales
gas and NGL’s. Oil is exported through the
Forties Pipeline System to Grangemouth.
In 2022, activity returned to pre-Covid levels
on the platform as national controls were
relaxed. A 14-day maintenance campaign
focussing on integrity works was executed
in the summer. During this campaign we
completed the removal of the redundant
caisson that had interrupted production
in 2020. In addition, a Bruce platform well
work campaign was successfully executed
in Q3. Operations included well integrity
maintenance, production logging, adding
perforations to the upper producing zones
and water injectivity trials.
In addition, the first vessel-based
interventions (LWIVs) of Serica’s
ownership took place on two of the WAD
wells, performing logging, maintenance
interventions, water shut-off, scale removal
and addition of new perforations. Both
interventions were successful and have
helped define future targets for campaigns
in 2023 and 2024.
Prior to carrying out the intervention
on the WAD wells, maintenance on the
field electrical supply was carried out
including replacement of master control
system (MCS) modules and power leads
to protect production from the WAD area.
Further work is planned ahead of the 2023
intervention campaign.
Bruce field production in 2022 averaged
approx. 6,900 boe/d (2021: 6,700 boe/d)
net to Serica. Full year production reliability
was 94%.
16 l Serica Energy plc Annual Report & Accounts 2022
“ During 2022 the Rhum separator on the Bruce
topsides was debottlenecked to allow more
flexibility optimising production from all three
Rhum wells”
The latest independent estimate of
reserves by RISC Advisory estimated
2P reserves of 31.8 million boe net to
Serica as of 1 January 2023 (2022:
15.8 million boe). This increase reflects
the benefits from future planned well
interventions and from field life extension
beyond 2030.
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
and requires very little maintenance. In
normal operation Keith produces at a
relatively low rate but provides a low-cost
contribution to the oil export from Bruce.
During 2022 work was undertaken on the
electrical supply to Keith which discovered
a fault in the system. The system was
isolated and production shut in ahead of a
replacement being fitted in Q3 2023. This,
in combination with a well intervention
planned for Q2 2024, is expected to restore
the field to sustained production.
The latest independent estimate of
reserves by RISC Advisory estimated 2P
reserves of 2.4 million boe net to Serica
as of 1 January 2023 (2021: nil). These
reserves are recognised based upon the
planned 2023 and 2024 programmes.
Northern North Sea: Rhum Field
Blocks 3/29a, Serica 50% and operator
The Rhum field is a gas condensate field
producing from three 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
Mike Killeen
VP Operations
content than Bruce gas and so is blended
with Bruce gas before leaving the offshore
facilities.
In February 2022, the master control
system (MCS) module supplying power to
the Rhum wells failed in service shutting
down the field. A vessel was sourced
and the spare MCS was fitted restoring
production after an 18-day outage. The
recovered MCS has been overhauled to
ensure that a spare remains available.
Also during 2022 the Rhum separator on
the Bruce topsides was debottlenecked to
allow more flexibility optimising production
from all three Rhum wells.
Rhum field production in 2022 averaged in
excess of 15,700 boe/d net to Serica. Full
year production reliability was 80%.
The latest independent estimate of
reserves by RISC Advisory estimated
2P reserves of 36.4 million boe net to
Serica as of 1 January 2023 (2022:
37.2 million boe). This represents an
increase in reserves after 2022 production
is taken into account which arises from the
extension of field life into the 2030s.
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. Serica provide
a secondee to Lomond as part of the
offshore management team.
The Erskine field has five production wells
and produces oil and gas over the Erskine
normally unattended installation, which is
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.
In March 2022 an intervention to replace
the downhole safety valve on well W5
was successfully carried out and a 22-day
maintenance outage was carried out in July
and August. An intervention to reinstate
production from another well is being
considered for late 2023 or early 2024.
Erskine production levels in 2022 averaged
over 1,680 boe/d (2021: 1,650 boe/d).
Operating efficiency in 2022 was 76%.
An updated independent audit of the
Erskine field by RISC Advisory confirmed
Serica’s share of estimated 2P reserves at
3.3 million boe as of 1 January 2023 (2022:
3.4 million boe). The level of estimated
remaining reserves at the beginning of 2023
matched those at the point of acquisition
in June 2015 with all production in the
intervening period effectively having been
replaced through reserves upgrades to-date.
Serica Energy plc Annual Report & Accounts 2022 l 17
Strategic Report REVIEW OF OPERATIONS – PRODUCTION continued
Central North Sea: Columbus Field
Blocks 23/16f and 23/21a (part),
Serica 50% and operator
The Columbus Development is located in
the UK Central North Sea and produces
from a gas-condensate reservoir in
the Forties Sandstone Formation. The
development consists of a single horizontal
well which runs along the central axis
of the reservoir, drilled in the spring of
2021, and production commenced in
November 2021.
The Columbus well is connected to the
Arran export pipeline through which
Columbus production is exported along
with Arran Field production. When
production reaches the Shearwater
platform, it is separated into gas and
condensate. The gas is exported to
St Fergus via the SEGAL line and the
condensate to Cruden Bay via the Forties
Pipeline System.
Columbus had good initial test rates and
started production in November 2021. Flow
rates declined during the first few months
of production and average Columbus
production in 2022 was around 1,900 boe/d
net to Serica. There were two planned
outages during 2022, a 10-day field outage
in January and an 18-day Shearwater
maintenance outage in August.
Columbus reserves had a downward
revision in 2022 due to analysis of
data gathered from the first full year
of production, and the subsequent
interpretation of this data. The latest
independent report of reserves, compiled
by RISC Advisory, estimated 2P reserves
of 1.1 million boe net to Serica as at
1 January 2023 (2022: 4.9 million boe) after
allowing for production of 0.6 million boe
during 2022.
“ 2022 was an important year strategically
for our business. With significant remaining
reserves, we are focused on putting the right
long term strategic plans in place for the
Bruce hub. This will bring increased activity,
meaning it is vital that we set ourselves up
for success, are clear about our priorities and
set realistic, deliverable goals. In this way we
can be more strategic in our decision-making
whilst managing resources efficiently to
deliver safe, consistent production”
Carol Stewart
North Sea Business Manager
INVESTING TO MAXIMISE THE ECONOMIC LIFE OF BRUCE
Stable operations deliver consistent
production and in 2022, due to excellent
teamwork, we had a record-breaking run of
consecutive days’ production.
Our goal to extend the productive life
of Bruce has its foundations in ‘Project
2035+’, a structured plan to ensure that
our investment in the asset follows a pre-
defined, logical path with a clear vision that
is shared across all disciplines within the
Company, on and offshore.
In this way we will give everyone on the
team the direction they need to execute
work in a way that will access Bruce’s
remaining reserves whilst complying with
our ESG targets.
During 2022 we re-structured our Asset
Management teams and reporting
structures to empower our talented Team
Leads to plan and direct maintenance
covering Asset Life, Operations and
Production optimisation plus a fast
response team to make sure that day-to-
day issues are dealt with promptly. This
co-ordinated approach will dovetail in
support of our ultimate goal of maintaining
safe production from Bruce beyond 2035.
18 l Serica Energy plc Annual Report & Accounts 2022
REVIEW OF OPERATIONS – EXPLORATION
“ Exploration starts the value chain. During 2022
Serica drilled North Eigg, and evaluated 32nd round
acreage and infill drilling opportunities”
Fergus Jenkins
VP Technical
Skerryvore and Ruvaal
Blocks 30/12c (part), 30/13c (split),
30/17h, 30/18c and 30/19c (part), Serica
Energy (UK) Limited: 20% working interest,
Operator Parkmead
The Skerryvore and Ruvaal prospects lie in
the Central North Sea, 60km south of the
Erskine field. Potential for both sandstone
and chalk reservoirs has been identified.
In September 2022, the P2402 Joint
Venture elected not to proceed to the next
phase of the Licence and that has therefore
now been relinquished (effective date
30 September 2022).
Parkmead, CalEnergy and Serica decided
to move ahead with P2400 (Skerryvore),
though NEO chose to withdraw. Serica
maintained its equity in the licence,
staying at 20%. Both Parkmead and
CalEnergy increased their shares to 50%
and 30% respectively, absorbing the equity
previously held by NEO (effective date
30 September 2022).
The next phase of the Licence includes a
commitment well before October 2025 and
the Joint Venture are targeting a well by the
end of 2024.
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, or to other facilities
in the region. The work programme does
not include any commitment wells but
is designed to mature these leads to
drill-ready status. A decision whether to
continue with the licences is due before the
end of 2023. A decision about next steps
therefore needs to be nominated to NSTA
by the end of September 2023.
North Eigg and South Eigg
Blocks 3/24c and 3/29c, Serica Energy
(UK) Limited 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 commitment included drilling
an exploration well within two years. The
North Eigg prospect was high-graded for
drilling, as it was believed to share many
similarities with the nearby Rhum field,
operated by Serica.
The 3/24c-6B North Eigg exploration well
was drilled to a total depth of 16,728 feet
in the Jurassic Heather formation and
initial analysis indicated that, whilst the well
encountered hydrocarbons, commercial
quantities were not encountered by
the wellbore. At the well location, the
objective sands were thinner than had
been prognosed, with a total of 16 feet of
hydrocarbon-bearing sands discovered.
These did however confirm the presence of
hydrocarbons at a deeper depth than in the
adjacent producing Rhum field.
A full suite of wireline logging data was
acquired and analysis of this, along with
results from core and fluid samples
recovered is ongoing and will be used
to update geological interpretations and
models. The results of the interpretation
will determine whether a future sidetrack
of the well can be designed to better
evaluate the volumes of hydrocarbon in this
new discovery.
The well was left suspended in a way
that would allow potential re-entry and
sidetrack, or abandonment, as appropriate.
Serica Energy plc Annual Report & Accounts 2022 l 19
Strategic Report GROUP PROVED PLUS PROBABLE RESERVES (“2P”)
2P Reserves at 31 December 2021
2022 production
Revisions
2P Reserves at 31 December 2022
Oil
mmbbl
13.2
(1.0)
6.5
18.7
Gas
bcf
294.1
(43.7)
87.0
337.4
Total oil and gas*
mmboe
62.2
(8.3)
21.0
74.9
*
Total Group gas reserves at 31 December 2021 and 2022 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 may not convert precisely.
Group Proved and Probable reserves at 31 December 2022 shown here are extracted from an independent report prepared by RISC Advisory
(“RISC”) in accordance with the reserve definitions guidelines defined in SPE Petroleum Resources Management System 2018 (“PRMS 2018”).
RISC were familiar with the assets, having also completed an audit in the previous year.
Figures quoted relate to export fluids, so Fuel in Operation has already been subtracted.
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.
Some volumes classified as contingent resources during the previous audit have now been re-classified as reserves, primarily because work
has been included in the approved forward work programme to further enhance production. In addition, the Rhum R3 well has performed at
the upper end of expectations since its successful workover.
Columbus reserves had a downward revision due to analysis of data gathered from the first full year of production, and the subsequent
interpretation of this data.
For the previous report, Serica had assumed the permanent cessation of production (COP) for the Bruce hub would occur at the end of
2030 which was reflected in the CPR prepared by RISC. As part of the ‘North Sea Transition Deal’ the UK plans ‘Zero Routine Flaring’ at the
end of 2030, and hence continuing production past that date requires investment related to flare gas recovery and other emission reduction
measures. During 2022, Serica matured plans to undertake the projects necessary to meet these requirements and the cost of the projects
has been included in the economic modelling required to determine economic cut-offs used to determine reserves. On the basis of these
plans and the economic analysis, the new CPR assumes that Bruce hub production will continue to 2035 which is a significant part of the
upward revision in 2P reserves.
The CPR takes account of the Energy Profits Levy (“EPL”) introduced by the UK Government in 2022 (and subsequently revised) which did not
previously apply.
20 l Serica Energy plc Annual Report & Accounts 2022
LICENCE HOLDINGS
The following table summarises the Group's licences as at 31 December 2022.
Licence
Block(s)
Description
Role
%
Location
UK
P.090
9/9a Bruce
Bruce Field Production
Operator
99%
Northern North Sea
P.090
9/9a Rest of Block Excluding
Bruce (REST)
Development
Operator
98%
Northern North Sea
P.198
3/29a (ALL)
Rhum Field Production
Operator
50%
Northern North Sea
P.209
9/8a Bruce
Bruce Field Production
Operator
98%
Northern North Sea
P.209
9/8a Keith
Keith Field Production
Operator
100% Northern North Sea
P.209
9/8a Rest of Block Excluding
Bruce and Keith (REST)
Development
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
Operator
100% Northern North Sea
P.975
3/29d (ALL)
Rhum non-unitised production
Operator
100% Northern North Sea
P101
23/21a Columbus
Columbus Development Area
Operator
50%
Central North Sea
P1314
23/16f
Columbus Development Area
Operator
50%
Central North Sea
P57
23/26a
Erskine Field – Production
Non-operator
18%
Central North Sea
P264
23/26b
Erskine Field – Production
Non-operator
18%
Central North Sea
P2400
30/12c, 30/13c, 30/17h,
30/18c
Exploration
Non-operator
20%
Central North Sea
P2501
3/24c, 3/29c
Exploration
Operator
100% Northern North Sea
P2506
3/25b, 3/30, 4/26, 9/5a
Exploration
Operator
100% Northern North Sea
Serica Energy plc Annual Report & Accounts 2022 l 21
Strategic Report FINANCIAL REVIEW
“Profits were boosted during the year by a combination
of increased production arising from successful 2021
investment on the Rhum R3 and Columbus wells, work
on Bruce wells during 2022 and from high gas prices”
Andrew Bell
Chief Financial Officer
2022 results
Serica generated a profit before taxation
of £488.2 million for 2022 compared to
£135.1 million for 2021. After current and
deferred tax provisions of £310.4 million
(2021: £55.8 million), profit for the year was
£177.8 million compared to £79.3 million
for 2021.
Profits were boosted during the year by
a combination of increased production
arising from successful 2021 investment
on the Rhum R3 and Columbus wells,
work on Bruce wells during 2022 and
from high gas prices. Serica’s continuing
success in replacing oil and gas production
since completion of the BKR acquisitions
through investment assists the Company
in counteracting the normal decline profiles
of mature fields in the UKCS and thus
sustaining financial performance.
Sales revenues
The total 2022 sales revenue of
£812.4 million (2021: £514.1 million)
included £37.5 million of gas supply
contract revenue (2021: £nil). Gas supply
contract revenue reflects the extinguishing
of liabilities which were booked upon
the conversion of some gas price
swaps into fixed pricing under gas sales
agreement during 2021. These liabilities
are extinguished when the relevant gas
volumes are delivered with an equivalent
credit to the income statement.
Total product sales volumes for the
year comprised approximately 431.5
million therms of gas (2021: 373.7
million therms), 1.1 million lifted barrels
of oil (2021: 0.8 million barrels) and
71,290 metric tonnes of NGLs (2021:
52,400 metric tonnes). The combined
sales revenue of £812.4 million (2021:
£514.1 million) consisted of BKR revenues
of £678.2 million (2021: £463.4 million),
Erskine revenues of £63.6 million (2021:
£36.3 million) and Columbus revenues of
£70.6 million (2021: £14.4 million).
Average 2022 sales prices net of system
fees were: 160 pence per therm including
contract revenue (2021: 122 pence per
therm) for gas, US$97.2 per barrel (2021:
US$71.4 per barrel) for oil and £480 per
metric tonne (2021: £340 per metric tonne)
for NGLs. This gave a combined realised
sales price net of hedging of US$104
per barrel of oil equivalent (2021: US$77
per boe). The average gas sales price of
160 pence per therm reflects a mix of
volumes sold at current spot prices and
volumes sold at contracted fixed prices.
This is before gas price hedging costs
on the retained gas price swaps detailed
below. The fixed price element represented
a reduction from daily spot pricing
averaging approximately 30 pence per
therm (2021: nil).
Gross profit
The gross profit for 2022 was
£594.3 million compared to £386.8
million for 2021. Overall cost of sales of
£218.2 million compared to £127.3 million
for 2021. This comprised £121.0 million
of operating costs (2021: £97.1 million)
and £76.9 million of non-cash depletion
charges (2021: £37.0 million), reflecting
higher production volumes and the impact
of reduced Columbus reserves. A further
charge of £20.3 million represents a
movement during the year of the opening
liquids underlift to a significant overlift
position (2021: credit of £6.9 million).
Operating costs comprise production,
processing, transportation and insurance
and also included some non-recurring
charges. Operating costs per boe were
US$15.7, compared to US$16.5 for 2021.
Costs per boe have benefitted from
the fixed elements of production costs
being spread over increased production
volumes but this has been partly offset by
underlying cost inflation and exceptional
costs related to the Rhum production
interruption in Q1.
22 l Serica Energy plc Annual Report & Accounts 2022
The 2022 depletion charge reflects
the impact of a full year of Columbus
production. Following the significant
downgrade to Columbus reserves in the
year, Columbus depletion is charged at
a relatively higher unit cost per boe than
the other producing assets and this has
increased the overall depletion charge.
Operating profit before BKR fair value
adjustment, net finance revenue and tax
The operating profit for 2022 was
£476.2 million compared to £246.1 million
for 2021. This included hedging expense,
related to gas price swaps, of £45.4 million
realised during 2022 (2021: £56.6 million)
partly offset by unrealised hedging
income of £20.9 million (2021: expense
£74.6 million). Unrealised income
represented the movement in respective
valuations of future period swaps
outstanding at year end 2021 and year
end 2022.
An E&E asset write-off for 2022 of
£82.7 million (2021: £nil) comprised drilling
costs from the North Eigg exploration
well incurred to 31 December 2022. The
well encountered hydrocarbons, but not
of commercial quantities as the reservoir
sands were thinner than prognosed. The
expenditure is applicable for total tax offset
of approx. 85%. Further analysis of data
is ongoing to assess if a future sidetrack
location can be designed to evaluate
further and the well has been suspended.
Administrative expenses for 2022 of
£9.2 million compared to £6.1 million
for 2021 mainly due to an increase in
corporate activity, including advisor costs
on projects separate to the Tailwind
acquisition.
Transaction costs of £1.8 million (2021:
£nil) comprise work on the due diligence,
negotiation and structuring of the Tailwind
transaction during 2022.
Share-based payments were £3.5 million
(2021: £2.4 million) and currency gains
were £3.9 million (2021: losses of
£0.9 million) largely arising on GBP-
reported US$ holdings as sterling
weakened compared to the US$
during 2022.
Profit before taxation and profit for the
year after taxation
Profit before taxation for 2022 was
£488.2 million (2021: £135.1 million)
after an £8.4 million credit arising
from a decrease in the fair value of the
BKR financial liability (2021: charge of
£110.5 million) and £3.6 million of net
finance revenue (2021: net costs of
£0.4 million).
The 2022 fair value credit of £8.4 million
relating to the BKR financial liability largely
arose from an increased discounting
effect from field life extension on the
estimated amounts of those remaining
liabilities. The fair value of the liabilities,
which are described under BKR asset
acquisitions below, is re-assessed at each
financial period end. The prior year charge
of £110.5 million included significant
increases in the settlement of final net
cash flow sharing and Rhum contingent
consideration that occurred following
higher production and gas prices impacting
these items in 2H 2021.
Net finance revenue represents interest
income earned on cash deposits offset by
the discount unwind on decommissioning
provisions and other minor finance costs.
As the Group had fully utilised its remaining
losses carried forward from previous years
during 2021, cash taxes are payable on
2022 income. In addition to corporation tax
and supplementary charge, 2022 full year
results also include charges for the newly
introduced Energy Profits Levy (“EPL”).
The EPL applies an additional 25% tax on
profits earned from the production of UK oil
and gas from 26 May 2022, increasing to
35% from January 2023 to March 2028.
The 2022 taxation charge of £310.4
million (2021: £55.8 million) comprised
current tax charges of £277.7 million
(2021: £15.8 million) and non-cash
deferred tax charge of £32.7 million
(2021: £40.0 million). The current tax
expense includes an EPL current tax
charge of £64.3 million. The deferred
tax expense includes a one-off non-cash
deferred tax charge of £59.0 million due
to the introduction of the EPL. This arises
because the deferred UK tax position on
our balance sheet has been revalued from
40% to 75%, where relevant, to reflect the
increase in our future tax rate in the period
to 10 March 2028.
Overall, this generated a profit after taxation
of £177.8 million for 2022 compared to
a profit after taxation of £79.3 million
for 2021.
Group balance sheet
Exploration and evaluation assets reduced
by £1.9 million in the year from £2.9 million
at 31 December 2021 to £1.0 million at
31 December 2022. New expenditure of
£80.8 million on UK licences during the
year largely comprised £80.0 million on
drilling the North Eigg prospect. However,
this was more than offset by E&E asset
write-offs of £82.7 million comprising 2022
and prior period North Eigg well costs.
Total property, plant and equipment
decreased from £328.9 million at year end
2021 to £265.9 million at 31 December
2022. Additions comprised capital
expenditure during 2022 of £16.3 million
mainly on the Bruce LWIV campaign. These
were offset by depletion charges for 2022
of £76.9 million (2021: £37.0 million),
decommissioning asset revisions of
£2.2 million and other depreciation
charges of £0.2 million (2021: £0.2 million).
Depletion charges represent the allocation
of field capital costs over the estimated
producing life of each field and comprise
costs of asset acquisitions and subsequent
investment programmes. Depletion
charges on the Columbus asset increased
significantly from 2021 given the full year
of production on the asset and reduction in
the asset reserve base.
An inventories balance of £4.0 million
and trade and other receivables of
£134.6 million at 31 December 2022
showed little change from year end 2021.
Hedging advances of £24.3 million
at 31 December 2022 (31 December
2021: £115.4 million) represented cash
security lodged with commodity hedging
counterparties, covering both remaining
swaps and fixed forward prices, and is
based upon gas futures prices at the end of
December 2022. This is returned to Serica
should forward gas prices fall or when
monthly contracts are settled. Hedging
advances showed extreme fluctuations in
2022 reflecting the extraordinary volatility in
the gas market this year.
The increase in cash balances from
£103.0 million at 31 December 2021 to
£432.5 million at 31 December 2022
reflected cash flow from operations of
£704.9 million mainly offset by significant
taxation payments of £143.5 million,
dividends paid of £46.3 million, capital
expenditures of £97.1 million and
£93.9 million of final net cash flow
and other consideration paid to BKR
counterparties.
Current trade and other payables increased
to £69.9 million at 31 December 2022 from
£33.7 million at the end of 2021, mainly
due to the timing of significant ongoing
operational work on North Eigg in Q4 2022
and the generation of a significant oil
overlift balance during 2022.
The balance of UK corporation tax payable
of £150.0 million (31 December 2021:
£15.8 million) represents final instalments
due in respect of 2022, covering
corporation tax, supplementary charge
and EPL. The increase from 2022 reflects
Serica being a tax-payer for the full 2022
period following the utilisation of tax losses
in 2021, and increased tax rates applicable
from 26 May 2022. Significant corporation
tax payments of £143.5 million were made
in 2H 2022.
Derivative financial liabilities of
£24.9 million at 31 December 2022
(31 December 2021: £45.8 million)
represent the valuation of gas price swaps
remaining in place at the year end and the
consequent amounts projected to be due
based upon futures pricing prevailing at
that date.
Gas contract liabilities arising from the
replacement of some gas price swaps
by contracted fixed price elements as
described above, comprise current liabilities
of £1.0 million (31 December 2021:
£37.5 million) and non-current liabilities of
£nil (31 December 2021: £1.0 million).
Current financial liabilities of £nil
(31 December 2021: £93.9 million)
and non-current financial liabilities
of £29.4 million (31 December 2021:
£37.8 million) comprise remaining deferred
consideration projected to be paid under
the BKR acquisition agreements.
The current financial liability of
£93.9 million at 31 December 2021
comprised the final two net cash flow
sharing payments due, those for November
and December 2021 totalling £63.3 million,
a fixed payment of £16.0 million arising
from the successful outcome of the
Rhum R3 well operations and a further
£14.6 million of contingent consideration in
Serica Energy plc Annual Report & Accounts 2022 l 23
Strategic Report FINANCIAL REVIEW continued
respect of Rhum field performance during
2021 and over the previous two years.
These amounts were all settled in 1H 2022.
Non-current financial liabilities comprised
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.
Non-current provisions relate to future
decommissioning obligations. These
showed a decrease of £2.9 million from
£28.1 million at 31 December 2021 to
£25.2 million at 31 December 2022.
The decrease arose from £1.2 million
of expenditure on suspended wells and
£2.3 million of downward revisions to
discounted cost estimates offset by a
£0.6 million expense due to the unwinding
of the discount applied to the estimates.
The deferred tax liability of £153.3 million
at 31 December 2022 increased from
£120.6 million at year end 2021 and
reflects accounting provisions expected
to be released in future periods now the
Group’s tax losses have been fully utilised.
The deferred tax position in the balance
sheet has been revalued from 40% to 75%
where applicable to reflect the increase in
the future tax rate in the period to 10 March
2028 resulting from the EPL.
Overall, net assets have increased from
£272.5 million at year end 2021 to
£408.7 million at 31 December 2022 after
payment of dividends of £24.5 million
in July 2022 and £21.8 million in
November 2022.
The increase in share capital from
£182.0 million to £183.2 million arose
from shares issued following the exercise
of share options and shares issued
under employee share schemes, whilst
the increase in other reserves from
£22.1 million to £25.6 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 2022 the Group held cash
and cash equivalents of £432.5 million
(31 December 2021: £103.0 million)
excluding cash lodged as security with
gas price hedge counterparties. Of total
cash and cash equivalents, £18.1 million
was held in a restricted account against
letters of credit issued in respect of
certain decommissioning liabilities as
at 31 December 2022 (31 December
2021: £12.9 million). Having utilised all
of its tax losses carried forward by end
2021, Serica’s first cash tax instalments
of £143.5 million, were paid in 2H 2022,
including the first instalment of the Energy
Profits Levy paid in December 2022.
Final instalments for 2022 were paid in
January 2023.
No gas price hedges have been added
since July 2021. In August 2021, some gas
price swaps for 2022/3 were replaced by
equivalent pricing for the same volumes
fixed directly under gas sales contracts.
These were valued at that date and are
held as gas contract liabilities in the
balance sheet without further revaluation.
These liabilities are then extinguished when
the relevant gas volumes are delivered.
Consequently, Serica’s gas price hedging
comprises a mix of gas price swaps, fair
valued at the balance sheet date, and fixed
pricing under gas sales contracts which is
held at initial value until extinguished.
At 31 December 2022 Serica held gas
price swaps and equivalent fixed pricing
under gas sales agreements for periods up
to Q3 2023. For 2023, it held an average
150,000 therms per day for H1 and 50,000
therms per day for Q3 at average prices
of 49 pence per therm and 41 pence
per therm respectively. At 31 December
2022, cash hedging security advances
of £24.3 million had been lodged with
hedge counterparties as security against
settlement of future hedge instruments
(31 December 2021: £115.4 million).
Outstanding gas hedging is around 10%
of volumes for 1H 2023 with negligible
amounts remaining thereafter. The low
level of remaining hedges continues
to reduce exposure to hedge security
requirements. The Company’s oil and
liquids production remains unhedged.
As of 31 March 2023, the Company
held cash and cash equivalents of
£389.3 million, after payment of cash
consideration for the Tailwind acquisition of
£61.6 million on 23 March 2023.
Cash projections are run periodically to
examine the potential impact of extended
low oil and gas prices as well as possible
production interruptions. Serica currently
has substantial net cash resources and
relatively low operating costs per boe which
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 18%
share of decommissioning costs 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. 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 is expected to
cover Serica’s retained share of ongoing
field expenditures as well as deferred
consideration due under the respective
BKR acquisition agreements set out below.
Serica’s share of decommissioning costs
relating to its interests in the existing BKR
field facilities will be met by the vendors
apart from those field shares acquired from
Marubeni (Bruce 3.75%, Keith 8.33%) for
which Serica is directly responsible.
On the Columbus field, Serica’s share
of production revenue is expected to
cover Serica’s share of ongoing field
expenditures. Decommissioning obligations
are limited as the development comprises
a single well linked via a subsea completion
to an existing pipeline.
The Group’s only significant exploration
commitment is the drilling of a
commitment well on Licence P2400
(Skerryvore) to be drilled before
October 2025.
BKR asset acquisitions
On 30 November 2018 Serica completed
the four BKR acquisitions. During 1H 2022,
the final elements of contingent cash
consideration arising from the net cash
flow sharing arrangements, and other
contingent payments arising from Rhum
R3 well production and Rhum performance
criteria, were made. The following elements
of consideration were outstanding at
31 December 2022:
• BP, Total E&P and BHP 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
24 l Serica Energy plc Annual Report & Accounts 2022
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.
These are held as non-current financial
liabilities at 31 December 2021 and
2022. Staged prepayments against
such projected amounts commenced
in 1H 2022 (£9.1 million is included
within trade and other receivables in
the Balance Sheet at 31 December
2022) and will 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. These
are held as non-current financial
liabilities at 31 December 2021 and
31 December 2022.
Other
Asset values and impairment
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 2022 and no
impairment triggers were noted other
than for the Columbus production asset
following the significant downgrade
in reserves for the asset. The future
recoverable amounts of the Columbus
were then assessed and no impairment
was recorded.
At 31 December 2022, Serica’s market
capitalisation stood at £777.9 million
based upon a share price of 285.0 pence
which exceeded the net asset value of
£408.7 million. By 11 April the Company’s
market capitalisation has risen to
£911.0 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 carry 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.
Serica has built a strong working capital
reserve which 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
ongoing operating costs 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 where considered
cost effective.
The principal risks currently recognised
and the mitigating actions taken by
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
Business conditions may deteriorate and 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 investment options throughout the business cycle
Management aims to avoid over-exposure to individual assets,
to identify the associated risks objectively and mitigate these
where practical
Serica Energy plc Annual Report & Accounts 2022 l 25
Strategic Report FINANCIAL REVIEW continued
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
The Group carries business interruption cover
Safety may be compromised or control of production may be lost
Safe operating procedures are applied and updated
Emergency response planning is carried out and rehearsed regularly
Asset integrity of the production facilities may cause production or
HSE disruptions
Strict adherence to Company ‘Integrity Management Framework’
and company Performance Standards
Comprehensive maintenance programme and assurance process
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
The Group carries business interruption cover
Capital programmes may be delayed and costs may overrun
The Company is reliant upon its IT systems to maintain operations
and communications
Planned programmes incorporate the potential impact of normal
delays and overruns
The Group retains working capital reserves to cover these
The Group employs specialist support
Protection against external intrusion is incorporated within the
system and tested regularly
Excessive flaring causes increased emissions and exceeds
guidelines
Close monitoring of flaring is conducted and targets set
Work is ongoing to eliminate routine flaring from assets
Personnel: The Group relies upon a pool of experienced and motivated personnel to conduct its operations and execute successful
investment strategies
Risks
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
26 l Serica Energy plc Annual Report & Accounts 2022
Political and commercial environment: World share and commodity markets and political environments continue to be volatile
Risk
Mitigation
Tax rates and allowances may be varied at short notice, significantly
reducing retained income
Management will utilise investment incentives where available and
consider geographical diversification
Volatile commodity prices mean that the Group cannot be certain of
the future sales value of its products
Planning and forecasting considers downside price scenarios
Oil and gas floor price hedging is utilised where deemed
cost effective
Price mitigation strategies are considered at the point of major
capital commitment
Sanctions imposed by the U.S. government may threaten continuing
production from the Rhum field and licences are required to be
renewed periodically, with the current licence to be renewed in
January 2025
Serica operates comprehensive controls to ensure compliance with
license terms
The renewal process is initiated well in advance of renewal dates
The UKCS licensing regime under which Serica’s operational rights and
obligations are defined may be subject to future change
Management maintains regular communication with regulatory
authorities
The Company aligns its standards and objectives with government
policies as closely as possible
Task Force for Climate-related
Financial Disclosures (“TCFD”)
Details of ESG strategies directed
towards reducing carbon emissions and
contributing to government Net Zero
targets are described on pages 12 to 13
and also in a separate ESG Report.
The TCFD has developed a framework to
formalise and implement the reporting
of financial disclosures related to climate
change. Serica has reviewed guidance
issued by the TCFD with regard to the
identification, management and reporting
of climate-related financial risks and the
Company is developing its capabilities to
analyse and report climate-related risks
giving consideration to the TCFD guidance.
Governance
• The Board is ultimately responsible for
the governance of climate-related risks
and opportunities. It sets policies and
then reviews these as appropriate.
authorities accordingly. This includes
progress on emissions reduction,
general environmental performance,
developments in climate-related
regulation and cost impacts.
• The Health, Safety and Environment
Committee reports to the Board on
the effectiveness of the Company’s
HSE and ESG programs and ensures
that risks, including environmental
or carbon-related hazards are fully
assessed and appropriately mitigated.
In addition, this sub-committee
ensures that all personnel, including
contractors employed by the Company,
are fully aware of their HSE and
ESG responsibilities and have been
properly trained.
• The Audit Committee supervises
the financial analysis of climate-
related risks and opportunities and
its incorporation into economic and
investment models.
• The Board recognises climate change
• The Remuneration Committee
as a material risk to Serica with
potential financial implications and
understands that responding to the
risks associated with climate change
and building resilience is integral to the
long-term success of the organisation.
•
It reviews major risks regularly, receives
updates from its subcommittees
and also takes direct reports from
key personnel. It sets general
policy related to climate risks and
opportunities, identifies where further
actions are required and delegates
determines employee compensation
packages and bonus structures which
incorporate incentives to deliver climate-
related objectives.
• The above subcommittees all meet
regularly as required.
• At the end of 2022, the decision
was made to create a dedicated
Sustainability Board Committee,
outside of the HSE Committee, to
focus on specific ESG topics and
issues, including climate related risk
and opportunities. This new Board
Committee has since been formed and
its terms of reference published.
Strategy
The Company’s focus is on acquiring or
developing oil and gas assets, extending
the producing lives of mid-to-late life
assets and developing additional reserves
where this can be done with a low carbon
footprint, typically by utilising existing
processing and export facilities.
Serica aligns with the UK government’s
commitment to achieving Net Zero
emissions by 2050. Although our current
assets are estimated to cease production
well before 2050, Serica takes into account
the earlier emissions reduction targets of
the North Sea Transition Deal when making
strategic decisions. Serica uses the risk
categories recommended by the TCFD
to further its reflection of climate-related
risk and opportunities: Transition risks,
including policy, legal, technology, market
changes, and Physical risks resulting
from event driven (acute) or longer-term
(chronic) shifts in climate patterns.
Serica also recognises the opportunities
presented to its organisation that are
associated with climate change and the
transition to a low carbon economy. These
include divestments by larger companies
of assets where Serica can seek to
improve environmental performance,
investment in energy efficient technology
and collaboration between asset and
infrastructure owners. Domestically-
produced gas has a strategic role to play
Serica Energy plc Annual Report & Accounts 2022 l 27
Strategic Report FINANCIAL REVIEW continued
in the UK’s energy transition. This offers a
lower carbon alternative to more carbon-
intensive fuels and to LNG imports and
also assists in protecting the UK’s security
of energy supply as global energy sourcing
is restructured. Serica is well-placed to
apply its proven capabilities to extending
the production lives of such assets whilst
driving carbon-reduction programmes.
Serica has developed operational objectives
which are aligned with climate-related risk
reduction and climate change resilience
planning. These include:
• Creation and continued use of
emissions related key performance
indicators (KPIs) and targets that
directly affect employee bonus
payments including those of the Senior
Management Team;
• Continued development and
enhancement of a robust ESG policy
and strategy with a corresponding
communication structure to internal and
external stakeholders;
• Submission to the Regulator of a
Bruce Emissions Reduction Action
Plan (ERAP) that clearly lays out the
programme of activities to achieve
the emissions reduction targets set
out in the North Sea Transition Deal.
This includes major equipment change
out and a degree of electrification of
facilities;
• A dedicated VP ESG and Business
Innovation to lead strategy development,
drive change and support continuous
improvement in emissions performance
and wider ESG commitments;
• Creation of an Emissions Reduction
Group, who look at opportunities
to reduce the Company’s carbon
emissions in line with Industry targets.
This group is led by Serica’s Energy
Transition Engineering Advisor, a new
role that was created in 2022;
• Serica are active members of the Net
Zero Technology Centre, who aim to
help accelerate the development and
implementation of technology to lower
emissions;
• Alignment to recognised international
ESG benchmarks and transparency
initiatives such as the Global Reporting
Initiative (“GRI”) and Sustainability
Accounting standards Board (“SASB”) in
addition to developing alignment to the
TCFD recommendations.
Scenario Analysis
The TCFD has proposed that business
resilience to climate risks should be
assessed through scenario analysis.
Scenarios start with the end goal, i.e.
limiting global temperature rise to 1.5°C,
and then model the steps that society,
industry, governments etc must take in
order to achieve it. The scenarios describe
the impact on factors such as supply,
demand, regulations, taxes and commodity
pricing. Serica has taken a pragmatic
approach to modelling and looks at the
comparative changes to commodity prices
under different scenarios, i.e., modelling
a high and a low-price case, rather than
taking the absolute values suggested in
the scenarios. Serica has decided to base
its analysis on two scenarios developed
by the International Energy Agency’s (IEA)
World Outlook:
1. Net Zero – accelerated emissions
reduction to achieve Net Zero emissions in
the energy industry by 2050
2. Stated Policies – slower progress based
upon existing governmental policies
In 2022, Serica ran quantitative scenario
analysis against its business economic
models, looking at the legacy Serica
and Tailwind assets and the combined
assets post-acquisition in March 2023.
Parameters for the economic models
were based on those of the International
Energy Agency’s (IEA) 2022 Net Zero and
Stated Policies scenarios and concentrated
on carbon taxes and commodity prices.
The results of the exercise confirmed that
Serica’s business models are resilient under
these scenarios. Serica will continue to use
scenario analysis to test its resilience under
different climate scenarios.
Climate Risk Management
• The Senior Management Team is
structured and empowered to ensure
that the Board has the necessary
climate related information to assess
the associated risks and opportunities.
The team is responsible for compliance
with and reporting against the
organisational climate related metrics
and targets in their individual business
areas. The team evaluates climate-
related risks and opportunities as an
integral part of its business activities
developing risk management systems,
standards and procedures as required
to achieve this.
28 l Serica Energy plc Annual Report & Accounts 2022
• Serica’s Risk Management Policy
underlines the identification,
assessment and mitigation of climate-
related risks. Climate-related risks and
opportunities are identified under the
Company’s Risk Management Policy.
As its existing assets are all currently
projected to cease production within the
next ten to fifteen years, this is the key
period of focus for the Company.
• Serica uses an operating risk
management framework and risk
assessment matrix to capture, rank and
manage significant risks.
• Having assessed climate-related risks
the Company either identifies specific
mitigating actions and programmes
or, where such specific responses are
not considered feasible, builds likely
financial impacts into valuations and
planning.
• Where investigating new investment
opportunities and acquisitions, reviews
are conducted of all climate-related
risks and potential mitigations.
• As Serica’s climate-related risk
identification and management
programme progresses, regular updates
are provided to the Board and where
appropriate added into the Group’s risk
register which is then reviewed monthly.
As Serica’s existing fields are all currently
projected to cease production within the
next fifteen years, as such, this is the
key period of focus for the Company.
Hence, Serica has primarily targeted its
considerations of climate-related risks and
opportunities over the short and medium
terms. Serica have defined the time period
for short, medium and long terms risks as:
• Short term risks: 1 – 3 years
• Medium term risks: 4 – 9 years
• Long term risks: 10 + years
Serica uses the risk categories
recommended by the TCFD to further
its reflection of climate-related risk
and opportunities: Transition risks and
Physical risks.
Serica have identified the following climate related risks:
Climate Related Risks
Risk
The transition away from carbon-based energy sources may restrict
the future demand for, or production of, the Group’s oil and gas
reserves (Medium to Long term)
Mitigation
The estimated value of future reserves is progressively discounted
for later periods of production
Since the acquisition of Tailwind Energy, our reserves are more evenly
split between oil and gas. This mitigates the risk of the demand for
one commodity reducing more than another in the medium term
The Company closely follows industry related forecasts and trends
from numerous sources, including the IEA and OEUK
The Company’s ESG team reviews opportunities for investment in
clean technology and is currently involved in projects with the Net
Zero Technology Centre
Energy transition objectives may bring additional levies or taxes
(Short term)
Estimates of climate-related charges are included in cost estimates
where reasonably identifiable
Costs related to the transition including ETS carbon credits and
investment in more efficient equipment/processes may increase
significantly whilst commodity prices may be volatile
(Short to Medium term)
More extreme weather patterns may threaten or disrupt operations
(Short to Long term)
Management prioritises the delivery of ESG objectives which may
reduce such impacts
A range of potential outcomes are modelled, and financial plans are
flexed to ensure economic resilience under a wide range of scenarios
The Company Emission Reduction Action Plan was developed in
2022 to address this
The Company seeks to maintain robust transport and supply chains
The impact of extreme climatic conditions such as exceptional
waves are incorporated in risk management scenarios
The Company conducts an annual Severe Weather Action Plan
Emergency Response exercise
Sources of finance including equity markets and debt providers may
be harder to access or become more expensive
Management engages with potential sources to anticipate their ESG
compliance requirements
(Short term)
The Company also seeks to retain a range of alternative
financing options
Potential funding cost increases are considered when planning
investments
The range of potential acquisitions may be restricted by ESG
considerations
Management considers the emissions profiles of potential
acquisition targets and the mitigating actions that it can implement
(Short to Medium term)
It prioritises opportunities to deliver low carbon intensity production
into the UK market
The industry’s reputation is damaged through negative perception by
external stakeholders
The Company follows internationally recognised ESG reporting
guidelines
(Short to Medium term)
It also seeks regular engagement with stakeholders on its ESG
activities and performance
Serica Energy plc Annual Report & Accounts 2022 l 29
Strategic Report Section 172 statement
The Directors’ statement under Section 172
of the Companies Act 2006 is included on
pages 47 to 48.
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
12 April 2023
FINANCIAL REVIEW continued
Metrics and Targets
Carbon emissions data is collected from
Serica’s assets, including operated and
partnered facilities. Serica assures this
data for consistency and comparability
throughout its portfolio over time. This
data is used to ensure compliance with
UKCS emissions regulation and to comply
with all operating permits and consents
associated with Serica’s assets. It also
provides benchmarks for delivering
emissions reductions through the adoption
of meaningful and achievable carbon
reduction targets. Details on progress
will be provided in the ESG Report to
be published in conjunction with the
Annual Report.
Serica sets annual emissions targets
as part of its annual bonus scheme.
Performance against these targets is
directly linked to the remuneration of
our staff and executives. Serica has
implemented ESG bonus linked targets
since 2021.
These are based on absolute rather
than proportionate or intensity based
targets. Performance against these
targets is monitored on a regular basis
and performance is reported across the
organisation from our Board to staff and
contractors via Serica’s Environmental
Performance Dashboard.
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 an updated ESG Report:
• Recordable incidents and injuries
• Workforce engagement in HSE
• Quality of discharges to water and air
• Ongoing maintenance programmes
ESG performance is tracked through the
following KPI’s whose progress is covered
within the ESG Report:
• Annual carbon emissions
• Flare volumes
• Establishing a methane action plan
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 within the ESG Report which will be
issued along with the 2022 Annual Report.
30 l Serica Energy plc Annual Report & Accounts 2022
FORWARD LOOKING STATEMENTS
This disclosure contains certain
forward looking statements that involve
substantial known and unknown risks and
uncertainties, some of which are beyond
Serica Energy plc’s control, including: the
impact of general economic conditions
where Serica Energy plc operates,
industry conditions, changes in laws and
regulations including the adoption of
new environmental laws and regulations
and changes in how they are interpreted
and enforced, increased competition, the
lack of availability of qualified personnel
or management, fluctuations in foreign
exchange or interest rates, stock market
volatility and market valuations of
companies with respect to announced
transactions and the final valuations
thereof, and obtaining required approvals of
regulatory authorities. Serica Energy plc’s
actual results, performance or achievement
could differ materially from those
expressed in, or implied by, these forward
looking statements and, accordingly, no
assurances can be given that any of the
events anticipated by the forward looking
statements will transpire or occur, or if any
of them do so, what benefits, including the
amount of proceeds, that Serica Energy plc
will derive therefrom.
Serica Energy plc Annual Report & Accounts 2022 l 31
Strategic Report EXECUTIVE MANAGEMENT TEAM AND BOARD OF DIRECTORS
Antony Craven Walker
Non-Executive Chair / Appointed: 2004
Started his career with BP as a petroleum engineer 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 Chair. Both companies were acquired by larger groups in 1986 and 1999 respectively.
Mr Craven Walker was also a founder member of BRINDEX (Association of British Independent Oil Exploration
Companies). Mr Craven Walker was appointed Non-Executive Chair of Serica in 2004 and, following the retirement of
the then Chief Executive in April 2011, initially acted as interim Chief Executive. In 2015, he took the role of Executive
Chair, 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 provided him the skills
necessary to provide the services of Executive Chair whilst the Company developed its business strategy. With effect
from 1 July 2022, Mr Craven Walker was appointed as Non-Executive Chair of the Company. He will be standing
down from the Chair and the Board following this year’s AGM.
COMMITTEES Nomination & Corporate Governance Committee
Mitch Flegg
Chief Executive Officer / Appointed: 2017
Has over 40 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 Health Safety & Environmental Committee, Reserves Committee and Sustainability Committee
Andrew Bell
Chief Financial Officer / Appointed: 2021
Joined the Board on 4 September 2021. Mr Bell had provided consultancy to Serica since 2004 on the Company’s
original AIM listing, the implementation of all finance systems and also on supporting acquisitions, disposals and
associated financing structures. Mr Bell worked on the BKR transactions and was appointed VP Finance upon
signature in 2017. Mr Bell has approaching 40 years’ experience of all aspects of upstream finance for public
companies listed in London and Toronto and for private-backed companies. These include Charterhouse Petroleum
plc, Monument Oil and Gas plc, Consort Resources Ltd and Centric Energy Corp.
Trevor Garlick
Independent Non-Executive Director / Appointed: 2018
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 Energy Transition Zone (ETZ) Limited. Mr Garlick chairs the Company’s Health,
Safety and Environmental Committee and the Reserves Committee.
COMMITTEES Health Safety & Environmental Committee (Chair), Reserves Committee (Chair), and Sustainability
Committee
Malcolm Webb
Senior Independent Non-Executive Director / Appointed: 2018
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 Nomination & Corporate Governance Committee (Chair) and Remuneration Committee
32 l Serica Energy plc Annual Report & Accounts 2022
Kate Coppinger
Independent Non-Executive Director / Appointed: 2020
Joined the Board on 22 April 2020. Ms. Coppinger has over 20 years’ experience in 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 M&A transaction experience spans Asia through to South
America with particular emphasis on the North Sea. Ms Coppinger chairs the Company’s Audit Committee.
COMMITTEES Audit Committee (Chair) and Remuneration Committee
David Latin
Independent Non-Executive Director / Appointed: 2021
Joined the Board on 7 December 2021. Mr Latin has over 30 years’ experience in Upstream Exploration and
Production and Investment/Advisory sector. He worked for BP from 1993 to 2011, holding a number of VP and
global/regional business roles. He was then OMV Group Senior Vice President for E&P in NW Europe, Africa and
Australasia from 2011 to 2017. In 2017 he co-founded First Alpha Energy Capital, investing in Upstream E&P and
Energy Services, Technology and Equipment sectors and in 2021 he co-founded Talaria Technology, providing
smart sensors focused on assisting offshore wind energy and carbon storage. Mr Latin chairs the Company’s
Remuneration Committee. He has agreed to assume the role of Chair of the Board following this year’s AGM.
COMMITTEES Remuneration Committee (Chair), Health Safety & Environmental Committee, Nominations and
Corporate Governance Committee, Sustainability Committee and Reserves Committee
Jérôme Schmitt
Independent Non-Executive Director / Appointed: 2022
Joined the Board on 1 July 2022. Mr Schmitt has over 30 years’ experience in the energy and mobility sector,
with particular emphasis across Finance, Sustainability and Business streams. Mr Schmitt was the Head of M&A
and Chief Sustainability officer at TotalEnergies and Chairman of OGCI Executive Committee until 2021. He was
responsible for developing and financing gas value chain projects in Middle East & Asia and created and led the Net
Zero Businesses division of TotalEnergies. Mr Schmitt chairs the Sustainability Committee.
COMMITTEES Sustainability Committee (Chair)
Michiel Soeting
Independent Non-Executive Director / Appointed: 2023
Joined the Board on 1 February 2023. Mr Soeting is a chartered accountant, qualified in both the Netherlands and
the United Kingdom, he has extensive financial expertise, strong governance, risk management and regulatory
compliance experience. Mr Soeting has over 30 years’ experience in the audit and financial service sector, he was
the former global lead partner and global head of energy & natural resources at KPMG.
COMMITTEES Audit Committee and Reserves Committee
Robert Lawson
Non-Executive Director / Appointed: 2023
Joined the Board on 23 March 2023. Mr Lawson spent a large part of his career with BP in various roles including
Commercial Vice President for BP’s Refining and Marketing Segment then becoming the Global Head of Mergers
and Acquisitions. In 2022, Mr Lawson joined Mercuria Energy Group as Executive Vice President and a member of
its board.
COMMITTEES Nominations and Corporate Governance Committee
Guillaume Vermersch
Non-Executive Director / Appointed: 2023
Joined the Board on 23 March 2023. Mr Vermersch started his career with Arthur Andersen in Paris. His career
includes roles at ING/BBL Bank and CIB in Geneva and Paris and as head of the Credit and Finance Risk department
of Sempra Oil Trading for Europe and Asia where he was responsible for defining, implementing and monitoring
the full scope of the Sempra Energy credit and financial strategies, from trading business requirements to banking,
finance and risk management responsibilities to support the oil and energy division’s expansion. He is the group
chief financial officer and a group board member of Mercuria Energy Group
COMMITTEES Audit Committee
Serica Energy plc Annual Report & Accounts 2022 l 33
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 2022.
Principal Activities
The principal activity of the Company
and its subsidiary undertakings (the
“Group”) is to identify, acquire, explore and
subsequently exploit oil and gas reserves.
Its current activities are located in the
United Kingdom.
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).
Engagement with Employees,
Suppliers and Customers
Information regarding Serica’s engagement
with employees, suppliers and customers is
included in the Directors’ statement under
Section 172 of the Companies Act 2006 on
pages 47 and 48.
Results and Dividends
The profit for the year was £177,796,000
(2021: £79,294,000).
The Directors are recommending the
payment of a final dividend by the
Company of 14.0 pence per share for the
year to 31 December 2022, see note 13
(2021: 9.0 pence per share). Subject to
shareholder approval at the AGM, this will
be payable on 27 July 2023 to shareholders
registered on 30 June 2023 with an
ex-dividend date of 29 June 2023.
Following the year end, the Directors
became aware that certain dividends paid
in 2022 had been made otherwise than in
accordance with the Companies Act 2006,
section 838, because interim accounts had
not been filed at Companies House prior
to payment. It is important to note that the
Company has had sufficient distributable
profits at the time each relevant dividend
was paid and therefore did not pay out by
way of dividends more income than it had,
and no payments were made out of capital.
Relevant dividends were the final dividend
paid in July and the interim dividend paid
in November. A resolution will be proposed
at the Annual General Meeting to be held
on 29 June 2023 to remove any right
that the Company may have had to claim
from shareholders or Directors or former
Directors for repayment of these amounts
by entering into deeds of release in relation
to any such claims. This will, if passed,
constitute a related party transaction under
IAS 24. The overall effect of the resolution
is to return the parties so far as possible
to the position they would have been in
had the relevant dividends been made in
full compliance with the Act. The amounts
for dividends included within the financial
statements have not been restated as the
financial resources had left the Company
and the intention of the resolution to be
passed will be to remove any right for
the Company to pursue shareholders or
directors for repayments.
Financial Instruments
The Group’s financial risk management
objectives and policies are discussed in
note 24.
Events Since Balance Sheet Date
On 23 March 2023, Serica completed the
acquisition of Tailwind Energy Investments
Ltd. See note 31 for further information.
Directors and their Interests
The following Directors have held office in
the Company since 1 January 2022 to the
date of this report:
Antony Craven Walker
Ian Vann (retired 30 April 2022)
Mitch Flegg
Trevor Garlick
Malcolm Webb
Kate Coppinger
Andrew Bell
Richard Rose (resigned 21 June 2022)
David Latin
Jérôme Schmitt (appointed 1 July 2022)
Michiel Soeting (appointed 1 February 2023)
Robert Lawson (appointed 23 March 2023)
Guillaume Vermersch (appointed
23 March 2023)
The Directors who held office at the end
of the financial year had the following
interests in the ordinary shares of the
Company according to the register of
Directors’ interests:
Antony Craven Walker¹
Mitch Flegg
Andrew Bell
Kate Coppinger
Trevor Garlick
David Latin
Jérôme Schmitt
Malcolm Webb
Class
of share
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Interest at
end of year
7,357,694
184,445
18,709
–
–
–
–
Interest at
start of year (or date of
appointment if later)
7,357,694
184,445
18,709
–
–
–
–
64,506
64,506
¹. 6,448,810 ordinary shares were held by Antony Craven Walker and 908,884 by Rathbones (pension funds).
34 l Serica Energy plc Annual Report & Accounts 2022
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
12 April 2023
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 2022 and up
to 12 April 2023 under the Serica Energy
plc Long Term Incentive Plan (the “LTIP”)
are also included in note 27.
Greenhouse gas (‘GHG’) emissions
Information regarding Serica’s GHG
disclosure is included in the Environmental,
Social and Governance (ESG) section on
pages 12 and 13.
Auditor
A resolution to reappoint Ernst & Young
LLP, as auditor will be put to the members
at the annual general meeting.
Serica Energy plc Annual Report & Accounts 2022 l 35
Corporate Governance CORPORATE GOVERNANCE STATEMENT
Chair’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 Non-Executive Chair
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
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, Reserves 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.
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. During 2022 Ian Vann,
Non-Executive Director and Richard Rose,
Independent Non-Executive Director,
stepped down from their positions,
following which Jérôme Schmitt was
appointed to the Board during 2022. Michiel
Soeting has recently been appointed to
the Board in February 2023. 2023 will
be another transformational year for the
Company and, with the acquisition of
Tailwind Energy Investments Ltd, this has
brought further changes to the Board with
the appointment of Guillaume Vermersch
and Robert Lawson in March 2023 under
the terms of the Tailwind acquisition
agreement.
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.
During 2022 the Board welcomed
shareholders in person at the Annual
General Meeting after two years when
the Annual General Meeting was held as
a closed meeting due to Covid-19. The
Executive Directors were available to meet
with shareholders and analysts following
the Company’s interim and final results.
The Company also held a General Meeting
in early 2023. This provided shareholders
with an opportunity to raise questions in
connection with the Company’s acquisition
of Tailwind Energy Investments Ltd and to
vote in favour of the acquisition.
36 l Serica Energy plc Annual Report & Accounts 2022
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 new investment,
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 2022,
the Company engaged as best as possible with stakeholders
through online forums, and was also able to hold a face to
face investor event. The Chair of the Company and the Senior
Independent Director are available at any time to address any
shareholder concerns.
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 and the Board. See
further details on page 40.
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 36.
Ensure that between them the Directors have the necessary
up-to-date experience, skills and capabilities
Evaluate Board performance based on clear and relevant objectives,
seeking continuous improvement
Promote a corporate culture that is based on ethical values and
behaviours
Maintain governance structures and processes that are fit for
purpose and support good decision-making by the Board
Communicate how the Company is governed and is performing
by maintaining a dialogue with shareholders and other relevant
stakeholders
The complementary skills and experience of our Board and
Executive Management team are included on pages 30 and
31. The Nomination and Corporate Governance Committee
maintains oversight of the need to continually improve the depth
of knowledge, experience and diversity at Board and Senior
Management level.
Refer to discussion of Board evaluation on page 37.
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.
Refer to further discussion of the Company’s governance
structures, including matters reserved for the Board, on pages
37 and 38.
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 2022 l 37
Corporate Governance 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 ensuring that the Company has a robust
governance framework in place, ensuring
that governance is appropriately embedded
throughout the business. The Company
holds regular Board meetings at which
financial, operational, risk and other reports
are considered and, where appropriate,
voted on. The Board Committees provide
regular updates at the meeting. The Board
is responsible for the Group’s strategy,
performance, risk, key financial and
compliance issues, approval of any major
capital expenditure and the framework of
internal controls.
The Chair has overall responsibility for
the management of the Board, which in
turn oversees the Company’s strategy and
operational and financial performance, and
manages business requirements through
a formal schedule of matters reserved
for decision making. An annual rolling
Board agenda helps ensure that matters
of governance are addressed throughout
the year.
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. There are a total of 11
directors of which six are Independent Non-
Executive Directors one of whom (Malcolm
Webb) acts as Senior Independent Director
who provides additional support to the
Chair. The Chair 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 Chair 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,
ESG report 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 2022, the Board
of the Company consisted of the Non-
Executive Chair, the Chief Executive
Officer, Chief Financial Officer and six
Independent Non-Executive Directors. The
Chair and Malcolm Webb, as the senior
Independent Non-Executive director, along
with the other Independent Non-Executive
Directors ensure that the Board remains
independent. All the Independent Non-
Executive Directors are independent in
character and judgement. Following the
retirement as directors of Ian Vann and
Richard Rose in 2022, the appointment
of Jérôme Schmitt in 2022 and Michiel
Soeting in 2023 continues to provide the
Board with a wide 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 appointments of Rob Lawson and
Guillaume Vermersch as Non-Executive
Directors in March 2023 following the
Company’s acquisition of Tailwind
Energy Investments Ltd strengthen the
Board further.
Board Committees and Structure
The Board has the following Committees:
Nomination & Corporate Governance
Committee, Audit Committee (including
Reserves Committee), Health, Safety
and Environmental Committee and
Remuneration Committee. More
recently, the Company has established a
Sustainability Committee. All Committees
operate under clearly defined terms of
reference to ensure proper functioning and
effective application of best practice. The
Committee terms of reference are reviewed
by the Committees and by the Board on
an annual basis. Committees are required
to report back to the Board following a
Committee meeting.
More detailed information of each
Committees can be found on pages 39
to 43.
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.
Antony Craven Walker
Non-Executive Chair
12 April 2023
38 l Serica Energy plc Annual Report & Accounts 2022
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.
As set out in our report last year, it was
recognised that, with the expansion of
the Board in parallel with the growth of
the Company’s activities and the need to
meet the requirements of the QCA Code, a
formal evaluation process for each of the
Board, its Committees, the Independent
Non-Executive Directors and Non-
Executive Directors should be conducted.
Performance evaluations of the Board and
of each of its Committees were undertaken
last in 2020. The Chair conducted a
performance evaluation with each of the
Independent Non-Executive Directors in
2022 with assistance from the Senior
Independent Non-Executive Director, the
results of which were entirely satisfactory.
The next regular evaluation of the Board and
its Committees will be performed this year.
During 2022, the Independent Non-
Executive Directors, amongst other things,
agreed that Board meetings should place
more focus on providing a varied agenda
for each Board meeting, a stronger
focus by the Board was required on risk
management, that there should be more
interface with senior VP’s and that a
succession plan for Executive Directors
and Independent Non-Executive Directors
was required.
There is a strong flow of communication
between the Directors, and in particular
between the Chief Executive Officer,
Chief Financial Officer and the Chair, with
consideration being given to the strategic
and operational needs of the business.
Comprehensive board and committee
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 quoted
company. 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 Chair, Chief
Executive Officer, Chief Financial 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 two new
appointments made in the last twelve
months with full consideration of diversity
aspects where this is possible and uses
independent external advisers to help
the Board meet these objectives. 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. The assistance of an external
recruitment advisor was used to make
recent Independent Non-Executive Director
appointments and, if assistance with
recruitment is required by the Committee,
this will continue to 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 succession
planning
Director appointments and succession
planning for the Board and senior
executives is evaluated on a regular basis
commensurate with good corporate
governance practice on diversity,
experience and skills and the evolving
needs of the Company.
Serica Energy plc Annual Report & Accounts 2022 l 39
Corporate Governance BOARD EVALUATION/REVIEW OF THE BOARD’S EFFECTIVENESS continued
BOARD EVALUATION/REVIEW OF THE BOARD’S EFFECTIVENESS continued
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.
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 Directors’ attendance at Board
meetings and Board committees during
2022 is detailed in the table below:
Board
Ad Hoc
Audit Remuneration
Nomination
& Corporate
Governance
HSE
Reserves
10*
3
10
10
9
10
4
9
10
5
10
7
2
7
6
6
6
2
6
5
4
7
–
–
–
2
4
4*
2
4†
–
–
4
–
4*
4†
6
–
6
–
–
5*
–
6
4
–
–
4*
4
–
–
–
–
–
4
–
2
3
–
4*
–
–
–
4
–
4
–
1
–
–
1*
–
–
–
1
–
1
Director
A Craven Walker
(Chair of the Board)
I Vann**
M Flegg
M Webb
T Garlick
K Coppinger
R Rose**
A Bell
D Latin
J Schmitt***
M Soeting***
Total meetings
Notes:
The Chair, Chief Executive Officer and Independent 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 Comittee chair.
* Chair
†
Invitee
** Ian Vann resigned from the Board on 30 April 2022 and Richard Rose resigned from the Board on 21 June 2022.
*** Jérôme Schmitt joined the Board on 1 July 2022 and Michiel Soeting joined the Board on 1 February 2023.
40 l Serica Energy plc Annual Report & Accounts 2022
NOMINATION AND CORPORATE GOVERNANCE COMMITTEE REPORT
During 2022 the activities of the Committee
included:
•
•
•
•
•
•
continued review of succession
planning at Board and Senior Executive
level and assisting in appointments
to the Board as part of this ongoing
process.
supporting the transition of Antony
Craven Walker from Executive Chair to
Non-Executive Chair of the Board.
facilitating meetings of the Independent
Non-Executive Directors and Non-
Executive Directors.
reviewing and overseeing the release of
a new Whistleblower Policy.
Assisting in the Director evaluation
process which was conducted early in
the year.
launching a review of the terms
of reference (‘TOR’s) of all Board
Committees with a view to updating all
TOR’s in Spring 2023.
Looking forward, the Committee will
continue to monitor and advise the Board
on Corporate Governance and succession
planning and expects to see further Board
and Senior Executive appointments in
2023 as the Company’s needs evolve. An
evaluation of the Board and each Board
Committee will also be undertaken in
accordance with our established timetable
for such evaluations.
Malcolm Webb
Chair of the Nomination and Corporate
Governance Committee
12 April 2023
The Nomination and Corporate Governance
Committee assists the Board in the
oversight of Corporate Governance at
Board level. The Company follows the
Corporate Governance Code of the
Quoted Companies Alliance, of which
it is a member. The Committee is also
responsible for overseeing succession
plans and their implementation for the
Board and Executive Team.
Following recent Board appointments
with the acquisition of Tailwind the
Committee’s membership was reviewed
and now comprises Malcolm Webb (Senior
Independent Non-Executive director and
Committee Chair), David Latin (Independent
Non-Executive Director), Antony Craven
Walker (Non-Executive Chair of the
Company) and Robert Lawson (Non-
Executive Director).
The Committee met formally four times
during 2022, and has, so far, met three
times in 2023.
Independence of Non-Executive
Directors
The Committee and the Board are
satisfied that each Independent Non-
Executive director of the Company
remains independent and continues to
have sufficient time to discharge their
responsibilities to the Company.
Board changes
Antony Craven Walker transitioned from
Executive Chair of the Company to Non-
Executive Chair in July 2022. Ian Vann
retired from the Board in April 2022 and
Richard Rose stepped down from the
Board in June 2022. Jérôme Schmitt
was appointed as an Independent Non-
Executive Director in July 2022 and Michiel
Soeting was appointed as an Independent
Non-Executive Director in February 2023.
Guillaume Vermersch and Robert Lawson
were appointed as Non-Executive Directors
in March 2023, pursuant to the terms of the
Tailwind acquisition agreement.
Serica Energy plc Annual Report & Accounts 2022 l 41
Corporate Governance AUDIT COMMITTEE REPORT
Purpose and Responsibilities
The Audit Committee is a standing
committee of the Board and reviews and
makes recommendations to the Board on
all material financial decisions affecting the
Company, including:
The Committee meets at least four times
a year (it has met four times so far in
2023) and also holds private sessions with
management and with the external auditor
without management present whenever it
deems it appropriate to do so.
any change in accounting policies
2022 activities
•
•
•
•
•
•
•
The Committee spent considerable
time during the year reviewing the
financial reporting judgements and key
accounting estimates associated with
the Company’s full and half-year results.
A Review of the Taskforce for Climate-
related Disclosures (“TCFD”) was
conducted alongside monitoring of the
implementation of scenario analysis.
The Committee reviewed and gave
advice regarding the Company’s risk
management policies and systems
including those relating to product price
hedging.
The Committee reviewed the Company’s
existing systems of financial control.
This review involved assessing the
Group’s internal control and risk
management policies and systems and
their effectiveness. The recommended
improvements were implemented.
The Committee was satisfied that the
Group does not currently require an
internal audit function, although this will
be kept under review as the Company
continues to grow.
The Committee considered the spread
of risk between the Company’s banks
to keep in line with the Company’s
current Treasury and Cash Management
Policy and reviewed and suggested
changes to that Policy, which were duly
implemented.
The Committee reviewed and made
recommendations to the Board
regarding dividends and other payments
which could be made to shareholders
by the Company during the course of
the year.
•
The Committee reviewed the findings of
the Reserves Committee.
•
•
•
•
•
•
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 integrity 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
An essential element of the integrity of
the financial statements concerns the key
assumptions and 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.
Membership
Following recent Board appointments with
the acquisition of Tailwind the Committee’s
membership was reviewed and now
comprises Kate Coppinger (Committee
Chair), Michiel Soeting and Guillaume
Vermersch, all of whom are Independent
Non-Executive Directors. Richard Rose
retired from the Committee in June 2022
on leaving the Company, at which time
Malcolm Webb joined the Committee,
subsequently retiring from the Committee
in April 2023. Trevor Garlick also retired
from the Committee in April 2023.
42 l Serica Energy plc Annual Report & Accounts 2022
External Auditors
The external auditors, EY, were re-appointed
in 2022 at the Company’s annual general
meeting. The Serica Group fee to EY for
the financial year to 31 December 2022 is
£404,000. The Audit Committee undertakes
a comprehensive review of the quality,
effectiveness, value and independence of
the audit provided by EY each year.
The Committee are comfortable that EY’s
audit remained independent during the
year. The current audit partner having
served for 5 years will be succeeded by
another partner for the next audit. In 2023,
the Committee introduced an Audit Tender
Policy which requires a tender process to
be run every 10 years with effect from 2018
when the Company underwent a major and
transformative change in its size and the
scope of its operations.
2023 looking forward
The Committee, will 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 over financial
reporting remain appropriate.
Continue to assess the Company’s
hedging policy and practice.
Continue to adhere to the Quoted
Companies Alliance Corporate
Governance Code, Audit Guide.
Review the Taskforce for Climate-related
Disclosure (“TCFD”) recommendations
and include appropriate disclosures
within the Annual Repost and other
publications.
Consider whether a dividend or
other payments should be made to
shareholders.
Undertake a review of its Terms of
Reference.
Kate Coppinger
Chair of the Audit Committee
12 April 2023
•
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.
2023 looking forward
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
Chair of the Reserves Committee
12 April 2023
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 Independent Non-Executive Directors.
The Committee comprises of Trevor Garlick
(Independent Non-Executive director and
Committee Chair), David Latin (Independent
Non-Executive director), Mitch Flegg
(Chief Executive Officer of the Company)
and from April 2023 Michiel Soeting. The
Committee met once in 2022 and typically
meets once a year prior to publication of
the annual results.
2022 activities
•
•
Worked with reserves auditor, RISC
Advisory who calculated the reserves in
respect of each field.
Met with management and the
qualified reserves auditor to review the
reserves data and the auditor's annual
reserves report.
Serica Energy plc Annual Report & Accounts 2022 l 43
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.
Environmental, Social and Governance
(ESG) assurance also until recently fell
under the Committees remit, however a
separate Sustainability Committee has
been established focusing primarily on
monitoring environmental performance,
tracking our emissions reduction action
plan projects (ERAP), ESG reporting and
reviewing investment options in the energy
transition sector.
The Committee comprises of Trevor Garlick
(Independent Non-Executive director and
Committee Chair), Mitch Flegg (Chief
Executive Officer of the Company) and
David Latin (Independent Non-Executive
director) who joined the Committee in
2022. The VP Operations and VP ESG and
Business Innovation are invited to attend
the meeting and present their reports.
During 2022, the Committee has met
quarterly to discuss matters pertaining to
Health, Safety and Environmental issues.
The Committee consider 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.
2022 activities
2023 looking forward
During 2023, the Committee plans to
continue to review the on-going HSE
procedures and culture, evaluate HSE
performance against our internal plan and
industry standards, evaluate performance
against the internal 2023 plan, agree a HSE
bonus scorecard for 2023 to be linked to
the Company bonus scheme for 2023 and
ensure that the HSE policy and procedures
remain effective. The Committee also shall
continue to monitor progress against the
maintenance backlog campaigns.
The new Sustainability Committee shall
focus on ESG transparency, reviewing
potential Energy Transition projects and
monitor the Company plans to reduce
carbon intensity and emissions.
Trevor Garlick
Chair of the Health, Safety and
Environmental Committee
12 April 2023
•
•
•
•
•
•
•
•
•
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.
Monitored delivery of HSE performance
against the HSE and Risk Management
Plan at each meeting.
Monitored HSE performance of personal
and process safety metrics, looking at
both leading and lagging indicators.
Reviewed major and reportable HSE
incidents that occurred, investigations
and lessons learned at each meeting.
Reviewed Maintenance Backlogs and
the Plan to address the backlog at
each meeting.
Monitored environmental performance
and emissions management and the
ERAP submission to NSTA.
Reviewed various energy transition
projects.
Agreed with the Renumeration
Committee the HSE performance
metrics linked to the Company
bonus scheme.
•
Reviewed the Committee Terms of
Reference.
44 l Serica Energy plc Annual Report & Accounts 2022
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. 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 David Latin
(Independent Non-Executive Director
and Committee Chair), Kate Coppinger
(Independent Non-Executive Director)
and Malcolm Webb (Independent Non-
Executive Director). The Committee met six
times in 2022.
The Committee invites the Chief Executive
Officer to attend meetings to provide
business context, but he is not present
when his own remuneration is discussed.
During the year the Committee appointed
independent advisors, FIT Remuneration
Consultants LLP (FIT), to provide external
support. FIT is a founding member of the
Remuneration Consultants Group and
are signed up to its Code of Conduct. FIT
provides no other services to the Company.
• Agreed the 2022 Executive Director
salary increases.
• Approved the grant of LTIP awards for
2022.
• Approved a Sharesave Scheme
invitation 2022.
• Approved the vesting of performance
awards granted in 2019.
• Approved the outcome of the 2022
cash bonus (to all employees) and the
discretionary executive bonus.
• Discussed a review of pay according
to job groupings across the Company
and was satisfied that there exists no
gender pay gap.
• Made a change to the measurement
of the performance condition of the
2022 LTIP award under the LTIP Plan to
ensure that performance is measured
over the full three-year vesting period.
Looking forward to 2023, we anticipate the
following:
• A review of the competitiveness of the
remuneration of the Executive Directors
(and other members of the Executive
Management Team) pay in relation to
a material change in size, scope and
complexity of the business following the
Tailwind acquisition.
• Reviewing and agreeing the 2023 bonus
measures including the Chief Executive
Officer and Chief Financial Officer
scorecard.
• Considering and agreeing a programme
for the grant of any LTIP awards for
2023 and the appropriate performance
measures and targets.
• Considering developments in market
practice and corporate governance.
• Considering a Share Save scheme
invitation for 2023.
Consideration by the Directors
of matters relating to Directors’
remuneration
The Committee is responsible for making
recommendations to the Board on 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 the Company’s overall
compensation philosophy and
programs.
• Determining and recommending to
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 the structure of the
annual bonus plan, whether annual
bonus payments should be made and
approving payments to the Executive
Directors.
• Determining each year whether any
awards/grants should be made under
the incentive schemes and the value of
such awards.
• Considering long-term incentive (LTIP)
scheme awards and performance
criteria.
• Agreeing 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.
The Committee’s activities in relation to
2022 and early 2023:
• Agreed the targets for the 2022 cash
bonus scheme.
• Advised on fees to be included in
the Appointment Letter for the Non-
Executive Chair upon termination
of Antony Craven Walker’s Service
Contract as Executive Chair with effect
from 30 June 2022 and his appointment
as Non-Executive Chair with effect from
1 July 2022.
Serica Energy plc Annual Report & Accounts 2022 l 45
Corporate Governance DIRECTORS’ REMUNERATION REPORT continued
Executive Directors’ service contracts
The Company’s policies on Directors’ service contracts are indicated below:
Director
Effective term
Notice period
Antony Craven Walker*
1 July 2015 – 30 June 2022
Mitch Flegg
Andy Bell
21 November 2017
3 September 2021
6 months from Executive
12 months from Company
6 months from Executive
12 months from Company
6 months from Executive
6 months from Company
Mr Craven Walker’s Service Contract as Executive Chair was terminated on 30 June 2022 in accordance with the terms of the contract.
Following the contract termination, he became a Non-Executive Director and Non-Executive Chair.
Executive remuneration
The table below sets out the single total figure of remuneration and breakdown for each Executive Director paid for the 2022 financial year.
Salary
Annual Bonus
Benefits
Pension
Total
Antony Craven Walker*
Mitch Flegg
£490,000
Nil
Nil
Nil
£523,000
£422,750
£522
£68,188
£490,000
£1,014,460
Andy Bell
£328,000
£246,000
£1,164
£42,764
£617,928
*
Mr Craven Walker’s Service Contract as Executive Chair was terminated on 30 June 2022 in accordance with the terms of the contract.
The pay shown in the table above relates to his period of service as an Executive from 1 January 2022 to 30 June 2022 (£245,000) plus
payment in lieu of notice (£245,000) for the balance of the year in accordance with the terms of the Service Contract.
Mr Craven Walker receives no pension contribution or cash in lieu or any other benefits.
Mr Flegg receives cash in lieu of his entitlement to pension contribution.
Mr Bell receives cash in lieu of his entitlement to pension contribution.
Additional Details
Base salary
To reflect the increase in responsibility and complexity of his role, Mitch Flegg was awarded a base salary increase of 15% with effect from
1 January 2022. The increase for Andy Bell was 13%. There was no increase in Antony Craven Walker’s base salary during the period he was
Executive Chair. The average increase for all other employees in 2022 was 5.9%
Annual Bonus
For 2022, the annual bonus was based on a scorecard of measures featuring HSE/ESG, production projects and M&A for the Chief Executive
Officer and financing, TCFD implementation and M&A for the Chief Financial Officer.
Progress against the scorecard was assessed by Committee, taking into account input from the HSE Committee and other independent
directors as appropriate. When determining performance, the Committee considered a number of quantitative and qualitative factors which
included, for example, overall safety performance and carbon dioxide emissions.
The Committee determined that the annual bonus for 2022 should be 80.83% of salary for the CEO and 75% of salary for CFO. The former
Executive Chair did not receive an annual bonus for 2022.
46 l Serica Energy plc Annual Report & Accounts 2022
Long Term Incentive Plan
The Company operates 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.
Performance Share Awards were granted in 2022 at 100% of salary for the Executive Chair, Chief Executive Officer and Chief Financial Officer)
which were subject to the achievement of absolute share price performance over a three-year period (50% weighting) and carbon reduction
targets to the period ending 31 December 2024 (50% weighting). Following feedback from some of our investors and their representatives,
the Remuneration Committee has changed, with effect from the 2022 award onwards, the measurement of absolute share price. Share price
performance will be assessed using the average share price over the final six months of the three-year performance period. The target range
used for both measures includes a sliding scale with none of the award vesting at Threshold and rising pro-rata to full vesting for achieving
the Maximum.
To enhance the alignment of interest between the share plan participants and our shareholders, from 2023 onwards any dividends awarded
as notional shares to vested LTIP share holdings will be added to the original LTIP holding and used to calculate future awards of notional
shares when dividends are paid.
The targets in respect of the 2019 Performance Share Awards were met and vested in full on 5 March 2022. All Performance Share Awards
are structured as nil-cost options and may be exercised up until the tenth anniversary of the date of grant.
For earlier awards granted, please see last year’s annual report as published on the company website.
Director
Antony Craven Walker
Mitch Flegg
Andy Bell
2022
2021
2020
2019 (vested
in full)
138,300
147,615
92,576
587,349
587,349
386,100
386,100
411,067
411,067
306,210
224,478
234,308
378,491
1,480,908
996,678
1,056,443
Performance Share Awards were granted in 2019, 2020, 2021 and 2022, were subject to different vesting criteria based on absolute share
price performance over a three-year period. The awards granted in 2021 and 2022 were also subject to ESG performance targets to be met.
Following the Company’s 8p per share dividend to shareholders in June 2022 and 9p per share dividend to shareholders in November 2022,
dividend accrual amounts of 44,406 LTIP scheme interests (nil cost) were granted to both Mr Craven Walker and Mr Flegg and 25,310 LTIP
scheme interests (nil cost) were granted to Mr Bell in relation to their respective 2019 PSA Plan awards that had fully vested in March 2022.
Mr Craven Walker’s outstanding LTIP awards will be allowed to vest on their normal vesting date, subject to the achievement of the relevant
performance conditions and time pro-rating for the period of service rendered.
Serica Energy plc Annual Report & Accounts 2022 l 47
Corporate Governance DIRECTORS’ REMUNERATION REPORT continued
The Chair and the Non-Executive Directors
2022 Non-Executive Director fees
Non-Executive Directors
Antony Craven Walker
Ian Vann
Malcolm Webb
Trevor Garlick
Kate Coppinger
Richard Rose
Jérôme Schmitt
David Latin
Director Fees (£)
Board Chair/Committee Chair Fees (£) **
*
16,666 **
50,000
50,000
50,000
23,526**
25,000****
50,000
*
3,333***
10,000
10,000
10,000
-
-
6,666***
*
Mr Craven Walker drew no Non-Executive Director or Chair fees in 2022. Following his appointment as Non-Executive Chair with effect
from 1 July 2022 his annual fees for the role of Non-Executive Director and Non-Executive Chair are £50,000 and £125,000 per annum
respectively. However, until July 2023 Mr Craven Walker has waived his entitlement to both the Non-Executive Director and Non-Executive
Chair fees whilst receiving payment in lieu of the one year notice served under his Executive Service Contract.
** Ian Vann resigned as a Non-Executive Director on 30 April 2022 and Richard Rose stood down an an Independent Non-Executive Director
on 21 June 2022. Fees for both Ian Vann and Richard Rose for 2022 are a pro-rata figure of the annual fee of £50,000.
*** The Committee Chair fees for 2022 are pro-rata figures for both Ian Vann and David Latin.
**** Jérôme Schmitt was appointed as an Independent Non-Executive Director on 1 July 2022, his fees for 2022 are a pro-rata figure of the
annual fee of £50,000.
David Latin
Remuneration Committee Chair
12 April 2023
48 l Serica Energy plc Annual Report & Accounts 2022
DIRECTORS’ STATEMENT UNDER SECTION 172 (1) OF THE COMPANIES ACT 2006
We ensure that:
•
•
•
•
•
•
•
•
•
•
•
Health, Safety and the Environment are
considered paramount throughout the
organisation (both on-shore and off-
shore).
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. This is carried
out with Company Town Hall meetings
together with individual team and one to
one engagement.
Working conditions are favorable.
Newsletters and management updates
are provided.
Team-building sessions and social
events are arranged.
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.
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.
Stakeholder engagement is a priority for
the Board, with a view to obtaining a wide
range of views and achieving a common
understanding of the opportunities and
challenges that underpin a long-term
sustainable business plan.
Engagement typically takes place with
stakeholders through both the Board and
the senior management team. Outcomes
are reported through to the Board to have
a holistic understanding of all stakeholder
positions, to balance competing interests
and to take into account various views
when making decisions.
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 the
Strategic Report.
Selective examples of the highlights in
respect of each stakeholder group are set
out below.
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.
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
and the senior management team, 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. The Board supported
the Company’s adoption of the OEUK
Energy Services Agreement that sets base
terms for employees working offshore in
the UK and promotes a ‘safe, stable and
fair operating environment’.
Community and Environment
The Company runs an active community
support programme through its
committees; Charity and Fundraising,
Education and Diversity and Inclusion. The
Board is kept informed of events through
monthly Board papers and regular HSE
committee meetings. Recently, the Board
has put in place a dedicated Sustainability
Committee, who focusses primarily on
sustainability, environmental and social
aspects of the Company. Staff and
stakeholders are updated by various means
such as the company newsletter, a weekly
staff ‘round-up’ email, posts on social
media – LinkedIn and Twitter, as well as
staff HSE and sustainability meetings. The
annual ESG report provides details of the
Company’s social activities and is approved
by the Board.
Improving environmental performance of
the company and acting responsibly is
a key Company objective and the Board
receives monthly performance updates
of key environmental metrics such as
emissions, flaring and waste. More
detailed updates are given in the HSE
quarterly meetings, the recently formed
Sustainability Committee and by in-person
updates in the main board. The Board is
regularly updated on the activities and
progress of the Emissions Reduction
Group and the offshore ESG Champions.
Feedback from industry bodies and the
Regulator is also provided via the Board
committee meetings.
Serica Energy plc Annual Report & Accounts 2022 l 49
Corporate Governance DIRECTORS’ STATEMENT UNDER SECTION 172 (1) OF THE COMPANIES ACT 2006 continued
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 Company also published
its ESG report in 2022 which is 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.
On behalf of Board
Antony Craven Walker
Non-Executive Chair
12 April 2023
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.
50 l Serica Energy plc Annual Report & Accounts 2022
DIRECTORS’ RESPONSIBILITIES STATEMENT in relation to the Group and Company financial statements
•
•
provide additional disclosures
when compliance with the specific
requirements in UK-adopted
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 UK-adopted
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.
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 UK-adopted
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 UK-adopted
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
UK-adopted 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 UK-adopted 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
Serica Energy plc Annual Report & Accounts 2022 l 51
Corporate Governance INDEPENDENT AUDITOR’S REPORT to the members of Serica Energy plc
Opinion
In our opinion:
•
•
•
Serica Energy’s 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 2022 and of the group’s profit for the year then
ended;
the group financial statements have been properly prepared in accordance with UK adopted international accounting standards;
the parent company financial statements have been properly prepared in accordance with UK adopted international accounting standards
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 2022 which comprise:
Group
Group balance sheet as at 31 December 2022
Group income statement for the year then ended
Parent company
Balance sheet as at 31 December 2022
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
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
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 UK adopted international accounting
standards 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 and parent company in accordance with the ethical requirements that are relevant to our audit of the financial
statements in the UK, including the FRC’s Ethical 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 understood and walked through management’s process and controls related to assessing going concern including discussion with
management to assess whether all key factors were taken into account;
we obtained the group’s going concern assessment which includes the cash flow forecast and its liquidity position covering the period to
30 June 2024 (the going concern period) and confirmed that the method used in management’s model is appropriate and checked the
clerical accuracy of the model. Management’s assessment included a base case and a downside scenario, which are described on page 63
and in the basis of preparation in note 2 to the financial statements;
we evaluated the forecasted production profile, operating and capital expenditure and other key assumptions used in the going concern
assessment for consistency with the business plans and information obtained through auditing other areas of the business. This
included the impact of the acquisition of Tailwind Energy on the group’s future cash flow forecasts, and the possible mitigation steps and
assumptions regarding the availability of future liquidity. We also determined whether management’s forecasts reflected the expected cash
cost to Serica of executing plans aimed towards delivering the group’s ESG and climate change commitments;
we challenged the key assumptions included in the forecasts, with the most sensitive assumption being management’s view on forecast
oil and gas prices during the going concern period. We compared management’s price assumptions with the most recently available price
forecasts issued by a range of banks, brokers and consultants, which we obtained independently;
52 l Serica Energy plc Annual Report & Accounts 2022
•
•
•
•
•
•
•
•
we independently conducted a reverse stress test to determine the conditions under which the group could potentially experience a
liquidity shortfall. We modelled an extreme hypothetical, downside scenario under which we assumed no revenues or cash inflows are
generated by the legacy Tailwind assets throughout the going concern assessment period, but that the budgeted level of operating and
capital expenditures for these assets were still incurred. Under this scenario, we also assumed that the group would be required to repay
the entire amount drawn down under the RBL facility, replicating a covenant breach scenario;
we obtained bank confirmations of the group’s cash and cash equivalent balances as at 31 December 2022 and received bank statements
to confirm the balances as at 28 February 2023;
we obtained the RBL debt facility agreement, read and confirmed the terms of the facility, including the maturity date, redetermination
mechanism and covenant calculations. We also confirmed the total amount available under the facility and the amount utilised as at the
start of the going concern assessment period;
we reviewed the performance during the first quarter of 2023 to identify any issues that may impact management’s ongoing assessment;
we 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,
review of board minutes and other financial information to consider events or conditions beyond 30 June 2024 that may cast significant
doubt on the entity’s ability to continue as a going concern and compared their response to other information gathered during the course
of our audit;
we 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
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 2024 and to ensure such disclosures are in accordance with relevant standards.
Our key observations
Applying conservative price assumptions and assuming an adverse scenario whereby the group’s entire portfolio is shut-in and generating
no revenues for six months, sufficient liquidity remains in management’s sensitised forecast. Under an even more adverse forecast scenario,
management eliminated all future revenues relating to legacy Tailwind assets, but still assumed operating and capital costs were incurred in
line with budget. In this scenario, management’s forecast showed that the group has access to sufficient liquidity through committed funding
and other mitigating actions under management’s control.
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 the period to
30 June 2024.
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.
The components where we performed full scope audit procedures accounted for 99% of the profit before
tax measure used to calculate materiality, 100% of revenue and 99% of total assets.
Key audit matters
Assessment of commercial oil and gas reserves and their impact on the financial statements
Impairment of property plant and equipment related to Columbus
Materiality
Overall group materiality of £11.7m, which represents 5% of normalised profit before tax excluding the
impact of fair value movements on the BKR contingent consideration and commodity price swaps and
one-off charge relating to North Eigg asset write down (“adjusted profit before tax”).
Serica Energy plc Annual Report & Accounts 2022 l 53
Auditor’s Report INDEPENDENT AUDITOR’S REPORT to the members of Serica Energy plc continued
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 group financial statements. We take into account size,
risk profile, the organisation of the group and effectiveness of group wide controls, the potential impact of climate change, and changes in the
business environment 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 two components covering entities
within the UK, which represent the principal business units within the group.
For both of the components selected, we performed an audit of the complete financial information of the components (“full scope
components”) which were selected based on their size or risk characteristics.
The reporting components where we performed audit procedures accounted for 99% (2021: 99%) of the group’s adjusted PBT measure used
to calculate materiality, 100% (2021: 100%) of the group’s revenue and 99% (2021: 99%) of the group’s total assets.
The remaining eight components together represent 1% of the group’s adjusted profit before tax. For these components, we performed other
procedures, including analytical review, testing of consolidation journals and intercompany eliminations to respond to any potential risks of
material misstatement to the group financial statements.
Involvement with component teams
All audit work performed for the purposes of the audit was undertaken by the group audit team.
Climate change
Stakeholders are increasingly interested in how climate change will impact Serica Energy plc. The group has determined that the most
significant future impacts from climate change on their operations will be around decarbonisation, investment required to reduce carbon
emissions and to improve energy efficiency. These are explained on pages 25 to 28 in the Task Force for Climate related Financial Disclosures
and on pages 23 to 25 in the principal risks and uncertainties. All of these disclosures form part of the “Other information,” rather than the
audited financial statements. Our procedures on these unaudited disclosures therefore consisted solely of considering whether they are
materially inconsistent with the financial statements, or our knowledge obtained in the course of the audit or otherwise appear to be materially
misstated, in line with our responsibilities on “Other information”.
In planning and performing our audit we assessed the potential impacts of climate change on the group’s business and any consequential
material impact on its financial statements.
The group has explained in the Basis of Preparation in note 2 to the group financial statements how they have reflected the impact of climate
change in their financial statements. These disclosures also explain where governmental and societal responses to climate change risks are
still developing, and where the degree of certainty of these changes means that they cannot be taken into account when determining financial
statement impacts under the requirements of UK adopted international accounting standards.
Our audit effort in considering the impact of climate change on the financial statements was focused on evaluating management’s
assessment of the impact of climate risk, physical and transition, their climate commitments, the effects of material climate risks disclosed on
pages 25 to 28 and whether these have been appropriately reflected in, where relevant, asset values where these are impacted by future cash
flows and associated sensitivity disclosures, and in the timing and nature of liabilities recognised, following the requirements of UK adopted
international accounting standards (see note 2 to the financial statements). As part of this evaluation, we performed our own risk assessment,
supported by our climate change internal specialists, to determine the risks of material misstatement in the financial statements from climate
change which needed to be considered in our audit.
We also challenged the Directors’ considerations of climate change risks in their assessment of going concern and associated disclosures.
Where considerations of climate change were relevant to our assessment of going concern, these are described above.
Based on our work we have not identified the impact of climate change on the financial statements to be a key audit matter or to impact a key
audit matter.
54 l Serica Energy plc Annual Report & Accounts 2022
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of
the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified.
These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing
the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in
our opinion thereon, and we do not provide a separate opinion on these matters.
Risk
Our response to the risk
Assessment of commercial oil and gas 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 63)
The estimate of oil and gas reserves has a significant
impact on the financial statements, particularly
impairment assessments and the estimation of
depreciation, depletion and amortisation (‘DD&A’)
charges.
As described in note 15 to the financial statements,
oil and gas properties amounted to £265.7 million
and have an associated DD&A charge of
£76.9 million.
The estimation of oil and natural gas reserves is
complex as there is significant estimation uncertainty
in assessing the quantities of reserves in place.
If reserves are recognised that are not ultimately
produced, DD&A will be understated, and the
recoverable amount of assets may be overstated.
Reserves are also a fundamental indicator of
the future potential of the group’s performance.
Estimation uncertainty is further elevated given the
transition to a low-carbon economy which could
impact life-of-field assumptions and increase the
risk of underutilised or stranded oil and gas assets.
Also, given the estimation of oil and gas reserves
is complex, there is a risk that inappropriate
management bias influences the estimate.
Our procedures included, amongst others:
• confirming our understanding of the group’s controls
over their certification process for technical and
commercial specialists who are responsible for
reserves estimation by performing a walk through and
assessing the design effectiveness of controls;
• assessing the competence and objectivity of
these specialists, to satisfy ourselves they were
appropriately qualified to carry out the volume’s
estimation;
• obtaining confirmation directly from management’s
third-party specialists 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 were
made in the appropriate accounting period;
• assessing, where relevant, whether life of field and
cessation of production assumptions incorporated
Serica’s estimate of costs associated with the
potential impact of climate change and the energy
transition;
• validating that the reserves estimates were included
appropriately as key inputs within the group’s financial
statements, including the determination of the
recoverable amount of assets and accounting for
DD&A.
The above audit procedures were performed by the group
primary team in respect of one full scope component,
covering 100% of this risk amount.
Key observations
communicated to the
Audit Committee
We did not identify any
exceptions as a result of
our audit procedures.
We confirmed that
material changes in
reserves volumes
have been made in the
appropriate accounting
period and validated
that the updated
reserves estimates are
included appropriately
in the group’s forecasts
for impairment
assessments and
the calculation of
DD&A. We consider
the disclosures in the
financial statements to
be appropriate
We confirmed that the
significant revision to
Columbus reserves has
been reflected in the
DD&A calculation for the
year, in line with Serica’s
accounting policies.
Serica Energy plc Annual Report & Accounts 2022 l 55
Auditor’s Report INDEPENDENT AUDITOR’S REPORT to the members of Serica Energy plc continued
Key observations
communicated to the
Audit Committee
On the basis of our
audit procedures,
we are satisfied
with management’s
identification of an
impairment trigger
relating to the
Columbus asset, and no
other assets, as at 31
December 2022.
We challenged the
assumptions applied
by management in
their impairment
assessment, including
consideration of where
the values used fall
within a reasonable
range of assumptions
that could have been
applied. We are satisfied
that the assumptions
used by Serica are
reasonable and
highlighted to the Audit
Committee that the
Brent crude and NBP
gas price assumptions,
although reasonable, are
relatively conservative
compared to external
benchmarks.
Overall, we are satisfied
that the results
of management’s
impairment assessment
are reasonable and
that no impairment of
Columbus is required as
at 31 December 2022.
Risk
Impairment of property plant and equipment related
to Columbus
Refer to the Accounting policies section “Use
of judgement and estimates and key sources of
estimation uncertainty” (page 63)
As described in note 15 to the consolidated financial
statements, oil and gas properties recorded within
property, plant and equipment (PP&E) amounted
to £265.7 million as at 31 December 2022. Of
this amount, £52.8 million related to Columbus.
The balance sheet also includes a £4.0 million
decommissioning provision and £38.0 net million
deferred tax liability relating to Columbus.
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).
Potential indicators of impairment include a
producing asset’s operational performance and
significant changes (reductions) in oil and gas
reserve estimates and oil and gas prices. There is a
risk that impairment indicators are not identified, and
any resulting impairment tests are not performed on
a timely basis.
The asset recorded within PP&E that we assessed
as having presented the highest risk of potential
impairment was Columbus. Although oil and gas
prices were relatively high during the year and at
year-end, management identified the downward
revision of reserves as an indicator of impairment as
at 31 December 2022.
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 and the energy transition on the demand
for both crude oil and natural gas products. Where
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. We have described the risk within the
assessment of commercial reserves and its impact
on the financial statements key audit matter above.
Our response to the risk
Our procedures included:
• confirming our understanding of the group’s controls
over the impairment assessment process by
performing a walk through and assessing the design
effectiveness of the controls;
• obtaining management’s assessment of whether any
indicators of impairment were present across Serica’s
portfolio as at 31 December 2022;
• challenging 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. Also, we have
considered the extent to which management’s
assertions in the impairment indicator assessment
reflect the uncertainty associated with the energy
transition;
where indicators were identified (Columbus) and
impairment tests were subsequently performed:
•
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 challenged the impact of the Columbus reserves
downgrade and assessed whether this has been
appropriately considered by management;
• we assessed the economic performance of Columbus
since commissioning against approved budgets,
taking into account updated reserves estimates;
• we challenged whether the post-tax nominal discount
rates applied by Serica fell within a reasonable
range by engaging our EY valuations specialists to
independently determine a range of discount rates for
Serica’s portfolio;
• we evaluated the tax cash flow assumptions
applied in management’s model and whether these
appropriately reflected the expected impacts of the
UK Energy Profits Levy introduced during 2022;
• we assessed whether the cash flow forecasts tested
as part of our audit of going concern, including the
impact of price downside scenarios and sensitivity
analyses, supported management’s impairment
assessment conclusions; and
•
the procedures we performed in relation to oil and gas
estimates are described above within the Assessment
of commercial oil and gas reserves key audit matter.
The above audit procedures were performed in one
component under full scope audit, covering 100% of this
risk amount.
56 l Serica Energy plc Annual Report & Accounts 2022
In the prior year, our auditor’s report included a key audit matter in relation to the valuation of gas hedging instruments. This was due to the
level of hedging instruments held by the company and the impacts of significant price volatility experienced in 2021. In addition, the risk was
elevated in the prior year by the restructuring of contracts held with one counterparty and the accounting implications of the change. In the
current year, the exposure to hedging instruments was reduced because a large proportion of the remaining hedging contracts were settled
during the year.
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 £11.7 million (2021: £5.8 million), which is 5% (2021: 5%) of adjusted profit before tax. We
believe that adjusted profit before tax, on a normalised basis, provides us with an appropriate basis for planning materiality for the current year
audit. The increase in materiality is due to significant increases in the profitability of the group, driven by, amongst other things, a full year of
production from R3 and Columbus in 2022 and higher oil and gas prices.
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 adjusted profit before
tax. We believe that adjusted 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 significant increase and volatility in commodity prices experienced throughout 2022, we determined that the basis of planning
materiality should be normalised adjusted profit before tax. We normalised the 2022 adjusted profit before tax by applying the mid-long
term expected commodity prices to the actual volumes sold during the period. 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 second half of 2022, NBP gas prices
have increased to unprecedented high levels and are forecast to decrease in the long term. By applying a normalised approach, large year-on-
year swings in materiality, caused primarily by commodity price volatility, are minimised.
In our calculation of planning materiality, we also excluded from profit before tax the impact of fair value movements on the BKR contingent
consideration and unrealised 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 £17 million (2021: losses of £242 million) that have therefore been excluded from adjusted profit
before tax. In our final assessment of materiality at year-end, we have also excluded the impact of the significant one-off charge relating to the
North Eigg write down.
We determined materiality for the parent company to be £5.4 million (2021: £5.3 million), which is 2% (2021: 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. 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.
During the course of our audit, we reassessed initial materiality and based on the final results for 2022, we concluded that no changes were
required other than to reflect the impact of the North Eigg write off, which was not known at the planning stage of our audit.
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% (2021: 75%) of our planning materiality, namely £8.8m (2021: £4.3m). 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 low number of audit differences
identified in the 2021 audit.
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 £7.4m (2021: £3.7m)
Serica Energy plc Annual Report & Accounts 2022 l 57
Auditor’s Report INDEPENDENT AUDITOR’S REPORT to the members of Serica Energy plc continued
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 £0.59m (2021: £0.28m),
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 2 to 4 and 8 to 49, 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 this gives rise to 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
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement set out on page 49, 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.
58 l Serica Energy plc Annual Report & Accounts 2022
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 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 and 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.
Following the year-end date, it was identified that certain dividend distributions paid in 2022 were not made in accordance with The
Companies Act 2006, because the necessary interim financial statements required to demonstrate that sufficient distributable reserves
were available prior to payment of those dividends had not been filed at Companies House. We understood how the company, along
with their legal and corporate secretarial advisors, plans to remedy these breaches and ensured that related disclosures in the financial
statements were appropriate.
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.
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
12 April 2023
Serica Energy plc Annual Report & Accounts 2022 l 59
Auditor’s Report
GROUP INCOME STATEMENT for the year ended 31 December
Continuing operations
Sales revenue
Cost of sales
Gross profit
Unrealised hedging income/(expense)
Realised hedging expense
Pre-licence costs
E&E asset write-offs
Administrative expenses
Transaction costs
Foreign exchange gain/(loss)
Share-based payments
Operating profit before net finance revenue and tax
Change in fair value of BKR financial liabilities
Finance revenue
Finance costs
Profit before taxation
Note
2022
£000
2021
£000
4
5
6
6
14
31
27
22
9
10
812,423
514,136
(218,155)
(127,313)
594,268
386,823
20,877
(74,592)
(45,384)
(56,615)
(185)
(82,749)
(9,225)
(1,785)
3,903
(3,510)
(199)
–
(6,097)
–
(854)
(2,386)
476,210
246,080
8,407
4,499
(938)
(110,529)
82
(527)
488,178
135,106
Taxation charge for the year
11a)
(310,382)
(55,812)
Profit for the year
177,796
79,294
Earnings per ordinary share - EPS
Basic EPS on profit for the year (£)
Diluted EPS on profit for the year (£)
12
12
0.65
0.62
0.30
0.28
Group Statement of Comprehensive Income
There are no other comprehensive income items other than those passing through the income statement. Therefore, the total comprehensive
income attributable to equity holders of the parent is £177,796,000.
60 l Serica Energy plc Annual Report & Accounts 2022
BALANCE SHEET as at 31 December
Group
Company
Registered number: 5450950
Non-current assets
Exploration & evaluation assets
Property, plant and equipment
Investments in subsidiaries
Current assets
Inventories
Trade and other receivables
Hedging security advances
Cash and cash equivalents
TOTAL ASSETS
Current liabilities
Trade and other payables
Corporate tax payable
Derivative financial liabilities
Gas contract liabilities
Financial liabilities
Non-current liabilities
Gas contract liabilities
Financial liabilities
Provisions
Deferred tax liability
TOTAL LIABILITIES
NET ASSETS
Share capital
Merger reserve
Other reserve
Accumulated funds/(deficit)
14
15
16
17
18
19
20
21
19
19
22
19
22
23
Note
2022
£000
2021
£000
1,001
2,949
265,907
328,944
2022
£000
–
216
2021
£000
–
43
–
–
105,256
105,256
266,908
331,893
105,472
105,299
3,998
134,627
24,320
432,529
4,053
132,351
115,390
102,984
–
–
25,445
162,010
–
141,218
–
578
595,474
354,778
166,663
162,588
862,382
686,671
272,135
267,887
(69,887)
(33,697)
(3,367)
(1,023)
(149,998)
(15,804)
(24,914)
(45,791)
(987)
(37,505)
–
–
(93,861)
(987)
(29,378)
(37,795)
(25,199)
(28,095)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
11d)
(153,295)
(120,608)
(453,658)
(414,143)
(3,367)
(1,023)
408,724
272,528
268,768
266,864
25
16
27
183,177
181,993
155,478
154,294
–
25,576
199,971
–
22,066
68,469
88,088
25,576
(374)
88,088
22,066
2,416
TOTAL EQUITY
408,724
272,528
268,768
266,864
The profit for the Company was £43.5 million for the year ended 31 December 2022 (2021: loss of £0.4 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 12 April 2023
Mitch Flegg
Chief Executive Officer
Andrew Bell
Chief Financial Officer
Serica Energy plc Annual Report & Accounts 2022 l 61
Financial Statements
STATEMENT OF CHANGES IN EQUITY for the year ended 31 December
Group
Share
capital
£000
Other
reserve
£000
Note
Accum’d
funds/
(deficit)
£000
Total
£000
At 1 January 2021
181,606
19,680
(1,440)
199,846
Profit for the year
Total comprehensive income
Share-based payments
Issue of share capital
Dividend paid
At 31 December 2021
Profit for the year
Total comprehensive income
Share-based payments
Issue of share capital
Dividends paid
–
–
–
387
–
–
–
2,386
–
–
79,294
79,294
–
–
79,294
79,294
2,386
387
(9,385)
(9,385)
181,993
22,066
68,469
272,528
–
–
–
1,184
–
–
–
3,510
–
–
177,796
177,796
–
–
177,796
177,796
3,510
1,184
(46,294)
(46,294)
27
25
13
27
25
13
At 31 December 2022
183,177
25,576
199,971
408,724
Company
Share
capital
£000
Merger
reserve
£000
Other
reserve
£000
Accum’d
funds/
(deficit)
£000
Total
£000
At 1 January 2021
153,907
88,088
19,680
12,170
273,845
Loss for the year
Total comprehensive income
Share-based payments (note 27)
Issue of share capital (note 25)
Dividend paid
–
–
–
387
–
–
–
–
–
–
–
–
2,386
–
–
(369)
(369)
–
–
(369)
(369)
2,386
387
(9,385)
(9,385)
At 31 December 2021
154,294
88,088
22,066
2,416
266,864
Profit for the year
Total comprehensive income
Share-based payments (note 27)
Issue of share capital (note 25)
Dividend paid (note 13)
–
–
–
1,184
–
–
–
–
–
–
–
–
3,510
–
–
43,504
43,504
–
–
43,504
43,504
3,510
1,184
(46,294)
(46,294)
At 31 December 2022
155,478
88,088
25,576
(374)
268,768
62 l Serica Energy plc Annual Report & Accounts 2022
CASH FLOW STATEMENT for the year ended 31 December
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 (income)/costs
Depreciation and depletion
Oil and NGL over/underlift
E&E asset write-offs
Unrealised hedging (gains)/losses
Movement in contract revenue
Share-based payments
Other non-cash movements
Decrease/(increase) in security advances
(Increase)/decrease in trade and other receivables
Decrease in inventories
Increase in trade and other payables
Cash inflow from operations
Taxation paid
Decommissioning spend
Group
Company
Note
2022
£000
2021
£000
2022
£000
177,796
79,294
43,504
2021
£000
(369)
310,382
(8,407)
(3,870)
76,887
20,270
82,749
(20,877)
(37,505)
3,510
(1,503)
91,070
(8,571)
55
22,872
704,858
(143,500)
(1,218)
55,812
110,529
445
37,048
(6,859)
–
74,592
–
2,386
349
(113,590)
(86,527)
580
3,544
157,603
–
–
–
–
(982)
–
–
–
–
–
–
–
49
–
–
–
–
–
3,510
2,386
140
–
(24)
–
2,131
48,279
–
–
80
–
453
–
207
2,806
–
–
Net cash inflow from operating activities
560,140
157,603
48,279
2,806
Investing activities:
Interest received
Purchase of E&E assets
Purchase of property, plant and equipment
Receipts from Group subsidiaries
Cash outflow from business combination
Cash outflow arising on asset acquisitions
Net cash flow from investing activities
Financing activities:
Payments of lease liabilities
Proceeds from issue of shares
Dividends paid
Finance costs paid
Net cash flow from financing activities
Net increase/(decrease) in cash and cash equivalents
Effect of exchange rates on cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
4,499
82
1,033
(80,801)
(1,906)
(16,298)
(50,252)
–
–
–
–
136,761
(93,871)
(81,277)
–
(1,002)
–
–
(186,471)
(134,355)
137,794
(132)
1,184
(179)
387
(132)
1,184
(46,294)
(9,385)
(46,294)
(385)
(71)
(51)
(45,627)
(9,248)
(45,293)
328,042
14,000
140,780
1,503
102,984
432,529
(349)
89,333
102,984
(140)
578
141,218
22
23
28
25
13
26
26
26
26
7
–
–
–
–
–
7
(179)
387
(9,385)
(56)
(9,233)
(6,420)
(80)
7,078
578
Serica Energy plc Annual Report & Accounts 2022 l 63
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 2022 were authorised for issue by the Board of Directors
on 12 April 2023 and the balance sheets were signed on the Board’s behalf by Mitch Flegg and Andrew Bell. 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 UK-adopted 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 2022.
The Company’s financial statements have been prepared in accordance with UK-adopted 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
2022 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 £43,504,000 (2021:
loss £369,000).
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 2022.
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.
In preparing the Group financial Statements management has considered the impact of climate change. These considerations did not have a
material impact on the financial reporting judgements and estimates and consequently climate change is not expected to have a significant
impact on the Group’s going concern assessment to June 2024 nor the viability of the Group over the next five years. However, governmental
and societal responses to climate change risks are still developing, and are interdependent upon each other, and consequently financial
statements cannot capture all possible future outcomes as these are not yet known. It is recognised that Net Zero targets and third party
expectations may drive government action that imposes further requirements and costs on companies in the future. The Group has additional
planned expenditure related to flare gas recovery and other emission reduction measures, however, as all of the Group’s currently producing
assets are projected to cease production by 2036 it is believed that any such future changes would have a relatively limited impact compared
to assets with longer durations.
Going Concern
The Directors are required to consider the availability of resources to meet the Group’s liabilities for the period ending 30 June 2024, the ‘going
concern period’. The financial position of the Group, its cash flows and capital commitments are described in the Financial Review above.
At 31 December 2022 the Group held cash and term deposits of £432.5 million which included £18.1 million of restricted funds. Following
completion of Serica’s acquisition of Tailwind Energy Investments Ltd on 23 March 2023 the Serica Group’s going concern considerations
now include a US$366 million assumed RBL facility, and a separate undrawn US$50 million junior facility which is available until the RBL is
repaid. See note 31 for further details of the RBL and junior facility. The acquisition of Tailwind gives the Group increased production and
operating cash flows, a balance in product mix between gas and oil, and two main operating hubs which reduces the potential impact of
production interruptions. Serica currently has competitive operating costs per boe and its capital commitments can be funded from existing
cash resources.
The Group regularly monitors its cash, funding and liquidity position, including available facilities and compliance with facility covenants. 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. In recent years, management has given priority to building a
strong cash reserve which can respond to different types of risk.
As at 31 March 2023 the Group held cash and term deposits of £389.3 million including £18.1 million of restricted funds, with separate RBL
liquidity headroom of US$36 million (US$330 million drawn versus US$366 million available).
For the purposes of the Group’s going concern assessment we have reviewed two cash projections for the going concern period. These
projections cover a base case forecast and an extreme stress test scenario for the combined operations of the Group, including both
legacy Tailwind and Serica assets. RBL repayments have been assumed based on the current redetermination and no covenant compliance
matters noted.
64 l Serica Energy plc Annual Report & Accounts 2022
2. Accounting Policies continued
The base case assumptions include commodity pricing of £1/therm for gas and US$70/bbl for oil throughout the going concern period.
Production, opex, capex and tax assumptions are those currently included in standard management forecasting. The forward looking price
assumptions are considered as reasonable in light of recent commodity forward pricing and a consensus of published forecasts from the
industry, brokers and other analysts.
The stress test assumptions assume commodity pricing of £1/therm for gas and US$70/bbl for oil for Q2 2023, a full six-month shut-in of
all production for 2H 2023, followed by a return to base case production in 1H 2024 to the end of the going concern period at 30 June 2024.
Lower commodity pricing of 75 pence/therm and US$50/bbl oil are assumed for the 1H 2024 period in this scenario which are significantly
below the range of current market expectations for the going concern period. Under this scenario, which would result in lower cash inflows
and repayments of the RBL facility as redetermined, the Group was able to maintain sufficient cash to meet its obligations and maintain
covenant compliance. A number of mitigating factors and mitigating actions that are under management control are available to management
in the stress test event. These would mitigate the reduced operating cash outflows experienced and are not included in the projection.
After making enquiries and having taken into consideration the above factors, the Directors considered it appropriate 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.
Use of judgement and estimates and key sources of estimation uncertainty
The preparation of financial statements in conformity with UK-adopted 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.
Uses of judgement
A key source of judgement that has a significant risk of causing material adjustment to the amounts recognised in the financial statements is
whether impairment triggers exist that might lead to the impairment of the Group and Company’s assets (including oil and gas development
assets and Exploration and Evaluation “E&E” assets).
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.
Sources of estimation uncertainty
The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the amounts recognised in the
financial statements are: the assessment of impairment indicators, the assessment of commercial reserves, determining the fair value of
contingent consideration and decommissioning provisions.
Assessment of impairment indicators
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).
Serica Energy plc Annual Report & Accounts 2022 l 65
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
2. Accounting Policies continued
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 2022 in accordance with the stated policy and no impairment triggers were noted other than for the Columbus production asset.
Columbus reserves booked in the 2022 reserves report had a significant downward revision due to analysis of data gathered from the first
full year of production, and the subsequent interpretation of this data. This analysis, together with lower production than initially forecast
and the introduction of the EPL, are factors that combine as a trigger for potential impairment. The future recoverable amounts of the
Columbus were assessed and no impairment was recorded, largely due to the impact of strong future commodity prices (see note 15) and
the significantly reduced carrying amount given the increased depletion charge recognised as a result of the reserves reduction. Based on
sensitivities performed, there is no risk of a material adjustment to the carrying value of the Columbus CGU, because a reasonable change in
key assumptions used to determine the recoverable amount would not result in an impairment.
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 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. A 10% reduction in the assessed
quantity of commercial reserves would lead to an increase in the depletion charge for 2022 of £8.5 million (2021: £4.1 million).
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 the remaining contingent consideration on the
BKR acquisitions payable as at 31 December 2022, assumptions underlying the calculation were updated from 2021. 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).
Basis of Consolidation
The consolidated financial statements include the accounts of Serica Energy plc (the “Company”) and entities controlled by the Company (its
subsidiaries) made up to 31 December each year. Together these comprise the "Group".
Control is achieved when the Company:
• has power over the investee;
•
is exposed, or has rights, to variable returns from its involvement with the investee; and
• has the ability to use its power to affect its returns.
The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of
the three elements of control listed above. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and
ceases when the Company loses control of the subsidiary. Specifically, the results of the subsidiaries acquired or disposed of during the year
are included in profit or loss from the date the Company gains control until the date when the Company ceases to control the subsidiary.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with the
Group’s accounting policies. All inter-company balances and transactions have been eliminated upon consolidation.
66 l Serica Energy plc Annual Report & Accounts 2022
2. Accounting Policies continued
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.
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.
Serica Energy plc Annual Report & Accounts 2022 l 67
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
2. Accounting Policies continued
Exploration and Evaluation (E&E)
The costs of exploring for and evaluating oil and gas properties, including the costs of acquiring rights to explore, geological and geophysical
studies, exploratory drilling and directly related overheads, are capitalised and classified as intangible E&E assets. These costs are directly
attributed to regional CGUs for the purposes of impairment testing; UK.
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 annual reporting date.
Proved and probable reserves estimates obtained from an independent reserves specialist have been used as the basis for 2021 and 2022
calculations.
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.
68 l Serica Energy plc Annual Report & Accounts 2022
2. Accounting Policies continued
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 are 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.
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.
Serica Energy plc Annual Report & Accounts 2022 l 69
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
2. Accounting Policies continued
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.
Emissions liabilities
The Group operates in an energy intensive industry and is therefore required to partake in emission trading schemes (‘ETS’). The Group
recognises an emission liability in line with the production of emissions that give rise to the obligation. To the extent the liability is covered
by allowances held, the liability is recognised at the cost of these allowances held and if insufficient allowances are held, the remaining
uncovered portion is measured at the spot market price of allowances at the balance sheet date. The expense is presented within ‘production
costs’ under ‘cost of sales’ and the accrual is presented in ‘trade and other payables’.
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. The Company holds inter-company loans with subsidiary undertakings with repayment dates being repayable on demand. These
inter-company loans are disclosed on the face of the balance sheet. None are past due nor impaired. The carrying value of these loans
approximates their fair value. The expected credit loss on these loans with subsidiary undertakings is expected to be immaterial, both on initial
recognition and subsequently.
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.
70 l Serica Energy plc Annual Report & Accounts 2022
2. Accounting Policies continued
Revenue from contracts with customers
Revenue from contracts with customers is recognised when control of the goods or services are transferred to the customer at an amount
that reflects the consideration to which the Group expects to be entitled to in exchange for those goods or services. Revenue is measured
at the fair value of the consideration received or receivable and represents amounts receivable for goods provided in the normal course of
business, net of discounts, customs duties and sales taxes. The Group has concluded that it is the principal in its revenue arrangements
because it typically controls the goods or services before transferring them to the customer.
The sale of crude oil, gas or condensate represents a single performance obligation, being the sale of barrels equivalent on collection of a
cargo or on delivery of commodity into an infrastructure. Revenue is accordingly recognised for this performance obligation when control over
the corresponding commodity is transferred to the customer. The Group principally satisfies its performance obligations at a point in time and
the amounts of revenue recognised relating to performance obligations satisfied over time are not significant. 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.
Serica Energy plc Annual Report & Accounts 2022 l 71
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
2. Accounting Policies continued
Deferred tax assets are recognised for all deductible temporary differences, to the extent that it is probable that taxable profits will be available
against which the deductible temporary differences can be utilised. Deferred tax assets and liabilities are presented net only if there is a legally
enforceable right to set off current tax assets against current tax liabilities and if the deferred tax assets and liabilities relate to income taxes
levied by the same taxation authority.
Earnings Per Share
Earnings per share is calculated using the weighted average number of ordinary shares outstanding during the period. Diluted earnings per
share is calculated based on the weighted average number of ordinary shares outstanding during the period plus the weighted average
number of shares that would be issued on the conversion of all relevant potentially dilutive shares to ordinary shares. It is assumed that any
proceeds obtained on the exercise of any options and warrants would be used to purchase ordinary shares at the average price during the
period. Where the impact of converted shares would be anti-dilutive, these are excluded from the calculation of diluted earnings.
Leases
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 2022. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet
effective. Other than the changes described below, the accounting policies adopted are consistent with those of the previous financial year.
Several amendments and interpretations apply for the first time in 2022, but do not have an 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 2024 and must be applied retrospectively. The
Group is currently assessing the impact the amendments will have on current practice.
72 l Serica Energy plc Annual Report & Accounts 2022
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 one geographical reportable
segment of the UK for the years ended 31 December 2022 and 2021. Costs associated with the UK corporate centre are included in the UK
reportable segment.
Revenue
Continuing operations
Depletion
Other expenses
E&E asset write-offs
Operating and segment profit
Change in BKR financial liability
Finance revenue
Finance costs
Profit before taxation
Taxation charge for the year
Profit after taxation
Other segment information:
Property, plant & equipment
Exploration and evaluation assets
Other assets
Total assets
Segment liabilities
Total liabilities
Capital expenditure:
Property, plant & equipment
Exploration and evaluation assets
In 2021 and 2022 all cash on deposit is allocated to the UK operating segment.
Information on major customers is provided in note 4.
2022
£000
2021
£000
812,423
514,136
(76,887)
(37,048)
(176,577)
(231,008)
(82,749)
–
476,210
246,080
8,407
4,499
(938)
(110,529)
82
(527)
488,178
135,106
(310,382)
(55,812)
177,796
79,294
Total
£000
Total
£000
265,907
328,944
1,001
2,949
595,474
354,778
862,382
686,671
(453,658)
(414,143)
(453,658)
(414,143)
16,298
80,801
50,252
1,906
Serica Energy plc Annual Report & Accounts 2022 l 73
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS continued
4. Sales Revenue
Gas sales
Gas supply contract revenue
Total gas sales
Oil sales
NGL sales
Total revenue
2022
£000
2021
£000
652,680
455,969
37,505
–
690,185
455,969
88,048
34,190
40,215
17,952
812,423
514,136
Gas sales revenue in 2021 and 2022 arose from one key customer. Gas supply contract revenue in 2022 arose from the unwind of gas
contract liabilities initially recognised upon the restructuring of certain gas swaps to other fixed price instruments under a gas sales contract
in August 2021. Further information is provided note 19.
All oil sales revenue in 2021 and 2022 was from one key customer, and NGL sales in 2022 were made to six (2021: six) customers.
5. Cost of Sales
Operating costs
Depletion (see note 15)
Movement in liquids overlift/underlift
2022
£000
120,998
76,887
20,270
2021
£000
97,124
37,048
(6,859)
218,155
127,313
The 2022 depletion charge reflects the impact of a full year of Columbus production. Following the significant downgrade to Columbus
reserves in the year, Columbus depletion is charged at a relatively higher unit cost per boe than the other producing assets and this has
increased the overall depletion charge.
74 l Serica Energy plc Annual Report & Accounts 2022
6. Group Operating Profit
This is stated after crediting/(charging):
Realised hedging losses
Unrealised hedging gains/(losses) on gas swaps
Other hedging losses (note 19)
Unrealised hedging gains/(losses)
2022
£000
2021
£000
(45,384)
(56,615)
20,877
–
(36,100)
(38,492)
20,877
(74,592)
Realised hedging losses measured at fair value through profit or loss for 2021 and 2022 comprise losses realised on 2021 and 2022 gas price
swaps respectively.
Unrealised hedging gains/(losses) measured at fair value through profit or loss on gas swaps comprise unrealised amounts on the movement
during 2022 and 2021 respectively in the calculated fair value liability of outstanding gas price derivative contracts measured at the respective
Balance Sheet dates.
Other hedging losses in 2021 comprise charges for the fair value of 2022 and 2023 hedging instruments crystalised as gas contract liabilities
upon a restructuring of certain gas swaps to other fixed price instruments under a gas sales contract in August 2021. Further detail is
provided in note 19.
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 2021 or 2022.
2022
£000
338
30
36
2021
£000
310
30
15
404
355
Serica Energy plc Annual Report & Accounts 2022 l 75
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
Wages and salaries
Social security costs
Other pension costs
2022
£000
2021
£000
21,755
19,637
3,727
2,199
3,510
2,525
2,104
2,386
31,191
26,652
3,539
718
156
3,064
554
126
4,413
3,744
The average number of persons employed by the Group during the year was 175 (2021: 164), with 9 in management functions (2021: 9),
155 in technical functions (2021: 145) and 11 (2021: 10) in finance and administrative functions.
The average number of persons employed by the Company during the year was 12 (2021:11) with 7 in management functions (2021: 7),
1 in technical functions (2021:1) and 4 (2021: 3) in finance and administrative functions.
Staff costs for key management personnel:
Short-term employee benefits
Post-employment benefits
Share-based payments
2,616
111
2,036
2,040
82
617
4,763
2,739
76 l Serica Energy plc Annual Report & Accounts 2022
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
A Bell¹ and²
N Pike³
I Vann4
T Garlick
M Webb
K Coppinger
R Rose5
D Latin6
J Schmitt7
2022
Salary and
fees
£000
490
523
328
–
20
60
60
60
24
57
25
2022
Bonus
£000
–
423
246
–
–
–
–
–
–
–
–
2022
Pension
£000
2022
Benefits
in kind
£000
–
68
43
–
–
–
–
–
–
–
–
–
1
1
–
–
–
–
–
–
–
–
2
1,647
669
111
¹ Cash in lieu of pension.
² Andrew Bell was appointed on 3 September 2021
³ Neil Pike retired on 24 June 2021
4 Ian Vann retired on 30 April 2022
5 Richard Rose was appointed on 28 September 2021 and resigned on 21 June 2022
6 David Latin was appointed on 7 December 2021
7 Jérôme Schmitt was appointed on 1 July 2022
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
2022
Total
£000
490
1,015
618
–
20
60
60
60
24
57
25
2021
Total
£000
592
865
195
30
60
60
60
55
13
4
–
2,429
1,934
2022
2021
2
–
£000
–
2
–
£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.
Serica Energy plc Annual Report & Accounts 2022 l 77
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS continued
9. Finance Revenue
Bank interest receivable
Total finance revenue
10. Finance Costs
Other interest payable
Unwinding of discount on decommissioning provisions (note 23)
Total finance costs
11. Taxation
a) Tax charged/(credited) in the income statement
Charge for the year
Adjustment in respect of prior years
Total current income tax charge
Deferred tax
Origination and reversal of temporary differences in the current year
Adjustment in respect of prior years
Total deferred tax charge
2022
£000
4,499
4,499
2022
£000
385
553
938
2021
£000
82
82
2021
£000
71
456
527
2022
£000
2021
£000
276,674
15,804
1,021
–
277,695
15,804
32,687
–
32,687
41,060
(1,052)
40,008
Tax charge in the income statement
310,382
55,812
78 l Serica Energy plc Annual Report & Accounts 2022
11. Taxation continued
b) Reconciliation of the total tax charge/(credit)
The tax in the income statement for the year differs from the amount that would be expected by applying the standard UK corporation tax
rate for the following reasons:
Accounting profit before taxation
2022
£000
2021
£000
488,178
135,106
Statutory rate of corporation tax in the UK of 40% (2021: 40%)
195,271
54,042
(Income)/expenses not deductible/(chargeable) for tax
Movement in unrecognised deferred tax assets
Investment Allowance
EPL – deferred tax charge
EPL – Income taxed at different rates
EPL – Investment allowance
Income tax at different rates
Permanent differences
Other
Adjustment in respect of prior years
(2,237)
(500)
(1,927)
59,045
82,473
(18,136)
378
(5,006)
–
1,021
5,299
717
(3,140)
–
–
–
7
–
(61)
(1,052)
Tax charge reported in the income statement
310,382
55,812
c) Recognised and unrecognised tax losses
The Group’s deferred tax assets at 31 December 2022 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 2022 with respect to ring fence losses and allowances.
The Group has UK ring fence tax losses of £nil available as at 31 December 2022 (2021: £nil) which form part of total UK tax losses of
approximately £25.4 million (2021: £28.0 million) that are available indefinitely for offset against future trading profits of the companies in
which the losses arose. No amounts have been set off against taxable temporary differences in 2021 or 2022. The benefit of approximately
£25.4 million (2021: £28.0 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.
Serica Energy plc Annual Report & Accounts 2022 l 79
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
11. Taxation continued
d) Deferred tax
The deferred tax included in the balance sheet is as follows:
Deferred tax liability:
Temporary differences on capital expenditure
(166,219)
(131,846)
Deferred tax liability
(166,219)
(131,846)
2022
£000
2021
£000
–
2,844
10,080
–
–
11,238
12,924
11,238
(153,295)
(120,608)
2022
£000
2021
£000
(120,608)
(80,600)
(32,687)
(40,008)
(153,295)
(120,608)
Deferred tax asset:
Movement in tax losses carried forward
Other permanent differences
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
80 l Serica Energy plc Annual Report & Accounts 2022
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
Tax losses carried forward
Net Cash Flow Sharing Deed
Permanent differences
Other temporary differences
Deferred income tax charge
e) Unrecognised deferred tax liability
2022
£000
2021
£000
34,373
–
–
(2,844)
1,158
7,065
20,427
14,635
–
(2,119)
32,687
40,008
In 2022 and 2021 there are no material temporary differences associated with subsidiaries for which deferred tax liabilities have not been
recognised.
f) Company
The Company has £25.4 million (2021: £28.0 million) of UK corporation tax losses which are not recognised as deferred tax assets.
g) Changes to UK corporation tax legislation
On 26 May 2022, the UK Government announced the introduction of an Energy Profits Levy (‘EPL’) on the UK ring fence profits of oil and gas
producers with effect from 26 May 2022. The legislation introducing the EPL was substantively enacted on 11 July 2022. The EPL will increase
to a rate of 35% from 25% with effect from 1 January 2023. The increase in rate was substantively enacted on 30 November 2022. The EPL
will be in place until 31 March 2028.
The EPL is charged on taxable profits in addition to ring fence corporation tax of 30% and Supplementary Charge of 10%, making a total rate
on ring fence profits of 65% for the period from 26 May 2022 to 31 December 2022, and 75% from 1 January 2023 to 31 March 2028. Any
temporary differences subject to the EPL expected to reverse in this period have consequently been remeasured to the higher rate. This has
resulted in a one-off deferred tax charge to the income statement of £59.0 million. The net impact on the deferred tax liability at the end of the
period as a result of the EPL is an increase in the deferred tax liability of £59.0 million.
The Finance Bill 2021 contained legislation to increase the main rate of UK corporation tax from 19% to 25% with effect from 1 April 2023.
This rate was substantively enacted in May 2021. 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.
Serica Energy plc Annual Report & Accounts 2022 l 81
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS continued
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:
2022
£000
2021
£000
Net profit from continuing operations
177,796
79,294
Net profit attributable to equity holders of the parent
177,796
79,294
2022
‘000
2021
’000
Basic weighted average number of shares
271,678
268,262
Dilutive potential of ordinary shares granted under share-based payment plans
16,757
13,106
Diluted weighted average number of shares
288,435
281,368
Basic EPS on profit for the year (£)
Diluted EPS on profit for the year (£)
2022
£
0.65
0.62
2021
£
0.30
0.28
82 l Serica Energy plc Annual Report & Accounts 2022
13. Dividends proposed
Proposed dividends on ordinary shares
A final cash dividend for 2022 of 14.0 pence per share (2021: 9.0 pence per share) is proposed which would generate a payment of £53.4
million (2021: £24.4 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.
Dividends on ordinary shares paid in 2022
A final cash dividend for 2021 of 9.0 pence per share was proposed in April 2022 and approved at the annual general meeting on 24 June
2022. Following the approval in the 1H 2022 period, the dividend payable of £24.4 million was paid in July 2022.
An interim cash dividend for 2022 of 8.0 pence per share was announced in September 2022 and £21.9 million was paid in November 2022.
Following the year end, the Directors became aware that certain dividends paid in 2022 had been made otherwise than in accordance with the
Companies Act 2006, section 838, because interim accounts had not been filed at Companies House prior to payment. It is important to note
that the Company has had sufficient distributable profits at the time each relevant dividend was paid and therefore did not pay out by way of
dividends more income than it had, and no payments were made out of capital. Relevant dividends were the final dividend paid in July and
the interim dividend paid in November. A resolution will be proposed at the Annual General Meeting to be held on 29 June 2023 to remove any
right that the Company may have had to claim from shareholders or Directors or former Directors for repayment of these amounts by entering
into deeds of release in relation to any such claims. This will, if passed, constitute a related party transaction under IAS 24. The overall effect
of the resolution is to return the parties so far as possible to the position they would have been in had the relevant dividends been made in full
compliance with the Act. The amounts for dividends included within the financial statements have not been restated as the financial resources
had left the Company and the intention of the resolution to be passed will be to remove any right for the Company to pursue shareholders or
directors for repayments.
Serica Energy plc Annual Report & Accounts 2022 l 83
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
14. Exploration and Evaluation Assets
Group
Cost:
1 January 2021
Additions
Write-offs
31 December 2021
Additions
Write-offs
31 December 2022
Provision for impairment:
1 January 2021
Impairment reversal for the year
31 December 2021
Impairment reversal for the year
31 December 2022
Net book amount:
31 December 2022
31 December 2021
1 January 2021
Total
£000
1,043
1,906
–
2,949
80,801
(82,749)
1,001
–
–
–
–
–
1,001
2,949
1,043
The E&E asset write-off for 2022 of £82.7 million comprised drilling costs from the North Eigg exploration well incurred to 31 December 2022.
The well encountered hydrocarbons, but not of commercial quantities as the reservoir sands were thinner than prognosed.
Company
The Company has no E&E assets.
84 l Serica Energy plc Annual Report & Accounts 2022
15. Property, Plant and Equipment
Group
Cost:
1 January 2021
Additions
Decommissioning asset
31 December 2021
Additions
Revisions (note 23)
Oil and gas
properties
£000
Equipment,
fixtures and
fittings
£000
Right-of-use
assets
£000
Total
£000
411,462
212
516
412,190
50,252
4,840
–
–
–
–
50,252
4,840
466,554
212
516
467,282
15,953
(2,231)
–
–
345
–
16,298
(2,231)
31 December 2022
480,276
212
861
481,349
Depreciation and depletion:
1 January 2021
Charge for the year (note 5)
31 December 2021
Charge for the year (note 5)
31 December 2022
Net book amount:
31 December 2022
31 December 2021
1 January 2021
Depletion
100,650
37,048
137,698
76,887
114
53
167
45
301
101,065
172
37,273
473
138,338
172
77,104
214,585
212
645
215,442
265,691
328,856
310,812
–
45
98
216
43
215
265,907
328,944
311,125
Columbus reserves booked in the 2022 reserves report had a significant downward revision due to analysis of data gathered from the first full
year of production, and the subsequent interpretation of this data. This analysis, together with lower production than initially forecast and the
introduction of the EPL, are factors that combine as a trigger for potential impairment. The future recoverable amounts of the Columbus were
then assessed and no impairment was recorded.
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 2022 (2021: £0.04 million).
Serica Energy plc Annual Report & Accounts 2022 l 85
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
16. Investments
Company – Investment in subsidiaries
Cost:
As at 1 January 2021, 31 December 2021 and 31 December 2022
Provision for impairment:
As at 1 January 2021, 31 December 2021 and 31 December 2022
Net book amount:
1 January 2021, 31 December 2021 and 31 December 2022
Total
£000
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.
Details of the investments in which the Group and the Company (unless indicated) hold 20% or more of the nominal value of any class of
share capital are as follows:
Name of company:
Serica Holdings UK Ltd (ii)
Serica Energy Holdings BV (i & iii)
Serica Energy (UK) Ltd (i & ii)
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 & iv)
APD Ltd (i & iv)
PDA Asia Ltd (i & iv)
PDA (Lematang) Ltd (i & ii)
Serica UK Exploration Ltd (i & ii)
% voting
rights and
shares held
2022
% voting
rights and
shares held
2021
Nature of business
Holding
Holding
E&P
Dormant
Dormant
Dormant
Dormant
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
(i) Held by a subsidiary undertaking
(ii) Incorporated in the UK
(iii) Incorporated in the Netherlands
(iv) Incorporated in the British Virgin Islands
* company liquidated in December 2022 and removed from trade register in the Netherlands in February 2023.
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, 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.
86 l Serica Energy plc Annual Report & Accounts 2022
17. Inventories
Group
Company
2022
£000
2021
£000
2022
£000
2021
£000
Materials and spare parts
3,998
4,053
3,998
4,053
–
–
–
–
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 £3.1 million (2021: £2.7 million).
18. Trade and Other receivables
Group
Company
2022
£000
2021
£000
2022
£000
2021
£000
Due within one year:
Amounts owed by Group undertakings
–
–
24,998
161,759
Trade receivables
Amounts recoverable from JV partners
Other receivables
Prepayments and accrued income
VAT recoverable
Liquids underlift
100,445
121,373
2,567
9,192
18,306
4,117
–
1,466
426
1,180
1,611
6,295
–
–
222
–
225
–
–
–
131
–
120
–
134,627
132,351
25,445
162,010
Trade receivables at 31 December 2022 arose from six (2021: 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.
At the reporting date the amounts owed by Group undertakings to the Company are disclosed net of an impairment of £13,231,000 (2021:
£13,231,000). These amounts have not been secured, have no maturity and bear no interest.
The Company holds inter-company loans with subsidiary undertakings being repayable on demand. These inter-company loans are disclosed
on the face of the balance sheet. None are past due nor impaired. The carrying value of these loans approximates their fair value. The
expected credit loss on these loans with subsidiary undertakings is expected to be immaterial, both on initial recognition and subsequently.
19. Derivative financial (liabilities)/assets
Financial liabilities
Derivative financial instruments
Group
Company
2022
£000
2021
£000
2022
£000
2021
£000
(24,914)
(45,791)
(24,914)
(45,791)
–
–
–
–
Serica Energy plc Annual Report & Accounts 2022 l 87
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
19. Derivative financial (liabilities)/assets continued
Fair value hierarchy
All financial instruments for which fair value is recognised or disclosed are categorised within the fair value hierarchy, based on the lowest
level input that is significant to the fair value measurement as a whole, as follows: Level 1: Quoted (unadjusted) market prices in active
markets for identical assets or liabilities; Level 2: Valuation techniques for which the lowest level input that is significant to the fair value
measurement is directly (i.e. as prices) or indirectly (i.e. derived from prices) observable; Level 3: Valuation techniques for which the lowest
level input that is significant to the fair value measurement is unobservable. The valuation methodology for derivative financial instruments is
detailed below and for contingent consideration is disclosed in note 22. A table summarising the Group’s liabilities measured at fair value is
included in note 24.
Derivative financial instruments
The Group enters into derivative financial instruments with various counterparties. No gas put options were held at 31 December 2021 or
31 December 2022. Other derivative financial instruments held at 31 December 2021 and 2022 comprised gas swaps which were valued by
counterparties, with the valuations reviewed internally and corroborated with readily available market data of forward gas pricing (level 2).
Details of the Group’s derivative financial instruments held as at 31 December 2022 are provided in note 24.
Hedging security advances
Hedging security advances of £24.3 million at 31 December 2022 (2021: £115.4 million) represented cash security lodged with commodity
hedging counterparties which reflected the gas prices at the end of 2022. This will be returned to Serica should forward gas prices fall or when
monthly contracts are settled.
Gas contract liabilities
Gas contract liabilities (<1 year)
Gas contract liabilities (>1 year)
Group
Company
2022
£000
2021
£000
2022
£000
2021
£000
(987)
(37,505)
–
(987)
(987)
(38,492)
–
–
–
–
–
–
In August 2021, Serica restructured certain existing hedging arrangements with one of its hedging counterparties covering swap agreements
for the 2022 and 2023 periods through moving these from fixed price swaps to fixed-price forward sales of gas. The new fixed-price
instruments (“gas contract liabilities”) were on the same terms (volumes, prices and delivery dates) as the existing swap arrangements that
they superseded. The new arrangements have changed from net settled gas swaps to a physically settled gas supply contract. This change is
substantive and is therefore considered from an accounting perspective as a cancellation of the financial swaps and the formation of a new
agreement including physical forward sales. Consequently, the new arrangements are no longer accounted for at fair value in accordance
with IFRS 9 but rather assigned a contract value at inception and accounted for in accordance with IFRS 15 “Revenue from Contracts with
Customers”.
The new arrangements do not represent financial instruments within the scope of IFRS 9 as they were entered into and continue to be
held for the purpose of the delivery of a non-financial item in accordance with the company’s sale or usage requirements and instead are
accounted for under IFRS 15. The gas contract liability value is calculated as the fair value at the point of inception in August 2021 but not
then re-measured at the period end.
Consequently, an unrealised hedging loss of £38.5 million, representing the crystallised fair value of the swaps cancelled in August 2021, has
been expensed in the income statement (see note 6) with an equivalent gas contract liability created and then retained in the balance sheet
as at 31 December 2021. This liability is released to the income statement and recorded as revenue during 2022 (£37.5 million) and 2023
(£1.0 million) when the relevant volumes are delivered at fixed prices rather than spot rate prices in these periods.
Details of the fixed price instruments that together with gas swaps, comprise the Group’s hedging instruments in place at 31 December 2022,
are provided in note 24.
88 l Serica Energy plc Annual Report & Accounts 2022
20. Cash and Term Deposits
Cash at bank and in hand
Short-term deposits
Group
Company
2022
£000
2021
£000
146,986
102,363
285,543
621
2022
£000
49,261
91,957
2021
£000
208
370
Cash and cash equivalents
432,529
102,984
141,218
578
As at 31 December 2022, the cash balance of £432.5 million (2021: £103.0 million) contained an amount of £18.1 million held in a restricted
account as security against letters of credit issued in respect of certain decommissioning liabilities (2021: £22.9 million comprising
£12.9 million in respect of decommissioning liabilities and £10.0 million to cover margining arrangements).
Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods with original
maturities of between one day and three months at the date acquired. They are considered to be readily convertible into cash and subject to
an insignificant risk of changes in value. The placing of deposits depends on the immediate cash requirements of the Group and they 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
DNB Bank ASA
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
P-1
Group
Company
2022
£000
104,586
184,548
103,272
40,071
2021
£000
16,650
76,166
–
10,124
2022
£000
104,150
2,068
35,000
–
Group
Company
2022
£000
2021
£000
15,832
7,972
32,108
13,975
2,262
16,977
14,458
–
2022
£000
603
521
2,243
–
2021
£000
380
198
–
–
2021
£000
100
153
770
–
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.
69,887
33,697
3,367
1,023
Serica Energy plc Annual Report & Accounts 2022 l 89
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
22. Financial liabilities
Group
Company
2022
£000
2021
£000
2022
£000
2021
£000
BKR contingent consideration
29,378
131,656
Split:
Current
Non-current
BKR consideration
29,378
131,656
–
29,378
93,861
37,795
29,378
131,656
–
–
–
–
–
–
–
–
–
–
On 30 November 2018 Serica completed the four BKR acquisitions. During 1H 2022, the final elements of contingent cash consideration
arising from the net cash flow sharing arrangements, and other contingent payments arising from Rhum R3 well production and Rhum
performance criteria, were made. The following elements of consideration were outstanding at 31 December 2022:
•
•
BP, Total E&P and BHP 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.
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.
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 and 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.
Other contingent consideration payable has assumed repayment across the other operational timelines that trigger payment of consideration.
Estimated contingent consideration payments have been calculated at a discount rate of 10% (2021: 10%).
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 has not been 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 2022, assumptions underlying the
calculation were updated from 2021. These included updated commodity prices, production profiles, future opex, capex and decommissioning
cost estimates, discount rates, proved and probable reserves estimates and risk assessments.
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 £4.1 million, and an increase from 10% to 11% would result in a decrease in the fair value of the
contingent consideration by £3.6 million.
2022 payments and income statement credit of £8.4 million arising on revaluation of BKR consideration measured at fair value through
profit or loss
Short and long-term financial liabilities representing estimated BKR consideration as at 31 December 2021 totalled £131.7 million. During
2022, £93.9 million of BKR contingent consideration was paid comprising £30.5 million of Rhum contingent consideration (paid to BP) and
£63.4 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 2022 financial period end, with the final estimate of short and
long-term liabilities as at 31 December 2022 amounting to £29.4 million (2021: £131.7 million). The overall liability decrease of £102.3 million
in 2022 comprised cash payments of £93.9 million and a non-cash revision of £8.4 million recorded as a gain in the Income Statement.
90 l Serica Energy plc Annual Report & Accounts 2022
22. Financial liabilities continued
Reconciliation of movement in BKR consideration
At 31 December 2021
Payments made in year
Revisions during the year
Effect of discount*
Change in fair value liability
At 31 December 2022
Classified as:
Current
Non-current
Total
£000
131,656
(93,871)
937
(9,344)
(8,407)
29,378
–
29,378
29,378
*
the effect of discounting includes the impact of the unwinding of discount in the year and the increased impact of discounting on the
revised assumptions for payment of the consideration in later periods.
23. Provisions
At 1 January 2021
Additions
Unwinding of discount (note 10)
Payments
At 31 December 2021
Additions
Revisions during the year (note 15)
Unwinding of discount (note 10)
Payments
At 31 December 2022
Classified as:
Current
Non-current
Erskine
consideration
£000
Decommissioning
provision
£000
Total
£000
1,002
22,799
23,801
–
–
(1,002)
4,840
456
–
4,840
456
(1,002)
–
–
–
–
–
–
–
–
–
28,095
28,095
–
(2,231)
553
(1,218)
–
(2,231)
553
(1,218)
25,199
25,199
–
–
25,199
25,199
25,199
25,199
Serica Energy plc Annual Report & Accounts 2022 l 91
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
23. Provisions continued
Decommissioning provision
Bruce, Keith and Rhum fields
The Group makes full provision for the future costs of decommissioning its production facilities and pipelines on a discounted basis. With
respect to the Bruce, Keith and Rhum fields, the decommissioning provision is based on the Group’s contractual obligations of 3.75%,
8.33334% and 0% respectively of the decommissioning liabilities rather than the Group’s equity interests acquired. The Group’s provision
represents the present value of decommissioning costs which are expected to be incurred prior to 2040 and assumes no further development
of the Group’s assets. The liability is discounted at a rate of 3.25% (2021: 2%) and the unwinding of the discount is classified as a finance cost
(see note 10).
The main factor behind the downward revisions to the decommissioning provision during 2023 were the extension of the assumed CoP of the
BKR producing fields back to 2036 and its increased impact on the discounting.
Columbus field
The Group makes full provision for the decommissioning liabilities for the Columbus field on its 50% equity interest. The Group’s provision
represents the present value of decommissioning costs which are expected to be incurred up to 2030 and assumes no further development
of the Group’s assets. The liability is discounted at a rate of 3.25% (2021: 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 2021 or 2022 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.
Other
The estimation of costs, inflation and discount rates are considered to be judgemental although changes in single variables are not individually
considered to have a significant impact. If the cost estimates were increased by 10% and the spread between inflation and discount rate
reduced to 0%, the value of the provisions could increase by c.£4.2 million.
The Group considers the impact of climate change and Net Zero targets, including action that may impose further requirements and costs
on companies in the future, on decommissioning provisions, specifically the timing of future cash flows, and has concluded that it does not
currently represent a key source of estimation uncertainty. As all of the Group’s currently producing assets are projected to cease production
by 2036 it is believed that any such future changes would have limited impact compared to assets with longer durations.
Erskine consideration payments
Under the terms of the Erskine acquisition, certain contingent payments were due to be made by Serica related to savings in field operating
costs. The payment for these amounts was capitalised as an oil and gas asset cost and a final settlement of £1.0 million was made in 2021.
Company
The Company has no provisions.
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 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 given the level of expenditure plans over 2023/24 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.
92 l Serica Energy plc Annual Report & Accounts 2022
24. Financial Instruments continued
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 2022
Within 1 year
£000
1–2 years
£000
2–5 years
£000
Total
£000
Fixed rate
Short-term deposits
Floating rate
Cash
285,543
–
–
285,543
285,543
Within 1 year
£000
1–2 years
£000
2–5 years
£000
Total
£000
146,986
–
–
146,986
146,986
Year ended 31 December 2021
Within 1 year
1–2 years
2–5 years
Total
Fixed rate
Short-term deposits
Floating rate
Cash
621
–
–
621
621
Within 1 year
1–2 years
2–5 years
Total
102,363
–
–
102,363
102,363
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 2022
£000
Effect on profit
before tax 2021
£000
1,618
(1,618)
611
(611)
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.
Serica Energy plc Annual Report & Accounts 2022 l 93
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
24. Financial Instruments continued
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 2022
Fixed rate
Short-term deposits
Floating rate
Cash
Year ended 31 December 2021
Fixed rate
Short-term deposits
Floating rate
Cash
Credit risk
Within 1 year
£000
1-2 years
£000
2-5 years
£000
Total
£000
91,957
–
–
91,957
Within 1 year
£000
1–2 years
£000
2–5 years
£000
91,957
Total
£000
49,261
–
–
49,261
Within 1 year
£000
1–2 years
£000
2–5 years
£000
370
–
–
Within 1 year
£000
1–2 years
£000
2–5 years
£000
Total
£000
370
370
Total
£000
208
–
–
208
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.
94 l Serica Energy plc Annual Report & Accounts 2022
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
2022
£000
2021
£000
2022
£000
44,535
11,947
25,369
6
106
5
81
–
–
8,410
5,079
61
6,829
1,470
279
2021
£000
379
–
–
21
49
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 2022
£000
Effect on profit
before tax 2021
£000
(4,612)
4,612
(1,556)
1,556
The table below summarises the maturity profile of the Group and Company’s financial liabilities at 31 December 2022 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 2022
Within 1 year
£000
1 to 2 years
£000
2 to 5 years
£000
>5 years
£000
Total
£000
Trade and other payables
Derivative financial liabilities
69,887
24,914
–
–
–
–
–
–
69,887
24,914
Year ended 31 December 2021
Within 1 year
£000
1 to 2 years
£000
2 to 5 years
£000
>5 years
£000
Total
£000
Trade and other payables
Derivative financial liabilities
33,697
29,421
–
16,370
–
–
–
–
33,697
45,791
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.
Serica Energy plc Annual Report & Accounts 2022 l 95
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
24. Financial Instruments continued
Company
Year ended 31 December 2022
Within 1 year
£000
1 to 2 years
£000
2 to 5 years
£000
>5 years
£000
Total
£000
Trade and other payables
3,367
–
–
–
3,367
Year ended 31 December 2021
Within 1 year
£000
1 to 2 years
£000
2 to 5 years
£000
>5 years
£000
Total
£000
Trade and other payables
1,023
–
–
–
1,023
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 2022 Serica held gas price swaps and equivalent fixed price mechanisms covering 150,000 therms per day for H1 2023 and
50,000 therms per day for Q3 2023 at average prices of 49 pence per therm and 41 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.
The table below details the Group’s fair value measurement hierarchy for liabilities as at 31 December:
Liabilities measured at fair value
Year ended 31 December 2022
Derivative financial liabilities – gas swaps
Contingent consideration liability
Year ended 31 December 2021
Derivative financial liabilities – gas swaps
Contingent consideration liability
Fair value measurement using
Quoted
prices in
active
markets
Level 1
£’000
Significant
observable
inputs
Level 2
£’000
Significant
unobservable
inputs
Level 3
£’000
–
–
–
–
24,914
–
–
29,378
45,791
–
–
131,656
Note
19
22
19
22
There were no transfers between Level 1 and Level 2 during 2021 or 2022.
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 2022, capital employed of the Group amounted to £408.7 million (comprised of £408.7 million of
equity shareholders’ funds and £nil of borrowings), compared to £272.5 million at 31 December 2021 (comprised of £272.5 million of equity
shareholders’ funds and £nil of borrowings).
The acquisition of the Tailwind Energy Investments Ltd on 23 March 2023 to further the Group’s business objectives, has brought some debt
into the capital structure of the Group. This consists of the borrowings disclosed in note 31. The Board regularly reassesses the appropriate
dividend payments proposed within the capital structure of the Group. Any future payment of dividends is expected to depend on the earnings
and financial condition of the Company and such other factors as the Board considers appropriate.
At 31 December 2022, capital employed of the Company amounted to £268.8 (comprised of £268.8 million of equity shareholders’ funds and
£nil of borrowings), compared to £266.9 million at 31 December 2021 (comprised of £266.9 million of equity shareholders’ funds and £nil of
borrowings).
96 l Serica Energy plc Annual Report & Accounts 2022
25. Equity Share Capital
As at 31 December 2022, the share capital of the Company comprised one “A” share of GB£50,000 and 272,953,371 ordinary shares of
US$0.10 each. The “A” share has no special rights.
The balance classified as total share capital includes the total net proceeds (both nominal value and share premium) on issue of the Group
and Company’s equity share capital, comprising US$0.10 ordinary shares and one ‘A’ share.
Allotted, issued and fully paid:
Group
As at 1 January 2021
Number
Share
capital
£000
Share
premium
£000
Total
Share capital
£000
267,809,703
21,107
160,499
181,606
Shares issued
1,081,341
79
308
387
As at 1 January 2022
268,891,044
21,186
160,807
181,993
Shares issued
4,062,328
328
856
1,184
As at 31 December 2022
272,953,372
21,514
161,663
183,177
Allotted, issued and fully paid:
Company
As at 1 January 2021
Number
Share
capital
£000
Share
premium
£000
Total
Share capital
£000
267,809,703
21,107
132,800
153,907
Shares issued
1,081,341
79
308
387
As at 1 January 2022
Shares issued
268,891,044
21,186
133,108
154,294
4,062,328
328
856
1,184
As at 31 December 2022
272,953,372
21,514
133,964
155,478
4,062,328 ordinary shares were issued in 2022 under the Company’s Share Incentive Plans. 108,199,080 ordinary shares have been issued in
2023 to date and as at 11 April 2023 the issued voting share capital of the Company was 381,152,451 ordinary shares and one “A” share.
26. Additional Cash Flow Information
Analysis of Group net cash
Year ended 31 December 2022
Cash
Short-term deposits
Year ended 31 December 2021
Cash
Short-term deposits
1 January
2022
£000
Cash flow
£000
Non-cash
movements
£000
31 December
2022
£000
102,363
44,423
621
283,619
102,984
328,042
200
1,303
1,503
146,986
285,543
432,529
1 January
2021
£000
36,010
53,323
89,333
Cash flow
£000
66,639
(52,639)
14,000
Non-cash
movements
£000
31 December
2021
£000
(286)
(63)
(349)
102,363
621
102,984
Serica Energy plc Annual Report & Accounts 2022 l 97
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
26. Additional Cash Flow Information continued
Analysis of Company net cash
Year ended 31 December 2022
Cash
Short-term deposits
Year ended 31 December 2021
Cash
Short-term deposits
27. Share-Based Payments
Share Option Plans
1 January
2021
£000
208
370
Cash flow
£000
49,093
91,687
Non-cash
movements
£000
31 December
2022
£000
(40)
(100)
49,261
91,957
578
140,780
(140)
141,218
1 January
2020
£000
1,217
5,861
Cash flow
£000
(990)
(5,430)
7,078
(6,420)
Non-cash
movements
£000
31 December
2021
£000
(19)
(61)
(80)
208
370
578
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 2022, 3,900,000 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 2021 or 2022 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
Outstanding as at 31 December
Exercisable as at 31 December
2022
Number
4,100,000
(200,000)
–
3,900,000
3,900,000
2022
WAEP
£
0.14
0.27
–
0.14
0.14
2021
Number
4,578,050
(478,050)
–
4,100,000
4,100,000
2021
WAEP
£
0.15
0.22
–
0.14
0.14
The weighted average remaining contractual life of options outstanding as at 31 December 2022 is 2.4 years (2021: 3.3 years). The weighted
average share price for the options exercised in 2022 was £3.28 (2021: £2.23).
For the Serica 2005 option plan, the exercise price for outstanding options at the 2022 year-end ranges from £0.07 to £0.24 (2021: £0.07 to
£0.27).
98 l Serica Energy plc Annual Report & Accounts 2022
27. Share-Based Payments continued
As at 31 December 2022, the following director and employee share options were outstanding:
Expiry Date
January 2024
June 2025
July 2025
July 2025
July 2025
Total
Amount
300,000
1,100,000
1,000,000
1,000,000
500,000
3,900,000
Exercise cost
GB£
39,000
72,600
120,000
180,000
120,000
Long Term Incentive Plan
The following awards granted to certain Directors and employees under the LTIP are outstanding as at 31 December 2022.
Deferred Bonus Share Awards
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.
Outstanding as at 1 January
Exercised during the year
Expired during the year
Outstanding as at 31 December
Exercisable as at 31 December
2022
Number
2021
Number
726,000
864,000
–
–
(138,000)
–
726,000
726,000
726,000
726,000
The weighted average remaining contractual life of options outstanding as at 31 December 2022 is 0.4 years (2021: 1.4 years).
Performance Share Awards
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.
Performance and Retention Share Awards
Outstanding as at 1 January
Granted during the year
Exercised during the year
Outstanding as at 31 December
Exercisable as at 31 December
2022
Number
2021
Number
14,448,764
11,762,847
665,632
2,725,032
(1,787,829)
(39,115)
13,326,567
14,448,764
7,264,623
5,484,747
The weighted average remaining contractual life of options outstanding as at 31 December 2022 is 7.0 years (2021: 7.9 years). The weighted
average share price during 2022 across the period that options were exercised in was £3.23 (2021: £1.57).
LTIP awards in 2021
In May 2021, the Company granted nil-cost Performance Share Awards over 2,725,032 ordinary shares under the LTIP. All of the total
awards were outstanding at 31 December 2022. The award was made to members of the Group’s executive team, senior management and
employees.
These awards are subject to vesting criteria based on absolute share price performance over a three-year period (75%) and on reductions in
carbon intensity of production from the BKR assets (25%) and are not exercisable at 31 December 2021.
Serica Energy plc Annual Report & Accounts 2022 l 99
Financial Statements NOTES TO THE FINANCIAL STATEMENTS continued
27. Share-Based Payments continued
LTIP awards in 2022
In May 2022, the Company granted nil-cost Performance Share Awards over 665,632 ordinary shares under the LTIP. All of the total awards
were outstanding at 31 December 2022. The award was made to members of the Group’s executive team, senior management and
employees.
The vesting criteria are based on absolute share price performance over a three-year period and specific performance targets related to
carbon emissions from operations over the same period. For the awards to vest in full, a 100% increase in average share price must be
maintained for at least a six-month period together with a significant decrease in carbon emissions per barrel of oil equivalent produced.
These awards are not exercisable at 31 December 2022.
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 2021 and 2022 were consistently valued in line with the Company’s valuation policy. For
the options subject to market conditions, assumptions made included a weighted average risk-free interest rate of 2%, a weighted average
expected life of 5 years, and a volatility factor of expected market price of in a range from 55-70%. 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 £1.95 (2021: £0.71). The estimated fair value of options is amortised to expense over the options’
vesting period.
£3,510,000 has been charged to the income statement for the year ended 31 December 2022 (2021: £2,386,000) and a similar amount
credited to the share-based payments reserve, classified as ‘Other reserve’ in the Balance Sheet. The ‘Other reserve’ was comprised solely of
the share-based payment reserve which totaled £25,576,000 as at 31 December 2022 (2021: £22,066,000). A charge of £2,036,000 (2021:
£617,000) 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. The Group confirmed a two-year option extension in March 2022 and the office lease now expires
in March 2024. Incremental right-of-use assets and lease liabilities of £345,000 were recognised by the Group during 2022 within property,
plant and equipment and other liabilities respectively. A depreciation charge of £172,000 (2021: £172,000) was expensed within administrative
expenses. £132,000 (2021: £179,000) of cash payments made against the lease liability during 2022 are reflected in the 2022 Group cash flow
statement as a cash outflow in financing activities. The remaining lease liability of £213,000 falls due within one year.
29. Capital Commitments and Contingencies
At 31 December 2022, 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 £4 million for the Group and £nil for the
Company (2021: £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 outstanding at 31 December 2022, however on the Bruce
fields plans are in hand to conduct well work at an estimated cost of £21 million in 2023 designed to enhance current production profiles
and extend field life. Net revenues from Serica’s share of income from the fields, are expected to cover Serica’s retained share of ongoing
field expenditures and deferred or contingent consideration due under the respective acquisition agreements. 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.
Serica has posted cash collateral of approximately £18.1 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
£432.5 million as at 31 December 2022. The funds are freely transferable but alternative collateral would need to be put in place to replace the
cash security.
Other commitments
The Group’s only significant exploration commitment is the drilling of a commitment well on Licence P2400 (Skerryvore) to be drilled before
October 2025. Other less material minimum obligations include G&G, seismic work and ongoing licence fees in the UK.
100 l Serica Energy plc Annual Report & Accounts 2022
29. Capital Commitments and Contingencies continued
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. Acquisition of Tailwind Energy Investments Ltd
On 23 March 2023, the Company acquired Tailwind Energy Investments Ltd for initial purchase consideration of £297.4 million. This
comprised cash of £61.6 million and the fair value of 108,170,426 ordinary shares in Serica Energy plc issued in exchange for all Tailwind
shares. The fair value of the shares issued was calculated using the market price of the Company’s shares of £2.18 on the AIM Market of the
London Stock Exchange at its opening of business on 23 March 2023.
A further 2,877,698 ordinary shares have not yet been issued to the sellers but would form part of the maximum number of 111,048,124
ordinary shares that can be issued as part of the purchase consideration. These will only be issued to the extent there are no successful
warranty claims and would be in addition to the initial purchase consideration noted above.
Tailwind’s activities comprise development and production oil & gas assets in the UK North Sea. The acquisition of Tailwind was aimed at
achieving Serica’s longstanding objective to have a more diverse and broadly based UKCS portfolio of producing fields, with material reserves
and value upside potential. The transaction represents substantial progress towards this objective with the number of producing fields
increased from five to eleven, mainly centred around two hubs (Bruce and Triton), a substantial increase in 2P and 2C reserves and a balance
of gas and oil production.
The fair value of the net assets acquired and any resultant goodwill to be recognised as a result of the acquisition have not yet been
determined. Access to information required to assess the market participant value to be assigned to individual assets acquired and liabilities
assumed at the date of acquisition was necessarily limited in the period prior to the signing of these Consolidated Financial Statements.
Transaction costs of £1.8 million incurred in 2022 have been expensed in the Income Statement.
Reserve Based Lending facility arrangements
Following completion of the acquisition on 23 March 2023, the Serica Group now has reserve-based lending and junior facility arrangements
that are linked to the legacy Tailwind sub-group. This has a reserve-based lending facility (RBL) of US$425 million from a syndicate of banks,
secured over the Tailwind sub-group’s oil and gas assets. In addition to the US$425 million committed facility, a further US$400 million is
available on an uncommitted “accordion” basis. Interest accrues at LIBOR/SOFR plus a margin of between 2.5% to 3.1% depending on the
maturity of the facility. The Tailwind sub-group is primarily exposed to 1 month USD LIBOR until June 2023 and 1 month term SOFR thereafter.
The facility has a maturity date of 30 June 2027 and at the last RBL redetermination in February 2023, the facility available for drawdown was
amended to US$366 million. At 31 March 2023, the facility was drawn by US$330 million.
On 24 September 2018, the Tailwind sub-group also entered in a Junior Facility agreement with Mercuria Energy Trading S.A. for a facility
of US$50.0 million available on demand and with a maturity of 24 September 2026. This is a committed facility and funds can be utilised at
Serica’s discretion. There were no drawdowns on this facility as at the completion date of 23 March 2023 or to date thereafter.
Serica Energy plc Annual Report & Accounts 2022 l 101
Financial Statements GLOSSARY
bbl
bcf
boe
BKR
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
BPEOC
BP Exploration Operating Company
CGU
CPR
ESG
FDP
FPS
GRI
HPHT
mscf
mmbbl
mmboe
mmscf
mmscfd
NGLs
NTS
OGA
Overlift
Underlift
P10
P50
P90
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
102 l Serica Energy plc Annual Report & Accounts 2022
CORPORATE INFORMATION
Registered and Main Office
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
Bankers
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
Produced by Communiqué Associates Limited, Edinburgh +44 7802 349934
www.serica-energy.com