Risk factors
Risk analysis outlining key risks facing Tullow together with their potential impact and
the mitigation strategies developed is contained below.
Stratigic risk
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Impact – Ineffective or poorly executed strategy fails to create
shareholder value or fails to meet shareholder expectations.
| Risk |
Mitigation |
| Strategy fails to meet shareholder expectations |
Strategy focused on delivering Ghana and Uganda developments and selective high-impact
exploration programme. Effective communication with all stakeholders based on uniform,
open and transparent dialogue. |
| Ineffective capital allocation |
Consistent investment appraisal through application of agreed criteria with ranking of
opportunities validated by executive management. Material acquisitions and disposals and
new country entry require Board approval. |
| Loss of key staff and succession planning |
Remuneration policies to attract and retain staff, staff appraisal, specific development
and training policies implemented. Board succession plan to be reviewed in 2009. |
Financial risk
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Impact – Asset performance and excessive leverage results
in the Group being unable to meet its financial obligations.
| Risk |
Mitigation |
| Insufficient liquidity, inappropriate financing strategy |
Prudent approach to debt and equity balance maintained through refinancing
and equity placing. Regular Board review and approval for financing options.
Short- and long-term cash forecasts reported to senior management and Board monthly. |
| Inadequate or excessive hedging |
Hedging strategy agreed by the Board utilises a mix of physical and derivative
products appropriate to Tullow’s size and production base. Hedging activity is reported
to the Board monthly and accounting reviewed by external audit. |
| Underperforming assets |
Monthly asset financial and operational performance reporting and KPI measures
established. Detailed senior management review completed quarterly with business
unit teams. Active portfolio management and review of carrying values. |
| Cost and capital discipline |
Comprehensive annual budgeting process covering all expenditure approved by
the Board. Executive management approval required for major categories of
expenditure effectively managing capital allocation. Monthly reporting vs budget
with variance analysis. |
| Uninsured events |
Comprehensive insurance programme approved annually with business interruption
cover for key producing assets. |
Operational risk
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Impact – Operational event impacting staff, contractors,
communities or the environment leading to loss of reputation and/or revenue.
| Risk |
Mitigation |
| EHS |
EHS performance standards set and monitored regularly across the Group through
KPI reporting. EHS management system implemented. |
| Security incident |
Integrated Management System covers day-to-day operational risks. Crisis
management system implemented. |
| Key development failure |
Technical, financial and Board approval for all projects, dedicated project
teams established. Risk evaluation and progress reporting initiated for all projects.
Project milestone KPI’s established for Ghana and Uganda. |
| Ineffective management processes / increased scale of business |
Policies and procedures developed for all significant business processes
appropriate for Tullow’s size and scale. Application validated through management
and internal audit review. |
| Failure to secure equipment, services and resources |
Rigorous contracting procedures and competitive tendering. Major contracts require
senior management and partner approval. |
| Corruption or reputation risk |
Consistent ethical standards established and applied through code of business
conduct and contract and procurement procedures. |
| Corporate and Social Responsibility |
Social and community programmes overseen by CSR Committee, policies established
and regular reporting of progress and financial commitment implemented. |
| Sustained exploration failure |
Exploration process validates programmes prior to Board approval, KPI measuring
success of exploration spend reported monthly to Board. |
External risk
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Impact – The overall external political, industry or market
environment may negatively impact on the Group’s ability to independently manage and grow its business.
| Risk |
Mitigation |
| Political risk and fiscal change |
Developing and maintaining successful relationships with governments and communities. |
| Lack of control of key assets |
Joint venturing with partners and governments. Enforceability of licence and production agreements. |
| Corporate governance failings |
Regular review of compliance requirements with periodic Board reporting. |
| Oil and gas price volatility |
Hedging strategy agreed by Board, monthly reporting of hedging activity. |
| Hostile acquisition |
Robust defence strategies against hostile acquisitions. Effective investor engagement
and ongoing communications programmes. |
| Industry cost inflation |
Rigorous contracting procedures and competitive tendering required for all significant expenditures. |
